a Bloodbath. That's the only way to describe it.
August 3, the Dow Jones took a 280 point nosedive on fears that
losses in the subprime market will spill over into the broader
economy and cut into GDP. Ever since the two Bears Sterns hedge
funds folded a couple of weeks ago the stock market has been writhing
like a drug-addict in a detox-cell.
Yesterday's sell-off added to last week's plunge that wiped out
US$2.1 trillion in value from global equity markets. New York
investment guru, Jim Rogers, said that the real market is "one
of the biggest bubbles we've ever had in credit" and that the
subprime rout "has a long way to go."
We are now
beginning to feel the first tremors from the massive credit expansion
which began six years ago at the Federal Reserve.
of dollars which were pumped into the global economy via low interest
rates and increased money supply have raised the nominal value
of equities, but at great cost. Now, stocks will fall sharply
and businesses will fail as volatility increases and liquidity
Stagnant wages and a declining dollar have thrust the country
into a deflationary cycle which has - up to this point - been
concealed by Greenspan's "cheap money" policy. Those days are
over. Economic fundamentals are taking hold. The market swings
will get deeper and more violent as the Fed's massive credit bubble
continues to unwind. Trillions of dollars of market value will
vanish overnight. The stock market will go into a long-term swoon.
Street has become a bundle
of nerves and the problems in
housing have only just begun.
Inventory is still building, prices are
falling and defaults are steadily rising;
all the necessary components
for a full-blown catastrophe.
Mises summed it up like this:
is no means of avoiding the final collapse of a boom brought about
by credit expansion. The question is only whether the crisis should
come sooner as a result of a voluntary abandonment of further
credit expansion, or later as a final and total catastrophe of
the currency system involved." (Thanks to the Daily Reckoning)
matter if the "underlying economy is strong" (as Henry Paulson
likes to say). That's nonsense. Trillions of dollars of over-leveraged
bets are quickly unraveling which has the same effect as taking
a wrecking ball down Wall Street.
a third Bear Stearns fund shuttered its doors and stopped investors
from withdrawing their money. Bear's CFO, Sam Molinaro, described
the chaos in the credit market as the worst he'd seen in 22 years.
At the same time, American Home Mortgage Investment Corp - the
10th-largest mortgage lender in the U.S. - said that "it can't
pay its creditors, potentially becoming the first big lender outside
the subprime mortgage business to go bust". (MarketWatch)
This is big
news, mainly because AHM is the first major lender OUTSIDE
THE SUBPRIME MORTGAGE BUSINESS to go belly-up. The contagion
has now spread through the entire mortgage industry - Alt-A, piggyback,
Interest Only, ARMs, Prime, 2-28, Jumbo - the whole range of loans
is now vulnerable. That means we should expect far more than the
estimated two million foreclosures by year-end. This is bound
to wreak havoc in the secondary market where $1.7 trillion in
toxic CDOs have already become the scourge of Wall Street.
Some of the
country's biggest banks are going to take a beating when AHM goes
under. Bank of America is on the hook for $1.3 billion, Bear Stearns
$2 billion and Barclay's $1 billion. All told, AHM's mortgage
underwriting amounted to a whopping $9.7 billion. (Apparently,
AHM could not even come up with a measly $300 million to cover
existing deals on mortgages! Where'd all the money go?) This shows
the downstream effects of these massive mortgage-lending meltdowns.
to now, the banks have had
no trouble bundling mortgages off
to Wall Street through collateralized
debt obligations (CDOs).
Now everything has changed.
The banks are buried under
MORE THAN $300 BILLION
worth of loans that no one wants.
stock plunged 90 per cent IN ONE DAY. Jittery investors are now
bailing out at the first sign of a downturn. Wall Street has become
a bundle of nerves and the problems in housing have only just
begun. Inventory is still building, prices are falling and defaults
are steadily rising; all the necessary components for a full-blown
warned investors on Tuesday that it had stopped buying loans from
a variety of originators. Two other mortgage lenders announced
they were going out of business just hours later. The lending
climate has gotten worse by the day. Up to now, the banks have
had no trouble bundling mortgages off to Wall Street through collateralized
debt obligations (CDOs). Now everything has changed. The banks
are buried under MORE THAN $300 BILLION worth of loans that no
one wants. The mortgage CDO is going the way of the Dodo. Unfortunately,
it has attached itself to many of the investment banks on its
way to extinction.
it's not just the banks that are in for a drubbing. The insurance
companies and pension funds are loaded with trillions of dollars
in "toxic waste" CDOs. That shoe hasn't even dropped yet. By the
end of 2008, the economy will be on life-support and Wall Street
will look like the Baghdad morgue. America's biggest financials
will be splayed out on a marble slab peering blankly into the
the big investment banks are taking on water. Merrill Lynch has
fallen 22 per cent since the start of the year. Citigroup is down
16 per cent and Lehman Bros Holdings has dropped 22 per cent.
According to Bloomberg News: "The highest level of defaults in
10 years on subprime mortgages and a $33 billion pileup of unsold
bonds and loans for funding acquisitions are driving investors
away from debt of the New York-based securities firms. Concerns
about credit quality may get worse because banks promised to provide
$300 billion in debt for leveraged buyouts announced this year
- Bear Stearns Cos., Lehman Brothers Holdings Inc., Merrill Lynch
& Co. and Goldman Sachs Group Inc., are as good as junk."
right - "junk".
insurance companies and
pension funds are loaded with trillions
of dollars in "toxic waste" CDOs.
That shoe hasn't even dropped yet....
Now the banking giants are scratching
their heads - wondering how they
can unload $220 billion of toxic-debt
onto wary investors. It won't be easy.
seen an economic tsunami like this before. The dollar is falling,
employment and manufacturing are weakening, new car sales are
off for the seventh straight month, consumer spending is down
to a paltry 1.3 per cent, and oil is hitting new highs every day
as it marches inexorably towards a $100 per barrel.
the silver lining?
the two million-plus foreclosures, and the 80 or so mortgage lenders
who have filed for bankruptcy; a growing number of investment
firms are feeling the pinch from the turmoil in real estate. Bear
Stearns; Basis Capital Funds Management, Absolute Capital, IKB
Deutsche Industrial Bank AG, Commerzbank AG, Sowood Capital Management,
C-Bass, UBS-AG, Caliber Global Investment and Nomura Holdings
Inc. - are all either going under or have taken a major hit from
the troubles in subprime. The list will only grow as the weeks
go by. (Check
out these graphs to understand what's really going on in the housing
The problems in real estate are not limited to residential housing
either. The credit crunch is now affecting deals in commercial
real estate, too. Low-cost, low-documentation, "covenant lite"
loans are a thing of the past. Banks are finally stiffening their
lending requirements even though the horse has already left the
barn. Commercial mortgage-backed securities are now nearly as
tainted as their evil-twin, residential mortgage-backed securities
(RMBS). There's no market for these turkeys.
are returning to traditional lending standards and simply don't
want to take the risk anymore.
good are US Treasuries
if the dollar continues to plummet?
No one will put up with 5 or
6 per cent return on their investment
if the dollar keeps sliding
10 to 15 per cent per year.
Buy Outs (LBOs) have been a dependable source of market liquidity.
But, not any more. In the last quarter, there was $57 billion
in LBOs. In the first month of this quarter that amount dropped
to less than $2 billion. That's quite a tumble. The Wall Street
Journal's Dennis Berman summed it up like this: "the Street is
scrambling to finance some $220 billion of leveraged buy out deals"
(but) the "mood has gone from Nantucket holiday to Bataan Death
nailed it. The investment banks took great pleasure in their profligate
lending; raking in the lavish fees for joining mega-corporations
together in conjugal bliss. Then someone took the punch bowl.
Now the banking giants are scratching their heads - wondering
how they can unload $220 billion of toxic-debt onto wary investors.
It won't be easy.
banks and brokers are in the bull's eye," said Kevin Murphy. "There's
article after article not only on subprime, but also banks sitting
on leveraged buy out loans." (WSJ) Credit protection on bank debt
is soaring just as investor confidence is on the wane. In fact,
the VIX index (the "fear gauge") which measures market volatility
- has surged 60 per cent in the last week alone. The increased
volatility means that more and more investors will probably ditch
the stock market altogether and head for the safety of US Treasuries.
that just presents a different set of problems. After all, what
good are US Treasuries if the dollar continues to plummet? No
one will put up with 5 or 6 per cent return on their investment
if the dollar keeps sliding 10 to 15 per cent per year. It would
be wiser to move one's money into foreign investments where the
currency is stable.
the Chinese don't purchase more
US debt, then panicky US investors
will start moving their dollar
into gold, foreign currencies and
German state bonds as a hedge
against inflation... This
accelerate the flight of foreign
capital from American markets
and trigger a massive blow-off
in the stock and bond markets.
that is (presumably) why Treasury Secretary Paulson is in China
today - to sweet talk our Communist bankers into buying more USTs
to prop up the flaccid greenback. (Note: The Chinese are currently
holding $103 billion in toxic US-CDOs - and are not at all happy
about their decline in value.) If the Chinese don't purchase more
US debt, then panicky US investors will start moving their dollars
into gold, foreign currencies and German state bonds as a hedge
will further accelerate the flight of foreign capital from American
markets and trigger a massive blow-off in the stock and bond markets.
In fact, this process is already underway (although it has been
largely concealed in the business media). In truth, the big money
has been fleeing the US for the last three years. What passes
as "trading" on Wall Street today is just the endless expansion
of credit via newer and more opaque debt-instruments. It's all
a sham. America's hard assets are being sold off at an unprecedented
Crunch: Whose ox gets gored?
money gets tight; anyone who is "over-extended" is apt to get
hurt. That means that the maxed-out hedge fund industry will continue
to get clobbered. At current debt-to-investment ratios, the stock
market only has to fall about 10 per cent for the average hedge
fund to take a 50 per cent scalping. That's more than enough to
put most funds underwater for good. The carnage in Hedgistan will
likely persist into the foreseeable future.
might not bother the robber-baron fund-managers who've already
extracted their 2 per cent "pound of flesh" on the front end.
But it's a rotten deal for the working stiff who could lose his
entire retirement in a matter of hours. He didn't realize that
his investment portfolio was a crap-shoot. He probably thought
there were laws to protect him from Wall Street scam-artists and
be even worse for the banks than the hedge funds. In fact, the
banks are more exposed than at anytime in history. Consider this:
the banks are presently holding a half trillion dollars in debt
(LBOs and CDOs) FOR WHICH THERE IS NO MARKET. Most of this debt
will be dramatically downgraded since the CDOs have no true "mark
to market" value. It's clear now that the rating agencies were
in bed with the investment banks. In fact, Joshua Rosner admitted
as much in a recent New York Times editorial:
original models used to rate collateralized debt obligations were
created in close cooperation with the investment banks that designed
the securities. (The agencies) actively advise issuers of these
securities on how to achieve their desired ratings." (Joshua
Rosner "Stopping the Subprime Crisis" NY Times)
cozy deal, eh? Just tell the agency the rating you want and they
tell you how to get it.
we know why $1.7 trillion in CDOs are headed for the landfill.
banks are more exposed than
at anytime in history. Consider this:
the banks are presently holding
a half trillion dollars in debt
(LBOs and CDOs) FOR WHICH
THERE IS NO MARKET. Most of this
debt will be dramatically downgraded
since the CDOs have no true
"mark to market" value. It's clear
now that the rating agencies were
in bed with the investment banks.
downgrading of CDOs has just begun and Wall Street is already
in a frenzy over what the effects will be. Once the ratings fall,
the banks will be required to increase their reserves to cover
the additional risk. For example, "As a recent issue of Grant's
explains, global commercial banks are only required to set aside
56 cents ($0.56) for every $100 worth of triple-A rated securities
they hold. That's roughly 178 to 1 ratio. Drop that down to double-B
minus, and the requirement skyrockets to $52 per $100 worth of
securities held - a margin increase of more than 9,000 per cent".
cents ($0.56) for every $100 worth of triple-A rated securities"?!?
Are you kidding me?
Mugambo Guru says, "That is 1/18th of the 10 per cent stock margin
equity required in 1929"!! (Mugambo Guru; kitco.com)
high-risk game the banks have been playing - of "securitizing"
the loans of applicants with shaky credit - is falling apart fast.
There's no market for chopped up loans from over-extended homeowners
with bad credit. The banks don't have the reserves to cover the
loans they have on the books and the CDOs have no fixed market
value. End of story. The music has stopped and the banks can't
find a chair.
public doesn't know anything about this looming disaster yet.
How will people react when they drive up to their local bank and
see plywood sheeting covering the windows?
will happen. There will be bank failures.
derivatives market is another area of concern. The notional value
of these relatively untested instruments has risen to $286 trillion
in 2006 - up from a meager $63 trillion in 2000. No one has any
idea of how these new "swaps and options" will hold up in a slumping
market or under the stress of increased volatility. Could they
bring down the whole market?
depends on whether they're backed-up by sufficient collateral
to meet their obligations. But that seems unlikely. We've seen
over and over again that nothing in this new deregulated market
is "as it seems". It's all stardust mixed with snake oil. What
the Wall Street hucksters call the "new financial architecture
of investment" is really nothing more than one over-leveraged
debt-bomb stacked atop another. Ironically, many of these same
swindles were used in the run-up to the Great Depression. Now
they've resurfaced to do even more damage. When the crooks and
con-men write the laws (deregulation) and run the system; the
results are usually the same. The little guy always gets screwed.
That much is certain.
public doesn't know anything
about this looming disaster yet.
How will people react when they drive
up to their local bank and see plywood
sheeting covering the windows?...
When the crooks and con-men
write the laws (deregulation)
and run the system;
the results are usually the same.
The little guy always gets screwed.
the stock market is running on fumes. Another four to six months
of wild gyrations and it'll be over. The NASDAQ plunged 75 per
cent after the dot.com bust.
How low will
it go this time?
Keep an eye
on the yen. The ongoing troubles in subprime and hedge funds are
pushing the yen upwards which will unwind trillions of dollars
of low interest, short term loans which are fueling the rise in
stock prices. If the yen strengthens, traders will be forced to
sell their positions and the market will tank. It's just that
simple. The Dow Jones will be a Dead Duck.
So far, Japan's
monetary manipulations have been a real boon for Wall Street -
enriching the investment bankers, the big-time traders and the
hedge fund managers.
one's who can take advantage of the interest rate spread and then
maximize their leverage in the stock market. It works like a charm
in an up-market, but things can unravel quickly when the market
retreats or starts to zigzag erratically.
rumblings suggest that the volatility will continue which will
push the yen upwards and cut off the flow of cheap credit to the
stock market. When that happens, the end is nigh.
People: "We're not a dumb as you think"
refreshing to find out that the majority of Americans seem to
have a grasp of what is really going on behind the fake headlines.
For example, The Wall Street Journal/NBC conducted a poll this
week which shows that two-thirds of Americans believe that "the
economy is either in a recession now or will be in the next year."
That matches up pretty well with the 71 per cent of Americans
who now feel the Iraq War "was a mistake".
Americans are clearly downbeat in their outlook on the economy
and haven't been taken in by the daily infusions of happy talk
about "low inflation" and "sustained growth" from toothy TV pundits.
In fact, the mood of the country regarding the economy is downright
gloomy. "Only 19 per cent of Americans say things in the nation
are headed in the right direction, while 67 per cent say the country
is off on the wrong track". Iraq , of course, is the number one
reason for the pessimism, but the dissatisfaction runs much deeper
than just that.
Federal Reserve is a
central player in a carefully
considered plan to shift the
nation's wealth from one class to
another. And they have succeeded.
Nearly four million American jobs
have been sent overseas, the country
has increased the national debt by
$3 trillion dollars, and foreign
investors own $4.5 trillion in
US dollar-backed assets.
16 per cent expressed substantial confidence in the financial
industry" - "18 per cent in the energy or pharmaceutical industries"
- "17 per cent in large corporations and 11 per cent in health-insurance
companies". Only 18 per cent of the people have confidence in
the corporate media and only 16 per cent in the federal government.
are encouraging numbers. They show that the vast majority of people
have lost confidence in the system and its institutions. They
also illustrate the limits of propaganda. People are not as easily
indoctrinated as many believe. Eventually the "bewildered herd"
catches on and sees through the lies and deception.
American people know intuitively that something is fundamentally
wrong with the economy. They just don't know the details or the
extent of the damage. Decades of neoliberal policies have inflated
the currency, broadened the wealth gap, and destroyed manufacturing.
Workers can no longer buy the things they produce because wages
have stagnated through a stealth campaign of inflation which originated
at the Federal Reserve. When wages shrink, prices eventually fall
from overcapacity and the economy slips into a deflationary cycle.
This downward spiral ultimately ends in depression. So far, that's
been avoided because of the Fed's massive expansion of cheap credit.
But that won't last.
policy is not "accidental". The Fed's policies were designed to
create a crisis, and that crisis was intended to coincide with
the activation of a nation-wide police-state. It is foolish to
think that Greenspan or his fellows did not grasp the implications
of the system they put in place. These are very smart men and
very shrewd economists. They knew exactly what they were doing.
They all understand the effects of low interest rates and expanded
money supply. And, they're also all familiar with Ludwig von Mises,
is no means of avoiding the final collapse of a boom brought about
by credit expansion."
crash is unavoidable because the policies were designed to create
a crash. It's that simple.
Federal Reserve is a central player in a carefully considered
plan to shift the nation's wealth from one class to another. And
they have succeeded. Nearly four million American jobs have been
sent overseas, the country has increased the national debt by
$3 trillion dollars, and foreign investors own $4.5 trillion in
US dollar-backed assets.
American people know
intuitively that something is
fundamentally wrong with the
economy. They just don't know
the details or the extent of
the damage. Decades of neoliberal
policies have inflated the currency,
broadened the wealth gap,
and destroyed manufacturing.
Fed has been carrying out its economic strategy; the Bush administration
has deployed the military around the world to conduct a global
resource war. These are two wheels on the same axel.
is to maintain control of the global economic system by seizing
the remaining energy resources in Eurasia and the Middle East
and by integrating potential rivals into the American-led economic
model under the direction of the Central Bank.
All of the
leading candidates - Democrat and Republican - belong to secretive
organizations which ascribe to the same basic principles of global
rule (new world order) and permanent US hegemony. There's no quantifiable
difference between any of them.
economic crisis is part of a much broader scheme to remake the
political system from the ground-up so it better meets the needs
of the ruling elite. After the crash, public assets will be sold
at fire sale prices to the highest bidder. Public lands will be
auctioned off. Basic services will be privatized. Democracy will
expansion of credit through interest rate manipulation is the
fast-track to tyranny. Thomas Jefferson fully understood this.
American people ever allow private banks to control the issue
of our currency, first by inflation, then by deflation, the banks
and the corporations that will grow up will deprive the people
of all property until their children wake up homeless on the continent
their fathers conquered."
We are now
in the first phase of Greenspan's Depression. The stock market
is headed for the doldrums and the economy will quickly follow.
Many more mortgage lenders, hedge funds and investment banks will
be carried out feet first.
As the disaster
unfolds, we should try to focus on where the troubles began and
keep in mind Jefferson's injunction:
of power should be taken from the banks and restored to the people
to whom it properly belongs."
Paul is the only presidential candidate who supports abolishing
the Federal Reserve.
Mike Whitney lives in Washington. He can be reached at [email protected].