Well, we are far past a period of warning signs and into the panic stage. It appears that many European financial companies suddenly decided they just don't know how much risk they are taking by dealing with, ahem, other European financial companies that may have also bought securities somehow related to US mortgages.
The only question is – has a cascading nuclear reaction of cross-defaults started, or do central banks still have time to create tons of new fiat money - which eventually push inflation back up enough so that homeowners still have some equity in their homes?
PeakOil is You
ECB Steps In - Major Warning Tremor?
Re: ECB Steps In - Major Warning Tremor?
by DantesPeak » Thu 09 Aug 2007, 23:46:40
It's already over, now it's just a matter of adjusting.
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Re: ECB Steps In - Major Warning Tremor?
by Eli » Fri 10 Aug 2007, 00:20:17
Well the shock wave is right now going around the globe.
The bomb has already gone off.
I think we are just starting the cascade and the news does not get any better.
The mortgage problem has spread into a lender problem and now into a major banking problem.
The biggest thing right now is that people are being forced to show their cards and when they do, it turns out they don't have a pair of aces they have 7 2 off suit. The funds and CDOs these guys own have also been leveraged to the tune of times 10, that makes the gains great and the losses horrendous.
Right now people have no friggin idea what to do within the banking industry. They own paper that was rated AAA top quality debt and they have no idea how much it is really worth and no way of finding out, they don't want to find out and the y sure as hell don't want the sheep to know.
They are getting major investors big fish, not like you and me, institutions and such calling saying give me my money back you bitch. And they aren't allowing withdrawals because they have no idea how much to hand out. If the hedge is really worth nothing then they don't want to just give away money.
Now they can't just try and put these tainted funds, hedges cdos out on the market to find out how much it is worth because if they do all this stuff is coming back with no bids.
Country wide is the lower level of this debacle they are selling mortgages and no one is buying the paper. As soon as there liabilities get higher than their assets they are not allowed to sell mortgages and it is lights out.
Then we get into the multi trillion dollar carry trade unwind and then it gets ugly not like this, bad.
Like I said the bomb has gone off lowering rates will lead to the dollar melt down. We can either chose to be crushed by a bolder or jump off a cliff.
The bomb has already gone off.
I think we are just starting the cascade and the news does not get any better.
The mortgage problem has spread into a lender problem and now into a major banking problem.
The biggest thing right now is that people are being forced to show their cards and when they do, it turns out they don't have a pair of aces they have 7 2 off suit. The funds and CDOs these guys own have also been leveraged to the tune of times 10, that makes the gains great and the losses horrendous.
Right now people have no friggin idea what to do within the banking industry. They own paper that was rated AAA top quality debt and they have no idea how much it is really worth and no way of finding out, they don't want to find out and the y sure as hell don't want the sheep to know.
They are getting major investors big fish, not like you and me, institutions and such calling saying give me my money back you bitch. And they aren't allowing withdrawals because they have no idea how much to hand out. If the hedge is really worth nothing then they don't want to just give away money.
Now they can't just try and put these tainted funds, hedges cdos out on the market to find out how much it is worth because if they do all this stuff is coming back with no bids.
Country wide is the lower level of this debacle they are selling mortgages and no one is buying the paper. As soon as there liabilities get higher than their assets they are not allowed to sell mortgages and it is lights out.
Then we get into the multi trillion dollar carry trade unwind and then it gets ugly not like this, bad.
Like I said the bomb has gone off lowering rates will lead to the dollar melt down. We can either chose to be crushed by a bolder or jump off a cliff.
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Re: ECB Steps In - Major Warning Tremor?
by savethehumans » Fri 10 Aug 2007, 01:29:04
Look, folks, I don't understand finance and economics, and never will. But I've know TS is about to HTF for awhile now.
I just want to know how it'll affect me, typical account holder.
I have the money I'm going to pay Uncle Sam next year in a 9-month CD (to make SOME money for me before I give it up). It matures in November. Is it safe? Will I lose the money I'll be owing Uncle? Am I needing to plan to flee the country?
And will I have the money in my checking accounts to pay for doing so?
I'm really getting nervous, here. Anyone wanna reassure me? Or give me a full nervous breakdown? Anyone?
I just want to know how it'll affect me, typical account holder.
I have the money I'm going to pay Uncle Sam next year in a 9-month CD (to make SOME money for me before I give it up). It matures in November. Is it safe? Will I lose the money I'll be owing Uncle? Am I needing to plan to flee the country?
And will I have the money in my checking accounts to pay for doing so?
I'm really getting nervous, here. Anyone wanna reassure me? Or give me a full nervous breakdown? Anyone?
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Re: ECB Steps In - Major Warning Tremor?
by MrBill » Fri 10 Aug 2007, 03:21:31
It is easier to buy an asset than to fund an asset, and if you borrow money, you have to generate a positive return on investment to payback that loan with interest.
Many banks, like BNP Paribas, are sitting on 'assets' that they cannot sell. Or they do not want to sell them in the current climate at a loss. But they still have to fund these assets.
$this->bbcode_second_pass_quote('', ' ')But that comforting outlook did not help the credit markets recover, or persuade anyone to buy the newly questioned securities — at least at anything like the prices people had assumed. No one wants to sell the securities at very low prices — and in many cases they have borrowed heavily against them. So the markets have dried up.
Source: NYTimes.comMany banks, like BNP Paribas, are sitting on 'assets' that they cannot sell. Or they do not want to sell them in the current climate at a loss. But they still have to fund these assets.
$this->bbcode_second_pass_quote('', ' ')But that comforting outlook did not help the credit markets recover, or persuade anyone to buy the newly questioned securities — at least at anything like the prices people had assumed. No one wants to sell the securities at very low prices — and in many cases they have borrowed heavily against them. So the markets have dried up.
So with stock markets falling and bond spreads widening it is not a good time for them to tap the capital markets. There are no investors willing and able to step in at this point and buy new debt or equity.
Therefore, the only option left for banks is the interbank money market. However, as this is a fixed pool of money, and everyone is going over-weight cash at the moment either by selling fixed income or equity, so the cost of money is going up.
When the cost of over-night funds in the money market goes up too much, primary dealers or banks that can deal directly with the central bank, will go to the Open Window to take money market funds directly from the central bank.
But the central bank has a target rate, 5.25% p.a. for the Fed and 4.25% for the ECB, they are forced to release more money supply than they would like to OR raise their target rate.
It is the mandate of the central bank to be 'the lender of last resort'. And they are there to calm markets when they get over-active to aid in market stability.
Just like the CB can mop-up excess liquidity when there is too much money supply, which is inflationary, so too can they add liquidity when it is necessary.
As we all know that one of the off-shoots of fractional banking is that there are more loans in existance than physical money to back them, so the central bank has to be ready at all times to avoid runs on the financial institutions by being ready to release more money into the banking system to match short-term liquidity gaps if depositors want to withdraw money.
The amount banks can withdraw from the CB is limited by their ability to repay those loans with interest. If they are borrowing money at 4.25% or 5.25% to fund assets that are losing their value like CDOs or stocks then it will be very hard for them to repay those loans to the CB with interest. So at a certain point in time they will obviously be forced to sell what liquid assets they have to cover their funding gap, and to cut their losses. Those that do not will either go bankrupt or become take-over targets by their competitors.
By historical standards risk spreads are still very narrow. The market is just in the process of re-pricing that risk back into the financial system. If I use EUR/JPY as a proxy for global risk taking due to the yen carry trade that funded many of these risky bets then we have fallen from almost 169 to 161 now. That is just 4-5%. EUR/JPY was 150 at the start of the year and even then yen was under-valued by 40% against the euro. It clearly has a lot farther to fall as those yen carry trades are unwound. And it is probably necessary. The question being whether it will be orderly or not?
Having lived through several 'currency crises' (EMU, CZK, RUB, etc.) as an interbank FX trader/market maker yesterday's intervention by the ECB neither surprised nor alarmed me. On a scale of one to ten it was a non-event.
That is not to say this liquidity crisis, and I use the term very loosely, is over or that it could not get worse. But most European banks have reported healthy H1'07 profits already. As for the pension funds I would not be as sanguine. I think that is where the real mess is hidden? A lot of them had holes in the balance sheets before this CDO crisis stemming from stock market losses in 2000, along with low yields on bonds since then, so many of them bought these high yielding derivatives in an attempt to close their gap between current assets and future liabilities. This latest blow-up is rather likely to set them back yet once again.
August 15th will be a key date. That is when many investors can withdraw funds from mutual and hedge funds. Asset and portfolio managers may then find themselves having to sell assets come what may? Next week we'll know.
UPDATE:
$this->bbcode_second_pass_quote('', 'B')ut a new financial architecture emerged in the last decade — one that relied more on securities and less on banks as intermediaries. With the worth of those securities now being questioned — and no equivalent of deposit insurance — some who financed the securities want their money out, a fact that has created the 21st-century equivalent of a run on a bank.
Left to deal with the run are the institutions that were created to deal with the old system’s problems — notably the central banks like the Federal Reserve and the European Central Bank. But, in contrast to their close involvement with the banking system, these banks have little regulatory oversight of the securities that are in trouble and may not even know who is holding them.
At the heart of the new system was a decision to have loans financed directly by investors, rather than indirectly by bank depositors. Investors, ranging from hedge funds to wealthy individuals, had confidence in the arrangement because most of the securities were blessed as very safe by the bond rating agencies, like Moody’s and Standard & Poor’s.
The highly rated securities pay relatively low interest rates, but until now there were many willing to own them or to lend money to those who did own them. But there is no reason to hold them if there is any question about their safety — just as there was no reason to keep deposits in a bank that was facing a run amid rumors about its safety.
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
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Re: ECB Steps In - Major Warning Tremor?
by mgtser » Fri 10 Aug 2007, 06:13:16
is this the song in every investors head
(the ones losing money of course)
And I'm losing my favourite game
you're losing your mind again
I'm losing my baby
losing my favourite game
And I'm losing my favourite game
you're losing your mind again
I'm losing my favourite game
I've tried but you're still the same
I'm losing my baby
you're losing a saviour and a saint
(the ones losing money of course)
And I'm losing my favourite game
you're losing your mind again
I'm losing my baby
losing my favourite game
And I'm losing my favourite game
you're losing your mind again
I'm losing my favourite game
I've tried but you're still the same
I'm losing my baby
you're losing a saviour and a saint
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Re: ECB Steps In - Major Warning Tremor?
by MrBill » Fri 10 Aug 2007, 09:19:57
I am not sure how to put this succinctly? It is in poor taste to indulge in schadenfreude when these down moves hurt not just Wall Street players, greedy hedge fund managers and their clients, but ordinary citizens and taxpayers.
Every bull market sows the seeds of its own destruction. On the way up the conscientious and the cautious get pushed to the side to make room for up and coming stars. As a matter of fact, caution be damned! The mantra is always the same, 'this time it is different.'
I am not glad this is happening, but we all said, 'it was unsustainable', and what is unsustainable is by definition going to end sooner rather than later. We should not be surprised when it happens.
A good 25% lower in all asset classes would be a much needed lesson in prudent risk management. Of course, deep down, many of us hope, and maybe even need to believe, that 25% is enough. If it turns out to be a Dot.Con Bubble bursting like 2000, but for all markets, there will be widespread collateral carnage in the real economy, not just the financial community.
Just deserts for a few paid for by the misery of many.
Good night America and God Bless!
Every bull market sows the seeds of its own destruction. On the way up the conscientious and the cautious get pushed to the side to make room for up and coming stars. As a matter of fact, caution be damned! The mantra is always the same, 'this time it is different.'
I am not glad this is happening, but we all said, 'it was unsustainable', and what is unsustainable is by definition going to end sooner rather than later. We should not be surprised when it happens.
A good 25% lower in all asset classes would be a much needed lesson in prudent risk management. Of course, deep down, many of us hope, and maybe even need to believe, that 25% is enough. If it turns out to be a Dot.Con Bubble bursting like 2000, but for all markets, there will be widespread collateral carnage in the real economy, not just the financial community.
Just deserts for a few paid for by the misery of many.
Good night America and God Bless!
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
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Re: ECB Steps In - Major Warning Tremor?
by firestarter » Fri 10 Aug 2007, 09:47:30
Professor Roubini does an excellent job summarizing the situation we now face:
Insolvency crisis
$this->bbcode_second_pass_quote('', '[')b]....This is not just a liquidity crisis like in the 1998 LTCM episode. This is rather a liquidity crisis that signals a more fundamental debt, credit and insolvency crisis among many economic agents in the US and global economy. Liquidity runs can be resolved by the liquidity injections by a lender of last resort: in the cases of the liquidity crises of Mexico, Korea, Turkey, Brazil that international lender of last resort was the IMF; but in the insolvency crises of Russia, Argentina, and Ecudaor the provision of the liquidity by the lender of last resort – the IMF – only postponed the inevitable default and made the eventual crisis deeper and uglier. And provision of liquidity during an insolvency crisis causes moral hazard as it creates expectations of investors’ bailout. Thus, while the Fed and the ECB had no option today but to provide massive liquidity in the presence of a most severe liquidity crunch and run, they should not delude themselves that this liquidity injections can resolve the deep insolvency problems of many overstretched borrowers: households, financial institutions, corporates. Insolvency/credit crises lead to financial and economic distress – hard landing of economies – and cannot be resolved with liquidity injections by a lender of last resort. And now the vicious circle of a weakening US economy – with a housing recession getting worse and a fatigued consumer being at the tipping point - and a generalized credit crunch sharply has increased the probability that the US economy will experience a hard landing. We are indeed at a "Minsky Moment" and this recent financial turmoil is the beginning of a much more serious and protracted US and global credit crunch. The risks of a systemic crisis are rising: liquidity injections and lender of last resort bail out of insolvent borrowers - however necessary and unavoidable during a liquidity panic- will not work; they will only pospone and exacerbate the eventual and unavoidable insolvencies.
Insolvency crisis
$this->bbcode_second_pass_quote('', '[')b]....This is not just a liquidity crisis like in the 1998 LTCM episode. This is rather a liquidity crisis that signals a more fundamental debt, credit and insolvency crisis among many economic agents in the US and global economy. Liquidity runs can be resolved by the liquidity injections by a lender of last resort: in the cases of the liquidity crises of Mexico, Korea, Turkey, Brazil that international lender of last resort was the IMF; but in the insolvency crises of Russia, Argentina, and Ecudaor the provision of the liquidity by the lender of last resort – the IMF – only postponed the inevitable default and made the eventual crisis deeper and uglier. And provision of liquidity during an insolvency crisis causes moral hazard as it creates expectations of investors’ bailout. Thus, while the Fed and the ECB had no option today but to provide massive liquidity in the presence of a most severe liquidity crunch and run, they should not delude themselves that this liquidity injections can resolve the deep insolvency problems of many overstretched borrowers: households, financial institutions, corporates. Insolvency/credit crises lead to financial and economic distress – hard landing of economies – and cannot be resolved with liquidity injections by a lender of last resort. And now the vicious circle of a weakening US economy – with a housing recession getting worse and a fatigued consumer being at the tipping point - and a generalized credit crunch sharply has increased the probability that the US economy will experience a hard landing. We are indeed at a "Minsky Moment" and this recent financial turmoil is the beginning of a much more serious and protracted US and global credit crunch. The risks of a systemic crisis are rising: liquidity injections and lender of last resort bail out of insolvent borrowers - however necessary and unavoidable during a liquidity panic- will not work; they will only pospone and exacerbate the eventual and unavoidable insolvencies.
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Re: ECB Steps In - Major Warning Tremor?
by mkwin » Fri 10 Aug 2007, 11:50:21
I am actually happy this could unwind now. I would prefer to see a global unwinding over the next 2/3 years before peak oil really bites, say, in 2011. If many of the assets bubbles have been deflated. We will be in a better position to react to oil depletion and the financial instability of the peak will be less severe than it might have otherwise been.
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Re: ECB Steps In - Major Warning Tremor?
by emersonbiggins » Fri 10 Aug 2007, 12:40:16
Mmmm, mmmm.... another bowl please! 
(Don't ask me to explain the how/why of above; I'm not sure I understand.)
(Don't ask me to explain the how/why of above; I'm not sure I understand.)
Last edited by emersonbiggins on Fri 10 Aug 2007, 12:41:54, edited 1 time in total.
"It's called the American Dream because you'd have to be asleep to believe it."
George Carlin
George Carlin
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Re: ECB Steps In - Major Warning Tremor?
by mmasters » Fri 10 Aug 2007, 13:23:54
This is a bank run no different than the old bank runs. The only difference is this time the banks aren't holding the bag of toxic waste loans. They've managed to offload the junk notes they created to third parties (read: suckers) in the midst of the boom. Now these people are taking a roasting for it and losing their shirts. So it's really just a classic boom-bust bank run with some slight of hand envolved to favor the banks. Of course, the central bankers have decided to help these shirtless folks out by loaning them some freshly printed new money to ease the pain, the good souls they are.
Last edited by mmasters on Fri 10 Aug 2007, 13:39:46, edited 1 time in total.
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Re: ECB Steps In - Major Warning Tremor?
by mmasters » Fri 10 Aug 2007, 13:43:20
$this->bbcode_second_pass_quote('pstarr', '')$this->bbcode_second_pass_quote('mkwin', 'I') am actually happy this could unwind now. I would prefer to see a global unwinding over the next 2/3 years before peak oil really bites, say, in 2011. If many of the assets bubbles have been deflated. We will be in a better position to react to oil depletion and the financial instability of the peak will be less severe than it might have otherwise been.
What is happening is exactly what peak is. Do you think if petroleum were $20 we would be in this mess? Petroleum is energy. It is easy credit. It is the free ride. If oil were $20 then another timber forest would be cut and delivered and another construction project funded.Yeah what he said. When the easy money bust meets with the easy energy bust. You have one big BUUUUUUUUUUUUUUUUUUUUUUUSSSSSSSSSSSSSSSSSSSSSSSTTTTTTTTTTTTTTTTTTTTTT. That will probably kill all of us.
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