The financial tsunami: sub-prime mortgage debt is but the tip of the iceberg
Palash Biswas
Contact: Palash C Biswas, C/O Mrs Arati Roy, Gosto Kanan, Sodepur, Kolkata- 700110, India. Phone: 91-033-25659551
Email: alashbiswaskl@gmail.com">palashbiswaskl@gmail.com
Andhra Cafe
Sensex creating 5 times more wealth than MF route
Financial Express - 8 hours ago
Mumbai, November 25: Investors putting money in blue-chip stocks belonging to benchmark indices Sensex and Nifty directly are earning five times more compared those who take the mutual fund schemes route to invest in stocks from these two indices.
Weekly wrap: Sensex loses 845 pts on global weakness Sify
Value buying sees key indices close higher Economic Times
See also http://www.globalre search.ca/ index.php? context=va&aid=7407 and http://www.iht. com/articles/ 2007/11/23/ business/ 23yen.php and also http://www.economis t.com/finance/ PrinterFriendly. cfm?story_ id=10191717
The dollar
Time to break free
Nov 22nd 2007
From The Economist print edition
http://www.economis t.com/finance/ PrinterFriendly. cfm?story_ id=10191717
The Middle East's oil exporters should end their currencies' peg to the dollar.
IN THE past week Iran's president, Mahmoud Ahmadinejad, has damned it as a “worthless piece of paper” and China's premier, Wen Jiabao, has moaned that it is causing his country “big pressure”. The dollar's relentless decline—it hit a new low of $1.49 against the euro on November 21st—is prompting jibes from America's critics, jangling investors' nerves and giving policymakers headaches.
Nowhere are the dilemmas more acute than in the Gulf, where virtually all the oil-rich states peg their currencies to the greenback. The combination of soaring oil prices and the tumbling dollar is distorting their economies and fuelling inflation. When the Gulf states meet on December 3rd in Qatar, they should agree to loosen their ties to the dollar.
The argument for linking to the greenback was to provide an anchor for the region's economies, many of which are small, open and financially immature. In effect, the Gulf states import America's monetary policy. The trouble is that a fixed currency makes it hard for oil exporters to adjust to swings in the price of oil. And monetary policy in the world's largest oil-importer is not always right for those who sell the stuff.
Soaring oil prices have brought the Gulf Arabs huge riches. Their real exchange rates, as a result, ought to rise. The simplest way to do that is for the currency to strengthen, but the peg prevents nominal appreciation. Worse, the dollar itself has been falling. The result is rising domestic inflation. Some smaller Gulf economies now have inflation rates of around 10%.
What is to be done? The two most widely discussed options are to revalue or to shift to a currency basket (which Kuwait has already done). By repegging their currencies to the dollar at a higher rate, the Gulf states would alleviate some of today's inflationary pressure. But they would not address the underlying mismatch between any oil exporter and a dollar peg. Switching the peg to a basket of currencies that included, say, the euro and yen as well would give the Gulf states a bit more protection against oil-price swings, but it is hardly a perfect fit. Since most big currencies belong to oil importers, the Gulf States would still be linking their currencies to monetary conditions that may not suit them.
Eventually, the currency pegs should be abandoned. After all, developed economies that are big commodity exporters, such as Norway, allow their currencies to float. In recent years many emerging economies have shifted from exchange-rate pegs to a “managed float”. Instead of aiming for an exchange rate, their central banks have an inflation target. If the Gulf states move to a single currency, as they plan to in the next few years, that currency should surely float. But floating is not feasible in the short-term. These countries have no history of independent monetary policy and few institutions to conduct it.
Look beyond a basket
For the moment, the Gulf states are stuck with a currency peg. But they could do better than the dollar. One intriguing idea is to include the oil price as part of a basket that includes the leading currencies (see article). This would ensure their currencies absorbed some of the impact of oil-price swings.
A big uncertainty is what such a shift would mean for the dollar. In the short term, the effect on the Gulf states' appetite for greenbacks would not be dramatic, since the dollar would have a big weight in any basket. And there should not be a sudden sale of the oil exporters' dollar reserves. The worry is that the end of the Gulf states' dollar peg would send jittery investors into a panic. That risk is real. But with oil prices rising and the dollar falling, the dangers of inaction are greater. The Gulf states need to get rid of their dollar peg now.
By F. William Engdahl
URL of this article: http://www.globalresearch.ca/index.php?context=va&aid=7413
Global Research, November 23, 2007
Part 1: Deutsche Bank’s painful lesson
Even experienced banker friends tell me that they think the worst of the US banking troubles are over and that things are slowly getting back to normal. What is lacking in their rosy optimism is the realization of the scale of the ongoing deterioration in credit markets globally, centered in the American asset-backed securities market, and especially in the market for CDO’s—Collateralized Debt Obligations and CMO’s—Collateralized Mortgage Obligations. By now every serious reader has heard the term “It’s a crisis in Sub-Prime US home mortgage debt.” What almost no one I know understands is that the Sub-Prime problem is but the tip of a colossal iceberg that is in a slow meltdown. I offer one recent example to illustrate my point that the “Financial Tsunami” is only beginning.
Deutsche Bank got a hard shock a few days ago when a judge in the state of Ohio in the USA made a ruling that the bank had no legal right to foreclose on 14 homes whose owners had failed to keep current in their monthly mortgage payments. Now this might sound like small beer for Deutsche Bank, one of the world’s largest banks with over 1.1 trillion euros (Billionen) in assets worldwide. As Hilmar Kopper used to say, “peanuts.” It’s not at all peanuts, however, for the Anglo-Saxon banking world and its European allies like Deutsche Bank, BNP Paribas, Barclays Bank, HSBC or others. Why?
A US Federal Judge, C.A. Boyko in Federal District Court in Cleveland Ohio ruled to dismiss a claim by Deutsche Bank National Trust Company. DB’s US subsidiary was seeking to take possession of 14 homes from Cleveland residents living in them, in order to claim the assets.
Here comes the hair in the soup. The Judge asked DB to show documents proving legal title to the 14 homes. DB could not. All DB attorneys could show was a document showing only an “intent to convey the rights in the mortgages.” They could not produce the actual mortgage, the heart of Western property rights since the Magna Charta of not longer.
Again why could Deutsche Bank not show the 14 mortgages on the 14 homes? Because they live in the exotic new world of “global securitization”, where banks like DB or Citigroup buy tens of thousands of mortgages from small local lending banks, “bundle” them into Jumbo new securities which then are rated by Moody’s or Standard & Poors or Fitch, and sell them as bonds to pension funds or other banks or private investors who naively believed they were buying bonds rated AAA, the highest, and never realized that their “bundle” of say 1,000 different home mortgages, contained maybe 20% or 200 mortgages rated “sub-prime,” i.e. of dubious credit quality.
Indeed the profits being earned in the past seven years by the world’s largest financial players from Goldman Sachs to Morgan Stanley to HSBC, Chase, and yes, Deutsche Bank, were so staggering, few bothered to open the risk models used by the professionals who bundled the mortgages. Certainly not the Big Three rating companies who had a criminal conflict of interest in giving top debt ratings. That changed abruptly last August and since then the major banks have issued one after another report of disastrous “sub-prime” losses.
A new unexpected factor
The Ohio ruling that dismissed DB’s claim to foreclose and take back the 14 homes for non-payment, is far more than bad luck for the bank of Josef Ackermann. It is an earth-shaking precedent for all banks holding what they had thought were collateral in form of real estate property.
How this? Because of the complex structure of asset-backed securities and the widely dispersed ownership of mortgage securities (not actual mortgages but the securities based on same) no one is yet able to identify who precisely holds the physical mortgage document. Oops! A tiny legal detail our Wall Street Rocket Scientist derivatives experts ignored when they were bundling and issuing hundreds of billions of dollars worth of CMO’s in the past six or seven years. As of January 2007 some $6.5 trillion of securitized mortgage debt was outstanding in the United States. That’s a lot by any measure!
In the Ohio case Deutsche Bank is acting as “Trustee” for “securitization pools” or groups of disparate investors who may reside anywhere. But the Trustee never got the legal document known as the mortgage. Judge Boyko ordered DB to prove they were the owners of the mortgages or notes and they could not. DB could only argue that the banks had foreclosed on such cases for years without challenge. The Judge then declared that the banks “seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test,” the Judge concluded, “their weak legal arguments compel the court to stop them at the gate.” Deutsche Bank has refused comment.
What next?
As news of this legal precedent spreads across the USA like a California brushfire, hundreds of thousands of struggling homeowners who took the bait in times of historically low interest rates to buy a home with often, no money paid down, and the first 2 years with extremely low interest rate in what are known as “interest only” Adjustable Rate Mortgages (ARMs), now face exploding mortgage monthly payments at just the point the US economy is sinking into severe recession. (I regret the plethora of abbreviations used here but it is the fault of Wall Street bankers not this author).
The peak period of the US real estate bubble which began in about 2002 when Alan Greenspan began the most aggressive series of rate cuts in Federal Reserve history was 2005-2006. Greenspan’s intent, as he admitted at the time, was to replace the Dot.com internet stock bubble with a real estate home investment and lending bubble. He argued that was the only way to keep the US economy from deep recession. In retrospect a recession in 2002 would have been far milder and less damaging than what we now face.
Of course, Greenspan has since safely retired, written his memoirs and handed the control (and blame) of the mess over to a young ex-Princeton professor, Ben Bernanke. As a Princeton graduate, I can say I would never trust monetary policy for the world’s most powerful central bank in the hands of a Princeton economics professor. Keep them in their ivy-covered towers.
Now the last phase of every speculative bubble is the one where the animal juices get the most excited. This has been the case with every major speculative bubble since the Holland Tulip speculation of the 1630’s to the South Sea Bubble of 1720 to the 1929 Wall Street crash. It was true as well with the US 2002-2007 Real Estate bubble. In the last two years of the boom in selling real estate loans, banks were convinced they could resell the mortgage loans to a Wall Street financial house who would bundle it with thousands of good better and worse quality mortgage loans and resell them as Collateralized Mortgage Obligation bonds. In the flush of greed, banks became increasingly reckless of the credit worthiness of the prospective home owners. In many cases they did not even bother to check if the person was employed. Who cares? It will be resold and securitized and the risk of mortgage default was historically low.
That was in 2005. The most Sub-prime mortgages written with Adjustable Rate Mortgage contracts were written between 2005-2006, the last and most furious phase of the US bubble. Now a whole new wave of mortgage defaults is about to explode onto the scene beginning January 2008. Between December 2007 and July 1, 2008 more than $690 Billion in mortgages will face an interest rate jump according to the contract terms of the ARMs written two years before. That means market interest rates for those mortgages will explode monthly payments just as recession drives incomes down. Hundreds of thousands of homeowners will be forced to do the last resort of any homeowner: stop monthly mortgage payments.
Here is where the Ohio court decision guarantees that the next phase of the US mortgage crisis will assume Tsunami dimension. If the Ohio Deutsche Bank precedent holds in the appeal to the Supreme Court, millions of homes will be in default but the banks prevented from seizing them as collateral assets to resell. Robert Shiller of Yale, the controversial and often correct author of the book, Irrational Exuberance, predicting the 2001-2 Dot.com stock crash, estimates US housing prices could fall as much as 50% in some areas given how home prices have diverged relative to rents.
The $690 billion worth of “interest only” ARMs due for interest rate hike between now and July 2008 are by and large not Sub-prime but a little higher quality, but only just. There are a total of $1.4 trillion in “interest only” ARMs according to the US research firm, First American Loan Performance. A recent study calculates that, as these ARMs face staggering higher interest costs in the next 9 months, more than $325 billion of the loans will default leaving 1 million property owners in technical mortgage default. But if banks are unable to reclaim the homes as assets to offset the non-performing mortgages, the US banking system and a chunk of the global banking system faces a financial gridlock that will make events to date truly “peanuts” by comparison. We will discuss the global geo-political implications of this in our next report, The Financial Tsunami: Part 2.
F. William Engdahl is the author of A Century of War: Anglo-American Oil Politics and the New World Order. He is a Research Associate of the Centre for Research on Globalization (CRG). His most recent book, which has just been released by Global Research is Seeds of Destruction, The Hidden Agenda of Genetic Manipulation.
Actuwa ! - http://www.actuwa.org
Archives: http://www.ymlpr.net/pubarchive.php?actuwaNovember 24 / 25, 2007
"A Generalized Meltdown of Financial Institutions"
Take a Look at Professor Roubini's Crystal Ball
By MIKE WHITNEY
http://www.counterp unch.org/ whitney11242007. html
Reality has finally caught up to the stock market. The American
consumer is underwater, the banks are buried in dept, and the
housing market is in terminal distress. The Dow is now below its 200-
Day Moving Average -- the first big "sell" signal. Anything below
12,500 could trigger program-trading and crash the market. The
increased volatility suggests that we are watching a "real time"
meltdown.
International Business editor for the UK Telegraph, Ambrose Evans
Pritchard, summed up yesterday's action in the Asian markets:
"The global credit crisis has hit Asia with a vengeance for the
first time, triggering a massive flight to safety as investors
across the region pull out of risky assets. Yields on three-month
deposits in China and Korea have plummeted to near 1pc in a
spectacular fall over recent days, caused by panic withdrawals from
money market funds and credit derivatives.
"'This' is a severe warning sign,' said Hans Redeker, currency chief
at BNP Paribas. 'Asia ignored the credit crunch in August but now
we're seeing the poison beginning to paralyze the whole global
economy.'" (Credit 'Heart attack' engulfs China and Korea" Ambrose
Evans Pritchard,UK Telegraph,)
The credit storm that began in the United States with subprime
mortgages has spread to markets across the globe. In fact, the train
has already crashed. What we're seeing now is the boxcars piling up
on top of each other.
On Tuesday Chinese government officials ordered a complete halt to
bank lending to slow the speculative frenzy that has created an
enormous equity bubble in the stock market. According to the Wall
Street Journal:
"Chinese authorities are slamming the brakes on bank lending, in
their latest attempt to curb the runaway investment threatening to
overheat what is soon to be the world's third-largest economy. In
recent weeks, regulators have quietly ordered China's commercial
banks to freeze lending through the end of the year, according to
bankers in several cities. The bankers say that to comply, they are
canceling loans and credit lines with businesses and individuals. "
("China freezes lending to Curb Investing Frenzy" Wall Street
Journal)
The move illustrates how concerned the Chinese are that a slowdown
in US consumer spending will trigger a crash on the Shanghai stock
market. It also shows that the Chinese are having difficulty dealing
with the inflation generated by the hundreds of billions of US
dollars absorbed via the trade imbalance with the US. China is awash
in USDs and that surplus is causing a steady rise in food and energy
costs. This could be mitigated by allowing their currency to "float"
freely. But a sudden, steep increase in the Chinese yuan's value
could also send the world headlong into a global recession. For now,
the lending freeze and price fixing appear to be the way out.
Another sign that the markets have reached a "tipping point"
appeared in a Reuters article on Wednesday; "Interbank Covered Bond
Trading Halted on Volatility":
"Renewed credit turmoil and volatility led the European Covered Bond
Council (ECBC) on Wednesday to suspend inter-bank market-making in
covered bonds until Monday, Nov. 26.
The move is a sign of the stress in the covered bond market, which
is dominated by German institutions that have almost a trillion
euros of covered bonds outstanding.
Covered bonds -- backed by pools of assets that remain on the
borrower's balance sheet -- are usually highly liquid and typically
rated triple-A by ratings agencies. The ECBC's recommendation is
aimed at relieving the pressure on market makers who are forced to
quote prices at a fixed bid-offer spread.
"In light of the current market situation and in order to avoid
undue over-acceleration in the widening of spreads, the 8-to-8
Market-Makers & Issuers Committee recommends that inter-bank market-
making be suspended," the ECBC said in a release."
Note: This isn't mortgage-backed junk that's being sold, but highly
liquid bonds that are usually easy to cash in. The ECBC's action is
a sign of pure desperation and indicates that credit paralysis has
infected the entire euro banking system.
Reuters: "Due to general market conditions and the specific
mechanics of the inter-dealer market making it even seems possible
that inter-dealer market making will not be resumed this year."
That's bad. The mechanism for converting covered bonds into cash has
broken down.
The dollar took another pasting on Wednesday, sliding to $1.49 on
the euro; another new record. Gold shot up to $814 per ounce. Oil
continues to flirt with the $100 per barrel mark, and the yen rose
to 107 per dollar forcing a sell-off of hedge fund assets levered
through the carry trade.
Jon Basile, economist at Credit Suisse, summed it up like
this: "There's a heck of a lot of bad news out there." Indeed.
In California Governor Arnold Schwarzenegger has joined with four
mortgage lenders to freeze adjustable interest rates (ARMs) for some
of the state's highest-risk borrowers; another unprecedented move.
The Governor hopes to avoid a collapse of the California real estate
market which has gone into a tailspin. Home sales have plummeted
more than 40 per cent for the last two months. Prices have dropped
sharply---roughly 12 per cent statewide. New construction has slowed
to a crawl. Layoffs are steadily rising. Jumbo loans (mortgages over
$417,000) have been put on the "Endangered Species" list. Even
qualified borrowers can't get mortgages. Nothing is selling.
California housing is "off the cliff".
Schwarzenegger' s plan to keep over-extended subprime mortgage-
holders in their homes faces an uncertain future. What incentive is
there for homeowners to continue paying exorbitant monthly rates
when their payments are not applied to the principle? The homeowners
would be better off bailing out, accepting foreclosure, and starting
over with a clean slate.
It's unrealistic to thinks that Schwarzenegger can stop the tidal
wave of foreclosures that are sweeping across the state. An
estimated 3 million homeowners will lose their homes nationwide.
If you want to blame someone; blame Alan Greenspan. He's the one who
created this mess. According to the economist Mike Shedlock:
"The Fed caused the credit crunch by slashing interest rates to 1
per cent to bail out its banking buddies in the wake of a dotcom
bubble collapse. All the Fed did was create a bigger bubble. This
bubble is so big in fact that it cannot even be bailed out. It's the
end of the line for a serially bubble blowing Fed.
"So not only was this the biggest credit bubble in history, this was
also the biggest transfer of wealth from the poor and middle class
to the already enormously wealthy. That is the real travesty of
justice regardless of whether or not the price tag is $1 trillion,
$2 trillion, or $10 trillion." (Mike Shedlock, "Mish's Global
Economic Trend Analysis")
The problem has gotten so serious that even Secretary of the
Treasury, Henry Paulson, is putting up red flags. Last week, Paulson
ignited a sell-off on Wall Street when he made this statement:
"The nature of the problem will be significantly bigger next year
because 2006 [mortgages] had lower underwriting standards, no
amortization, and no down payments.... We're never going to be able
to process the number of workouts and modifications (to mortgages)
that are going to be necessary doing it just sort of one-off. I've
talked to enough people now to know that there's no way that's going
to work."
The desperation is palpable. Like Schwarzenegger, Paulson is trying
to get mortgage-lenders to provide a safety net for struggling
borrowers who are defaulting on their loans.
Paulson is calling for emergency legislation that will allow the
Federal Housing Administration to play a greater role in the relief
effort. The FHA has already expanded its traditional role by taking
on hundreds of billions in extra debt just to keep a few "private"
mortgage lenders and banks from going bankrupt. Of course, when
Paulson's plan goes kaput and the debts pile up; it'll be the
taxpayer that foots the bill.
"Paulson also called the Senate's failure to pass legislation
overhauling mortgage giants Fannie Mae and Freddie Mac frustrating, "
saying that the two government-sponsore d entities need to be playing
a bigger role in the housing market.
"If we ever need them it's during times like today, and they're most
valuable when there is distress in the mortgage market," he
said. "I'd like to see them playing an even bigger role."(Wall
Street Journal)
Fannie and Freddie, have already posted enormous quarterly losses
and don't have the capital reserves to put millions of subprime
mortgage-holders under their "government- sponsored" umbrella.
Paulson is just grabbing at straws.
Similar troubles are brewing in the broader market where late-
payments and defaults have spread to credit card debt and new car
loans. Every area of "securitized" debt has suddenly veered off the
road and into the ditch. Last week the Fed injected more credit into
the teetering banking system than anytime since 9-11.
No one has predicted the downward-spiral in the market more
accurately than Nouriel Roubini. Roubini is a Professor at the Stern
School of Business at New York University. His analysis appears
regularly on his blogsite, Global EconoMonitor. Last week's
prediction was particularly dire and is worth reprinting here:
"It is increasingly clear by now that a severe U.S. recession is
inevitable in next few months...I now see the risk of a severe and
worsening liquidity and credit crunch leading to a generalized
meltdown of the financial system of a severity and magnitude like we
have never observed before. In this extreme scenario whose
likelihood is increasing we could see a generalized run on some
banks; and runs on a couple of weaker (non-bank) broker dealers that
may go bankrupt with severe and systemic ripple effects on a mass of
highly leveraged derivative instruments that will lead to a seizure
of the derivatives markets... massive losses on money market funds
with a run on both those sponsored by banks and those not sponsored
by banks; ..ever growing defaults and losses ($500 billion plus) in
subprime, near prime and prime mortgages with severe knock-on effect
on the RMBS and CDOs market; massive losses in consumer credit (auto
loans, credit cards); severe problems and losses in commercial real
estate...; the drying up of liquidity and credit in a variety of
asset backed securities putting the entire model of securitization
at risk; runs on hedge funds and other financial institutions that
do not have access to the Fed's lender of last resort support; a
sharp increase in corporate defaults and credit spreads; and a
massive process of re-intermediation into the banking system of
activities that were until now altogether securitized. " (Nouriel
Roubini's Global EconoMonitor)
"A generalized meltdown of the financial system".
Looks like Chicken Little might have gotten it right this time; "The
sky IS falling."
Mike Whitney lives in Washington state. He can be reached at:
fergiewhitney@ msn.com