naked capitalism

Anonymous says:

Young Mr Joye has the ear of government here and is behind the advent of an Australian GSE!

http://aussiemac.org/AussieMac/Home.html

Anonymous says:

The Australian banking/mortgage system only looks good because our housing bubble hasn’t burst yet. We have the second most expensive residential housing market in the world. An average house is six times average earnings. All bubbles pop eventually, and then the banks’ balance sheets won’t look so good.

Anonymous says:

The Australian housing market has moved down in recent months, 500,000 median in my neck of the woods, its lost about 140,000 off the top so far with more to come. Family member was just recently at yacht party in Sydney with Sonja McMahon and John Laws, so party time is still swinging for the well heeled, Titanic theme would have gone down well (pun intended). Have connections via family to the banking and mining industry over here and shes not pretty. They are in a bit of shock, hoping beyond hope that things will turn around. Point in case, family member is partner in Heavy Equipment concern (Doc holiday he can supply said Caterpillar Trucks for TARP fund transfer), he is now selling housing assets at bellow price paid to stay afloat to the next quarter, no sales for the last 4 months.

The lag effect is months out from the northern hemisphere, but it is starting to show its face at last. CBofA is experiencing its own little problem with the Storm finance debacle, brokers getting people to take out mil+ loans to invest via Storm, now its coming out that people with 25k to 45k were getting ARM/low doc/we sill fill the forms out OK, mil+ loans to invest with Storm all with CBofA knowledge.

One of the better programs over here (Insight SBS Australia) just ran a open forum with people of all strata here in Australia and two guests from the US, one economist from Standford and one from Yale, highly recommend watching it.

Skippy…Yves, you soon may have to change the theme of Antidote du jour… could bring on hunger pangs in readers.

Anonymous says:

Tim Duy:

“Leaving aside the issue of housing prices for a moment, consider the issue of household net worth. I always feel that academics misinterpret balance sheets, particularly household balance sheets. Here Bernanke is saying that debt is not a problem because it is matched by an asset of equal or greater value. Ergo, you have positive net worth, so everything is good. But that debt needs to be supported by a positive cash flow, and the many assets on household balance sheets generally do not generate cash flow, especially owner occupied housing assets. This differs from a corporate balance sheet, where the assets are supposed to be combined in some fashion that generates a positive cash flow.”

The second order effect is worse. Rising asset prices signals increasing debt translating to reduced free cash flow. Throw in the variable cost of money (ARMs).

The world is not linear.

Lucifer says:

canucks are lying… they are just as exposed to CDS and other exotic instruments. Not acknowledging exposure is not the same as not having exposure.

They probably have a much higher exposure than the 800 billion they have acknowledged.
_________________

Canadian banks stuck with more than $800B in credit default swaps

Posted: September 16, 2008, 1:00 PM by Drew Hasselback

Amid the ongoing credit crisis few investment instruments have fallen out of favour as much as credit default swaps, and that is becoming a problem for Canadian banks that hold them.

In a note put out this morning, RBC Capital Markets analyst Andre-Philippe Hardy estimated that the Big Six hold about $832-billion of credit default swaps.

Hardy said some of those positions may be in trouble because of the collapse of Lehman Brothers and the potential failure of the insurance giant AIG, both significant players in the US$62-trillion global credit default swap market. Dealers in the U.S. and the U.K. have voted to delay rollovers in the market due to the turmoil left by the Lehman collapse.

http://network.nationalpost.com/np/blogs/fpposted/archive/2008/09/16/canadian-banks-stuck-with-more-than-800b-in-credit-default-swaps.aspx

Anonymous says:

Yale will fire up to 300 staff Yale Daily News (hat tip reader John)

If Yale and its Sisters does not continue to churn out well Papered Sons and Daughters of the Elite to man the command posts of our Economy, how will America survive?

cj says:

Private securitisation did not exist in the US prior to the early-to-mid 1980s. And it came about in the US prior to any other country in the world because of the GSEs.

Between the establishment of the two GSEs and the mid 1980s the ONLY securitisers were the GSEs. Read Liars Poker. In fact, Lewis Rinieri, who is widely regarded as the godfather of private securitisation, was at the summit with me presenting to the Obama team.

It was the long precendent established by the GSEs that enabled a private securitisation market to eventually emerge. And when it did other countries, like Australia and the UK, followed suit.

The reason GSE and private securitisation funds around 70% of all US home loans (again dominated by the GSEs) and only a very small fraction elsewhere is almost certainly because of the absence of GSEs in most of those other countries.

This person’s claim that there were “mortgage features that prevented securitisation” in other countries seems pretty specious.

In adjustable-rate dominated markets like Australia (where three quarters of all loans are variable) it is much easier to securitise than in the US, where the bulk of all loans are 30 year fixed rate. Why?

As anyone who understands the US history knows, the 30 year fixed rate mortgage created massive prepayment risks that for years dampened any private sector interest: why invest in a fixed income security with an uncertain term when the borrower effectively has a free prepayment option to game against you and repay when rates fall?

This prepayment risk caused major havoc in the first years of the emerging US securitisation market (I did not have space in my article to go through all of these issues).

The point on deposits is also wide of the mark. The empirical fact is that the US banking system is extraordinarily decentralised with over 8,400 institutions (around half of which have assets of less than $100m), and extroardinarily prone to failure with over 2,600 such failures between 1985 and 2003 (according to the FDIC).

While there had been a big increase in consolidation by the 1990s as laws prohibiting bank mergers and, amazingly, the establishment of branches interstate, were slowly removed, the dominant position of the GSEs and the displacement of traditional bank balance-sheets had already occurred decades prior (remember Fannie was set up in 1938 and Freddie in 1970).

Indeed, bank failures in the US between 1987 and 1991 still averaged an incredible 388 per year.

By the time some bank consolidation in the US did belatedly come about (ie, where today you have a much higher level of savings concentrations) the dominance of the GSEs in the housing finance space care of their government-supplied fund-raising advantages (ie, the implicit AAA rating), the effective disintermediation of traditional deposit-taking institutions had already taken place. And whatever partial consolidation did occur could not compete effectively with the GSEs.

I ran my article by an academic banking expert at MIT, David Singer, to have him check it for accuracy. He said he thought it was very good and could not find any glaring or nonglaring errors.

It is also widely accepted in the US that even today they only have one truly coast-to-coast bank: Bank of America. And friends of mine tell me that transferring money from the the east and west coasts within Bank of America is like dealing with two completely different institutions.

Again, I did not have space to deal with all these issues in the article due to the fact that it was already way over limit.

Anonymous says:

Throughout this “crisis” the Germans have been the only thinking and level-headed people. They know that they among all Europeans will be on the hook for bailing out other Europeans for years into the future, and they don’t want to waste money in one-size-fits-all solutions that are bound to fail. If only the U.S. government had a similarly frugal, effective and targeted approach. This is the sort of thing that builds investor confidence.

Anonymous says:

Kitty must be on Haldol. No chance birdie would survive that close an encounter if things were otherwise. While I’ve trusted the recent kitty and puppy and doggie and fawn pictures, this one defies both nature and common sense. It has all the credibility of an Obama promise.

brushes9 says:

The drop in the indexes today is metal.

Anonymous says:

Great point in that Models & Agents post about derivatives' effect on receivables. They put firms in a situation where the quick ratio abruptly blows up beyond critical levels. Monitoring is useless.

Old Bogus says:

cj’s long screed sounds like a ringing endorsement for monopolistic banking. His conflating the failure of small banks’s failures with the need for big monopolies is specious logic.