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alstry (34.92)

How Bad is the Worst?

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February 12, 2008 – Comments (8)

Objectively, has anyone noticed what has happened to the value of the following assets:

Commercial Bonds:  Down

Commercial Real Estate:  Down

Commercial Real Estate Loans: Down

Residential Homes: Down

Residential Morgages: Way Down

Municipal Bonds: Down

Private Equity Debt: Down

The value of the above substantially exceeds the value of the entire stock market by multiple times.  If debt is impaired, equity is basically worthless.  Basically, much of the stuff above is what our banks and insurance companies hold as investments.  The value of the investments seem to be declining daily potentially impacting the reserves.

Now money seems to be harder and harder to come by:

Threre were a number of municipal bond offerings over the past few days that couldn't be funded.  Corporate offerings are having the same problems.  The problem has gotton so bad that AIG's auditors say that there is a "material weakness" in the way AIG reports its asset values on the books.  Maybe they got a lesson from homebuilders?

If bonds are defaulting.  SWAPS come due.  There is not enough money in the world to pay off SWAP liability if there is large scale defaults.  Buffet calls SWAPS the WMD of investments.  it appears that a number of our financial institutions and funds may be learning the hard way.

If bank or insurance assets keep falling in value, a problem of solvency is becoming a very real issue.  If banks and insurance companies don't have enough money to pay their depositors and claims, then what?  How will the system function? 

Right now municipalities and corporations are having trouble getting funding as evidenced by failed auctions over the past few days.  Without funding, the cities can't pay their bills or complete projects.

The situation seems to be deteriorating by the day.  AAA rated resididential mortgage CDO's are trading at new lows.  This is the high quality stuff.  Imagine the BB and BBBs trading at pennies on the dollar.

It is clear that our leaders are becoming increasingly concerned.  Paulson today said the Worst is JUST BEGINNING.  If it is just  beginning, how bad is the worst?

8 Comments – Post Your Own

#1) On February 12, 2008 at 7:20 PM, DemonDoug (81.27) wrote:

alstry, in case you haven't noticed, the Fed and banks in the US and around the world are trying as hard as they can to prevent a black swan, 5000 point Dow slide in one day.  I think many of these debts and derivatives are going to go belly up, but the powers that be are doing their best to make the unwinding of these instruments orderly, as opposed to panicy.  It's likely that these actions will put off recovery by many years, but it will prevent huge losses in the short term that would cause unbearable social ramifications.  The worst would be the Dow to zero.  I doubt that would happen.  I do think that the markets are going to continue to drop and there will be a lot more pain for a few years to come, this is why everyone is talking about gold and silver, because hard assets are the only ones that retain value in that scenario.

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#2) On February 12, 2008 at 7:30 PM, alstry (34.92) wrote:

I agree.

But it appears that the "powers" at be are beginning to let the cat out of the bag.  First Bush yesterday, Paulson today.  Now the auditors are willing to stand up to the financial institutions and force a qualified opinion.

As asset prices keep falling, assets are going to have to be sold to meet various liquidity requirements.  It just seems that the perfect storm is developing, especially with Credit Default Swaps triggering.

Greenspan characterized swaps as follows:

"The CDS is probably the most important instrument in finance... What CDS (credit default swaps) did is lay-off all the risk of highly leveraged institutions – and that's what banks are, highly leveraged – on stable American and international institutions."

 What happens when all these stable American and international institutions all start selling at the same time.  The exit is only so big...........just ask homeowners in Fort Meyers, Florida.

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#3) On February 12, 2008 at 7:36 PM, alstry (34.92) wrote:

I agree.

But it appears that the "powers" at be are beginning to let the cat out of the bag.  First Bush yesterday, Paulson today.  Now the auditors are willing to stand up to the financial institutions and force a qualified opinion.

As asset prices keep falling, assets are going to have to be sold to meet various liquidity requirements.  It just seems that the perfect storm is developing, especially with Credit Default Swaps triggering.

Greenspan characterized swaps as follows:

"The CDS is probably the most important instrument in finance... What CDS (credit default swaps) did is lay-off all the risk of highly leveraged institutions – and that's what banks are, highly leveraged – on stable American and international institutions."

 What happens when all these stable American and international institutions all start selling at the same time.  The exit is only so big...........just ask homeowners in Fort Meyers, Florida.

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#4) On February 12, 2008 at 7:38 PM, mickeyc21 (29.36) wrote:

hi Alstry - could you source the Paulson quote. I can't find it.

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#5) On February 12, 2008 at 7:41 PM, alstry (34.92) wrote:

Source of Greenspan Quote:

http://www.minyanville.com/articles/index/a/15885

Source of Paulson Quote:

http://calculatedrisk.blogspot.com/2008/02/is-bofa-willing-to-write-down-loans-30.html

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#6) On February 12, 2008 at 8:11 PM, alstry (34.92) wrote:

DemonDoug:

Here is the problem in a nut shell.

Right now a lot of American individuals and business do not have the income(without supplemental credit) to meet their current monthly obligations.  For the first time since the Great Depression we have a negative savings rate.  We bridged the gap with rising asset/home values and homeequity loans.

Now, that homes are falling in value, HELOCs are not an option and many people simply do not have enough income to meet their current necessary expenditures as inflation persists.  Inflation has been rampant on non housing related issues digging the consumer into a deeper hole.

For the last five years, the system was more than happy to provide a shovel.  Trillions were loaned out and the economy boomed.  We probably have more granite countertops than any country in the world while losing millions of manufacturing jobs.  Now that there is limited credit availability, relatively few can service debt obligations creating an ever increasing cycle of defaults.

The problem is that home values must fall 60-70% just to maintain 2000 affordibility levels.  With the economy slowing and layoffs rising, the problem is just getting worse.

The spillover effect is now hitting our corporations with slowing and now declining sales.  Corporate debt spreads are wide and getting wider.  Revenues are falling to municipalities causing their debt obligations to come under scrutiny.

The situation is simply a cluster flop, many individuals, corporations, and municipalities simply cannot support their current debt levels.  There is trillions and trillions potentially impaired.  There is even more trillions of SWAPs on top of that.

It seems that pressure is getting a little too strong to keep it under lid.  Friday's failed muni auctions.  Yesterday AIG and Bush's concern for the economy.  And today, did Paulson sound the alarm with the worst is just beginning?

I am not sure how you restructure Trillions in debt.  It is a problem never confronted before in magnitude or scope.  The question is how do you get money to the people and business to service their debt?

If you let the debt default, then what happens to our financial institutions and savings?

Interesting dilema isn't it?

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#7) On February 12, 2008 at 9:02 PM, mickeyc21 (29.36) wrote:

Alstry - I know many businesses that are not meeting their monthly obligations. This is in a strikingly wide variety of industries. In fact this is true with ALL the businesses I know where the owner trusts me enough to tell me the truth.

That Paulson quote is staggering.He has been an absolute cheerleader up to now.

It's nice to see someone writing about what Buffet actually is saying rather than the buy and hold blather that people who are refusing to think post here every day.

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#8) On February 12, 2008 at 9:11 PM, mickeyc21 (29.36) wrote:

Alstry - I know many businesses that are not meeting their monthly obligations. This is in a strikingly wide variety of industries. In fact this is true with ALL the businesses I know where the owner trusts me enough to tell me the truth.

That Paulson quote is staggering.He has been an absolute cheerleader up to now.

It's nice to see someone writing about what Buffet actually is saying rather than the buy and hold blather that people who are refusing to think post here every day.

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