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Lehman and other reading



April 10, 2008 – Comments (7)

Good morning.  Yves describes this one as a critter crawling out from under a rock..  This garbage never ends.  Lehman has some questionable accounting and it appear that the investment banks that are now allowed to borrow from the fed are "taking their hung leveraged buyout loans and bundling them into collatearlized loan obligations so they can use them as collateral for loans fromt the Fed."

Go to the link to read more about what you are subsidizing.

I have been in the deflation camp, but I think what the fed is doing puts the US currency at risk for a hyper-inflation.  In simple terms this mess has to correct one of two ways

  1. The magical money that was created from nothing needs to go back to where it came from, or
  2. The magical money works it way into the system at the peril of the masses.

Credit expansion has increased the money supply far, far beyond the price increases we seen.  Well, we've seen some, housing prices, oil, base metals, and now wheat and agricultural commodities.  So, what happened to make investors their average 20% per year for the last 5 years, or total 150%?  Input costs went up 500%.  I don't see that the increase in money supply has worked its way into the economy until every thing is up 500%.

The wealthy made the majority of this money and the masses simply find themselves with an inability to make ends meet.  The rules are being changed to protect the wealthy and I am increasingly seeing less and less correcting in credit.  Or perhaps, credit is being corrected, but taxpayers are increasingly on the hook for the losses for the correction and the government is more than broke. 

With increase in money supply from credit expansion, money supply can disappear and it doesn't have to completely work its way through the economy.  With the fed having that money supply on its books in the form of debt, it doesn't disappear.  I think to fix it they eventually have to increase the money supply with a printing press.  

I saw a piece yesterday that showed the breakdown of the decreasing quality of the federal reserve.  It was something like 85% treasuries and now it is 57% treasuries and the rest is banking garbage. 

I definitely have to think what is happening here through more.

I just headed over to The Big Picture to find the link to the story on the quality of the federal reserve (not where I saw it...) and there is a post about inflation.   Personally, I think the "inflation" or expansion of the money supply, has already happened and this isn't further expansion of the money supply, but the gross level of increased money supply working into the economy.  There simply is a delay between when the money supply is increased (inflation) and when price increases show up.

Put this with the stagnant wages.  I have no idea where I saw the piece on the quality of the federal reserve, nor what day I saw it.

On another of Yves posts, "Banks are still hoarding cash, which means the Fed's heroic and ever-larger efforts have still not resolved the initial problem, namely, high interbank spreads."

I have no idea what historic interbank spreads were before the fancy computer models, but I did work in banking from 79 to 84 and the banking spread of what the bank charged and what customers got was several hundred basis points.  I never saw daily interest rates go above 12% yet mortgages went as high as about 20%, to that's an 800 basis point spread.  It seems to me there was always about a 500 basis point spread for clients.  So I am not so sure I'd call a comparison to the 12 basis point spread for interbank loans prior to the market problems starting last summer reasonable.  It has absolutely no risk built into it and I think artifically low due to banking activities that ought to have been illegal.

Apparently if you put a frog into cold water on the stove and heat that water up, the frog won't notice the water temperature increasing and won't save itself.  Bankers are a bunch of frogs. 

7 Comments – Post Your Own

#1) On April 10, 2008 at 9:43 AM, dwot (29.24) wrote:

I am with Soros:

``They claim that there will be a pickup in the second half of the year,'' he said. ``I cannot believe that. I don't see any reason to believe it because it will take much longer for the full effect of the decline in the housing market to be felt.''

Our housing crisis in Vancouver from 79-80 took until 85-86 to turn around.  I went back to university in 85. I had no idea I was evaluating what my job prospects and housing affordability would be at a time when it would never again be so good, a peak in wages and a depression in housing prices...  Well, actually the wages probably started to flatten from about 1980, but since then buying power has grossly declined.

Seriously, I started working in a bank straight out of high school and I could fill my gas tank with about an hour's worth of wages.  I can't do that now with two degrees and working up north where wages are significantly higher than what I would get in Vancouver.

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#2) On April 10, 2008 at 12:15 PM, StockSpreadsheet (69.38) wrote:

Not surprised Lehman is using questionable accounting.  Their business model is unwinding.  I saw on the news this morning that Lehman is supposedly being forced to unleverage.  They stated on Bloomburg that Lehman had to take two funds worth over a billion dollars onto its books.  Bloomburg stated that Lehman's current leverage level is 12x.  They said that Lehman's normal leverage level is 20x to 25x.  They said that this loss of leverage is going to greatly impact the profitability of Lehman and that their stock was down in early trading.  If all of Wall Street was forced to get by on only 10x leverage levels, then we wouldn't be having a lot of the creidt problems we are having today.

As far as what the Fed is doing, I keep hoping that since these are supposed to be "loans" against the "collateral" that the Wall Street firms are putting up, and that since all of the "loans" are supposed to be for something like 38 days or less, (though some are for 9 months or less), that the Fed isn't getting too terribly under water, as they could still take punitive action against the Wall Street firms if the firms tried to walk away from the "loans" they got from the Fed and hoped that the Fed would take their "collateral" as payment for the loans.  I might be naive in these assumptions, but I am mad enough as it is at Wall Street and the Fed so these assumptions help me not get madder still, when there isn't a whole lot I can do about it.  Congress is in the pockets of Wall Street and the Fed is in the pockets of both Wall Street and the major banks, so my little voice and my little bank account doesn't hold much sway.  Hopefully, with an election coming up, the voices of us little guys might get heard and some of this crap can be stopped.

I live in hope.


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#3) On April 10, 2008 at 12:40 PM, cubanstockpicker (20.82) wrote:

"Maybe the magic money is coming from imagination land or we might start seeing an unpegging of the Disney Dollar"

Well its obvious something is funny(but no one will be laughing). Lehman raises 4 billion from investors but only do that because the company is fine?

Then why would they need to raise money? I never knew of a a company that was doing well and had "strong" cash reserves that needed more cash unless they are witholding something. At least Wamu is honest enough to get the money and immediately use it to shore up, or try and shore up their bad loans.

I posted a blog yesterday on a news story about CDSes explained in the best plain english a pro can

Click here 

I also brought up an interview of the guy who invented the fancy computer program (Banker and economic historian Charles Morris) banks used to put these "assets" together.

He even warned every bank not to use his progam that way and wrote a book on the crisis and danger of Bear Stearns going belly up... LAST YEAR in APRIL!! If anyone has a disagreement with the commentary posted by dwot and follow up by stockspreadsheet this blog is straight from the horse's mouth .

Fool On,

El cubano escojedor de bolsas

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#4) On April 10, 2008 at 12:50 PM, Hezakiah (40.05) wrote:

I have quite a hard time understanding inflation myself. 

Most people (see Ron Paul, see Jim Rogers) simply state stuff like "oh the Fed is printing money like mad... therefore we will have hyper inflation."  Then there are people like Mish who state that we are facing deflation due to the credit collapse.

 Here is how I see it... maybe someone can better explain this to me.

1)  The Fed is not printing tons of money, at least not yet.  Therefore, there is no driving force for inflation via increased levels of raw currency. 

2)  Due to deleveraging and increased lending standards, it seems like there should indeed be a significant retraction in the overall money supply.  All else being equal, this would lead to deflation.

3)  However, it seems to me that you cannot simply determine inflation / deflation from the U.S. money supply.  That would assume our economy is a closed system... which is certainly not the case anymore. If you define inflation as the change in prices, then money supply will only be one factor affecting the demand side of the pricing curve.  Another major factor affecting the demand side will be the rise of emerging markets and a more global middle class.  Then you also must consider the supply side of the equation (commodities).


So when I put all that together, I see that the U.S. will be facing a constriction in the money supply (although I can see how many of the Feds lending facilities work to counter this), but that the overall supply-demand curve will be leaning towards higher prices.  Thus we have inflation.  And if we see a major U.S. led recession, this may turn into deflation.


Spreadsheet - Another issue Lehmen will be facing:  If I remember correctly, they reported quarterly EPS of $0.71, beating the street's estimate of $0.60.  However, much of their "profit" stemmed from the fact that they were writing down the value of their debt liabilities to the current market value (which was discounted heavily due to fears of default).  Without this writedown, their profit would have been $0.11.  So, assuming they survive, then they are going to have to write these debts back up to full value.  

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#5) On April 10, 2008 at 12:52 PM, AnomaLee (29.03) wrote:

Treasuries Rise as Lehman Fund Closures Reignite Credit Concern (Bloomberg)

By Sandra Hernandez and Deborah Finestone

April 10 (Bloomberg) -- U.S. Treasuries rose after Lehman Brothers Holdings Inc. liquidated three investment funds, reigniting speculation that credit-market losses are widening.

Two- and five-year notes led gains as traders raised bets the Federal Reserve will cut its target interest rate a half- percentage point this month to bolster the economy. U.S. stock index futures fell, boosting demand for government debt, amid concern that more than $230 billion in global losses and asset writedowns at financial firms have pushed the economy into a recession.

I love corporate accounting. It's amazing crap like appreciation, depreciation, 'goodwill; and the ability to move $1billion on and off your balance sheet that can amount to amazing earnings.

There is no amount of outside analysis that can truly reflect the fundamentals of a corporation abusing "GAAP".

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#6) On April 10, 2008 at 1:03 PM, Hezakiah (40.05) wrote:

Ahh - I see that the link mentioned the thing about the debt writedown... did not read it until after my post.

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#7) On April 11, 2008 at 9:33 PM, dwot (29.24) wrote:

Here's where I was looking for the post on the quality of what's backing the fed, and my memory was off, 87 to 53%, so my memory gave a bettery perspective.  It looks bad Craig.

Cubanstockpicker, you see today, news is WaMu has up to $23 billion in losses and a very rare "short" recommendation.  Interesting posts you have there.

Hezaikiah, I see "inflation" as things being priced to the money that's already out there.  You just have to glance at the M2 and M3 money supply graphs and feel sick about the increase and what it will do.

I saw that AnomaLee..  Yes, the accounting is a mess and easy to mislead investors. 



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