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alstry (35.00)

Municipal Nightmare!!!!!

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15

July 29, 2008 – Comments (23)

Somebody forgot to tell the Stock Market today that our State and Local Governments are facing a ENORMOUS fiscal emergency.  Deficits are already HUGE and growing by the day.

California is wrestling with a deficit that seems to be so large that even firing all the state employees won't balance the budget.  The city of Vallejo already went bankrupt.

Georgia tax receipts decreased by 11% in the last month of the fiscal year while only down 1% over the whole year.......clearly a sign the deterioration is accellerating.

Now another biggie......New York:

In a televised speech a few minutes ago,  Gov. David Paterson announced that he would be calling back the legislature on Tuesday, August 19 for an “emergency economic session.”

When he came into office in March, this year’s projected deficit was $5 billion. Now, the estimate is $6.4 billion.

That is $1.4 billion higher in only four months. The combined budget deficit estimate for the next three years has gone up to $26.2 billion from $21.5 billion, a 22% increase in less than 90 days.

Last year, the top 16 banks paid $173 million in taxes last year; this year, its $5 million, a 97% decrease.

Paterson: “The fact is, we confront harsh times. Let me be honest. This situation will get worse before it gets better.

http://blogs.timesunion.com/capitol/archives/8176

The above only addresses state issues.  County and City issues are just as bad if not more dire.

Revenues are evaporating to our local governments.  There is trillions in municipal bonds dependant on those revenues.  Insurance backing those bonds are now suspect.

Non Federal governments can only use their taxing authority or borrowing capacity to meet its budget requirements......many many states are now facing HUGE budget shortfalls......and seemingly growing by the week.  How are they going to pay their employees and make bond payment obligations?  Should we simply screw the bondholders?

How far will services and jobs have to be cut back and what impact will that have on the economy.  Businesses are already shutting down due to lack of revenues.....will governments be forced to shut down??????

And they are projecting the Federal deficit to be half a trillion????  Anyone want to buy a bridge in the Sahara?

23 Comments – Post Your Own

#1) On July 29, 2008 at 9:09 PM, alstry (35.00) wrote:

DEMON VS. ALSTRY

We are rapidly approaching the point where our country is going to have to make a very dramatic decision.  Are we going to devalue our currency so debt obligations can be serviced or are we going to clense the system and allow the toxic debt to default?

Demon says print which will result in hyper inflation.  Quite frankly, I doubt it.  If we hyper inflate, our dollar will basically be worthless and few will be able to afford much.  Especially with wages constrained overseas wage pressures holding salaries down.

Altthough likely to be painful, we are likely going to have to let the debt default and bring the system into equilibrium between debt and revenues.  In doing so, the savers will be reward and the debtors will have to reorganize.

Conversely, if we hyperinflate in a wage constrained environment....practically everyone will go broke as few will be able to afford anything.

Over the next few weeks, our states are going to have to make some painful decisions....this should give us some insight as to where things are going.

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#2) On July 29, 2008 at 9:10 PM, LordZ wrote:

Shut it all down...

I'm rich B**CH...

more money more money :)

ha ha ha ha ha ha ha

 

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#3) On July 29, 2008 at 9:21 PM, alstry (35.00) wrote:

Lordy,

Have you noticed how everything is happening at the same time

Record Residential Real Estate Price Declines, Record Foreclosures, Bond values crashing, Mortgage values crashing, State Tax Revenues evaporating, Municipal Revenues decreasing, Growing Federal Deficit, More and more banks in danger of failing, Bankruptcies exploding ect....?

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#4) On July 29, 2008 at 9:41 PM, DemonDoug (92.09) wrote:

To the main body of your post:

I remember with Buffett was offering to buy MBIA's and Ambac's municipal insurance divisions; and they said no, because it was profitable.  I'm willing to bet that if subprime insurance and default swaps don't completely obliterate them (which it should on it's own), then this wave of muni defaults is going to absolutely bury them.  The entire bond insurance racket is quickly coming to an end.  Now if we can just get the SEC to end the ratings agency tri-opoly and make ratings a free market, we might actually get some sanity into the bond system.

Altthough likely to be painful, we are likely going to have to let the debt default and bring the system into equilibrium between debt and revenues.  In doing so, the savers will be reward and the debtors will have to reorganize.

Al, I wish this is what would happen.  In fact, I thought for a time that we might actually have a power structure that would allow for an orderly unwinding of all this debt. The truth of the matter is even more painful.

Conversely, if we hyperinflate in a wage constrained environment....practically everyone will go broke as few will be able to afford anything.

Yup.  But the banks will still be around, and that's what matters to the powers that be.  As long as JPM, GS, and The Fed control the money, that's what will happen.

If you need solid proof, here it is:

Helicopter Drop Speech

Some excerpts:

"Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy....

"Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation...

"Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"... However, a principal message of my talk today is that a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition. As I will discuss, a central bank, either alone or in cooperation with other parts of the government, retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is at zero"

"In the remainder of my talk, I will first discuss measures for preventing deflation--the preferable option if feasible. I will then turn to policy measures that the Fed and other government authorities can take if prevention efforts fail and deflation appears to be gaining a foothold in the economy."

----

The point here alstry is that bernanke's dyed-in-the-wool belief is that deflation is the worst possible outcome.  

He goes on to talk about all the ways the Fed can prevent deflation or even cure it if need be.

He gives a quick reasoning for why Japan has been stuck in a deflation cycle - he states that it mainly has to do with the fact that there is no strong leadership taking the bull by the horns and making radical decisions needed to reform or change the system (in effect saying the Central Bank doesn't have the power to do helicopter drops of money).

I still don't understand why you aren't seeing what I'm seeing Al.  300b ag bill is all pork.  160 stimulus bill - all pork.  300b housing bailout - pork.  that's 760b of basically new money that is going pretty much solely to prop up asset prices.  This is to say nothing of the TAF, PDCF, the open market purches the Fed has made to artificially keep interest rates low, and the fact that the Fed has been accepting subprime MBS's for collateral for a lot of these loans.

All the Fed needs to do is monetize all that debt and we get an instant 50% devaluation of the dollar, easily.

So unless and until the powers-that-be kick Bernanke out of the Federal Reserve and install an Austrian economist, we are going to get inflation.

BTW, I never made the claim of hyperinflation, and I would appreciate in this and future debates if you would maintain that distinction.  We are in a period of high inflation, 12% currently, and my prediction is we'll get to 20-30% annually for the next couple of years at worst.  That is not hyperinflation.  Hyperinflation is in the hundreds to thousand of percentages per year, and usually happens when there are things like tanks rolling in city streets and people are starving and unemployment is above 60%.   If you'd like to make a friendly wager on the price of goods, I'd take any bet on any consumer item or commodity.  Oil, gold, eggs, rice krispies - one year from now all will be more expensive priced in US dollars.

And yes, it's going to be very, very, very painful for many people.  But I bet you anything that JPM, GS, C, and BAC will still have CEO's making millions and millions of dollars while the economy tanks.

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#5) On July 29, 2008 at 9:58 PM, alstry (35.00) wrote:

Demon,

I will maintain the distinction on the definition of hyperinflation and we agree on the distinction:) 

Here is my problem with your thesis:

Yes, relatively recently the FED has announced what approaches $1 Trillion dollars in various programs....some stimulative and some not.

However, between 2004 and 2006, I calculate between HELOCs, toxic mortages, crazy CRE financing, insane LBOs, and nutty private equity deals.....we were stimulating the economy by at least $3 Trillion dollars per year.

The current programs don't even come close.  That is why debt is now defaulting because few have access to credit to roll it over.

It is simply an analysis between debt creation in the go go years and current printing vs. debt destruction.

Right now, I see money evaporating a lot faster than it is being printed.....and the evidence seems to be turning in my favor.

But nothing definitive can be determined yet.

 

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#6) On July 29, 2008 at 10:02 PM, rd80 (98.66) wrote:

"Altthough likely to be painful, we are likely going to have to let the debt default and bring the system into equilibrium between debt and revenues.  In doing so, the savers will be reward and the debtors will have to reorganize."

Not exactly.  The debtors will have to reorganize, but it's the savers who'll be punished. They're the ones holding those bonds.

In your scenario, the only pain for municipal politicians if they default is that they'll need to learn how to run the gov't on a balanced budget since new bond issues won't be feasible.  It's the bond holders, aka savers, who'll take the pain, not the bond issuers.

In your scenario, there's no backstop if the FDIC is depleted and the gov't opts to default on its obligations. Sorry savers, you're wiped out.

Of course, municipal bond holders could come out in pretty good shape depending on how far a bankruptcy court would go in liquidating assets to pay off the bonds.  What do you think California's state parks are worth? 

Hmm, maybe CA bonds aren't such a bad investment idea - dibs on Carlsbad beach state park.

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#7) On July 29, 2008 at 10:10 PM, LordZ wrote:

Alstry as the great Iranian president told the news interviewer who was commenting on how in his oil rich land, they ration gasoline and have long lines that take hours to even buy gas,

you shouldnt needlessly worry about the immaterial (the Iranian president said in his interview), and he went on to talk about how the oil price is manufactured and that oil should be around 78 dollars a barrel.

Boone pickens finally dumped his Yahoo shares... good for him.. did it at a loss...

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#8) On July 29, 2008 at 10:15 PM, MarketBottom (29.43) wrote:

BOTTOM LINE

You can't lend new money to pay old money that people, companies, or government could not pay in the first place.

The whole of the fdic banking system had in quarter 1 of 2008  

89 cents of reserves to cover each present dollar of past due loans . The US banking system is bankrupt. All government has been bankrupt for years, and foolishly paying todays bill with tomorrows estimated revenues.

That day that would never come is finally here. 

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#9) On July 29, 2008 at 10:29 PM, alstry (35.00) wrote:

MarketBottom,

You hit the nail on the head.  In the past, the system was willing to extend credit keep old debt performing.  In the last seven years, new debt creation exploded with the fiction of deritives somehow insuring the losses that were supposed to be contained.  Now individuals, businesses, and municipalities all need revenues at the same time to service the debt.  Without revenues, the must borrow but few are willing to step up to the plate and take risk of loss.  Especially since HUGE shortfalls and additional losses are forecasted.

The system has simply run out of money!!!!!!

From the WSJ: 

Ford last week wrote down $2.1 billion in pre-tax profits as a result of unprofitable leases. GM and Chrysler are likely to suffer big lease-related losses through their own lending units.

As of March 31, GMAC held $33 billion in lease assets on the books. Of that, about $14 billion is at risk of being written down as financial losses.

When you are leveraged, you don't have to write off much before you write off your total equity.  Sorta like a house, if you only put 10% down, if the house declines in value 11%, you have NEGATIVE equity.

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#10) On July 29, 2008 at 10:37 PM, LordZ wrote:

Alstry if you only put down 10% you really didnt buy the house, you bought debt, and until said debt is repaid, you really dont have equity... you have obligations...

Its not the end of the world, now get some sleep so you can think up some more bearish stuff that you'll read about tommorrow,,, lol

 

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#11) On July 29, 2008 at 10:45 PM, MarketBottom (29.43) wrote:

Hopefully, this will be the turning point for America. If pain is what it takes to rid this country of illegal drugs, and over prescribed prescription drugs, to rid government of self serving liars, to be able to put some faith in a companies financial statement, and finally for all Americans to realize that we should stand together for the common good, even if we must sacrifice individually. Then so be.

Today was a beginning, as Merrill made an attempt at the TRUTH and a worthless senator was indicted. 

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#12) On July 29, 2008 at 11:00 PM, alstry (35.00) wrote:

Market,

Think of the hundreds of billions of dollars finance executives took in as bonuses for illusory profits based on BS loans between 2001 and 2007. 

The of the sales stimulation and boost to GDP from trillions in home equity and other types of toxic loans that were not really material before 2001.

Think of the hundreds of billions of profits that translated into stock market capitalization that are now turning into losses and writedowns.

Think of the BS wealth people thought they had in their houses now shrinking by the minute.

Think of the taxes our governments got accustomed to now evaporating.  And to add insult to injury....HUGE corporate NOL carryback rebates will be due.

Revenues are evaporating.  Our governments are running out of money.  Our businesses are shutting down everyday.  And individuals are scrambling as they are getting fired or incomes getting cut(airline workers, auto workes, real estate sales people, mortgage workers, restaurant workers, retail employees, technology sales people, medical sales workers, government employees ect.......)

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#13) On July 29, 2008 at 11:08 PM, abitare (52.68) wrote:

FYI - I will go with Soros here:

The worst market crisis in 60 years

By George Soros

Published: January 23 2008 02:00 | Last updated: January 23 2008 02:00

T he current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years.

However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.

MY COMMENT: It is systemic and severe. I do not know how far many Americans are from burying money in the back yard, as apposed to holding it in an American "financial institution"

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#14) On July 29, 2008 at 11:34 PM, alstry (35.00) wrote:

It appears both Soros and I are calling for the mother of all busts.

Without credit expansion, the system suffocates.  Individuals, businesses and governments are becoming desperate for cash.

Delta is now charging $50 for a second checked bag.  New York and California are facing an immediate fiscal crisis.  Bennigans, Mervyn's, and Steve and Barry's recently filed BK.  Individual bankruptcies skyrocketing.

The amazing part is that we are just at the beginning.  Without credit expansion, more and more will suffocate and eventually die.

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#15) On July 29, 2008 at 11:42 PM, lquadland10 (< 20) wrote:

As long as Mexico and Canada can hold our dollar that we paid them instead of changing it back into their money it will work to keep the dollar strong and comedies down. That way the Fed can say inflation is low.

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#16) On July 29, 2008 at 11:52 PM, alstry (35.00) wrote:

For those that look around and think everything is fine.........tell that to Bennigan's employees who probably thought the same thing:

Alphonso Prince, manager of the Bennigan's at 1250 Torrence Ave. in Calumet City, said he was notified of the shutdown at 12:10 a.m. from his area director, who was crying on the telephone. He said there was no forewarning about the shutdown.

"I'm angry," Prince said. "I'm hurt; I'm devastated."

"No blast of e-mails, nothing to say, 'Sorry, we just can't do it anymore,'" Prince continued, "just a phone call from my area director who doesn't know anything, because she just found out. She'd been with the company for 21 years."

After 21, simply shut down without warning to the employees.  That is what happens in a credit crisis, here today and gone tomorrow without warning.  If no one is willing to extend credit, the business simply shuts down.

Chrysler has 30 Billion dollars of debt coming due in a few weeks.  Now that it has cut out leasing completely, its propects for future sales is even worse.  If Chrysler can't obtain the necessary committments.....it could spell serious issues.  Between Chrysler and its suppliers...tens of thousands of jobs could be affected.....not to mention all of the municipalities those jobs are located in.


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#17) On July 29, 2008 at 11:53 PM, DemonDoug (92.09) wrote:

Al, in case you were wondering, this is how the Fed can inflate the currency, even in the trillions of dollars.  From the link I posted above:

Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).8 Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation. 

-----------

Do you understand the ramifications of this?  The Fed has already done the emphasized actions.  It did it when it backed the buyout of BSC.  29B straight from the Fed to the financial markets.  1 trillion, 2 trillion, 500 quadrillion - it doesn't matter.  They are all just numbers in a computer.

Let me repeat that last line in case you didn't read it, or ignored it: If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.

And bernanke is right.  If you put enough money out there, you will force people to spend it, because it will cause a highly inflationary cycle where you have to spend your money now, because tomorrow it will be worth a lot less.

While the Fed currently doesn't have a trillion dollars on it's balance sheet, this is merely a technicality.  All the Fed needs to do is "buy" a few trillion in US T-bills, and presto, they have the means to inject unlimited amounts of money into the financial system.

Al, I've asked this to you before, but you still haven't responded to my knowledge:

Imagine a scenario where financial assets are falling, unemployment is rising, banks and businesses are going belly-up, but consumer and commodity prices are rising.  Imagine how much more painful that is as opposed to consumer and commodity prices falling.

In your scenario, we have a lot of pain while the toxic debt gets flushed out of the system, and we can maybe get a reset to a better lending and financial system.

In my scenario, we have a lot of pain while the toxic debt begets high inflation, and instead of massive defaults, we have a continuation of the overstimulated system we've had for the past 30 years.

In each case, there is a lot of pain.

In your scenario, Joe 6pack goes hungry for a few years, but then American entrepreneurship and ingenuity starts leading us out of recession.  In the interim, many many banks and financial companies go away.  Many very rich Wall Street types end up dirt poor, and permanently out of a job as the entire financial industry contracts and becomes more streamlined and efficient.

In my scenario, Joe 6pack goes hungry for a few years, but not as hungry as unemployment stays a bit lower than in a highly deflationary scenario (because some of that money will trickle to the labor pool - see infrastructure stimulation and ag packages).  American entrepreneurship and ingenuity leads a bit of a recovery, but the debt still out there makes things tough.  In the interim, a few banks and financial institutions die, but the system lives on.  BAC, C, GS, and WFC survive, and continue to rake in interest income from the backs of joe 6pack who continues to struggle against continued under-reporting of inflation, and has real wages that continue to decline. Also in this scenario, banking executives still get paid huge bonuses.  And nothing changes with the system itself.

Bernanke has basically told everyone that the second scenario is what is going to happen.  His actions have shown that too.  Why you continue to deny the reality of what he and The Fed is doing is beyond me.

I see you haven't dared touch my wager request.  I think alstry you really are starting to see the light and how absolutely insidious the Fed is, and how much power they really have.  They will continue to defend the Dow and asset prices at all costs.

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#18) On July 29, 2008 at 11:58 PM, AnomaLee (28.85) wrote:

The municipal nightmare is going to get worse, a lot worse...

Everyone should heed you, CAPs Spurter-Superbear #1, on that...

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#19) On July 30, 2008 at 4:16 AM, alstry (35.00) wrote:

Market,

Think of the hundreds of billions of dollars finance executives took in as bonuses for illusory profits based on BS loans between 2001 and 2007. 

The of the sales stimulation and boost to GDP from trillions in home equity and other types of toxic loans that were not really material before 2001.

Think of the hundreds of billions of profits that translated into stock market capitalization that are now turning into losses and writedowns.

Think of the BS wealth people thought they had in their houses now shrinking by the minute.

Think of the taxes our governments got accustomed to now evaporating.  And to add insult to injury....HUGE corporate NOL carryback rebates will be due.

Revenues are evaporating.  Our governments are running out of money.  Our businesses are shutting down everyday.  And individuals are scrambling as they are getting fired or incomes getting cut(airline workers, auto workes, real estate sales people, mortgage workers, restaurant workers, retail employees, technology sales people, medical sales workers, government employees ect.......)

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#20) On July 30, 2008 at 4:17 AM, alstry (35.00) wrote:

Market,

Think of the hundreds of billions of dollars finance executives took in as bonuses for illusory profits based on BS loans between 2001 and 2007. 

The of the sales stimulation and boost to GDP from trillions in home equity and other types of toxic loans that were not really material before 2001.

Think of the hundreds of billions of profits that translated into stock market capitalization that are now turning into losses and writedowns.

Think of the BS wealth people thought they had in their houses now shrinking by the minute.

Think of the taxes our governments got accustomed to now evaporating.  And to add insult to injury....HUGE corporate NOL carryback rebates will be due.

Revenues are evaporating.  Our governments are running out of money.  Our businesses are shutting down everyday.  And individuals are scrambling as they are getting fired or incomes getting cut(airline workers, auto workes, real estate sales people, mortgage workers, restaurant workers, retail employees, technology sales people, medical sales workers, government employees ect.......)

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#21) On July 30, 2008 at 4:25 AM, alstry (35.00) wrote:

Demon,

Right now I only see the Fed doing the first part of your scenario.  The $600 payment was pretty much a joke.

If they start doing the second part, simply ramp up the presses without abandon, you are absolutely right and it will be much worse for all.

Maybe Obama having Volker as an advisor might make a difference?

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#22) On July 30, 2008 at 11:33 AM, dwot (96.94) wrote:

I agree, I found your opening funny....

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#23) On July 31, 2008 at 6:51 AM, DemonDoug (92.09) wrote:

Al: taking toxic mortgage backed securities at face value market to fantasy model and trading them for t-bills is akin to giving banks gold bars for piles of ash.

They are already doing this, and if you took the time to see the total credit creation including the TAF and PDCF (which was just extended til next year, of course, always the short-term answer to the long-term problem), you would see that money supply is rising almost 20% annualized.

My thesis is that the banks have the power.  They are doing everything they can to maintain that power.  Deflation destroys banks, inflation allows them to maintain their power.  It is in the banks' best interest to continue to inflate, and all actions to this point have been in support of this thesis.

I would not be surprised to see another rate cute, with the fed funds rate going to 1.5% or less by year end.  It will probably come on an emergency basis with the next "crisis" which will probably be one of the following companies imploding: WM, WB, MER, LEH.

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