Do You Think That Your Money Market Cash Accounts Are Safe?
Saturday, 5. April 2008, 22:54:49
The Term Subprime Is A Red Herring
Mike Whitney writes: "In a recent interview with the New York Times, former Secretary of the Treasury Paul O' Neill, was asked how the problems with subprime mortgages could lead to a financial crisis of global proportions. O' Neill said, “If you have 10 bottles of water, and one bottle has poison in it, and you don't know which one, you probably won’t drink out of any of the 10 bottles; that’s basically what we’ve got here.”
Bulls-eye. O' Neill's answer is the best yet for explaining a complex situation in simple terms. The term “subprime” is a red herring; it is used by the media to minimize what is really going on. The meltdown in financing extends across the entire range of mortgage-security products. No loan-type has been spared. The wholesale market for anything connected to mortgages is frozen and the details are being intentionally withheld from the public. Two years ago, more than 65 percent of all mortgages were converted into securities and sold off to Wall Street. No more. That scam unraveled in July when two Bear Stearns hedge funds blew up and their were no takers for billions of dollars of mortgage-backed junk. Since then, bankers and hedge fund managers have been scrambling to conceal the facts about what mortgage-backed securities (MBS) are really worth; nothing. The fear is that when the public finds out what is really going on, they'll draw the logical conclusion that the banking system is bankrupt, which it probably is. Just look at these eye-popping losses which appeared in Bloomberg News on April 1. The financial ship is listing, and the mainstream media is doing its best to keep the public in the dark.
So for the last eight months, a simple matter of “price discovery” on publicly traded securities has been a nonstop game of hide-n-seek. That's no way to run a free market. The recent collapses of Bear Stearns and Carlye Capital are just the latest additions to this ongoing farce. Carlyle was a $22 billion hedge fund that couldn't scrape together a measly $400 billion to meet a margin call. Why? Every analyst who wrote on the topic noted that the fund was loaded up with high-quality Triple-A and GSE, Fannie Mae, FNM, bonds. So what were they offered for their MBS? That question was never answered because Fed chief Ben Bernanke rode to the rescue and created a new $200 billion auction facility and –Whoosh---Carlyle's mortgage-backed junk disappeared down a black hole. How convenient; another Fed bailout to hide the damning evidence that trillions of dollars of MBSs are utterly worthless and devouring the financial system from the inside."
The Fed's Framework Agreements of TAF, TSLF, PDCF Are Only Temporary Fixes Which Obscure The Danger Of A Fiancial Emergency
Mr Whitney continues: "Bernanke's myriad auction facilities (four, so far) are ostensibly designed to remove these mortgage-backed stinkers from the banks' balance sheets so they can start lending again. But there's another reason, too. The Fed thinks they can simply put these MBSs in cold-storage for a while and then re-thaw them when the market bounces back. But the market for MBSs won't bounce back. This is biggest housing bust in US history and prices have a long way to go. Who is going to invest in mortgage-backed bonds when the underlying asset is losing value every day? Besides, as Paul O' Neill points out; one of the bottles contains poison and investors don't like poison. So, Bernanke is stuck trying to treat with the symptoms rather than the disease."
Pimco's Bill Gross Basically Says The Banks And Investment Bankers Are Insolvent
Pimco's Bill Gross said, “What we are seeing is the collapse of the modern day banking system”; Mr Whitney continues: "American-style capitalism is in crisis-mode and the outcome is far from certain. The Fed's interventions show that the long held belief that markets are self-correcting has vanished. Laissez-faire is out; regulation is in."
The Fed And OFHEO Has Nationalized Investment Bankers, Banks, And Mortgage Suppliers And Transferred Illiquid Debt Onto The Taxpayers
The Federal Reserve has formed a public private partnership with the Banks and investment bankers: it is privatizing profits and socializing losses; it has de-leveraged illiquid investment debt onto the taxpayers.
Mr. Whitney relates: “Since the Fed cannot retire loans made via TAF and its repo program without adding to those 'elevated pressures', the loans should be considered an equity infusion, because they’ll be repaid at the convenience of the borrower rather than on a schedule agreed with the lender." What Waldman did not say was that the Fed had ventured into a broad nationalization of the prime dealers on Wall Street by being an equity investor. (Quote,Steve Randy Waldman of Interfluidity; Henry Liu, “A Panic-stricken Federal Reserve”)
And he continues: "Since housing peaked in 2005, 240 independently-owned mortgage lenders have filed for bankruptcy. Wholesale funding sources have dried up and foreclosures are on the rise. Now, more than 75 percent of mortgages are funded by Fannie Mae or Freddie Mac while another 10 percent are underwritten by FHA. The real estate industry has been nationalized; another knock-on effect of Greenspan's low interest monetary policy. Presently, the Fed and the Secretary of the Treasury, Henry Paulson, are pushing (OFHEO) to expand Fannie's and Freddie's balance sheets so they can absorb bigger and riskier mortgages. This is lunacy. Fannie Mae is already perilously under-capitalized and, if it defaults, taxpayers will be on the hook for $2.2 trillion. That doesn't seem to bother Paulson who is determined to reflate the equity bubble so the profits keep rolling in to Wall Street's coffers. Still, even if the plan goes forward, it's unlikely that Paulson and Bernanke will be able to re-energize the real estate market or ignite another housing boom. Public attitudes have changed dramatically in the last few months. The myth that “housing prices never going down” has been dispelled and high levels of personal debt have forced many to reassess their spending priorities. The American consumer has never been so over-extended."
The Feds actions are just now starting to turn down the money and will deflate bond and stock market value; at the same time the Feds actions weaken the US Dollar and are inflationary to the price of gold.
A Finacial Emergency Is Coming
Mr Whitney has it right when he suggests an emergency is coming: "The housing market will be dead for a generation. That means the MBS market will falter and the multi-trillion dollar derivatives monolith will continue to unwind. It will take 'emergency measures' to address the credit avalanche which is just now hitting the broader economy."
He points out that the Federal Reserve has assumed Sovereignty via its Framework Agreements; elite Bankers together with the Fed, an oligarchy, have managed a coup, and now govern the institutions of finance, trade and commerce: "The Bear Stearns bailout is a prime example of the extent to which the Fed is willing to go to stop a meltdown. By approving the $30 billion dollar deal with JP Morgan, the Fed arbitrarily went beyond its mandate of providing liquidity to the markets and usurped Congress' authority to appropriate funds. It was a power-grab engineered under shaky pretenses. The Fed isn't authorized to prevent privately-owned businesses that are recklessly leveraged at 30 to 1 from defaulting. More importantly, the Federal Reserve is not Congress, although they have now assumed those constitutional duties. Speaker of the House Pelosi has said nothing so far."
Mike Mish Sheldon presents the James Pressley Bloomberg report of $1 Trillion Dollar writedown which is the amount of defaults and writedowns Americans will likely witness before they emerge at the far side of the bursting credit bubble, estimates Charles R. Morris in his shrewd primer, "The Trillion Dollar Meltdown." That calculation assumes an orderly unwinding, which he doesn't expect.
Expect the landslide to cascade through high-yield bonds, commercial mortgages, leveraged loans, credit cards and -- the big unknown -- credit-default swaps, CDS, Morris says. The notional value for those swaps, which are meant to insure bondholders against default, covered about $45 trillion in portfolios as of mid-2007, up from some $1 trillion in 2001, he writes.
Credit hedge funds are now the weakest link in the chain, Morris says. Their equity stands at some $750 billion and is so massively leveraged that "most funds could not survive even a 1 percent to 2 percent payoff demand on their default swap guarantees," he writes.
Morris sketches a scenario in which hedge fund counterparty defaults would ripple through default swap markets, triggering writedowns of insured portfolios, demands for collateral, and a rush to grab cash from defaulting guarantors. The credit system would suffer "an utter thrombosis," he says, making the subprime crisis "look like a walk in the park."
What he fears is that the U.S. will instead follow the Japanese precedent, seeking to 'downplay and to conceal. Continuing on that course will be a path to disaster.'"
A Two Fold Financial Emergency Risk To The Investor Suggests The Wisdom Of Inesting In Gold
One one may not have access to one's securities or two, even to one's money market accounts. Herb Greenberg points out in a Moneywatch Blog article that his doesn't want to cause panic, "but one thing that is getting little in the way of attention here is the question of whether investors should have investments in their name or street name. Many brokerage accounts are automatically opened as margin accounts, or with margin features, which means if a brokerage runs into trouble, you become just another creditor".
Given the emergence of a financial emergency, and possible inability to access funds, do you think that investing in the gold ETF, GLD, or investing long the Yen, FXY, and short the Euro, FXE, -- FXE:FXY might be better than cash.
Related Charts
Bill Luby provides the chart of M3 which I believe is largely money market cash accounts: M3 has been expanding at a rate of almost 20% as investors are not buying either stocks or US government Treasuries.
Mike Whitney writes: "In a recent interview with the New York Times, former Secretary of the Treasury Paul O' Neill, was asked how the problems with subprime mortgages could lead to a financial crisis of global proportions. O' Neill said, “If you have 10 bottles of water, and one bottle has poison in it, and you don't know which one, you probably won’t drink out of any of the 10 bottles; that’s basically what we’ve got here.”
Bulls-eye. O' Neill's answer is the best yet for explaining a complex situation in simple terms. The term “subprime” is a red herring; it is used by the media to minimize what is really going on. The meltdown in financing extends across the entire range of mortgage-security products. No loan-type has been spared. The wholesale market for anything connected to mortgages is frozen and the details are being intentionally withheld from the public. Two years ago, more than 65 percent of all mortgages were converted into securities and sold off to Wall Street. No more. That scam unraveled in July when two Bear Stearns hedge funds blew up and their were no takers for billions of dollars of mortgage-backed junk. Since then, bankers and hedge fund managers have been scrambling to conceal the facts about what mortgage-backed securities (MBS) are really worth; nothing. The fear is that when the public finds out what is really going on, they'll draw the logical conclusion that the banking system is bankrupt, which it probably is. Just look at these eye-popping losses which appeared in Bloomberg News on April 1. The financial ship is listing, and the mainstream media is doing its best to keep the public in the dark.
So for the last eight months, a simple matter of “price discovery” on publicly traded securities has been a nonstop game of hide-n-seek. That's no way to run a free market. The recent collapses of Bear Stearns and Carlye Capital are just the latest additions to this ongoing farce. Carlyle was a $22 billion hedge fund that couldn't scrape together a measly $400 billion to meet a margin call. Why? Every analyst who wrote on the topic noted that the fund was loaded up with high-quality Triple-A and GSE, Fannie Mae, FNM, bonds. So what were they offered for their MBS? That question was never answered because Fed chief Ben Bernanke rode to the rescue and created a new $200 billion auction facility and –Whoosh---Carlyle's mortgage-backed junk disappeared down a black hole. How convenient; another Fed bailout to hide the damning evidence that trillions of dollars of MBSs are utterly worthless and devouring the financial system from the inside."
The Fed's Framework Agreements of TAF, TSLF, PDCF Are Only Temporary Fixes Which Obscure The Danger Of A Fiancial Emergency
Mr Whitney continues: "Bernanke's myriad auction facilities (four, so far) are ostensibly designed to remove these mortgage-backed stinkers from the banks' balance sheets so they can start lending again. But there's another reason, too. The Fed thinks they can simply put these MBSs in cold-storage for a while and then re-thaw them when the market bounces back. But the market for MBSs won't bounce back. This is biggest housing bust in US history and prices have a long way to go. Who is going to invest in mortgage-backed bonds when the underlying asset is losing value every day? Besides, as Paul O' Neill points out; one of the bottles contains poison and investors don't like poison. So, Bernanke is stuck trying to treat with the symptoms rather than the disease."
Pimco's Bill Gross Basically Says The Banks And Investment Bankers Are Insolvent
Pimco's Bill Gross said, “What we are seeing is the collapse of the modern day banking system”; Mr Whitney continues: "American-style capitalism is in crisis-mode and the outcome is far from certain. The Fed's interventions show that the long held belief that markets are self-correcting has vanished. Laissez-faire is out; regulation is in."
The Fed And OFHEO Has Nationalized Investment Bankers, Banks, And Mortgage Suppliers And Transferred Illiquid Debt Onto The Taxpayers
The Federal Reserve has formed a public private partnership with the Banks and investment bankers: it is privatizing profits and socializing losses; it has de-leveraged illiquid investment debt onto the taxpayers.
Mr. Whitney relates: “Since the Fed cannot retire loans made via TAF and its repo program without adding to those 'elevated pressures', the loans should be considered an equity infusion, because they’ll be repaid at the convenience of the borrower rather than on a schedule agreed with the lender." What Waldman did not say was that the Fed had ventured into a broad nationalization of the prime dealers on Wall Street by being an equity investor. (Quote,Steve Randy Waldman of Interfluidity; Henry Liu, “A Panic-stricken Federal Reserve”)
And he continues: "Since housing peaked in 2005, 240 independently-owned mortgage lenders have filed for bankruptcy. Wholesale funding sources have dried up and foreclosures are on the rise. Now, more than 75 percent of mortgages are funded by Fannie Mae or Freddie Mac while another 10 percent are underwritten by FHA. The real estate industry has been nationalized; another knock-on effect of Greenspan's low interest monetary policy. Presently, the Fed and the Secretary of the Treasury, Henry Paulson, are pushing (OFHEO) to expand Fannie's and Freddie's balance sheets so they can absorb bigger and riskier mortgages. This is lunacy. Fannie Mae is already perilously under-capitalized and, if it defaults, taxpayers will be on the hook for $2.2 trillion. That doesn't seem to bother Paulson who is determined to reflate the equity bubble so the profits keep rolling in to Wall Street's coffers. Still, even if the plan goes forward, it's unlikely that Paulson and Bernanke will be able to re-energize the real estate market or ignite another housing boom. Public attitudes have changed dramatically in the last few months. The myth that “housing prices never going down” has been dispelled and high levels of personal debt have forced many to reassess their spending priorities. The American consumer has never been so over-extended."
The Feds actions are just now starting to turn down the money and will deflate bond and stock market value; at the same time the Feds actions weaken the US Dollar and are inflationary to the price of gold.
A Finacial Emergency Is Coming
Mr Whitney has it right when he suggests an emergency is coming: "The housing market will be dead for a generation. That means the MBS market will falter and the multi-trillion dollar derivatives monolith will continue to unwind. It will take 'emergency measures' to address the credit avalanche which is just now hitting the broader economy."
He points out that the Federal Reserve has assumed Sovereignty via its Framework Agreements; elite Bankers together with the Fed, an oligarchy, have managed a coup, and now govern the institutions of finance, trade and commerce: "The Bear Stearns bailout is a prime example of the extent to which the Fed is willing to go to stop a meltdown. By approving the $30 billion dollar deal with JP Morgan, the Fed arbitrarily went beyond its mandate of providing liquidity to the markets and usurped Congress' authority to appropriate funds. It was a power-grab engineered under shaky pretenses. The Fed isn't authorized to prevent privately-owned businesses that are recklessly leveraged at 30 to 1 from defaulting. More importantly, the Federal Reserve is not Congress, although they have now assumed those constitutional duties. Speaker of the House Pelosi has said nothing so far."
Mike Mish Sheldon presents the James Pressley Bloomberg report of $1 Trillion Dollar writedown which is the amount of defaults and writedowns Americans will likely witness before they emerge at the far side of the bursting credit bubble, estimates Charles R. Morris in his shrewd primer, "The Trillion Dollar Meltdown." That calculation assumes an orderly unwinding, which he doesn't expect.
Expect the landslide to cascade through high-yield bonds, commercial mortgages, leveraged loans, credit cards and -- the big unknown -- credit-default swaps, CDS, Morris says. The notional value for those swaps, which are meant to insure bondholders against default, covered about $45 trillion in portfolios as of mid-2007, up from some $1 trillion in 2001, he writes.
Credit hedge funds are now the weakest link in the chain, Morris says. Their equity stands at some $750 billion and is so massively leveraged that "most funds could not survive even a 1 percent to 2 percent payoff demand on their default swap guarantees," he writes.
Morris sketches a scenario in which hedge fund counterparty defaults would ripple through default swap markets, triggering writedowns of insured portfolios, demands for collateral, and a rush to grab cash from defaulting guarantors. The credit system would suffer "an utter thrombosis," he says, making the subprime crisis "look like a walk in the park."
What he fears is that the U.S. will instead follow the Japanese precedent, seeking to 'downplay and to conceal. Continuing on that course will be a path to disaster.'"
A Two Fold Financial Emergency Risk To The Investor Suggests The Wisdom Of Inesting In Gold
One one may not have access to one's securities or two, even to one's money market accounts. Herb Greenberg points out in a Moneywatch Blog article that his doesn't want to cause panic, "but one thing that is getting little in the way of attention here is the question of whether investors should have investments in their name or street name. Many brokerage accounts are automatically opened as margin accounts, or with margin features, which means if a brokerage runs into trouble, you become just another creditor".
Given the emergence of a financial emergency, and possible inability to access funds, do you think that investing in the gold ETF, GLD, or investing long the Yen, FXY, and short the Euro, FXE, -- FXE:FXY might be better than cash.
Related Charts
Bill Luby provides the chart of M3 which I believe is largely money market cash accounts: M3 has been expanding at a rate of almost 20% as investors are not buying either stocks or US government Treasuries.
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