IMMINENT
FINANCIAL CRASH PREDICTED BY MIKE WHITNEY
[earthchange-bulletins]
Whitney: The Great Credit Unwind of 2008
MWM: Whitney predicts another major
round of disintegation within something like 14 days. Cause: massive
wave of defaulting among mortgage insurance companies pulling DJI down
2000 points. As should be obvious, the decision to drop interest rates
again (second time in two weeks) is a major tip off that the PLUNGE TEAM
is pressed to the max to contain the corporate equity slide. I give this
high credibility. Doubtless this is 1929 with the Bulls and the Bears
contending mightily for the power of the direction, now up now down, all
the while expanding the money supply much too aggressively to fuel
speculation bubbles. Currently the Federal Reserve is going in the
opposite direction the central bankers around the world urgently desire.
Accordingly, a major deterioration in confidence is rippling through the
globalist seas, growing stormier as the weeks pass. Every move for
Domestic Confidence creates International Disequilibrium and Loss of
Confidence. And vice verse. THE HORN OF THE GLOBALIST DILEMMA. THE ONLY
WAY OUT IS A MASSIVE NORTH AMERICAN INDUSTRIAL POLICY OF VERY AGGRESSIVE
20 YEAR PROGRAM OF SOLARIZATION, AN EQUALLY AGGRESSIVE REBUILD OF THE
RAIL SYSTEM TO TAKE HALF THE TRAFFIC OFF THE ROADS AND OUT OF THE AIR,
AND SERIOUS SUPPORT OF EXPANSION OF ROBOTIC TECHINOLOGY FOR AGRICULTURE
AND OCEAN MANAGEMENT.
January 29, 2008
An Inverted Pyramid of Subprime
Slop
The Great Credit Unwind of 2008
By MIKE WHITNEY
http://www.counterpunch.org/whitney01292008.html
Global market turmoil continued into a second week as stock markets in
Asia and Europe took another tumble on Monday on growing fears of a
recession in the United States. China's benchmark index plummeted 7.2
per cent to its lowest point in six months, while Japan's Nikkei index
slipped another 4.3 per cent. Equities markets across Asia recorded
similar results and, by midmorning in Europe, all three major
indexes---the UK FTSE "Footsie", France's CAC 40, and the German DAX---were
all recording heavy losses. It's now clear that Fed Chairman Bernanke's
'surprise' announcement of a 75 basis points cut to the Fed Funds rate
last Tuesday has neither stabilized the markets nor restored confidence
among jittery investors.
In Monday's Financial Times,
Harvard economics professor, Lawrence Summers, made an impassioned plea
for further government action in addition to the Fed's rate cuts and
Bush's $150 billion "stimulus plan". Summers believes that steps must be
taken immediately to mitigate the damage from the sharp downturn in
housing and persistent troubles in the credit markets. He suggests a
"global coordination of policy", which is another way of admitting that
the Fed has lost control of the system and cannot solve the problem by
itself.
Summers is right, although it's
easy to wonder why he remained silent while the markets were soaring and
the investment banks were reaping trillions of dollars in profits on a
"structured investment" swindle which has left the global financial
system teetering on the brink of catastrophe. Now that the US economy is
sliding towards recession; Summers is calling for "transparency". How
convenient.
"Financial institutions are holding
all sorts of credit instruments that are impaired but are difficult to
value, creating uncertainty and freezing new lending. Without more
visibility, the economy and financial system risk freezing up as Japan's
did in the 1990s."
Right again. The banks are "capital
impaired" because they are holding nearly $600 billion in
mortgage-backed assets which are declining in value every month. This is
forcing many banks to conceal their real condition from investors while
they scour the planet for the extra capital they need to continue
operations. As long as the banks are in distress, consumer and business
lending will dwindle and the economy will continue to shrink. The main
gear in the credit-generating mechanism is now broken. The rate cuts can
provide liquidity, but they cannot bring insolvent banks back from the
dead. Summers is expecting too much.
The US' current account deficit
(nearly $800 billion) has been recycling into US Treasuries and
securities from foreign investors. Up to this point, American markets
were an attractive place to put one's savings. The dollar was strong,
and the stock market had a proven record of profitability and
transparency. But since President Bill Clinton repealed Glass-Steagall
in 1999, the markets have been reconfigured according to an entirely new
model, "structured finance".
Glass-Steagall was the last of the
Depression-era bulwarks against the merging of commercial and investment
banks. As a result banking has changed from a culture of "protection"
(of deposits) to "risk taking", which is the securities business.
Through "financial innovation" the investment banks created myriad
structured debt instruments which they sold through their Enron-like
"off balance" sheets operations (SIVs and Conduits) Now, trillions of
dollars of these subprime and mortgage-backed bonds---many of which were
rated triple A---are held by foreign banks, retirement funds, insurance
companies, and hedge funds. They are steadily losing value with every
rating's downgrade.
Summers, of course, understands the
enormity of the swindle that has taken place beneath the noses of US
regulators, but chooses not to point fingers. Instead, he draws our
attention to a little known part of the market which will probably lead
the way to a stock market crash and a system-wide meltdown.
Here's Summers:
"It is critical that sufficient
capital is infused into the bond insurance industry as soon as possible.
Their failure or loss of a AAA rating is a potential source of systemic
risk. Probably it will be necessary to turn in part to those companies
that have a stake in guarantees remaining credible because they have
large holdings of guaranteed paper. It appears unlikely that repair will
take place without some encouragement and involvement by financial
authorities. Though there are many differences and the current problem
is more complex, the Long-Term Capital Management work-out is an example
of successful public sector involvement."
Some of the largest bond insurers
are are currently unable to cover the losses that are piling up from the
meltdown in mortgage-backed securities (MBS) and collateralized debt
obligations (CDO). Their business model is hopelessly broken and they
will require an immediate $143 billion bailout to maintain operations.
The largest of the bond insurers is MBIA. Here's stock analyst Michael
Lewitt, quoted in Bloomberg:
"MBIA's total exposure to bonds
backed by mortgages and CDOs was disclosed to be $30.6 billion,
including $8.14 billion of holdings of CDO-squareds (eds note; pure
garbage). MBIA was being priced as a weak CCC-rated credit when it
issued its bonds last week; it is now being priced for a bankruptcy.
MBIA's stock, which traded just under $68 per share last October,
dropped another $3.50 this morning to under $10.00 per share."
Barclay's estimates that the
investment banks alone are holding as much as $615 billion of structured
securities guaranteed by bond insurers. If the insurers default,
hundreds of billions will be lost via downgrades.
So, in practical terms,
what does it mean if the bond insurers go under?
It means that the system will freeze and the stock market will crash.
Listen to TV stock guru Jim Cramer summed it up last week in an
interview with MSNBC's Chris Matthews:
"But, Chris, there is something I
would urge all the candidates to think about and our Treasury Secretary,
which is that there are a group of insurance companies which insure all
these bad mortgages and, Cris, I think they are all about to go
belly-up, and that will cause the Dow Jones to decline 2,000 points.
They've got to be shut down and the insurance given to a New Resolution
Trust. This is going to happen in maybe two or three weeks, Chris, it
going to on the front of every newspaper and no one in Washington is
even willing to admit it."
Chris Matthews: "So who are you
including in these mortgage companies that are going to go belly-up;
give me a description?"
"These are MBIA and Ambac. Remember
the companies that Merrill Lynch and Citigroup wrote down a lot of stuff
the other day? All these companies are relying on insurance to save
them. The insurers don't have the money. There's also personal mortgage
insurance; that's PMI, is one company; MGIC is another. Chris, I am
telling you that these companies do not have the capital to "make good".
And when they do fall, and I believe it is when---if the
government does not have a plan in action; you will not be able to open
the stock market when they collapse." No one is even talking about the
fact that these major insurers, who insure $450 billion of mortgages are
all about to go under."
Cramer is correct in assuming that
the market won't open. And yet, so far, nothing has been done to avert
the disaster just ahead. Maybe nothing can be done?
So, how did things get so bad, so
fast? How could the world's most resilient, reliable and profitable
markets be transformed into a carnival show peddling poisonous
"mortgage-backed" snake-oil to every gullible investor?
Author and stock market soothsayer <http://www.counterpunch.org/martens01032008.html>Pam
Martens puts it like this
"How could a layered concoction of
questionable debt pools, many of dubious origin, achieve the equivalent
AAA rating as U.S. Treasury securities, backed by the full faith and
credit of the U.S. government, and time-tested over a century of panics,
crashes and the Great Depression?
How did a 200-year old "efficient"
market model that priced its securities based on regular price discovery
through transparent trading morph into an opaque manufacturing and
warehousing complex of products that didn't trade or rarely traded,
necessitating pricing based on statistical models?"
The answer to all these
questions is "deregulation". The financial system has been handed over
to scam-artists and fraudsters who've created a multi-trillion dollar
inverted pyramid of shaky, hyper-inflated, subprime slop that they've
sold around the world with the tacit support of the ratings agencies and
the US political establishment."
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