By Jim Willie CB | 8 June 2008
An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and [[mortally(?): normxxx]] wounded the world financial system, urgently pushed after removing the anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.
Standard & Poor's announced in late May it has cut or might cut debt ratings on $34 billion of securities tied to Alt-A mortgages, whose type issued in 2007 have a default rate to 6.64% for 90 days late as of end April. Massive S&P downgrades might soon force Wall Street firms to move up to $5000 billion of assets from off-balance sheet locations back onto their books. The bank sector has so far seen very little in bank failures, compared to past such cycles.
The Texas Ratio is calculated by dividing non-performing loans at a bank, including those 90 days delinquent, by their tangible equity capital plus money set aside for future loan losses. Using this ratio, IndyMac Bancorp, Sterling Financial, Corus Bankshares, Imperial Capital Bancorp, and GMAC Bank are all on the verge of busts. Look for these banks to possibly lead the list of failures, each with unique vulnerabilities.
Many of the regional and other private banks scattered across the United States are in deep trouble. The Federal Deposit Insurance Corp (FDIC) has declared 76 banks as officially 'Troubled' in a rise from the 50 declared with similar status at the end of year 2006. Joining the breakdown of the big banking stock index BKX breakdown in progress is the breakdown of the regional bank stock index RKH. It has fallen below the pennant pause pattern. The word CONTAGION comes to mind, the nightmare for USFed officials. The worst lies directly ahead for banks and stated losses. All propaganda will be unmasked very soon. Panic might set in within a few months time.
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The big banks have begun to set up 'private' resolution business segments [[patterned after the Resolution Trust Corp. set up by the Fed after the S&L bust: normxxx]], entrusted with the duty of liquidating credit related assets. This trend appears to be an attempt to circumvent regulators, to avoid proper accounting, and to prevent a cascading decline of valuations in disclosed [[i.e., public: normxxx]] bond markets. JPMorgan hired Blackrock to manage the $30 billion raid on Bear Stearns [[probably why the Fed ended up financing it! : normxxx]]. Merrill Lynch has also set up a private resolution business segment, according to an internal memo. They seek to reduce their $1000 billion book of assets. They had $6.6 billion in asset backed CDO bonds at the end of March. UBS has created a new distressed asset fund under Blackrock management, again another private resolution business segment. UBS conducted an ugly circular deal, where they sold basically to themselves $22 billion worth of impaired bonds for 68 cents on the dollar value.
Special Purpose Entities, Structured Investment Vehicles, and now Variable Interest Entities (VIE) constitute the shell game for insolvent giant banks avoiding honest balance sheet reporting. CreditSights estimates that impaired mortgage related assets of up to $784 billion remain in VIEs scattered across major Wall Street and money center banks. The potential additional losses related to VIEs could reach $88 billion, they estimate. Goldman Sachs recently admitted they are holding $11.1 billion in VIEs. Citigroup has a whopping $320 billion in VIEs that are off-balance sheet still.
Standard & Poor's just downgraded MBIA and Ambac, the major bond insurers. Last month Fitch downgraded them. This could provide the ultimate push for the banks to move damaged assets onto their balance sheets. An avalanche of bank writeoffs looms. The insurers are dead! Municipal bonds are another matter altogether. Delays by banks on credit asset portfolio writedowns, create risks that may be greater in the Untied States today than they were in Japan in the 1990s. The next process will involve heavy bank stock dilution much like shampooing: lather, rinse, repeat, then write down, raise capital, repeat.
Lehman Brothers stock has massive option puts, especially at strikes that would only pay off if LEH completely imploded, with some even that expire in June, an identical situation to Bear Stearns just three months ago. Lehman Brothers is also poised to be killed. The Credit Default Swap for Lehman Brothers corporate bonds has jumped from 130 at end April to 240 at end May and to 275 in early June. In 1Q2008, Lehman recently admitted a mere $200 million in losses from the oversized $6.5 billion portfolio of subprime securities on its balance sheet. But, considering that a quarter of their total securities bear junk status, Lehman's executive comments, made public, do not match reality. The time has come to punish, err, to impose proper value.
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The USFed portfolio of resources is limited. The USFed is [was] in possession of $800 billion in assets. It has relinquished at least $300 billion in USTreasurys so far for damaged mortgage bonds. It has extended over another $140 billion in credit.
UBS, the Union Bank of Switzerland, is a prime highlighted candidate for imminent failure and declared bankruptcy. The bank still is plagued by rather substantial continued debt exposure, despite heavy writedowns already. They have $45 billion in US mortgage assets, $8.6 billion in leverage financial commitments like Collateralized Debt Obligations, and $10.4 billion in US student loans. Rumors have swirled that Barclays of London is considering an acquisition of either Lehman Brothers or UBS. The US-UK tag team of banking vultures take their turns.
Countrywide might lose its acquiring suitor in Bank of America, which could quickly force its bankruptcy. The implication of all of this is that the credit market will soon realize (if it hasn't already) that the financial scheiss storm is nowhere near ended. Some call the last couple of months 'the eye of the hurricane', appropriately. Countrywide originated almost 20% of all US mortgages in recent years. Countrywide could produce the largest bankruptcy of a bank in US history. Ripple effects could be enormous and spread like wildfire across the entire banking industry [[look for the Fed to 'assist' BoA with this acquisition, à la Bear Sterns, if necessary; where, oh where, will it all end? : normxxx]].
In April 73,880 homeowners with privately insured mortgages fell more than 60 days late on payments, compared with 39,584 who got back on track, according to Countrywide's report. The lower 54% so-called 'Cure Ratio' among defaulted mortgages last month compares with 80% in April 2007 and 87% in March. The foreclosure process is hardly abating.
The Standard & Poor's Case Shiller composite index of 20 metropolitan areas showed prices of existing homes fell 2.2% in March, accelerating to worse than a scary 20% annualized decline. The National Assn of Realtors reports the 1Q2008 single family home price to be 14.1% lower than Q1 of last year. Home values provide the collateral for the majority of bank loans, and are carried as by far the largest asset class [[not much 'risk amelioration' through 'diversification' when all of these assets are going down together: normxxx]].
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The precious metal mining stock index HUI does not show anywhere near as much volatility as the gold and silver metal prices. The triple leg down in the precious metal price charts contrasts with a double leg down for the HUI in correction this spring. The necessary event for systemic conditions to be favorable to gold, silver, and their mining stocks is the creation and operation of a New Resolution Trust Corp for mortgages. Until then, banks are just playing shell games, shifting bonds among themselves to and from the USFed. Some draining might be taking place by the USFed in open market actions in the rebalance of their own portfolios.
A New RTC would enable the USFed to have another Clydesdale horse pulling the GOLDEN beer wagon, one from the USGovt breed. That would constitute mammoth monetary inflation. To date all profligate money creation has been hogged by the money center banks and investment banks on Wall Street. However, the US Congress is a pack of cowards on the matter. They refuse to make the tough decisions on a New RTC until the November presidential elections. Until then, housing declines further. Households will retrench as they endure dire straits, then fail. Until then, expect bank mortgage bonds and portfolios to crumble further. They will retrench until they seize, then fail.
Until then, money creation funnels to Manhattan at the further expense of the USEconomy and US Middle Class. They will enjoy the counterfeit fiesta first, despite being the most culpable for the excesses tied to lax lending and fraudulent loan packaging. When the second big horse is fitted for the harness, we will have the powerful pair ready to drive all things precious. We are witnessing a foundation built for gold. We might also be witnessing calculated plans to centralize financial power [[is there any other? : normxxx]]in a truly historic manner; naturally, for the benefit of the few.
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Normxxx
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