Infinite Unknown

Not for nothing did US billionaire Warren Buffett call them the real ‘weapons of mass destruction’

The market is worth more than $516 trillion, (£303 trillion), roughly 10 times the value of the entire world’s output: it’s been called the “ticking time-bomb”.

It’s a market in which the lead protagonists - typically aggressive, highly educated, and now wealthy young men - have flourished in the derivatives boom. But it’s a market that is set to come to a crashing halt - the Great Unwind has begun. (Related articles)

Last week the beginning of the end started for many hedge funds with the combination of diving market values and worried investors pulling out their cash for safer climes.

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Tags: Banks, Ben Bernanke, Credit Crisis, credit crunch, Derivatives, Derivatives market, Economy, Fed, Federal Reserve, hedge funds, LTCM, Wall Street, Warren Buffet

Oct. 9 (Bloomberg) — The government is planning to buy stakes in a wide range of banks within weeks as the credit freeze increasingly threatens to tip the U.S. economy into a deep recession.

Treasury Secretary Henry Paulson and top aides are still considering options on how the purchases would work, including having the government acquire preferred stock, two officials informed of the matter said.

The move would be a shift in emphasis in Paulson’s original intention for the $700 billion bailout package passed by Congress last week. While the Treasury still aims to buy troubled mortgage-backed securities from financial institutions, a direct capital injection would offer more immediate relief by giving banks quick access to funds they could then lend out.

“The Treasury is no longer looking for one silver bullet,” said Steve Bartlett, president of the Financial Services Roundtable, which represents 100 of the biggest firms in the industry. “They have to proceed on all fronts.”

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Tags: Ben Bernanke, Credit Crisis, credit crunch, Economy, FDIC, Fed, Federal Reserve, Government, Henry Paulson, mortgage crisis, Mortgages, NYSE, Politics, Treasury

Paulson yesterday signaled he’s considering pumping capital (=Taxpayers’ Money) into U.S. financial institutions, saying “we will use all of the tools we’ve been given to maximum effectiveness” under the $700 billion Troubled Asset Relief Program.
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Henry Paulson, secretary of the U.S. Treasury, left, and Ben S. Bernanke, chairman of the U.S. Federal Reserve, testify before the House Financial Services Committee in Washington, D.C., on Sept. 24, 2008. Photographer: Joshua Roberts/Bloomberg News

Oct. 9 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson are discovering both the leeway and limits they have as policy makers as they struggle to combat the 14-month-old credit crisis.

The two have worked to come up with novel strategies, including a complex plan for the Fed to backstop the everyday finances of corporate America by buying commercial paper, and potential injections of capital into banks. So far, they’ve made scant progress in restoring calm to the markets and are turning abroad for help, including joint interest-rate cuts yesterday.

“The relative position of the U.S. in the world economy and the world of finance is much lower than it used to be,” said Allen Sinai, chief economist at Decision Economics in New York. “With markets so global, so interconnected, we need a more unified approach to fighting the world financial crisis.”

Which proves more important in the end — the continued creativity of Bernanke and Paulson in fashioning policies to tackle the turmoil or the intractability of the now global crisis facing them — will go a long way in determining whether a developing global recession turns into something even worse.

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Tags: Ben Bernanke, Credit Crisis, credit crunch, Economy, Fed, Federal Reserve, Government, Henry Paulson, mortgage crisis, Mortgages, Politics, taxpayers, Treasury, U.S., Wall Street

A security officer stands outside of the Federal Reserve building in Washington on Sept. 16, 2008. Photographer: Jay Mallin/Bloomberg News

Oct. 8 (Bloomberg) — The Federal Reserve, European Central Bank and four other central banks lowered interest rates in an unprecedented coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression.

The Fed, ECB, Bank of England, Bank of Canada and Sweden’s Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn’t participate in the move, said it supported the action. Switzerland also took part. Separately, China’s central bank lowered its key one-year lending rate by 0.27 percentage point.

Today’s decision follows a global meltdown that sent U.S. stock indexes heading for their biggest annual decline since 1937; Japan’s benchmark today had the worst drop in two decades. Policy makers are also aiming to unfreeze credit markets after the premium on the three-month London interbank offered rate over the Fed’s main rate doubled in two weeks to a record. Continue reading »

Tags: Bank of Canada, Bank of England, Banks, Ben Bernanke, ECB, Economy, Fed, Federal Reserve, G7, Great Depression, IMF, Lehman Brothers, Meltdown, Politics, Recession, Stock Market, Sweden, U.S., Wall Street

Ben S. Bernanke, chairman of the U.S. Federal Reserve, speaks on a television above a trader in the S&P pit at the Chicago Board of Trade in Chicago, on Tuesday Oct. 7, 2008. Photographer: Joshua Lott/Bloomberg News

Oct. 7 (Bloomberg) — U.S. stocks fell, sending the Standard & Poor’s 500 Index below 1,000 for the first time since 2003, on speculation banks and real-estate companies are running short of money as the credit crisis worsens.

Bank of America Corp. tumbled 26 percent after cutting its dividend in half and saying it plans to sell $10 billion in common stock to brace for a recession. Morgan Stanley, KeyCorp and JPMorgan Chase & Co. slid more than 10 percent as investors shrugged off signs the Federal Reserve will reduce interest rates. General Growth Properties Inc., a mall owner, plunged 42 percent on concern it won’t be able to repay debt.

The S&P 500 slid 60.66 points, or 5.7 percent, to 996.23, extending its 2008 tumble to 32 percent in the market’s worst yearly slump since 1937. The Dow Jones Industrial Average dropped 508.39, or 5.1 percent, to 9,447.11, giving it a 29 percent retreat in 2008 that would also be the worst in 71 years. The Nasdaq Composite Index lost 5.8 percent to 1,754.88.

“We’ve approached the edge of the cliff,” Leon Cooperman, 65, who manages $6 billion at hedge fund Omega Advisors Inc., said at the Value Investing Congress in New York. “Do we go over the cliff or begin to recede? History says we recede, but there’s no guarantee. This is the most difficult financial environment I’ve lived through.”

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Tags: Bank of America, Ben Bernanke, Dow Jones, Economy, Fed, Federal Reserve, Ford, GM, Goldman Sachs, JPMorgan, Merrill Lynch, Morgan Stanley, Nasdaq, S&P 500, Stock Market, U.S., Wall Street

Forget the stock market gyrations. Forget Bernanke and Paulson’s ineffective, unconstitutional schemes.

Thursday’s auction for Lehman’s credit default swaps (CDS) is much more important.

Why?

Well, if banks are reassured by the CDS auction, it could do more to free up frozen capital than all of the Fed and Treasury’s ill-conceived plans put together.

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Tags: Ben Bernanke, Derivatives, Derivatives market, Economy, Fannie Mae, Fed, Federal Reserve, Freddie Mac, Government, Henry Paulson, Lehman Brothers, Politics, Treasury

When the precious metals were smashed out of nowhere and the dollar started climbing this summer I became very worried. I didn’t question my conviction that commodities are in a bull market, or that precious metals in particular are undervalued. I felt something sinister was at work. Neither move was justified on a fundamental level. I assumed that something very bad was about to happen and the metals needed to be brought lower in advance of the bad news.

Now we have a glimpse at the ugly consequences foreseen by the Treasury Department and the Federal Reserve. In early September, Fannie Mae and Freddie Mac were nationalized with a financial commitment of USD$200 billion from the taxpayers. Incredibly, the loan limits at the former GSEs were raised from $417,000 to $729,750 in March when it was more than obvious these institutions needed to be reined in. Like most bailouts and bank failures, this one was announced on a weekend to limit the impact on the stock markets.

As I mentioned in last month’s issue, Treasury Secretary Paulson was under severe pressure to act, as the Chinese started selling Fannie and Freddie bonds while threatening further retribution. Common shareholders were left with nothing, while bondholders like Pimco and Asian central banks benefited. The small investor was stung again, as taxpayer dollars were used to bail out foreigners and wealthy Americans in a policy that Jim Rogers terms “socialism for the rich.”

Unfortunately, $200 billion is just the tip of the iceberg. As the government has assumed responsibility for Fannie and Freddie’s $5.4 trillion in liabilities, the Congressional Budget Office correctly states that these institutions “should be directly incorporated into the federal budget.” The Bush Administration has strongly opposed this move. Continue reading »

Tags: AIG, bailout, bank failure, Bank of America, bankruptcy, Banks, Bear Stearns, Ben Bernanke, Bush administration, Congress, Credit Crisis, credit crunch, debt, Dollar, Economy, Fannie Mae, FDIC, Fed, Federal Reserve, Freddie Mac, George Bush, Gold, Goldman Sachs, Government, Henry Paulson, hyperinflation, Inflation, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, mortgage crisis, Mortgages, Politics, Recession, Silver, Treasury, Wachovia

Oct. 6 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke may find the next fronts of the financial crisis to be just as chilling as last month’s downfall of Wall Street titans: its spread to corporate America and state and local governments.

Companies from Goodyear Tire & Rubber Co. and Duke Energy Corp. to Gannett Co. and Caterpillar Inc. are being forced to tap emergency credit lines or pay more to borrow as investors flee even firms with few links to the subprime-mortgage debacle. California Governor Arnold Schwarzenegger says his and other states may need emergency federal loans as funding dries up.

A cash crunch on Main Street would endanger companies’ basic functions — paying suppliers, making payrolls and rolling over debt. The widening of the crisis suggests that Bernanke and Treasury Secretary Henry Paulson may have further fires to put out even as the Treasury sets up the $700 billion financial- industry rescue plan approved last week.

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Tags: Arnold Schwarzenegger, Ben Bernanke, California, Caterpillar, Credit Crisis, credit crunch, Economy, Fed, Federal Reserve, Goodyear Tire, Government, Henry Paulson, Politics, U.S.

David Tice, manager of the $1.1 billion Prudent Bear Fund, advised viewer of Bloomberg TV to move out equities into safer investments

Posted: September 30, 2008

Source: eyeblast.tv

Tags: bailout, Ben Bernanke, Credit Crisis, Dollar, Dow Jones, Economy, Gold, Inflation, Silver, Stock Market, U.S., Wall Street

The financial crisis has put a spotlight on the obscure world of credit default swaps - which trade in a vast, unregulated market that most people haven’t heard of and even fewer understand. Will this be the next disaster?

(Fortune Magazine) — If Hieronymus Bosch were alive today to paint a triptych called “The Garden of Mortgage Delights,” we’d recognize most of the characters in the bacchanalia and its hellish aftermath. Looming largest, of course, would be the Luciferian figures of Greed and Excessive Debt. Scurrying throughout would be the Wall Street bankers who turned these burgeoning debts into exotic securities with tangled structures and soporific acronyms - CDO, MBS, ABS - that concealed the dangers within. Needless to say, we’d see the smooth-tongued emissaries of the credit-rating agencies assuring people that assets of lead could indeed be transformed into investments of gold. Finally, somewhere past the feckless Fannie Mae executives and the dozing politicians, one final figure would lurk in the shadows: a hulking and barely recognizable monster known as Credit Default Swaps.

CDS are no mere artist’s fancy. In just over a decade these privately traded derivatives contracts ballooned from nothing into a $54.6 trillion market. CDS are the fastest-growing major type of financial derivatives. More important, they’ve played a critical role in the unfolding financial crisis. First, by ostensibly providing “insurance” on risky mortgage bonds, they encouraged and enabled reckless behavior during the housing bubble. Continue reading »

Tags: Alan Greenspan, bailout, Ben Bernanke, Citigroup, Congress, Credit Crisis, credit crunch, Economy, Fed, Federal Reserve, Government, mortgage crisis, Mortgages, Politics, U.S., Wachovia, Wall Street