Bond Bubbles, Bankers' Pools, and Fire Sales
(Conspiracy Nation, 10/14/07) – Wachovia Corp. added a risky slug to its books: a Collateralized Debt Obligation (CDO) valued at $600,000. Wachovia had a special holiday sale: This week only, risky slug, half-price, $297,000. But the shoppers stayed home because of the weather. So Wachovia had a bigger, super-sale: Risky slug, today only, $138,000. But the shoppers stayed home because of the weather. Eventually they sold the risky slug for $60,000 – a fire-sale price. (Pulliam, Susan, et al. “U.S. Investors Face An Age Of Murky Pricing”. Wall Street Journal, October 12, 2007)
A “slug” is, in other words, an “SLGS”: State Local Government Securities. Half the battle in understanding economical matters is to be familiar with the lingo.
A new vocabulary item appears in today's New York Times: SIVS. Repeated countless times is “HIV causes AIDS” (even though the assertion is questionable. See “Inventing The AIDS Virus”, by Peter H. Duesberg. Regnery, 1996). If HIV causes AIDS, what does SIVS cause? RAIDS?? SIVS means “Structured Investment Vehicles.” As with the Wachovia fire-sale, “investors have all but stopped buying SIV-affiliated commercial paper, and the worry is that the 30 or so SIVs will unload billions of dollars of mortgage-related assets all at once.” If the SIVS unload the billions all at once, it would be like a raid on mortgage-related assets. Hence, you would have “SIVS, the virus which causes RAIDS.” (See “Banks May Pool Billions to Avert Securities Sell-Off,” by Eric Dash. New York Times, October 14, 2007)
The report by Pulliam (op. cit.) is a meaty article. The Conspiracy Nation editor clipped it, got the magnifying glass, the pen-and-ruler for underlining, and focused his eyes. “Age Of Murky Pricing” translates to “Bond Bubble.” Estimated is that 29 percent of the lower-quality CDOs will eventually lose all their value! Estimated is that, even with the quality CDOs, 12 percent will lose all their value! The lost value is estimated at $85 billion out of $475 billion in such valuations.
The “clarity is gone. Large parts of American financial markets have become a hall of mirrors.” (Pulliam, op. cit.)
Involved is “marking to market,” another vocabulary addition. What were the CDOs worth? Bonuses were paid to Wall Streeters based on the holdings. The bigger the holdings, the bigger the bonus. In the real world, prices for CDOs were based upon what people would pay for them. Marking to market, it is called. But there is also “marking to matrix” and “marking to model,” increasingly imprecise. The CDO valuations take off into pipe-dream land. Between 2000 and 2006, market value for bonds outstanding rose 75 percent! Pulliam (op. cit.) compares that with a 23 percent growth in the Wiltshire 5000 stock index during the same time frame. The bond bubble rose to $25.2 trillion, compared with a $17.7 trillion Wiltshire value.
Valuation for CDOs via the pipe-dream method is “akin to a homeowner valuing a house based on how much he wants for it – not how much a buyer is willing to pay.” (Pulliam, op. cit.)
On Wednesday, October 10th, in “Real Economic News” (http://www.shout.net/~bigred/RealEcon.html), Conspiracy Nation reported on “little clues” found in that day's Wall Street Journal. “Banks are having trouble selling their leveraged buyout (LBO) loans... The banks managed to sell 10 percent of their highest-quality LBO loans, and these were sold at discount (e.g., 96 cents on the dollar, in one case). The other 90 percent of LBO loans are still 'in the pipeline,' i.e., investors are not beating down the doors to get them. To unload the remaining 'in the pipeline' loans, the banks might need to have a 'fire sale' (i.e., huge discounts).”
Today, in the London Times, Dominic Rushe reports top banks might have to sell their SIVS at fire-sale prices. “Some of the world’s biggest banks are discussing plans to put their weight behind a scheme to back $100 billion in shaky mortgage investments as they try to head off further turmoil in the credit markets.” (“Top banks plan $100bn bail-out of sub-prime funds”)
“With so much uncertainty over the valuation of the complex debt holdings now on the books of most of the world’s banks there are fears that an unforeseen event could trigger a fire sale of mortgage-backed securities and other assets, further driving down prices and causing panic in the financial markets.” (Ibid.)
Panic? As in the Panic of 1907 perhaps? (“Contagion Of 1907,” http://www.shout.net/~bigred/Contagion1907.html)
“Citigroup, Bank of America and JPMorgan Chase, along with several other financial institutions, have been meeting to come up with a plan to create a fund that could prevent a sharp sell-off in securities owned by bank-affiliated investment vehicles.” (Dash, op. cit.) This would be, in other words, a Bankers' Pool. Such a Bankers' Pool was also hastily assembled by J.P. Morgan in 1907. Feared was the dumping onto the market of almost $1 billion (1907 dollars) in securities. The venerable Morgan assembled the big bankers in the library of his mansion, then locked the doors upon them. “You are not leaving this library until you reach an agreement,” Morgan ordered. Morgan, a private citizen, had effectively arrested the bankers!
Also involved in the surfacing crisis of confidence is The Bernanke Belief System. Ben Bernanke, chief of the so-called “Federal” Reserve, sees back only so far as the 1930s. His eyesight does not reach back to 1907. Bernanke is locked-into solving the Great Depression. He believes more liquidity solves everything. But when bankers no longer trust each other, what good is it to deliver boatloads of cash? The bankers will only hoard it (and/or inflate the stock market). That distrust among bankers trickles down to the rest of us. We too begin to hoard, and the Christmas shopping season suffers.
Conspiracy Nation
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