stand for the world to see a print, you got problems. If this toxic shock has to price...

http://mauberly.blogspot.com/

Sorry this is OT, and well done spotting the blameshifting in those rich pricks, but just got the new Time magazine. 2 Stories worth paying attention to:

1. Hugo Chavez just masterminded a new Banco del Sur, a South American bank which Brazil and Argentina joined to rival the World Bank. I guess they all got shafted by them and the IMF just 3, 4 too many times. Time blames it on new oil wealth and itchy trigger fingers (though not explicity mentioning why someone like Hugo might).
2. Its cover story is by David Talbot and is actually a claim that JFK was LESS a Cold Warrior than he's conventionally portrayed. This from a mag that goes out of its way to namedrop Truman and Teddy R. as the 'bold leader' type! Is this some kind of feint to freak people like me who read this for opposition research?

James Kunstler

I will be so bold to say that I called the housing crash correctly last year, though the worst symptoms are slow to present for technical reasons. There's no question that the action on the real estate scene changed drastically in mid-year. The implosion of this mighty structure of fraud, folly, and misinvestment so far has taken place in such breathtaking slow-motion that its victims have not really felt the pain from the falling bricks yet. By late summer, buyers started evaporating. Real estate signs planted in lawns last June are still sitting there on New Years. Prices have come down a bit in many markets, including most of the hotties such as Florida, Phoenix, Las Vegas, San Diego, and Boston. But the buyers are still not bidding. Meanwhile, the sellers have dug in, determined to get something at least close to their wished-for inflated prices, egged on by their representatives, the realtors. This mutually reinforcing psychology cannot hold indefinitely. Many of these sellers don't have the luxury to wait around forever. Some have had to move to other houses in other places because of job changes, and are stuck paying two mortgages. Many are stuck with "creative" mortgages that all the evil ingenuity of the human mind conjured in recent years to enable the feckless to live above their means -- adjustable rate, payment optional, no money down contracts that suckered buyers into booby-trapped obligations whose initial low-interest terms lured them in and are now set to blow up in their faces as terms automatically re-set upwards to higher rates and "optional" deferred payments get backloaded onto the principal, putting the mortgage holders so far underwater on their contracts that a tour of the Titanic would feel like a day at the beach.
The trouble is, when both the sellers and their agents decide to get with the reality program and lower their prices, they will only stimulate a massive death spiral of house price deflation as buyers see the numbers go lower and hold out longer in the expectation that prices will go down even further. That would, of course, put more sellers into gross distress and lead them either to dump their properties or enter the cold waters of default and foreclosure. The whole process could run for a couple of decades, and as that occurs it will be made much much worse by oil depletion -- as so many suburban houses drastically lose locational value, combined with the consequences of poor construction carried out in cheap materials like vinyl and chipboard.
Add to this that the late stages of the hyper-boom caused so much "product" to be brought onto the market by the "production home builders" that there now exists an unprecedented oversupply of exactly the kind of crappy suburban houses (in all price ranges) that are bound to lose value going just a little bit forward. Foreclosures will only add more to the oversupply. In the subprime mortgage niche, defaults are officially reported to be running at 20 percent. Foreclosures are trailing because the process is so awkward, and many have not yet shown up in the housing markets. I predict that foreclosures on subprime mortgages will run above the 50 percent range when all is said and done.
As the music stops in the lending rackets, liquidity in the form of mortgage backed securities and other sources of hallucinated "money" will dry up, and will start to make itself felt in all the other arenas and regions that "money" has been migrating to. Jobs associated with house-building and all those ancillary enterprises -- big box shopping, chain restaurant revenues, car sales -- will disappear and incomes with them. Many home sales in past decade were made to people benefiting directly from the housing bubble. (The sheer number of real estate agents in America more than doubled since 2001.) This evaporation of both credit and incomes will impact the so-called "consumer economy", said to make up 70 percent of the total US economy. In other words, the term "depression" might be applicable as this economy lurches into actual contraction of more than a few percentage points.

Much more at the link

I did inhale.

I've seen nothing in print yet that rivals Sean-Paul's pithy and accurate interpretation of the Bear Stearns hedge fund disaster.

The fund has $6 billion in assets, of which only $600 million was equity from investors. The rest was borrowed from big banks so that the fund could use the leverage to generate much more profit than the $600 million would allow. In one month, the fund takes a 2.3% loss on its assets, or $138 million, which is not an atypical loss in the markets. But as a percentage of the real assets of the fund - its equity - that translates into a 23% loss that "shocks" investors, who start withdrawing their money until Bear Stearns freezes their investments.

And why must the fund be frozen? Because each dollar withdrawn by an investor requires $10 of assets to be sold in a deleveraging operation. These $6 billion of assets consist of just about every sort of illiquid, difficult-to-price, and now apparently deeply unloved derivative that Wall Street's alchemists can invent. Things like CDOs and CDOs squared, that can't be sold at a moment's notice, if ever.

Bear Stearns was doing exactly what Sean-Paul describes - reaching for 35% p.a. returns because this is what hedge funds as supposed to generate, and investors are so greedy that they react with disgust when a fund can only produce 12% per year in returns.

Here's another example of greed at work. Merrill Lynch, JP Morgan and the other Wall Street banks who lent Bear Stearns the $6 billion took all those CDOs as collateral. To them, the 2.3% loss on their collateral is a big thing, because they have no other real assets supporting their loan - just the hope that Bear Stearns will top up the loans with more collateral if there is a market drop in value. They issue margin calls on the Bear Stearns hedge fund, which really means on its manager, Bear Stearns (which itself only has $40 million of the $600 million in actual equity invested in the fund). Either Bear Stearns comes up with the additional margin, or they will be finished on Wall Street forever because they can never borrow again.

When Bear Stearns balks at this, probably because it doesn't have $138 million in truly liquid assets it can fork over just like that, the Wall Street banks start "liquidating" their portion of the $6 billion in assets. But they discover there are no takers for this toxic waste, which is the cute but accurate term Wall Street assigns to a lot of these derivatives, and much worse, if they do agree to accept a price of 20 cents on the dollar for these securities, all similar securities would have to be marked down 80%. Now that is true horror.

So they back off from their threat and renegotiate with Bear Stearns over $2.0 billion or so in "loans" Bear Stearns owns that can be used to top up the collateral. How this $2.0 billion relates to the announced loss of $138 million I don't exactly know, but it probably means the lenders have realized that 40% - 50% of their collateral is impaired, not 2.3%.

What this reveals is yet another facet of greed at work. Wall Street is happy to accept mark to market accounting, or in this case the more esoteric mark to model valuations, when the values are going up or are at least stable. But they balk at taking any write-downs when the model says value is lower. And if anything can trump the output of these models in an accountant's eye, it's a real live price you can put on these securities when Wall Street actually sells them to someone. Even if only $10 million changes hands - $6 billion has to be revalued downwards.

Pity the poor accountants and market risk oversight officers working now on Wall Street. They are in a battle with their own management, because if they really were doing their jobs they would be insisting that whole chunks of these portfolios need to be written down. Management will have none of it, since it represents an Armageddon of losses.

There is a lot riding on this battle. Whoever wins it will determine whether the great profit generating machine on Wall Street that is propped up by leverage and creative financing will come to an end. The outcome will determine whether or not Wall Street will relearn an ancient financial lesson: liquidity is not the same as cash. We hear so much about how the markets "are awash in liquidity". No one bothers to point out that this liquidity is generated by debt, and very little of it is actual cash that can be made to appear at a moment's notice, especially when the liquidity has been invested not in U.S. Treasuries but in esoterica like CDOs.

Nor should we think that this is a matter strictly affecting Wall Street. This great game of generating liquidity through debt and then investing it in frozen assets has been played all around the world, especially China.

Is there any country, really, that can afford to have the curtain drawn back so that the public can really see what's been behind the sizzling global economy?

Closing the 'Collapse Gap': the USSR was better prepared for peak oil than the US

by Dmitry Orlov

Energy Bulletin

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So if I followed his advice, how would I buy durable objects when he is saying is that there won't be anything left that I recognize that will have survived the melt down of the American economy? Canada is linked to the US and when its economy goes up in smoke and evaporates, our economy follows shortly thereafter.