:wow:

http://smirkingchimp.com/thread/12708

<snip>

There were some interesting developments in a case involving Merrill Lynch last week which sheds a bit of light on the true “market value” of these complex debt-pools called CDOs. The Massachusetts Secretary of State has charged Merrill with “fraud and misrepresentation” for selling them a CDO that was "highly risky and esoteric" and "unsuitable for the City of Springfield.” (Most cities are required by law to only purchase Triple A rated bonds) The city of Springfield bought the CDO less than a year ago for $13.9 million. It is presently valued at $1.2 million---MORE THAN A 90% LOSS IN LESS THAN A YEAR.

Merrill has quietly settled out of court for the full amount and seems genuinely confused by the Massachusetts Secretary of State's apparent anger. A Merrill spokesman said blandly, “We are puzzled by this suit. We have been cooperating with the Secretary of State Galvin's office throughout this inquiry.”

Is it really that hard to understand why people don't like getting ripped of?

This anecdote shows that these exotic mortgage-backed securities are real stinkers. They're worthless. The market for structured debt-instruments has evaporated overnight leaving a massive hole in the banks' balance sheets. The likely outcome will be a rash of defaults followed by greater consolidation of the major players. (re: banking monopolies) The Fed's multi-billion bailout plan; the “Temporary Auction Facility” (TAF) is a quick-fix, but not a permanent solution. The real problem is insolvency, not liquidity.

The smaller banks are dire straights, too. They're bogged down with commercial and residential loans that are defaulting faster than any time since the Great Depression. The Comptroller of the Currency,John Dugan--who is presently investigating commercial real estate loans---discovered that commercial banks “wrote off $524 million in construction and development loans in the third quarter of 2007, almost nine times the amount of 2006”. The commercial real estate market is following residential real estate off a cliff and will undoubtedly be the next shoe to drop.

Dugan found out that, “More than 60% of Florida banks have commercial real estate loans worth more than 300% of their capital, a level that automatically attracts more attention from examiners.” (Wall Street Journal) He said that his office was prepared to intervene if banks with large real estate exposure maintained unreasonably low reserves for bad loans. Dugan is forecasting a steep “increase in bank failures.”

According to Reuters: “Dozens of U.S. banks will fail in the next two years as losses from soured loans mount and regulators crack down on lenders that take too much risk, especially in real estate and construction," predicts Gerard Cassidy, RBC Capital Markets analyst. Apart from the growing losses in commercial and residential real estate, the banks are carrying over $150 billion of “unsyndidated” debt connected to leveraged buyout deals (LBOs) which are presently stuck in the mud. Like CDOs, there's no market for these sketchy transactions which require billions in cheap, easily available credit. They've just become another anvil dragging the banks under.

On January 31, Bloomberg News reported: “Losses from securities linked to subprime mortgages may exceed $265 billion as regional U.S. banks, credit unions and overseas financial institutions write down the value of their holdings.” Standard and Poor's added that “it may cut or reduce ratings of $534 billion of subprime-mortgage securities and CDOs as default rates rise.” Another blow to the banks withering balance sheets. Is it any wonder why the "new loans" spigot has been turned off?

Surprisingly, there's an even bigger threat to the financial system than these staggering losses at the banks. A default by one of the big bond insurers could trigger a meltdown in the credit-default swaps market, which could lead to the implosion of trillions of dollars in derivatives bets. The inability of the under-capitalized monolines (bond insurers) to “make good” on their coverage is likely to set the first domino in motion by increasing the number of downgrades on bond issues and intensifying the credit-paralysis which already is spreading throughout the system.

Get rid of the bank examiners! They only bring me bad news.

http://www.atimes.com/atimes/Global_Economy/JB09Dj01.html



I was in the Mogambo Bunker, leisurely calculating the risk-reward ratio between trying to stuff the last, lingering piece of that huge pizza down into my gorged stomach and maybe throwing up, versus putting it in the refrigerator and having somebody in the family take it and eat it, which they will do even if I leave a note on it saying that it is mine, and that if anybody takes it, I will track them down and kick some serious butt.

But my ruminations were put aside when I saw that in the banks, the results of their stupidity is seemingly made suddenly, terrifyingly manifest in that non-borrowed reserves in the banks collapsed by -US$8.751 billion, which is a huge negative number, meaning that bank capital is going up in smoke as a lot of the crappy, stupid, insane loans they made go bad! I want to laugh, "Hahahaha!" at the banks, as being busted out has never been more deserved, and ditto the stupid investors who looked at all those annual reports from all those banks but never said, "Whoa! This is freaking insane! Let me sell that stupid bank stock before everybody else finds out what in the hell is going on!"

Of course, there is no end to duplicity and corruption in the banks anymore, and so it is but child's play to diddle with numbers in accounts and ledger entries to get Total Reserves back up to its $41.639 billion more-or-less average by doing something tricky, like letting banks move losses off their balance sheets into Special Purpose Investment Vehicles or something in, say, an off-shore account in a related subsidiary in which they have a 0.0001% stake or more, or changing what is counted as reserves ("You could sell the building and all future cash flows, so that should count as reserves!"), or using a 15-year moving average of past reserve balances as "reserves".

John Williams at Shadowstats.com had noticed it, too, and says, "In December 2007, total borrowings from the Fed topped 36% of total reserves, then the highest proportion seen since 46% in March 1933, when President Franklin Roosevelt declared a 'bank holiday' and closed the banks."

Who knows what in the hell is going on? It's bad, it's blatant corruption, and it will not help in the long run, anyway, sort of like an idiot psychiatrist saying, "Those new pills seem to be helping you!", when, in fact, the only thing that re-connecting with reality has done for me is to be confronted with a truer, starker, uglier reality of the Federal Reserve destroying my money and my country, which makes me MORE fearful and angry!

Well, to be fair, I also no longer feel compelled to jump to my feet, run to the window, and shout, "We're freaking doomed, you morons! Your stupid, un-constitutional fiat money and unlimited fractional-reserve banking in the hands of an intellectually corrupt Federal Reserve and a willing accomplice in the Congress (except Ron Paul) will destroy you with inflation in prices, just like it has destroyed every other stupid country that has ever dared commit such halfwitted folly!"

But you are not interested in my medication regimen or its efficaciousness, although you will need some heavy medications yourself when I give you another interesting bit of news, which is that the Fed's stash of US Securities Owned Outright dropped again, by $4.9 billion last week, which takes their stash down $60.5 billion from levels a year ago!

My God! This is the dropping of the last pretense of the Fed. Not only have bank reserves not gone up in 10 years by so much as a dime, but the Treasury bonds that the Fed bought, by creating the money to buy them, are also disappearing! As Dorothy Parker so famously said, "What fresh hell is this?"

Well, to be fair, it will theoretically not be a "fresh hell" soon, as the Fed cut its Fed Funds rate (the rate at which banks have to lend to each other) by another 0.50%, taking that rate down to 3%. That's a drop of 1.25 percentage points in a week or so, down from 4.25%, which is slashing interest rates by (astonishingly) about a third! It is said to be, by people who actually look these things up instead of just pulling facts and figures out of thin air like I do, the biggest plunge in 20 years! Wow!