NightBlogger

Bob Chapman
International Forecaster
Never underestimate the diabolical ingenuity of the Illuminati. They have been perfecting their techniques for a millennium. They plan decades in advance, and conduct test runs to see how people and markets will react to different types of stresses and manipulations. They see to it that any legislation necessary to achieve their evil objectives is adopted far in advance of the implementation of their criminal schemes to inflict constant and continual fraud on the sucker-dupe sheople. They handpick politicians who can be bribed or who are compromised and then see to their election, thus ensuring that any such legislation is passed by their puppets in government. They act as our “shadow government,” pulling the strings of our official marionettes so as to legalize and legitimize their foul acts before carrying out what would otherwise be deemed maleficent acts of criminality, thus ensuring the successful completion of their various shell games and Ponzi schemes. And if they are unable to pass legislation which would legitimize any part of their intended criminal actions, they needn’t worry in any case, because they have the regulators and courts in their back pockets.

All their efforts are funded by the profits and plunder which they have raped, pillaged and extorted from the people of the world over many centuries of criminal activity, which nefarious dealings include such things as wars for profit, incitement of civil wars and race wars, genocide, murders for profit, gun-running, illicit drug trade, extortion, protection rackets, slavery, prostitution, illegal monopolies and every imaginable fraud and deceitful scheme ever conceived by men, with European, debt-based, fractional reserve banking being the lynchpin of the heinous system they have devised to achieve the total financial impoverishment and abject enslavement of the sheople.

These reprobates and sociopaths are energized by the powers of darkness. They are a malevolent group of megalomaniacal, satanic trillionaires who are hell-bent on forcing the people of the world into an Orwellian police state, a state of feudality where everyone caters to every demented whim and wish of the would-be masters of the universe for money, sex and power. They plan on reducing the world population to a half a billion people in order to achieve their demonic goals, since they believe that any larger size world population would be too difficult to maintain and control in what they refer to as a state of “sustainable development.”

If you do not grasp this foul and fiendish agenda, nothing that is currently happening will make sense to you, and you will remain clueless until it becomes too late for you to do anything about it. It is the purpose of this publication to educate you about this agenda and all the evil plans which these miscreants have in store for you.

The Illuminati own our President and his Cabinet, both Houses of Congress, the judiciary and the media, large portions of state and local governments, as well as the CEO’s and directors of most transnational conglomerates and Wall Street banks and financial institutions. The same is true for all major nations that are a part of Western Civilization, and many nations outside the West are being bent to their will in a variety of ways by utilizing such things as the United Nations, the IMF, the BIS, the WTO and the World Bank to extort what they want from these nations and to plunder their resources.

From these positions of power they control a great many aspects of the sheople’s lives, yet the sheople remain clueless about what they are up to due to media brainwashing, news suppression, misinformation and outright, pathological lying. The dumbing-down of the sheople via our pathetic system of secular public education finishes the job lest any should escape the other methods of mind control. And those who know what these Illuminist miscreants are up to have been unable to effect a change of course because these evil elitists have infiltrated and controlled our national and state election systems for over a century. During that time, they have chosen, and continue to choose, all our major candidates for public office, especially for the Presidency and other federal elective positions. They mercilessly crush all third party opposition and they threaten, intimidate, scandalize, ostracize and/or attempt to make a fool out of any Dumbo and Jackass candidates who refuse to adopt their agenda for a one-world government which they refer to as the New World Order, which in Latin is rendered as “Ordo Novus Seclorum,” meaning a “New Order of the Ages,” all as set forth on the obverse of every one dollar bill, where you will find it under the incomplete pyramid and all-seeing eye of the ancient mystery religions which by and large are now encompassed by the New Age movement.

Our shadow government devises the party platforms for Dumbo and Jackass candidates alike, creating the illusion of a two-party system when in reality there is only one agenda — their agenda — which is split between the two bogus parties, and now they even control our voting machines, courtesy of Diebold. They Illuminati always win no matter who gets elected. Their man is always in office, because they select both candidates, who both tell you whatever you want to hear, and then do whatever their Illuminist masters tell them to do. Yet the sheople somehow are not able to grasp this obvious ploy to steer them into doing whatever the shadow government wants them to do. Just listen to the screams of adulation at political rallies and watch as the silly dolts pass out when their mighty savior candidate walks by. If that doesn’t scare you, nothing will.

Their final objective is to control all aspects of the sheople’s lives, from the cradle to the grave. They consider the people of the world, other than those who are part of their elitist cadre, to be little more than dumb animals and beasts of burden to be worked to the bone for Illuminist fun and profits, only to be discarded later when they are no longer useful, having been slave-driven to death in fascistic labor camps which are ready and waiting to receive their victims as we write this article, courtesy of Halliburton. Their motto is: “Arbeit Macht Frei.” And so we can’t help but wonder why all the admirals and generals from most of the principal NATO countries are gathering in a remote location in New York’s Adirondack Mountains. Do you suppose they are admiring the fall foliage, or catching up on their fishing? Whatever they are up to, we can assure you that it is not good. Martial law and internment camps are looking more and more likely every day.

You are about to be liberalized into oblivion whether Obama or McCain is elected, so vote for one of the third party candidates for President. Otherwise, prepare for the Fall of the American Empire. You must throw out all Congressional incumbents except for Ron Paul and a handful of others. You can use the vote on the Paulson Ponzi Plunder Plan, also known as the Troubled Assets Relief Program (TARP), or as H. R. 1424, or as the Emergency Economic Stabilization Act of 2008, as a guide to determine who is worth keeping and who is worth throwing out of office.

In our last issue, we gave you the new Illuminist formula for profitability: Profitability = Volatility + Dark Pools of Liquidity + Plunge Protection Team. We see them moving toward a two-tiered Big Sting Two operation.

First note that this new volatility and insider trading, assisted by the PPT, is payola for specs that left the commodity markets so the cartel could have their way with the casinos after the SEC stopped all shorting on some 800 financial stocks and threatened to require public disclosure of short positions, which basically amounted to strong-arming of the large spec hedgies. Note how from September 29 to October 10, the specs were given the opportunity to make enormous profits from trading on inside information provided by the PPT and enhanced by unprecedented volatility, with a grand finale on October 10. This was the elitist’s showing their good faith in the bargain, and they even allowed a rally of gold to 930 so the specs could have one final rally before exiting. Then, in return, over the next two weeks, the specs stayed out of the casinos and the cartel took the whole commodity sector down. The average daily peak to trough for the Dow from September 29 to October 24 was 622.63 points, which is almost double that of the previous 19 trading days, thus allowing for plenty of room to profit from insider trading, and that does not even take into account the many gyrations that take place over the course of any given day. The Dow could have a zero peak to trough, but if it went down 500, and then up 500, there is still plenty of room for profit for those who know which way the PPT is going to take the markets, and when. Also note how, from October 10 to October 24, both gold and silver have come straight down virtually unimpeded, with gold dropping from a high of about $930 to as low as $681, and with silver dropping from a high of about $12.24 down to as low as $8.63, while physical prices remain 50% or more over these manipulated paper prices. Incidentally, on Friday near the end of the trading session, both gold and silver turned around sharply. We also note that almost 12,000 gold option contracts for December of ‘08 were added on the COMEX on Wednesday and Thursday as gold was bottoming, which is very bullish.

The increase in volatility also enables the Illuminist insiders to bail out profitably in pursuit of their Big Sting Two scheme, without having to run the stock markets up to new heights, which is currently impossible due to horrendous economic news and abysmal fundamentals. For instance, if on the one hand you go long the Dow and it rallies 2000 points, or on the other hand you short the Dow and it drops 1500, and then you go long the Dow and it rallies 500 points, either way, your profit is the same. The dark pools allow you to get in and out of positions without the public markets knowing about your transactions, so covering shorts and selling off to lock in profits does not bite into your profits as much. Also, the dark pools are not regulated. They are the stock market’s equivalent of OTC derivatives markets. Since their is no regulation, as long as you do all your insider trades in the dark pool, no one will ever know what you have done as there is no investigation or oversight of these transactions. These dark pools are therefore the perfect insider trading fraud machines, which is the whole reason why they were created. Wait until you see all the losses which the sucker-dupe, non-insider, dark-pool, institutional participants suffer that no one yet knows about because these losses are off market. We see some pensions, mutual funds and hedge funds going down in the not-too-distant future. Insiders will be big winners. Non-insiders will get vaporized.

This period of volatility and market downside, together with drastically reduced commodity prices, which allow the elitists to roll their proceeds from insider trading over into commodities at bargain-basement prices, is just the first phase. A goodly portion of these proceeds will be rolled into the OTC markets via commodity derivatives so that the whole scam is done outside of public view and underneath the radar of regulators without running up commodity prices. First, you do your insider trading in unregulated dark pools, and then roll the proceeds over into unregulated OTC derivative markets. What a scam! It’s freaking perfect!

Now for the second phase. Note how everything the Illuminati are doing right now is funneling money back into the banking system in the form of bank deposits and into treasury bonds to create a demand for them. Incidentally, we note that the bank hoarding may not be due only to a loss of trust and confidence. The banks may be under orders from the Fed to hoard this money until they are told to start lending it again. This is to keep inflation under wraps and to stop gold from going ballistic and exposing the destruction of our economy by the Illuminati and their various henchmen at the Fed, on Wall Street, in corporate America and in our government. This also buys time to figure out where all the losses are, starting with AIG derivative fallout and all the credit default swaps covering vaporized Lehman bonds, some $300 to $400 billion worth.

This replenishment of bank capital is being accomplished with what may be described as a many-pronged approach. First, you have the Paulson Ponzi Plunder Plan kicking in $250 billion in the form of equity injections to the Big Nine fraudster banksters that was supposed to be used to buy toxic waste assets. Then you have the ceiling raised on FDIC insurance from $100,000 to $250,000 to stop depositors from bolting out of weaker fraudster banks and into stronger regional banks, money markets, or foreign banks whose governments have fully guaranteed deposits. Then, you have all the money being flushed out of crashing stock and commodity markets being rolled over into bank accounts and treasury bonds as perceived safe-havens. Next, some toxic waste will be bought up by the US Treasury and the bigger banks will start to use their newfound largesse in the form of taxpayer equity injections and new deposits from the rollover of market liquidations to buy up the smaller banks that stayed out of all the toxic waste, thus enhancing their financial statements via mergers and acquisitions. Finally, you have the FASB allowing fraudsters to continue to mark to model despite Sarbanes-Oxley so they can continue to hide their losses from the public and so everyone can continue to pretend that the subprime, credit-crunch and CDS debacles never happened.

Once this is all in place, there will be one last attempt to re-inflate the system with a sudden surge in lending and speculation to create a final blow-off top to complete the Big Sting Two. Anything they were unable to unload in their previous insider trading will be unloaded in the dark pools behind the backs of the sucker-dupe sheople. The proceeds will be rolled over at first into commodity derivatives in the unregulated OTC to keep commodities from rising too sharply too soon, and then after the Illuminists have sated themselves on their initial positions, they will rollover their proceeds publicly into the commodity markets and send gold and silver to the moon for their fun and profits. Their fun may be spoiled, however, if the Derivative Death-Star decides to detonate before they can re-inflate the markets. Make sure have your precious metals positions in place before this happens so you can join in on their fun, or, if they fail, you can enjoy the price increases that will result as everyone realizes that gold and silver are the only things left that will go up in value while the whole world financial system comes down around everyone’s ears!

Check out the yen. It has gone ballistic. Worldwide stock markets are crumbling. The Nikkei is in total meltdown, and we have joined the Japanese in a sympathetic explosion of US markets. The yen has risen by an astonishing 10 yen per dollar and 20 yen per euro just this week, and as of 6:15 am on Friday, the yen stood at $.918208 yen per dollar and 115.411 yen per euro, up a stupefying 6 yen per dollar and 10 yen per euro just from yesterday’s close. When the yen blew through 93, it hit a 13-year high against the dollar. We are looking at a major bloodbath on Friday. Many already stressed hedge funds will not survive this total massacre of the carry trade. Liquidations have once again caused huge downturns in gold and silver, which is already happening. The whole system has started to unravel again. The Japanese people must be on the verge of committing Hari-Kari en masse.

Fortunately, as the day progressed on Friday, the yen backed off substantially, and the stock markets and precious metals and their shares reversed course. The yen ended at about 94 yen per dollar and 119 yen per euro. The Dow clawed back from a 500-point deficit courtesy of the PPT and the Japanese bankers to end with a loss of 312 points. Gold shot from $681 to $749 before settling at about $730 while silver scooted from $8.63 to $9.69 before settling in at $9.28.

Adding to our woes, we now have hundreds of billions of losses on the credit default swaps that covered Lehman’s bonds floating around in the never-never land of OTC derivatives, totally undisclosed and lurking in the background, waiting to show up as a hidden IED in the year-end financial statements of some very unfortunate financial institutions. The unknown location of the losses that were suffered on CDS’s covering Lehman bonds may destroy what little remains of confidence and trust in the system, as everyone fearfully contemplates the potential for a devastating thermonuclear chain reaction once these losses are finally disclosed early next year. The Derivative Death-Star is running out of the fuel it needs to keep glowing and expanding and to prevent it from imploding, and soon it will collapse into a super-massive financial black hole that will suck the worldwide financial system into it’s ominous, pitch-black singularity. So much for reviving bank lending and credit amongst the fraudsters if this happens. Of course, the fane-stream media has announced that the whole Lehman CDS situation was anticlimactic, that nothing much happened, and that the piddling $6 billion or so lost shows that the CDS markets were run tightly after all — and never mind that a $6 billion loss is mathematically impossible. This is the United Goldilocks Matrix after all. Reality is whatever we the Illuminists say it is. Those hundreds of billions in losses floating in never-never land are just a figment of your imagination.

Note that OPEC cut production by 1.5 million barrels a day, to no effect. Usage is going to drop much faster than they are cutting due to a disintegration of the global economy, which is happening before your eyes. Also, most oil investors feel that OPEC will not follow through on the cuts because they are all desperate for money. We also note that while the dollar has risen from $72 to $87 during the same period that oil dropped from $147 to $64. While most of their currencies are pegged to the dollar, which has gained about 20%, their oil profits have dropped about 55%. That’s not a very good trade off as far as these nations are concerned. A reduction in inflation does not help when revenues are plummeting at almost triple the rate that inflation is being reduced by virtue of a stronger currency. The OPEC nations are not going to tolerate having oil used to produce a euro effect to save the dollar so the US bond and treasury markets do not collapse. They have a lot of treasuries, so they have to be careful, but all the nations are now on to the fact that the US is totally bankrupt and the run for the exits could start at any time. You can expect a new OPEC nation currency like a gold-backed dinar, which could be part of a regional basket of BRIC nation currencies, while the G-7 countries form their own regional basket of currencies, also with some gold backing. Things are about to change quite drastically on the currency scene as OPEC oil producers stick together and Russia potentially takes the place of the US as protector of Arab sheikdoms. Things are getting wild and wooly very quickly.

TheStreet.com TV

Dylan Ratigan, CNBC’s Closing Bell Co-Anchor:
“If you go into history you will see that as a CEO of Goldman Sachs he [Pauslon] was one of the folks who testified and pushed and pushed the SEC to allow for more relaxed standards for the assumption of risk — self regulation, but even worse than that, he was one of the ones that said allow us the ability to go 40-1, allow us the ability to take more risks. We have to figure out a way to spread risk around the world such that it will not have negative repercussions — let us do it.

Now at the same time he and the other four banks that were involved: Merrill, Goldman, Lehman, Bear, — all those executives running those banks were then in effect allowed to take the entire bank and go nakedly long on the housing market. The risk of that naked long now pushed on to the tax payer. They were able to bonus themselves hundreds of millions of dollars by being nakedly long in the housing market. It doesn’t take a rocket scientist to get nakedly long or nakedly short anything. Particularly if it goes the other way, you don’t bear the risk.

The question is, is he the best qualified person to unwind this now because he is one of the individuals who advocated the system, or is it outrageous that somebody who was an advocate of the system is now given the authority to disassemble it, not to mention do it is secret? In other words, the Treasury meeting with the bank CEO’s has no transcript. There were no shareholders there. There’s no record of that.”

Riley McDermid
Lehman Brothers Holdings Inc. said in a court hearing Thursday that it will attempt to unwind more than a million derivatives trades outstanding since the bank’s collapse, after a lawyer for the bankrupt firm said it is only now emerging from the “chaos” that followed its implosion last month. During the hearing at the U.S. Bankruptcy Court in Manhattan, Lehman lawyer Harvey Miller told the court that the firm’s legal and financial team will need to hire around 210 financial professionals to help disentangle the bank from the trades.

Miller said the nature of Lehman’s unprecedented collapse meant the bank would face a complicated process of unwinding its previous business obligations. “This is really an atypical case, a case without any pre-planning, a case that had a high level of chaos in the first weeks,” said Miller, of law firm Weil, Gotshal & Manges said. “We are moving out of a reactive mode.” Requests for additional comment from the public relations firm which is now handling Lehman’s post-bankruptcy communications, Sard Verbinnen, were not immediately returned Friday. Miller declined to comment further.

During the same hearing, Judge James Peck of the U.S. Bankruptcy Court in Manhattan postponed a request from several of the 8,000 counterparties originally involved in the trades to allow their legal teams to investigate Lehman’s money transfers immediately before it filed for bankruptcy. Peck said he would revisit that request on Nov. 5. More

Ambrose Evans-Pritchard
The Telegraph
Ominous talk of big names and big sums continues to haunt global markets, thwarting efforts by the US and European authorities to unlock inter-bank lending. Traders have noted with acute interest that insurer AIG - now nationalised - says it will need another $38bn from the US government, on top of the $85bn bail-out it has already received. AIG is the world’s biggest underwriter of credit protection.

Those on the wrong side of these Lehman debt contracts - known as credit default swaps (CDS) - must come up with the money by Tuesday, the next D-Day in the ever-fraught calendar of the credit markets. There has been a deafening silence so far. There is no easy way of finding out who they are, so every bank and insurer is suspect. The $55,000bn CDS market is “completely lacking in transparency and completely unregulated” in the words of Chris Cox, the chairman of the US Securities and Exchange Commission.

The settlement auction on Lehman CDS contracts last week was in itself a bombshell. Creditors retrieved just nine cents on the dollar from the Lehman wreckage. As Naked Capitalism put it, the bank had “vaporised”. The biggest players at the auction were Goldman Sachs and Deutsche Bank but they were almost certainly transacting for clients. The insurers of the debt — a third are hedge funds — will have to pay 91pc of the $400bn in contracts. The Depository Trust and Clearing Corporation says the risks have been exaggerated in headline scare stories, insisting that the total sum to be paid will be closer to $6bn. It says most positions are “netted out”.

“That’s not credible,” says Andrea Cicione, credit chief at BNP Paribas.

“They keep coming up with these number by ‘netting’ but we think the amount is going to anywhere from $220bn to $270bn. The chain broke in the CDS market when Lehman Brothers went down. We may now see other counter-parties defaulting,” he said. With hindsight, it is now clear the decision to let Lehman Brothers go bankrupt set off a melt-down of the world financial system, forcing North America, Britain, Europe, Australia, and now parts of Asia to rescue their banks. “A dramatic error,” said Christine Lagarde, France’s finance minister. US Federal Reserve chair Ben Bernanke said this week that Washington lacked the legal power to take on the vast liabilties stemming from a Lehman rescue.

“A public-sector solution for Lehman proved infeasible, as the firm could not post sufficient collateral to provide reasonable assurance that a loan from the Federal Reserve would be repaid, and the Treasury did not have the authority to absorb billions of dollars of expected losses to facilitate Lehman’s acquisition by another firm. Consequently, little could be done,” he said. The new legislation passed by Congress “will give us better choices.” In truth, both Congress and the US public wanted a scalp. Treasury Secretary Hank Paulson had to bide his time until it was clear to almost everybody that a domino collapse of the US banking system would lead to catastrophe. The Lehman collapse did the trick.

The list of companies admitting to losses on Lehman investments reveals the global extent of the damage. Dexia held €500m of bonds, which may have caused its own need for a Franco-Belgian rescue days later. Among the others with declared exposure: Swedbank $1.2bn; Freddie Mac $1.2bn; State Street $1bn; Allianz €400m; BNP Paribas €400m; AXA €300m; Intesa Sanpaolo €260m; Raffeissen Bank €252m; Unicredit €120m; ING €100m; Danske Bank $100m; Aviva £270m; Australia and New Zealand Bank $120m; Mistubishi $235m; China Citic Bank $76m; China Construction Bank $191m, Industrial Commercial Bank of China $152m and Bank of China $76m. Ultimately, some money may be recovered.

These losses are out in the open, but the CDS shoe has yet to drop. Perversely the insured volume is greater than the $150bn total of Lehman debt. Some $400bn of CDS contracts were sold. Many were used by hedge funds to take “short” bets on the fate of the bank. The contracts nevertheless have to be honoured. Chris Whalen, head of Institutional Risk Analytics, says this creates a huge moral dilemna. Why should taxpayers now responsible for AIG foot the bill for huge windfall transfers to hedge funds?

“We need to shut this whole thing down. The people who don’t own the underlying collateral and were just betting should be flushed away. It would be grotesque if the US authorities were now to subsidize speculators. The US political class is waking up to this,” he said. If so, the winners may have more trouble than they realize collecting their prize.

Nouriel Roubini
It is obvious that the current financial crisis is becoming more severe in spite of the Treasury rescue plan (or maybe because of it as this plan it totally flawed). The severe strains in financial markets (money markets, credit markets, stock markets, CDS and derivative markets) are becoming more severe rather than less severe in spite of the nuclear option (after the Fannie and Freddie $200 billion bazooka bailout failed to restore confidence) of a $700 billion package: interbank spreads are widening (TED spread, swap spreads, Libo-OIS spread) and are at level never seen before; credit spreads (such as junk bond yield spreads relative to Treasuries are widening to new peaks; short-term Treasury yields are going back to near zero levels as there is flight to safety; CDS spread for financial institutions are rising to extreme levels (Morgan Stanley ones at 1200 last week) as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market; and stock markets around the world have reacted very negatively to this rescue package (US market are down about 3% this morning at their opening).

Let me explain now in more detail why we are now back to the risk of a total systemic financial meltdown…

It is no surprise as financial institutions in the US and around advanced economies are going bust: in the US the latest victims were WaMu (the largest US S&L) and today Wachovia (the sixth largest US bank); in the UK after Northern Rock and the acquisition of HBOS by Lloyds TSB you now have the bust and rescue of B&B; in Belgium you had Fortis going bust and being rescued over the weekend; in German HRE, a major financial institution is also near bust and in need of a government rescue. So this is not just a US financial crisis; it is a global financial crisis hitting institutions in the US, UK, Eurozone and other advanced economies (Iceland, Australia, New Zealand, Canada etc.).

And the strains in financial markets – especially short term interbank markets - are becoming more severe in spite of the Fed and other central banks having literally injected about $300 billion of liquidity in the financial system last week alone including massive liquidity lending to Morgan and Goldman. In a solvency crisis and credit crisis that goes well beyond illiquidity no one is lending to counterparties as no one trusts any counterparty (even the safest ones) and everyone is hoarding the liquidity that is injected by central banks. And since this liquidity goes only to banks and major broker dealers the rest of the shadow banking system has not access to this liquidity as the credit transmission mechanisms is blocked.

After the bust of Bear and Lehman and the merger of Merrill with BofA I suggested that Morgan Stanley and Goldman Sachs should also merge with a large financial institution that has a large base of insured deposits so as to avoid a run on their overnite liabilities. Instead Morgan and Goldman went for the cosmetic approach of converting into bank holding companies as a way to get further liquidity support – and regulation as banks – of the Fed and as a way to acquire safe deposits. But neither institution can create in a short time a franchise of branches and neither one has the time and resources to acquire smaller banks. And the injection of $8 b of Japanese capital into Morgan and $5 b of capital from Buffett into Goldman is a drop in the ocean as both institutions need much more capital. Thus, the gambit of converting into bank while not being banks yet has not worked and the run against them has accelerated in the last week: Morgan’s CDS spread went through the roof on Friday to over 1200 and the firm has already lost over a third of its hedge funds clients together with their highly profitable prime brokering business (this is really a kiss of death for Morgan); and the coming roll-off of the interbank lines to Morgan would seal its collapse. Even Goldman Sachs is under severe stress losing business, losing money, experiencing a severe widening of its CDS spreads and at risk of losing most of its values most of its lines of business (including trading) are now losing money.

Both institutions are highly recommended to stop dithering and playing for time as delay will be destructive: they should merge now with a large foreign financial institution as no US institution is sound enough and large enough to be a sound merger partner. If Mack and Blankfein don’t want to end up like Fuld they should do today a Thain and merge as fast as they can with another large commercial banks. Maybe Mitsubishi and a bunch of Japanese life insurers can take over Morgan; in Europe Barclays has its share of capital trouble and has just swallowed part of Lehman; while most other UK banks are too weak to take over Goldman. The only institution sound enough to swallow Goldman may be HSBC. Or maybe Nomura in Japan should make a bid for Goldman. Either way Mack and Blankfein should sell at a major discount of current price their firm before they end up like Bear and be offered in a few weeks a couple of bucks a share for their faltering operation. And the Fed and Treasury should tell them to hurry up as they are both much bigger than Bear or Lehman and their collapse would have severe systemic effects.

When investors don’t trust any more even venerable institutions such as Morgan Stanley and Goldman Sachs you know that the financial crisis is as severe as ever and the fear of collapse of counterparties does not spare anyone. When a nuclear option of a monster $700 billion rescue plan is not even able to rally stock markets (as they are all in free fall today) you know this is a global crisis of confidence in the financial system. We were literally close to a total meltdown of the system on Wednesday (and Thursday morning) two weeks ago when the $85 b bailout of AIG led to a 5% fall in US stock markets (instead of a rally). Then the US authorities went for the nuclear option of the $700 billion plan as a way to avoid the meltdown together with bans on short sales, a guarantee of money market funds and an injection of over $300 billion in the financial system. Now the prospect of this plan passing (but there is some lingering deal risk the votes in the House are not certain) -as well as the other massive policy actions taken to stop short selling “speculation” and support interbank markets and money market funds - is not sufficient to make the markets rally as there is a generalized loss of confidence in financial markets and in financial institutions that no policy action seem to be able to control.

The next step of this panic could become the mother of all bank runs, i.e. a run on the trillion dollar plus of the cross border short-term interbank liabilities of the US banking and financial system as foreign banks as starting to worry about the safety of their liquid exposures to US financial institutions; such a silent cross border bank run has already started as foreign banks are worried about the solvency of US banks and are starting to reduce their exposure. And if this run accelerates - as it may now - a total meltdown of the US financial system could occur. We are thus now in a generalized panic mode and back to the risk of a systemic meltdown of the entire financial system. And US and foreign policy authorities seem to be clueless about what needs to be done next. Maybe they should today start with a coordinated 100 bps reduction in policy rates in all the major economies in the world to show that they are starting to seriously recognize and address this rapidly worsening financial crisis.

CARACAS, Venezuela — The government of Hugo Chávez holds about $300 million in debt instruments that Lehman had agreed to cash, according to three analysts who calculated the holdings separately. With Lehman in trouble, Venezuela will have a hard time selling the debt. More

Martin D. Weiss, Ph.D.
In the wake of Lehman’s demise, Fed Chairman Bernanke and Treasury Secretary Paulson will try to put out the word that it’s no great trauma. But it’s a lie and they know it. If they openly admitted that the Lehman collapse will paralyze Wall Street, torpedo the stock market and sink the economy, they’d have to pony up $100 billion or more to support it. Instead, their agenda was to push big banks to put up the money. And they failed to do so. No matter what, there’s no denying that the Lehman debacle is a massive and immediate threat to U.S. and global markets. At the latest reckoning, Lehman had $691 billion in assets. That makes it bigger than Wachovia, twice as big as Washington Mutual, and over sixteen times larger than Schwab.

Lehman’s debts — at $668.6 billion — are also enormous. Even if you added together all the debts of TD Ameritrade, E-Trade and Schwab, you’d still have only $108.5 billion, or less than one-sixth the total debts which Lehman reports. In fact, among brokers, there are only two other U.S. firms that beat Lehman in the debt category: Morgan Stanley, with $1 trillion, and Merrill Lynch, with $988 billion. Can you imagine anyone in his right mind making the argument that a Merrill Lynch downfall would be “no great trauma to investors and financial markets”? Of course not. The reality: The collapse of America’s third-largest brokerage operation is very serious business with equally serious consequences. The primary concern …

Defaults on Derivatives

We’ve lost count of how many times the authorities have virtually sworn on a stack of Bibles that “our financial system is fundamentally sound.” But no one could possibly lose count of their recent desperate efforts to prevent the system’s collapse — actions which directly belie their words: One — the coordinated efforts by central banks to flood the global economy with liquidity in the summer of 2007. Two — the hasty bailout of Bear Stearns in March of this year. Three — the giant Fannie and Freddie rescue announced just eight days ago. Each time they intervene, they say “we must not reward CEOs who deceive the public and walk off with multibillion dollar bonus checks.” And each time they say it’s the “last time we’ll make an exception to that rule.”

But then they go ahead and do it anyhow, not only breaking their own word … but also trashing the long tradition of restraint established by their predecessors since the Great Depression. Why? Because they had neither the courage nor the audacity to confront Wall Street’s ultimate nightmare: A collapse in the giant mountain of derivatives. Derivatives are essentially bets on interest rates, foreign currencies, stocks or specific events like the bankruptcy of a particular company. The interest rate-related bets are by far the biggest. But the bets on bankruptcies — called credit default swaps — are the fastest growing and the most volatile. These derivatives were originally designed to help hedge investments reduce risk — like insurance policies. But in practice, they’ve been increasingly used to leverage investments, increasing the risks of participants.

Here are some essential facts that illustrate the enormity of the problem …

* The amounts are absurdly large. The total “notional,” or face value, of derivatives held by U.S. banks is $180 trillion, and it’s three times that much globally. This figure is said to overstate the actual market risk. But it does not overstate the risk of defaults such as those that could be triggered by the failure of a company the size of Lehman Brothers.

* Over 90% of all derivatives are traded outside of regulated exchanges. Consequently, other than very general information, the authorities have no mechanism for keeping track — let alone efficiently cleaning up the mess in the wake of a giant failure.

* Off the balance sheets. Some companies report nothing more than the total value of their derivatives in footnotes to their financial statements. Others don’t report at all. Consequently, the actual risk, amounts and even the very existence of derivatives is often poorly disclosed to investors.

* Disclosure in the brokerage industry is especially bad. Many brokerages are private and do not disclose more than their rank and serial number. The SEC collects sparse data and does not publish it. So if you want to figure out how much derivates risk your broker is exposed to, good luck! Getting the information can be like pulling teeth. More

(Reuters)
In structured credit markets, Lehman Brothers’ demise is likely to trigger unwinds of some products, leave investors stranded without a market or lead to months of wrangling over what many are worth. “There are hundreds of issues to be resolved in the structured credit world,” said a strategist specialising in structured credit, particularly now that a major player in the opaque market has stopped doing business. “In all these different markets, Lehman acted as a counterparty or an arranger or made markets or was referenced as collateral,” he added.

Lehman’s collapse is likely to force some unwinds in the roughly $600 billion market of synthetic collateralized debt obligations (CDOs), which pose one of the biggest deleveraging threats hanging over the market, analysts said. Synthetic CDOs are pools of credit default swaps (CDS) on 50, 100 or more typically investment-grade U.S. and European corporate credits. These portfolios are divided into tranches, or slices, by degree of risk and sold to investors. The riskiest slice at the bottom is exposed to the first few percent of losses from defaults in the portfolio. Mezzanine tranches take the next fixed percentage of losses and so on to the triple-A rated tranches at the top.

Lehman’s collapse could trigger unwinds in most CDOs in which it acted as a swap counterparty, unless investors can find another bank to take its place, usually within a timeframe of 10 to 30 days, Fitch Ratings said in a report on Tuesday. Any unwind is likely to be at a steep loss — around 30 cents on the dollar for typical mezzanine tranches, a second strategist estimated — because investor demand has dried up and market values have dropped. More

brad setser: follow the money
I am guilty of instinctively comparing large defaults to the Argentina’s default. That is the largest default that I know well.

And Lehman qualifies as a large default.

John Jansen reports one of Lehman’s bonds now trades at 35 cents of on the dollar. That a bit above the levels that Argentina’s bonds traded at after Argentina’s default in late 2001. But Argentina’s bonds also eventually proved to be worth something like fifty cents on the dollar, at least to investors who participated in Argentina’s exchange and got the GDP warrant.*

Lehman’s bankruptcy filing indicates that Citi is a trustee for $138b of Lehman bonds, and the Bank of New York is a trustee for another $17b. The resulting $155b in outstanding bonds significantly exceeds Argentina’s outstanding stock of bonds at the time of its default.

And investors had far longer to adjust their portfolios in anticipation of Argentina’s default than in anticipation of Lehman’s default.

I continue to believe that the credit markets’ reaction to Lehman will ultimately matter more than the reaction of the equity markets. John Jansen reports that the spreads on Morgan Stanley and Goldman have widened significantly. Evans-Pritchard reports (hat tip naked capitalism):

The interest rate on Tier 1 debt for typical banks has jumped by 125 basis points since Friday. “This is a violent effect,” said Willem Sels, credit strategist at Dresdner Kleinwort.

Michael Lewis seems to be thinking along similar lines.

As important as it seems right now on Wall Street, this isn’t a day that most Americans will remember as all that big of a deal. When Lehman Brothers Holdings Inc. goes out of business, the reaction of the average citizen is either “Lehman who?” or, “I heard of them! What do they do?”

It is a big deal, however, but not because some bond traders are out of work, or that puff pieces in business sections about Dick Fuld’s survival skills turned out to be wrong. It’s a big deal because this is the day that American financiers, from the point of view of the Asians who sit on top of the world’s biggest pile of mobile capital, became a bad risk.

And yes, the Bank of China seems to have a bit of exposure to Lehman. It also presumably has additional exposure to other US financial institutions (The BoC has by far the largest external portfolio of the Chinese state banks). Widening spreads though only really bite when debt actually has to be refinanced. AIG seems to be facing some rather more immediate pressure from its swap counterparties. More

Video: British private equity banker John Moulton

British private equity banker John Moulton talks about the current US financial debacle. It’s the worst crisis he’s seen in his “lengthy career.” The Fed will find out real soon now if refusing to prop up Lehman was a good idea. More

Anthony M. Freed
Your Mortgage or Your Life
AIG, Lehman Brothers, Merrill, WaMu - This weeks Four Horsemen of the Markets have had a tremendous, even historical effect on every aspect of business and finance this week, and the surprises keep coming. Just as the Markets hit lows for the year, the Fed has now announced that they want Goldman Sachs and JP Morgan to fund a $70BB rescue fund for AIG. This announcement may have a saving effect here at the end of trading today. AIG was somehow allowed to bend the rules and borrow $20BB from it’s own subsidiaries, effectively eating it’s own tail - and this maneuver does not get them out of liquidity hot water - they still have to hunt down more money, which seemed more likely last week than it does this, given the shakeups. The stock has been hammered today on the news. Governor Patterson of NY seems willing to help in a regulatory manner, but there is no sign of the $40BB bridge loan life-line that AIG is looking for from the Feds.

Markets closed at record lows for the year, with the Dow down over 500 points, Nasdaq down more than 70 points, and the S&P down nearly a whopping 50 points.

Lehman Brothers is under Chapter 11 Bankruptcy protection - this essentially will buy time for Lehman to sell off some of their still valuable assets in an organized, not-so-firesale like manner. There are still buyers (Vultures) hanging around looking to pick up Nuberger Berman, if given the chance. Lehman has acknowledged today that they are still entertaining offers for Neuberger that were presented prior to the BK. which looks to be nothing more than a tactic employed by Dick Fuld to keep his job longer, and take the media pressure off while he sells off what is best about Lehman. More

(Bloomberg)
Lehman Brothers Holdings Inc. prepared to file for bankruptcy after Barclays Plc and Bank of America Corp. abandoned talks to buy the U.S. securities firm and Wall Street prepared for its possible liquidation. Lehman and its lawyers are getting ready to file the documents for bankruptcy protection tonight, said a person with direct knowledge of the firm’s plans. A final decision hasn’t been made, though none of the other options being considered appeared likely, the person said, declining to be identified because the discussions haven’t been made public. Barclays, which had emerged as a leading candidate to acquire Lehman, pulled out first, contending it couldn’t obtain guarantees from the government or other Wall Street firms to protect against potential losses on Lehman’s assets. Bank of America withdrew about three hours later, according to a person with knowledge of the talks. Banks and brokers began consolidating trades in which Lehman is involved to minimize the impact of a possible bankruptcy filing tonight. More

Source: The Angry Bear
Nouriel Roubini
It is now clear that we are again – as we were in mid- March at the time of the Bear Stearns collapse – an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer.

Let me elaborate in much detail on these issues…

This bail-in of investors is the opposite of a bailout of investors like the one that was done in the case of Bear Stearns and Fannie and Freddie. It is thus akin to the bail-in of investors that was done in the case of LTCM in the summer of 1998 and the bail-in of the interbank creditors of Korean banks in the winter of 1997. I wrote in 2004 with Brad Setser an entire book titled “Bailouts versus Bailins: Responding to Financial Crises in Emerging Markets” that discusses these policy tradeoffs in financial crises where you have runs on the liquid liabilities of either illiquid and/or insolvent countries. Those were the international equivalent of the banks runs and financial crises that we are now seeing in the cases of Bear Stearns, Lehman and Fannie and Freddie.

Since government bailouts put at risk public money and create moral hazard Treasury and the Fed decided that they need to draw a line somewhere after the bailouts of Bear Stearns creditors, of Fannie and Freddie and all the other actions aimed at backstopping the financial system. These actions have included the creation of the TAF, TSLF, PDCF, the use of the FHLBs to provide liquidity to distressed mortgage lenders, the provision of Treasury liquidity to the FHLBs, the outright purchase of agency MBS by the Treasury, the swapping of two thirds of the safe Treasuries of the Fed for toxic illiquid securities of banks and non banks, etc. So after having created the mother of all moral hazard with their actions (including the biggest bailout of all, i.e. the rescue of Fannie and Freddie) the Fed and Treasury are playing a chicken game with the financial system. Tim Geithner told clearly to the heads of all the major Wall Street firms that if they pull the plug on Lehman and Lehman collapses they are next in line for a run on their institutions. So if a buyer for Lehman is not found (or even if it is found and the counterparty lines are still pulled) not only Lehman will collapse but the run will extend to all of the other major broker dealers and banks that are the counterparties of Lehman.

The Fed may delude itself in thinking – as its stress models suggest – that the systemic risk of a collapse of Lehman are less serious than those of Bear Stearns: afterall Lehman is less involved into CDSs than Bear was and now both Lehman and the other major broker dealers have access to the discount window with the PDCF. A collapse of Lehman instead will have as much of a systemic effect as the collapse of Bear for many reasons: Lehman is larger than Bear was; Lehman is a major player in a variety of key financial markets; all the other major Wall Street institutions are interconnected with Lehman in dozens of different types of counterparty activities; the PDCF support of the Fed is neither unlimited nor unconditional, i.e. investors cannot assume that Lehman or any other broker dealer can borrow unlimited amounts with no conditions from the discount window. Thus, a collapse of Lehman would trigger a panic and a potential run on all sort of other broker dealers and also on other distressed financial institutions like banks (WaMu) and insurance companies (AIG) and smaller member of the shadow financial system (distressed and highly leveraged hedge funds, etc.).

The reason why Lehman is having a hard time to find a buyer is that it is most likely insolvent. If you had to mark to market the value of it illiquid and toxic assets (the $40 billion of commercial real estate assets, its remaining residential MBS and CDOs, its holdings of real estate private equity funds) Lehman is most likely insolvent (i.e. has negative net worth with liabilities well above its impaired assets). So leaving aside the potential and now dubious value of its franchise (an option to the value of a much slimmed down financial institution) no financial institution should be paying even a single penny to buy an insolvent firm. That is why all the potential suitors of Lehman (such as Bank of America and others) are waiting for the government to provide another sleazy Bear Stearns deal where the government would buy at higher than market value the toxic assets of Lehman (the commercial real estate assets for example) so as to make the net worth of the remaining institution positive and worth buying. But such action – borderline illegal in the case of Bear as pointed out by Paul Volcker – would be a scandal in the case of Lehman and severely exacerbate the moral hazard problem.

But here lies the conundrum of this Lehman crisis: no one seems to want to buy for a positive price Lehman unless there is a public subsidy (taking off their toxic assets off the firms’ balance sheet). The government cannot afford to provide the subsidy as the moral hazard problems are becoming severe. But then if on Monday no deal is done Lehman collapses and goes into Chapter 11 court and you have the beginning of a systemic financial meltdown as the run on the other broker dealers will start. Thus, what Fed and Treasury are trying to do this weekend is another 1998 LTCM bailin or Korea 1997 bailin, i.e. trying to convince all the major institutions to either support a purchase of Lehman or maintain their exposure to Lehman if no buyers is found. Can this bail-in work? It is not clear as there is a major collective action problem: you can’t only convince half a dozen major Wall Street firms to maintain their exposure to Lehman. You need also to convince all the other counterparties of Lehman (including the hedge funds and the other broker dealers and banks) not to roll off their claims and credit to Lehman. This is a much more messy collective action problem and coordination game than in the case of LTCM and Korea where the number of involved counterparties was more limited (less than 20 in each case).

Paulson and Bernanke and Geithner (the troika managing this financial crisis) have all made public statements in the last few month to the necessity of finding an orderly way to close down – rather than bailout – a major and systemically important non bank financial institutions: the embarrassment and losses for the Fed that the bailout of the creditors of Bear led made it paramount to avoid another Bear like bailout. That is why they are now playing tough with Lehman and its creditors. But in this game of chicken the Fed and the Treasury may end up being the ones to blink. Faced with the risk of a generalized run on the other broker dealers they may decide that greasing again a deal for the purchase of Lehman may be less costly and less risky than testing whether the system can orderly work out a collapse of Lehman (something that is highly uncertain). Even in the case of the Bank of America purchase of Countrywide such public subsidy was significant (the FHLB of Atlanta lent to Countrywide over $50 billion and Bank of America has most likely received plenty of tacit forbearance from the Fed to support its takeover of an insolvent Countrywide). So implicitly or explicitly the Fed and the Treasury may decide – however reckless and moral hazard laden that choice may be – to provide some explicit or implicit subsidy to a private purchase of Lehman.

The trouble is that, in spite of all public statements regarding the need to provide an orderly demise of large broker dealers, the Fed and the Treasury have done nothing to create such insolvency regime for such broker dealers. So the only option for Lehman – if a buyer is not found - will be the one of ending up in Chapter 11 and trigger massive losses on its counterparties that will in turn trigger a run on such counterparties.

In February of 2008 I predicted – in my “12 Steps to a Financial Disaster” – that one or two major broker dealers would go bankrupt. A month later Bear Stearns went bust and the collapse of the other ones was avoided for a time by the most radical change in monetary policy since the Great Depression, i.e. the creation of the PDCF that extended the lender of last resort (LOLR) role of the Fed to non-bank systemically important broker dealers (i.e. all of the bank and non bank primary dealers of the Fed).

I next argued in June that such action would not prevent a run on other broker dealers such Lehman as to avoid a run you need both deposit insurance and unlimited and unconditional access to the Fed LOLR support. I also discussed why Lehman was next in line for a collapse and why the PDCF would not prevent a run on Lehman.

I also argued in follow-up pieces that, in a matter of two years, no one of the remaining independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley and Goldman Sachs) would survive as: 1. their business model is now impaired (securitization is semi-dead); 2. they will need to be regulated like banks given the PDCF support and thus have lower leverage, higher liquidity and more capital that will erode their profitability; 3. Their severe maturity mismatch – borrowing very short term and liquid, leveraging a lot and lending and investing in more long term and illiquid ways – makes them very fragile – in the absence of deposit insurance and in the presence of only limited LOLR support by a central bank – to bank like run that are destructive even of illiquid but otherwise solvent institutions. Thus all such broker dealers need to merge with larger financial institutions that have a commercial banking arm and thus access to stable and insured deposits and to true LOLR Fed support. That process of unraveling of independent broker dealers started with Bear Stearns; now it is moved to Lehman; tomorrow Merrill Lynch will be on line; and Morgan Stanley and Goldman Sachs will be next. No one of them can and will survive as independent entities. So, the Fed and Treasury should advise them all to start finding a large international partner (international as almost no domestic partner is now sound to take them over) and merge with such partner before we get another Bear or Lehman disaster.

The step by step, ad hoc and non-holistic approach of Fed and Treasury to crisis management has been a failure so far as plugging and filling one hole at the time is useless when the entire system of levies is collapsing in the perfect financial storm of the century. A much more radical, holistic and systemic approach to crisis management is now necessary.

What we are facing now if the beginning of the unraveling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank like runs; but unlike banks they are not properly regulated and supervised, they don’t have access to deposit insurance and don’t have access to the lender of last resort support of the central bank (with now only a small group of them having access to the limited and conditional and thus fragile support of the Fed). So no wonder that this shadow banking system is now collapsing. The entire conduits/SIV system has already collapsed with the roll-off of their ABCP financing; next is the collapse of the broker dealers (Bear, Lehman and soon enough the other ones) that rely mostly on unstable overnight repos and other very short term funding for their financing; next will be hundreds of poorly managed hedge funds that will face a tsunami of redemptions; and finally runs on money market funds that are not supported by a large financial institutions or other smaller member of the shadow banking system as well as highly leveraged and distressed private equity funds cannot be ruled out either.

This is indeed the most severe financial crisis since the Great Depression and occurring at a time when the US is falling in a now severe consumer led recession. The vicious interaction between a systemic financial and banking crisis and a severe economic contraction will get much worse before there is any bottom to it. We are only in the third inning of a nine innings economic and financial crisis. And the only light at the end of the tunnel is the one of the incoming train wreck.

(Reuters)
Bankers and regulators held a second day of emergency talks to tackle the crisis at investment bank Lehman Brothers and soothe financial markets after Treasury and Fed officials urged Wall Street chiefs to come up with their own solution. With LTCM, major banks each contributed to a $3.65 billion bailout of the hedge fund, allowing it to be wound down in an orderly way. But this time may be different. The capital of many top banks is already strained by the credit crisis, making them reluctant to fork over funds to help Lehman, whose problems are largely a result of bad bets on the U.S. mortgage market. “The big concern here is, that the system is short on capital in a big way,” said Dan Alpert, banker at Westwood Capital in New York.

“That’s a problem–there could be another half a trillion dollars in writedowns, and you have to find that somewhere.” Also, while LTCM was a client of most Wall Street firms, Lehman is a competitor. “I’m not sure why Goldman Sachs would want to keep Lehman in business,” said Charles Peabody, analyst at independent research firm Portales Partners in New York. He called a “pre-packaged bankruptcy” the best possible scenario for Lehman since it would keep the bank’s broker dealer operating subsidiary intact even if largely wiping out equity holders and hurting bondholders. More

WALL STREET JOURNAL
The crisis gripping the nation’s financial system deepened, with Lehman Brothers Holdings Inc. racing to sell itself over the weekend and other major U.S. institutions scrambling to show they have the financial wherewithal to ride out the crisis. Potential buyers of Lehman were heading toward a standoff with federal officials Friday. Firms weighing offers for the battered investment bank sought financial assistance, while Treasury Secretary Henry Paulson has been unwilling to support a government-led bailout, people familiar with the situation say. The weekend’s negotiations over Lehman’s fate could define the next chapter of the government’s handling of the crisis.

Friday’s unease spread beyond Lehman. Shares of American International Group Inc., the giant insurer, fell more than 30%. Standard & Poor’s said it might lower its credit ratings on AIG because of its tumbling share price and the increasing yield on its debt instruments compared with safe government Treasurys. Friday’s share drop prompted top AIG management to consider holding a conference call for investors Monday morning to announce a series of steps, including asset sales, aimed at reassuring the market, according to a person familiar with the matter.

Merrill Lynch & Co., which boasts the largest force of retail brokers on Wall Street, saw its stock drop 12%, following a 17% drop Thursday. Washington Mutual Inc. shares fell 3.5% Friday, after the thrift released some financial projections late Thursday in hopes of reversing a week-long stock-price slide fueled by worries about its capital levels and access to cash. Speculation that WaMu could be up for sale, with J.P. Morgan Chase & Co. as a potential suitor, fanned rollercoaster trading. While the New York bank remains interested in WaMu, no talks are under way, people familiar with the situation said. More

Ilargi
The Automatic Earth
There are pretty desperate negotiations over Lehman going on into this morning, and it looks by no means sure that a deal will be done. For one thing, the Treasury and the Fed seem to want nothing to do with doling out more funds, on the heels of the $5.5 trillion taxpayer tab for Fannie and Freddie. There is an end even to that sort of largesse.

Then again, which private party will be willing to take the risk to buy into the -at least- $52 billion in debt Lehman is exposed to? The reason the talks are so frantic lies hidden in Lehman’s involvement in the global derivatives trade, an involvement that could cause a cascading storm surge throughout the global financial system to the tune of untold trillions of dollars, where one gamble covers the next bet covers the next gamble. Rinse and repeat. Lehman’s market cap may be a mere $3 billion, its damage potential may be 1000 times bigger.

That leads us face first into the true state of affairs in the world of finance. The US banking system, as a whole, is insolvent. It doesn’t have the money to support its commitments. Plain and simple. And it’s not just the banks; the entire US financial system is insolvent. On Monday, Lehman’s will be history, one way or another. And the next set of American orphans are lining up in front of our eyes: AIG, Merrill Lynch, Washington Mutual, Wachovia, Ambac and MBIA, none of them can survive unless there is divine intervention. Really, the whole system is insolvent. Not every single part of it, but at least 85% of the parts. And if that many cogs in a machine fail, chances are that the whole apparatus will stop functioning.

But that’s still not the whole picture: the whole global financial system is insolvent too. Europe is sliding fast, Japan has the largest public debt on the planet, China’s production is sputtering for lack of clients, Russia puts large amounts of money into its economy. The international banks, like their US counterparts, all have large amounts of paper in their vaults that has been creatively valuated using computer models programmed using generous prescriptions of Prozac and LSD. Going back to the US for a moment: commercial-bank loans from Fed emergency windows rise to a record $19.8 billion, U.S. government debt balloons to $5.3 trillion, home foreclosures climb again in August, retail sales are slumping, the trade deficit is soaring. Is there anyone who believes that an orderly buy-out of Lehman will reverse all that mayhem? No, we need to add another one to our list of insolvent systems: the US government.

Of course we can have lengthy debates over the very possibility of a federal government going bankrupt; while that can be interesting in theory, the reality remains that US deficits rise ever faster, that interest payments on the debt alone will rise over half a trillion dollars soon, and tax revenues at all levels of government are falling off a steep cliff. On top of all the shortages and deficits, the situation is worsening fast. And even for a government, it has to stop somewhere. Print money? No, you can’t do that, not in a global economy. The more you print the less it’s worth, like a hamster on a treadmill. What would have to happen for all of this to heal and revert, is a return to prices of homes and other assets to their peak levels of a few years back. And that is simply not going to happen; it is not possible. Banks have no money to lend, or invest, and individuals have no collateral to use against mortgage or car loans. Game over.

That in turn means there is NO way to prevent the financial crisis we see approaching, no more than Galveston can wish or pray for the behemoth hurricane with the little name, Ike, to magically go away. We, like Galveston, will have to live through this. Or die trying. All that’s left as collateral for the value of the US economy, and the US dollar, is the future capacity of the American worker to cough up taxes. And the US worker, bless her soul, makes her meagre livelihood flipping burgers for other US workers. Which is not even enough to make the payments for her trailer home. No matter what happens with Lehman, or AIG or Merrill, or with any other bail-out attempt, this will not get better. It will get much worse. The system is broken, and we have spent our future. More

NEW YORK (Reuters)
Lehman Brothers Holdings Inc plans to sell a majority stake in its asset management unit and spin off commercial real estate holdings, hoping to restore investor confidence and ensure its survival after reporting a record quarterly loss of about $4 billion. Shares failed to rebound on Wednesday morning after plunging 45 percent a day earlier, reflecting Wall Street disappointment that Lehman did not announce more concrete actions. “What you are dealing with is a confidence issue,” said Doug Roberts, chief investment strategist at Channel Capital Research in Shrewsbury, New Jersey, “What people are saying is that there has been no resolution of the problem.” More

Ilargi
TheAutomaticEarth.blogspot.com
Looking at the fall-out from the Fannie and Freddie bottomless pit bail-out, I can’t help combining in my head the financial news with reports on the Hadron particle accelerator. Protesters claim it could create black holes. And I’m thinking: guys, if black holes are your thing, you should be watching Wall Street. After yesterday’s market losses, it’s obvious that hardly anybody was fooled for more than 24 hours into thinking that the unlimited bail-out would calm investors, or stabilze mortgage rates, or anything of that sort. And I’ll repeat once again that it can’t. Calling a bottom in this market is a very simple thing to do, it’s just that no-one wants to do it, for good reasons perhaps (fear). The mayhem hasn’t even started for real yet: the problems will be solved when both of the following issues have been fully addressed. First, home prices will have to go down to trendline levels; to do so, they will need to lose around 65% of their 2005-6 peak levels. They are down about 20% today, according to Robert Shiller. Because swings of this magnitude are always intensified by sheer momentum, the losses, as I have said 1000 times, will be close to 80%.

Second, the securities, derivatives and other casino toilet paper that reside in the vaults of banks, pension funds, money funds and elsewhere, will have to be exposed to daylight and valued at the market price of the day, not that of 10 years ago or 10 years in the future. This is called mark-to-market, and it gets harder to avoid it, try as they all might. Until these two conditions have been met, the only result of actions such as the Treasury “rescue” of Fannie and Freddie will be one, and one only: the transfer of public funds, revenue drawn from taxpayers past, present, and future, into private coffers. And no, I do not believe that is an unintended consequence.

The news of the day: everyone’s eyes are fixed on Lehman, which lost 44.95% yesterday. Today, Lehman faces failed take-over talks with suitors like the Korean Development Bank. Ostensibly over the price it asks for itself, but I bet you that in reality it’s over the “assets”, the toilet paper, that Lehman holds. The bank is now trying to sell its asset-management division, Neuberger, but that only reveals the next problem: investors value Lehman at the same price as Neuberger. So if they sell it, Lehman has ZERO value. Expect another rescue from Paulson and the Fed very soon, if Lehman keeps plunging. Interestingly, as Lehman is up a few points this morning, its holding company scrapes the bottom of the barrel. It’s like the Russian dolls.

More fall-out. The Fannie and Freddie purchase by the American public included a sucker punch hit for holders of preferred shares. Many of those holders were smaller US banks. The halt in dividend pay-out on the shares is bad enough for many of them. But that’s not all: to (re-) finance their debt, they would like to (as usual) issue shares, including preferred shares. But who now is still nuts enough to buy that stuff? It could be wiped out tomorrow morning, if the Treasury pulls the same stunt again. Talk about a double whammy! And that’s not all (nothing is these days, it seems). Banks have to write down an estimated $30 billion on the preferred shares boondoggle. Which, in fractional banking terms, means that another $300+ billion in credit leaves the country. As a result of a bail-out promoted as intended to make credit (mortgage loans) more accessible.

So look beyond Lehman. Watch what happens to Fifth Third, Key Corp, Wachovia. They are all bleeding now. What really scares me today, though, is Washington Mutual. Down 20% yesterday, and the same today. WaMu is the United States’ largest savings and loan association, with 2600 offices, the third largest mortgage lender (!!), and 9th largest credit card company. If WaMu fails, we will see the Treasury need to bail out the FDIC soon, just because of its size. And then there’s no telling how other commercial banks will fare. Or your allegedly “guaranteed” deposits. WaMu is the proverbial big fish. Make that BIG FISH. A fuzzier subject when it comes to the infamous biggest bail-out in history (until the next one) is the effect it has on credit default swaps and, with it, the entire derivatives market. Most of it is too opaque to call, but we know there are hedge funds deep in Fannie and Freddie swaps, for whom things changed a lot overnight.

CDS are nothing but bookie bets with a glamorous and legal veneer. Their estimated total is $62 trillion, and it’s very hard to estimate what part of that would have to be paid out. But don’t be surprised if it turns out to be 10%, or even more likely 20%. We haven’t even started yet on the way down, this is just the engines warming up. Lots of noise, but no movement. Home prices down 80%, and toilet paper out in the open. Those are your clues. Any claim until then is fake. More

ALICE GOMSTYN
ABC NEWS
As the government proceeds with its bailout of ailing mortgage giants Fannie Mae and Freddie Mac, Wall Street is abuzz about the fate of another financial heavyweight: Lehman Brothers. By noon on Tuesday, shares of the country’s fourth largest brokerage firm were down more than 30 percent as investors worried about whether Lehman would be able to cover the losses it continues to sustain from its mortgage holdings. “There’s a strong suspicion in the marketplace that a lot of their assets, which are related to residential and commercial mortgages, are not worth what they’re being carried on the balance sheet for,” said Lawrence J. White, an economics professor at New York University’s Stern School of Business. “One of these days, Lehman is going to have to recognize that.” More

Anthony M. Freed
Blackstone, KKR may buy Lehman assets - that is all the rumor story says so far. Lehman has cried wolf one too many times now… Something substantial better come of this or confidence in Lehman and Dick Fuld will reach an all time low next week. Also of interest is how much Merrill is tracking Lehman today, and in the graphs below. As I have been saying, there is a lot riding on Lehman Brothers, especially for Merrill Lynch. Nice bounce… Time is literally running out on Dick Fuld and the Lehman Brothers crew, as rumors of a rescue by the EBA (Every Bank in Asia) evaporated, and the Days Trading Turned Dim. To me , risky maneuvers reek of panic and desperation: More

Anthony M. Freed
Your Mortgage or Your Life
While the world and I wait for the shoe to finally drop on this Lehman-KDB deal (Lehman Brothers On the Ropes - KDB Deal May be Ugly, or Not Happen At All) I have been putting together some research to support my supposition that Merrill Lynch is next on the chopping block. A lot is at stake here, and depending on the terms Lehman is able to secure - assuming they can close a deal all - Merrill Lynch will have to make some quick and decisive decisions regarding their own strategy for shoring up the compan