Collapsing Global Credit Bubble Churns up Financial "Whales"

[EJ]

http://www.itulip.com/images/crapcreditsign.jpgCollapsing Global Credit Bubble Churns up Financial "Whales"

As the Whales Hit the Beach, Don't Forget Where they Came From

by Eric Janszen

Editor's Note: We're fans of independent research and money management firm GaveKal and the writings of Charles Gave, Louis-Vincent Gave and Anatole Kaletsky based in Hong Kong. We've heard iTulip described as GaveKal's evil twin brother. Both firms strive to be rigorous and consistent, but where GaveKal surveys the financial markets scene and sees a glass half full, iTulip sees a glass of Kool-Aid.

Louis-Vincent Gave, in his letter to subscribers today, continued with a metaphor to illuminate the global liquidity contraction, "in which the central banks keep throwing in sticks of dynamite until the ocean finally disgorges a huge dead whale," and listing as previous "whale" examples Continental Illinois, Chrysler, Brazil, Drexel Burnham, Kidder Peabody, Mexico, LTCM/Russia, and Enron/MCI/Argentina. The letter explores the idea that Northern Rock PLC, Britain’s fifth-biggest mortgage lender, may be it. We say Northern is a lead whale, and look for a lot more to hit the beach over the next year.
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Let's compare the US and UK situations as the credit crisis progresses. Bernanke rode into the Fed in 2006 on his reputation as an asset deflation fighter, the prefect man for the job as everyone from Wall Street to Washington knew the credit party had gone on so long and reached such extremes that only a person believed to be able to deal with the inevitable crisis was suitable.

While Bernanke's famous 2002 "dropping money from helicopters" speech is frequently cited, he has been developing a reputation as a virtuoso in the subtle arts of deflation fighting for nearly 25 years, to wit: Bernanke, B. (1983) "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression," American Economic Review, Vol. 73, 257-276. The promise to supply copious liquidity at the drop of a hat was just the right cover for the much more prudent approach that was intended. Clearly, the actual fulfillment of that expectation would spell disaster for a Fed managing the aftermath of a nearly 20 year old credit bubble in the context of a dollar trading at 34 year lows and oil at all time highs.

These antecedents, along with the seeds of the current credit crisis, are the legacy of Fed, Treasury Dept, and Congressional post-stock market bubble re-inflation policies 2001 - 2005: cut rates, cut taxes, debase the currency. Imagine US creditors' relief when the Fed merely changed discount window policies, as ex-Fed governor Larry Meyer told everyone they'd do (we heard it on a Goldman client call; Meyer's on the payroll) as CDOs were marked to market from mark to model. Setting such low expectations of prudence made the measures taken appear hawkish.

The Bank of England made no such pre-crunch PR arrangements so is now stuck playing political catch-up, thus the hard line with banks in official statements that echo the words of President Hoover's Treasury secretary, Andrew Mellon, who advocated allowing the 1929 crash to "liquidate labor, liquidate stocks, liquidate the farmers and liquidate real estate." But the intention is to not take it that far. After some speculator's blood has been spilled, the necessary bailout measures will be taken. The risk, though, as the Japanese learned, is that these short term political decisions can morph into suboptimal long term monetary decisions. The politics are deterministic, so a repeat of the Japanese deflation cycle experience is possible if the hard line is maintained too long; the credit crunch may become self-reinforcing if the BoE doesn't soon start to get as creative as the Fed has been in the US. One factor holding them back is that the Brits have this class thing to deal with that makes the appearance of the BoE bailing out rich people more politically problematic than for the Fed. In the US there may be occasional noise about wealth inequality and socialism for bankers but it's restricted to academics and well-meaning journalists and isn't politically significant as long as the flat panel TVs keep flowing out of Asia and the credit keeps flowing to pay for them.

The experience for net debtor versus net creditor nations is different in the circumstance of a debt deflation. In the case of the US in the 1930s and Japan in the 1990s, as net creditors debt deflations have a tendency to reinforce processes that increase the purchasing power of the currency, exacerbating asset and commodity price deflation. In the case of the US today, in its role as the world's largest debtor with massive military and entitlements bills still piling up, a self-reinforcing debt deflation could eventually lead to a repudiation of the currency unless arrangements can be worked out to sell assets to US creditors at very favorable prices, such as the oil and other resource companies that China desires above US Treasury bonds, but is blocked by Congress from purchasing.

Whether Northrock is "a" whale of "the" whale remains to be seen, but I suspect the former will be proven in time. Recall that the current credit problems originated in the US housing market and that has a long way to go down. Greenspan admits in his new book "The Age of Turbulence" that might be better titled "Duh" that there was indeed a housing bubble and housing prices are still closer to a top than a bottom for the cycle. More importantly from a whale counting perspective, the housing bubble, while it gets lots of press today, is just the start. A similar fate awaits the US commercial real estate market, which financing via Commercial mortgage-backed securities was even more outlandish (see 1031 Exchanges: More FIRE Economy Hijinks and Curtains for Commercial Real Estate? (http://itulip.com/forums/showthread.php?p=16101#post16101) iTulip Select (http://itulip.com/forums/showthread.php?p=7837#post7837), Sept. 16, 2007).

Then there's the private equity deals funded by CLOs that have left many US companies with impaired balance sheets even in good times. A modest decline in demand, even without outright recession, will make many of those deals uneconomical (see Interview with John Challenger, CEO, Challenger, Gray & Christmas (http://itulip.com/forums/showthread.php?p=11276#post11276), iTulip Select (http://itulip.com/forums/showthread.php?p=7837#post7837), June 13, 2007). While the optimists opine that these deals are benignly re-negotiable, recent experience in the mortgage lending industry, which offered similar assurances as recently as Q1 2007, provides evidence that in practice when the money dries up, PE firms will need their cash flow as much as anyone else, and at the same time as everyone else.

As duration of unemployment grows and fuel demand by air carriers declines along with freight shipping volumes, the US economy shows itself on a descent path into recession, which we modeled October 2006 as due to start in Q4 2007. The only serious questions are how fast and how far. Policy options are limited and raise further questions. What can the Fed do with one hand tied behind its back by inflation? What options are available for additional foreign borrowing given Treasury Dept. head Henry Paulson's recent unfruitful bond sales trips to Asia? And what kind of fiscal stimulus can be supplied by a Democratic Congress on the hook with voters to stop spending the US into oblivion so Hillary Clinton can get elected President in 2008. In fact, a recession in 2008 would probably seal a Clinton win.

The whale metaphor in this context reminds me of the joke about the Bostonian who was stopped by an environmental activist at Logan Airport and asked, "Please, sir, will you help us save the whales?" The Bostonian replies, "Save the whales? How? I can see saving stamps and coins, but where am I gonna put a collection of whales?"

Not a whale but a collection of whales is what we'll have before the credit bubble Greenspan made is finally unwound.

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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[Chris Coles]

The most interesting quote this evening here in the UK is to the effect that the underlying "credit" of the UK Government is "unlimited".

That was a comment following the government action to give an unlimited guarantee to all depositors in Northern Rock.

That guarantee surely is a moot point if they have to cover the majority of all depositors for all banks? I ask that as we see already that the first signs are appearing of the stock market run on other banks named over the weekend to be vulnerable.

So far the Whales are mere sprats when compared to the major players in the US market. And how many are now prevented from telling anyone that they have a problem by the sight of the run on Northern Rock?

One last point, I do not detect any form of "class" comment. Everyone is affected. Here in the UK many otherwise poor people are good at saving for a rainy day and there is no bias in the queues outside the bank.
_________
Chris.

[FRED]

The most interesting quote this evening here in the UK is to the effect that the underlying "credit" of the UK Government is "unlimited".

That was a comment following the government action to give an unlimited guarantee to all depositors in Northern Rock.

That guarantee surely is a moot point if they have to cover the majority of all depositors for all banks? I ask that as we see already that the first signs are appearing of the stock market run on other banks named over the weekend to be vulnerable.

So far the Whales are mere sprats when compared to the major players in the US market. And how many are now prevented from telling anyone that they have a problem by the sight of the run on Northern Rock?

One last point, I do not detect any form of "class" comment. Everyone is affected. Here in the UK many otherwise poor people are good at saving for a rainy day and there is no bias in the queues outside the bank.
_________
Chris.

What's meant by the political class issue is not the composition of the line at the bank but the perception by voters of preferential bailing out of bankers over borrowers, like this:

http://www.itulip.com/images/discountwin.jpg

[Chris Coles]

Ed,

No!

The whole problem is seen as being caused by EXACTLY the opposite; no one has been prepared to do ANYTHING to help any bank.

At the retail level, today, banks here do not have any friends at all. And, may I say from my own experience, this is a general view.

Interbank lending has stopped dead in its tracks.

I will go so far as to suggest that any UK government that bailed out the investors would guarantee to lose the next election.
_________
Chris.

[FRED]

Ed,

No!

The whole problem is seen as being caused by EXACTLY the opposite; no one has been prepared to do ANYTHING to help any bank.

At the retail level, today, banks here do not have any friends at all. And, may I say from my own experience, this is a general view.

Interbank lending has stopped dead in its tracks.

I will go so far as to suggest that any UK government that bailed out the investors would guarantee to lose the next election.
_________
Chris.

Yes, that's exactly the point. The BoE isn't doing anything to help investors because it is politically unpopular to do so. Rather they are taking a populist stance and bailing out depositors, the opposite of what the Fed is doing.

Or maybe it's long standing British tradition:
The actions of governments after a crash may also influence the severity of its effects. Many economists argue that after October 1929 President Hoover should have followed the advice of his Treasury secretary, Andrew Mellon, who advocated allowing the crash to "liquidate labor, liquidate stocks, liquidate the farmers and liquidate real estate." Instead, Hoover led a campaign to maintain wage levels in the face of falling prices. Japanese authorities committed the same error in the early 1990s with their futile attempts to prevent asset prices from falling.

They would have done better to follow the example of the British authorities who remained benignly laissez-faire in the face of the South Sea Bubble and all 19th-century crashes.

When the Bubble Bursts (http://www.internetional.se/wsjburst9908.htm)
By Edward Chancellor
author of "Devil Take the Hindmost: A History of Financial Speculation"
(Farrar, Straus & Giroux, 1999).

[Spartacus]

It's not completely clear to me where the GaveKal stuff ends and the iTulip starts.

[simon galbraith]

The (long standing) BoE rules seem to have been designed to inflict the maximum possible pain on the shareholders of Northern Rock whilst removing all but minor pain from depositors (early withdrawl fees). Indeed the rules seem specifically designed to completely wipe out all shareholder capital (http://www.bbc.co.uk/blogs/thereporters/robertpeston/2007/09/rock_cant_be_sold.html).
It seems Northern Rock can only be transfered to new ownership when the the existing shareholders have lost everything, so expect a sale for £1 to someone like HBOS, ala Barings (http://en.wikipedia.org/wiki/Barings_Bank).

The only new aspect of this is the fuller than promised protection for depositors, this was officially only up to £32,000 ($65,000) and is now unlimited. The overall thrust of the BoE policy is unchanged and seems unlikely to change.

My understanding of the problem in Japan was that the megabanks were allowed to continue trading whilst insolvent, to companies that themselves were insolvent. (http://en.wikipedia.org/wiki/Deflation#Deflation_in_Japan) The BoE certainly can't be accused of this with Northern Rock, it will be gone within the week.

If we're going to have fun speculating about "Who's the dead whale?" I'd put my money on Goldman Sachs, they seem eerily similar to Enron:

No one understands how they make money
High connections in government
Hubris
On-both-sides-of-trades and,
They aren't what they say they are (Hedge fund, not investement bank).There will be plenty more dead sea creatures bobbing to the surface in the UK, all of our asset bubbles are still fully inflated and those bubbles are more extreme than those found in the USA in 2006/7 or in Japan in 1989.

Simon Galbraith

ps. My folks had all of their cash savings in NR until about 4pm this afternoon. They are probably writing thank you cards to the BoE right now.

[Chris Coles]

24 hours is a long time in banking here in the UK. To start, a small comment on BBC Radio this morning is that the Treasury has widened the guarantee to all depositors of any such bank. I believe this has been made on the basis that as the regulatory authorities have ascertained that all banks are sound then the guarantee can be given.

I quote from the UK Treasury web site page: http://www.hm-treasury.gov.uk/newsroom_and_speeches/press/2007/press_94_07.cfm

"In its role as lender of last resort, the Bank of England stands ready to make available facilities in comparable circumstances, where institutions face short-term liquidity difficulties."

You can find all of the press releases here:

http://www.hm-treasury.gov.uk/newsroom_and_speeches/press/2007/press2007_index2.cfm

Northern Rock has been, effectively, nationalised with a full guarantee from the UK Government and I know what I would do if I were in charge of a financial institution in difficulties and had problems, I would move all my funds to Northern Rock immediately. In fact, I suspect that is exactly what is happening as the stock market is reporting that Northern Rock shares are taking off again.

So the next question must be how long does the present guarantee stand if that is correct? I ask that as Northern Rock will very quickly become the strongest bank in the world with unlimited funds available to lend and a very competitive interest rate to depositors.

We are into totally new ground this morning and I feel that the guarantee has been given without enough thought as to the consequences in a total world market for money.
_________
Chris.

[Chris Coles]

One other small point. Here in the UK we use the term "investor" when we talk about a saver in any of the smaller banks outside of the big four. The reason is that before they became banks they were what we called Building Societies that made their savers shareholders as a part of the mechanism of saving for the purchase of a house.

When you hear reports of "investors", you will need to sort the wheat from the chaff.
_________
Chris.

[Chris Coles]

A £28bn cheque to stop the panic

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2477847.ece?EMC-Bltn

[GRG55]

It's not completely clear to me where the GaveKal stuff ends and the iTulip starts.

You can access the GaveKal article at John Mauldin's website here:

http://www.investorsinsight.com/

[GRG55]

The (long standing) BoE rules seem to have been designed to inflict the maximum possible pain on the shareholders of Northern Rock whilst removing all but minor pain from depositors (early withdrawl fees). Indeed the rules seem specifically designed to completely wipe out all shareholder capital (http://www.bbc.co.uk/blogs/thereporters/robertpeston/2007/09/rock_cant_be_sold.html).
It seems Northern Rock can only be transfered to new ownership when the the existing shareholders have lost everything, so expect a sale for £1 to someone like HBOS, ala Barings (http://en.wikipedia.org/wiki/Barings_Bank)...

...If we're going to have fun speculating about "Who's the dead whale?" I'd put my money on Goldman Sachs, they seem eerily similar to Enron:

No one understands how they make money
High connections in government
Hubris
On-both-sides-of-trades and,
They aren't what they say they are (Hedge fund, not investement bank).Simon Galbraith

ps. My folks had all of their cash savings in NR until about 4pm this afternoon. They are probably writing thank you cards to the BoE right now.

It's not BoE rules that are designed to inflict pain. It's the nature of fractional banking. In every banking crisis first goes the liquid capital reserves (withdrawals), then shareholder equity, followed by unsecured lenders and depositors (over the deposit insurance limit) and finally secured lenders which include other banks and the BoE (or Fed as the case may be). Because banks are so heavily levered it takes only a small change in the value of their assets (loan book) before their equity is completely wiped out. This time we have the Mother of all Credit Bubbles due to the magic of derivatives - essentially an already heavily levered business, is now hyper-levered for those banks caught up in the derivative game. There is no valid reason bank shareholders should be bailed out any more than the shareholders of Enron or Parmalat.

Further, if the banks won't lend to each other what reason would an unsecured depositor have to keep their money exposed in ANY bank? Glad to hear your parents got their money out. Although the Exchequer announced a 100% guarantee, they probably sleep better now...unless they went across the street and put the money into an account at Barclays.

In the run-up to the crash of '29, Goldman Sachs, with the same attributes listed above, was at the forefront of creating pyramids of levered investment trusts. In his book "The Great Crash" economist John Kenneth Galbraith has an entire chapter - "In Goldman Sachs We Trust" - devoted to the whole amusing episode. Goldman survived and thrived after that, and no doubt they will again...

[GRG55]

24 hours is a long time in banking here in the UK. To start, a small comment on BBC Radio this morning is that the Treasury has widened the guarantee to all depositors of any such bank. I believe this has been made on the basis that as the regulatory authorities have ascertained that all banks are sound then the guarantee can be given...

...Northern Rock has been, effectively, nationalised with a full guarantee from the UK Government and I know what I would do if I were in charge of a financial institution in difficulties and had problems, I would move all my funds to Northern Rock immediately. In fact, I suspect that is exactly what is happening as the stock market is reporting that Northern Rock shares are taking off again.

So the next question must be how long does the present guarantee stand if that is correct? I ask that as Northern Rock will very quickly become the strongest bank in the world with unlimited funds available to lend and a very competitive interest rate to depositors.

We are into totally new ground this morning and I feel that the guarantee has been given without enough thought as to the consequences in a total world market for money.
_________
Chris.

Extending the deposit guarantee to other banks was inevitable, or there would have been runs on every bank with a mortgage business or an investment arm potentially carrying mortgage related paper. The banks still won’t lend to each other because they don’ know who is sound. There is no possible way the regulatory authorities know that answer either. If the authorities are actually making that claim then, to paraphrase Mandy Rice-Davies “Well they would, wouldn’t they”.
<O:p</O:p
I don’t see how Northern Rock is now “nationalized” as nowhere does it say that Her Majesty’s Loyal Government is taking possession of the stock. The BoE has agreed to provide short term loans to the NR, at a penalty rate of interest, in exchange for collateral from NR’s loan book. The BoE is risking their balance sheet to some degree, and it is not clear how they are assessing the credit risk of the collateral they intend to accept (do they have their own internal expertise?). Nothing here seems to directly protect the shareholders - the BoE is buying time to engineer a take over of Northern Rock, which is unlikely to survive the month as an independent bank.

[dbarberic]

Call me Ishmael.

[Chris Coles]

<O:p</O:p
I don’t see how Northern Rock is now “nationalized” as nowhere does it say that Her Majesty’s Loyal Government is taking possession of the stock.

GR,

I was only quoting a reporter with the BBC who made that comment.
_________
Chris.

[GRG55]

GR,

I was only quoting a reporter with the BBC who made that comment.
_________
Chris.

I wonder if the Beeb gets a Reuters feed?
80 Billion Pound notional mortgage book on 2 Billion of equity + 78 Billion of short term loans = ...

<?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:p...LONDON</st1:City> (Reuters) - Shares in embattled British bank Northern Rock tumbled 20 percent to an all-time low on Wednesday as speculation of a cut-price takeover bid combined with stake sales from two investors stoked concerns over its future. The latest leg down by its shares was blamed on talk of opportunistic cut-price bids for the bank from rivals Lloyds TSB , HBOS or HSBC . A bid could be pitched at 200p a share or lower, according to dealers.
<O:p</O:p

[GRG55]

GR,

I was only quoting a reporter with the BBC who made that comment.
_________
Chris.

Chris: I see the nationalization debate is still going strong. Did you see this in the Telegraph this morning?

http://www.telegraph.co.uk/core/Content/displayPrintable.jhtml?xml=/money/2007/09/21/cnnrock121.xml&site=1&page=0

I would think that Brown, the Exchequer and especially Governor King would like this carcass to be hauled away soon...
GR.

[Chris Coles]

GR,

Thanks for finding that, I was worried that I had misheard the quote and that it would backfire on me. But I return to my original point, if I had duff paper on my hands I would immediately cover it through Northern Rock. They have to accept for the time being they have the great gift of being able to turn the proverbial sow's ear into a gold bar. As every loan they take on earns them money and they cannot lose, no matter how hard they might try, I would move everything into their hands. And, the faster the better. Once it is on the books, whoopee!! As the Telegraph states, as good as UK Gilts.....

You wanna buy some dodgy paper pal?? Going cheap...... nice return! You cannot lose.

[c1ue]

Chris,

Hope you already had an account there.

The weaseling has already begun: No guarantee on new accounts.

http://www.ireland.com/newspaper/breaking/2007/0920/breaking14.htm

The next step will be no guarantee on deposits over existing balances as of 'xx/xx/xx' date.

Then the limit will be set to deposits under 'xx,xxx'.

[GRG55]

Chris,

Hope you already had an account there.

The weaseling has already begun: No guarantee on new accounts.

http://www.ireland.com/newspaper/breaking/2007/0920/breaking14.htm

The next step will be no guarantee on deposits over existing balances as of 'xx/xx/xx' date.

Then the limit will be set to deposits under 'xx,xxx'.

But of course, they have to do this. Imagine what would happen otherwise:
- word gets out that this is the place to safekeep your savings;
- people begin to line up outside high street branches so they can put their money into Northern Rock;
- TV camera crews show up to find out what's going on;
- The BBC runs the story as the evening news opening feature;
- next morning people line up in the dark 5 hours before branches open, so they too can put their money into Northern Rock;
- savings accounts at every other bank in England are drained as people rush to move their savings to Northern Rock;
- police are called to restore public order;
- Governor King, the Chancellor of the Exchequer and PM Brown broadcast statements;
- these efforts fail; indeed they just fuel the mania;
- a Parliamentary investigation is started to look into the whole sordid affair.
- years after the fact Alan Greenspan announces mysterious "global influences" caused it all.

See, they really have no choice... :)

[Chris Coles]

This should give you a better idea of the debate here in the UK.
Bank gives the details of its watered-down rules


http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2508102.ece

£100,000 guarantee to cover all savers

http://www.timesonline.co.uk/tol/news/politics/article2508003.ece

(But please note the comment by one of the Times readers to the effect of asking if the guarantee is for just one person per UKP100,000, or per tranche of UKP 100,000 per bank account).

The general point I was trying to make was that, once the BoE had given a blanket guarantee, then if you are another financial institution, you lend as much as Northern Rock needs and, as the government has made it quite clear that Northern Rock will not fail, (or the government loses its credibility), then your institutional funds are quite safe. So, you have lots of dodgy paper on your own books, but you cover that by lending to Northern Rock, ..... who cannot fail.

Just to let you know that I am off air for a few days to finish a book, (not economics), and should be back on site early October.

Chris.

[c1ue]

The general point I was trying to make was that, once the BoE had given a blanket guarantee, then if you are another financial institution, you lend as much as Northern Rock needs and, as the government has made it quite clear that Northern Rock will not fail, (or the government loses its credibility), then your institutional funds are quite safe. So, you have lots of dodgy paper on your own books, but you cover that by lending to Northern Rock, ..... who cannot fail.


Chris,

I understand what you are getting at - but you're missing the basic behavior of bankers: Even with a BoE guarantee - the fact that it is already being modified from 'blanket' means there is risk.

Banks don't like risk unless they're paid for it - and I very much doubt Northern Rock is in any shape to pay a premium for anything although they will probably have to.

I think a lot of the bankers are also looking at Countrywide and the BofA lendvestment.

Unfortunately - Mr. Lewis is head of a traditionally acquisitive institution. BofA is where its at because they've always doubled down and gotten bigger.

I personally think that the era for that is over - but time will tell!

[GRG55]

Collapsing Global Credit Bubble Churns up Financial "Whales"

As the Whales Hit the Beach, Don't Forget Where they Came From

by Eric Janszen


...Not a whale but a collection of whales is what we'll have before the credit bubble Greenspan made is finally unwound.


More "sticks of dynamite" going off in interesting places - Australia, Japan, and now China too. The dark side of globalization?

Australia, Japan Bond Risk Rises to Record After CDO Downgrades

By Laura Cochrane and Oliver Biggadike
Nov. 22 (Bloomberg) -- The risk of Australian and Japanese companies defaulting on their debt rose to the highest on record as downgrades on securities tied to mortgage bonds increased concern losses at banks will widen.

The iTraxx Australia Series 8 Index rose 2 basis points to 67 basis points at 7:23 p.m. in Sydney, the highest since its start in 2004, according to Citigroup Inc. The iTraxx Japan Series 8 Index of credit-default swaps rose as much as 4.25 basis points to 50 basis points, according to Morgan Stanley.

Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc., Japan's two largest banks, in the past month reported profits declined because of investments linked to the U.S. mortgage market. Citic Ka Wah Bank Ltd., a unit of China's biggest state-owned investment company, had its financial strength rating cut yesterday by Moody's Investors Service because of potential losses from structured investment vehicles.

``Subprime is like a steamroller,'' said Peggy Furusaka, sector specialist at BNP Paribas SA in Tokyo. ``I don't think anyone really believes that what's been reported by the major banks is everything.''
The turmoil in global credit markets may force banks, brokerages and hedge funds to cut lending by $2 trillion, Goldman Sachs Group Inc. economists said last week.

``Concerns about subprime issues adversely impacting global growth have grown from whispers to a dull roar,'' Commonwealth Bank of Australia analysts in Sydney said in a report today.
Fitch Ratings downgraded $29.8 billion of CDOs linked to residential mortgage bonds yesterday. Standard & Poor's cut ratings on $5 billion of securities and said it's reviewing $24 billion more.

Citic Ka Wah Downgrade
Potential losses from structured investment vehicles at Citic Ka Wah Bank could wipe out a year's profit, Moody's said yesterday.
A global slump in corporate debt and equity markets has prompted investors to buy government securities, pushing 10-year yields on Treasuries and Japan's bonds to the lowest since 2005.

The Australian iTraxx index, containing credit-defaults swaps on 25 borrowers, including BHP Billiton Ltd., Macquarie Group Ltd. and Australia's five biggest banks, has more than doubled in the past three weeks as banks led by Merrill Lynch & Co. announced at least $20 billion of writedowns on the value of collateralized debt obligations.

Each basis point on a contract protecting $10 million of debt from default for five years adds $1,000 to the annual cost.

`Definitely Bearish'
``The markets are definitely bearish and a bit nervous,'' said Anita Yadav, head of credit and hybrid research at UBS AG in Sydney.
Credit-default swaps tied to the debt of BHP Billiton, the world's largest mining company, increased 3 basis points to 56 basis points, BNP Paribas prices show. The contracts have more than doubled since the Melbourne-based company said Nov. 8 it offered to buy rival Rio Tinto Group.

Japan's iTraxx index eclipsed an earlier record of 48 basis points reached by the previous index on July 30. The benchmark contains credit-default swaps tied to 50 Japanese companies including All Nippon Airways Co. and Japan Tobacco Inc. The iTraxx indexes are revised every six months to include the most actively traded contracts.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aDTQzKAl4.fw&refer=home

[Glenn Black]

Perhaps an alagory will help other to understand

You are a "smooth operator" (China and the rest of the world). A young & inexperienced youth in your neighbourhood (the USA) receives a brand new Lambourghini from Papa (the previous, hard working generations of the USA). You resent the neuveau riche. You like those bright red sportscars, but the young fool won't sell it to you. You decide to take it from him.

You befriend the young fool. Soon the fool trusts you. You invite him to a friendly card game with a few other friends. After you let him win a few hands, the young fool thinks he is a card shark, and will always wins, no matter how stupid he bets. Suddenly, you turn the tables on the fool. He thinks he has a winning hand, but loses each time. The longer he plays, the more he loses. Soon, he is out of money.

You, his new best friend, soothe his feelings, and tell him his luck will soon turn good again. You express trust and belief in the young fool as a true master of life and cards. You agree to loan him a little money to help him win it all back and more, provided the young fool (or Papa) pays you back. Soon there is a pile of IOU's in front of you for the money you have loaned the fool time and again.

As soon as you are owed more than the bright red car parked outside is worth, you suddenly become very tired and want to go home in your new car. The young fool protests, asks for time to pay, threatens to tell Papa, cries, yells, etc. You listen but insist on payment immediately; what you came here for in the first place, the red car. The young fool may try to run away, or call the cops, but you have muscle on your side. Soon, you are driving off in your new car.

When will the young fool (the USA, and those like him) realize what they have done? How will they tell Papa?

[c1ue]

Glenn,

Welcome to iTulip.

[Nervous Drake]

Does the story change if the young fool has an M-14?

Perhaps an alagory will help other to understand

You are a "smooth operator" (China and the rest of the world). A young & inexperienced youth in your neighbourhood (the USA) receives a brand new Lambourghini from Papa (the previous, hard working generations of the USA). You resent the neuveau riche. You like those bright red sportscars, but the young fool won't sell it to you. You decide to take it from him.

You befriend the young fool. Soon the fool trusts you. You invite him to a friendly card game with a few other friends. After you let him win a few hands, the young fool thinks he is a card shark, and will always wins, no matter how stupid he bets. Suddenly, you turn the tables on the fool. He thinks he has a winning hand, but loses each time. The longer he plays, the more he loses. Soon, he is out of money.

You, his new best friend, soothe his feelings, and tell him his luck will soon turn good again. You express trust and belief in the young fool as a true master of life and cards. You agree to loan him a little money to help him win it all back and more, provided the young fool (or Papa) pays you back. Soon there is a pile of IOU's in front of you for the money you have loaned the fool time and again.

As soon as you are owed more than the bright red car parked outside is worth, you suddenly become very tired and want to go home in your new car. The young fool protests, asks for time to pay, threatens to tell Papa, cries, yells, etc. You listen but insist on payment immediately; what you came here for in the first place, the red car. The young fool may try to run away, or call the cops, but you have muscle on your side. Soon, you are driving off in your new car.

When will the young fool (the USA, and those like him) realize what they have done? How will they tell Papa?

[Chris Coles]

Glenn,

Welcome to iTulip.

As I gather you all say in the US; Roger That!