"ICH " --
The Fed’s policies were designed to create a crisis
Sun Aug 5, 2007 21:23

The impending economic crisis is part of a Much Broader
Scheme to remake the political system from the ground-up
so it better meets the Needs of Ruling Elite.
- Economic policy is NOT “Accidental”.

The Fed’s policies were designed to create a crisis,
and that crisis was intended to
Coincide with the Activation of a Nation-Wide Police-State.


Stock Market Meltdown

By Mike Whitney

“Whatever is going to happen, will happen...
just don’t let it happen to you.”
~ Doug Casey, Casey Research

08/04/07 "ICH " --

--- It’s a Bloodbath. That’s the only way to describe it.
On Friday the Dow Jones took a 280 point nosedive
on fears that that losses in the subprime market
will spill over into the broader economy and cut into GDP.
Ever since the 2 Bears Sterns hedge funds folded
a couple weeks ago the stock market has been
- writhing like a drug-addict in a detox-cell.

Yesterday’s sell-off
added to last week’s plunge that wiped out
- $2.1 trillion in value from global equity markets.
New York investment guru, Jim Rogers said that the real market
is “one of the biggest bubbles we’ve ever had in credit”
and that the subprime rout “has a long way to go.”

We are now beginning to feel the first tremors from the massive
credit expansion which began 6 years ago at the Federal Reserve.

The trillions of dollars which were pumped into the global economy
via low interest rates and increased money supply have raised
the nominal value of equities, but at great cost.

Now, stocks will fall sharply and businesses will fail
as volatility increases and liquidity dries up.
Stagnant wages and a declining dollar have thrust the country
into a deflationary cycle which has - up to this poin t-
- been concealed by Greenspan’s “cheap money” policy.

Those days are over.
Economic fundamentals are taking hold.
The market swings will get deeper and more violent
as the Fed’s massive credit bubble continues to unwind.
Trillions of dollars of market value will vanish overnight.
The stock market will go into a long-term swoon.
Ludwig von Mises summed it up like this:

"There is no means of avoiding the final collapse of a boom
brought about by credit expansion. The question is only
whether the crisis should come sooner as a result
of a voluntary abandonment of further credit expansion, or later
as a final and total catastrophe of the currency system involved."
(Thanks to the Daily Reckoning)
It doesn’t matter if the - “Underlying Economy is Strong”.
(as Henry Paulson likes to say)
That’s nonsense.

Trillions of dollars of over-leveraged bets
are quickly unraveling which has the same effect
as taking a wrecking ball down Wall Street.
This week a third Bear Stearns fund shuttered its doors
and stopped investors from withdrawing their money.

Bear’s CFO, Sam Molinaro, described the chaos
in the credit market as the worst he'd seen in 22 years.
At the same time, American Home Mortgage Investment Corp -
- the 10th-largest mortgage lender in the U.S. - said that
“it can't pay its creditors, - potentially becoming the first
BIG Lender outside the subprime mortgage business to Go Bust”.

This is big news, mainly because AHM is the first major lender

The contagion has now spread through the entire mortgage industry
- Alt-A, piggyback, Interest Only, ARMs, Prime, 2-28, Jumbo,
- the whole range of loans is now vulnerable.
That means we should expect far more than
the estimated 2 million foreclosures by year-end.
This is bound to wreak havoc in the secondary market where
- $1.7 trillion in toxic CDOs have already become
the Scourge of Wall Street.

Some of the country’s biggest banks
are going to take a beating when AHM goes under.
Bank of America is on the hook for $1.3 billion,
Bear Stearns $2 billion and
Barclay’s $1 billion.
All told, AHM’s mortgage underwriting
amounted to a whopping - $9.7 Billion. -

(Apparently, AHM could not even come up with a measly
$300 million to cover existing deals on mortgages!
Where’d all the money go?) This shows the downstream effects
of these massive mortgage-lending meltdowns.
Everybody gets hurt.

AHM’s stock plunged 90% IN ONE DAY.
Jittery investors are now bailing out at the first sign of a downturn.
Wall Street has become a bundle of nerves and the problems
in housing have only just begun. Inventory is still building,
prices are falling and defaults are steadily rising;
all the necessary components for a full-blown catastrophe.

AHM warned investors on Tuesday that it had stopped Buying
- Loans from a variety of originators. 2 other mortgage lenders
announced they were going out of business just hours later.
The lending climate has gotten worse by the day.

Up to now, the banks have had no trouble bundling mortgages
off to Wall Street through collateralized debt obligations (CDOs).
Now everything has changed.

The banks are buried under MORE THAN $300 BILLION
worth of loans that no one wants.

The mortgage CDO is going the way of the Dodo.

Unfortunately, it has attached itself
to many of the investment banks
on its way to extinction.
And it’s not just the banks that are in for a drubbing.

The insurance companies and pension funds are loaded
with trillions of dollars in “Toxic Waste” CDOs.

That shoe hasn’t even dropped yet.
By the end of 2008, the economy will be on life-support
and Wall Street will look like the Baghdad morgue.
American biggest financials will be splayed out
on a marble slab peering blankly into the ether.

Think I’m kidding?

Already the big investment banks are taking on water.
- Merrill Lynch has fallen 22%
since the start of the year.
- Citigroup is down 16%
- and Lehman Bros Holdings has dropped 22%.

According to Bloomberg News:

“The highest level of defaults in 10 years on subprime
mortgages and a $33 billion pileup of unsold bonds and
loans for funding acquisitions are driving investors away
from debt of the New York-based securities firms.
Concerns about credit quality may get worse
because banks promised to provide $300 billion in debt
for leveraged buyouts announced this year……
Bear Stearns Cos.,
Lehman Brothers Holdings Inc.,
Merrill Lynch & Co. and
Goldman Sachs Group Inc.,
are as Good as Junk.”
That’s right---“junk”.
We’ve never seen an economic tsunami like this before.
- The dollar is falling,
- employment and manufacturing are weakening,
- new car sales are off for the seventh straight month,
- consumer spending is down to a paltry 1.3%,
- and oil is hitting new highs every day
as it marches inexorably towards a $100 per barrel.

So, where’s the silver lining?
Apart from the 2 million-plus foreclosures, and the
80 or so mortgage lenders who have filed for bankruptcy;
a growing number of investment firms are feeling the pinch
from the turmoil in real estate.

Bear Stearns;
Basis Capital Funds Management,
Absolute Capital,
IKB Deutsche Industrial Bank AG,
Commerzbank AG,
Sowood Capital Management,
Caliber Global Investment and
Nomura Holdings Inc.

- are all either going under or have taken a major hit
from the troubles in subprime. The list will only grow
as the weeks go by. (Check out these graphs
to understand what’s really going on in the housing market.

The problems in real estate are not limited
to residential housing either. The credit crunch
is now affecting deals in commercial real estate, too.
Low-cost, low-documentation,
- “covenant lite” loans are a thing of the past.
Banks are finally stiffening their lending requirements
even though the horse has already left the barn.

Commercial mortgage-backed securities are now nearly as tainted
as their evil-twin, residential mortgage-backed securities (RMBS).
There’s no market for these turkeys.

The banks are returning to traditional lending standards
and simply don’t want to take the risk anymore.

Bataan Death March?

Leveraged Buy Outs (LBOs)
have been a dependable source of market liquidity.
But, not any more. In the last quarter, there was
$57 billion in LBOs. In the first month of this quarter
that amount dropped to less than
$2 billion.

That’s quite a tumble. The Wall Street Journal’s
Dennis Berman summed it up like this:
“the Street is scrambling to finance some $220 billion
of leveraged buy out deals” (but) the “mood has gone
From - Nantucket holiday to Bataan Death March”. -

Berman nailed it.
The investment banks took great pleasure in their profligate lending;
raking in the lavish fees for joining mega-corporations together
in conjugal bliss. Then someone took the punch bowl.

Now the banking giants are scratching their heads -
- wondering how they can unload $220B of toxic-debt
on to wary investors. It won’t be easy.
“The banks and brokers are in the bull’s eye,”
said Kevin Murphy.

“There’s article after article not only on subprime, but also
banks sitting on leveraged buy out loans.” (WSJ) Credit protection
on bank debt is soaring just as investor confidence is on the wane.

In fact, the VIX index (The “fear gauge”) which measures
market volatility--- has surged 60% in the last week alone.
The increased volatility means that more and more investors
will probably ditch the stock market altogether
and head for the safety of US Treasuries.

But, that just presents a different set of problems.
After all, what good are US Treasuries if the dollar continues
to plummet? No one will put up with 5% or 6% return
on their investment if the dollar keeps sliding 10% to 15% per year.
It would be wiser to one’s move money into foreign investments
where the currency is stable.

And, that is (presumably) why Treasury Secretary Paulson
is in China today - to sweet talk our Communist bankers
into buying more USTs to prop up the flaccid greenback.
(Note: The Chinese are currently holding
$103 billion in toxic US-CDOs -
- and are not at all happy about their decline in value.)
If the Chinese don’t purchase more US debt, then panicky
US investors will start moving their dollars into gold, foreign
currencies and German state bonds as a hedge against inflation.

This will further accelerate the flight of foreign capital from
American markets and trigger a massive blow-off in the stock
and bond markets. In fact, this process is already underway.
(although it has been largely concealed in the business media)
In truth, the big money has been fleeing the US for the last 3 years.

What passes as “trading” on Wall Street today is just the endless
expansion of credit via newer and more opaque debt-instruments.
It’s all a sham. America ’s hard assets are being sold off
to at an unprecedented pace. Credit Crunch:
Whose ox gets gored?

When money gets tight; anyone who is “over-extended”
is apt to get hurt. That means that the maxed-out
hedge fund industry will continue to get clobbered.

At current debt-to-investment ratios, the stock market only has to
fall about 10% for the average hedge fund to take a 50% scalping.
That’s more than enough to put most funds underwater for good.
The carnage in Hedgistan will likely persist into the foreseeable future.

That might not bother the robber-baron fund-managers who’ve
already extracted their 2% “pound of flesh” on the front end.
But it’s a rotten deal for the working stiff who could lose
his entire retirement in a matter of hours.

He didn’t realize that his investment portfolio was a crap-shoot.
He probably thought there were laws to protect him
from Wall Street scam-artists and flim-flam men.

It’ll be even worse for the banks than the hedge funds.
In fact, the banks are more exposed than anytime in history.
Consider this: the banks are presently holding a 1/2 Trillion dollars

Most of this debt will be dramatically downgraded since
the CDOs have no true “mark to market” value. It’s clear now that
the rating agencies were in bed with the investment banks. In fact,
Joshua Rosner admitted as much in a recent New York Times editorial:

“The original models used to rate collateralized debt obligations
were created in close cooperation with the investment banks
that designed the securities”….(The agencies) “actively advise
issuers of these securities on how to achieve their desired ratings”
(Joshua Rosner “Stopping the Subprime Crisis” NY Times)
Pretty cozy deal, eh?
Just tell the agency the rating you want and they tell you how to get it.

Now we know why $1.7 trillion in CDOs
are headed for the landfill.

The downgrading of CDOs has just begun and Wall Street
is already in a frenzy over what the effects will be.

Once the ratings fall, the banks will be required to increase
their reserves to cover the additional risk. For example,

“As a recent issue of Grant’s explains,
global commercial banks are only required to set aside 56 cents
($0.56) for every $100 worth of triple-A rated securities they hold.

That’s roughly 178 to 1 ratio.
Drop that down to double-B minus, and the requirement
skyrockets to $52 per $100 worth of securities held -
- a margin increase of more than 9,000%”.
“56 cents ($0.56) for every $100 worth of triple-A rated securities”?
Are you kidding me?
As Mugambo Guru says,
"That is 1/18th of the 10% stock margin equity required in 1929"!!
(Mugambo Guru; kitco.com)

The high-risk game the banks have been playing - of “securitizing”
the loans of applicants with shaky credit---is falling apart fast.
There’s no market for chopped up loans from over-extended
homeowners with bad credit. The banks don’t have the reserves
to cover the loans they have on the books and the CDOs
have no fixed market value. End of story.

The music has stopped and the banks can’t find a chair.

The public doesn’t know anything about this looming disaster yet.
How will people react when they drive up to their local bank
and see plywood sheeting covering the windows?
This will happen. There will be bank failures.

The derivatives market is another area of concern.
The notional value of these relatively untested
instruments has risen to $286 trillion in 2006 -
up from a meager $63 Trillion in 2000.

No one has any idea of how these new “swaps and options” will hold
up in a slumping market or under the stress of increased volatility.
Could they bring down the whole market?

That depends on whether they’re backed-up by sufficient
collateral to meet their obligations. But that seems unlikely.
We’ve seen over and over again that nothing
in this new deregulated market is “as it seems”.

It’s all stardust mixed with snake oil.

What the Wall Street hucksters call the “new financial
architecture of investment” is really nothing more than
one overleveraged debt-bomb stacked atop another.

Ironically, many of these same swindles were used
in the run-up to the Great Depression.
Now they’ve resurfaced to do even more damage.
When the crooks and con-men write the laws (deregulation)
and run the system; the results are usually the same.
The little guy always gets screwed. That much is certain.

At present, the stock market is running on fumes.
Another 4 to 6 months of wild gyrations and it’ll be over.
The NASDAQ plunged 75% after the dot.com bust.
How low will it go this time?

Keep an eye on the yen. The ongoing troubles in subprime
and hedge funds are pushing the yen upwards which will
unwind trillions of dollars of low interest, short term loans
which are fueling the rise in stock prices.

If the yen strengthens, traders will be forced to sell
their positions and the market will tank. It’s just that simple.
The Dow Jones will be a Dead Duck.

So far, Japan ’s monetary manipulations have been
a real boon for Wall Street - enriching the investment bankers,
the big-time traders and the hedge fund managers.

They’re the one’s who can take advantage of the interest rate
spread and then maximize their leverage in the stock market.

Main Page - Thursday, 08/09/07

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