Monday was a crazy day in the financial markets worldwide. Oil and gold achieved record prices, the dollar sank lower and in general, the situation got worse. And it doesn’t appear to be over. Weekend efforts by the Federal Reserve to ease investor fears, instead seem to have fueled those fears to new heights. Invoking powers they haven’t used since the Great Depression of the 20th century, the Fed has adopted a “no-holds-barred” stance to fight the current recession. The Guardian reports:
Wall Street opened almost 200 points lower this afternoon, at 11,760.67. There was a brief respite later with the Dow Jones index briefly moving into positive territory. By 5pm, however, it was back in the red with a loss of 87 points, at 11,870.
The FTSE 100 closed 217.3 points down, or 3.9%, at 5,414.4 – its lowest since November 2005. There were sharp falls throughout the rest of Europe and in Asia the Nikkei 225 ended the day down 3.7% at 11,787.51, its lowest level in two-and-a-half years.
The Bank of England moved to stabilise the markets this morning, offering £5bn of three-day funds in a move designed to bring overnight interest rates down. Banks scrambled for the cash, asking for nearly five times more than was on offer.
The US Federal Reserve took emergency action on Sunday, cutting its discount rate – the rate at which banks lend to each other – by a quarter of a point. It also said it would set up a new lending facility for investment banks – something it has not done since the Great Depression in the 1930s.
But the Fed’s actions failed to reassure the markets and traders remained in a state of near-panic, with many fearing that Bear Stearns will not be the last casualty of the credit crunch that has gripped the global financial system since last August.
All Aboard!
Asian and European markets tumbled, as investors were finally convinced that the US markets are on the verge of catastrophe. Indexes closed down across the board, posting losses from 3 and a half to more than 4 percent. Overseas investors seem worried that the economic crisis in the US is more severe than they’ve been led to believe. As Time reports
“There is persistent credit uncertainty. Market players have been repeatedly let down which shows the subprime mortgage problems are so deep-rooted,” said Atsuji Ohara, global strategist of Shinko Securities in Tokyo.
“Just buying an investment bank does not solve the problem,” he said. “Markets are prodding (the U.S. government) to inject public funds.”
Further slides in Asian markets are likely, said Ismael Cruz, the governor of the Philippine Association of Securities Brokers and Dealers Inc.
“The outlook is very grim,” he said.
The bane of BS was their exposure to “bad mortgages”, which they hawked like carnies to unwary consumers for the past several years. According to ADN.com, that same risk has already accounted for more than $150 billion in write-downs worldwide. They go on to say, “The head of the International Monetary Fund said Monday that the global financial crisis is more serious and more widespread than even a few weeks ago.”
No Confidence
Speculation abounds as to who will be next, and whether they will garner the kind of help that BS was able to get. Most eyes are on Lehman Brothers, another investment firm sunk heabily into the subprime mortgage mess. LEH was trading considerably lower at the close on Monday, down nearly 20% after tumbling over 45% during the day. Earlier, Lehman “repeated that it has enough cash to keep doing business”. As late as last Thursday, BS was assuring their investors the exact same thing. It’s no surprise that investors aren’t listening to management anymore. Like it says over on UrbanDigs
“…the kicker is that TWICE in the past 4 days that this rumor was floating around executives at Bear told us that rumors were FALSE, and that cash cushion was fine; THERE IS NO LIQUIDITY ISSUES AT BEAR!
What happened today proves one thing: we can’t trust anything we hear!”
When investors lose confidence in management, there are hard times ahead for the markets. And that means hard times ahead for all of us, not just here in the US, but everywhere. Terry Smith, chief executive of specialist inter-bank broker Tullett Prebon explains in an article from the Guardian:
“I don’t think anybody alive has seen events of this seriousness and magnitude affecting the financial markets.”
He doubts that lowering interest rates will have any real effect: “High interest rates didn’t cause this problem, so lowering interest rates isn’t going to solve it. It is hard to see exactly what tools the authorities do have.”
The Fed’s activities over the last fortnight imply that a number of systemic risks are crystalising – “and this in turn implies a need for an extraordinary response,” he said.
Russell Jones, head of fixed income and currencies global research at RBC Capital Markets
“If the US financial system is in as much trouble as it seems, it is a global problem and will require a global policy response.”
Bring Out The Big Guns
The men who are the Federal Reserve must agree. More than half a century has passed since the Fed has taken such drastic action to bolster the economy. With last week’s promise to inject more than $200 billion to support the failing credit markets, the weekend bailout of BS, and the opening of a new program to provide emergency loans, the Fed hopes to make investors confident in the system as a whole, even while admitting some of the system’s major components are faulty. The Telegraph puts it this way:
The Federal Reserve, the Bank of England and the other central banks today ramped up their efforts to prevent credit markets falling into a deeper freeze by announcing plans to inject more than $200bn.
The agency crisis was a Tsunami event,” said Tim Bond, global strategist at Barclays Capital.
“The market was starting to question the solvency of bodies that stand at the top of the credit pile. These agencies together wrap or insure $6 trillion of mortgages. They cannot be allowed to fail because it would cause a financial disaster. The fact that this sector has blown up has caught everybody’s attention in Washington,” he said.
It is a ground-breaking move for the Fed to accept mortgage collateral, even if the debt is theoretically ‘AAA-grade’ debt. The Fed is constrained by Article 13 of the Federal Reserve Act from buying mortgage bonds outright, but it can achieve a similar effect by letting banks roll over collateral indefinitely. The European Central Bank is already doing this, shielding Dutch, Spanish, German, and some British banks from the full impact of the credit crunch.
The Fed is to create a new facility that allows banks to swap their mortgage bonds for US Treasuries. It is a well-targeted “sterilized” move to avoid adding fuel to inflationary fire. It follows the Fed’s separate pledge last Friday to add up to $200bn in liquidity.
Bernard Connolly, global strategist at Banque AIG, said the Fed action may help calm the markets for now, but it cannot solve the root problem of eroded of bank capital.
“There is the risk of a very damaging credit contraction. We face the most serious global crisis since the Great Depression. But this time at least the North American central banks are doing their best to stop it spreading to the real economy,” he said.
Mr Bond said the mortgage agencies may ultimately need to be nationalized. Fannie Mae has already seen its stock price drop 70pc since October at a cost of $50bn in market value, even though it has an implicit federal guarantee. “There is going to have to be a very big bail-out,” he said.
A very big bailout, indeed. That sentiment is echoed across the spectrum. At MSNBC we read, “You’re going to have some very weak players pushed out of business,” said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. He said JPMorgan’s buy of Bear Stearns and Bank of America Corp.’s acquisition of mortgage lender Countrywide Financial Corp. are probably not the only rescues the industry will witness during this credit crisis.”
Grief
I caught a bit of grief from a few readers over my last post here @ Wordout. It seems that I am “ignoring all the little guys” that got caught up in this greed-grab we are now calling the subprime mortgage crisis. Let me make myself clear: I do feel badly for the “little guys” who were manipulated into these horrible instruments of financial destruction by the slightly less little guys at the local bank. You were manipulated by your desires and your fears. I do feel terribly for most of you.
But that loan agent at your local bank who might lose her job? Or her boss, the manager, or the VP or the investment firm employees? You guys can live in a ditch, for all I care. All you “house flippers” and speculators who drove prices so unsustainably high, you can eat smegma and wash it down with horse urine. You deserve everything that’s happening, and is going to happen to you. And to you really big fish, you billionaires who started this whole fiasco:
The windows are open. Jump.
Oh, that’s right, you guys didn’t lose any money, did you…. I almost forgot that part.
I am Jon, and this is your world.
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See a timeline of the BS decline here.
No Doubt, It’s BS
It was only a little over a year ago that Bear Stearns traded around $170 a share. With about 118 million shares outstanding as of last Friday, the company agreed to a sale with a share price of just $2, a 99.99% drop in value since those glory days of early 2007. Let the doubt in your mind disappear: We are in a recession, and maybe worse.
The
BS problems began several years ago when they became a major player in the so-called “sub-prime” housing market. They heavily gambled in that market with several hedge funds, which went belly-up in 2007. By the end of trading last Thursday, their stock was still trading above $51, but early Friday morning, the final “run on the bank” began, and the stock entered a free fall. At the close of trading, the stock had barely held on above $30 per share. If you want to see what a run on the bank looks like, check out the free falling graph in that Bear Stearns link up there.
So what prompted the weekend emergency deal? The New York Times described it this way:
The price represents a startling 93 percent discount to Bear Stearns’ closing stock price on Friday. Bankers and policy makers raced to complete the deal before financial markets in Asia opened on Monday, as fears grew that the financial panic could spread if Bear Stearns failed to find a buyer.
Everybody’s A Little Bit BS
But Bear Stearns is just one company, right? Well, not quite so right anymore, in this ever more interconnected global marketplace. The subprime calamity had been marketed to investment firms worldwide, and BS was a large part of that. Business Week explains it this way:
It would have been highly risky for other Wall Street firms if Bear Stearns had been allowed to go under because Bear is tightly interconnected with them as both a borrower and a lender. Any firms that are owed a lot of money by Bear would have fallen under suspicion, on grounds that they might not be able to pay their own debts if Bear failed to pay them. That could have triggered a dangerous wave of defaults. The rescue by JPMorgan Chase gives the financial system breathing room to pay off Bear’s debts gradually.
The Federal Reserve has agreed to back the deal with JP Morgan to the tune of $30 billion. This is the first time since 1998 that the Fed has gotten involved with a plan to salvage a failing company, and is thought to be the largest bailout in history. As we learn from Wall Street Journal:
To help facilitate the deal, the Federal Reserve is taking the extraordinary step of providing as much as $30 billion in financing for Bear Stearns’s less-liquid assets, such as mortgage securities that the firm has been unable to sell, in what is believed to be the largest Fed advance on record to a single company.
Interestingly, in the 1998 bailout of Long Term Capital management, many sources report that BS refused to help. For instance, from the New York Times:
When the Federal Reserve helped plan a bailout in 1998 of Long Term Capital Management, the hedge fund, Bear Stearns proudly refused to join the effort.
At The End Of The Day
This didn’t happen overnight. And it is somebody’s fault. For half a decade firms like BS have pushed lousy loans on unwary consumers with no regard for the obvious consequences. Many of those people had much more money last week than they have today, and I truly don’t care. It’s their greed that brought this calamity on us all. The quote below from The Wall Street Journal says that BS was left with a “horrible choice”. I’m certain that those few who made that horrible choice aren’t the ones who lost their cash in this fiasco.
Bear Stearns had a stock-market value of about $3.5 billion as of Friday — and was worth $20 billion in January 2007. But the crisis of confidence that swept the firm and fueled a customer exodus in recent days left Bear Stearns with a horrible choice: sell the firm — at any price — to a big bank willing to assume its trading obligations or file for bankruptcy.
“At the end of the day, what Bear Stearns was looking at was either taking $2 a share or going bust,” said one person involved in the negotiations. “Those were the only options.”
I am Jon, and I think the whole thing is BS.
If you’d like to read more about the mortgage crisis, the credit meltdown, the financial fiasco… cick HERE.
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A House of Good Guys?
(writer’s comment: i know it’s slightly political, but try to think of it as a post about technology being used for illegal purposes, kind of like hackers or something…)
This past week the House of Representatives declined to offer immunity to the large telecoms who illegally handed over their customers’ data to the White House. At the risk of sounding naive, I didn’t think they would have the guts to do it. Maybe they are counting on the Senate’s and Bush’s promises to kill the bill. Below are some reactions:
Republicans
“They [Democrats] know, they know the risks they are taking on behalf of the American people and they don’t care … and that’s what bothers me most,” said Republican Rep. Heather Wilson of New Mexico on Friday.”
A joint statement from the Department of Justice and the office of the director of national intelligence said that based on initial reports, “We are concerned that the proposal would not provide the intelligence community the critical tools needed to protect the country.”
“Exposing the private sector to continued litigation for assisting in efforts to defend the country understandably makes the private sector much more reluctant to cooperate. Without their cooperation, our efforts to protect the country cannot succeed,” it said.
Mike McConnell, the director of national intelligence, warned Wednesday that the House proposal “would, in essence, shut us down”
Democrats
House Judiciary Committee Chairman John Conyers took a different angle.
“We are not going to cave into a retroactive immunity situation,” the Michigan Democrat said. “There’s no law school example in our memory that gives retroactive immunity for something you don’t know what you are giving it for. It just doesn’t work in the real world or on the Hill either.”
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I am Jon, and to me, retroactive immunity sounds like a disease.
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You may be more interested in a different piece which offers a more analytical approach to CitiGroup.
For more info on CitiGroup’s performance in 2008 and prospects for the future click HERE.
For the latest Wordout on Citibank Risks, including the November bailout, click HERE.
Citibank May Be Lost In Your Spam Folder
Here’s a great example of a huge corporation either being stupid, or else inadvertently setting their customers up for some easy harvesting. Citibank, arguably one of the largest financial institutions on the planet, has sent out emails to its customers with details on how to make sure they don’t miss any Citibank emails due to “false-positives” in their anti-spam filters. Here’s the main gist of that email, from the post over at the RISKS-LIST:
“Dear Rich B. Astaird,
As a current Citi Cardmember, you know your security is our top
priority. But we also want to make sure you receive emails containing
important information from us.
Don’t let Citi messages be filtered out by your e-mail provider – add
our “from addresses” to your address book.
Follow these 3 simple steps:
1. Open your e-mail address book
2. Add a contact or “add new contact”
3. Enter citicards@info.citibank.com and click Save”
They’re Certainly Lost In Customer Service
“Rich” then does some quick (for him) analysis, revealing the email’s originating IP address has a reputation for spam-like behavior, and is blacklisted on at least 2 spam monitoring services. At the “risk” of aggravating the great Rich B Astaird, I will quote him further for the readers here at Wordout, because he says it so well:
“Let’s see, if I were Citibank, and wanted to stop my mail from getting flagged as spam, would I (a) stop outsourcing my email to a company with a reputation for spamming, or (b) send vaguely-worded email to my customers in the hope that it will convince them to whitelist my return address?
The worst-case RISK is that people who use a provider where such instructions actually work will follow them, and then every phishing email trying to steal their Citibank credentials will sail right through.
Way to go, Citibank!”
Or Maybe They’re Taking The Scenic Route?
I’m thinking, that just maybe they’re thinking… well, I don’t know. After all, it must be getting hard on them, with all those looming foreclosures they helped to create over the past 5 years. It reminds me of the recent merger FNB Southeast went through here in North Carolina. Immediately after the merger, literally everyone I know who used that bank lost money from their accounts. Some of us were lucky enough to have our cash returned to us in a few days or weeks. Some of us still can’t get our money back (“I’m sorry, sir, that account doesn’t exist. How else may we help you?“). Even if all the cash was returned, Newbridge Bank would have made a mint from “technical” problems relating to the new “computer programs”. Each day their customers’ cash was “lost”, that cash did, in fact, exist, and was working somewhere else in the bank’s name, at the least, earning millions in interest.
My great-grandfather, A.G. Roberts said it best: “Banks are there to take your money. And when they have your money, they act like they own your soul. Don’t put your money in a bank. Better to put it in the dirt.”
I am Jon, and I’m thinking about putting it in the dirt.
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.Many thanks to the author at the RISKS-LIST, whose name almost certainly isn’t Rich.
For info about the mortgage meltdown, the credit crisis, the financial fiasco, CLICK HERE.
The following is a copy of an email I found in my Junk EMail. I always go through it in case there’s an old friend or something that I might actually want to see. Usually it’s a necessary waste of time. But I thought you might like to see this.
Notice that the return address seems to go right where it ought to go: irs dot gov. If you type that into your address bar you will go to the US Internal Revenue website. But right after that is where the 1st tip-off is found. See all that “Add to Address Book” stuff? Trust me, the government could care less whether they are in my address book. And they certainly don’t want to be in my phone…or do they?
Looking at the subject line, we find that there is a “Tax Refund” on my VISA or my MasterCard. Hmm, they don’t know which one? That is clue #2. Come along and I think in the end we’ll have a bit of a giggle:
From: “Internal Revenue Service” <refund@irs.gov> Add to Address BookAdd to Address Book Add Mobile Alert
Subject: Notification of Tax Refund on your VISA or MasterCard Now
Date: Thu, 29 Nov 2007 10:48:06 -0500
> Notification of Tax Refund on your VISA or MasterCard Now,
> After the last annual calculations of your fiscal activity we have
determined that you are eligible to receive a tax refund of $329.30.
Hey, cool! I could use $329.30 right about now. What perfect timing!
>A refund can be delayed for a variety of reasons.
Fox example submitting invalid records or applying after the
deadline.
Wow, I didn’t submit any invalid records! Sure hope the deadline hasn’t passed… It was nice of them to include that “Foxy” example, just so I would know what to look for…
> Sorry for any inconvenience this may cause and thank you for your
patience.
Gee, these are the nicest IRS guys I’ve ever heard of!
> To access the form for your tax refund please copy/paste the link
below in your browser (or click the link below)
http://hostxxx-xxx-235-101.ixxxxxxxxxxxxxxxxx/xxxxxxx.php
ok, nobody use that link, ok???
Huh? “host217-36-235-101.in-addr.btopenworld.com:84/”? Is the IRS outsourcing their refunds?
> Note: For security reasons, we will record your ip-address, the date
and time.
Deliberate wrong inputs are criminally pursued and indicated.
Well, guess these guys aren’t so nice after all! Or very bright, either. I wonder how far they plan to pursue me. And how, exactly, will they indicate me? And for what?
Regards,
Internal Revenue Service
© Copyright 2007, Internal Revenue Service U.S.A.
YLJCUUZGQFEMHHZMZPUQGGDZIXWKXKRPBPMPUT
I especially like all the seemingly random letters at the end. I guess they were trying to imitate a hash of some sort? Who knows?
Well, we had ourselves a little chuckle here, but the sobering thought is that somewhere, somebody believed this. I can only hope they haven’t lost alot of money over it. We are gullible, people. Maybe not me or you, maybe not this time, but sometime or the other we just choose to believe, regardless. Given just the wrong circumstances, the right motivations, we can be fooled.
Let’s all be careful out there. And in here.
I am Jon, and I am indicated.
