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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (10259)	10/10/2008 10:25:14 PM
From: John Pitera	1 Recommendation Read Replies (1) \| Respond to of 33421

Market crash shakes world By John Authers in New York, Chris Giles and Krishna Guha in Washington and Neil Hume in London Published: October 10 2008 19:18 \| Last updated: October 10 2008 21:38 US stock prices suffered their worst weekly loss in history on Friday, prompting a pledge from global policymakers to implement an aggressive but broad-brush plan to combat the financial crisis. Finance ministers and central bankers meeting in Washington said they would use “all available tools” to prevent the failure of any systemically important banks after a day of virtually indiscriminate selling in Asia and Europe and unprecedented volatility in the US. The Dow Jones Industrial Average fell as low as 7,882.51 and rose as high as 8,901.28 before closing down 1.5 per cent at 8,451.19. For the week, its 18.2 per cent fall was the worst ever. Policymakers from the Group of Seven nations said they would take “urgent and exceptional action” to stem the financial crisis, though stopped short of adopting a specific and uniform set of policies that would individually bind all its member countries. The communiqué also did not include a wholesale adoption of a common policy such as the UK plan to guarantee interbank lending. “Different countries have different financial systems,” Hank Paulson, US Treasury secretary, said after the meeting. The G7 said its tools to prevent failure of “systemically important financial institutions” would be tailored for each country, including recapitalising banks, ensuring strong deposit insurance to protect savers and restarting frozen credit and mortgage markets. Mr Paulson firmed up the US intention to invest directly in troubled financial institutions, announcing a “standardised programme” of purchases of non-voting stock that would be designed to encourage private capital also to come forward. The G7 communiqué followed a stomach-churning day on Wall Street that saw measures of volatility reach unprecedented levels. The main volatility gauge, the Chicago Board Options Exch-ange’s Vix index, rose above 75, having never even breached 50 before this week. At its low point yesterday, the Dow was down as much as 23.64 per cent for the week . During the week of the Great Crash of 1929, the Dow lost 23.62 per cent at its worst point before ending the week down 9.2 per cent. Losses in other major markets were more severe than in the US. The UK’s FTSE 100 lost 21 per cent, the FTSE Eurofirst 300 22 per cent and Japan’s Nikkei 225 24.3 per cent. *“The events we’ve seen this week represent a once-in-a-generation increase in risk aversion and total lack of faith,* in the financial system surviving in its current state,” said Graham Secker, equity strategist at Morgan Stanley in London. Confidence was shaken when investors bid 8.625 cents on the dollar for credit derivatives linked to the debt of the Lehman Brothers, which sought bankruptcy protection last month. Trading was halted in several stock markets, including Russia. Copyright The Financial Times Limited 2008

To: John Pitera who wrote (10259)	10/11/2008 12:41:27 PM
From: Hawkmoon	1 Recommendation Respond to of 33421

For their part, the two men who followed Greenberg at AIG faulted an accounting rule that they said forced the company to book unrealized losses. John.. I think, in part, this is true. It's not all of the truth, but it's the pin that pricked the real estate bubble. So while I can't see giving Fuld a pass, because his firm was involved in the marketing of these toxic CDOs, I can give a pass to a company like AIG which was offering protection against assets which had been ineptly (fraudulently) rated as AAA. Maybe AIG shouldn't have been so aggressive in offering protection via CDS transactions, and I think the post-Greenberg era executives were caught square in the middle of the FASB 157 change. I think the SEC should have required all CDOs to be "pure" with regard to credit ratings and no toxic debt intermingled, and solely deriving their value directly from the debt instrument (mortgage/corporate bond.. etc), NOT FROM ANOTHER CDO (as I understood has been the case). Btw, here is an interesting video on CDOs I thought I might share. Certainly the explanation of how the second CDO is constructed is alarming. I had no idea they were doing this.: paul.kedrosky.com So here you are, an insurer being asked to provide insurance on a Traunche in a particular CDO. Moody's and S&P have rating them highly and you perceive they have little risk for default. Besides, you're understaffed in your analyst department (just as the Ratings Agencies were) so you don't have the time to question their call on the ratings they are giving. And even if you did try to question them, you'd face incredible resistance from anyone who has an interest in "doing the deal". And if you don't approve the insurance, your competition will, and your profits will suffer. So the analyst just nods his head and management accepts their opinion. Miscalculation built upon miscalculation.. So can I understand how a FASB 157 rule change, and especially one that fundamentally alters the valuing of complex mortgage backed instruments never previous subject to M2M accounting, might bring down this house of cards?? And I can certainly understand how the folks insuring these mortgage backed instruments might have been inclined to avoid conflict with Moody's/S&P by questioning their ratings scheme. After all, let's face it.. it would be in the interest of the insurance companies to rate these instruments as a higher risk so they could require higher premiums. But you don't "tug on Superman's cape" by telling the RAs that you don't believe their credit rating models. For the future, I think the one thing that we should be very hesitant in messing with is the mortgage markets. And I'm not sure how the banks can handle the balance sheet issues of holding all of those mortgages on their books. But at the very least, the mortgage borrower should be readily able to identify the entity that is holding their actual mortgage. Ok.. enough of my Saturday morning ramble.. But would enjoy your take on some of these issues.. Hawk

To: John Pitera who wrote (10259)	10/11/2008 9:27:34 PM
From: Hawkmoon	1 Recommendation Read Replies (2) \| Respond to of 33421

Hey John!! Found a Forbes article that states that the final cost of the Lehman CDS unwind was about $8 Billion: Of course that also means the banks, funds and insurance companies that sold it are out $365 billion, which is the difference between the price of Lehman's bonds as set in the auction and the remaining 91.375 cents in face value. It won't be easy to draw up a quick winners and losers column, however. Buyers of insurance are also sellers and vice versa. The International Swaps and Derivatives Association says all this netting out means the ultimate payout among trading partners may be closer to 2% of the gross outstanding $400 billion, or $8 billion. Still, the arcane, mostly unwatched, corner of the markets known as credit default swaps, estimated at $61 trillion in notional value, continues to drive the broader markets into a free fall because investors are skittish about which firms are exposed and to how much............... ...................The auction, conducted Friday at the invitation of the International Swaps and Derivatives Association and administered by Markit and Creditex, involved bidding by 14 of Wall Street's biggest (remaining) banks. There were more sellers than buyers in the morning, when the initial pricing was set at 9.75 cents on the dollar. An order imbalance of $4.9 billion, with more sellers than buyers, pushed the final price down by the 2 p.m. reporting deadline. According to data released about the auction, the three biggest sellers were Goldman Sachs (nyse: GS - news - people ), offering $1.47 billion either for itself or customers, followed by Deutsche Bank (nyse: DB - news - people ), offering $870 million, and Credit Suisse, offering $755 million. forbes.com Kind of interesting that, after all that consternation and hulla-balloo in advance of the Lehman CDS unwind, it only wound up actually costing $8 Billion. But that strange order imbalance at the end of the auction strikes me as being the work of Paulson and the Treasury TARP program. Call me suspicious. Hawk