Financial Armageddon!!

[mattnz]

Good point Gatekeeper,

Imagine the effect on hedge funds will be extreme if they cant short sell. The entire model of a hedge fund is based on identifying high performing and low performing assets within a market. You then leverage to buy one and short sell the other, pocketing the difference in performance between the two assets.

They have basically made it impossible for hedge funds to operate. Imagine how much liquidity will dry up. They have massively inflated prices beyond what the market feels is fair value in an unprotected market.

[muppet]

Schwarzman Raises Investing Hurdle, Buffett Uses Cash

Schwarzman Raises Investing Hurdle, Buffett Uses Cash (Update2)

By Bob Ivry

Sept. 19 (Bloomberg) -- Bankrupt Lehman Brothers Holdings Inc. and government-seized American International Group Inc. top the list of distressed sellers seeking buyers for at least $1 trillion of assets. So far, bargain hunters aren't biting.

The same uncertainty that erased $3.1 trillion from global stocks in the first four days of this week has all but paralyzed the market for unpaid corporate debt, non-performing mortgages, degraded securities and repossessed real estate. Before takeovers are pursued that help troubled companies bolster capital and pay off creditors, hedge funds and buyout firms that have raised $163 billion this year face roadblocks such as a lack of financing.

``We're raising the hurdles for putting money out there because there are going to be increasingly better opportunities,'' Blackstone Group LP Chief Executive Officer Stephen Schwarzman said in an interview. ``You're most aggressive when you're coming off the bottom.''

Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben S. Bernanke and members of Congress pledged yesterday to fill the void by moving bad debt to a government institution that would sell it.

``The goal of that would be to assure people that there is a way to price the assets,'' said Neal Soss, chief economist at Credit Suisse Holdings USA Inc. in New York. ``Then private investors would gain courage and come back more actively in the markets.''

Berkshire Hathaway

The winners from Lehman's bankruptcy and AIG's government bailout will be investors such as billionaire Warren Buffett who can buy without borrowing and, in some cases, afford to hold onto their purchases for as long as five years without cashing them in, said Thomas Priore, chief executive officer of New York-based ICP Asset Management, which originated and oversees $13 billion in collateralized debt obligations.

Buffett's Omaha, Nebraska-based Berkshire Hathaway Inc. has been involved in eight acquisitions since October, including yesterday's $4.7 billion purchase of Constellation Energy Group Inc. in Baltimore. That compares with six in the previous 12 months, when Berkshire's largest acquisition cost $350 million. The deals were possible because the company had cash on hand totaling $31.2 billion at the end of June.

Pre-Crisis Position

``The ability to raise capital, no matter who you are, has changed dramatically,'' Richard Friedman, global head of merchant banking at Goldman Sachs Group Inc., said Sept. 16 at the Dow Jones Private Equity Analyst conference in New York. ``People are winning by not losing at the moment. It's going to be eerie for a while.''

Priore estimates financial firms will have to sell $1 trillion of assets worldwide to make up for the shortfall between the $518 billion they have lost or written down, and the $364 billion in new money they've been able to raise.

If the average bank has borrowed 10 or 11 times that amount, multiplying by the roughly $100 billion difference means ``that's $1 trillion worth of assets they need to shed to get back to the position they were in pre-crisis,'' Priore said.

Funds run by Washington-based Carlyle Group, Sailfish Capital Partners LLC of Stamford, Connecticut, and Peloton Partners LLP in London have shut down because of mortgage- related losses, illustrating the perils of jumping in too early.

Hedge Fund Losses

Hedge funds that invest in distressed assets and corporate restructurings have lost 4.9 percent so far this year, compared with gains of 5.1 percent for all of 2007 and 15.9 percent in 2006, according to Hedge Fund Research Inc. in Chicago. Hedge funds are private pools of capital whose operators receive management and performance fees.

Sovereign wealth funds, money controlled by countries or their rulers, were among the first called upon by banks starting last year to shore up their capital. The funds responded by investing more than $46 billion. The share price declines of the beneficiaries, including New York-based Merrill Lynch & Co., Citigroup Inc. and Morgan Stanley, mean government-owned funds, such as Korea Investment Corp. and the Government of Singapore Investment Corp., have losing positions.

The pain prompted at least one fund, Mubadala Development Co., the Abu Dhabi government-owned investment company, to withhold any new lifelines to the U.S. financial services industry, Waleed al-Muhairi, Mubadala's chief operating officer, said in a telephone interview.

``In the U.S., it's typically new investors who come in and they wipe out older ones,'' said Yngve Slyngstad, executive director of Norges Bank Investment, which runs Norway's sovereign fund, the world's second-largest.

Savings and Loan

Hedge funds have raised $129 billion to invest in distressed assets and restructurings, data compiled by Hedge Fund Research show. Buyout firms have amassed $33 billion so far this year for distressed assets and are in the process of raising $30.5 billion more, according to London-based Private Equity Intelligence Ltd.

Distressed assets expected to flood the market dwarf what was available to investors following the collapse of the U.S. savings and loan industry in the early 1990s, said Paul E. Johnson, president of Southwest Next Capital Management, a real estate fund in Phoenix.

As mayor of Phoenix from 1990 to 1994, Johnson had a front- row seat when the government closed 747 thrifts, costing taxpayers $140 billion.

Asset Disposal

``For Arizona, 1990 was brutal,'' Johnson said. ``I think with what's going on right now with the financial institutions, this is going to be bigger.''

Resolution Trust Corp., created by the federal government to liquidate assets of failed thrifts in an effort to repay creditors, ended up recovering almost $400 billion from asset sales, its acting chief executive, John Ryan, said when the RTC concluded its operations.

Former Federal Reserve Chairman Alan Greenspan, Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, and Representative Barney Frank, chairman of the House Financial Services Committee, are among those who have called for an agency styled after the RTC to dispose of devalued assets.

``The best answer is to get these assets cleared, reset and get the economy going again,'' Johnson said. ``Even so, we may have done such a colossal job of fooling ourselves it will take years to get out of this.''

22 Cents

Before Lehman filed for bankruptcy Sept. 15, the New York- based securities firm was already selling off pieces of itself. Lehman shed 19 percent of its gross assets in the second quarter, Chief Financial Officer Ian Lowitt said on a June 16 conference call. It was part of the firm's plan to pursue sales in a measured way, Lowitt said at the time.

That process was disrupted July 28, when Merrill Lynch said it sold $30.6 billion of CDOs to an affiliate of Dallas-based Lone Star Funds for $6.7 billion, or about 22 cents on the dollar. Merrill, the world's biggest brokerage firm, agreed Sept. 14 to be sold to Charlotte, North Carolina-based Bank of America Corp.

More than $125 billion of junk bonds, including some of those most likely to default, will mature in the next three years, said Daniel Arbess, founder of New York-based Perella Weinberg Partners' Xerion hedge fund.

When the bonds mature, it will be in a new credit environment in which lenders will be less likely to refinance that type of high-risk debt, Arbess said.

Default Rates

``That creates a very high likelihood of near-record defaults,'' Arbess said.

Default rates for high-yield corporate debt probably will rise to 4.9 percent by the end of this year and 7.4 percent in 2008, according to a Sept. 8 report by New York-based Moody's Investors Service.

Instead of buying now, it's better to wait for terms to improve, Arbess said.

``Our single best asset in the portfolio right now is patience,'' Mark Patterson, chairman of New York-based Matlin Patterson Global Advisors, said at a Sept. 16 investors' conference. Patterson's company has raised $5 billion to buy distressed companies.

BlackRock Inc., the largest publicly traded U.S. money manager with $1.4 trillion in assets, began raising $3 billion this month to buy loans that banks are selling at a loss.

``The deleveraging that's occurring is putting a lot of big asset pools up for sale,'' Laurence Fink, New York-based BlackRock's CEO, said in an interview. ``We're looking at one or more big opportunities.''

Real Estate for Sale

Lehman has a $32.6 billion commercial real estate portfolio, according to Real Estate Alert, a Hoboken, New Jersey-based industry newsletter.

Local developers have been teaming up with private equity firms to buy raw land, lots that have been prepared for building, and unfinished or unsold single-family homes, apartments and condominiums, said David Tobin, principal of Mission Capital Advisors LLC in New York, which advised on about $5 billion of whole home-loan sales in 2007.

``Money wants local knowledge,'' he said.

Last month, Miami developer Jorge Perez, with Lubert-Adler Partners LP, a Philadelphia-based private equity firm headed by Dean Adler, bought 120 new condos on Biscayne Boulevard for $30.3 million, about half the price of individually sold units. It was the largest bulk sale of downtown Miami condos to date.

Falling Prices

Today, IndyMac Federal Bank FSB, the Pasadena, California, mortgage lender that was seized by the Federal Deposit Insurance Corp. on July 11, will put eight pools of California properties on the market, according to IndyMac Director of Corporate Communications Evan Wagner.

``Some of these sales are going on now because we want to sell before prices decline further,'' Wagner said. The goal is to sell the pools by the end of November, he said.

The median price of a new home in the U.S. has fallen 12 percent since the peak in March 2007, according to the U.S. Commerce Department.

That's not far enough for some bargain hunters -- not for homes, not for mortgages, not for corporate debt and not, in Scott Sperling's case, for companies he might want to buy.

``Prices still need to drop dramatically,'' said Sperling, co-president of Thomas H. Lee Partners LP, a closely held leveraged buyout firm in Boston, at the Dow Jones conference. ``Just because prices are down doesn't mean it's cheap.''

http://www.bloomberg.com/apps/news?pid=20601109&sid=aSW356GUarw4&refer=home

[Austrokiwi]

You don't believe in efficient market theory do your austro?

Quote I am catching up with a possible new zietgiest Behavioral economics. The research in this field is challenging some of the more sacred cows of traditional economics. ( I say possible zietgiest as most economists still hold to the old zietgiest at the moment)

[Steve Netwriter]

As for all the running down of economists, well, you really need to see who is paying their wages. There are few in the news who don't have a finger in some pie.

I think this is a very good point.

Maybe that explains why I have yet to see a bank writer promote gold over paper money

[TonyMacaroni]

Now they've banned frowning - what's next???..

http://www.financialsense.com/fsu/editorials/2008/0919.html

SEC bans frowning

by Peter Forth, StockReflex| September 19, 2008

In an unexpected move intended to prevent the continued slide of financial stocks, the SEC has banned all forms of frowning, scowling or cursing with regards to stock market activities.
“We needed to find a way to keep speculators from forcing valuations of our insolvent financial institutions to zero” said SEC Chairman Christopher Cox. This move follows another earlier move today in which the SEC banned short selling of nearly 800 financial stocks.
“Stopping evil shortsellers from making us recognize when companies are bankrupt is at most a stopgap solution. What we really need is to change the attitude of investors in America. Once they recognize that our failed institutions are actually too big to fail they will realize that the only failure was our attitude”.
“People need to start treating our venerable financial institutions with a little more respect. Until shortsellers forced them to open their books, our bankers have never let us down”, said Treasury Secretary Hank Paulson, “In fact, some of my best friends are bankers.”
One of the foremost experts on the great depression, Fed Chairman Ben Bernanke, added “It is not possible to have a depression in America if everyone just keeps smiling.”
What’s the next move in the government’s unconventional bag of tricks? “Which is worse: an evil shortseller or the financial analyst that recommended a stock be sold short?” speculated Mr. Bernanke, “These people are advising and inciting others to commit criminal shortselling activity and should be punished. We really need to be hearing only positive things to help us through this time of crisis.”
The Bush administration gave its blessing to the new moves, “We all just need to completely forget about this nasty episode, start smiling and buy lots of stocks”

This article is intended for comedic and sarcastic purposes only and none of the quotes contained therein are actually real.

[Steve Netwriter]

[Libertas]

I doubt they would even then libertas. Efficient Market Theory assumes everybody in the market has the same information at the same time. (in a nutshell). A very difficult proposition really.

Sorry tpr2 I was refering to 'Spontaneous Order' in my previous post. Which relates to a Free Market Ecconomy.

Here's some info:

Many economic classic liberals, such as Hayek, have argued that market economies are creative of a spontaneous order - "a more efficient allocation of societal resources than any design could achieve."[4] They claim this spontaneous order is superior to any order human mind can design due to the specifics of the information required. Centralized statistical data cannot convey this information because the statistics are created by abstracting away from the particulars of the situation.[5] In a market economy, price is the aggregation of information acquired when people are free to use their individual knowledge. Price then allows everyone dealing in a commodity or its substitutes to make decisions based on more information than they could personally acquire, information not statistically conveyable to a centralized authority. Interference from a central authority which affects price will have consequences they could not foresee because they do not know all of the particulars involved. This is illustrated in the concept of the invisible hand proposed by Adam Smith in The Wealth of Nations. Thus in this view by acting on information with greater detail and accuracy than possible for any centralized authority, a more efficient economy is created to the benefit of a whole society.

http://en.wikipedia.org/wiki/Spontaneous_order#Markets

[muppet]

Democrats Seek to Add Subprime Relief to Paulson's Rescue Plan

By Craig Torres and Dawn Kopecki

Sept. 20 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson is sending a financial-rescue plan worth about $800 billion to Congress as Democrats prepare to turn it into a vehicle to help people with high-cost mortgages stay in their homes.

The Treasury will run the program to take on illiquid mortgage-related debt, with the Federal Reserve consulting on its design, officials said. Treasury aides are spending the weekend with congressional staff to negotiate a compromise that the House and Senate can vote on next week.

Paulson, Fed Chairman Ben S. Bernanke and other regulators are eager to stop a contagion of credit risk that has toppled three financial giants and forced one into a merger as capital flight began to squeeze Wall Street. Democrats are indicating they want to target relief for households by restructuring loans of struggling borrowers.

``We're going to be buying up a lot of mortgage paper,'' said House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat. ``Between Fannie Mae and Freddie now owned by the federal government and the mortgage paper we'll be acquiring here'' and the Federal Deposit Insurance Corp. running failed bank IndyMac Bancorp Inc., ``we should now be able substantially to reduce foreclosures,'' he said.

Frank said the Treasury was due to present the plan to lawmakers late yesterday.

$800 Billion

The program may be worth about $800 billion, split into $50 billion tranches, said four people briefed on drafts of the Treasury's proposal who spoke on condition of anonymity because details haven't been finalized. The funds, which would last for at least two years, will likely accept mortgage-backed securities and collateralized debt obligations, they said.

The Treasury plans to hire asset managers to purchase the assets through so-called reverse auctions, seeking the lowest prices, one of the people said. Congress will need to raise the limit for the federal debt to allow the government to borrow enough to fund the program, the person said.

Republicans warned against turning the bailout into an agenda.

``Congress and the administration must keep this plan as simple and straightforward as possible,'' said John Boehner, the leading Republican in the House. ``Loading it up to score political points or fit a partisan agenda will only delay the economic stability that families, seniors, and small businesses deserve.''

Last Resort

The Treasury is stepping up as the buyer of last resort for mortgage-linked assets that few other financial institutions in the world want to buy. To avoid giving a direct subsidy to Wall Street, officials must structure the fund so taxpayers either get fees, a high rate of interest, or some participation in the full recovery of the assets.

``Illiquid assets are choking off the flow of credit that is so vitally important to our economy,'' Paulson said yesterday at a press conference in Washington. ``As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.''

Senator Richard Shelby, an Alabama Republican who has advocated that markets should be allowed to penalize bad bets, warned that bailout could saddle taxpayers with large debts.

``This could be the biggest bailout in the history of the country and could ultimately cost $500 billion to $1 trillion,'' Shelby, the ranking Republican on the Senate Banking Committee, said in a Bloomberg Television interview yesterday. ``Congress is not going to rubber stamp something.''

Delinquencies Soar

Nearly one-in-10 American mortgages is delinquent or in foreclosure. The government would be buying debt backstopped by the U.S. home values that have been falling in value for eight consecutive quarters, according to the S&P Case-Shiller U.S. Home Price Index.

Senator Christopher Dodd, the Banking Committee chairman, said the plan's framers should consider the full debt load of U.S. consumers, possibly including credit cards.

``We'' have ``got some strong concerns about what's included here,'' said Dodd, a Connecticut Democrat. ``They haven't limited this conversation exclusively to residential mortgages. So I know that other securitized debt is also going to be considered.''

Investors are unlikely to tolerate partisan wrangling and brinksmanship. U.S. stocks surged in the biggest two-day global rally in history as talk of the plan began to circulate Sept. 18.

The House will pass legislation to implement the plan by the end of next week, and the Senate will act soon after, Frank said yesterday in an interview on Bloomberg Television's ``Political Capital with Al Hunt.''

Stimulus Spending

The temporary plan is likely to include a ``second stimulus'' proposal with infrastructure funds, low-income energy aid and Medicaid assistance, Frank said. Congress will begin weighing broad regulation of hedge funds, private-equity firms and investment banks when it reconvenes next year, he said.

Frank, in a separate C-Span interview, said he expects Wall Street executives to give up pay and other perks in exchange for the federal intervention.

Officials devising the plan ``need to make sure that they keep that hard-headed approach so that people are not profiting off this,'' said Martin Baily, who was chairman of the Council of Economic Advisers under Democratic President Bill Clinton.

``To some extent that's unavoidable,'' said Baily, now a senior fellow at the Brookings Institution in Washington. ``Anytime you do something like this you have the problem of bailing people out and creating moral hazard. That's the reason why you hold your nose. But it's better than the alternative.''

http://www.bloomberg.com/apps/news?pid=20601087&sid=aB_rf1rurtio&refer=home

[tpr2]

Quote I am catching up with a possible new zietgiest Behavioral economics. The research in this field is challenging some of the more sacred cows of traditional economics. ( I say possible zietgiest as most economists still hold to the old zietgiest at the moment)

ahhh behavioral economics. I saw a few FP's in oz advertising they were heading down that path as well. Probably not a bad idea. I have not looked at it much other than an interested read but no real study.

How's it looking from your perspective?

[Austrokiwi]

As An industrial Psych somethings in traditional economics just didn't really make sense. Behavioural economics seems more consistent with reality as I understand it but at the same time it is ignoring some very good Behavioural psych in particular reinforcement and punishment schedules, an understanding of those schedules ( and the assumptions behind them) would assist a lot of people in understanding some market behaviour.

On example in behavioural psych is the research result called the endowment effect, people behave as if what they already own is of higher value than something they don't ( Follows the saying a bird in the hand is worth two in the bush)

Take a recent rare coin investment I made............ A coin came up in Auction that was phenomenally rare ( 10 known examples in the world) Now to purchase it I had to sell some other coins......... it was a stuggle psychologically..............understanding the emotional effects of the endowment effect halped me make up my mind to purchase the rariety. I believe the same happens to investors in specific fields they are reluctant to move from one field to another because of the Investment (emotionally they have made in the current field) this also means people hold on to an investment product longer than they should!

[mattnz]

Yes you definitely see this in action. If you own a property and are thinking of selling, you jump on the net and look at the other properties in the area, you automatically look at the highest possible priced properties that could be comparable with yours, and you assume they are probably selling for close to the listed price.

As a buyer of property in an area though you do exactly the opposite. Look for the lowest cost properties in the area and assume there should be a significant discount off the lowest asking price even though you know it is already by far the best deal in town.

[tpr2]

As An industrial Psych somethings in traditional economics just didn't really make sense. Behavioural economics seems more consistent with reality as I understand it but at the same time it is ignoring some very good Behavioural psych in particular reinforcement and punishment schedules, an understanding of those schedules ( and the assumptions behind them) would assist a lot of people in understanding some market behaviour.

On example in behavioural psych is the research result called the endowment effect, people behave as if what they already own is of higher value than something they don't ( Follows the saying a bird in the hand is worth two in the bush)

Take a recent rare coin investment I made............ A coin came up in Auction that was phenomenally rare ( 10 known examples in the world)
Now to purchase it I had to sell some other coins......... it was a stuggle psychologically..............understanding the emotional effects of the endowment effect halped me make up my mind to purchase the rariety. I believe the same happens to investors in specific fields they are reluctant to move from one field to another because of the Investment (emotionally they have made in the current field) this also means people hold on to an investment product longer than they should!

It's a wonder I have not spend more time on it actually, with a sister inlaw who had a phd in psychology, a best friend with a phd in it, a mother in law with a masters in it and a wife with a degree in it.

It gets kind of scary when they are all in the same room and focusing on me. ... lol

[Perry]

It gets kind of scary when they are all in the same room and focusing on me. ... lol

You're brave enough to do that?
Wow! Or a masochist, perhaps?

[tpr2]

You're brave enough to do that?
Wow! Or a masochist, perhaps?

I start doing pushups and makeing Tim the toolman Taylor noises to try and confuse them.....lol

[Austrokiwi]

Now that we are off topic...........Has any one ever noticed that there are more female Psych students than Male?

There is an evolutionary psych explanation for that ..... When your a student ( and male) studying Psychology there is this horrible party effect! Your at a party you start a conversation with an attractive female student.............and then the conversation deterioates as follows:

She says "what do you study"
He says ( having had previous experiences of the prophalactic qualities of previous responses to this query) " Um.... er..... Social science"
She says.....( getting worried) your studying sociology?
He says.....( With a similar feeling to that of most of us married men when we are asked what do you think of my new ...... hair, dress etc) " No actually its psychology"
She says " Oh... excuse me I just saw an old friend in the corner whom I haven't spoken to in ages"