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The Deleveraging Spiral – Black Friday?
This might become a very interesting day in the financial markets.
New U.S. unemployment numbers will be announced at 8:30 ET. If they are worse than expected, everything might tank. That is, unless the Fed and the Plunge Protection Team step in.
All financial institutions and funds are now deleveraging, i.e. lowering their risk or cutting their losses.
A leveraging factor of 10 means an entity holds assets at a value of 100, but only has a capital of 10 and borrowed the other 90. If the assets of such an entity lose 10% of their value, the capital of the entity is 0. If they lose 20%, the capital of the entity is 0 and its lenders will have to take the rest of the losses.
As lenders do not like to lose money, they watch carefully and as soon as there is a threat of such a situation, they demand immediately repayment of a part of their loans, or more safe collateral for these loans. In finance speech – a margin call.
The entity receiving the margin call has to come up with new capital to bolster the collateral it can give to its lenders or make an emergency-sell of some of its already decreased assets to repay some of the loans and take the loss.
Yesterday Carlyle Capital, a listed hedge fund, received margin calls it could not satisfy. Practically it is bankrupt and its lenders, big banks like Citibank and UBS, will now have to take losses on the loans they made to CC too.
The fund was leveraged at a lunatic factor of 33 with assets of $22 billion and capital of $670 million. A fall in the value of its assets of just 3.3% wiped out all of its capital. But the assets even fell more (though we don’t know how much yet) or were at least perceived to be worth less than 97% of their original value by the banks who lend to CC.
There is one really bothering issue in the CC story. The assets Carlyle Capital was holding were bonds issues by the Congress chartered Fannie Mae and Freddie Mac. These are first class rated bonds which, until a few days ago, were largely perceived to be backed by the U.S. government and as valueable as U.S. Treasuries. But as the Freddie Mac FAQ says:
Freddie Mac’s obligations and securities do not constitute government debt and are not guaranteed by the Federal government.
The perceived government guarantee for Freddie and Fanny debt does not exist. The market value of their debt was ‘faith based’ and that faith has eroded.
Bloomberg headlines Agency Mortgage-Bond Spreads Rise; Markets ‘Utterly Unhinged’
Yields on agency mortgage-backed securities rose to a new 22-year high relative to U.S. Treasuries as banks stepped up margin calls and concerns grew that the Federal Reserve may be unable to curb the credit slump.
…
"Everything is telling you the financial system is
broken,” Simon, whose Newport Beach, California-based unit of
Allianz SE manages the world’s largest bond fund, said in a
telephone interview today." Everybody’s in de-levering mode.”
Rising yields on a bond is an expression of its loss in value. So now Freddie and Fannie debt is perceived to have less value. This is quite bothering as Fannie and Freddie themselves are leveraged with a factor of about 30.
Their chartered business is to lend to homeowners (indirectly through brokers) and to issue debt bonds on the other side to get loans from investors. They only have $1 of capital for each $30 they borrow and lend to homeowners. As markets now value their debt at less than 97%, Fannie and Freddie are, in theory, bankrupt.
But these entities are ‘too big to fail’ and the government (taxpayer) will step in and add to their capital to lower their leveraging factor. The government will of course have to borrow the money itself. This will put further pressure on the dollar, increase long term interest rates and feed inflation through higher import prices.
With gas prices going to $5/gal more people will default on their mortgage, more of Freddie and Fannies mortgage holdings will go bad. Their bonds will lose further values. More bond holders will default. Their lenders will eventually default too. Citibank was one of the banks that lend billions to Carlyle Capital. If Citibank has to take more losses of this kind it will be bankrupt too. (It is also too big to fall and will likely be taken over by the government too.)
A deleveraging spiral is in full motion now. It feeds inflation and decreases the value of the dollar. It has not yet really hit the stock market, but it will when bank shares go down further and hedge funds will panic-sell their share holdings to meet margin calls on their debt.
Today may see the bad-news-trigger that marks the point where the ‘faith crisis’ hits the stock markets and these turn out to be ‘unhinged’ too.
American History for Schools, 1776 – 2008
2000-2008 The Second Bosch Wars
“After the declared end of the Third Gulf Oil War, Congress
had passed the Corn Law, imposing a heavy duty on Brazilian
ethanol distilled from sugar cane, and passing that duty on
to American ethanol from corn, in the form of a tax subsidy.
It was thought that if cane ethanol came in from Brazil, it
would be sold too cheaply, then the farmers and landholders
and agricultural corporations could not get enough for their
corn to enable them to make a rich livelihood, and that
marginal land would go out of cultivation.
In this way bread and meat were made very much dearer than
they would have been if Brazilian sugar ethanol had come in,
and with them the price of agricultural land, driving many
who had before made their living by the soil, into urban
ghettos as indentured wage-slave refugees.
Besides this, there was no care taken for the health of the
poor, either in America itself, where 10% of the population
were found homeless and destitute, and 18% without healthcare
of any kind, as in the world at large, where subsidized corn
prices soon led to mass starvation on a global scale.
When people are dissatisfied, the first thing they think of
usually is that if they had political power they could set
everything right. So it was now. Large numbers of Americans
supported what was called, “The People’s Charter”, and were
therefore called “Populists”, or “Paulists” for a popular
statesman of the time, who advocated against Federalism.
At that time both the ruling gentry in WADC, the financial
elites in NYC and the corporate merchant classes were very
much alarmed when they heard what a large number of Paulists
there were, and that dissatisfaction had become so widespread.
Certainly the mass starvation around the world was not theirs
as a concern, but rather, that Paulists would stop shopping,
and with it, the flow of taxes and fees upward to the gentry.
The then Republican President, His Royal Haughtiness George
W Bosch Jr, even went so far as to speak to all the plebians,
declaring that, “…whatever ye dost, do not stop shopping!” [ital. ed.]
The Paulists presented their Commodities Reform Bill at the
Republican Convention that September in the State of Minnesota.
Whereas the nomination selection process has already settled
on another Reaganaut, Senator John McCain, the Paulist’s Reform
Bill was rejected by the gentry in private, and never brought
to the convention floor as a plank in the Republican platform.
The news was received with a torrent of indignation. Meetings
were everywhere held to expunge the Federal government laws
and tariffs from State affairs, and so reduce the staggering
hyper-inflation on food, energy and commodity materials so vital
to the health and economic well-being of the nation. In some
cities with large homeless or underclass populations, riots,
arson and mayhem broke out. There was Corn Fever in the air!
The two Democrat candidates standing for election at that time
were both allied with the Neo World Order, a convenient mix of
Free Trade and Protectionist Socialism serving the high elites.
They would no more touch the Corn Law question, than touch the
hands of the poor and homeless rabble wandering city streets.
And so, through that summer, commodities inflation soared from
13.5% (2007), to 21% in real terms by the time of the elections.
The US dollar, having fallen in value against world currencies
by nearly half since HRH Bosch stole office, and the price of
oil having risen by well over truly usurous and astounding 700%,
with it, the costs for food to eat and fuel to heat, citizenry
began to rise up in places, demanding an end to the Corn Law.
The soon-to-be President McCain was forced to address this issue
as a promise in his campaign, and from there it was taken up
by those Congressmen also standing for re-election, until by
the time of McCain’s inauguration, every newspaper and magazine
not controlled by Rupert Murdoch’s Clear Channel Media spoke
of the egregious hyper-inflation in food and energy commodities.
Senator Paul, having regained his seat in Congress, introduced
the Kava Amendment to the Farm Bill of 2009, which declared an
end to the Brazilian ethanol tariff and an end to corn subsidies.
But his amendment went farther, suggesting that it is an inherent
right of the people to be free from usury, free from speculation
in commodities which affect human health and well-being.
Although the combined might of the gentry and main stream media
allied against it, Paul’s 36-hour long filibuster carried the
day, and so made it a law that henceforth, only providers and
processors of commodities may carry on trade in food and energy,
and that only They, in so far as their pro-rated share of the
overall bounty, and in so far as they were able to make delivery
and/or take delivery, may speculate in commodity price futures,
and that outside capital attempting to seize control of these
producers and processors and thereby indirectly speculate in
the commodities trade, would henceforth be taxed by 50%.
Congress’s abolition of the Corn Law and Paul’s Kava Amendment
had an immediate beneficial effect. The price of corn plummeted,
and with it the price of gasoline as Brazilian ethanol flooded
into the country. With lower grain and fuel costs, the prices of
meat fell precipitously as well, and the prices for shipping and
deliveries, and for housing construction materials, and for all
matter of previously artificially-usurized goods and services.
With the rampantly spiking Fed Rate carry trade speculation
in commodities now averted, limited only to precious metals,
and precluded against all types of food, energy and materials,
the American economy began to slowly and steadily re-balance.
That mass global starvation which had threatened to turn the
world into a seething cauldron of violence subsided, and with
it the violent fluctuations in prices and supplies which had
threatened to destroy the global economy.
The world’s leaders met at UN headquarters in New York City
on July 4, 2010, and together declared unanimous support for the
American ideals of Freedom and Democracy, putting an end forever
to the Neo-Zi Reaganauts, elevating instead Paulist Republicans.
President McCain, in the dodderage of his final years in office,
came to be treated well by history as the Father of Global Renewal,
in bringing an end to Usurists and Speculatists, which have come
so very near to destroying the World, in their Greed for the Lucre.”
Posted by: Salma Gundi | Mar 9 2008 19:24 utc | 50
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