The Market Ticker

Me thinks you doth protest too much.....

"The European Central Bank on Thursday voiced its 'high concern' at growing evidence that banks are exploiting its efforts to unblock the frozen funding markets by using its liquidity scheme to offload more risky assets than it envisaged."

"Investment bankers who work in securitisation say that their main business is structuring bonds that are eligible for ECB liquidity operations. Some analysts have concerns about whether the bonds being created will ever be saleable if markets recover."

What in the Sam Hell did you think was going to happen?

Bernanke, by the way, did the same thing you know.

Both The Fed and the ECB set up these "liquidity conduits" to take collateral that nobody else will loan against and provide "liquidity."

Well, now suddenly there's a problem with swapping that garbage for perfectly-good treasury bonds?

Who'd a thunk that when you advertise that you'll take used toilet paper and treat it like its "money good" that you will get, indeed, used toilet paper?

And if its toilet paper (that is, nobody else will buy it for any amount of money) then is it really an "asset" or is it, in fact, a zero that someone is hiding? What sort of capital position do you think these banks might have if they were forced to value these things at what they could get for them in the open market?

Hell, there is evidence that Lehman has put together synthetics (e.g. CLOs, etc) especially for presentation to these facilities in the United States. That is, they took securities and created a synthetic specifically for the purpose of swapping it for treasuries!

What is with the ECB and Bernanke?

I am absolutely stunned that anyone would expect anything different out of these bankers.

You put together a system that is just screaming "scam me!" and then you complain when that is exactly what happens?

Three, four, five, eight years of these very same bankers claiming that "liar loans" are "prime paper" wasn't enough evidence that folks in the banking system would do the very same thing to the central banks, quite confident that in the end the taxpayers would get the bill?

I'm shocked that anyone is surprised. I'm even more shocked that there isn't an instantaneous reaction that goes far beyond these "yelps" - something on the order of an immediate "putback" of all this garbage followed by bank examinations to see exactly what sort of other games are being played!

Moral hazard? Hell, how about outright fraud! Moral my bupkis.

You want another example of the shining ethics in our banking system today? Try this:

"NEW YORK: Would you invest money - at a very low interest rate - to finance mortgage loans that allow risky borrowers to buy homes with no money down? What if you knew the company that made most of the loans had gone bankrupt because so many of its loans had turned bad almost immediately?

Now, no one would do that. But it was just a year ago that Merrill Lynch was wrapping up a securitization that met just those criteria. The securities were snapped up by such buyers as the Bond Fund of America, one of the largest mutual funds."

That's right, just one year ago, it is alleged, Merrill, one of those fabulous trustworthy bankers, apparently put together a securitization and sold it off to a huge mutual fund - with loans from a company that had gone under before the securitization was completed because they were writing bad paper!

Oh, and the best part?

That great securitization was rated "Aaa" by Moody's - the top investment grade rating.

Current estimates? 60% of the loans will default or already have.

How can you possibly invest anything in American securities, much less American banks, when this sort of garbage does not result in an instantaneous indictment and prosecution?

How can Moody's retain its "NRSRO" status or even be allowed to remain in business when they issued an "Aaa" rating to a securitization where the originator of the loans went bankrupt because it had been writing trash?

How can you justify leaving your money in the bank when this sort of game is played and nobody goes to prison for it? Do you really think the FDIC or anyone else in government will protect your money when they have failed to do anything about this behavior?

How is it that our "banking regulators" permit this sort of outrage to take place without revoking the involved bank's charter?

How is it that Congress does not subpoena all these clowns along with Bernanke and ask them, under oath, how they justify this sort of thing, and why they shouldn't be forced to eat these so-called "money good" instruments?

If that's not stupid enough now Fannie is going to scrap its "must have positive equity" rule in declining markets:

"Fannie Mae is expected to announce Friday that it is scrapping a policy requiring higher down payments on home mortgages in areas where house prices are falling.

The change comes in response to protests from vital political allies of the government-sponsored provider of funding for mortgages, including the National Association of Realtors, the National Association of Home Builders and organizations that promote affordable housing for low-income people."

"In a recent letter sent to Fannie and Freddie, the Realtors reminded the companies that the trade group in recent years helped them fend off Bush administration attempts to impose tighter regulatory constraints."

Absolutely. The National Association of Realtors, who were prime architects of the housing bubble, along with the other clowns who were largely responsible for this problem in the first place, now are pressuring Fannie to do even more unsafe things.

Of course the Realtors remind Fannie that they were part and parcel of lobbying so that they could have a balance sheet problem in the first place. Why, regulation, that's bad! And now, having applied pressure when Fannie needed it, its time to call in our chips and put the heat on Fannie so we get what we want, whether its a sound lending practice or not.

The Taxpayer is always there to bail us out after we screw the American Public (again.)

The FHA scam is in full swing. You need only a 620 FICO and no more than one missed payment in 12 months, and you can refi virtually anything. Yes, all the way up to and in some cases beyond 100% LTV!

The banks are loving these deals as they take absolutely no risk - the government takes it all.

620 FICO and one missed payment? This is "good credit"? Oh, the only problem is that it actually is, apparently, hard to find people with only one missed payment!

The Taxpayer is always there to bail us out after we screw the American Public (again), and this time Congress wants to give the FHA even more buying power so we can screw the public even harder, faster, and more often!

Now let me tell you what I think, and make some predictions, based on the "observable inputs":

• The bankers are lying about their exposure and delinquency rates in various real-estate loan experience categories. That is, whether through incompetence or outright fraud, real honest-to-God credit losses are being taken that are not being reported at the present time. The bankers are not pressuring their staff to be up front in this regard because they are quite sure they will not face prosecution for their "lack of attention", and they are right. This will become apparent over the next few months.
• Foreclosures are not being pursued (intentionally) and REOs are being held off the market (intentionally) in a vain attempt to "wait it out." Cash flow will, in the next three to six months, make this tactic impossible and force the banks and servicers to act. Then we will see the real foreclosure and REO rates, which will be much higher than are currently being reported.
• Consumer spending is being propped right now by people who are blowing off their mortgage, not being pursued by the banks or foreclosed upon, and as a consequence they are living "free" in their home and spending the difference, holding up consumer spending numbers. Consumer spending numbers will positively crater when the foreclosures and REOs are pursued actively in the second half of the year.
• Commercial Real Estate is in much worse shape than is being reported. This will become apparent in the second and third quarter as retailer bankruptcies start to ramp.
• Business credit defaults are beginning to increase. They will peak over 10%; on balance the credit quality of American Business is the worst it has ever been going into a slowdown in the economy. Don't believe the BS you hear on CNBC - look at the bond ratings, they don't lie.
• There will be bank failures. Lots of them. If you have uninsured deposits in a bank at the present time, anywhere, you're an idiot. Fix that right now.
• Average hourly earnings have been falling since October without so much as a single month of advances in real (inflation-adjusted) terms, and this is using the government's cooked CPI numbers! You can't have growing consumption and GDP without growing earnings; ALL of the consumption growth in the last six months has been fueled by increases in the debt to equity ratio among American households. This WILL blow up in the economy's face; it is a mathematical certainty.
• The economy and the markets will be the issue by November and McCain will lose badly. In fact, I believe that The Senate is very likely to become filibuster-proof.
• The only way oil prices will decline on a sustained basis is if we see an outright demand collapse in the United States. This may well happen - but if it does, you won't be talking about it being "bullish" as we'll have ramping unemployment and a deeply-negative GDP print to go along with it. Otherwise, I hope you like $4 or even $5 gasoline, because you're going to get it.
• Government will attempt to increase its "bail out" actions, even though only a minority of people behaved badly or took foolish risks. Look for the government to continue this foolishness up until they are forced to stop by the bond market, and the bond market may go "overcenter" where long interest rates shoot the moon - this year.
• There will be talk - if not outright action - by consumers that will border on a revolt against the fraudsters/bankers. As government continues to give "free passes" to the bankers at the expense of all there will be rumblings if not outright organized actions such as consumers banding together and simply refusing to pay good and sound mortgages as a protest action. There is already a hint of this with sites like http://thisjune5th.com/, which standing alone means little - but may be the start of a trend. This sort of "economic counterattack" is a totally-unappreciated risk to those who are trying to let the fraudsters get away with it. With even a few-percent uptake such protests could cripple the system and force immediate reform. The damage done from even 5% of all households refusing to pay their mortgages for a couple of months as an act of protest would be extreme and force the issue, should the people get sufficiently angry. Do not count out the people if they truly get pissed off!

Housing starts up 8% so they say, but guess what - its all condos! Here's what Bloomberg said:

"Builders broke ground on 692,000 single-family homes at an annual rate, down 1.7 percent from March and the fewest since January 1991, the Commerce Department said today in Washington. Total starts jumped 8.2 percent to a 1.032 million pace that was higher than forecast as construction of multi-family units increased 36 percent following a 35 percent drop in March.

Lower prices and bigger incentives have yet to revive demand for houses, indicating builders will need to come up with even more discounts to attract buyers. Stricter lending rules, job losses and growing pessimism about the economy signal sales will not rebound quickly. "

Yeah, and the CNBC pumper Jack with his "GOP" badge was instantly on the boob tube crowing about how this was "great" for the market and the economy.

He didn't bother to actually read the report, did he?

Try getting a mortgage for a condo and tell me how it works out; you only think the foreclosure and default rate in single-family homes is high.

Every one of these clowns is going to go bankrupt playing this game.

I'm stunned that this is considered "good news", but do you actually expect reporting these days from Bubble TV? If so you're going to be disappointed - there is no reporting nowadays, only blatant falsehood and intentional misdirection.

Oh yeah, I'm sure these banks are securitizing the construction loans and sending them to The Fed for Treasuries, and will stick us with the bill for this stupidity as well.

Sentiment came in weaker than expected at 59.5, weakest in 28 years. Gee, what a surprise; you mean Joe Sixpack knows that the incessant CNBC pumping is a bunch of BS - he can see what's reality when he goes to the gas station and grocery store!

Funny that.