The Administration and the Fed are fully deploying their bag of tricks to patch up, prop up, and disguise what is really happening in the credit markets and the economy. The intervention has increased considerably in the last week.
They *may* be successful, which will only defer the reckoning with past malinvestment and the destruction of productive capital into the future where it will fester and grow. When the bankers intervene they often can only create the appearance of health and vigor temporarily as in the Crash of 1929. After this the decline is worse since it impacts so many who are late entries and poorly equipped to absorb the losses, capitulating in a panic.
Time will tell. We may be seeing the end of a long phase of central bank influence in the world as they spend the last chips of their credibility. If this is for the benefit of the financial insiders who are exiting their own positions then no punishment will be too severe for such a disgraceful betrayal of the public trust.
The next six months may be the heart of the storm, but the reconstruction and repair may take the heart out of an entire generation of Americans. Equitable punishment will serve as a deterrent and as an act of justice which may restore lost credibility in corrupt governance not only in the US but in Europe and Japan.
August 12, 2008, 11:07 am
The Wall Street Journal
Who’s on the Other Side of That Trade, Anyway?
Donna Kardos reports:
A growing proportion of U.S. firms are seeing credit-default-swap counterparty risk as a serious threat to global markets, and think another major financial company will go under due amid the global-markets crisis, according to a study by research firm Greenwich Associates.
The study’s results, which say the proportion seeing CDS counterparty risk as a serious threat is approaching 85%, highlight the perceived concern of another financial firm going down. Only 27% of the institutions surveyed think there won’t be another casualty along the lines of Bear Stearns, Greenwich consultant Frank Feenstra said in a statement.
The research firm said of the 146 U.S. and European banks, hedge funds and investors it surveyed, most “believe another major financial-services firm will fail as a result of the ongoing crisis in global markets — and they expect it to happen sooner rather than later.”
Almost 60% of the respondents expect another big financial firm will collapse within the next six months, while another 15% see it happening in six to 12 months.
“If you are looking for a silver lining in these findings, it seems that most institutions think we are currently in the most dangerous period for global financial-services firms,” Feenstra said. “Perhaps if the markets can make it through the next six months, the level of pessimism may begin to subside.”
Greenwich said nearly 80% of the firms in the study say their banks have tightened margin or collateral requirements since the outbreak of the global credit crunch. More than a quarter of those companies said the new requirements have caused them to reduce their trading activity.
Concerns about counterparty risk have caused institutions to cut back on their CDS use. Among fixed-income survey participants that employ such swaps, 62% said higher counterparty risk has caused them to limit their use.
Meanwhile, nearly two-thirds of the firms in the survey said they try to limit their concentration of exposure to a single counterparty, while three-quarters said the establishment of a centralized clearing entity would be effective in mitigating credit-default swap counterparty risk.
In Europe, institutions are “at least slightly more sanguine,” Greenwich said compared with U.S. firms surveyed. It said just more than 55% of the European companies surveyed see CDS counterparty risk as a significant danger.
AP
JPMorgan shares tumble on widening 3Q losses
Tuesday August 12, 11:44 am ET
JPMorgan shares fall after bank reports widening losses related to mortgage debt in 3rd qtr
NEW YORK (AP) -- Shares of JPMorgan Chase & Co. tumbled Tuesday after the bank said it has heaped more losses in its mortgage investments so far in the third quarter than it did in the previous three-month period.
In a filing with the Securities and Exchange Commission late Monday, the bank said turbulence in the credit markets has caused it to lose about $1.5 billion, after hedges, in its mortgage-backed securities and loans to date in the July-to-September quarter.
That's more than the $1.1 billion in losses JPMorgan incurred in its investment bank's portfolio during the second quarter.
The news set off fresh concerns about the scope of the troubles in the credit markets and the overall health of the financial sector.
Meanwhile, New York Attorney General Andrew Cuomo said Monday he is expanding his investigation into the collapse of the auction-rate securities market to include JPMorgan, Morgan Stanley and Wachovia Corp.
In its quarterly regulatory filing, JPMorgan said it is cooperating with the investigations.
