The Next Six Months May Be the Heart of the Financial Storm

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.

Long Term Gold and US Dollar Charts

Our working hypothesis is that there has been a coordinated intervention by several central banks to support the dollar, perhaps tied to an overall message to Russia from the Bush Administration. Foreign central banks, most notably Japan, have been supplying significant capital to the Fed via the custodial accounts as noted in the last chart.

One or more of the big multinationals became aware of this and have taken the opportunity to trigger a forced liquidation among the hedge funds as they unwind cross trades, such as short financials - long oil. The funds are also strangled for short term liquidity as the banks suck up the available capital.

We may see several hedge funds and commodity brokers fail because of the steepness of the decline. We think the predators will emerge and become known. They may even be the same ones who helped to trigger the run on Bear Stearns.

We doubt this is a major trend change simply because the fundamentals for the dollar and the economy are so negative, and world growth has not gone on permanent hold. The demand-supply figures are compelling.

The mantra now is "Yes the US is bad but Europe is worse." Perhaps, but the jury is still out and it does sound a little too Orwellian.

The dollar is at serious resistance, and gold has strong support at 790. Let's see what happens.

Corporate Defaults 'Could Hit 10%' as the Credit Crisis Worsens

Nothing has changed. The fundamentals continue to deteriorate in the US financial system and economy. What this headline implies is that ten percent of US businesses could become bankrupt in the next year or so. Think about that.

So why is the dollar strengthening and the stock market rising? For two reasons.

First, as the fog of war descends on the Caucasus, so too the fog of government meddling if not outright intervention has been descending on the financial markets. It would take a leap of faux faith to believe that Georgia launched their assault, timed with the opening of the Olympics, without informing the US which is supplying logistical support and military advisors. Cheney has shown rare personal involvement as well. At the least we are sure that there is more to this than meets the eye.

Secondly, a significant amount of liquidity has been arriving at the NY Fed's custodial accounts, coming from Japan and other foreign central banks, which explains much of the short term financial markets action during the thinly traded late summer months.

Nothing has changed. Things continue to worsen in the real economy. We will look for the markets to reflect the underlying trends again soon enough.


Corporate debt default ‘could hit 10%’
By Nicole Bullock
The Financial Times
August 8 2008 01:28

Defaults on corporate debt are ratcheting up as economic weakness takes it toll on the financial health of companies.

The global default rate is expected to climb to 6.3 per cent over the next 12 months and it could reach 10 per cent should the US sink into a protracted recession, Moody’s Investors Service said on Thursday.

“The storm is gathering for default rates moving up,” said Kenneth Emery, Moody’s director of corporate default research.

Fellow rating agency Standard & Poor’s also warns that credit conditions are deteriorating. “We have long been proponents of the view that the credit euphoria of the prior boom years beginning with 2003 would necessitate a shake-out and purge,” S&P said in a recent report.

“This would result in substantially higher downgrades and defaults, concentrated in the US, but not without repercussions in other parts of the world.”

A year into the credit crunch, defaults have begun to move higher, but they still remain well below the levels reached in other economic downturns. Moody’s default rate hit 10.4 per cent in 2002 and the all-time peak was 11.9 per cent in 1991.

In July, the speculative-grade default rate rose to 2.5 per cent from a revised level of 2.1 per cent in June, marking the largest monthly increase since the default rate bottomed at 0.9 per cent in November 2007, Moody’s said. A year ago, the global speculative-grade default rate stood at 1.5 per cent.

“Certainly, this year the lack of issuers with debt coming due and the prevalence of covenant-lite deals have helped to keep a lid on defaults,” Mr Emery said. “As we move through this year and 2009 that lid will be removed.”

In the past few years of easy lending, issuers refinanced debt and obtained so-called covenant-lite deals, which do not include traditional default triggers that safeguard lenders.

In the US, the consumer transportation companies, primarily airlines, will have the highest defaults, Moody’s expects, while in Europe durable consumer goods companies will be the most troubled.