Free Republic

A reporter contacted me recently with the following question: "I am a reporter, and I am doing a story on Bernard Madoff's life after pleading guilty. As part of this, I was wondering if you could comment on what significance he will have in the history of this period. Will he represent more than a scamster who stole a lot of money from a lot of people? As Bernie Ebbers and Ken Lay came to embody corporate greed and deceit, what will Madoff symbolize?" Americans lived in a "Made-off" and Ponzi bubble economy for a decade or even longer. Madoff...

World's economies tumbling like dominoes /snip By Bill Fleckenstein MSN Money Lately, I have been struck by how bleak and black the newspapers have been in their coverage of the economy. Not that I've been surprised, but one can never know when events in the economy will coalesce into the news that causes the masses to realize how difficult the environment is. In reading the papers, it was obvious to me that it's becoming clear to everyone that "the next time down" is well under way, though the average person wouldn't call it that. 1980-82 versus now I was trying...

Bank Leverage Stats, 12/31/08 February 17, 2009 – 12:45 am The table below is an update from this post published a couple months ago (the prior post also explains this leverage calculation in detail…and why it matters). Click on the image to enlarge. As you can see, Morgan Stanley and Goldman have cut their leverage significantly. Citi is in worse shape. BofA and Chase are treading water. GE is the scary one. I mean, is Timmy Geithner going to stress test them too? I’m pulling balance sheet data from their quarterly earnings release, which doesn’t offer any detail on shareholders’...

Extreme Leverage In Reverse Portends Global Systemic Crash Inquiring minds are investigating a visual comparison of banks' market caps valuation as of January 20, 2009 vs. the second quarter of 2007. Bank Market Cap Comparison Note: I had posted a draft version of the chart that follows.Here is the corrected copy with thanks to Financial Times Alphaville. click on chart for sharper imagechart courtesy of JP Morgan and Bloomberg. Extreme Leverage In Reverse The chart is an illustration of extreme leverage in reverse. Bear in mind that fallout from Alt-A, prime home equity, credit cards, small business, and commercial real...

The United States lived in Lever-Lever Land too long. Like Peter Pan, the country has refused to grow up. The object of the stimulus plans offered by the present and the next US administrations is to return to Lever-Lever Land, that is, to debt-financed consumption. It won't work. Leverage is for the young, who borrow to build homes and start businesses. The financial crisis forces Americans to act their age, that is, to save rather than borrow and spend. For a world economy geared to servicing the once-insatiable maw of American consumption, that is very bad news for 2009. Recovery...

Madoff meets Lehman Posted by: Matthew Goldstein on December 19 It’s not a lot of money compared to the estimated $3 billion that a fund managed by The Tremont Group has lost in the Bernard Madoff scandal. But the same Tremont fund also claims it lost $25 million when Lehman Brothers went bust in September. In October, Tremont’s Rye Select Broad Market fund filed a lawsuit alleging that it was owed some $25 million on a derivatives contract that permitted it to borrow money from a Lehman subsidiary. The derivative contract enabled the Rye fund to leverage its investment in...

Leverage Is an 8 Letter Word November 21, 2008 By John Mauldin Leverage is an eight-letter word, which the markets now regard as twice as bad as the two four-letter words debt and pain (or fill in your own four-letter words). This week I try to give some insight into what is happening in the credit markets, some of it below the radar screen of most analysts. We will look at the potential for deflation and the Fed’s response. There is a lot to cover, so let’s jump right in. If Loans Are So Cheap, Why Don’t They Sell? I...

The unwinding of the investment vehicles that drove the credit boom is roiling the once-staid corporate leveraged loan market, and the pain may not be over yet. For years the US loan market was a clubby world dominated by banks, insurance companies and a few mutual funds. In the early part of the decade steady returns, low defaults and high recovery in bankruptcy attracted new buyers that used leverage to boost returns. Now these vehicles are unravelling in a wave of selling that is causing and feeding on volatility in the asset class. “We expect market volatility around loans to...

Time for the Darwinian flush Highlights from the latest Hayman Advisors letter to clients (i.e. the text in full): October 14, 2008 ‘The ultimate result of shielding man from the effects of folly is to people the world with fools.’ Herbert Spencer What’s Next? It is the “what’s next” that scares us the most. There is no doubt that many books will be written chronicling the times we are living through today. When we wrote to you in July 2007, we really meant “feet first”! The common denominator of everything that has gone wrong so far has been reckless amounts...

Last week saw the demise of the shadow banking system that has been created over the past 20 years. Because of a greater regulation of banks, most financial intermediation in the past two decades has grown within this shadow system whose members are broker-dealers, hedge funds, private equity groups, structured investment vehicles and conduits, money market funds and non-bank mortgage lenders. Like banks, most members of this system borrow very short-term and in liquid ways, are more highly leveraged than banks (the exception being money market funds) and lend and invest into more illiquid and long-term instruments. Like banks, they...

Default Swaps May Be Next In Credit Crisis Ultimate Moral Hazard Looms in the Markets By JULIE SATOW, Staff Reporter of the Sun | September 22, 2008 The biggest Wall Street story most Americans haven't yet heard of is the $62 trillion unregulated credit default swaps market. Here is one scenario: A hedge fund buys insurance in case a company defaults on its bonds — a so-called credit default swap — when the hedge fund doesn't necessarily own the bonds. Then it immediately shorts the stock, driving down the company's share price, leading to a downgrade, and eventually triggering a...

Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers 'They constructed a mechanism that simply didn't work' By JULIE SATOW, Staff Reporter of the Sun | September 18, 2008 http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/ The Securities and Exchange Commission can blame itself for the current crisis. That is the allegation being made by a former SEC official, Lee Pickard, who says a rule change in 2004 led to the failure of Lehman Brothers, Bear Stearns, and Merrill Lynch. The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed...

Hedge funds ready to blow as positions liquidated Adele Ferguson | September 06, 2008 DEBT-GORGED hedge funds are the next ticking bomb in the global credit crisis as they liquidate their positions in equities and commodities ahead of an expected spike in quarterly redemptions by investors throughout September. The first hedge fund victim was Ospraie Management, which announced earlier this week it would close its flagship hedge fund and liquidate its stock after it plunged 27 per cent in August due to losses in energy, mining and natural resources equity holdings. Other hedge funds are expected to topple as investors...

Carlyle unit misses some margin calls By Martin Arnold and Harry Sender in London Published: March 6 2008 13:01 | Last updated: March 6 2008 13:01 Carlyle Capital Corp became the latest casualty of the banks’ increasingly unforgiving attitude towards even the most powerful private equity funds on Thursday when the highly leveraged mortgage-backed securities fund said it had failed to meet margin calls from some of its lenders. The fund, listed in Amsterdam by the Carlyle Group last year, has been hit by a fall in the value of its $21.7bn portfolio of AAA-rated residential mortgage-backed securities, illustrating that...

Insight: True impact of mark-to-market on the credit crisis By Paul J Davies Published: February 28 2008 16:25 | Last updated: February 28 2008 16:25 Back in April 1993 the eyes of the world were on the beseiged Balkan town of Srebrenica, which the UN declared a safe haven for Bosnian muslims, and on Northern Ireland, where secret talks between leaders from rival factions kick-started a tentative peace process. In the same month, a less-noticed development saw US accountancy regulators approve a rule that paved the way for today’s widespread use of mark-to-market accounting standards. This rule, which forced US...

Hedge Funds Feel New Heat By GREGORY ZUCKERMAN February 23, 2008; Page A1 The past decade has been the era of the hedge fund, as investors snapped them up for their track record of beating the market with often highly complex trades. But now, as the credit crunch upends financial markets, that very complexity is coming back to bite some of them. In the past year, shares of Fortress Investment Group LLC -- which became the symbol of hedge-fund success when it went public last February -- are down 50% as investors wring their hands about the value of its...

Most anybody in the mortgage business will tell you that August was a month that will live in infamy: The market was in turmoil, as doubts about the stability of subprime loans spread to other sectors of the mortgage world. How bad was it? A survey of mortgage brokers suggests that one in three consumers who recently signed purchase contracts canceled in August -- up from just 4 percent three years ago, according to the research firm that conducted the survey for Inside Mortgage Finance, a trade journal. The cancellation rate undoubtedly was fed by two scenarios playing out: Many...

THE DOWNWARD SPIRAL IN housing, the source of so much of the turmoil in so many markets and already proceeding at a rather sickeningly dizzying pace, accelerated further in these memorable three months. For both existing and new homes, sales and prices continued to buckle and inventories continued to extend their unrelenting rise to the heavens. Wachovia, which knows a thing or two about real estate, mortgages and the like, relays the news that in August, sales of new homes sagged to an annual pace of 795,000 units, a breathtaking 40% below the peak set in October '05, and median...

Environmental requirements in San Bernardino County. Transportation projects approved by voters last fall. Such mundane matters have little to do with California's annual budget, but they are among the chief reasons the spending plan for the current fiscal year is almost seven weeks overdue. The reason: California's requirement that the budget pass with a two-thirds vote in each house. It is one of only three states to have the requirement, which gives minority Republicans a rare chance to exert influence. "Quite frankly, there are a few places to which we can leverage those kind of policy issues, and this is...

BEIJING - When North Korea fired a volley of missiles this week, it not only defied warnings from longtime enemies the United States and Japan, it also spurned the pleas of its chief benefactor — China. For a country that is North Korea's stalwart diplomatic protector and economic lifeline, providing the North with trade, lots of aid and all of its oil, China seemingly has little pull with its neighbor and ally of 55 years. "China sends oil, grain and other assistance to North Korea. But aid isn't a weapon if it's not used as a weapon," said Zhang Liangui,...