it seems that nobody really wants to talk about it, but a few whispers are coming through anyhow ...
(snip)"From The Times
August 11, 2007
In retrospect the crisis was inevitable
Siobhan Kennedy: Analysis
(snip)"the fear is that the worst may yet be to come.
In retrospect, the crisis was inevitable. American families on low incomes were lent money way beyond their means with interest payments that were ratcheted up after the initial “teaser” rate expired.
For Felipe Deluna, a native Mexican who moved to America when he was 19, it meant that the 1 per cent interest he was paying on his mortgage quickly became 7.7 per cent. And Mr Deluna, who earned $2,000 a month, was facing mortgage repayments of $4,500. Like thousands of other homeowners in similar circumstances, it didn’t take long before Mr Deluna ran into severe trouble and was forced into a distressed sale of his home.
The problem was that the banks who had lent him the money had packaged up the debt and sold it on to hundreds of other investors, who got stuck with the bad loans when people such as Mr Deluna could not make their repayments. Many of those funds, most famously two run by Bear Stearns, the US bank, went bust as a result of the crisis.
Making matters worse, the packages of debt, so-called collateralised debt obligations (CDOs) and collateralised loan obligations (CLOs), did not just stay in America. They were sold globally, with billions of dollars ending up in Europe’s biggest banks and CLO funds. Now several of those banks, including IKB in Germany and BNP of France, have caused widespread panic by admitting their sub-prime exposure and freezing funds.
Unfortunately, those same banks and CLO funds had been fuelling the boom in the private equity sector. So it did not take long for the fear about sub-prime to spill into the buyout world. The result has been that the big banks, such as JPMorgan, Deutsche Bank and Citigroup, who had lent billions of dollars for these highly leveraged acquisitions – such as the £11 billion deal to acquire Alliance Boots – have got stuck holding on to the debt as the CLOs, still reeling from sub-prime losses, refused to take it off their books.
The spill-over into the equity markets was also inevitable, in retrospect, given that the valuations of companies on the stock markets had been buoyed by the prospect of private equity takeover approaches. With no one lending to private equity the buyout market has dried up.
In this environment of confusion and panic selling, with rumours of hedge funds going bust and banks sitting on billions of dollars in sub-prime losses, it is not surprising that the European Central Bank intervened this week, pumping more than €150 billion (£100 billion) of cash into the banking system to ward off fears of a global credit crisis.
But the reaction has been surprising. Rather than the markets being calmer, investors have become even more spooked, fearing that the ECB and the US Federal Reserve, which followed suit, would intervene in this way only if it knew something that the rest of us didn’t.
As one City source put it yesterday: “It’s like there’s some sort of black box in the middle, some sort of nervousness that the banks have yet to come clean on what the problems are. To be honest, no one is quite sure who’s lost what.”(snip) from
to get deeper insight into the nature of that 'black box', one has to go to less trustworthy sources ...
(snip)"August 9, 2007 (LPAC)--A senior European banking source reports that the interbank money market closed down this morning for two to three hours, for the first time ever. Rumors had spread that the German Bundesbank was holding an emergency meeting because of a collapse of a major German bank, believed to be Westdeutsches Landesbank, one of the largest in Germany. The Bundesbank then released a statement saying that the meeting was to discuss the IKB banking crisis.
The source said that a Westdeutsches Landesbank failure would have collapsed the entire global financial system. The source underlined that this ongoing crisis is far worse then anything he has witnessed.
The next threat to the banking system in Germany, which will have obvious global ramifications, is what is called Asset Backed Commissioned Paper. Banks issue these to customers such as hedge funds and other banks, which, theoretically, can draw on them in case of emergency. The problem is that banks have been issuing far more then they should have. The deadline for the hedge funds and other customers to draw on these ABC-Ps is between August 13 and 15. If their customers rush to draw on them, this will be unsustainable for the banks.
The source said that these ABC-Ps were involved in the IKB bank crisis, because its Rhineland Funding unit had drawn on one of these, forcing IKB to cover it. Then IKB requested to draw on one of these ABC-Ps it had with Deutsche Bank, but the latter refused to honor it, and IKB collapsed.
Another senior banking source told EIR that he too had heard that the interbank money market had closed, and it had been closed under orders of the European Central Bank (ECB), so that the latter could funnel emergency credit to selected, troubled banks.
Meanwhile Bloomberg News reported that the ECB, in an "unprecedented" response to banks in desperate need of cash, loaned 94.8 billion euros to these banks. This followed a jump in overnight lending rates the banks charge each other, to the highest level in six years."(snip) from
trustworthy source or not, if the above speculation is even partially true re European bank issued Asset Backed Commission Paper ( equivalent to US Bank Letters of Credit ?? ) being exercised by troubled hedge funds on a grand scale, quickly followed by banks not actually having the cash to honor these Paper commitments due to CDO / CLO losses, all hell could break loose in the world financial markets next week !
Also, from a standpoint of 'scale', in order to avert major market crashes in the last two days the 'Western world's' central banks injected something like $400 billion dollars out of their collective reserves. These injections were TEMPORARY. However, it would appear to be a practical impossibility for the central banks to withdraw these temporary funds without precipitating the very crash that they managed to 'postpone'. $400 billion represents something like 10% of the combined reserves of the 'Western world's' central banks - meaning that they could theoretically run out of reserves to keep making such injections in a matter of a couple of weeks.
If that scenario were to materialize, then the 'Western world's' financial system would then be at the mercy of the Chinese, the Russians, the Arabs etc. as Chinese and Russian and Arab central banks (as well as the central banks of other small countries with no great love for the Western world) would be the only ones left standing ! An alternate scenario was hinted at by yesterday's US FED announcement that they were prepared to keep providing UNLIMITED funds to stabilize the economy. However, by itself, the US FED has about $800 billion in reserves which represents two whole days worth of worldwide injections at the same pace as last thursday and friday. Thus to make good on this promise the FED would have to start printing $400 billion brand new US dollars every day ... which would translate into something like a 100% inflation rate in terms of the US dollar = US dollar prices for EVERYTHING doubling once a year.
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