Courtesy of Michael Panzner of Financial Armageddon
I feel more than a little vindicated.
On July 30, 2007, I wrote a post, "Delusions, Deceptions, and Distortions," which was one of many where I warned readers about the BS they were being fed — and were going to be fed — by those in charge.
One obstacle the average man (or woman) will face while trying to keep tabs on the coming unraveling is the gusher of delusions, deceptions, and distortions that Wall Street and Washington will be constantly spewing out through various channels.
The truth is, those who pull the strings politically and financially often have a vested interest in convincing the masses that everything is hunky-dory, whether accurate or not. That is because they either benefit from selling expensive dreams or are looking for prospective dupes to dump their own troubles on.
Here, for example, are some stories from the Financial Times, Bloomberg, and other mainstream news sources that seem to sum up what is really going on in today’s financial world (hat tip to prudentbear.com for some of these links) :
"Corporate Bond Risk Surges as IKB Reports Subprime-Loan Losses"
"Signs of US subprime crisis spreading"
"Subprime Pain Spreads into Office Market"
"Five Signs That Subprime Infection Is Worsening: Mark Gilbert"
"Bonds Hit by Credit Market Dip"
"Tougher Lending Terms for Hedge Funds"
"’Very real contagion’ – IPOs Under Threat and the End of the LBO Boom"
Yet not all of the reports appearingly lately seem aimed at providing accurate information. When I read the following report, "CEOs See ‘No Clear Signs’ of Crisis," I nearly spit out my coffee:
On Wall Street, where the most lucrative credit markets are barely limping thanks to the worst housing slump in a decade, there isn’t a chief executive officer who will tell you there is a crisis.
A few weeks after Merrill Lynch & Co. CEO Stanley O’Neal said he saw "no clear signs" that rising delinquencies on subprime US mortgages were hurting the rest of the debt markets, borrowing costs for non-investment grade companies rose to the highest in nine months. ServiceMaster Co., US Foodservice and 19 other companies have canceled bond sales because nobody wants to buy them.
JPMorgan Chase & Co. CEO Jamie Dimon told investors on a July 18 conference call that waning demand for loans used in leveraged buyouts was "a little freeze." Two days later, an index that measures the default risk of the loans weakened to a record.
Investors’ confidence is being shaken as losses spread beyond subprime mortgage securities to corporate financings.
Federal Reserve Chairman Ben S. Bernanke said July 19 that he’s watching for signs that falling housing prices have spilled over to the rest of the economy, citing studies that show credit market losses from subprime mortgages may reach $100 billion.
"I don’t think anybody can say with great conviction that this is an isolated problem to a couple of small mortgage companies," said Walter Todd, a fund manager at Greenwood Capital Associates in Greenwood, South Carolina, who helps oversee about $800 million.
‘No disaster’
June was the worst month for US high-yield bonds in almost two years, with a loss of 1.69 percent, indexes created by New York-based Merrill that track the performance of fixed-income assets show. They’re down another 1% in July.
O’Neal told a gathering of state treasurers in New York recently that "not even a sharp downturn in one market today necessarily portends financial disaster in another." Jessica Oppenheim, a spokeswoman at Merrill Lynch in New York, declined to comment.
‘A challenge’
Lehman Brothers Holdings Inc. Chief Financial Officer Christopher O’Meara told investors on a June 12 conference call that "we continue to believe that subprime market challenges are and will continue to be reasonably contained."
Bear Stearns Cos. CFO Sam Molinaro told analysts on June 14 that while the declining value of subprime bonds was "a challenge" for the firm, "it hasn’t spilled into other areas of the market." "Subprime continues to be weak" and yet "there’s very little effect on other credit markets," David Viniar, the CFO of Goldman, said on a June 14 conference call with reporters.
Lehman and Bear Stearns, both based in New York, are the biggest underwriters of US mortgage bonds. Subprime mortgages are given to borrowers with poor credit histories or high levels of debt. Merrill Lynch was the largest underwriter of subprime bonds in the first half and Lehman was second, according to newsletter Inside B&C Lending. Bear Stearns ranked eighth.
"As a CFO you’re paid to be optimistic when you talk to the Street," said Brad Hintz, a former Lehman CFO who is now an analyst at Sanford C. Bernstein & Co. in New York. "The brokerage industry has been running on eight cylinders, but it’s not going to be running on eight cylinders."
Canceled sales
Investors in early June demanded an extra 2.41 percentage points of yield on average to own US junk bonds rather than Treasuries, a record low. The so-called spread has since shot up to 3.37 percentage points, the most since October, according to Merrill index data.
Companies have canceled, postponed, restructured or increased yields on more than $20b. of bond offerings since mid-June as investors sought safer securities. The derivatives index linked to junk-rated loans has fallen more than 5.7% since it was created May 22.
Debt rated below "BBB-"by Standard & Poor’s and "Baa3" by Moody’s Investors Service is considered junk.
The comments from Molinaro and Viniar came five days before Bear Stearns offered to provide $3.2b. in loans to help rescue a money-losing hedge fund. The fund, run by its asset-management unit, invested in subprime mortgage-related securities. The amount was later lowered to $1.6b.
Bear Stearns told investors in the fund and a related one that they will get little if any money back.
‘What’s our exposure?’
Subprime concerns heated up again early this month, when S&P and Moody’s each cut ratings on more than $5b. of bonds, and said so-called collateralized debt obligations that contain the securities were also at risk. Moody’s two weeks ago joined S&P in warning it may also cut securities sold last year and backed by Alt A mortgages, a credit level above subprime loans.
"When the credit rating agencies come in and start to regrade a lot of this debt, investment committees like ours get together and say, ‘What’s our exposure?”’ said William Larkin, who manages a fixed-income portfolio at Cabot Money Management in Salem, Massachusetts. "Events are forcing people to react."
Goldman Sachs CEO Lloyd Blankfein said last month that low interest rates and narrow yield premiums on riskier debt fueled economic growth for the past four years by boosting investment in real estate, emerging markets and LBOs.
"The biggest risk we face, and there are a lot of things that contribute to this risk, would be a very big crisis in the credit markets," he said at a June 27 conference. "Some of that is supply-demand fundamentals, but a lot of it is sentiment."
No contagion
Goldman Sachs is the world’s biggest fixed-income, currency and commodity trader, with $14.3b. of revenue from those markets last year. It also manages the largest buyout fund and collects the most fees from private-equity firms.
Securities firms worldwide got about $27.4b. in revenue last year from underwriting, trading and holding bonds backed by mortgages and other assets, according to a June 4 report by Kian Abouhossein, a London-based analyst at JPMorgan.
Executives earlier this month said shrinking demand for high-yield debt won’t pose a serious problem.
Jeff Edwards, Merrill’s CFO, said it reflects "selectivity" that’s "healthy." Merrill Lynch is a passive minority investor in Bloomberg LP, the parent of Bloomberg News.
Dimon of New York-based JPMorgan, the largest arranger of loans rated below investment grade, said he isn’t "particularly concerned" about loans that the bank has been stuck with after failing to sell them to investors.
Wall Street CEOs and CFOs "are talking their books," said Tim Backshall, chief strategist at Credit Derivatives Research LLC, a Walnut Creek, California-based firm that advises clients on how to invest in the market for credit-default protection.
"The amount of talking seems to indicate they are worried."
More often the not, the best defense against disinformation like this is to be aware of its existence, to ask plenty of questions, and to consult as many sources as possible. If, for example, you normally rely on the mainstream media to ascertain what is going on,don’t forget to check out the blogs and the "alternative" news sites, too (many are listed to the right). If you tend towards a liberal perspective, take time as well to hear what the conservatives are saying. If you are mainly interested in domestic affairs, make sure you also pay attention to what the foreign press is reporting on the subject — you may be surprised.
Overall, the goal is to avoid being led up the garden path. In the troubled times ahead, there will be very little margin for error.
Nearly four years later, a New York Times report by Gretchen Morgenson, "The Bank Run We Knew So Little About,"confirms what the data I was looking at — and my cynical old gut — was telling me about where things really stood at the time:
In August 2007, as world financial markets were seizing up, domestic and foreign banks began lining up for cash from the Federal Reserve Bank of New York.
That Aug. 20, Commerzbank of Germany borrowed $350 million at the Fed’s discount window. Two days later, Citigroup, JPMorgan Chase, Bank of America and the Wachovia Corporation each received $500 million. As collateral for all these loans, the banks put up a total of $213 billion in asset-backed securities, commercial loans and residential mortgages, including second liens.
Thus began the bank run that set off the financial crisis of 2008. But unlike other bank runs, this one was invisible to most Americans.
Until last week, that is, when the Fed pulled back the curtain. Responding to a court ruling, it made public thousands of pages of confidential lending documents from the crisis.
The data dump arose from a lawsuit initiated by Mark Pittman, a reporter at Bloomberg News, who died in November 2009. Upon receiving his request for details on the central bank’s lending, the Fed argued that the public had no right to know. The courts disagreed.
The Fed documents, like much of the information about the crisis that has been pried out of reluctant government agencies, reveal what was going on behind the scenes as the financial storm gathered. For instance, they show how dire the banking crisis was becoming during the summer of 2007. Washington policy makers, meanwhile, were saying that the subprime crisis would subside with little impact on the broad economy and that world markets were highly liquid.
For example, on July 23, 2007, Henry M. Paulson Jr., the Treasury secretary at the time, said the housing slump appeared to be “at or near the bottom.” Two days later, Timothy F. Geithner, then the president of the New York Fed, declared in a speech before the Forum on Global Leadership in Washington: “Financial markets outside the United States are now deeper and more liquid than they used to be, making it easier for companies to raise capital domestically at reasonable cost.”
If that doesn’t convince you that the corrupt Washington-Wall Street establishment cares far more about their interests than yours, and thinks nothing of lying to further their aims, then nothing well.
If you want the kind of unvarnished reality that I’ve been doling out since December 2006, feel free to keep coming back to Financial Armageddon for more updates.
