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The Long Fall
A Market Without Parachutes
By Mike Whitney
11/08/07 "ICH" -- -- America is finished, washed up, kaput.
Foreign investors and central banks around the world have lost
confidence in US markets and are headed for the exits. The
dollar is sinking, the country is insolvent, and its leaders are
barking mad. That’s bad for business. Investors are voting with
their feet. They’ve had enough. Capital is flowing to China and
the Far East in a torrent. It’s "sayonara" Manhattan and “Hello”
Tiananmen Square.
Want some advice? Learn Mandarin.
The dollar fell another 2% last night, gold soared to $840 per
ounce, oil topped $98 per barrel, General motors reported a $39
billion loss after the market closed on Tuesday, the real estate
market continued its downward slide, and the major investment
banks are marching in lock-step towards bankruptcy.
The news is all bad. The nation’s economic foundation is in
shambles. US credibility is shot. Bush and Greenspan have put us
on the road to ruin. Now their work is done. We’re flat broke.
The catalogue of fiscal ailments now facing the country is too
long to list. We’d need a ledger the size of a small
encyclopedia. There’s been a stampede away from the dollar even
though it’s already lost over 60% of its value since Bush took
office and even though central banks around the world will lose
their shirts if it collapses. They don’t care. They’re getting
out while they can.
Cheng Siwei, the vice chairman of China’s National People’s
Congress, announced yesterday that China would continue to
diversify its $1.4 trillion reserves away from the dollar to
“stronger currencies” like the euro. “Strong currencies”; isn’t
that Paulson’s line? Siwei’s comments ignited a firestorm in the
currency markets triggering a big blow-off of the greenback. The
poor dollar has no place to go now but down, and it’s on a
greased pole to the bottom. With consumer spending paralyzed by
the decline in home equity and frozen wages, and the banks
“stuffed to the gills” with over a trillion dollars of
mortgage-backed sludge; the prognosis for the hobbled dollar is
looking grimmer by the day. The bulging trade deficits and
dwindling foreign inflows haven’t helped either. The greenback
has suddenly become the global pariah; all it needs is a leper’s
rattle and a tin cup.
The news is no better in the real estate industry either, where
the nation’s biggest builders are reporting record losses and
inventory is backed-up 11 months. Sales are off 22% in one year
alone. Foreclosures are skyrocketing, jumbo loans (over
$417,000) are impossible to get regardless of one’s credit
history, 40% of all mortgages (subprime, Alt-A, piggyback,
reverse amortization, interest-only) have been eliminated, and
entire projects in Florida, Arizona, Las Vegas, and California’s
Central Valley have stopped building altogether. Tens of
thousands of unoccupied homes across the Southwest have been
reduced to ghost towns. Nothing is selling. The building boom,
that began when Alan Greenspan ginned-up the Fed’s printing
presses in 2002, has turned into the biggest housing bust in
American history.
On top of that, the banks are tightening lending standards and
shunning potential buyers just when the economy needs a boost in
demand. Loan originations are down and bankers are spooked by
the gathering storm in the credit markets. That means that home
sales will continue to be sluggish, prices will correct more
quickly, and the anticipated “soft landing” will turn into a
full-blown crash.
New home construction has accounted for 2 out of every 5 new
jobs created in the last 5 years. Most of those workers are
either delivering pizzas, cleaning bed pans or are lining up at
the soup kitchen. The BLS’s numbers on employment are bogus.
It's just more government bunkum. They're predicated on a
“birth-death” model that creates millions of fictitious jobs out
of whole cloth. In truth, unemployment is soaring and the most
vulnerable and impoverished among us are taking a beating from
housing debacle.
According to the Mortgage Bankers Association of Washington, the
total of mortgage loans outstanding in 2006 was $10.9 trillion;
$6 trillion of which were transformed into securities. (CDOs,
MBSs) About $1.5 trillion of those securities are subprime;
another $1 trillion Alt-A (nearly as risky) and at least another
$1.5 trillion in adjustable rate mortgages (ARMs) At least 20%
of these shaky liabilities/securities will default, and yet, no
one really knows who is holding them on their books. All of the
major financial institutions—the insurance companies, foreign
banks, hedge funds, investment banks---have purchased these CDO
“roadside bombs” and mixed them in with their other performing
loans and hard assets. The projected explosions have already
begun to take their toll on the financial giants---Citigroup and
Merrill Lynch are just the latest victims; others will follow.
The problem can’t be fixed with Bernanke’s low interest rates.
The bad debts are everywhere and must accounted for and written
down. That puts us on the threshold of a jarring market-downturn
triggered by an unprecedented number of defaults that will
rumble through the entire system. Bankruptcies will pop up
everywhere at random. It is a blueprint for economic chaos. And
it is unavoidable.
The global markets have never seen a financial typhoon of this
magnitude before. Mortgage lenders, homeowners, banks, hedge
funds, bond insurers, etc. will all either go under or feel the
sting of a slumping market.
Many of the major investment banks are already broke; it’s clear
from their own reporting. Charles Hugh Smith sums it up like
this in his recent article “Empire of Debt: The Great
Unraveling”:
“If their bad bets were marked to market, Citicorp and Merrill
Lynch would be declared insolvent. Why? Because they are
insolvent--right now. The meaning of insolvency is
straightforward: their losses exceed their capital. Recall that
these firms list assets of $100 billion (or whatever) but their
actual net capital is on the order of 2.5% to 5%---a mere sliver
of their stated assets. In other words: a 5% loss of their
stated assets wipes them out…..The game is now over, and the
players shuffling losses can only last a few more days or
weeks.”
Up to this point, the banks have been able to place a sizeable
portion of their "hard-to-value" assets in a Level 3 grab bag,
which allowed company accountants to assign a value to those
assets according to their own judgment. No more. The new FASB
157 regulation will force the banks to use “market prices” to
determine the true value of their holdings. Some analysts
believe that these new disclosure rules may result in $200
billion write-downs on assets and require that the
over-leveraged banks to increase their capital reserves. That
will slow down lending and put a wrinkle in the banks' bottom
line. In any event, once the law is enacted; we’ll see who’s
"faking" the value of their assets or as Warren Buffet says,
“Who’s swimming with their clothes off.”
Professor Nouriel Roubini summed it up like this:
“The amount of losses that financial institutions have already
recognized - $20 billion – is just the very tip of the iceberg
of much larger losses that will end up in the hundreds of
billions of dollars….Calling this crisis a sub-prime meltdown is
ludicrous as by now the contagion has seriously spread to near
prime and prime mortgages…And it is spreading to every corner of
the securitized financial system that is either frozen or on the
way to freeze….The reality is that most financial institutions
have barely started to recognize the lower “fair value” of their
impaired securities….The credit crunch is getting worse and its
financial and real fallout will be severe.” (Nouriel Roubini
blog)
The constant drumbeat of bad news is having a numbing affect on
Wall Street. Traders’ are tight-lipped and downcast. Spirits are
sagging. No one likes loosing money, and yet, the credit storm
shows no signs of letting up anytime soon. Yesterday, the Dow
Jones Industrial’s took another 360-point pounding before the
bell rang. Another day, another bloodbath. The subprime virus
has now infected the broader markets leaving the once-brawny
financial giants bruised and reeling like Joe Frazier in the
Thrilla in Manila. A few more down-days like yesterday and
they’ll be carrying out hedge funds feet first. The stock market
is looking more and more like a glass pitcher propped up on the
edge of a bookshelf. One little bump, and down she goes.
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