Sunday, February 28, 2010
“USING these instruments in a way that intentionally destabilizes a company or a country is — is counterproductive, and I’m sure the S.E.C. will be looking into that.”
That’s what Ben S. Bernanke, chairman of the Federal Reserve, said last week when lawmakers asked him about credit default swaps during his Congressional testimony. Concerns are growing about such swaps — securities that offer insurance-like protection and helped tip over the American International Group in 2008 when it couldn’t pay mounting claims on the contracts.
Now, there are fears that the use of these swaps may also help propel entire countries — think Greece — to the precipice.
First, Greece employed swaps to mask its true debt picture, with the help of Wall Street bankers, of course. And now it appears that some traders are using swaps to bet that Greece won’t be able to meet its debt payments and will face a possible default.
Mr. Bernanke is undoubtedly an intelligent man. But his view that it’s “counterproductive” to use credit default swaps to crash an institution or a nation exhibits a certain naïveté about how the titans of finance operate now.
High-octane trading may be counterproductive to taxpayers, for sure. But not to the speculators who win big when such transactions pay off. And in the case of A.I.G., the speculators got their winnings from the taxpayers.
The certainty that Mr. Bernanke expressed about the S.E.C.’s inquiry into credit default swaps is quaint as well. If the past is prologue, we might see a case or two emerge from that inquiry five years from now. The fact is that credit default swaps and other complex derivatives that have proved to be instruments of mass destruction still remain entrenched in our financial system three years after our economy was almost brought to its knees.
DERIVATIVES are responsible for much of the interconnectedness between banks and other institutions that made the financial collapse accelerate in the way that it did, costing taxpayers hundreds of billions in bailouts. Yet credit default swaps have been largely untouched by financial reform efforts.
This is not surprising. Given how much money is generated by the big institutions trading these instruments, these entities are showering money on Washington to protect their profits. The Office of the Comptroller of the Currency reported that revenue generated by United States banks in their credit derivatives trading totaled $1.2 billion in the third quarter of 2009.
New York Times
Posted by Southofdub at 11:34 AM
Saturday, February 27, 2010
Sunday Times Money section, 31 July 2005:
"The lenders who have come up with the 100% [mortgage] have balanced the risk. Of 100 people that take out these mortgages, maybe 95 will be okay and five will get in serious trouble and the banks can take care of that trouble."
AskAboutMoney.com post, 8 Nov 2006:
"You can find extensive, informed, articulate, balanced and entertaining commentary on the impending collapse of the Irish property market [at thepropertypin.com]."
AskAboutMoney.com post, 9 Nov 2006:
Further speculation about the future direction of house prices is banned on Askaboutmoney.
Irish Independent, 18 August 2007:
I would invest in AIB or Bank of Ireland rather than putting money on deposit with them.
AskAboutMoney thread, January 2009:
Pat Neary distinguished himself as the Prudential Director of the Financial Regulator before he was appointed. Had I been on the interview panel, I would certainly have chosen him ahead of a 27 year old recent PhD graduate.
The academic qualifications of someone at a very senior level are of little relevance.
Sorry, I pay no attention whatsoever to Morgan Kelly who suggested burning the €1.5 billion instead of putting it into Anglo.
Sunday Times Money, 8 Mar 2009:
If you’ve a real need to buy now – for example, if you are starting a family – don’t allow the fact that your job is a bit uncertain to put you off. If the worst happens, the government has ordered AIB and Bank of Ireland to lay off homeowners in arrears for at least a year, while other lenders must give them a six-month breather.
AskAboutMoney.com post, 3 June 2009:
I still believe, that as a general rule, it is a good idea to buy your own home. With the benefit of hindsight, this would not have been a good idea over the past 5 years.
[..] I have made it very clear that, with hindsight, it would have made much more sense over the past few years to rent rather than buy.
AskAboutMoney.com post, 11 Oct 2009:
"People ask now why did we not listen to the economists who warned of the housing bubble and the economic crash? [...]. Their warnings were dressed up in such stupid, sensationalist language, that it would have been like taking the economic forecasts of the Sunday World seriously."
AskAboutMoney.com post, 22 Dec 2009:
The paperwork for money laundering is hugely inappropriate. Under the law, Charlie McCreevy would have had to provide a passport and two utility bills. Everyone in the Irish Nationwide knew him. I would have no problem with them not complying with this law.
“It would be wrong to ring-fence the home and mortgage and do a debt settlement on the other debt. Permitting such a proposal would encourage people to allow their other debts to expand in advance of applying for debt settlement while making normal capital and interest repayments on their mortgage.”
“Calling it “the family home” in some way confers a sacredness on it. We should not be doing this. If people lived a very high lifestyle and are now overborrowed, then they have to pay the price.”
“People buying their first home have very big expenses in the first few years. I recommend that they start with an interest-only mortgage. ”
“Paying interest only, means that you have more money with which to adjust to the life of home ownership. If you are in the housing market for the long term, which most people are, then what happens in the short-term to prices is not very relevant.”
“For those, interest-only in the first few years of their mortgage makes sense. They don’t have to blow the repayments saved on new cars and drink. They can use it to improve their home. They can even save it elsewhere to rebuild a savings fund.”
“There is an old-fashioned idea that mortgages should be paid over 20 years and people should start contributing to a pension at age 21. These ideas need to be challenged and reviewed from time to time.”
“IF YOU are investing in property, you should take out an interest-only mortgage, unless you are not on the top tax rate. In particular, you should always pay off your home mortgage before making any capital repayments against your investment property. You should borrow the maximum amount possible, bearing in mind the usual warnings about borrowing to invest. If you have an investment property, you should have an indefinite interest only loan. In other words, you should never pay it off while you still own the property.”
Posted by Southofdub at 10:45 AM
Saturday, February 20, 2010
Friday, February 12, 2010
Bubbles remain hard to define, difficult to measure and, like recessions, can only be accurately assessed after they have burst. Economists have wrestled with bubbles for generations, but have yet to devise an adequate scientific means of analyzing them, comparing them or providing us with an early warning system that would safeguard from their worst effects.
But lately, bubbles – or bubble fears – seem to be everywhere. From Chinese real estate to U.S. Treasury bills to global commodities, analysts point to a flood of easy credit that has helped to inflate values.
Now, soaring prices are triggering bubble fright on the Canadian housing front.
For much of the global downturn and financial crisis – which was triggered by the bursting of the U.S. housing bubble – Canada stood as an island of calm. House prices never reached the stratospheric levels of the subprime era south of the border and their decline was nowhere near as precipitous when the Canadian economy weakened.
Most housing watchers insist Canada is not in a bubble just yet. But they acknowledge there is no precise science that determines exactly when a market shifts from merely heating up to bubbling over.
“If it walks like a duck and quacks like a duck … ” said David Rosenberg, chief economist and strategist with Gluskin Sheff and Associates in Toronto.
Mr. Rosenberg pronounced Canadian housing in a bubble late last year, fuelled by the usual culprits: tight supply, extreme valuation, and dramatic credit expansion.
Mix in easy mortgage conditions luring more people to jump into home ownership – the current national rate of 68.4 per cent stands at an almost 40-year high and a full percentage point above the U.S. level – and you have the recipe for a classic bubble.
“Housing values are anywhere between 15 and 35 per cent above the levels that I would label as being consistent with fundamentals.”
When it comes to housing bubbles, Mr. Rosenberg's opinions carry some weight. He began his career as a housing economist.
Posted by Southofdub at 10:28 AM
Tuesday, February 9, 2010
Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country's already bloated deficit.
Greeks aren't very welcome in the Rue Alphones Weicker in Luxembourg. It's home to Eurostat, the European Union's statistical office. The number crunchers there are deeply annoyed with Athens. Investigative reports state that important data "cannot be confirmed" or has been requested but "not received."
Creative accounting took priority when it came to totting up government debt.Since 1999, the Maastricht rules threaten to slap hefty fines on euro member countries that exceed the budget deficit limit of three percent of gross domestic product. Total government debt mustn't exceed 60 percent.
The Greeks have never managed to stick to the 60 percent debt limit, and they only adhered to the three percent deficit ceiling with the help of blatant balance sheet cosmetics. One time, gigantic military expenditures were left out, and another time billions in hospital debt. After recalculating the figures, the experts at Eurostat consistently came up with the same results: In truth, the deficit each year has been far greater than the three percent limit. In 2009, it exploded to over 12 percent.
Posted by Southofdub at 9:15 PM
Friday, February 5, 2010
Chicago Spire developer Garrett Kelleher's effort to build the nation's tallest building in Chicago is threatening the viability of one of his Ireland-based firms.
Clarinabbey Ltd., a subsidiary of Kelleher's Shelbourne Property Group, lost $197.2 million for the year ended March 31, with much of the loss tied to an intracompany transfer of funds for the Spire. It compares with a loss of almost $11.4 million in March 2008.
The company said it made a provision of $187.8 million against money due it from sister companies because it was unsure that those funds would be recovered. That sum includes advances and loans made in 2008 totaling $153.4 million to Shelbourne entities associated with the Spire.
The annual financial accounting of the company was released Jan. 28 in Ireland.
The report said most of the covenants tied to the company's bank loans are "technically in breach" and that Kelleher and other directors are seeking a "standstill agreement" with its banks. Those lenders include Anglo Irish Bank Corp. Ltd., the Royal Bank of Scotland and Bank of Scotland Ltd.
If such an agreement cannot be reached, the directors' report submitted with the financial statements said "there exists a fundamental uncertainty over the company's ability to meet its obligations as and when they fall due."
Work on the Spire has been stalled for more than a year. In August, Bank of America Corp. sued Shelbourne Development Group and Kelleher, accusing the developer of defaulting on a loan and saying $4.9 million was due. Shelbourne since has countersued the bank.
Meanwhile, Shelbourne continues to seek alternative sources of financing to raise its Santiago Calatrava-designed twisting skyscraper from the hole in the ground at 400 N. Lake Shore Drive. Late last year, the company was seeking investment from the pension funds of construction trades unions whose members would directly benefit from the project.
Those discussions have yielded no agreements and ULLICO Inc., a labor-owned insurance and financial services firms with $5.4 billion in assets under management, turned down Shelbourne, confirmed Joe Harmening, the project's director of development.
Harmening said the company continues to have conversations with potential investors.
"The status hasn't changed," he said. "The conversations are continuing."
Posted by Southofdub at 10:44 AM