MBIA´s Fairytale Continues.....

And they still have an AAA rating...... If you want to have a good laugh click through the presentation MBIA´s Fairytale..... . There are so much low-lights that it is almost impossible to pick the best ones..... Warburg Pincus with their January investment at $ 31 must be proud of their due diligence...... :-). The counterparty risk is increasing.......

Schon sensationell das MBIA immer noch ein AAA Rating mit sich herumschleppt..... Kann jedem der ein bisschen ablachen möchte die nachfolgende Präsentation empfehlen. MBIA´s Märchenstunde........ . Dort sind etliche Tiefpunkte enthalten so das es unmöglich ist einzelne Punkte hervorzuheben..... Besonders glücklich muß wohl Warburg Pincus sein die groß zu $ 31 Ende Januer eingestiegen sind........ Das Risiko das eine Gegenpartei demnächst nicht in der Lage sein wird abgegebene Versprechen einzulösen dürfte demnächst explodieren........

MBIA Posts Loss of $2.4 Billion as CDO Slump Deepens Bloomberg

MBIA had insured bonds backed by home equity lines of credit and closed-end second loans totaling $21 billion at the end of 2007, according to the company.

MBIA: "Forensic experts reviewing loans" Calculated Risk

> Visit the presentation at page 38 for more details..... Funny to see that they were surprised that the " historical cumulative loss levels of 1-2%" is no longer in play......Clearly a sign that their own loss assumptions are superior to the fair value accounting....... Here comes a quote from MBIA from October 2007 MBIA / Denial "The Company believes that the “mark-to-market” loss does not reflect material credit impairment.".... A few billion in real losses later the confidence outside the rating agencies should be fading at light speed.......

> Mehr nette Details gibt es auf Seite 38 der Präsentation...... Besonders herzerfrischend ist das MBIA sich überrascht zeigt das die historisch niedrige Ausfallrate plötzlich nicht mehr zu gelten scheint..... Ein klares Anzeichen dafpür das man auch weiterhin locker auf die angeblich konservativen Modelle von MBIA vertrauen kann.....The Company believes that the “mark-to-market” loss does not reflect material credit impairment. Ich erinnere noch gerne an das MBIA Zitat aus dem Obktober 2007 MBIA / Denial "The Company believes that the “mark-to-market” loss does not reflect material credit impairment."..... Nach ein paar Mrd. realen Verlusten dürfte die Glaubwürdikeit ausserhalb der Ratingagenturen wohl ein wenig gelitten haben......

UPDATE via Calculated Risk / Bloomberg Moody's: Concerned about MBIA and Ambac

MBIA Inc. and Ambac Financial Group Inc. had ``meaningfully'' higher losses on home-equity loans and collateralized debt obligations than anticipated, raising concern about their Aaa status, Moody's Investors Service said. The first-quarter losses reported by the companies in the past two weeks elevate ``existing concerns about capitalization levels relative to the Aaa benchmark,'' Moody's, unit of Moody's Corp., said in a statement today.

Yves from Naked Capitalism sums it up nicely!

Moody's issued the weakest warning it could about the two big monolines. Most observers did not expect the bond insurers' last round of fundraising to carry them very far, and that view appears to be playing out on schedule. We may be moving towards a repeat the January-February drama, with the rating agencies saber rattling until the bond guarantors raise enough money to tide them over for another bit.

> I think we can call this an improvement...This time it took the agencies not years to react to the obvious (sarcasm off).....

> Ich denke man kann das als Verbesserung einstufen....Immerhin dazuert es jetzt nicht mehr Jahre um das Offensichtliche zu erkennen....Ich hoffe meine ironischenhen Bemerkungen werden nicht als echte Würdigung der Ratingagneturen verstanden.... :-)

Condo Desperation.....Lehman Offers Money Back Guarantee

Thank god their balance sheet is strong...... :-) . For more insights on Lehman see what Mish has to say Questions Linger Over Lehman's Balance Sheet & April Fool's Offering At Lehman . I also recommend to take a view of the table Level 2 "mark to model" & Level 3 "mark to a hope & a prayer" .

Zum Glück ist deren Bilanz ja bekanntermaßen kerngesund........ :-) Wer mehr zu der "starken" Lehman Bilanz wissen möche wirft am besten einen Blick auf das was Mish zu sagen hat Questions Linger Over Lehman's Balance Sheet & April Fool's Offering At Lehman. Zudem empfehle ich einen kurzen Blick auf die Bilanzpositionen der großen US Banken Level 2 "markt to model" & Level 3 "mark to a hope & a prayer"

Condo Comfort / WSJ
In a move that speaks volumes about the glut in the condominium market, Lehman Brothers Holdings Inc. is promising some luxury-condo buyers their money back after three years of ownership.

The offer applies to some 200 condo units, priced between $480,000 and $2 million, in West Bay Club , a Lehman-owned resort community in Estero, Fla., near Naples on the Gulf of Mexico.

>Add the news via Calculated Risk and it is no wonder some are getting nervous....... Especially when you have a condo to sell in Miami

> Wenn man dann noch diese Daten via Calculated Risk hinzunimmt sollte es wenig verwundern das einige langsam aber sicher extrem nervös werden..... Das gilt besonders dann wenn man ein Condo in Miami verkaufen möchte

The new building comes on top of unprecedented supply....Lenders of all sizes have $42 billion of condominium debt on their books, according to Foresight Analytics. In just three months -- between the third and fourth quarters of last year -- the delinquency rate rose to 10% from 5.9%, says the Oakland, Calif., research firm.

In an effort to jump-start sales in a skittish market, Lehman says that for every buyer until June 1, it will guarantee that the resort will either sell or buy back the residence at the "full cost of the purchase price three years after closing."

> Charts & Stats via Inventory Tracker from my old friend Soldatthetop and his superb blog Paper Money

Naples, FL Condo Statistics

Current Count: 6863 Historical Low: 5547 Historical High: 7768 Average Range: $500,000.00 - $550,000.00 Median Range: $300,000.00 - $325,000.00 Listed Market Cap: $3,759,455,000.00

Statistics for Naples collected between 07-24-2006 and 04-23-2008

The gamble is that prices will recover during that time, and buyers will hold on to their condos.

A spokeswoman for Lehman said no one was available to discuss details of the guarantee program, which appears to exclude 10 penthouse units in two towers.

Jack McCabe, a real-estate consultant in Deerfield Beach, Fla., said other developers desperate to move unsold condo inventory might have to follow Lehman's lead in offering price guarantees as market values continue to slide and thousands more condo units in Florida come on line this year

> In the end it is probably still better to make this kind of creative offer to move inventory than to wait for things to get better........This will put lots of pressure on other players to match this kind of offer...Not good news for players like disaster stocks like WCI :-) It will be interesting to see how they will manage the accounting..... UPDATE: I also recommend to read this from Mish Condo Credit Squeeze

> Im Endeffekt ist diese Art des Marketings wohl immer noch eine der besseren Möglichkieten die Ladenhüter zu vertickern. Darauf zu warten das sich die Zeiten bessern dürfte extrem langwierig werden.... Das dürfte den Druck auf andere Speiler im Condomarkt erheblich verschärfen....Das dürfte dem übelsten Spieler WCI wohl demnächst den endgültigen Todesstoß versetzen. Man darf gespannt sein unter welchen Punkt solch geartete Geschäfte in der Bilanz auftauchen...... UPDATE: Zum Themenkomplex Condo´s sollte man zudem noch mal einen Blick auf Condo Credit Squeeze via Mish richten

Consumer Spending Break-Down / Hester

Nice quote via William Hester from his piece Consumer Spending Break-Down .

Nettes Zitat via William Hester aus Consumer Spending Break-Down

Following a Bull's game in the 90's where Michael Jordan scored 69 points and the newly acquired Stacey King contributed one point, the rookie quipped, “I'll always remember this as the night Michael Jordan and I combined to score 70 points.” Whether you're handicapping basketball games or the economy, it's always best to figure out how the major producer will perform.

It´s still amazing that some are still in denial.....

Schon erschreceknd das bei den meisten "Experten" der Groschen noch immer nicht gefallen ist.....

A quick look at economist's expectations for the economy this year shows that much is riding on the forecast of a mild slowdown. The level of GDP should be essentially unchanged the first two quarters of this year, and then expand at almost 2 percent in the second half, according to a Bloomberg poll. Underlying those estimates is the forecast for spending to grow at an average rate of one half percent in each of the first two quarters, and at about 2 percent in the second half

But they are probably betting on the never ending story of creative accounting from the government level ( Pre-Revision CPI: 9%, Disappearing Economic Indicators, Unemployment Soars, Jobs Collapse etc ) to mask the real damage. At least the officials haven´t gotten so far as the pentagon ( Behind Analysts, the Pentagon’s Hidden Hand )..... :-)

Wahrscheinlich werden hier schon die "kreativen" Berechnungsmethoden von Staatsseite eingepreist ( Pre-Revision CPI: 9%,Disappearing Economic Indicators, Unemployment Soars, Jobs Collapse usw ) die nur ein Ziel haben die Wirklichkeit in einem besseren Licht erscheinen zu lassen. Das mag kurzfristig sogar funktionieren, mittel bis längerfristig wird hier aber enormer Schaden angerichtet. Immerhin sind Sie noch nicht soweit wie das Pentagon gegangen (Bush kaufte TV-Militärexperten ).... Obwohl ich ir da auch nicht immer ganz sicher bin .... :-)

Workers Get Fewer Hours, Deepening the Downturn

The report from the NYT offers some good hints what is going on beneath the radar. Add to this that the reported jobs numbers are more or less a farce and you know why the recession that already started will be much longer than most people think. Scary that some are still in denial ....

Make sure to read this from Mish about the "Enron" like unemployment data Unemployment Soars, Jobs Collapse. Even i would have thought that this kind of Black Box report is almost impossible to top, but wait...... Martin Hutchinson via Barry Ritholtz Pre-Revision CPI: 9% has made it...... UPDATE: More unbelievable stuff via Barry Disappearing Economic Indicators

Dieser kleine Lagebericht der NYT gibt einen guten Einblick was sich unterhalb der nackten Zahlen so abspielt.Wenn man jetzt noch bedenkt das die monatlich verkündeten Daten zum US Arbeitsmarkt bestenfalls was in der Muppetshow zu suchen haben und Enron in nichts nachstehen kann man sich sehr leicht ausrechnen das die USA für lange lange Zeit in einer bereits begonnenene Rezession stecken werden. Muß jedes mal wieder schmunzeln wenn ich höre das noch über die Möglichkeit einer Rezession gesprochen wird. Immerhin scheint sich bei einigen die Meinung zu verfestigen das diese "mild" sein wird. Sind halt "Permabullen".... :-)

Um zu verstehen wie die US Arbeitsmarktzahlen frisiert werden ist der nachfolgende Link von Mish Unemployment Soars, Jobs Collapse Pflicht! Und immer wenn man denkt man hätte in Scahen US Zahlenakrobatik alles gesehen kommt ein neues "Highlight. Dieses Mal von Martin Hutchinson via Barry Ritholtz Pre-Revision CPI: 9% UPDATE: Mehr selbst für mich kaum fassbares erneut von Barry Disappearing Economic Indicators

Workers Get Fewer Hours, Deepening the Downturn NYT
Not long ago, overtime was a regular feature at the Ludowici Roof Tile factory in eastern Ohio. Not anymore. With orders scarce and crates of unsold tiles piling up across the yard, the company has slowed production and cut working hours, sowing worry and thrift among its workers.

“We don’t just hop in the car and go shopping or get something to eat,” said Kim Baker, whose take-home pay at the plant has recently dropped to $450 a week, from more than $600. “You’ve got to watch everything. If we go to town now, it’s for a reason.”

“We don’t just hop in the car and go shopping or get something to eat,” said Kim Baker, whose take-home pay at the plant has recently dropped to $450 a week, from more than $600. “You’ve got to watch everything. If we go to town now, it’s for a reason.”

The gradual erosion of the paycheck has become a stealth force driving the American economic downturn. Most of the attention has focused on the loss of jobs and the risk of layoffs. But the less-noticeable shrinking of hours and pay for millions of workers around the country appears to be a bigger contributor to the decline, which has already spread from housing and finance to other important areas of the economy.

While official unemployment has risen only modestly, to 5.1 percent, the reduction of wages and working hours for those still employed has become a primary cause of distress, pushing many more Americans into a downward spiral, economists say.

Last month, the hours worked by those on American payrolls dropped, compared with six months earlier, according to an index maintained by the Labor Department. The last time the index moved into negative territory was February 2001, when the economy was on the doorstep of recession. A similar slide emerged in August 1990, one month into what proved an even more severe downturn.

At the end of last month, more than 4.9 million people were working part time either because they could not find full-time jobs or because their companies had cut hours in the face of slack business, according to a Labor Department survey. That represented an increase of 400,000 since November.

Paychecks are diminishing just as millions of Americans are finding their access to credit constricted as well. Borrowing against the value of real estate — a crucial artery of household finance in recent years — has been pared back as home prices have plummeted and as banks have tightened lending standards in the aftermath of the collapse of the housing bubble.

“At this point, those avenues are blocked,” said Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute in Washington. “Consumption going forward is going to be in large part a good old-fashioned function of paychecks and incomes.”

Even before the rollback in working hours, pay was barely keeping up with the rising costs of gas and food. From February to September of last year, the average hourly earnings for workers in the private sector was still growing at a slightly faster clip than the pace of inflation, according to the Labor Department. But from November through March, as employers began to scale back in a variety of ways, wage growth fell below the pace of inflation, meaning that paychecks were effectively shrinking.

> And this even on the base of the "reported" CPI ...

> Und das auf bereits auf Basis der absolut lächerlichen offiziellen CPI Nummer.....

Now, work opportunities are themselves declining, as the downturn snuffs out business

Freddie Mac's Accounting Evokes Shades of Enron: Jonathan Weil

It´s no surprise some call them "Phony Mae and Fraudie Mac".... Just in time Fannie is also out with some news. Fannie Mae Cutting Dividend 30 Percent, Selling $7 Billion in Preferred Stock to Raise Capital

Sie werden nicht umsonst auch "Phony Mae and Fraudie Mac"genannt....... Passend hierzu ist auch Fannie mit einer Meldung draussenFannie Mae Cutting Dividend 30 Percent, Selling $7 Billion in Preferred Stock to Raise Capital

Dec. 5 (Bloomberg ) -- You have to wonder if a company is playing games when its earnings hinge on predictions no mere mortal is capable of making. That's one of Enron Corp.'s great lessons. And it's one that Freddie Mac investors might heed now.

Before it collapsed in 2001, Enron recorded large profits by estimating the values of its future cash flows from energy contracts that extended 20 years or longer. It then booked those amounts as current earnings. Even if Enron's executives had been acting in good faith, which they weren't, the forecasts they made weren't humanly possible.

Freddie's results depend on similar predictions, with a twist. The Mclean, Virginia-based company is using far-out forecasts of future cash flows to avoid recognizing large losses in its net income and capital. To believe Freddie's financial statements, you must believe the government-sponsored mortgage financier can make prognostications about its cash flows and debt issuances as long as 26 years from now.

Here's how the accounting works. Freddie's Sept. 30 balance sheet shows $4.3 billion of pent-up losses on derivatives called cash-flow hedges. Companies use these side bets to guard against interest-rate fluctuations on, for example, variable-rate debt.

Changes in the hedges' values don't hit net income immediately. Instead, they go into a line in shareholder equity called accumulated other comprehensive income, or AOCI. From there, they are released gradually into net income as payments come due.

Doesn't Count
These losses also don't count in the primary gauge the government uses to measure Freddie's capital, the financial cushion that helps any company absorb losses. Had Freddie counted them in net income, it would have fallen $3.7 billion short of its minimum capital requirement at the end of the third quarter.

Freddie says it has closed out almost all its cash-flow hedge positions, meaning the losses are now fixed. It says about 70 percent of its AOCI will be released into earnings over the next five years. The rest will take longer.

So what's getting hedged? Many of the hedged items don't exist yet. That's because they are ``forecasted transactions,'' primarily future issues of debt. The company says it has hedged the cash-flow risks on such deals as far out as 2033.

Under the accounting rules for derivatives, a future deal must be ``probable'' to qualify as a hedged transaction. So must the deal's terms, such as size and timing. This is where the forecasts get tricky.

Think Back
Consider how hard it would have been for a company in 1981 to envision and hedge its cash-flow risks on a debt sale it thought back then that it would make in 2007.

``Who could have predicted the Internet being where it is today?'' Ketz says. ``Who could predict that China would be the economic power that it is? Even in the U.S., the decline of, say, General Motors -- I don't think anyone would have predicted that in 1981. These are structural changes that affect the society and economy, and they can affect the cash flows that occur.''

Predictions even a few years out are tough. Will the next president be a Democrat friendly to Freddie and Fannie Mae, or a Republican who's not? How much more will home prices fall in the next year? Where will interest rates be? And wouldn't these developments affect Freddie's business and plans?

Consider the History
A Freddie spokeswoman, Sharon McHale, says the company knows its forecasted transactions are probable because it ``has a history of issuing significant amounts of debt instruments, well in excess of amounts hedged.'' The mortgages and mortgage securities it purchases stretch over 15 to 30 years, she notes, while the longest maturity for Freddie's debt is 10 years. Therefore, ``we know there is a need for debt issuances in the future to fund existing and future mortgage securities that have not fully prepaid prior to their stated maturity.''

Still, knowing the need will exist isn't the same as knowing what the terms and risks will be.

Judging by Freddie's $34.6 billion of so-called core capital at Sept. 30, which was about $600 million above the government-set minimum, Freddie already was adequately capitalized. And by keeping its $4.3 billion of losses in the AOCI holding tank, Freddie is signaling that a like amount of benefits will materialize in years to come.

Nonetheless, after posting a $2 billion net loss for the third quarter, Freddie last week had to raise $6 billion through a preferred-stock offering and cut its dividend by half to shore up its dwindling capital. That undercuts the notion that its cash-flow hedges are working properly. If they were, then Freddie should be getting around $4.3 billion of gains over the next 26 years. So there would be no need for a capital infusion.

Yet there was such a need. And until just recently, Freddie didn't see it coming. The lesson for investors: Freddie's crystal ball is no better than yours.

> Got gold......?

HSBC Will Take on $45 Billion of Assets From Two SIVs

Finally .......If you take this event one step further you might ask why Citi & Co are not able to do the same and Paulson & Co is tring desperately to help and create the "Superfund"...... Maybe it has something to do with the strenth of their balance sheets...... UPDATE: Fire Sale At Citigroup...Citigroup to Get $7.5 Billion Infusion From Abu Dhabi

Endlich...... Im Umkehrschluß sollte man sich sehr wohl fragen warum Citi & Co es der HSBC nicht gleichtun und warum Paulson & Co so verzweifelt versucht den "Superfund" ins leben zu rufen....... Das liegt sicher nicht an den "starken" Bilanzstrukturen....... UPDATE: Fire Sale At Citigroup...Citigroup to Get $7.5 Billion Infusion From Abu Dhabi

Nov. 26 (Bloomberg) -- HSBC Holdings Plc, Europe's largest bank, will add $45 billion of assets to its balance sheet by consolidating two structured investment vehicles it manages.

The bank doesn't expect any ``material impact'' on its earnings or capital strength, it said today in a Regulatory News Service statement.

HSBC's decision comes as U.S. lenders led by Bank of America Corp. seek to persuade competitors to help finance an $80 billion bailout of other SIVs, companies that borrow short-term to invest in higher-yielding assets. HSBC will give investors in Cullinan Finance Ltd. and Asscher Finance Ltd. the chance to swap their holdings for securities issued by a new company, backed by loans from the London-based bank.

``HSBC's actions will set a benchmark and restore a degree of confidence to the SIV sector, while providing a specific solution to address the challenges faced by investors in Cullinan and Asscher,'' Stuart Gulliver, HSBC's chief executive officer of corporate and investment banking in London, said in the statement.

SIVs borrow in the $836 billion asset-backed commercial paper market to buy longer-dated debt including bank bonds, mortgage-backed securities and collateralized debt obligations. Investors are shunning SIVs because the holdings are difficult to value now that trading has collapsed in some mortgage debt markets. That's stoking concern SIVs will sell assets at distressed prices, adding to turmoil in credit markets.

FT Alphaville The other problem is that declines in asset values have left these vehicles facing NAV or market value triggers that would put them into a restricted state of operation.

The latter seems to be the more immediate problem for HSBC. The bank says that both its SIVs are funded beyond the end of the year, with Asscher funded to April 2008.

In terms of their asset value, Asscher, back at launch in January, was intended to have about about 10 percent of its portfolio invested in triple-A cash CDOs, with about 40 percent in residential mortgage-backed securities. Not a great place to be.

Other SIVs have been hamstrung by declining NAVs. But, as we noted earlier this month, HSBC has kept its portfolio tests under wraps

Bank of America Takes Lead in Backing `SuperSIV' Fund The ``SuperSIV'' fund, backed by U.S. Treasury Secretary Henry Paulson, would buy assets from so-called structured investment vehicles, whose $300 billion of holdings include corporate and mortgage debt in danger of default.

Bank of America, Citigroup and JPMorgan, the three largest U.S. banks, want SuperSIV in place by year-end because some SIVs haven't been able to trade, people familiar with the fund said. BlackRock Inc., the biggest publicly traded U.S. money manager, probably will manage the fund, said a person with knowledge of the plan.

Loomis Sayles & Co. declined to invest after receiving one of 16 invitations for a personal meeting last week with current Fed Chairman Ben Bernanke, said Daniel Fuss, who oversees $22 billion as chief investment officer at the Boston-based firm.

``It's so nice to get a personal invitation to go to Washington and have a one-hour visit with Ben Bernanke,'' said Fuss, who decided participating wasn't worth the risk to his firm. ``Oh, boy, did I feel important for about 27 seconds, and then you smell a rat.''

BRAVO :-)

Blue Pill Accounting At ACA Hits The Wall......

I suggest to read this post from July first ACA Capitals "Preferred Measurements Of Income" or "Blue Pill Accounting" & this from just a few days ago ACA "Hypothetical Speaking....." . In hindsight lots of comments from management, rating agencies & analysts are looking like they really live in the Matrix....... Amazing! Maxedoutmama has also a very good summary on ACA Hell's Bells Ringing On Wall Street

Ich empfehle im Vorwege dieses Post vom Juli ACA Capitals "Preferred Measurements Of Income" or "Blue Pill Accounting" und dieses von vor einigen Tagen ACA "Hypothetical Speaking....." zu lesen um deutlich zu machen wie planlos sowohl das Management, die Ratingagenturen und selbstredend auch die Analysten durch die Welt laufen...... Maxedoutmama hat eine weitere erstklassige Umschreibung zu diesem Thema Hell's Bells Ringing On Wall Street

ACA hits trouble - squared FT
More bad news from the world of structured finance. Lancer Funding II - a $1bn CDO squared - has entered an “event of default”, making it the first CDO squared to hit the wall.

CDO squared are, like the name suggests, CDOs of CDOs. A CDO squared defaulting then, is perhaps significant, since it acts as a litmus test for the broader CDO universe.

And Lancer is also part of a bigger grim picture at ACA Capital, its management company. They reported their Q3s on Monday and joined the banking big-league with a $1.7bn writedown. ACA are a big manager of CDOs and also a leading provider of CDO default insurance policies - which strikes us a pretty shortsighted combination.

Considering that ACA’s prime line of business is in structured finance, a $1.6bn writedown is hardly surprising, but it’s still worthy of note for several reasons:

Firstly, relative to ACA’s size, it’s a very big hit.

Secondly, the writedown ACA has taken may yet be a lot worse. The main cause for concern here is the fact that ACA’s Q3 results only cover the period up to September 30. And the very worst month for CDOs was October. Testament to that the fact that Lancer has now entered an event of default.


And thirdly, as a monoline insurer, ACA’s problems are not just ACA’s problems. The security of their insurance - on billions of dollars of CDO paper - is dependent on the safety of ACA’s own rating. And in the light of such a big writedown and the prospect of more trouble ahead, S&P has put the group on review.

ACA has been used as a “dumping ground” by subprime securitizers says Barrons, and that might now come back to haunt them. Wall Street does indeed seem keen to prop ACA up. According to filings with the SEC, a consortium of banks has provided liquidity facilities to the company. In spite of disastrous performance, banks have also continued to take out ACA insurance, unwilling perhaps, to pull the rug from under ACA’s feet.

Barrons

ACA has long been a convenient dumping ground in which major subprime securitizers like Bear Stearns (BSC), Citigroup (C), Merrill Lynch (MER) and some 25 other prominent dealers could pitch billions of dollars of risky obligations for modest premiums.

That let them gussy up their balance sheets and shift any potential mark-to-market hits to ACA.If ACA Capital were to founder, more than $69 billion worth of CDOs, including the $25 billion in subprime paper, would come rumbling back to the Wall Street banks, and likely with heavy attendant losses.That's why Wall Street has continued to do a brisk business with the beleaguered firm.

In the third quarter, ACA insured some $7 billion of subprime collateralized-debt obligations. Even if the company survives for only another couple of quarters, that would stave off the recognition of billions of dollars of losses.

All of this, of course, is immaterial, because October has happened and its presumably now just a question of time before ACA ‘fesses up to the damage already done. Little wonder that the company’s share price has just gone down and down and down. It stopped just short of collapsing through the dollar mark on Tuesday at $1.09.

"Liquidity Puts" / Enron Reloaded Part XXI.....

Floyd Norris from the NYT has some details on more ( some call it criminal ) "creativity" when it comes to financial alchemy. Nice to see that the regulators have also missed this kind of financial engineering.... Sooner or later the auditors will also face some serious questions

Floyd Norris von der NYT hat noch mehr Details zur (kriminillen) Kreativität der Finanzwirtschaft aufgedeckt um die Bilanzen und Gewinne in einem gänzlich anderen Licht erscheinen zu lassen. Ähnlich wie in Deutschland mit der Bafin sind die Aufsichtsbehörden anscheinend vollkommen überfordert. Wie zudem die Buchprüfer all diese Dinge ohne ganz besondere Hinweise durchwinken konnten ist ein Thema für ein seperates Post.

As Bank Profits Grew, Warning Signs Went Unheeded
We should have known something was strange. The banks were doing a lot better than they should have been doing.

When the history of the financial excesses of this decade is written, that will be a verdict of financial historians. There were signs that banks were either lying about their results or were taking large risks that were not fully disclosed, but investors were oblivious.

What were the signs? Consider how banks make money. They pay low rates on short-term deposits and charge higher rates on long-term loans. So they love what are known as positively sloped yield curves. And they like to see big credit spreads, where risky borrowers are charged much more than safe ones. Put them together, and banks should clean up.

By that light, nothing was going right in 2006 and early this year. The yield curve was inverted, or at best flat. And credit spreads were at historic lows. Risky loans, whether to subprime mortgage borrowers or junk-rated corporations, were readily available at rates that seemed to assume there was only the slightest risk of default.

And yet the bank stocks were buoyant, and so were reported profits.

Instead of being suspicious, many analysts believed that banks had found a new way to prosper. Making a loan and keeping it on the balance sheet until it was repaid was so old-fashioned. It was far better to collect fees for arranging transactions and passing on the risk to others. We did not ask why passing on risks should be so profitable to the risk-passers.

In reality, it was not.

In recent weeks, we have learned of many risks the banks kept. Not only did we not understand them, but there is every indication that senior managements did not either.

Consider “liquidity puts.” Don’t be embarrassed if you have no idea what I am talking about. In a fascinating article in Fortune, Carol Loomis quotes Robert E. Rubin, now the chairman of Citigroup, as saying he had never heard of them until this summer.

What were they? Banks put together collateralized debt obligations, or C.D.O.’s, many of which held subprime mortgage loans as assets. The C.D.O.’s were financed by issuing their own securities, and the risk of mortgage defaults seemed to pass to the people who bought the securities.

But we now learn that some banks also handed out liquidity puts, giving buyers of C.D.O. securities the right to sell them back to the bank if there was no other market for them.

> At least this would explain the AAA rating for these CDO´s from the rating agencies..... ;-)

> Das würde zumindest bei einigen CDO´s das AAA Rating erklären.... ;-)

That risk may have seemed slight when the securitization market was booming. But now the banks are being forced to buy back securities for more than they are worth.

With such a put in existence, I don’t understand how the banks could get the original loans off their balance sheets. How could they claim they had sold something if they could be forced to buy it back? It will be interesting to see if the Securities and Exchange Commission challenges the accounting.

But even if the accounting was completely proper, it was not very informative. It does not appear that any banks chose to mention the puts to investors before this month. Citigroup had billions of dollars of them, and in the new quarterly report from Bank of America, we learn that it had $2.1 billion of such puts on its books at the end of 2006, a figure that rose to $10 billion by the end of September.

In other words, as the subprime market was starting to falter early this year, the bank stepped up the issuance of such puts. Presumably, that was necessary to “sell” the paper. This week Bank of America announced a $3 billion write-off. A large part of it came from those puts.

There were many other funny ways to bolster profits, like specialized investment vehicles, or SIVs. These creatures bought those C.D.O. securities, paying for them with money borrowed in the commercial paper market.

Just like banks, the SIVs borrowed short and lent long. The spreads might be thin, but they could employ leverage to make narrow margins go a long way. The SIVs did not have much capital, but so long as everyone believed in C.D.O.’s, they did not need it. The banks that set up the vehicles swore they had no continuing interest in them, and so they also vanished from any balance sheet that investors could see. Now they are costing banks money to prop them up.

Jamie Dimon, the chief executive of JPMorgan Chase, told investors this week that “SIVs don’t have a business purpose” and “will go the way of the dinosaur.” Will they take the securitization system with them? The answer to that question may be crucial in determining how soon the financial system recovers.

The most important duty of the Federal Reserve is to preserve the health of the banking system. In the early 1990s, after the last big crisis, it engineered a steep yield curve for years, helping banks to recover. When the smoke clears, the Fed will try to do that again, even if it means significantly higher long-term interest rates.

Higher long-term rates are not what either debt-laden consumers or the depressed housing market really need, of course. But such trade-offs are what come when big risks are taken, and ignored, for too long.

IndyMac Increases Credit Reserves 47 Percent to $1.39 Billion

This number from the top Alt-A originator ( 14 percent) gives a hint how ugly the situation has become beyond subprime.

That might give a hint how bad the situation for several other players is that have bought back shares hand over fist during the past years and are more involed in subprime, havn´t sold their originations etc......

bigger / größer via Calculated Risk

Forecasted Home price depreciation ranging between 6% and 10% is factored into our loss expectations that drive valuation and reserves – average HPI declines expected to be around 9%

Diese Zahlen von dem Top Alt-A Kreditgeber ( 14 %) geben ein paar klare Indizien das neben Subrpime auch andere Segmente massiv an Qualität verlieren.

Das läßt erahnen wie übel es für andere Institute aussehen muß die im Gegensatz zu IndyMac in den letzten Jahren haufenweise Aktien zurückgekauft havben und sinnlose wertvernichtende Übernahmen getätigt haben aussehen mag. Ganz zu schweigen von denen die Ihre Riskiken nicht weiterreichen konnten und noch stärker im Subprime Sektor engagiert waren.....

We Hold Direct Credit Risk On $19.02 Billion Of Total Single Family Loans Serviced In Our Whole Loans And In Non-Investment Grade And Residual Securities

> Watch the large percentage of homebuilder credit costs....

> Man beachte den gewaltigen Anteil der Rückstellungen für die Homebuilder.....

In the call they said that they had claer signs in 2005 that the market for builders has peaked, but they have ignored it. Now they are paying a high price. They have stopped making any loans to builders and have no intend to re-enter the market soon.

Im CC hat das Management zugegeben das bereits Ende 2005 ganz klare Anzeichen für Probpleme bei den Buildern zu erkennen waren. Dummerweise wurden diese ignoriert und es wirde munter weiter verliehen. Nun kommt die Rechnung. Immerhin haben Sie versprochen dieses Segment nicht weiter zu bedienen und bis auf weiteres keine neuen Kredite zu begeben.

IndyMac Bancorp Reports Third Quarter Loss of $202.7 Million, ($2.77) Per Share

• Total pre-tax credit costs were $407.7 million (versus $103.5 million in the second quarter of 2007), or a negative impact on earnings per share (“EPS”) of $3.40.
• Spread widening in the private-label (non-GSE) mortgage secondary market resulted in a loss of gain on sale and MBS securities revenue estimated at $167.2 million pre-tax for the third quarter, or a negative EPS impact of $1.39.
• After surviving the global liquidity crisis in 1998 as a REIT, we purchased a federally chartered thrift and put our entire business inside the thrift, with the result that we have no liquidity issues today, while many mortgage companies have gone bankrupt or recorded massive losses due to liquidity shortfalls.
• We protected and bolstered our capital by not repurchasing any shares since 2002 and, in fact, raised a substantial amount of capital in 2007.
• We held virtually no subprime, closed-end seconds or HELOCs for investment purposes ($112 million, or 0.3 percent of total assets at September 30, 2007).
• We were not a major subprime lender, ranking 32nd among subprime lenders (according to the National Mortgage News 2006 survey). Our subprime volume in 2006 was $2.7 billion, or 0.39 percent of the total subprime market.
• While we originated $43 billion of Option ARMs from 2005 through Q3-07, we sold all but $1.0 billion (held for investment) and $2.6 billion (held for sale), and we retained no non-investment grade or residual securities related to these loans.
• We laid off virtually all Alt-A 2005/2006 credit risk into the secondary market, retaining only $7.0 million in non-investment grade and residual securities from this production.
• We hold no investments in collateralized debt obligations (CDOs) or structured investment vehicles (SIVs) and only hold mortgage backed securities (93.5 percent of the investment grade MBS are rated AAA and AA, none of which have been downgraded).
• We made one of the only successful acquisitions this decade in the mortgage business – Financial Freedom, the largest reverse mortgage lender in the nation – while virtually all other significant acquisitions have produced very poor results.

> Almost all of the new liquidity is coming from the Federal Home Loan Banks ......

> Fast die ganze zusätzliche Liquidität kommt von Seiten der Federal Home Loan Banks ......

Our operating liquidity is at an all time high of $6.3 billion at 9/30/07, up 54% from $4.1 billion at 6/30/07, and we have no reverse repurchase borrowings or extendable assetbacked commercial paper…95% of our borrowings are deposits, FHLB advances and long-term debt

> the next slide shows a nice Level 3 aka "Mark-to-Make-Believe Gains" etc gain. Wonder why they havn´t used an assumption that would have cover the entire loss from the credit costs.......... Maybe they are conservatice.......

> Nebenbei bemerkt zeigt die nächste Grafik das auch hier mal wieder ein nicht ganz unerheblicher Level 3 aka Mark-to-Make-Believe Gains etc Gewinnbestandteil. Schon erfreulich das Sie nicht gleich eine Berechnungsgrundlage berechnet haben die gleich die gesamten Verluste im Zusammenhang mit den Kreditkosten abdeckt...... Evtl. ist IndyMac ja betont konservativ......

I want to highlight the IndyMac Presentation / pdf that is full of details about every aspect of the mortgage market

Ich möchste Euch in diesem Zusammenhang die IndyMac Präsentation / pdf ans Herz legen die vollgepackt mit Details zur aktuellen Verfassung der Hypothekenmärkte ist.

As clear as alphabet soup: banks’ CDO exposures

I think the term "Black Box" is not an understatement....... Maybe some still think their exposue is hedged via MBIA & Co. Good luck...... I also suggest to read From level three to cloud nine from Roubini via the FT & the take from Mish. Keep this in mind when some "experts" are still hyping the high dividend yield and the strong balance sheets.......

Ich denke hier trifft der Begriff der Black Box ziemlich genau ins Schwarze....... Evtl. haben ja einige Ihre Bestände auch durch MBIA & Co abgesichert und sind daher der Meinung nicht tätig werden zu müssen. Viel Glück........ Zudem solltet Ihr Euch From level three to cloud nine von Roubini via der FT und die Beurteilung von Mish nicht entgehen lassen. Behaltet diese Zahlen im Hinterkopf und schaltet am besten die Glotze ab und überspringt den Artikel in denen immer noch auf die starken Bilanzen und die hohen Dividenden hingewiesen wird.....

As clear as alphabet soup: banks’ CDO exposures / FT

Forget the banks’ Q3s. By any account, they’re billions of dollars out of date. For banks holding CDOs - and that’s most of Wall Street - writedowns will have greatly increased in the past three weeks.

The trouble is, no one, not even the SEC, knows exactly what banks’ exposures are. But the losses are beginning to come out of the woodwork: for Citi, in the news Monday, a $8bn-$10bn loss on the value of some assets. For Merrill Lynch, last week, it worked out at $8bn. For UBS, reporting their Q3s last week, $3.4bn.

Citi have painted the most comprehensive picture to date. But rather than making things clearer, it simply casts doubt on the other banks’ disclosures. Citi, for example, are reporting $8-10bn writedowns on a portfolio containing $10bn of high-grade CDO paper - which has been the principal faller in the past two weeks. But UBS only report writedowns of $3.4bn. And they hold $20bn of high-grade CDO paper.

There are very few proxies which can be used to judge banks’ CDO holdings. Even a league table of CDO deals arranged is a pretty poor indicator:

An added complication is the fact that banks are using wildly different estimates on the pricing of CDO assets. Although indices such as the ABX and TABX are valuable proxies for the market’s prices as a whole, they don’t necessarily reflect where banks individually are pricing their debt.

As reported in today’s FT, for example, Merrill Lynch, has written down mid-quality ABX debt to 63 cents in the dollar, even though the bank’s own analysts say its worth only 40. UBS, meanwhile, assumes the same debt to be worth 90 cents in the dollar. “Simple math would imply that UBS needs an additional $8bn write-down [on its $15.4bn holdings] if the ABX pricing is correct,” Merrill themselves had the cheek to point out in a report on their rival.
Here’s a breakdown of the main CDO exposures:

Citi
$10bn senior rated CDO debt
$8bn mezzanine CDO debt
$2.7bn “warehoused” CDOs
£200m CDO squared


Merrill Lynch
$8.3bn senior rated CDO debt
$5.3bn mezzanine CDO debt
$1bn “warehoused” CDO debt
$600m CDO squared


UBS
$20.2bn senior rated CDO debt
$1.8bn warehoused CDO debt

Total exposure undisclosed:

Bank of America
Undisclosed

Barclays
Q3s due November 27

Deutsche
$1.6bn on “trading activities in relative value trading in both debt and equity, CDO correlation trading and residential mortgage-backed securities.”

JPMorgan
$339m (net of hedges) “on collateralized debt obligation (CDO) warehouses and unsold positions.”

Lehman Brothers
Undisclosed

Morgan Stanley
Undisclosed

Wachovia
$534m writedown on CDOs

"Enron-esque characteristics" / Deals With Hedge Funds May Be Helping Merrill Delay Mortgage Losses

Enron reloaded! I shouldn´t be surprised. This on top of Off Balance Sheet Vehicles, financing “Vulture Funds” to buy bank assets, UFOs (or Unidentified Financing Objects) & Level 2 and Level 3 accounting etc. makes me believe that this cartoon isn´t so far of the mark......... :-)

Enron lebt! Eigentlich sollte ich nach den letzten Meldungen über Off Balance Sheet Vehicles, die Finanzierung von “Vulture Funds” um Problemkredite aus der Bilanz zu bekommen, UFOs (or Unidentified Financing Objects) und Level 2 & Level 3 Buchführung usw nicht weiter überrascht sein. Evtl. ist der nachfolgende Cartoon doch nicht so übertrieben wie einst vermutet...... :-)

If the SEC, Auditors etc don´t act this should be viewed as another step in the bailout process..... Is still anybody wondering why gold is doing so well......

Sollten die Aufsichtsbehörden, Buchprüfer usw das auch noch durchgehen lassen darf man das wohl als weiteren Schritt in Richtung Bailout werten.....Gibt es immer noch welche die sich Fragen warum Gold so gut unterwegs ist......

Deals With Hedge FundsMay Be Helping MerrillDelay Mortgage Losses WSJ
Merrill Lynch & Co., in a bid to slash its exposure to risky mortgage-backed securities, has engaged in deals with hedge funds that may have been designed to delay the day of reckoning on losses, people close to the situation said.

The transactions are among the issues likely to be examined by the Securities and Exchange Commission. The SEC is looking into how the Wall Street firm has been valuing, or "marking," its mortgage securities and how it has disclosed its positions to investors, a person familiar with the probe said. Regulators are scrutinizing whether Merrill knew its mortgage-related problem was bigger than what it indicated to investors throughout the summer.

In one deal, a hedge fund bought $1 billion in commercial paper issued by a Merrill-related entity containing mortgages, a person close to the situation said. In exchange, the hedge fund had the right to sell back the commercial paper to Merrill itself after one year for a guaranteed minimum return, this person said.

> I assume that they aslo provide the probably very cheap financing.....

> Ich gehe mal davon aus das Merrill zudem noch die wohl günstige Finanzierung sicherstellt.....

While the Merrill-related entity's assets and liabilities weren't on Merrill's own balance sheet, Merrill might have been required to take a write-down if the entity was unable to sell the commercial paper to other investors and suffered losses, the person said. The deal delayed that risk for a year, the person said.

At issue with any hedge-fund deals is whether there was an attempt by Merrill to sweep problems under the rug through private transactions kept out of view from investors. Some previous scandals, such as the collapse of Enron Corp. and the troubles of Japan's financial system in the 1990s, involved efforts to hide problems through off-balance-sheet transactions.

Ground Zero
Merrill has become ground zero of mortgage problems in the U.S. Last week, the firm announced a $7.9 billion write-down fueled by mortgage-related problems -- one of the largest known Wall Street losses in history -- after projecting just a few weeks earlier that the write-down would be $4.5 billion. Merrill also took a $463 million write-down, net of fees, for deal-related lending commitments, bringing the firm's total third-quarter write-down to $8.4 billion.

The rapid widening of Merrill's losses has led investors to wonder whether other banks and brokerages have a good grasp of their exposure to bad debt. Bank shares fell sharply yesterday, contributing to a 2.6% fall in the Dow Jones Industrial Average. Merrill's shares fell $3.83, or 5.8%, to $62.19 in 4 p.m. trading on the New York Stock Exchange.

Making the Rounds
"Merrill has been making the rounds asking hedge funds to engage in one-year off-balance-sheet credit facilities," Janet Tavakoli, who consults for investors about derivatives, told clients in a recent note. "One fund claimed that Merrill was offering a floor return (set buy-back price)," she said in the note, "so this risk would return to Merrill." Ms. Tavakoli said such transactions would explain how Merrill's mortgage-related exposure dropped in the third quarter.

Thanks to Randy Glasbergen

In recent weeks, Merrill has been scrambling to line up hedge funds to take as much as $5 billion in mortgage-related securities, people close to the situation said, part of what Merrill executives refer to as a "mitigation strategy." Under the strategy, which started earlier this year, Merrill has tried several means of lowering the risk of its exposure to mortgage-backed securities, these people say.

In accounting for such transactions, "the general guiding principle is whether the benefits and risks of ownership were transferred," says Charles Niemeier, former chief accountant for the SEC's enforcement division and now a director of the Public Company Accounting Oversight Board. Legal questions can arise if the seller retains some exposure to the risk of the assets losing value, and if the deal is designed to disguise the picture of a business's financial health.

Other big securities firms with mortgage-related losses have arranged similar deals with hedge funds. As disclosed in a recent page-one article in The Wall Street Journal, Bear Stearns Cos. sold $1 billion of risky mortgage loans to a hedge fund under a one-year pact known as a "mandatory auction call." Bear Stearns agreed to participate in an auction for the loans that provided the hedge fund with a guaranteed minimum return.

Three big U.S. banks are assembling a group of financial institutions to create an investment pool to buy some mortgage-related securities from "structured investment vehicles" that are being forced to sell. That effort, which is backed by the Treasury Department, has also led some investors to question whether the goal is to delay the point at which banks recognize losses on troubled assets. The banks say their aim is to forestall forced selling of the assets.

In mid-July, before the credit crunch worsened, Merrill reported better-than-expected earnings with little impact from exposure to mortgage-backed securities. Asked about the firm's mortgage position on a call with analysts, Merrill Chief Financial Officer Jeff Edwards said: "Proactive aggressive risk management has put us in an exceptionally good position." Two weeks later, Mr. O'Neal personally sent an email to Merrill employees assuring them the firm had such risks well in hand.

By the end of June 2007, Merrill had CDO exposure of $32.1 billion and a subprime-mortgage exposure of $8.8 billion, totaling $40.9 billion. Much of the CDO exposure was in triple-A rated "super senior" slices. These were supposed to enjoy strong protection against defaults, but they began to decline steeply in price in late July.

By the end of September, Merrill says it reduced such positions through sales, hedges and write-downs to $15.2 billion of CDOs and $5.7 billion of subprime mortgages, a total of $20.9 billion. The write-downs totaled $6.9 billion for CDOs and $1 billion for subprime mortgages.

> Nice to see that the call for transparancy is working so well.....

> Schön zu sehen wie die Forderung nach mehr Transparenz so konsequnet umgesetzt wird.....

NAV SIVs

No wonder Paulson & Co are working overtime.......

Kein Wunder das Paulson & Co momentan sehr beschäftigt sind........

FT The point of M-LEC
Since SIVs were last in the limelight, things have not improved. In fact, asset prices in SIVs have continued to slide. Take a look at this graph, published by Fitch ratings in a note to clients:

Net Asset Value, or NAV, is a measure of the amount by which the market value of a SIVs portfolio exceeds the senior debt, divided by the capital - in other words, a measure of a SIVs underlying worth after leverage.

Not only does Fitch’s graph highlight that SIV’s fortunes have steadily worsened, it also points to a growing divide. Some SIVs are in a far worse NAV situation than others. Axon Financial, managed by TPC-Axon Capital Management, has a NAV currently at 35-40 per cent. Compare to AbAcAs Investments, managed by EBI/NSM. Its net asset value (NAV) is at around 100-105 per cent.

Even if funding briefly loosened up after August, SIV NAVs are still clearly troubled.

Citi - the prime mover behind M-LEC, is a case in point. While the bank could last week declare it had funding for all its SIV CP for the next year, it couldn’t rest on its laurels: The 3 Citi SIVs Fitch rates (in total there are 7) have seen NAVs slide pretty much in line with Fitch’s graph. On September 6, Beta’s NAV was 85.3 per cent, Five’s NAV was 81.6 per cent and Sedna’s NAV was 81 per cent. One month later, on October 8, Fitch puts Beta at 75-80 per cent, Five at 70-75 per cent and Sedna at 75-80 per cent. A decline of up to 10 per cent.

>Mish is asking in Enron Accounting at Citigroup

If a fire sale of those SIVs and conduits resulted in a 25% loss, Citigroup would have net tangible assets of $25.5 billion. If a fire sale of SIVs and conduits resulted in a 41% loss in those SIVs and conduits, Citigroup would have zero net tangible assets.

M-LEC is not only about restoring confidence and making the market more transparent. It’s about restoring asset values.

> Hellasious from Sudden Debt has a related post that is also painting a very bleak picture

> Hellasious von Sudden Debt hat ebenfalls ein Post zu diesem Thema das wenig Linderung verspricht

Hat Tip Eh

Market Sentiment & SIVs Explained... :-)

This is a must see! Hilarious.

Sehr treffend! Fantastisch!



Hat tip to Calculated Risk

US banks take $280bn onto books

Despite all the orchestrated efforts around the globe from central banks, regulators, politicians etc. the party or orgy :-) is over. The cracks are so obvious that no matter what kind of "bailout" attempt will happen next the real economy will take a significant hit. The times of easy credit are over. I think the biggest fear now is that the creditors will overshoot to the other side. The fact that foreigners are less willing to finance US assets will intensify this trend. I also recommend the excellent piece from Brad Setser The US trade deficit is falling, but not as fast as the world’s demand for US debt.

Trotz der konzertierten weltweiten Aktionen von den Zentralbanken, Aufsichtsbehörden, Politikern etc sind die Zeichen nicht zu übersehen das die Party oder Orgie :-) zu Ende ist. Die Einschläge sind so massiv das ganz egal was noch an neuen "Bailout" Versuchen auf die Agenda kommt die reale Wirtschaft darunter zu leiden haben wird. Die Zeiten des einfachen Zugangs zum Kreditmarkt sind Geschichte. Die größte Sorge die momentan vorherrscht ist sicher das die Kreditgeber von einem Extrem ins andere wechseln und es den Zugang über Gebühr erschweren. Die Tatsache das ausgerechnet jetzt die Ausländer aufwachen und immer weniger US Anleihen erwerben wird diesen Trend nur noch verstärken. Zu diesem Thema solltet ihr ebenfalls die Meinung von Brad Setser lesen The US trade deficit is falling, but not as fast as the world’s demand for US debt.

Banks’ debts threaten growth / FT

Big US commercial banks have seen $280bn of new debt come on to their balance sheets since the credit squeeze, threatening to undermine economic growth by inhibiting their ability to make new loans.

The banks have been forced to take on to their books large amounts of commercial paper and leveraged loans after investor demand for such assets dried up in the summer.

David Rosenberg, economist at Merrill Lynch, said that this amount had risen to $280bn since the start of August.

He added that according to data from the Federal Reserve, large bank capital – represented by net assets – had declined by $40bn since the beginning of August. “This has never happened before over such a short timeframe and this is rather serious because such a steep and sudden compression in large-bank capital has the potential to create a negative lending environment,” he said.

If left unchecked, this could “significantly inhibit” economic growth, he added.

> via Minyanville The Bernanke Put Defined

"Access to a backstop source of liquidity in turn reduces the incentives of banks to limit the credit they provide to their customers and counterparties."

Read that statement carefully. It's the one key sentence in the entire speech.

The misunderstanding that is perpetuated is that the Fed by "providing liquidity" is not actually "providing credit."

What Bernanke's statement means is that, in reality, the two are synonymous.

European banks are facing similar pressures with many observers expressing concern at the ability of some smaller lenders to handle the potential strain on their balance sheets.

Fears over the effect of the credit squeeze on US bank balance sheets was one factor behind the US Treasury’s encouragement of the creation of a "super fund" to take on the assets of troubled investment vehicles.

The three top US banks – Citigroup, JPMorgan Chase and Bank of America – this week unveiled plans for a fund that would buy up to $100bn of mortgage-backed assets from structured investment vehicles.

Citigroup, which manages $80bn of assets in such vehicles, has bought some of the vehicles’ commercial paper.

On Monday, Citi said it was suspending share buy-backs because its capital ratios had weakened partly due to the large amount of commercial paper and leveraged loans it had taken on.

According to Moody’s, the credit rating agency, assets held by bank-sponsored special investment vehicles fell to $320bn from $395bn in July.

“The large banks have been forced to take commercial paper back on their balance sheets and as a result are choking on assets they did not plan on having – thereby tying up regulatory capital and in turn possibly leading to a reduction in credit extension,” said Mr Rosenberg.

He pointed out that 30 per cent of the growth in the debt that US households took on was backed by asset-backed investors.