iBank Writedowns = $100 Billion

Ibank_writedownsNice schadenfreude porn via the WSJ’s Marketbeat:

"The great 2007-2008 parade of writedowns, which was hovering around the $100 billion mark already, has pushed far past that thanks to Merrill Lynch’s $14.5 billion in assets lost related to exposure to subprime mortgages, CDOs and all sorts of other things that were misvalued and are now (hopefully) valued at a more appropriate level.

According to figures calculated by MarketBeat, some $100 billion-plus in positions have been written down for 2007, as the world’s investment banks recognize, en masse, that nobody wants this paper, not even made-up vehicles that have no choice but to buy it. Susanne Craig, David Reilly and Randall Smith reported in today’s Wall Street Journal that banks are going back to basics, reducing risky loans as a result, but that requires that they set aside more capital on their balance sheet, which will hurt earnings.

The lion’s share of the writedowns comes from five companies — Merrill Lynch, Citigroup, UBS Morgan Stanley, and HSBC — who, combined, have written down about $73 billion in assets. HSBC got this party rolling in the first half of the year, with a $4.1 billion writedown, which ultimately turned out to be a harbinger of what was to come later in the year.

The thing is, the writedowns aren’t finished…"

Awesome . . .




Writedowns Surpass $100 Billion
David Gaffen
WSJ Marketbeat,  January 18, 2008, 8:35 am

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Scott commented on Jan 18

    Let’s see, $100 billion in phase one yields $145 billion bailout package proposal and $66 billion in big firm bonus pool … next year, when the numbers are triple on the writedowns, do the other two numbers triple as well? can we cut taxes fast enough to raise all that bail out moolah?

  2. Thomas Pindelski commented on Jan 18

    It would be really interesting to supplement this chart with the 2007 compensation of the CEOs involved.

    The quickest fix for the ‘too big to fail’ syndrome which keeps this cycle of destruction alive is to send one or two of these chief executives to jail for shareholder fraud, returning their pay to those who own the company.

    PE ratios would rise overnight and credibility would be restored. Of course, campaign finance reform would have to accompany any prosecutions, as it’s currently far too cheap to buy our lawmakers.

  3. blam commented on Jan 18

    Thank goodness the right hand at GS was selling to bet against the left hand at GS which was busy buying with their clients money. They call it a hedge but that doesn’t really make sense does it because they were using their clients money to buy (from them) while selling their own inventory as fast as they could and using their own capital to sell short.

    Anyway, I’m sure there is a logical explanation about how they’re the smartest guys in the room. Excuse me while I toss my cookies.

  4. hedge fund man commented on Jan 18

    Speaking of GS:

    I got sent this this morning: Goldman sales desk started seeing Value funds that have been buying all the way down starting to puke….(don’t see sign of a near term bottom)

    GS is starting to get short big even down here….as they said it is their opinion that it is just the beginning of such orders…
    last week late they advised covering half of financial-homebuilder shorts in anticipation of a fed move …. so they’re all over the place

    (one of my traders sent me the thing this morning about goldie’s sales desk alert; don’t remember who told me about their note last week to cover shorts)

  5. ARISTOTLE commented on Jan 18

    All I can say is it’s a damn good thing it’s “contained”

  6. Peter Davis commented on Jan 18

    Let the Games begin…

    I am not an economist, nor am I a fundamental analyst. My ability to read a balance sheet is somewhere on par with my ability to read ancient Sanskrit. However, the basic laws of human nature lead me to believe that the writedowns are not done.

    Simply put, as humans, one of our best instincts is that of self-preservation. I don’t believe for one second that these banks – who have tried to hide this toxic waste for so long – have come out with the proverbial kitchen sink. Given that Citi still has something like $37 billion in subprime exposure on its books (this after all its writedowns), I’d say the likelihood of more skeletons hanging out in the closet is still pretty high.

    I love it every time CNBC postulates on its kitchen sink theory, as if the investment banks have EVER been completely honest in their reportings. Excuse me if I’m skeptical of companies which:

    a) Knowingly covered up (and facilitated) egregious accounting fraud during the dot-com bubble

    b) Were too stupid to recognize the bubble and then rode the train all the way back down

    c) Securitized God-awful, fraudulently-rated paper backed by mortgages undertaken by homeowners who didn’t have enough money to buy a lawnmower, much less a house

    d) Failed to see that this paper was God-awful and that consumers hopelessly in debt might conceivably default on mortgages once their rates reset to ludicrous levels

    e) Further levered up to buy this stuff so that even a small drop in valuation would render this paper essentially worthless

    f) Tried to cover up their excessive losses by lying to everyone and burying it somewhere in the depths of Level 3 accounting

    g) Begged the Fed to lower rates so that they wouldn’t have to pay for their mistakes

    h) Gradually disclosed the extent of their losses while simultaneously sending their CEO’s packing with tens of millions of dollars of parting gifts

    i) Declaring even more losses, hitting up every sovereign wealth fund for money like someone’s unemployed, slacker brother-in-law

    j) Saying all is well

    k) Declaring even more losses

    l) Firing massive amounts of employees

    m) And declaring a bottom in financials while simultaneously watching their stock prices descend somewhere towards the region of the 4th layer of Hell.

    Call me a cynic.

  7. Aaron commented on Jan 18

    In honor of the rollercoaster cartoon you might like this….

    This link is an animation of US real estate prices portrayed as a roller coaster. The height and distance of the coaster is meant to accurately describe the market. Its very interesting to see.


  8. Eric Davis commented on Jan 18

    hear the latest Cramer…. he wants to federalize the insurers…

  9. Peter Davis commented on Jan 18

    Can’t we just federalize Cramer instead?

  10. Eric Davis commented on Jan 18

    I think he is looking for a job as the new fed chairman…..

    It’s very bullish that CNBC is doing everything they can to bring the insurance issue to government officials… they don’t seem to get it yet….

    I have no idea what can or should be done…

    I tried to watch bloomberg for a while today, and almost fell asleep… and who can live without Santelli updates.

    how about santelli for Fed Chairman.

  11. Bob A commented on Jan 18

    Hard to believe loan losses are all accounted for until housing inventory returns to ‘normal’ levels.

    “When inventory is building up, when prices are falling and sales are falling, it’s pretty difficult to identify the bottom,” said Charles McMillion, chief economist at MBG Information Services in the District. “It shows declines, if anything, are accelerating.”

  12. Don commented on Jan 18

    The perjorative “con” man springs from the confidence that we must place in them before they can steal our money.

    I’d say like Lou Reed, “don’t trust none of what you hear, and only half of what you see…you can’t even trust your mother.”

    Because as we peel the layers of deception away, we find a very rotten core of human nature at work, I’d say it will be awhile until “we get fooled again”.

    But we humans, particularly we American humans, are suckers for easy money. It won’t be that long.

    Kudos, Peter Davis–excellent post.

  13. Delicate Sound of Thunder commented on Jan 18

    Honest question…

    If these banks are writing off all this money then where does it actually go? Is it traceable to an actual entity who gained those amounts?

  14. Peter Davis commented on Jan 18

    It goes nowhere. It’s lost – or at least the banks are declaring that it’s lost. Essentially, they bought a bunch of very bad paper which is now essentially worthless, because there is no market for it.

    As I understand it – and I could be wrong on this – the writeoffs are similar to what I, as an individual trader would do if I had a bunch of losing trades. I would take the losses as a writeoff against my profits in order to decrease my tax burden. The end result, however, would be that I lost a bunch of money and these losses would cut into whatever profit I made.

    These banks are still holding the paper but they have essentially declared that is, for now, worthless. They reason they disclose this stuff is to bring some measure of transparency to the public, in the hopes that such “honesty” will somehow stem the bleeding that is their rapidly deteriorating stock price.

  15. Eric Davis commented on Jan 18


    The money goes the same place your money goes when the value of your car goes down.

    If you go here (http://www.mises.org/media.aspx?action=category&ID=40)

    and catch the video about centeral banking. It gives you some idea about why “Write Downs” in the banking industry are so important, since they have a 9X effect on the ability of the bank to loan money.

    But watch out for the “Black Helocopters”

    *swat swat*

  16. Delicate Sound of Thunder commented on Jan 18

    Thanks for the replies.

    I’m having a hard time wrapping my head around the reality of the situation here.

    Is this like the S & L fiasco where we’re going to see hundreds of new yachts pop up in the Virgin Islands?

    I do understand the destruction of the banks ability to lend based on the fractional reserve model.

    So the real question is was there 100 billion that moved from one party to the other (as a trade or a loan)? Was there $100 bil that existed as money that moved from one party to the other?

  17. Eric Davis commented on Jan 18


    Maybe this way… Bear Sterns gave loans to 30,000,000 people to buy houses, worth $100billion.

    if you want to trace some of the money, look around at people you know who have lost their jobs in the mortgage and financial industry…. They have been eating with it, and it’s in homes, that may be going into foreclosure, and resold at 50 cents on the dollar.

  18. Winston Munn commented on Jan 18

    Like A Mozillo

    (With apologies to Bob Dylan)

    Once upon a time dressed so fine made lotsa loans all subprime, didn’t you?

    People called said need a loan, promised to pay when a job comes their way, and you didn’t know they were just a kiddin’ you?

    You used to brag about all the money your were handin’ out. But now you don’t talk so loud. Now you don’t seem so proud, about having to be scrouging your next hundered and fifteen million dollar buyout deal….well

    How does it feel?
    How does it feel?
    No longer C.E.O.
    But with lots of dough
    No shareholders to snow
    Like a Mo-zill-o.

  19. Camille commented on Jan 18


    I guess the people who sold their homes at the peak price ultimately got some of that 100 billion that is now being written down as losses. Some of those write downs never represented true assets…essentially fabricated value. It’s analogous to someone stating that their car is worth $10k more than it’s really worth one quarter and then you have to sell it the next quarter and see that nobody will pay the asset value you declared earlier. Anyone correct me if I’m wrong here…I’m not an economist or banker.

  20. Short Man commented on Jan 18

    Eric – I think Delicate has a point though that at some point there was an underlying dollar for dollar transaction so the respective sellers of those 30,000,000 homes in theory would have made a relative financial winfall by selling their homes for more than it’s underlying value. Therefore, wealth creation for those individuals…unfortunately, 98%+ of those 30,000,000 sellers who reaped the rewards of selling their home for more than it was worth took the proceeds and put it towards bought a bigger McMansion that they figured they could flip in the future. Easy come, easy go and few sailing away on yachts to the Caribbean.

  21. Richard commented on Jan 18

    how can anyone declare the writedowns are over when they’ve only just begun? the complicated monstrosity will not be unwound and valued in a month or two. there will be more legs and they’re all going to go in the same direction. i’m still long market but 30% cash and short term maturities until i see something resembling a bottom which could take 6-12 months IMO.

  22. Jay commented on Jan 18

    Delicate — If you own the lowest rated tranche in a CDO, you are the last to get paid back both income and principal of all the underlying loans. Therefore, if the market value of the underlying loans/homes/collateral decline 20-30% and homeowners go into foreclosure… your principal has been eliminated completely and you can only hope that you receive a sliver of the ever-evaporating income stream.

  23. Ross commented on Jan 18

    The loss occurs in the income statement and then as a charge against book value.

    Wow look at that. Return on equity has skyrocketed. WAMU’s dividend yield is down 50%. Did that stock double when I wasn’t looking?

    Write offs affect a financial institutions ability to lend. Since we live in a credit based economy, your standard of living is negatively affected.

  24. Eric Davis commented on Jan 18

    Sure, mozillo and quite a few others… I don’t doubt tons of money has been … yachts

    … Seriously I sat in a bar, and hit on a woman, while she worked out a mortgage on a napkin, enticing the person on the other end of her cell phone to lie to her, for a No-Doc loan. I’m sure she pulled in a few grand off of it.

    I guess the point is to be angry about it, and that is honest… I don’t take issue.

    but do we turn the country into hooverville? over It? People will get Bailed out, who are greedy rich assholes, and walk away with loads of money. Banks who create these problems, and continue to be bullit proof.. and go on for 10 years and the cycle repeats..

    I’m a huge fan of Federalizing and liquidating some banks…. I have said repeatedly that what we do is… Liquidate and federalize Citi, Bear, Countrywide, Ambac and MBIA… have Spitzer divvy up the assets and use the money to Bail the country out. create some bail out device.

    or something….

  25. Jay commented on Jan 18

    I know a 40 year old guy that sold his business three years ago for a nice sum. He took those dollars, and though he had no experience whatsoever in real estate, decided developing beach property was a no-lose proposition. After leveraging up 20 times, he took out 100% loans on the property at inflated prices. Problem was no one came to buy his property, he couldn’t pay the increasing mortgages after a couple of years, and the bank finally came calling when the properties weren’t selling. Only three years later, he is now filing for bankruptcy. Looking back at that… who are the winners/losers?

    Winners: mortgage brokers, those that sold him the property at the top, and eventually those that are buying the property now at 50cents on the originally inflated dollar.

    Losers: HIM and his neighbors that try to sell there property at inflated prices and most of all the holder of the mortgages

  26. Bob A commented on Jan 18

    Thing about those mortgage brokers is most of them spent their commissions like it was gonna go on forever and a lot of’em are now “supersizing fries at MacDonalds”.

    P.S. “supersizing fries” was one of the lines they used at World Savings sales meetings to encourage mortgage brokers to pawn off one-month variable rate COFI/CODI mortages to desperate or gullible borrowers. “You wanna do this or you wanna supersize fries at MacDonalds?”. Such a shame about the stock price of WB, CFC and WM. Really gotta feel sorry for them.

  27. Norman commented on Jan 18

    There has been $108B in write-downs and the stock market has lost about $2,300B in market value? Seems a little crazy to me.

  28. Bob A commented on Jan 18

    p.s. why did people take those one month adjustable mortages from World Savings? Because you were allowed to qualify based on the lowest (negative amortization) payment. And even though World wouldn’t lend more than 80% ltv they’re still taking it in the rear on many of those loans because values have dropped more than 20% in a lot of cases and obviously those borrowers don’t qualify for a refi.

  29. John commented on Jan 18

    Barry, some great posts as always, as well as many of the posts last night, and today on our economic situation. I was wondering however, since many accuse this Blog of being so ‘Negative’ if we should get a debate going on some of the proposed solutions to this economic mess.
    I’m certainly no fan of Bernanke (and am “Impressed” so far with his resistance to yet another intermeeting rate cut), but I thought he was probably pretty much on the mark in yesterdays testimony before Congress that the majority of Bush’s proposed 140-150 billion (temporary) ‘stimulus package’ should be targeted at lower to middle income families, tax breaks for small businesses, extending the benefits of the unemployed– the people most likely to spend the money rather than to save it. Obviously, tighter lending standards at in the Mortage Industry/U.S. banks, reformation of the tax code to make it more understandable (and accountable), and certainly reducing corporate tax rates to make them more competitive on a global basis are longer term goals that would sure up economic credibility. Once the time limits on this stimulus package have expired, and the economy begins to gain traction, a revisitation of the ‘Statutory’ PAYGO rules passed in the 1990s for both Houses of Congress to help reduce unnecessary Federal Spending. I’m hoping that Congress takes a closer look at the Federal Reserve Boards proposed Home Ownership and Equity Protection Act (HOEPA) (open for public comment for another couple of months) to maintain the (for now reduced) predatory lending practices and excess borrower leverage but also to impose Stiffer Penalties/Fines on ‘Mortgage Lenders’/Wall Street Investment Banks for originating/underwriting fraudulent or predatory type loans — subject of course to clear definitions of “Predatory” and “Fraudulent” type Loan.
    This latter point is likely the case of closing the barn door after the horse has left, and may continue to resolve itself over the next +/- 24 months..

  30. Bob A commented on Jan 18

    Norman even if there were NOT a real estate problem, 20% corrections in a bull market are to be expected no? And we’re not there yet. Russel 2000 yes. SP no.

  31. FT Woods commented on Jan 18

    Credit Mess Raises Questions in Forbes today

    “One of the still-to-come reactions to the credit mess tangling up our global financial system will be a renewed scrutiny of CEO compensation. […]

    The debate was sparked by generous compensation paid to CEOs at banks such as Merrill Lynch & Co. and Citigroup Inc. that subsequently booked massive losses stemming from the very same behavior they had previously rewarded.”

  32. Winston Munn commented on Jan 18

    John wrote, “I was wondering however, since many accuse this Blog of being so ‘Negative’ if we should get a debate going on some of the proposed solutions to this economic mess.”

    I think this is a good idea, but speaking for myself I would have trouble contributing as I believe it is a structural problem – solutions within that structure are thus not solutions at all, but stopgap measures. Or as someone else might say, “rolling around the dungball”.

    As long a monetarists, Keynesians, and neo-Keynesians run the circus, I am not interested in fixing the ferris wheel when it breaks down.

  33. Clyde commented on Jan 18

    OK John, I’ll play:

    * Shut down every bank that is below capital levels, I mean now; The OCC is permitting zombie banks a la Japan as we speak;
    * Create a unified GSE/Bank regulator; put hedge funds under the control of that regulator;
    * Bring all swaps & CDS onto regulated exchanges;
    * Replace issuer-paid rating system with an investor-paid rating system, since the investors seem to have outsourced their credit analysis to the rating agencies anyway;
    * Prosecute Sarbanes-Oxley violations to the full extent of the law;
    * Reinstitute Glass-Steagall: prohibit dealers from lending and lenders from distributing;
    * Replace the Federal Reserve leadership since they saw fit to ignore their congressional mandate to regulate non-depository mortgage lenders;
    * Replace the SEC & Justice Department leadership that has gone into hiding the last 8 years.

    That would be a good start. Got popcorn?

  34. John commented on Jan 18

    Winston, I’m a big fan of your posts and I thought you did a great job last night expressing your ideas…
    I tend to agree. I think we certainly have structural problems, and personally speaking, I would like to see a Recession to clear out the excessive speculation that’s gone on in the Mortgage Industry-Housing and Structured Financial Markets. I do not want see Federal Government Bailouts cached as ‘programs’.
    I’m dissatisfied with our current FOMC because they seem much more subject to political pressures for easy monetary policies then in years past and do not operate with an Independent Mandate as Congress intended. Maybe this is just the “Institutional Inertia”, carried over from the last 4 years of the Greenspan Fed–Inflating your way out of economic downturns instead of letting the business cycle complete it’s course.
    But once the Old Building is torn down (preferably with a Wrecking Ball) you want to replace it with one that has a solid foundation. In this case I understand there’s a fine line between trying to legislate out or around problems in the Financial Markets–and are often impeded by politics/lobbyist interests–without stifling economic growth.
    I think serious attempts at Alternative Energy Exploration and Programs and Federal policy implementation directed specifically at reducing the Trade and Federal deficits, as well as reducing Federal Pork Barrel Spending/congressional bills with earmarks will play key roles in bringing the economy back on track…

  35. John commented on Jan 18

    Clyde, now you’re talking brother!! I like it!

  36. Peter Davis commented on Jan 18

    Wow, some good posts here.

    First things first: Delicate, I think this situation has the potential to far eclipse the S&L meltdown. I truly believe that there is real systemic risk out there. The mortgage problem is only the tip of the iceberg. The alphabet soup of bad paper – CLO’s, CDO’s, ABCP’s, etc. that was written on mortgages extends to all sorts of bad debt. Credit cards, auto loans and student loans are at multi-decade delinquency rates and all were securitized, levered up and sold. It’s likely these delinquency rates will rise as consumers find it more difficult to service their growing debt.

    And the wonderful financial alchemy that was used to turn lead into gold in the consumer debt sector has found its way into commercial real estate and, of course, corporate debt.

    When corporations issue bonds, these bonds are priced, in part, according the rating of that corporation’s debt. Say Investor A buys the bonds; he now wants some insurance should the value of those bonds drastically decrease. And so we have the wonderful invention of credit default swaps (CDS). Investor B sells a CDS to Investor A. It’s like an insurance policy. If the bonds tank, Investor B now must pay Investor B. If the bonds do fine, Investor B makes money off the premium of Investor A.

    Sounds good, right? Except that Investor B has now bought a CDS on his CDS from Investor C. And on and on. GM has $2 billion in outstanding bonds and $30 billion in CDS’ written on those bonds. Should those bonds get downgraded, a lot of people are on the hook and are all pretty much screwed. Poof! $30 billion up in flames.

    Wash, rinse, repeat, and you have the makings of one hell of a mess. U.S. (and global) finance is rife with these derivative structures. They are so intertwined and leveraged that one failure could bring down the entire house of cards. And because of their complexity, nobody knows who’s holding what. (Sound familiar?)

    You may have heard that bond insurers are the next contestant on The Price is Wrong. Why? Because these geniuses insured a ton of bad paper. And why? Because, like everyone else, they got greedy, compromised their standards and chased a little extra profit. But here’s the problem. The insurers don’t have the capital to meet their obligations should a good chunk of this stuff go bust. And going bust it is.

    Additionally, many of these insurers also back municipal bonds from states around the country. The municipalities have this insurance because it boosts their credit rating, allowing them to issue the bonds at lower rates and, thus, save on the interest payments. But if the insurers either go bust or have their credit ratings downgraded (Google Ambac), the munis are also in trouble as their credit ratings will be downgraded, forcing them into paying higher rates to service their debt.

    But, wait, there’s more. These muni bonds have been packaged into various securities and sold to the same folks who bought the mortgage crap. With leverage. And the municipalities also bought the mortgage paper in an effort to get a better return on their own money. Now that this mortgage paper has turned out to be worthless, the financial health of the munis is in jeopardy which, in turn, jeopardizes the bond insurers who are insuring the munis, which, in turn, jeopardizes the munis even further.

    If your head is starting to hurt, I don’t blame you. The point is that the right set of circumstances could cause a HUGE problem, simply because of how intertwined and leveraged everything is. To address an earlier post, this is part of the reason why $100 billion in writedowns can cause a much greater loss in terms of the stock market. There’s fear out there. And it ain’t over.

  37. JAN commented on Jan 18

    Peter Davis, thanks for the great exposition.

    I’ve taken 2 aspirins; could you comment on what happens after the insured bonds lose their AAA rating and a number of funds are not allowed to hold them.

  38. Peter Davis commented on Jan 18


    Like a cavity, I believe that, in the end, the best solution is to excise the problem. And the problem is an economy buoyed by excessive credit creation and propped up by an untenable asset bubble.

    I found Bernanke’s Congressional testimony more than a little humorous. He claims that we are not in a recession; growth, he feels, is simply slowing. Moreover, he expects growth to pick up in the 2nd half of 2008. If that’s the case, why the need for a stimulus package?

    And this is the problem with the Fed. While I have doubts as to whether Bernanke actually believed what he said, for the last 2 decades, the Fed has pursued an asymmetrical monetary policy in which it has repeatedly attempted to circumvent the natural business cycle. Recessions, while unpleasant, are a natural part of the business cycle and are necessary to clean out the excesses of the cycle peaks.

    Yet, the Fed has attempted to inflate its way out of every potential downturn and, as a result, has only sustained a tenuous credit and asset bubble. At some point, the paradigm needs to be changed. Had the Fed allowed the business cycle to proceed more naturally (and had they showed the least bit of interest in upholding their regulatory responsibilities) perhaps we wouldn’t be in such a mess.

    As for solutions, I truly believe the excesses need to be cleaned out by market forces. And that means a recession, and maybe a serious one. While that will undoubtedly and unfortunately hurt a lot of people, we have made our own bed. It’s about time we realized that we need to sleep in it as well.

    I agree with Clyde that we need serious regulation of hedge funds as well as a transparent exchange for CDS’, swaps and other collateralized securities. I also agree that Glass-Steagall needs to be reinstituted. Repealing this law was a huge mistake, and we’re now paying for it.

    I’d also add that a new paradigm needs to be developed for what PIMCO’s Paul McCaulley calls the “Shadow Banking System” – the system of unregulated lenders comprise of hedge funds, investment banks and other non-traditional extenders of credit. This shadow system bears tremendous responsibility for our current mess, and it must be addressed. Thus far, I feel as if the Fed and the Congress has simply ignored its prominence in this fiasco.

    Finally, a new global monetary system needs to be developed. Our current system in which governments can print enormous amounts of paper currency has created huge and potentially destabilizing imbalances. The natural market forces of checks and balances have become marginalized in favor of centralized monetary planning.

    And for anyone who thinks that’s a good idea, ask the Soviets how central planning worked for them.

  39. Peter Davis commented on Jan 18


    If the municipalities lose their Aaa ratings, forcing funds with certain standards to sell, I suspect you’ll see something eerily similar to what’s happening with mortgage paper.

    Those who own the paper will try to sell and discover that it is essentially worthless (particularly since just about everyone is extremely weary of buying anything that has been securitized right now). For funds, this may well cause a significant drop in the value of their assets, forcing some to liquidate and close up shop. For institutions, this will cause them to report more writedowns and probably fire more people.

    I have no idea who, specifically, is holding such bonds. But the alternate danger is in the bond insurers’ credit being downgraded. For a few months, the ratings agencies have been grousing about this, but no such downgrades have occurred yet – despite the fact that the insurers’ actual credit rating should be somewhere around junk.

    I believe that this is due to the fact the ratings agencies are completely and utterly ethically bereft at this point. They’ve shown their colors by willingly rating crappy mortgage paper as Aaa simply so they could get the business of rating it in the first place. I believe nothing these people say. Additionally, I suspect there is a well-justified feeling that downgrading the bond insurers’ credit ratings could cause a run on muni bonds and another round of huge problems.

    It’s one thing when Citi can’t pay its dividend. It’s an entirely different thing when a municipality can’t pay its policemen and teachers and can’t fix roads because its going broke due to higher debt servicing payments from credit downgrades.

    I’m sure there’s a lot I’m missing, but this thing is such a mess right now. Who knows how much of this will come to pass, but there is real danger out there. I believe that anyone who downplays this is either trying to talk themselves into rosier times or is simply ignoring a looming catastrophe.

    I am in now way suggesting that this will happen – and I really and truly hope it doesn’t. I’m simply acknowledging that it is a possibility.

    P.S. As I write this, I just saw that Ambac lost its Aaa rating from Fitch and is on watch from S&P.

  40. Winston Munn commented on Jan 18

    Peter Davis, well done. The only thing I might add is the effect of leverage, or better stated, undercapitalization of the bond issuers. If you have agreed to pay out $100,000 when the shit hits the fan, and all you have in the bank is $5000, it doesn’t take a genius to figure out that the insurance you sold is virtually worthless.

    John, thanks for the kind words. As for the structural problem, it is fairly simple in design yet near impossible to address: debt as the sole vehicle of economic expansion is unsustainable.

    Debt is a claim on future productivity; it is simply fairy-tale wishful believing to assume that productivity will always grow enough to service current debt-load while allowing continued exapansion of additional new debt-load.

    So the first structural problem to address is to eliminate debt; but without debt, there is no money.

    Catch-22 sound familiar?

  41. Delicate Sound of Thunder commented on Jan 18

    Thanks for all the replies. This truly is a complicated beast.

    It seems almost as if this situation was intended. Certainly the people at the FED, people who forecast for a living, could have seen the consequences coming.

    The fraud seems to have taken place mostly at loan origination so it doesn’t seem to be some sort of scheme intended by ibankers apart from getting the commission checks.

    Bernanke, instead of acting decisively this week passed the buck to the govt in hopes of a pipe dream that won’t have an effect until xmas.

    It’s almost as if they want it to fail.

    Maybe break it so they can “fix it”?

    Are we back to “the man with the gold makes the rules”?

  42. Winston Munn commented on Jan 18

    Peter Davis wrote, “I believe that anyone who downplays this is either trying to talk themselves into rosier times or is simply ignoring a looming catastrophe.”

    Peter, you are winning the home-run derby tonight. I appreciate you sharing your knowledge.

    To your quote above I might add this: Anyone who downplays the risks through rose-colored glasses most likely also believes those WMD in Iraq will be found any day, now.

    This does not mean I believe a collapse is a certainty or even likely, but to disregard the precipice over which we stand is simply being perma-bull-headed.

  43. Juan Serra commented on Jan 18

    Total already close to 130 B

    All these are missing from the WSJ List

    ACA Capital Holdings

    Aegis Mortgage – Houston

    American Home Mortgage

    Axon Financial Funding

    Axon Financial Funding

    BNP Paribas

    Capital One


    Dresdner Bank

    E Trade Financial

    Freddie Mac

    HBOS Bank

    IKB Deutsche IBank

    Lehman Bros

    Northern Rock Bank

    Sachsen LB Bank

    Sovereign Bancorp

    Swiss Re (SWCEY.PK)


    Washington Mutual WAMU (WM)

    Wells Fargo (WF)


  44. Stuart commented on Jan 18

    Barry’s going to love this one. I expect the inflation measures to fall over the coming quarters due to a collapse in owner occupied rental figures as the rental markets get flooded with converted homes, previously for sale, now put up as a rental property. Same goes for condos.

  45. Peter Davis commented on Jan 18


    It’s not just a matter of fraud on the part of loan originators. This entire mess is classic behavior in any kind of asset mania. Go back to the Dutch Tulip Bulb Mania of the mid-1600’s, and you’ll see the same thing. I believe that there are many players in this Greek tragedy of ours (in no particular order):

    1. The loan originators. Yes, there was some fraud, but to think that it was all-pervasive or coordinated is, I believe, to give these folks too much credit. Many were caught up in the housing boom and, like everyone else, figured the good times would never end.

    2. The investment banks. By dreaming new and wonderful of securitizing more and more mortgages, the banks gave the lenders the fuel to write mortgages to anyone with a pulse. The attraction of originating loans and then immediately selling the risk to someone else was easy fodder for lenders. Why wouldn’t write unlimited loans? It wasn’t their money.

    3. The investors. Everyone who bought this crap made it very easy for the banks to securitize it and sell it to them. These investors (be they funds, other banks, munis, Jimmy Hoffa, etc.) provided a willing and able market for these securities. And as the investors’ appetites proved more and more insatiable, the complexity of the securitizations increased dramatically, provided new and wonderful products to pawn off on more investors.

    4. The hedge funds. They’re a subset of the investors, but they get their own category simply because their unbelievable hubris and utter stupidity warrants it. Through the magic of leverage, the hedgies bought loads of this paper, but mostly with borrowed money. So when its value decreased just a bit, the leverage worked its magic and promptly busted them out. Some of these funds levered up as much as 100:1, a level of stupidity which would be unbelievable if it wasn’t, in fact, true. Didn’t any of these people read “When Genius Failed”? Or the story of Icarus, for the matter? Wax wings abounded.

    5. The ratings agencies. One of my personal faves, simply for what I’ll term their “moral ambiguity”. Talk about a conflict of interest. Because the banks pay the ratings agencies to rate whatever newfangled securities they dream up, the agencies naturally rated just about everything as Aaa. Although I have no confirmation, I do believe that the debt of my deadbeat college roommate could’ve gotten a Aaa from these guys.

    Afraid of losing their business, the agencies naturally curried favor with the investment banks by giving the mortgage securities ratings that would enable the banks to sell them to as many people for as much money as possible. The agencies even advised the banks on how to structure the paper in order to achieve Aaa ratings. Along the way, the ratings agencies conveniently forgot about what you and I would term “ethics”, opting instead for what is commonly known as “cold, hard cash”.

    6. The Fed. For two reasons.

    First, Easy Al made it his mission in life to prolong our grand economic boom at all costs. Mostly this cost came in the form of lowering interest rates to the point where the government probably would have paid you to take out a loan. On the heels of the dot-bomb collapse, this easy credit flowed into the housing market. Easy Al figured that such a scenario would be better than a natural, excess-clearing recession, given that it was likely the good times would never end. Ever.

    At the same time, the Fed utterly failed to regulate the lending industry. This was in spite of the fact that it was apparently their job to do just that. Greenspan is on record lauding the benefits of new lending practices that would extend the dream of home ownership to people who had no business owning a lawnmower, much less a house. Colleagues of his at the Fed urged him on several occasions to investigate reports of rampant lending fraud and dangerously lax lending practices, but he refused.

    Greenspan gets extra points for his Revisionist History Book Tour, in which he traveled from the country, repeatedly denying any responsibility, while Maria Baritoromo repeatedly tells him how dreamy he is.

    7. Congress. Let’s face it: they’ve screwed up just about everything, so why not this? But the truth is, they could have legislated sounder lending practices. While such a process would have taken considerably longer than Fed regulation, it’s still worth noting that they, too, failed to act.

    8. The consumer. The little piggy at the end of the food chain made it all happen. Without his insatiable appetite for more and more stuff, none of this would have been possible (And who says we’re powerless to change things?).

    Americans have been gorging on debt for far too long. When the dot-com bubble collapsed, the potential negative wealth affect from stock market losses was quickly and easily offset by the housing bubble. Cheap credit and lax lending practices made it far too easy for people to buy houses. As if that wasn’t enough, homeowners then used these houses as their personal ATMs, tapping home equity lines to furnish their houses, buy big screen tvs and, of course, to pay off their credit cards.

    Homeowners were simply giddy and believed that the good times would go on forever, and the rate of subprime mortgages peaked right around the same time as the housing market, itself, did.

    I don’t believe this bubble would have occurred had Joe and Jane consumer been living in a fantasy land in which the only way to pay down increasing amounts of debt was to borrow more and hope (pray) that their assets appreciated to infinity. Or at least until they died and could pass it on to someone else.


    This entire collective behavior is classic mob euphoria and has been found at the peak of every asset bubble in history. Everyone believed that asset prices would rise ad infinitum. And those who swamped with debt likely knew that the only way to get out of debt was to take on more and then basically hope for a miracle. This is like an alcoholic trying to get sober by continually drinking, but such is the psychology of bubbles.

    I disagree with those who have tried pointing the finger at one or two groups of people, particularly those who have reveled in singling out the lenders and the investment banks. Yes, these institutions benefited tremendously from sketchy and sometimes fraudulent practices, and many people got rich in the process. But we, as a society, have a wonderful habit of not wanting to accept responsibility for our actions.

    The Democrats love to talk about how the common folk got screwed. Well, the common folk also brought it upon themselves by acting incredibly foolishly. They had a nudge, for sure, but they still made the decision to jump off the cliff.

  46. Don commented on Jan 18

    Again, Peter Davis, Kudos. You have explained reality exactly how it appears to me, so I’ll not try to add anything….time for a cold beer, and a hot…well, anyways, a cold beer. Even in this disaster of epic financial portions, a good cold beer on a Friday night—life could be worse (and I make my living in the residential housing industry).

    I’ll just leave you w/ a line from the greatest singer songwriter that ever lived…

    “…the porch rotted down, that’s more expense, the durned old mule, he tore down the fence. The mortgage is due and I can’t pay, but we’re still a-livin’ so EVERYTHING’S OKAY…”

    Anybody guess who wrote that? Cheers to all. I think this may be the best blog in the universe. So many smart folks. Everything’s okay.

  47. Shane commented on Jan 19

    I truly believe there are eventually only two inevitable outcomes, either debt default Argentine style, or hyperinflation Weimar Republic style. The ultimate endgame of any fiat “money by decree” currency is death of that currency. Look at any modern country, except for a few (maybe Britain), most have had multiple different paper currencies over the past 100 years. I don’t include the US b/c the US has had prob. 5-6 different currencies since 1900, going from Gold/Silver notes, to Gold/Silver certificates, to Federal Reserve Notes . . . to the Amero????

    Not too get political, but the Founding Fathers knew that a paper currency (bills of credit in those days) was not a good idea. That’s where the phase, “not worth a Continental” came from. Everyone expects the FED to save the markets, and that it’s impartial.

    The FED is a PRIVATE bank entity who’s goal is to MAKE money-by printing it and by allowing bankers to make money–which is why there was very little regulation during the housing boom. There is nothing Federal about the FED, it’s as Federal as Federal Express.

    The big picture fix (without the nitty gritty details) is to do away with the almighty, all-knowing FED, have interest rates determined by the market, have a currency backed by something that can’t just be “created” by the stroke of a pen (which is one reason why gold was used for centuries b/c it took work to get it), and have some freaking restraint by Congress and spend LESS than you take in. No my friends debt is NOT wealth. Read history books, it wasn’t until the creation of the FED that we started running massive deficits. Shoot, there was a time when Congress actually worked to pay off debts accrued during wartime, now we just accrue debt with endless wars to juice the economy, and then print more money rather than cut spending.

    People ask why they FED didn’t know about this ahead of time . . . of course they knew about it. If a private citizen with an engineering background and not too much economic background could see it coming, they sure as heck knew about it. But that is NOT their charter. Their charter is to keep the game going-making money for them, Congress, and their banker friends, with minimal interruption.

    So when does this economic crisis/collapse happen, I have no clue, but unless we take drastic steps, such as those outlined by some . . . (Ron Paul lays it out nicely) . . . . it will happen. Is this crisis the one that sparks it . . . maybe . . . maybe not. One thing I’ve learned is that just like a bubble, the game goes on longer than you think it should.

    One last tidbit of info. I lived in Argentina from 99-01, and left right before their collapse. It started out not so good, but no horrible. When I finally realized that it was about time for the system to crack-up (mid 01) was when the middle class people I talked to worried that their kids would lead a worse life than they did.

    FYI, I’m not a pessimist by nature, I just have very little faith in the government created monopolies that manipulate the money supply :-), and I prefer to put my faith elsewhere.

  48. Winston Munn commented on Jan 19

    The Perfect Storm?

    Does the Ambac rating downgrade signify the approach of the first squall line in a perfect financial storm?

    Consider the consequences. Only those bonds that had a AAA rating without insurance will retain that rating – obviously not a great amount of the outstanding, as those with AAA did not need the insurance. No, the real value of bond insurance was to assume the AAA rating previously held by Ambac, and thus pay lower interest rates.

    Who does this affect? Cities, countines, municipalities, small community hospitals, and other types of borrowers with no steady stream of cash flow to sustain a AAA rating. With the downgrade, all these borrowers will be forced to pay higher rates, just at a time when sales tax receipts are falling and property tax values are dropping, thus increasing demand to cover the tax shortfall, creating higher demand for capital.

    And capital already is hard to find – just ask Citi, who had to go overseas to find a capital infusion.

    More demand on the capital markets will raise rates and shrink supply – making capital itself the scarcest of commodities.
    This, in turn, will encourage savings over spending, further stunting growth, fueling lower tax receipts and even more demand for diminished capital.

    Falling asset values, rising interest rates, and hording of money – this is a deflationary scenario – and it could turn into a classic debt-contraction, deflationary spiral.

    And because this is all occuring in the capital markets, it is outside the control of Federal Reserve interventions, no matter how low they drop the rates.

    It is Japan without a national positive savings rate to soften the blow.

    It could portend the perfect financial storm.

  49. Troy commented on Jan 19

    Peter, I agree with that modification that the 2002-2004 pre-bubble was intentionally blown by the PtB to keep “W” from experiencing a one-term presidency like HW. The 2 new pro-biz SCOTUS justices, plus an entire double layercake of Federalist Society types in the circuit levels are the true dividends of the Greenspan market actions of 2001-2004.

    And once the party started, ANY action that attempted to rein it in could be fatal, politically speaking. Better to just let it play out as it would.

    20% corrections in a bull market are to be expected no? And we’re not there yet. Russel 2000 yes. SP no.

    The financial system was pumped up with over TWO TRILLION of bubble blow-off lending 2003-2006 ($4T in total, but $2T over the baseline 2000-2001 level of $400B/yr).

    The Bush administration thinks $150B is an effective stimulus, well, guess what, the Bush Economy was getting that amount of stimulus EVERY QUARTER from 2003-2006 via the pump-up of home lending.

    You can have an amazing economy when consumer borrow an additional SEVEN TRILLION dollars over 7 years.

    What remains now for the average American consumer is debt service, not buying. ie. Recession.

  50. Cherry commented on Jan 19

    “And for anyone who thinks that’s a good idea, ask the Soviets how central planning worked for them”.

    Actually, they would tell you it did very well in the “industrializing” part. But a failure in the upkeep as it actually degenerated back into a quasi-market system.

    That surprises alot of people.

    What we are talking about is Oligarchies not “command planning”(which is a natural existant in nature FWIW). That is the point people like Paul’s of the world seem to forget. The Capitalist class screwed themselves because they won’t follow market ideals. Yet, the cattle calls of the Randian wannabe’s of “Socialism” is flat wrong. It was the eternal merchant that caused this problem and lead the laboring class down the rabbit hole.

    I could argue the US entered a depression Q1 1980 and didn’t recover from it to Q3 1996. That would be a sour puss. Ouch!!!!

    The real fear isn’t “Socialism” but hyper-nationalism. Revolution not from the middle class but “above” from the natural aristocracy(or they think) of the gods. I would read stuff such as Evola or Yockey. Most people don’t know those guys. But they are more important than Karl Marx, Mises or Rand going foward.

    A beaten down and degenerated are easy prey. We already have the Nazi experiment, why not try another?

  51. jds commented on Jan 19

    But, but, but, Troy, I was so sure that the amazing economy was solely tied to the tax cuts! At least that is what Larry Kudlow tells me every day.

  52. Justin commented on Jan 19

    Much thanks to everyone on here for providing such great education.

  53. Reply to All commented on Jan 19

    Fun with charts

    As someone who spends a fair amount of his time working to present ideas and information graphically, I found this very entertaining (via The Big Picture from the WSJ). It is all about scale so if we are talking about

  54. badhaikuguy commented on Jan 19

    Bubble Machine – ON!
    Every sucker, dime-a-dance.
    Benny B conducts.

  55. ZackAttack commented on Jan 20

    I think the monolines are going to be front and center next week.

    My understand is, between ABK and MBI, that might be another $200b in writedowns, roughly twice what we’ve already seen.

    Plus roiling the insured muni market (I didn’t know that 65% of all muni issuances are insured). Plus the timebombs in pension funds.

    Cramer talking about an RTC for them, far too late for all that. MBI is going to catch a downgrade in a matter of *days* here. They have to be thinking in terms of the cleanup now.

  56. Russ DoGG commented on Jan 20

    Getting back to the subject of writedowns…

    CBS researched this subprime mortgage fiasco several months ago and found that obout 1-2 Trillion dollars of these CDO’s were written based on subprime and ALT-A mortgages between 2003-2007 (with the dollar figures skewed towards later years. These are the mortgages making headlinbes as losing money.

    The Bear Stearns funds that collapsed had invested in these securities in a typical leveraged scheme. Their values went to essentially ZERO as losses on defaults cancelled out those loans that performed. And then the losses magnified through leverage.

    This is the prototype for loss estimation in the rest of that market…. Meaning that all the bogus credit won’t be written off until you see writedowns totalling the trillion dollar mark. So I don’t think you should call bottom until then.

    Of course some of this trash was bought by china, foreign investors and so -those writedowns- may never get recorded & included in the article’s chart.

    Hedge funds had gotten into the act by purchasing these securities from Wall St firms (with repurchase agreements in lace- of course) so to get them off the books. Just like ENRON. Hidden losses.

    To estimate the total writedowns I think you just need to look at how much was written. I think 100 Billion is just the start. But who knows who really holds it.

  57. tom a taxpayer commented on Jan 21

    Winston Munn – In regard to the perfect financial storm you discussed, what might investors do to protect themselves against the storm?

Posted Under