And on the other side of the world...

[solarbird]

Heads up: Venezuela Halts Oil Sales to Exxon Mobil. Yes, crude is fungible. However, there aren't as many refineries that can Venezuelan oil (it's heavy, and sour), and, more importantly, they're five days away by tanker, and replacement supplies are 30 days away. I don't know how many BPD we're talking about here; the markets reacted calmly. I have a small question in the back of my head as to whether this might help Chile with its severe upcoming energy crisis, but the answer is not really - they're more dealing with infrastructure failure than anything else. The market play here would probably be on copper futures, by the way. Not that this is financial advice, because it's not, and it's a risky play. But that would be it.

Today's bigger news items were the "Project Lifeline" mortgage aid plan, and the Warren Buffet offer to buy municipal obligations from the monoline insurers. These sent the Dow and S&P 500 up sharply, while doing somewhat less for the NASDAQ. Let's look at both of these for a minute.

"Project Lifeline" is basically a 30-day foreclosure-forbearance plan; if you're 90+ days late on your mortgage (if you're in default), it puts a 30-day hold on foreclosure so you can try to work something out. Bluntly, there's so much FAIL here I don't know where to start, but I'll keep it short and limit it to two elements. First, banks are already months behind on foreclosures, and, as previously detailed here, a lot of CDO-based foreclosures could be dragged on for months if not years due to crap record-keeping and the inability of mortgage owners even to prove ownership. 30 days is nothing in that environment.

But just as much, this isn't going to make that much difference even for those cases where loan ownership is clear. My first reaction when I heard this - on my own, I promise - was the same as Minyanville's Mike Shedlock, which is that this is just a month's free rent for people walking away. His column on "walking away" from mortgages buyers can't afford on properties not worth the loan cost, previously posted, is a bit of a shorter form of a blog post he wrote a week before on his own blog, but both boil down to the same thing: if it makes business sense to walk, walk. It's what they'd do to you; why should you owe them anything?

Warren Buffet's bid, on the other hand, has some real meaning. Again, my first reaction was that he was cherry-picking the salvageable assets from the monoline insurers, which is good in that it would restart the municipal bond market, and then the monolines could go down in flames, by which I mean Hindenberg-style. Mr. Shedlock and I apparently think alike, as he described the offer as Buffet's Kiss of Death.

The key takeaway is that this is not a monoline insurer bailout; they're dead in the water. I think we're better off burying them now and letting the chips fall, because all that's happening right now is more auction failures, this time in municipal bonds, which is just crazy. I mean, seriously:

Rates on $100 million of bonds sold by the Port Authority of New York and New Jersey with yields determined through periodic auctions soared to 20 percent today from 4.3 percent a week ago, after the debt failed to attract enough bidders, according to data compiled by Bloomberg. Presbyterian Healthcare in Albuquerque, operator of seven hospitals throughout New Mexico, had rates on $38.7 million of debt reset at 12 percent.

12% on hospitals?! 20% on ports?! I pay much less than that on my credit card! The good part is that New York is not willing to deal with this kind of crap for very long - their state regulators are forcing the issue, which is absolutely the right thing to do. Particularly when stories like this just keep coming.

On an earlier topic - bank reserves - Mike Shedlock also has his take on nonborrowed reserves going negative, which is to say bank reserves failure. He quotes an article that was going around pooh-poohing the whole thing as no big deal; the article in question asserted that despite this not happening before ever, everything is actually Just Fine. Mr. Shedlock, by contrast, considers this extremely serious. He notes that the banks can only borrow to maintain reserves on valid collateral. No collateral, no loans; no loans, no reserves. And the collateral has been, in large part, commercial real estate loans, since all their CDOs and SIVs and such are in the tank. He then quotes John Dugan, the Comptroller of the Currency, as saying:

Over a third of the nation’s community banks have commercial real estate concentrations exceeding 300 percent of their capital, and almost 30 percent have construction and development loans exceeding 100 percent of capital.

There will be more criticized assets; increases to loan loss reserves; and more problem banks. And yes, there will be an increase in bank failures.

I add that you need to remember those CMBX spreads I point to occasionally; what those are saying is that commercial real estate lending is auguring in, severely; the reason "up" is "bad" in those charts is that they're measurements of perceived risk. Up is bad. That much up is very bad. He tells his readers to keep reading all that until it sinks in. I repeat that recommendation.

Because the credit situation has deteriourated so badly that London's admittedly-bearish Banque AIG is making a massive US government buyout of assets to avoid a Great Depression their base scenario. Not their worst-case scenario. Their base scenario. It's not just for crazies anymore; it's for investment banks. Let that sink in, won't you?

Comments

[kensaro.livejournal.com]

This is going to be very un-researched, gut-feeling comment, so don't shoot me down too hard.

I've been saying for years that most of the financial sector should be outlawed, what they're doing is making money with money (or fiction) and what they're doing is only connected in one way with the real world, and that's the wrong way 'round. Instead of the real world dictating the financials and derivatives it seems that what goes on in the fictional money world dictates what goes on in the real world. Small example; you'll hear a stock analyst talk about how the market has 'rewarded' a company's good performance with a higher stock price, each time I hear something said like that, my mind boggles with the wrongness of it.

I've always said that lawyers would herald the end of western civilization in much the same way that the german barbarians did for the romans, but it seems I might have to revise this to financial traders.

[solarbird]

I actually agree that many people should be in jail here.

Seriously. So much of this has been made up entirely or almost entirely out of fraud - fraud by any definition, starting with liar-loans knowingly passed up the queue to complete-bullshit AAA ratings handed down by supposedly-trustworthy agencies to monoline insurers absolutely incapable of providing the actual coverage they offered - that you could fill three or four dozen, if not hundred, Gitmos with actual honest white-collar criminals here.

So we don't entirely disagree. We have substantial disagreement at some points - derivatives are not inherently fraud, CDOs are not inherently fraud, SIVs are not inherently fraud, but the way they were set up and managed pretty much was. But there has been very nearly no enforcement of existing regulations - like, say, on the ratings agencies, who were key in this debacle - since the Bush administration took power. And there won't be, until he leaves. So, well, here we are.

Maybe people should be found guilty of crimes in a court of law and go spend some serious time in actual jail. Hopefully many will.