bits and pieces, pennies and pounds

[solarbird]

Let's start with a couple of representative stories from the credit markets. First: you're starting to see institutions that can do so yank back borrowing, refusing to pay "loan shark" rates. Credit contraction leads to economic contraction. Those institutions which can't follow suit are seeing huge bond cost jumps, which isn't good either. But sadly, the plans to break the monolines into muni vs. everything else is starting to see serious resistance, primarily because of opportunities for lawsuit mania. Discussions I've read have indicated that without a functional legal theory for the split, you can't do it without huge lawsuit opportunity, so this solution may fail without government intervention to make this happen, and that's more difficult in the US than in, say, the UK. We hit Governor Spitzer's time limit on Friday - we'll see what happens after that.

Looking specifically at housing, Nouriel Roubini is reporting that the basic math says you're looking at 10 to 15 million walk-aways in housing, existing conditions remaining. That's a huge number. The ABX markets are at new record lows, but, of course, you're already at the point where you have to ask how much further down you can go. AAA CMBX spreads have returned some of the most recent spike (remember, up == bad), while other segments are fairly level at record (bad) highs.

To the surprise of many people - and without a lot of clear cause - oil closed over $100/barrel today, a substantial movement. But reportedly what's going to drive gasoline prices even higher than oil fundamentals this summer will be shortages in alkylate, an important gasoline additive. People are talking US averages of $3.50 or so per gallon at the lowest octane, which doesn't sound that bad for some of us in some regions, but will be a real shock for those in others.

Finally, Mish talks on his own blog about how governments (and, to some degree, individuals) can profit from monetary (as opposed to price) deflation. Sadly, the good positions are not occupied by many people.

Comments

[oh6.livejournal.com]

The trouble with breaking up a business into a solvent and an insolvent half is like Mike Shedlock says; it's a pretty transparent fraud to avoid debt. Not that mortgage securities are transparently legitimate or anything.

I'm wondering what's wrong with the alternative scenario where the existing bond insurers sink entire, and some new organization like Warren Buffet's steps in to insure debt that is likely to be paid off. I guess there would be a big shock in between the collapse of the old insurers and the new one starting up.

[solarbird]

His new one is already starting up, and that'll happen over time; the problem is more the already-issued debt. Insurance on these things is a one-time upfront payment, not recurring, so they'd have to pay a second time to insure the debt with another agency.

And sure, it's an attempt to avoid debt, and it's pretty fraudulent. But the entire business model was based on fraud - on the idea that they'd never really have to pay off - and these things are going down anyway. The only question, really, is how much they take down with them.