The National Australia Bank has decided to bite the bullet and call those US mortaged-back securities WORTHLESS and wrote them off by 90 per cent of their original value. What happens if other banks follow suit and declare their mortgaged-backed "assets" equally WORTHLESS? As commentator Mike Whitney says, "The big-hand just inched a little closer to midnight."

 


July 28's trading on the New York Stock Exchange (NYSE) was a real humdinger. It started off with the White House announcing that this year's fiscal deficit would soar to a new record of nearly US$500 billion. That was followed by news of rising oil prices, weak quarterly earnings and a slowdown in consumer spending. Plunk, plunk, plunk; one domino after another. By mid-morning the markets were in full retreat.

That's when investment giant Merrill Lynch announced that it would notch a $4.6 billion second-quarter loss and write-downs of $9.4 billion on collateralized debt obligations (CDOs) and other mortgage-related assets. That's when the dookie really hit the fan. Stocks quickly went verticle and the rout was on. By the closing bell the Dow was down 240 points. Traders staggered from the floor of the exchange slumped-over and bedraggled looking like they just got a missive from the draft board. The optimism is being wrung from the markets faster than the credit at an over-levered hedge fund. Every day brings another dismal surprise.

And, yet, on Tuesday, the market staged a valiant comeback surging 260 points in a matter of hours. It was enough to give the fund managers a bit of a lift and hope that things are finally turning around. But the market's woes are far from over. They're deeply-rooted and spreading like Kudzu throughout the system. The International Monetary Fund summed it up in warning they issued earlier in the week:

"Global financial markets are 'fragile' and indicators of systemic risk remain 'elevated'... Credit quality 'across many loan classes has begun to deteriorate with declining house prices and slowing economic growth.' Bank balance sheets are under 'renewed stress' and the decline in bank share prices has made it more difficult to raise new capital. (There is an) 'increased likelihood of a negative interaction between banking system adjustment and the real economy'." (Financial Times)

The IMF also stuck by its earlier prediction that total losses to financial institutions from the credit crisis would reach $1 trillion ($945 billion), a sum that will have devastating consequences for industry, consumers and the global economy. Tuesday's festivities on Wall Street are likely to be short-lived. It's just a one-day lull in the storm.

Merrill Lynch said it "will provide financing to the purchaser for approximately 75 per cent of the purchase price." Whoa. In other words, the banks are so anxious to off-load their junk-paper, they're almost paying people to take it off their hands. Now that's desperation!

Over at Nouriel Roubini's blog, Dr. Doom made this observation about the Merrill Lynch's troubles:

"Merrill Lynch's decision to 'sell' a good chunk of its remaining CDOs at 22 cents to the dollar has been widely praised as the firm finally recognizing the full extent of its losses on these toxic instruments. This batch of $30.6 billion of CDOs was already marked down to $11.1 billion. Now with the 'sale' of it to Lone Star at a price of $6.7 billion Merrill Lynch is taking another $4.4 billion write-down and 'selling' it at 22 per cent of the original face value. But is this a market-based 'sale'? No way, calling this transaction a 'sale' is a joke." (Nouriel Roubini's Global EconoMonitor)

This isn't a "sale"; it's more like abandoning a sinking ship. The investment chieftains are getting scorched by their downgraded assets and have started dumping them at any cost. There's no market for mortgage-backed anything now, and there won't be until housing finds a bottom. By the time that happens, most of the CEOs and CFOs in the mega-brokerage houses will be squatting on streetcorners on the lower East Side with tin-cup in hand. It's that bad.

The Merrill Lynch deal illustrates just how crazy things have gotten. Merrill said it "will provide financing to the purchaser for approximately 75 per cent of the purchase price." Whoa. In other words, the banks are so anxious to off-load their junk-paper, they're almost paying people to take it off their hands. Now that's desperation! No wonder the market is snorkeling its way to the bottom of the fishbowl. The problems haunting the financial markets have cross-pollinated with the real economy and are spreading misery everywhere.

Unemployment is rising, growth is slowing, inflation is up, the dollar is down. We've heard it many times before, but it's still jarring to see General Motors stock fall below Bed & Bath, or Starbucks shut down 600 stores, or million dollar McMansions sell for $425,000, or millions of middle-class families join the food stamp rolls. That's tragic no matter how you slice it.

The scariest news of the week comes from down-under, where the National Australia Bank (NAB) announced it would "slash a £400m bond sale by two thirds. The retreat comes days after the Melbourne lender shocked the markets by announcing a 90 per cent write-down on its £550m holdings of US mortgage debt, an admission that it AAA-rated securities are virtually worthless...

Now that the working stiff is maxed out on his mortgage, worried about losing his job, and trying to keep food on the table; the least congress can do is scatter the oil speculators; right?

Wrong. On Monday, the Financial Times reported that: "A US Senate proposal designed to curb speculation and increase transparency in the energy markets was blocked by Republican legislators on Friday. The move frustrates Democratic efforts to show the party is taking action on record petrol prices. The Stop Excessive Speculation Act, sponsored by Harry Reid, the Senate majority leader, fell 10 votes short of clearing a procedural hurdle."

Unbelievable. $4.00 gasoline and millions of consumers that are flat-broke and congress still refuses lend a hand? What a scrubby band of sandbaggers.

The scariest news of the week comes from down-under, where the National Australia Bank (NAB) announced it would "slash a £400m bond sale by two thirds. The retreat comes days after the Melbourne lender shocked the markets by announcing a 90 per cent write-down on its £550m holdings of US mortgage debt, an admission that it AAA-rated securities are virtually worthless... The decision by National Australia Bank to make drastic provisions on its US mortgage debt could have ramifications in the US itself. It opted for a 100pc write-off on a clutch of "senior strips" of collateralized debt obligations (CDO) worth £450m - even though they were all rated AAA. (Ambrose Evans Pritchard, "Australia faces worse crisis than America", UK Telegraph)

This is a huge story with grave implications for America's struggling banking system. No wonder the establishment media is avoiding it like the plague. If AAA rated CDOs are worthless, then some of the biggest financial institutions in the country will be packed off to the boneyard feet-first.

The original article appeared in the Business Spectator and was titled "NAB will shock Wall Street", by Robert Gottliebsen. "Shock" is an understatement. This is more like a meat cleaver crashing down on a butcher block. Schwook! This is a must-read for anyone who is following the meltdown in the financial markets.

If AAA rated CDOs are worthless, then some of the biggest financial institutions in the country will be packed off to the boneyard feet-first.

Here is an extended excerpt from Gottliebsen's article:

"The National Australia Bank's decision to write off 90 per cent of its US conduit loans will have dramatic repercussions around the world. Wall Street will be deeply shocked when they understand the repercussions of what NAB has done. It is clear global banks have nowhere near provided for their exposures to US housing loans which in the words of John Stewart are experiencing a "meltdown".

"We are now way beyond sub-prime. NAB says that it is suffering a 55 per cent loss on American housing loans - an event that has never happened in the history of a developed country in recent memory. This is an unprecedented event and means that the cost of bailing out the US financial system is now far beyond the highest estimates. A US recession is now locked in, but more alarmingly, 55 per cent loan losses point to the possibility of a depression.

"It means the cost of bailing out housing exposures to the two mortgage insurers will be so great that it will leave no room to bail out anything else and there are several US banks that are now in big trouble. NAB says that the dislocation in the residential market is separate from the corporate market, but the flow on is inevitable." (The Business Spectator,"NAB will shock Wall Street")

The conduits are off-balance sheets operations run by the banks which contain hundreds of billions of dollars of bonds which are now essentially worthless. So far, many of the banks have not accurately reported the losses from these operations hoping that the housing market will stabilize and the value of the bonds will rebound. The action taken by the National Australia Bank is a "game-changer"; it's like the Grim Reaper swooping down on Wall Street and lopping-off the top of every big investment bank in downtown Manhattan.

Gottliebsen again:

"The global banks have been marking to market the assets they held on their balance sheet, but the vast amounts held in so called 'conduit trust accounts' have not been written down because they were not marketable. NAB wrote them down when they saw the bad mortgages....US banks have written down $450 billion in bad housing loans. The revelation from NAB means that they will now certainly need to take provisions to $1,000 billion. But write-downs of $1,300 billion and perhaps even more are on the cards." (Business Spectator, http://www.businessspectator.com.au/bs.nsf/Article/NAB-will-shock-Wall-Street-GV4M7?OpenDocument&src=sph)

Tuesday's "sucker rally" in the stock market was just the convulsive writhing of a dying bull. It won't last. Once the bad news sinks in; investors will pull up stakes, equities will fall, and banks will crumble. The big-hand just inched a little closer to midnight.

Click here: For feedback and comments.

Mike Whitney is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective. He can be reached at fergiewhitney@msn.com.

The Last Hurrah For The US Banking System
Hunkering Down In Afghanistan
Why Are Those Wacky Koreans Dissin' Our Beef?
The Game Is Over. There Won't Be A Rebound
Bernanke's Speech: 'It's All China's Fault. Really.'
The Great Oil Swindle
Bernanke's Next Big Bail Out Plan
It's Time To Dump The Federal Reserve
Henry Paulson's Wild Ride On The Economic Hindenberg
The Mother Of All Rip-offs
The Bush Bust Of '80: "It's All Downhill From Here, Folks"
George Bush Delivers The Horse's Head
America's Teetering Bank System: "Where Did All Our Deposits Go?"
Bush's 'Stimulus' Cash Giveaway
When All Else Fails, Tell The Truth
Hillary And Diebold In 2008
Saint Joe And The Impending Financial Crisis
A Dollar The Size Of A Postage Stamp
'A Generalized Meltdown Of Financial Institutions'
For Whom The Closing Bell Tolls
The Long Fall
Stock Market Mayhem And Bush's Moral Swamp
 The Big Squeeze
Housing Flameout: California Falls Into The Sea
It's Time For The Banks To Face The Hangman
 The Era Of Global Financial Instability
 US Banks Brace For Storm Surge As Dollar And Credit System Reel
Are The Banks In Trouble?
 Stock Market Brushfire: Will There Be A Run On The Banks?
Judgment Week On Wall Street


For more... email mybigo@bigozine.com with the message, "Put me on your mailing list."
 
August 1, 2008
 

Merrill Zigzag Makes Investors Uncomfortably Numb
Mark Gilbert writes July 31: And that US$4.4 billion that Temasek Holdings Pte Ltd, Singapore's sovereign wealth fund, invested in Merrill at Christmas? That backing turns out to be somewhat less than wholehearted, because Merrill is now paying Temasek US$2.5 billion in restitution for the stock losing half of its value this year.

"Call me naive, but if these investors take an ownership stake by buying Merrill shares, why do they get compensated if the price falls?" Bill Blain, who produces a daily market report for bond broker KNG Securities LLP in London, wrote this week. "I thought providing equity capital to banks meant I shared in their upside and downside. Can I have the same, please?''

That "heads we win, tails we don't lose'' twist somewhat tarnishes the ringing endorsement from Manish Kejriwal, Temasek's senior managing director for investments. He said on Dec. 26 that the deal was "a vote of confidence for the management team and the underlying strengths of Merrill Lynch's franchise.''

Votes of confidence don't typically come with just-in-case side agreements. I'm starting to think that when I die, I'd like to come back as a sovereign wealth fund.
Full report here.

$ingapore's Temasek Confirms Merrill Lynch Stake
July 29: $ingapore's state-linked investment firm Temasek Holdings, the largest shareholder in troubled US investment bank Merrill Lynch, confirmed on Tuesday it was increasing its stake. In a brief statement, Temasek said it "confirms its commitment of USS3.4 billion in the public offering by Merrill Lynch, a portion of which is subject to regulatory approval."
Full report here.

Merrill Relief Another Illusion In Hall Of Mirrors?
July 30: U.S. bank stocks may be staging another suckers' rally. The launchpad for this week's recovery in financial sector shares was another huge $5.7 billion writedown from Merrill Lynch, which was swiftly followed by what is fast becoming Wall Street's motto in the year-long credit crisis: the worst is over. Not so fast, say skeptics, who argue that Merrill's announcement actually contains the seeds of another downturn in the credit markets.
Full report here.

Merrill Lynch Offloads $31bn Of Cheap CDOs
July 30: Battered US investment bank Merrill Lynch has sold off a US$30 billion ($31.3 billion) face-value tranche of toxic CDO mortgage assets to Texan group Lone Star Funds for $US6.7 billion, dumping them for the equivalent of 22c in the dollar, financing 75 per cent of the knockdown purchase price and taking a write-down of $US4.4 billion.
Full report here.