there isn't any way to liquidate this stuff (by mannfm11)

SuperCycleBear posted this on the previous page. It pretty much cuts to the chase. I'm going to write some of my own below. I posted this earlier today. Now the author has been identified, I post it again for the benefit of the board... SCB Two weeks away and little seems to have changed. Equities, commodities and credit are slightly better and bond yields are little changed, along with FX. The only change of note is short term interest rates as the money market crisis that I wrote about three weeks ago persists. Three month libor continues to rise. Yesterday it fixed 99 basis points over the repo in GBP, almost 75bp over in euro and today expectations are that 3 month dollars will fix at 5.69%, a level more synonymous with Fed Funds at 5 1/2 percent. So far other markets have treated these developments with a remarkable degree of insouciance. Indeed they seemed to have completely ignored the deteriorating situation. I can't help believing that this casual approach is a mistake and largely due to the widespread ignorance of many financial market participants about the functioning of money markets, yet ultimately everything comes down to money and it's availability. And that is the point about what is going on now. There is a credit crunch going on. Believe it. It just has taken on a different guise to previous forms. It's not a run on banks but on non-banks, institutions that have become quasi-banking operations but lack the capital and depth to ride the storm. The sheer size of the positions of many of those entities (I can't bring myself to call them businesses) is staggering. Tiny XYZ bank suddenly has a $20bn dollar exposure along with numerous "conduit" vehicles and then there are the SIV lites and the various hedge fund CP based mutants. In short things are a mess and unless central banks start to properly recognise the dangers, the situation could reach critical. This may sound overly dramatic but the risk of a significant failure is building and LTCM may come to be regarded as a walk in the park. The problem is of course is that central banks don't seem to recognise the dangers. Equities et al are not flashing red and the current situation is unprecedented in recent financial history. Just look at the chart of 3 month libor versus base rates over the past twenty years. The spread has occasionally been as wide but this was back in the late eighties when rates were moving dramatically higher and interest rates moved in 1 percent steps. The reality is that central banks don't know how to do to deal with the current situation within the confines of their existing rule books. [[UK CREDIT CRUNCH.gif] Fixed rate term repo is an obvious solution, but that doesn't itself address the problem of financing all the rubbish out there. Ultimately that will mean a continued liquidity unwind which will inevitably act on risk asset valuations and economic activity. Rate cuts are inevitable against this background and the Fed should move by a minimum of 50 basis points on September 18th and another 50bp on October 31st. The danger is of that even such aggressive action may come to be seen as merely pushing on a string. More later. Good Luck, PPG Patrick Perret-Green Director European Derivatives & Bond Trading
RE: Post from previous page	mannfm11	NEW 9/5/2007 12:09:46 AM
Ithink some of you recognize this and others don't. By this, I mean thereasoning in this post. It is something the doomsayers have beentalking about for awhile, but the CNBCers seem to fail to report exceptmaybe in a one liner from time to time. The problem here isthe whole paper game is tied together in the hands of operations thatact like they are banks. They are leveraging capital rather thanlending it. Thus bonds and other capital instruments are now nothingmore than credit of some sort, maybe from a repo agreement where thedifferential in interest rates is utilized. The yen carry trade,contrary to much talk is going to go on until the Japanese raise theirrates or the entities carrying on the trade lose their net worth intheir speculative lending. This is all a credit game, but it appears tobe a capital game. The problem here is the same capital isleveraged over and over again, the dollars recycled, borrowed andreloaned. You can't borrow capital and reloan it like that, you justcan't unless you are an insurance company or a pension. I suspect thatthe collateral behind this entire mess is STOCKS. This is whereliquidity is easiest to find. It explains all this crap and how wildthe stock market can get out of the blue. I remember the LTCM marketbecause I traded it. I think it had some of the wildest 20 minutesswings in history, but I don't recall the sands of the market shiftinglike this market. I watched the bug roll on CNBC and when it wouldleave and come back, it had 20 points quite often, stopped and wentback 10 to 15 by the time it rolled again. I'm talking about maybe 10second intervals. This is a shaky animal out there and the bull are outof their minds playing in a game where the liquidity of the players cancollapse over night. This is our credit machine that has beenfeeding the worlds appetite for credit cards, capital andinfrastructure expansion in China and India and Eastern Europe, Housingbooms all over the world. It isn't our fathers credit machine, to coina Chevrolet phrase. This is something from outer space and it ishidden. We missed the last credit crunch, the Enron and WCOM debaclesbecause they were covered up by 9/11. In fact, I think it is a goodconspiracy to explain 9/11 by these 2 huge failures. Enron haspositions that made LTCM look like a couple of kids playing bank intheir back yard. How did they get all that unwound? How many of theseSIV and SIV lites are there? They sound kind of like the double booksthat ENE ran with the help of the banks involved, JPM, C and I believeBank of America. How much more of this double dealing is hidden in thedepths of places like the Caymans? This is debt and thereisn't a market for it. There isn't a market for it because the funds tocreate it in the first place were created out of thin air, but not outof the printing press or the banking business. They were created bypretending. Selling the same securities over and over again with apromise to buy them back, a short sale backed by the ability to mark tomarket. There is always a problem with this type of debt. Forone, the repayment with interest is impossible. We aren't talking aboutrent on capital. The money has to come from somewhere and my pea brainat this time can only guess how this stuff is really structured. But,if I owned $1 billion in stock, something tells me that not only couldI write all this credit against it, much larger than the margin onstock, but that maybe I could also do some delta neutral stuff, maybeby contract. The point is there isn't any way to liquidatethis stuff and it has to be liquid to some point to move. There wasanother post on here about the banks just holding what they have untilit gets right again. Well, it isn't getting right again and the banksare the only entities that can create the liquidity to hold the stuff.Look at the huge decline in money supply that could be tied merely tothe mortgage market shutting down? CFC has something like $80 billionby themselves. That is hard money. Plus the operations that have beenclearing their books of this warehouse debt are now in deep freeze. TheFed isn't going to solve this mess. I think what this guy is saying isthat LTCM is small potatos compared to this and that the centralbankers need to get busy pulling these failing entities out of the firelong enough to stop them from seizing up the system. The credit systemhas reached its peak performance and has thrown a rod. I seriouslydoubt once the top comes off this mess that it is going to be allowedto operate in this fashion again. The result will be that never againin our lives will we see credit availability as it has been the pastdecade.
RE: debt escalation withering	simeon	NEW 9/5/2007 2:25:43 AM
problemis that the debt based system MUST expand or die. It is now dying dueto its not being able to expand. That is not a joke of logic. Thesystem must increase indebtedness or else even a flat lining of debtwill cause the system to eat itself due to the interest repaymentproblem. That is, interest has to be paid but the only way it can bepaid is by borrowing it (idrectly or otherwise), which means annoverall increase in total indebtedness.
RE: debt escalation withering	mannfm11	NEW 9/5/2007 9:55:13 AM
It has always been a debt based system. Only the collateral and where it is kept has changed.