``We're only about a third of the way through the writedowns''

Yes folks, you thought $4 a gallon was bad, the subprimes were bad, just hold on to your hats. Bloomberg is reporting that Global writedowns could top $1.3 Trillion. From Wikipedia's definition of what a writedown is:

Many of the consequences of the subprime crisis at financial institutions are referred to as a "write-down", which is synonymous with a write-off[1].

While a write-off in banking refers to a bad loan that is declared uncollectable, removing it from its balance sheet, a write-down, according to Investopedia, means:[2]

Reducing the book value of an asset because it is overvalued compared to the market value.

So while a "write-off" removes the loan from the balance sheet, a "write-down" reduces the value of the loan in the balance sheet. Despite this difference, both terms indicate that the loaned money in question has no chance of being recovered.

Yep, this is contraction of the money supply that mirrors the expansion of the money supply that fractional reserve banking creates.

(under fair use)

June 18 (Bloomberg) -- John Paulson, founder of the hedge fund company Paulson & Co., said global writedowns and losses from the credit crisis may reach $1.3 trillion, exceeding the International Monetary Fund's $945 billion estimate.

``We're only about a third of the way through the writedowns,'' Paulson, 52, told the GAIM International hedge fund conference in Monaco today. ``There are a lot of problems out there and it will continue to be felt through the year. We don't see any signs of stabilizing.''

Paulson, whose New York-based company manages about $33 billion, made bets last year that subprime-mortgage debt would fall after he noticed ``bubble like'' prices. His Paulson Partners fund rose 18 percent a year since it started in 1994, and his main subprime-debt fund rose 591 percent last year. Banks and securities firm worldwide posted more than $395 billion in losses and writedowns since the subprime crisis started last year.

The U.S. is heading into a recession as falling home prices weigh on consumer spending, Paulson said. The second half of this year will be worse than the first as the economic slowdown spills into 2009. Signs of stress are ``accelerating'' in the housing market, and he's betting on falling securities prices, he said.

``I don't consider myself a bull or a bear,'' he told the audience at Monaco's Grimaldi Forum. ``I'm a realist.''

A Royal Bank of Scotland Group Plc strategist agrees that stock and credit markets still face the worst in a slump that started almost eight months ago.

`Most Bearish Period'

``Mid-July through to October is likely to be the most bearish period we will experience in the bear market that began in the fourth quarter of last year,'' Bob Janjuah, a credit strategist at the bank in London, wrote in a report dated June 11.

The MSCI World Index has lost 13 percent since reaching a record in October. The index is down 4.1 percent this month after the Federal Reserve and the European Central Bank policy makers indicated interest rates may need to increase as the threat of inflation intensifies.

The economic slowdown and inflation have put central bankers ``into a dangerous corner'' where the chance of a ``major policy error has just super-spiked,'' Janjuah wrote.

Ambac Financial Group Inc., the second-biggest bond insurer, is ``the most leveraged, troubled company out there,'' Paulson said. It's at risk of being downgraded to non-investment grade, he said. Ambac spokeswoman Vandana Sharma declined to comment.

Ambac shares have lost 92 percent of their value this year after losses on subprime mortgage securities caused the company to lose its AAA credit rating at Fitch Ratings. Ambac, which said today it will terminate its ratings contract with Fitch, fell 7 cents, or 3.3 percent, to $2.07, in New York Stock Exchange composite trading.

`Deteriorate Significantly'

The housing and credit-market slump pushed Ambac to three straight quarterly losses after more than a decade of profit. It has written down $5.2 billion since the collapse of the U.S. subprime mortgage market last year.

Paulson's outlook is consistent with the view of hedge funds meeting in Monaco this week. More than 80 percent of the 1,300 fund managers, investors and service providers gathered in Monaco for the annual conference said they expect the credit crisis will continue, according to a GAIM survey. About 23 percent said the situation ``will deteriorate significantly.''

Bill Browder, founder and head of Hermitage Capital Management, said securities firms have a ``vested interest'' in claiming an early end to the crunch. ``If we're in the seventh or eighth inning, this is a 100-inning game,'' he said.

`$10 Trillion Opportunity'

Paulson's speech was the biggest draw at the event, which comes as the hedge fund industry endures some of its worst performance in nearly two decades, rising just 0.13 percent through May, according to Chicago-based Hedge Fund Research Inc.

``John Paulson has of course been very successful by making the right trade last year,'' said Manuel Echeverria, chief investment officer of Optimal Investment Services SA, a Geneva based investor with about $10 billion under management. ``We'll have to see what he's going to do now that the trade has run out of juice.''

Paulson said he's preparing to buy distressed securities such as bank loans, call them a ``potentially $10 trillion opportunity.'' While it is still ``premature'' to invest in many of them, he sees ``opportunities this year'' to buy mortgage backed debt, he said.

He hired employees this year to research securities firms such as Citigroup Inc. for long-term investment positions. ``We're trying to see the right entrance point,'' he said. ``If you invest too early, you lose money.''

Getting from bad to worse

So my brother the CPA sends me more stuff, and it seems the mortgage world is about to go supernova. Subprimes went first, now it looks like the prime market is about to implode as well.

I'll never understand, if he sees the storm coming, what the hell he's doing in NYC.

(Under fair use)

NEW YORK (CNNMoney.com) -- When Lehman Brothers reported a stunning $2.8 billion loss Monday, it was just the latest sign that bad mortgage loans continue to be a problem for the financial markets and the economy.

But subprime mortgages could only be the beginning. Many economists and market experts are worried that other problems are lurking that could cause a new credit crisis for consumers and businesses.

Meredith Whitney, the banking analyst for Oppenheimer & Co., estimates that the credit problems will continue to dog financial markets into 2009. She thinks future losses will dwarf the roughly $25 billion set aside by Wall Street firms so far to cover them -- perhaps reaching $170 billion by next year.

Other experts agree that the worst is not yet over.

There are several types of loans raising concerns, ranging from prime mortgage loans to credit cards. Much like subprime mortgages, many of these loans were packaged into securities traded on Wall Street. And many of these loans are beginning to see rising defaults and delinquencies, just as subprime mortgages were a year ago.

These defaults are nowhere near subprime loan levels and few think they will ever get that bad. But if defaults keep rising, this can cause the same kind of problems in the markets for those securities, leading to widespread losses for investors.

"There are plenty of additional problems on bank balance sheets," said Kevin Giddis, head of fixed income sales, trading and research for investment bank Morgan Keegan. "The bigger problem is we don't know how far it goes. Those problems remain well hidden for a reason."

But if they do eventually surface, it would mean higher costs and tighter credit for consumers. And that in turn could lead to an even longer slump for the economy than currently forecast.
Prime loans "the next shoe" to drop

Giddis worries most about prime mortgage loans, those made to borrowers with good credit histories.

A survey from the Mortgage Bankers Association showed that at the end of the first quarter, nearly 2% of prime loans were either 90 days or more past due, or already in foreclosure. That's more than twice the rate from a year ago, an even bigger spike than the jump in subprime delinquencies during that period.

"We've pretty much gone to the wall on subprime," said Giddis. "The problem that is going to face financial institutions now is the good borrower. It's the other shoe to drop."

Jay Brinkman, the MBA's vice president for research and economics, said the problem for prime loans isn't as much bad loans being made but a weakening economy causing job losses for borrowers. Making matters worse, many homeowners find it tough to sell because of a record drop in home values.

This unprecedented drop in home values is therefore likely to lead to record prime loan foreclosures, losses that were never forecast when the mortgages were written and then sold to Wall Street.
Will wheels come off of auto loans?

Prime mortgages aren't the only part of the credit market showing early signs of rising problems. Auto loan defaults are also increasing steadily, according to figures from the American Bankers Association.

The delinquencies on the most prevalent type of car loan rose to 3.13% at the end of the fourth quarter of last year, according to the ABA, the highest rate since 1990. Delinquencies were up 22% from a year earlier.

In addition, high gas prices have led to a continued decline in the resale value of many light trucks, such as SUVs and pickups. That's lead to a loan-to-value ratio of 94% for all autos in the most recent reading for April, up from 88% as recently as 2005.

John Silvia, chief economist with Wachovia, said this raises worries about consumers dumping vehicles they can no longer afford to drive in a period of $4 gas.

"If someone has a durable good that is inefficient, they're going to be more willing to walk away from it," he said.
Equity lines, credit card woes also rising

Credit cards and home equity line delinquencies are rising even faster than those of auto loans, according to the ABA figures. Nearly 1% of home equity lines of credit were delinquent in the fourth quarter, according to its report, up 68% from a year earlier. Delinquencies reached their highest level since 1991.

In addition, 4.5% of the money owed on credit cards was delinquent in the period, up from 3.54% a year earlier. James Chessen, ABA's chief economist, expects that delinquency rates for credit cards and home equity loans will continue to rise throughout the year.

"No relief for consumers is in sight as food and gas prices remain stubbornly high and income growth is anemic," Chessen said.

And while credit card delinquency rates are not high by historic standards, the Federal Reserve's most recent loan officer survey shows tighter credit standards for both those loans and home equity. That's a sign that lenders and investors are trying to back away from those markets as well, said Scott Hoyt, senior director of consumer economics at Moody's Economy.com.

Add all that up and it's just more bad news for consumers, and the economy that depends on their spending.

"This obviously impacts their ability to spend, their confidence, their ability to service their debt and it's going to continue even as the economy recovers," said Hoyt.

-----

I still contend stocking a goodly amount of food and water is always a good idea. So take a lesson from the Mormons, these folks know how to do it.

Credit Default Swaps, DMZ's in Washington.

So my brother the accountant points me to this article in Time dated 17 May 2008

(Used under Fair Use)

As Bear Stearns careened toward its eventual fire sale to JPMorgan Chase last weekend, the cost of protecting its debt, through an instrument called a credit default swap, began to rise rapidly as investors feared that Bear would not be good for the money it promised on its bonds. Not familiar with credit default swaps? Well, we didn't know much about collateralized debt obligations (CDOs) either — until they began to undermine the economy. Credit default swaps, once an obscure financial instrument for banks and bondholders, could soon become the eye of the credit hurricane. Fun, huh?The CDS market exploded over the past decade to more than $45 trillion in mid-2007, according to the International Swaps and Derivatives Association. This is roughly twice the size of the U.S. stock market (which is valued at about $22 trillion and falling) and far exceeds the $7.1 trillion mortgage market and $4.4 trillion U.S. treasuries market, notes Harvey Miller, senior partner at Weil, Gotshal & Manges. "It could be another — I hate to use the expression — nail in the coffin," said Miller, when referring to how this troubled CDS market could impact the country's credit crisis.

Credit default swaps are insurance-like contracts that promise to cover losses on certain securities in the event of a default. They typically apply to municipal bonds, corporate debt and mortgage securities and are sold by banks, hedge funds and others. The buyer of the credit default insurance pays premiums over a period of time in return for peace of mind, knowing that losses will be covered if a default happens. It's supposed to work similarly to someone taking out home insurance to protect against losses from fire and theft.

Except that it doesn't. Banks and insurance companies are regulated; the credit swaps market is not. As a result, contracts can be traded — or swapped — from investor to investor without anyone overseeing the trades to ensure the buyer has the resources to cover the losses if the security defaults. The instruments can be bought and sold from both ends — the insured and the insurer.

All of this makes it tough for banks to value the insurance contracts and the securities on their books. And it comes at a time when banks are already reeling from write-downs on mortgage-related securities. "These are the same institutions that themselves have either directly or through subsidiaries invested in the subprime market," said Andrea Pincus, partner at Reed Smith LLP. "They're suffering losses all over the place," and now they face potentially more losses from the CDS market.

Indeed, commercial banks are among the most active in this market, with the top 25 banks holding more than $13 trillion in credit default swaps — where they acted as either the insured or insurer — at the end of the third quarter of 2007, according to the Comptroller of the Currency, a federal banking regulator. JP Morgan Chase, Citibank, Bank of America and Wachovia were ranked among the top four most active, it said.

Credit default swaps were seen as easy money for banks when they were first launched more than a decade ago. Reason? The economy was booming and corporate defaults were few back then, making the swaps a low-risk way to collect premiums and earn extra cash. The swaps focused primarily on municipal bonds and corporate debt in the 1990s, not on structured finance securities. Investors flocked to the swaps in the belief that big corporations would seldom go bust in such flourishing economic times.

The CDS market then expanded into structured finance, such as CDOs, that contained pools of mortgages. It also exploded into the secondary market, where speculative investors, hedge funds and others would buy and sell CDS instruments from the sidelines without having any direct relationship with the underlying investment. "They're betting on whether the investments will succeed or fail," said Pincus. "It's like betting on a sports event. The game is being played and you're not playing in the game, but people all over the country are betting on the outcome."

But as the economy soured and the subprime credit crunch began expanding into other credit areas over the past year, CDS investors became jittery. They wondered if the parties holding the CDS insurance after multiple trades would have the financial wherewithal to pay up in the event of mass defaults. "In the past six to eight months, there's been a deterioration in market liquidity and the ability to get willing buyers for structured finance securities," causing the values of the securities to fall, said Glenn Arden, a partner at Jones Day who heads up the firm's worldwide securitization practice and New York derivative.

The situation is already taking a toll on insurers, who have been forced to write down the value of their CDS portfolios. American International Group, the world's largest insurer, recently reported the biggest loss in the company's history largely due to an $11 billion writedown on its CDS holdings. Even Swiss Reinsurance Co., the industry's largest reinsurer, took CDS writedowns in the fourth quarter and warned of more to come in the first quarter of 2008.

Monoline bond insurance companies, such as MBIA and Ambac Financial Group Inc., have been hit the hardest as they scramble to raise capital to cover possible defaults and to stave off a downgrade from the ratings agencies. It was this group's foray out of its traditional municipal bonds and into mortgage-backed securities that caused the turmoil. A rating downgrade of the monoline companies could be devastating for banks and others who bought insurance protection from them to cover their corporate bond exposure.

The situation is exacerbated by the heavy trading volume of the instruments, the secrecy surrounding the trades, and — most importantly — the lack of regulation in this insurance contract business. "An original CDS can go through 15 or 20 trades," said Miller. "So when a default occurs, the so-called insured party or hedged party doesn't know who's responsible for making up the default and if that end player has the resources to cure the default."

-----

I also ran across this: Seems the DC police have decided a little Warsaw Ghetto treatment is what we need. I'm so glad the DC police cheif said it was OK.
From the DCist.
(Under Fair Use)

June 4, 2008
Police to Seal Off D.C. Neighborhoods
Can you say Police State? The Examiner has the scoop on a controversial new program announced today that would create so-called "Neighborhood Safety Zones" which would serve to partially seal off certain parts of the city. D.C. Police would set-up checkpoints in targeted areas, demand to see ID and refuse admittance to people who don't live there, work there or have a “legitimate reason” to be there. Wow. Just, wow.

Some of the words used to describe such a plan by those quoted in the Examiner story include "breathtaking" and "cockamamie," but that hardly begins to scratch the surface. Interim Attorney General Peter Nickles actually said that measures of this sort have "been used in other cities.” Which cities are those, Mr. Nickles? Warsaw?

Today's proposal appears to be a desperate attempt by the city to tamp down recent violence that has ravaged the city, especially in Ward 5. The "Neighborhood Safety Zones" would last up to 10 days. It's a struggle to think of words to describe such a plan other than authoritarian or ghettoization.

The full description of this plan from the mayor's press release is below.

The Neighborhood Safety Zone initiative has been developed to help increase security for those who live in high-crime areas around the city and to help residents reclaim their communities. The program will authorize the Metropolitan Police Department to set up public safety checks to help safeguard community members and create safer neighborhoods in the District by increasing police presence aimed at deterring crime.

The safety zones will be established only upon request by a District Commander where there is evidence to support the existence of neighborhood violent crime, such as intelligence, violent crime data, police reports and feedback and concerns from the affected community.

Potential Neighborhood Safety Zones must be approved by the Chief of Police, and will be in effect for a maximum of 10 days. Public safety checks will be established along the main thoroughfares of the established neighborhoods. Anyone driving into a designated area may be asked to show valid identification with a home address in that neighborhood, or to provide an explanation for entering the NSZ, such as attending church, a doctor’s appointment or visiting friends or relatives. Pedestrians will not be subject to the public safety checks.

“The Neighborhood Safety Zones is just another tool MPD will employ to stop crime before it happens. The Neighborhood Safety Zone initiative will help residents terrorized by violent crime to take back their neighborhoods,” said Chief Lanier.

Initiatives such as the Neighborhood Safety Zones have been accepted by federal courts as a legitimate law enforcement practice in keeping with the Constitution’s Fourth Amendment. The constitutionality of the NSZ initiative has been reviewed by the D.C. Office of the Attorney General.

The NSZ will be launched next week in the Trinidad area.