Credit Crunch event of occurance

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Worth of US Companies after the credit crunch fall ..

* A I G - Then: $178.8 billion... Now: $5.46 billion. Down 96.95%.

* Bank of America - Then: $236.5 billion... Now: $123.4 billion. Down:47.82%.

* Citigroup - Then: $236.7 billion... Now: $76.34 billion. Down 67.75%.

* Merrill Lynch - Then: $63.9 billion... Now: $30.2 billion. Down 52.74%.

* Fannie Mae - Then: $64.8 billion... Now: $0.45 billion. Down 99.3%

* Morgan Stanley - Then: $73.1 billion... Now: $41.1billion. Down 43.78%

* Wachovia - Then: $98.3 billion... Now: $19.44 billion. Down 80.22%

* JP Morgan Chase - Then: $161 billion... Now: $130.2 billion. Down 19.13%

* Capital One Financial - Then: $29.9 billion... Now: $16.9 billion. Down 43.48%

* Washington Mutual - Then: $31.1 billion... Now: $3.64 billion. Down 88.3%

* Lehman Bros. - Then: $34.4 billion... Now: $0.80 billion. Down 97.6%

* Goldman Sachs - Then: 97.7 billion... Now: $40.6 billion. Down 58.7%

* Wells Fargo - Then: $124.1 billion... Now: $111.25 billion. Down 10.35%

* National City - Then: $16.4 billion... Now: $2.8 billion. Down 83%

* Fifth Third Bancorp - Then: $18.8 billion... Now: $7.9 billion. Down 57.6%

* American Express - Then: $74.8 billion... Now: $37.5billion. Down 43.78%

* Wachovia - Then: $98.3 billion... Now: $19.44 billion. Down 80.22%

* Capital One Financial - Then: $29.9 billion... Now: $16.9 billion. Down 43.48%

* Freddie Mac - Then: $41.5 billion... Now: $0.16 billion. Down 58.7%

* Suntrust Banks - Then: $27 billion... Now: $16.07 billion. Down 58.7%

* BB&T - Then: $23.2 billion... Now: $18.4 billion. Down 20.69%

* Marshall & Ilsley - Then: $11.6 billion... Now: $4.48 billion. Down 61.3%

* Keycorp - Then: $13.2 billion... Now: $5.68 billion. Down 56.97%

* Legg Mason - Then: $11.4 billion...Now: $4.96 billion. Down 56.49%

* Comerica - Then: $8.3 billion...Now: $4.74 billion. Down 42.89%

* Countrywide Financial - Then: $11.1 billion...Now: $0.00 billion. Down 100%

* Bear Stearns - Then: $14.8 billion...Now: $ 0.00 billion. Down 100%.

Together these 25 companies have lost investors a total of $992,690,000,000 over the last 12 months or nearly USD1 trillion !

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Securitization of Mortgages

Securitization is a mystery to many smart, reasonably well informed people. So here’s a simplified explanation. Let’s start with a 10-year mortgage. (It’s easier to see the chart with a 10-year mortgage than a 30-year mortgage, but it works the same way with any maturity.)

The mortgage consists of 12 payments a year, for 10 years. Let’s group the payments together by year, so each box on the following chart constitutes 12 monthly payments.





















Now let’s throw four such mortgages together. They look like this:





















Now let’s pool those into one. Think of it this way. Each payment is represented by a coupon, like an IOU. The lender has 120 coupons for each mortgage. He throws all the coupons for four mortgages into one box. The he starts sorting the coupons according to the year that the payment will be made.

He takes all of the coupons for payments in the first year, he staples them together, and calls them “Tranche A.” Then he takes all the coupons for payments in the second year, staples them together, and calls them “Tranche B.” In the chart below, each tranche has its own color.

When we started this explanation, before securitization, we thought the natural grouping of coupons was to put all the coupons from one borrower together. However, after securitization, all the coupons for one year are put together. The buyer of this tranche gets coupons from different home-owners, but all the coupons are to be paid in the same year.

This is a highly simplified example, because we haven’t talked about who gets what if the mortgage is paid off early, or what happens if one borrower does not pay. Add these rules, and you have a mortgage-backed security, consisting of 10 tranches. Each tranche can be sold individually.

Why do this? Dr. Frankenstein applies himself to finance? There’s a good reason. Few investors want to buy coupons for the entire life of the mortgage (10 years in this example, but 30 years in most cases).* However, there are folks who want the first year payments (money market funds). There are others who will be very interested in second and third year payments, such as property and casualty mutual funds. Other insurance companies might want fourth and fifth year payments, while university endowments, pension funds, and bond mutual funds might want the longer maturities. Investors are more interested if the specific tranche is tailored to their needs.

When the experts on TV talk about “slicing and dicing” mortgages, this is what they mean.

If you wants to know why few investors want to hold the entire 10 years of coupons, or 30 years of coupons.

Well, some folks want a shorter-term investment. That’s easy to understand; they don’t want to tie their money up for too long. Your car insurance company collects your premiums when you mail them a check, but it will be a while before they have to make payments on collisions. In the meantime, they need a short-term investment, but they can’t tie the money up for 10 years.

What about the folks who do want to tie up their money for a long time, like a pension fund or life insurance company? They don’t want to receive money back too early. They would rather keep it working, earning interest. If they get money back, they’ll only have to re-invest it. When they first invested their money, they would not be sure how much they would get back, because future interest rates on the re-invested money are unknown.

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Warren Buffett's Investing Philosophy

Market Bottom

(This article is extracted from MarketWatch' Mark Hulbert)

Investors who were shocked by the market's dramatic fall on Monday received some equally dramatic reassurance when the market made back much of this loss on Tuesday.

In fact, Mark Hulbert says that Tuesday was the first "90% up day" since the mid-July low. According to Hulbert, a "90% up day" occurs when the volume of shares rising in price on the NYSE comprises more than 90% of the volume of both rising and declining shares.

Market technicians believe such days can indicate a market bottom. But a bottom typically isn't signaled until a second "90% up day" occurs within a short period following the first one.

So investors awaiting a significant bottom could benefit by keeping a watchful eye on the market's trading volume in the days to come.

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Soros's plan to recapitalise the banking system as rescue plan

October 1 2008 02:05 , Financial Times.

The emergency legislation currently before Congress was ill-conceived – or more accurately, not conceived at all. As Congress tried to improve what Treasury originally requested, an amalgam plan has emerged that consists of Treasury’s original Troubled Asset Relief Programme (Tarp) and a quite different capital infusion programme in which the government invests and stabilises weakened banks and profits from the economy’s eventual improvement. The capital infusion approach will cost tax payers less in future years, and may even make money for them.

Two weeks ago the Treasury did not have a plan ready – that is why it had to ask for total discretion in spending the money. But the general idea was to bring relief to the banking system by relieving banks of their toxic securities and parking them in a government-owned fund so that they would not be dumped on the market at distressed prices. With the value of their investments stabilised, banks would then be able to raise equity capital.

The idea was fraught with difficulties. The toxic securities in question are not homogenous and in any auction process the sellers are liable to dump the dregs on to the government fund. Moreover, the scheme addresses only one half of the underlying problem – the lack of credit availability. It does very little to enable house owners to meet their mortgage obligations and it does not address the foreclosure problem. With house prices not yet at the bottom, if the government bids up the price of mortgage backed securities, the taxpayers are liable to loose; but if the government does not pay up, the banking system does not experience much relief and cannot attract equity capital from the private sector.

A scheme so heavily favouring Wall Street over Main Street was politically unacceptable. It was tweaked by the Democrats, who hold the upper hand, so that it penalises the financial institutions that seek to take advantage of it. The Republicans did not want to be left behind and imposed a requirement that the tendered securities should be insured against loss at the expense of the tendering institution. The rescue package as it is now constituted is an amalgam of multiple approaches. There is now a real danger that the asset purchase programme will not be fully utilised because of the onerous conditions attached to it.

Different focus - ‘Tarp’s adverse consequences could be mitigated by using taxpayers’ funds more effectively. If Tarp invested in preference shares with warrants attached, private investors, including me, would jump at the opportunity’

‘Tarp’s adverse consequences could be mitigated by using taxpayers’ funds more effectively. If Tarp invested in preference shares with warrants attached, private investors, including me, would jump at the opportunity’.

Nevertheless, a rescue package was desperately needed and, in spite of its shortcomings, it would change the course of events. As late as last Monday, September 22, Treasury secretary Hank Paulson hoped to avoid using taxpayers’ money; that is why he allowed Lehman Brothers to fail. Tarp establishes the principle that public funds are needed and if the present programme does not work, other programmes will be instituted. We will have crossed the Rubicon.

Since Tarp was ill-conceived, it is liable to arouse a negative response from America’s creditors. They would see it as an attempt to inflate away the debt. The dollar is liable to come under renewed pressure and the government will have to pay more for its debt, especially at the long end. These adverse consequences could be mitigated by using taxpayers’ funds more effectively.

Instead of just purchasing troubled assets the bulk of the funds ought to be used to recapitalise the banking system. Funds injected at the equity level are more high-powered than funds used at the balance sheet level by a minimal factor of twelve - effectively giving the government $8,400bn to re-ignite the flow of credit. In practice, the effect would be even greater because the injection of government funds would also attract private capital. The result would be more economic recovery and the chance for taxpayers to profit from the recovery.

This is how it would work. The Treasury secretary would rely on bank examiners rather than delegate implementation of Tarp to Wall Street firms. The bank examiners would establish how much additional equity capital each bank needs in order to be properly capitalised according to existing capital requirements. If managements could not raise equity from the private sector they could turn to Tarp.

Tarp would invest in preference shares with warrants attached. The preference shares would carry a low coupon (say 5 per cent) so that banks would find it profitable to continue lending, but shareholders would pay a heavy price because they would be diluted by the warrants; they would be given the right, however, to subscribe on Tarp’s terms. The rights would be tradeable and the secretary of the Treasury would be instructed to set the terms so that the rights would have a positive value.

Private investors, including me, are likely to jump at the opportunity. The recapitalised banks would be allowed to increase their leverage, so they would resume lending. Limits on bank leverage could be imposed later, after the economy has recovered. If the funds were used in this way, the recapitalisation of the banking system could be achieved with less than $500bn of public funds.

A revised emergency legislation could also provide more help to homeowners. It could require the Treasury to provide cheap financing for mortgage securities whose terms have been renegotiated, based on the Treasury’s cost of borrowing. Mortgage service companies could be prohibited from charging fees on foreclosures, but they could expect the owners of the securities to provide incentives for renegotiation as Fannie Mae and Freddie Mac are already doing.

Banks deemed to be insolvent would not be eligible for recapitalization by the capital infusion programme, but would be taken over by the Federal Deposit Insurance Corporation. The FDIC would be recapitalised by $200bn as a temporary measure. FDIC, in turn could remove the $100,000 limit on insured deposits. A revision of the emergency legislation along these lines would be more equitable, have a better chance of success, and cost taxpayers less in the long run.

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Volatility Spikes of market fear

September 29, 2008, the House of Representatives rejection for the bailout bill have sent Volatility index record intra-day high of 48.40, it closes at price of 46.72.

The VIX (^VIX) hit a high of 48.40, a true fear in the markets and ridiculous implied volatility in option contracts. 777.68 down on the DJIA (^DJI) is a record, officially worse than ‘87 Black Monday.


Comparing this with previous VIX , we are still not near the top range yet, but we can't be sure if this will be so until the House vote for the second time the bailout package on Wednesday, October 1, 2008.






Black Monday 1987 , Volatility recorded over 170 that day.



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Currency Swaps to address liquidity crunch

(This article was from Mike Hammill in the Atlanta Fed’s research department, we have no affiliation with him, we only find this article interesting to repeat it here for reader to consume.)

This morning September 18, 2008, the Federal Open Market Committee (FOMC) authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). According to the Fed’s press release, the changes allow for “increases in the existing swap lines with the ECB and the Swiss National Bank” and for “new swap facilities…with the Bank of Japan, the Bank of England, and the Bank of Canada.”

“These measures are designed to improve the liquidity conditions in global financial markets,” the release continued.

What did the Fed do and how will this action address some of the strain in liquidity conditions that recently have emerged?

A good place to start is by looking at what, exactly, a currency swap line is. A currency swap is a transaction where two parties exchange an agreed amount of two currencies while at the same time agreeing to unwind the currency exchange at a future date.

Consider this example. Today the Fed initiated a $40 billion swap line with the Bank of England (BOE), meaning that the BOE will receive $40 billion U.S. dollars and the Fed will receive an implied £22 billion (using yesterday’s USD/GBP exchange rate of 1.8173).

Currency Swap:






An underlying aspect of a currency swap is that banks (and businesses) around the world have assets and liabilities not only in their home currency, but also in dollars. Thus, banks in England need funding in U.S. dollars as well as in pounds.

However, banks recently have been reluctant to lend to one another. Some observers believe this reluctance relates to uncertainty about the assets that other banks have on their balance sheets or because a bank might be uncertain about its own short-term cash needs. Whatever the cause, this reluctance in the interbank market has pushed up the premium for short-term U.S. dollar funding and has been evident in a sharp escalation in LIBOR rates.

The currency swap lines were designed to inject liquidity, which can help bring rates down. To take the British pound swap line example a step further, the BOE this morning planned to auction off $40 billion in overnight funds (cash banks can use on a very short-term basis) to private banks in England.

In effect, this morning’s BOE dollar auction will increase the supply of U.S. dollars in England, which would work to put downward pressure on rates banks charge each other.

Consistent with this move, the overnight LIBOR rate fell from about 5.03 percent yesterday to 3.84 percent today.

The bottom line is that the Fed, by exchanging dollars for foreign currency, has helped to provide liquidity to banks around the world. This effort can help to bring interbank rates back down at a time when restrictively high rates can choke off access to financing that banks and other businesses need to operate.

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Money Market Funds vs Saving Account

No Need for Money Market Funds

Debra Borchardt explains why a savings account at a bank is better than a money market mutual fund. Visit this site for more rates details http://www.bankingmyway.com/

Crisis control when bank fails