Bank Run!

Okay, not quite a run on a bank. This is a state run investment account which is contemplating paying 90 cents on a dollar, on a short term investment fund backed by crappy subprime mortgages.

This is some serious shit, boys.

http://www.bloomberg.com/apps/news?pid=20601009&sid=acQKLEpS9YEg&refer=bond

Florida Says Unfreezing Fund Would Spark `Fire Sale' (Update1)

By David Evans

Dec. 3 (Bloomberg) -- Florida schools and towns with money frozen in a state-run investment account are unlikely to get their cash back tomorrow, when officials meet to discuss a crisis prompted by withdrawals that drained almost half of the fund's $27 billion in assets, a policy officer said.

``If we reopen the window without limitations on Tuesday, and we see behavior like we've seen up to now, there's simply no way to meet that demand without having a fire sale on assets,'' said James Francis, senior policy officer for the State Board of Administration, manager of the Local Government Investment Pool.

Officials raised the possibility of paying less than 100 cents on the dollar to governments seeking cash in a conference call with participants Nov. 30, a day after freezing withdrawals. The board also hired BlackRock Inc., the largest U.S. publicly traded money manager, as an adviser.

Florida counties and schools pulled out $13 billion in assets last month after learning the pool, described by state officials as a money-market fund, held $1.5 billion of downgraded and defaulted debt tainted by the subprime mortgage market collapse. The crisis shows the far-ranging effects of the housing slump, as complex investments once sold as high-yielding havens are now backed by collateral investors don't want.

The Florida fund's daily yield plunged to 2.77 on the day withdrawals were banned from 6.25 percent on Nov. 16.

Money Back

A newly formed advisory panel of school and local governments still stuck in the Florida pool told officials on the Nov. 30 call they expected to get all of their money back. The panel rejected the board's plan to survey participants to see if they would accept as little as 90 cents on the dollar as the price for getting access to their money this month.

The two-and-a-half hour call ended with a decision to poll pool investors on how much cash they absolutely need to withdraw over the next 90 days, as well as how much they plan to deposit. Governments are accustomed to drawing on the fund for routine expenditures.

``The very fact that you're out here talking to us about taking less than 100 percent is in my mind unacceptable,'' said MaryEllen Elia, superintendent of Hillsborough County Public Schools, which has $573 million tied up in the pool, more than any other school district. ``You need to figure out how to make the taxpayers in Florida whole.''

Meeting Tomorrow

The State Board of Administration's three trustees, Republican Governor Charlie Crist, state Chief Financial Officer Alex Sink and Attorney General Bill McCollum, will meet tomorrow to discuss possible solutions to the crisis. The board also manages $37 billion of additional short-term investments and Florida's $138 billion pension fund.

``We do need our political leaders to muster up some intestinal fortitude,'' said Dave Gaylor, superintendent of Charlotte County Public Schools and a member of the new 16- member advisory panel of participants, on the Nov. 30 call. ``You have leadership from the soldiers, that's who we are. It's not going to help if the generals aren't providing us with some leadership.''

About 94 percent of the fund's remaining $14 billion is invested in corporate floating-rate notes, maturing in an average of nine months, board employees told the panel.

Kevin SigRist, deputy executive director of the State Board of Administration, said the board can't promise to make pool participants whole, because of the pool's ``problematic'' securities. ``We have securities in the pool that clearly have credit risk associated with them,'' he said.

``We don't ever want to be in a situation here at the SBA where we are somehow issuing guarantees or suggestions that everyone will get dollar for dollar,'' said SigRist, who said executive director Coleman Stipanovich was tied up at the capitol and would join the call later.

Pension-Fund Proposal

The same day they voted to freeze withdrawals, the trustees rejected a plan by Stipanovich to solve the problem internally, using pension-fund money.

``We're fiduciaries, we're investment professionals, we know what we're doing,'' Stipanovich said Nov. 29. ``The commercial paper defaulted, but the collateral is different,'' he said, describing it as AAA.

Instead, the trustees decided seek advice from an independent financial adviser, hiring New York-based BlackRock on Nov. 30.

The state board said it chose BlackRock over firms including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Barclays Bank PLC and will pay the firm $125,000 in fees. Brian Beades, a spokesman for BlackRock, declined to comment.

Short-Term Funds

The fund had invested $2 billion in structured investment vehicles, or SIVs, and other debt tainted by the subprime mortgage collapse, state records show. Connecticut, Maine, Montana and King County, Washington, are among other governments holding such investments as part of $200 billion assets in more than 100 similar pools across the U.S.

The Florida pool was the largest of its kind in the U.S. at $27 billion before the withdrawals.

Its mission statement, as described in the state board's 2005-2006 annual report, was ``to help local governments maximize earnings on invested surplus funds, thereby reducing the need to impose additional taxes'' by investing in ``short- term, high-quality money-market instruments.''

It promoted itself as a place for governments to park cash, ``where liquidity and preservation of capital are the primary importance.''

To contact the reporter on this story: David Evans in Los Angeles at davidevans@bloomberg.net .

 

The smart boys have invested in so much crap the whole thing's gonna topple. But I'm sure the hedge fund managers and their pals will be set with their billions, thank God.

 

You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?...Now wait...now listen...now listen to me.
I beg of you not to do this thing. If Potter gets hold of this Building and Loan there'll never be another decent house built in this town. He's already got charge of the bank. He's got the bus line. He's got the department stores. And now he's after us. Why? Well, it's very simple. Because we're cutting in on his business, that's why. And because he wants to keep you living in his slums and paying the kind of rent he decides. Joe, you lived in one of his houses, didn't you? Well, have you forgotten? Have you forgotten what he charged you for that broken-down shack? Here, Ed. You know, you remember last year when things weren't going so well, and you couldn't make your payments. You didn't lose your house, did you? Do you think Potter would have let you keep it? Can't you understand what's happening here? Don't you see what's happening? Potter isn't selling. Potter's buying! And why? Because we're panicky and he's not. That's why. He's picking up some bargains. Now, we can get through this thing all right. We've got to stick together, though. We've got to have faith in each other.

 

I am in awe, slap.

 

Where's the $13 billion, you drunken old fool?

 

This is a pretty good primer on where we stand


December 3, 2007
Op-Ed Columnist
Innovating Our Way to Financial Crisis
By PAUL KRUGMAN

The financial crisis that began late last summer, then took a brief vacation in September and October, is back with a vengeance.

How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.

This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created.

Before I get to that, however, let’s talk about what’s happening right now.

Credit — lending between market players — is to the financial markets what motor oil is to car engines. The ability to raise cash on short notice, which is what people mean when they talk about “liquidity,” is an essential lubricant for the markets, and for the economy as a whole.

But liquidity has been drying up. Some credit markets have effectively closed up shop. Interest rates in other markets — like the London market, in which banks lend to each other — have risen even as interest rates on U.S. government debt, which is still considered safe, have plunged.

“What we are witnessing,” says Bill Gross of the bond manager Pimco, “is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.”

The freezing up of the financial markets will, if it goes on much longer, lead to a severe reduction in overall lending, causing business investment to go the way of home construction — and that will mean a recession, possibly a nasty one.

Behind the disappearance of liquidity lies a collapse of trust: market players don’t want to lend to each other, because they’re not sure they’ll be repaid.

In a direct sense, this collapse of trust has been caused by the bursting of the housing bubble. The run-up of home prices made even less sense than the dot-com bubble — I mean, there wasn’t even a glamorous new technology to justify claims that old rules no longer applied — but somehow financial markets accepted crazy home prices as the new normal. And when the bubble burst, a lot of investments that were labeled AAA turned out to be junk.

Thus, “super-senior” claims against subprime mortgages — that is, investments that have first dibs on whatever mortgage payments borrowers make, and were therefore supposed to pay off in full even if a sizable fraction of these borrowers defaulted on their debts — have lost a third of their market value since July.

But what has really undermined trust is the fact that nobody knows where the financial toxic waste is buried. Citigroup wasn’t supposed to have tens of billions of dollars in subprime exposure; it did. Florida’s Local Government Investment Pool, which acts as a bank for the state’s school districts, was supposed to be risk-free; it wasn’t (and now schools don’t have the money to pay teachers).

How did things get so opaque? The answer is “financial innovation” — two words that should, from now on, strike fear into investors’ hearts.

O.K., to be fair, some kinds of financial innovation are good. I don’t want to go back to the days when checking accounts didn’t pay interest and you couldn’t withdraw cash on weekends.

But the innovations of recent years — the alphabet soup of C.D.O.’s and S.I.V.’s, R.M.B.S. and A.B.C.P. — were sold on false pretenses. They were promoted as ways to spread risk, making investment safer. What they did instead — aside from making their creators a lot of money, which they didn’t have to repay when it all went bust — was to spread confusion, luring investors into taking on more risk than they realized.

Why was this allowed to happen? At a deep level, I believe that the problem was ideological: policy makers, committed to the view that the market is always right, simply ignored the warning signs. We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich, who was a member of the Federal Reserve Board, about a potential subprime crisis.

And free-market orthodoxy dies hard. Just a few weeks ago Henry Paulson, the Treasury secretary, admitted to Fortune magazine that financial innovation got ahead of regulation — but added, “I don’t think we’d want it the other way around.” Is that your final answer, Mr. Secretary?

Now, Mr. Paulson’s new proposal to help borrowers renegotiate their mortgage payments and avoid foreclosure sounds in principle like a good idea (although we have yet to hear any details). Realistically, however, it won’t make more than a small dent in the subprime problem.

The bottom line is that policy makers left the financial industry free to innovate — and what it did was to innovate itself, and the rest of us, into a big, nasty mess.

 

Am waiting for Ms. Slappy to come home so we can walk down the street singing Buffalo Gals...

 

I think we can safely call it a crisis when it reaches people above the Arctic Circle.
http://www.aftenposten.no/english/business/article2129238.ece

 

She's in the hydrangea bush.
And she's, well, nekkid.

 

"He's making violent love to me, mother!"

 

That second article made me glad to realize I wasn't the only one who heard the "We're going to freeze the rates on ARMs for 5-7 years," and went, "Um, won't that just mean we have the same problem in 5-7 years?"

 

From a wide stance!!!