Archive for the ‘Credit Crisis’ Category
50 trillion dollars gone poof
According to an Asian Development Bank report, the total loss from this crisis will reach 50 trillion dollars, almost equal to the annual GDP of the world. With 50 trillion you can give everybody in earth $8000 or buy enough burgers to cover 10 times the distance of earth and sun, or give a BMW 3 series car to every household on earth. You could also buy enough rice or wheat or corn to feed for the lifetime of every human on earth (assuming an average consumption of 350kg/year).
http://www.bloomberg.com/apps/news?pid=20601087&sid=aZ1kcJ7y3LDM&refer=worldwide
The value of global financial assets including stocks, bonds and currencies probably fell by more than $50 trillion in 2008, equivalent to a year of world gross domestic product, according to an Asian Development Bank report.
Asia excluding Japan probably lost about $9.6 trillion, while the Latin American region saw the value of financial assets drop by about $2.1 trillion, said Claudio Loser, a former International Monetary Fund director and the author of the report that was commissioned by the ADB. The report didn’t give a breakdown of asset declines in other regions.
Here is the full study.
How FDIC seizes a bank?
When do we say the market bottomed?
Here is a list of 10 things marketwatch considers to be the signal of a bottom. It is an interesting reading, though I don’t accept all their conclusions.
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A significant (more than 10%) one- or two-day drop in the market.
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Timothy Geithner is replaced with Paul Volcker.
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The 100th day of a bankruptcy by General Motors Corp.
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Gold at $2,000 an ounce.
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The Dow Jones Industrial Average changes more than two names at the same time, and/or adds names to increase the overall number of stocks in the index.
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New York Stock Exchange daily volume drops to 1 billion shares for 30 sessions in a row. "Sometimes you just need everyone to give up to make a bottom," the analysts reasoned.
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One million jobs lost in a month.
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The market starts to rally on bad news.
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Stock market favorites see 15% to 20% declines. When standout companies — such as Wal-Mart Stores Inc.) — "get clobbered" you’ll know a bottom is near, they said.
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CNBC goes off the air.
These companies benefitted from AIG bailout
Wall Street Journal identifies the beneficiaries of the AIG bailout for the first time.
Tutorials on CDOs and Synthetic CDOs – what everyone of you must know
CDOs and Synthetic CDOs are the biggest culprits of the current crisis. But, how much of it do you know. Spend some time, understanding them through these tutorials.
Day 1:
Job losses getting severe
Today’s Wall Street Journal reports on the bad job data released by Bureau of Labor Statistics today. 
Executive Summary
The economy has shed 4.4 million jobs since the recession began in December 2007
Nonfarm payrolls, which are calculated by a survey of companies, fell 651,000
Unemployment rate rose from 7.6 to 8.1 percent
2.9 million people were unemployed more than six months
Average hourly earnings increased a modest $0.03, or 0.2%, to $18.47
Service-sector employment tumbled 375,000
Special Report – Recession impact on various sections of the society
Executive Summary
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82% are job loss are among men. Women are going to pass men in workforce for the first time
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West is hit the most compared to North east and MidWest
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Young, blacks and Hispanics are hit more in the recession
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Artists face a far worse time than other professions though their unemployment rate is not different from average population
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Uneducated lost more jobs than educated workforces, unlike the previous 2 recessions.
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With various government policies and market movement, misery could be spread to everyone, including rich
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Portland and St. Louis rank among the unhappiest cities in the US
More businesses are going bankrupt
Formula that killed finance
The House of Cards – CNBC
A good CNBC series on the mortgage crisis.
Funny video on Optimism
This video is awesome. How many times we take modern things for granted? The credit crisis is partly led by customers who felt entitled to various things – new homes, biggest Plastma TVs, shiny cars… all on credit.
Who is John Galt? – Atlas Shrugged’s relevance today
Economist reports that there is a big spike in the sales of Atlas Shrugged – the monumental philosophical tome of Ayn Rand – since the start of the credit crisis. They even plotted the book sales against the economic events, and seems every time the government brings some major policy attempting to “solve” the crisis, the sale of the book goes up. Nothing incites as much love and hate as this book. And the book’s tagline – Who is John Galt is forever etched in the popular culture.
I have read the book atleast 5 times and consider it to be one among the greatest literary works ever written and thought I will share some opinion on this. From where I grew up, Atlas shrugged is not a political manifesto, but a kind of rite of passage from teenager into an adult. Almost every major college in India has fan clubs for this book, and since the reading of it was so normal (you don’t need to be a libertarian or atheist or anarchist anything) and so I didn’t go through the stereotyping process that goes on in America.
Credit crisis visualized
Here is a good video for visualizing credit crisis:
Part 1
Part 2
Frequent errors in Japanese investment banks don’t inspire enough confidence
http://www.cnbc.com/id/29381730
UBS said its computer systems mistakenly placed a $31 billion order for convertible bonds (CB) of videogame maker Capcom… UBS Securities Japan said that it had intended to place a 30 million yen order to simultaneously buy and sell the bonds in a so-called cross-trade but that its computer system placed a 3 trillion yen ($31 billion) order instead.
Wow. They thought millions to be trillions and put $31b in line. If you thought this is a one-off error, you are wrong. It now seems pretty routine for the Japanese banks.
How to proceed with Citi nationalization
Till this point government stuck to preferred stocks instead of common stocks (that we trade in the market). Preferred stocks are not exactly ownership, because there are no voting rights, and this arrangement between government and the banks is deliberate. Preferreds are more closer to debt than to equity. With today’s announcement, that might change with the government trying to convert its preferred holdings into common stocks. When it holds a majority of common stocks, it would then be defacto nationalization.
http://www.federalreserve.gov/newsevents/press/bcreg/20090223a.htm
Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory. Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares.
Great stocks for this Recession/Depression
A recession or a depression is not uniformly bad to everyone. There a lot of companies that can benefit from the current market condition, if their business model is good and they have enough cash to not rely on the debt markets. There are certain industries that will be created or be greatly benefitted as consumers shift their choices and lifestyles. In great depression, for example, the nascent movie industry greatly benefitted as more unemployed folks paid a nickel to watch a movie and spend 3 hours of their time. Then there are strong companies in weak markets where the recession helps in killing the weaker competitors and giving the strong ones a greater share of the market pie. They can also afford to give their employees lesser salary and bargain hard with their suppliers. Then there are companies that offer an inferior good (in an economic sense) that can be substituted for a superior good. Those who would normally buy at Nordstrom or Macy’s might move to Wal-Mart or Amazon.com, for example.
Excellent visual about how the crisis happened
Taking a look at investing in the airlines
If you have taken a flight these days, you will not be surprised with the amount of fees they add to your ticket. Most airlines even charge for the first bag you check-in. Here is the list of all charges in various airlines. Now, the positive is that many airlines are returning to profitability. Today’s WSJ writes:
But those who check multiple bags, ski equipment or oversized or overweight luggage are paying much, much more — allowing airlines to make a tidy profit. In those instances, baggage fees may yield more profit for the airline than what the carrier is making on the basic passenger ticket.
… Customers were paying the fee at other airlines without a backlash. Delta said it wasn’t getting any benefit from not charging the fee. So why not charge it?
Solution to Banking Crisis – Make small banks grow big
With money flocking to Treasuries and public mistrust on tainted institutions, why not create a fresh bank from the scratch, booted with government money? It will not carry too much of baggage and can be innovative with its management and hierarchies, and can do the basic job the banks must do – pool risk by transferring money from retail investors to capital spending in corporation. Today’s WSJ has an article on this.
http://online.wsj.com/article/SB122757211390954799.html
Now, I have another proposal. Identify the small strong banks and give them the money. Surely, there are enough banks that have played within their means with shrewd management. Now, pay enough attention to them and see if you can help few of these smaller banks to grow big. Too much of attention is paid to the failing banks that we might need to switch gear.
Are we done with the down fall yet?
We have been seeing housing and stock markets falling the last few months. So, are we there yet? Is the crisis over?
I don’t think so.
Housing
Here is Shiller’s home price snapshot between 1890-2006. We have fallen a bit since 2006, but we have not fallen anywhere closer to historical levels. Look at how home price zoomed in the last 20 years, and we have a long way to fall to that point.
Stocks
Here is the historic stock price to earnings ratio measure as an average of 10 year corporate profits. This is the classic measurement that says how much value for money you get from your stock investment. This snapshot was taken last year, and current P/E as measured by this chart is around 18, whereas during historical bear markets, P/E fell below 10. So, we are not even down the half way point.
Image from Newyork Times
Deloitte’ world economic outlook – summary
Here is the 4th quarter world report from Deloitte. Lots of good stuff on various things that affects global markets (credit crunch, oil prices, currency pegs) with their historical comparisons.
How do Banks create money in Fractional Reserve Banking?
I saw a few videos and articles about how banks create money in fractional reserve and disturbed by the whole tone. They showed this as though something illegal or counterintuitive is happening. But, this is not that controversial and the facts were not spelled out properly. How do banks create money actually? We will see some of Economics basics about these.
Pitfalls of Inverse ETFs
Suppose you believe that the market is going to go down, what would you do? Normal answer is sell what you have and get out. However, what if you have nothing to sell? Till a couple of years ago, the answer would have been "Stay on the sidelines" for simple investors. The sophisticated investors always had plenty of avenues – Shorting the stock, buying puts, selling naked calls, etc. However, the gap was narrowed with the arrival of Inverse ETFs that allows even novice investors to short the market in a less risky way (you cannot lose more than what you put in the ETF, while in shorts your loss is theoretically unlimited and this can be psychologically unsettling for some). However, the power and pitfalls of these instruments are poorly understood by many, particularly by the long term investors. The power is obvious – you can go 1/X or 2/X of the market pretty easily leaving all the pesky details of achieving them to the ETF managers. Here are the pitfalls.
Lending started to get back to normal? What investment choices do you make at this critical intersection?
The last couple of weeks we are seeing a thawing of global credit markets. The credit crisis caused the lenders to be extremely cautious and tighten standards in September. Loans to individuals and corporations with poor credit reduced substantially and banks started hoarding cash. The interest rate spreads between less risky and more risky loans widened substantially. However, recently things are seemingly coming back to normal and most people in the market believe that credit is getting available once again. CalculatedRisk blog writes about some of the progress made in the credit markets recently. Stock markets saw the progress and is having a rally the past 7 days. So, is it time to get back into the markets and start investing again? Should you consider buying more of Financial sector ETFs like XLF and UYG? Well, not so fast.
Credit Default Swaps – Some Transparency Coming?
The voodoo world of Credit Default Swaps (CDS) is slowly getting some transparency with a Trade organization – DTCC agreeing to publish volume data starting from today.
So what is a CDS, how it works and what is its importance? Don’t worry we will take you through the process and help you understand today’s developments.
Let’s start with why it is important to understand. The market size of CDS is of the order of $45 trillion (equals the wealth of almost 900 Bill Gates or equivalent to 80% of World GDP). If that is not enough, this market is extremely entwined with world financial order with some of the major insurers (like AIG) and Investment Banks (like Goldman Sachs) playing big in it. Unlike the traditional financial markets (stocks, bonds and commodities) this market is highly opaque and hardly regulated. And the survival of world financial system could be threatened if this market goes crazy. A lot of institutions like Lehman Brothers and AIG have already collapsed due to their big exposure in CDS. Let’s analyze what is a CDS, why the problem is this big and what are the recent steps taken to partly increase the transparency.
