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By LIZ RAPPAPORT and JUSTIN LAHART March 15, 2008
The U.S. is at the receiving end of a massive margin call: Across the economy, wary lenders are demanding that borrowers put up more collateral or sell assets to reduce debts. Recent days' cascade of bad news, culminating in yesterday's bailout of Bear Stearns Cos., is accelerating the erosion of trust in the longevity of some brand-name U.S. financial institutions. The growing crisis of confidence now extends to the credit-worthiness of borrowers across the spectrum -- touching American homeowners, who are seeing the value of their bedrock asset decline, and raising questions about the capacity of the Federal Reserve and U.S. government to rapidly repair the problems.
Global investors are pulling money from the U.S., steepening the decline of the U.S. dollar and sending it below 100 yen for the first time in a dozen years. Against a trade-weighted basket of major currencies, the dollar has fallen 14.3% over the past year, according to the Federal Reserve. Yesterday it hit another record low against the euro, falling 2.1% this week to close at 1.567 dollars per euro.
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Standard & Poor's Ratings Services, a unit of McGraw-Hill Cos., predicted Thursday that large financial institutions still need to write down $135 billion in subprime-related securities, on top of $150 billion in previous write-downs.
i have seen estimates that the actual write downs will be as much 3/4 trillion before we have washed out all the dirt....
the avg of the predictions that i have seen is about half-a trillion...
so we will most likely see another 300 to 500billion$ in write downs, which at a 20 to one leverage comes out to as much as 10 trillion in losses (worst case scenario)...
that is more than half the NYSE market cap...(at 17 trillion)
-------------------- Don't envy the happiness of those who live in a fool's paradise. Posts: 36378 | From: USA | Registered: Sep 2003
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Repurchase agreements (RPs or repos) are financial instruments used in the money markets and capital markets. A more accurate and descriptive term is Sale and Repurchase Agreement, since what occurs is that the cash receiver (borrower/seller) sells securities to the cash provider (lender/buyer) now in return for cash, and agrees to repurchase those securities from the buyer for a greater sum of cash at some later date, that greater sum being all of the cash lent and some extra cash (constituting interest, known as the repo rate) Sell/buy backs and buy/sell backs
A sell/buy back is the spot sale and a forward repurchase of a security. The basic motivation of sell/buy backs is generally the same as for a classic repo, i.e. attempting to benefit from the lower financing rates generally available for collateralized as opposed to non-secured borrowing. The economics of the transaction are also similar with the interest on the cash borrowed through the sell/buy back being implicit in the difference between the sale price and the purchase price.
There are a number of differences between the two structures. A repo is technically a single transaction while a sell/buy back is a pair of transactions (a sell and a buy). A sell/buy back does not require any special legal documentation while a repo generally requires a master agreement to be in place between the buyer and seller (typically the SIFMA/ICMA commissioned Global Master Repo Agreement (GMRA)). Any coupon payment on the underlying security during the life of the sell/buy back will generally be passed back to the seller of the security by adjusting the cash paid at the termination of the sell/buy back. In a repo, the coupon will be passed on immediately to the seller of the security.
A buy/sell back is the equivalent of a reverse repo.
Risks
While classic repos are generally credit-risk mitigated instruments, there are residual credit risks. Though it is essentially a collateralized transaction, the seller may fail to repurchase the securities sold at the maturity date. In other words, the repo seller defaults on his obligation. Consequently, the buyer may keep the security, and liquidate the security in order to recover the cash lent. The security, however, may have lost value since the outset of the transaction as the security is subject to market movements. To mitigate this credit risk, repos often are overcollateralized as well as being subject to daily mark-to-market margining. Credit risk associated with repo is subject to many factors: term of repo, liquidity of security, the strength of the counterparties involved, etc.
Repo transactions came into focus within the financial press due to the technicalities of settlements following the collapse of Refco. Occasionally, a party involved in a repo transaction may not have a specific bond at the end of the repo contract. This may cause a string of failures from one party to the next, for as long as different parties have transacted for the same underlying instrument. The focus of the media attention centers on attempts to mitigate these failures.
it's important to note that the borrower (repo seller) has to buy back the notes in order for the deal to be completed..
however?
the repurchases ARE NOT/HAVE NOT been happening, and that is why everybody is afraid to "lend" money
you can't repurchase if you don't make a profit on the loan, because everybody has already overborrowed, and they don't have ANY capital to begin with to buy the contract back after UNLESS they made a profit on the "loan"...
and? who wants to "re-purchase" bad paper once they unload it?
-------------------- Don't envy the happiness of those who live in a fool's paradise. Posts: 36378 | From: USA | Registered: Sep 2003
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posted
a google search for house of cards revealed the US economy
it didn't even take ten yeas:
Congress Passes Financial Services Modernization Act of 1999
By Saul Ewing LLP
On November 4, 1999, Congress passed sweeping legislation that will dramatically reshape the financial services industry by removing barriers between banks, insurance companies, and investment firms which have existed since the Great Depression. President Clinton is expected to sign this historic legislation. Eliminates many Federal and State legal barriers to affiliations among banks and securities firms, insurance companies, and other financial service providers, including provisions of the Bank Holding Company Act of 1956 and Section 20 of the Banking Act of 1933 (commonly referred to as the "Glass-Steagall Act"). Full affiliation can now occur between the entities.
The Glass-Steagall Act established the Federal Deposit Insurance Corporation (FDIC) and included banking reforms, some of which were designed to control speculation.[citation needed] Some provisions such as Regulation Q that allowed the Federal Reserve to regulate interest rates in savings accounts were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Other provisions which prohibit a bank holding company from owning other financial companies were repealed in 1999 by the Gramm-Leach-Bliley Act. [1]
Two separate United States laws are known as the Glass-Steagall Act. The Acts (Glass & Steagall) were both reactions of the U.S. government to cope with the economic problems which followed the Stock Market Crash of 1929.
Both bills were sponsored by Democratic Senator Carter Glass of Lynchburg, Virginia, a former Secretary of the Treasury, and Democratic Congressman Henry B. Steagall of Alabama, Chairman of the House Committee on Banking and Currency.
Emergency Banking Relief Act of 1933
The Emergency Banking Act of 1933 is often confused with the Glass-Steagall Acts,[citation needed] however it was a separate and independent bill.[citation needed]
Signed into law by President Franklin D. Roosevelt on March 9, 1933, the Act's primary function was to prohibit the hoarding of gold coins,[citation needed] and did so by authorizing the United States Treasury to request all people and companies of the U.S. to send in their gold reserves.[citation needed]
In addition, it ordered that all banks stop doing business until the Comptroller of the Currency had examined the soundness of such banks and had approved reopening.
BTW?
all of you Clinton supporters should consider the Clintons GUILTY too
-------------------- Don't envy the happiness of those who live in a fool's paradise. Posts: 36378 | From: USA | Registered: Sep 2003
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posted
David M. Walker became the seventh Comptroller General of the United States and began his 15-year term when he took his oath of office on November 9, 1998. He retired this month:
How the U.S. can avoid a fiscal wreck
By David M. Walker
The U.S. government's total liabilities and unfunded commitments for future Social Security and Medicare benefits and other items are estimated at $53 trillion, up from about $20 trillion at the start of this decade, and are rising at a rate of $2 trillion to $3 trillion a year.
This fiscal gap translates into an IOU of about $455,000 for every American household. In other words, our government has made a whole lot of promises that it will be hard-pressed to keep without increasing taxes to levels far beyond what the American people have tolerated historically. By refusing to make tough choices and by charging up the nation's credit card, we are mortgaging the future of our children and grandchildren.
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If we continue as we have, policymakers will eventually have two options: raise taxes dramatically or slash government programs and services. To avoid this fiscal train wreck, we need to make three changes as soon as possible:
* First, we need to impose strong budget controls, written into law, to constrain federal spending as well as the many tax preferences that reduce revenue and represent a type of back door spending.
* Second, lawmakers should work with the Government Accountability Office and the Congressional Budget Office to enhance transparency in federal financial reporting and budget practices. For example, current five- to 10-year budget projections fail to consider the massive costs associated with the retirement of baby boomers. They also ignore the revenue losses that will result if recent tax cuts become permanent.
* Third, it is time to establish a capable, credible and bipartisan commission to make recommendations to the next Congress and president for reforming Social Security as well as our health care and tax systems.
-------------------- Don't envy the happiness of those who live in a fool's paradise. Posts: 36378 | From: USA | Registered: Sep 2003
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