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303 comments on DrumBeat: May 9, 2007

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HeIsSoFly on May 9, 2007 - 9:25am

Subprime America infects Asia and Europe

By selling foreign investors its bad debt, America has shot itself in the foot. Because America is now the world’s #1 debtor, because America needs over $1 trillion in foreign investment capital each year to pay its bills—and because it was foreign investors that were primarily burned by Wall Street’s subprime CDOs, the flow of foreign capital to the US may soon be going elsewhere.

Today, the word “de-couple” is increasingly heard where global markets are discussed. No longer referring to freight trains or dogs in delicto flagrante, de-coupling refers to the distancing, i.e. de-coupling, of global economies from the US, to wit, the increasingly perceived expeditious act or art of separating still-healthy economies from the slowing US economic engine.

While it is true the US has been the driver of the global economy, it is no longer. The sobriquet “has been” is literally correct in this instance. The US share of global economic growth so far in 2007 is 10%, a figure analogous to Barry Bonds batting .134.

Global capital flows, like tsunamis, are not something to be taken lightly. If the flow of foreign money to the US slows, the US dollar will collapse and the US will be forced to raise interest rates to continue attracting foreign capital. And, if US interest rates are raised, the US economy will collapse.

Greenspan might call this a conundrum. Other people might call it and Greenspan something else.

.... because most people don’t know a financial crisis is in progress, they will have little chance of survival. This summer, America’s subprime CDOs are coming home to roost, and not just to the US.

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Alfred on May 9, 2007 - 10:33am

Deutsche Bank wins on subprime gamble

By Ivar Simensen in Frankfurt

Published: May 9 2007 03:00 | Last updated: May 9 2007 03:00

Deutsche Bank made a large profit from betting on the weak-ening of the US subprime mortgage market, the German bank said yesterday as it reported record first-quarter earnings.

Unlike some of its peers,Deutsche Bank benefited from the market correction in March, when the subprime mortgage market nearly collapsed, by placing bets on the US mortgage market weakening.

The fixed income desk late last year entered short positions in the ABX index, a derivatives basket on high-risk mortgages and home equity loans, which paid off when the market went into meltdown in March.

"Someone saw an opportunity and that was a good move," Josef Ackermann, chief executive, told the Financial Times.

The bank declined to say how much it earned on the trade. Revenues in the fixed income proprietary trading desks were between €340m (£231m) and €510m.

Deutsche Bank's success stood in stark contrast to some of its peers. Last week, Swiss rival UBS said it would close its external hedge fund unit, which had been spun off from its credit proprietary trading desk, and reintegrate it into the bank after the fund lost SFr150m (£61.9m), mainly in the US subprime mortgage market.

Pre-tax profits at Deutsche rose 22 per cent to a record €3.2bn in the first quarter. The investment banking business was again the main driver, accounting for 75 per cent of pre-tax profits as currency, debt and equity trading volumes boomed in volatile markets and takeover activity was strong.

The rising profits in the investment banking division helped the bank beat market expectations, but could not prevent further disappointment in its asset and wealth management businesses.

The businesses were hit by a slowdown in the US property market. Pre-tax profits in asset management fell 19 per cent to €188m, primarily due to lower performance fees from its US property funds businesses.

Mr Ackermann warned of the possibilities for further short-term volatility but gave an upbeat outlook for the bank.

"Despite the ongoing correction in the housing market, the US economy remains fundamentally resilient. Growth momentum and business confidence in Europe appear solid," he said.

Today's FT had the above article. Obviously, not everyone is going to be a winner out of net loss of $1.5 trillion!

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musashi on May 9, 2007 - 12:55pm

“This is the time of the vulture. For the vulture feeds neither upon the pastures of the bull nor the stored up wealth of the bear. The vulture feeds instead upon the blind ignorance and denial of the ostrich. The time of the vulture is at hand.”