The Oil Drum

333 comments on DrumBeat: August 9, 2007

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HeIsSoFly on August 9, 2007 - 11:49am

What everyone so far has overlooked and failed to address is why the ECB has chosen to make their money injection such a public spectacle. Normally these guys operate far from media scrutiny, after all.

That reason is precisely what Stoneleigh mentioned earlier though: fear and panic. By looking for headlines in the world's main media, the ECB tries to prevent a panic. It also gives off a signal, though, that it's afraid such a panic might ensue.

BNP is France's largest bank. If it reneges on obligations, there will be many a French nerve that starts twisting. Two German banks are in trouble since a few days, and a little-known Dutch investment bank cut short a substantial funding bid. All is not well that side of the Atlantic.

My guess is that European holdings of US securities are much higher than they're telling us. We'll soon start to see what pension funds, mutual funds and insurance companies have in their portfolio. A lot of it will be found to be way past its fit-for-consumption date. Something rottten in the state of Denmark, so to speak.

$100 billion doesn't seem nearly enough to turn anything around. There are many $trillions at stake here.

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Stoneleigh on August 9, 2007 - 11:59am

By looking for headlines in the world's main media, the ECB tries to prevent a panic. It also gives off a signal, though, that it's afraid such a panic might ensue.

That's exactly the issue - emergency liquidty injections are very much a double-edged sword. They play out differently depending on the mood of the market. (See the quote I added to my comment second from the top on the reaction of the market today.)

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Burgundy on August 9, 2007 - 12:05pm

And these two quotes from the Bloomberg article are scary:

This is an old-fashioned credit crunch,'' Chris Low, the chief economist at FTN Financial in New York, said in a report today. ``This is not a small thing. A credit crunch, when the short-term credit markets seize up, is extraordinarily serious, almost always the precursor of a significant recession.'

Somewhere out there, there are several people that are in trouble -- it's hard to put your finger on it,'' said Andrew Busch, global foreign-exchange strategist at BMO Capital Markets in Chicago. ``I cannot name names. We know BNP has issues with three funds. But you do not see a movement in overnight rates like that unless there is a huge concern about liquidity and funding.''

Triumvirate of collapse - Economy, Ecosystem, Energy

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Cid Yama on August 10, 2007 - 7:31am

'Black Friday' as Asian Markets Plunge Deep into the Red

http://www.news.com.au/story/0,23599,22220587-2,00.html?from=public_rss

"News that the Bank of Japan had pumped cash into the financial system to try to ease a liquidity squeeze failed to staunch the losses."

Asian Markets in a Bloodbath

Sydney off near 4%, Rest of Asia off over 3%

http://news.bbc.co.uk/2/hi/business/6939757.stm

Not a Liquidity Problem, A Credit/Insolvency Problem

"Thus, while the Fed and the ECB had no option today but to provide massive liquidity in the presence of a most severe liquidity crunch and run, they should not delude themselves that this liquidity injections can resolve the deep insolvency problems of many overstretched borrowers: households, financial institutions, corporates. Insolvency/credit crises lead to financial and economic distress – hard landing of economies – and cannot be resolved with liquidity injections by a lender of last resort. And now the vicious circle of a weakening US economy – with a housing recession getting worse and a fatigued consumer being at the tipping point - and a generalized credit crunch sharply has increased the probability that the US economy will experience a hard landing. We are indeed at a "Minsky Moment" and this recent financial turmoil is the beginning of a much more serious and protracted US and global credit crunch. The risks of a systemic crisis are rising: liquidity injections and lender of last resort bail out of insolvent borrowers - however necessary and unavoidable during a liquidity panic- will not work; they will only pospone and exacerbate the eventual and unavoidable insolvencies."

http://www.rgemonitor.com/blog/roubini

http://business.guardian.co.uk/story/0,,2145760,00.html?gusrc=rss&feed=2...

Countrywide in Trouble

Countrywide's biggest problem is that they are being forced to eat their own bad loans as the secondary market has stopped buying.

"Countrywide said it was no longer trying to sell $1 billion of subprime mortgage loans and would instead hold them as investments."

"Shares of Countrywide, which have lost a third of their value this year, fell to $25 in late trading from $28.66 at yesterday's close in New York Stock Exchange composite trading."

``We are experiencing home price depreciation almost like never before, with the exception of the Great Depression,'' Countrywide Chief Executive Officer Angelo Mozilo said during a conference call with investors"

http://quote.bloomberg.com/apps/news?pid=20601087&sid=awWmNtGguiq0

The business model of making bad loans and dumping them in someone else's lap is no longer viable.

European Markets open 2% lower

http://www.cnn.com/2007/BUSINESS/08/10/global.markets.reut/index.html?se...

Markets now down over 3% across Europe