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US Plunge protection team .... does it exist ?


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Part 2 ...




To what extent are they prepared to go ?


Is it possible to save a sinking ship ?


Traditional economics tells us if your budget deficit is 6% of GDP and your heading for a recession there is not a lot of room to spend more since receipts will fall and push up the overspending all by itself increasing the deficit. So if your already pumping the economy to death and likely the sub prime and other issues will creep the US deficit upwards into the 800 billion dollar sort of range, if you announced the spending in light of this of a further 200 billion on tax cuts would it in a traditional sense be wise ? A US $1- trillion dollar deficit or approaching 8% of GDP. That's 8% more debt eventually that must be repaid.

Traditional economics has us with a rising inflation market we tend to tighten interest rate to stem inflation. So when the US reports the worst headline inflation numbers since 1990 and worst PPI inflation numbers since 1984 what do they do ? Lower rates.

Interesting this move and history is quite amusing at times, not suggesting they go here but nothing surprises me at the moment.


Before World War I Germany was a prosperous country, with a gold-backed currency, expanding industry, and world leadership in optics, chemicals, and machinery. The German Mark, the British shilling, the French franc, and the Italian lira all had about equal value, and all were exchanged four or five to the dollar. That was in 1914. In 1923, at the most fevered moment of the German hyperinflation, the exchange rate between the dollar and the Mark was one trillion Marks to one dollar, and a wheelbarrow full of money would not even buy a newspaper. Most Germans were taken by surprise by the financial tornado http://www.pbs.org/wgbh/commandingheights/...rinflation.html


I finally found the start of the games as to when they started again :}



Paulson reactivates secretive support team to prevent markets meltdown Judging by their body language, the US authorities believe the roaring bull market this autumn is just a suckers' rally before the inevitable storm hits.

Mr Paulson has asked the team to examine "systemic risk posed by hedge funds and derivatives, and the government's ability to respond to a financial crisis".

"They have an informal agreement among major banks to come in and start to buy stock if there appears to be a problem," he said http://www.telegraph.co.uk/money/main.jhtm...30/ccview30.xml


What does any of it mean ?

Not unusual to take the nations interest first and others second. Its expected. How far this mess goes will I suspect not be released to the public for 100 years.

As I said at the start not looking for a bogey man and no interest in finding one. Important not to blame anyone if you make a bad decision and as I said I have been doing very well thank you. You don't respect the market or risk and it bites you. Usual rules. This team however is another matter. When as it appears you start messing with the fabric of markets or believe you are omnipresent as the turkey at Barings did and the new idiot at Soc Gen did eventually it all comes unglued.


With the US I have merely touched on the current macro problems they face with higher inflation and a total govt debt of USD$9.2 trillion. Add another US$40- trillion for the unfunded Social Security liabilities and Medicaid and the debt burden companies and individuals have racked up which is a further US$35- trillion. I work it out ignoring the Social security issue at US$45- trillion or USD$250,000- for every working person in the USA. It is growing given the govt deficit blowout from falling revenues and expanded spending and the trade numbers staying awful at around 14% a year.


Like the Thai Baht back when they spent 100% of their foreign exchange revenues supporting their currency whether the US faces the music now, unlikely or in the end the whole credibility of their pile of debt collapses in some spectacular fashion. In the end it cannot keep going for much longer at the same pace. Not suggesting it implodes overnight but this is possible as the emperor is in fact wearing no clothes. But even here if the total of all the debts including Social security are added up the ability of the average worker in the USA to repay a debt of USD$500,000 and growing at likely over 10% is frankly impossible to see.


Basically even the debt ignoring the big ticket number of social security has a burden which would place each and every worker with a repayment qualifying them for a stressed mortgage. Thing is no one is trying to repay the debt, no they are prepared to actually increase the size of the debt rather than try and repay any of it.


If a traditional approach was taken to inflation and we had a real Fed Funds rate that was positive and above the inflation rate. Likely it would be 1.5-2% region given the explosion we saw with CPI last year. Having Fed funds at 5.5-6% as opposed to the current 3.5% I suppose saves the sad fact the total debt is a complete and unlikely total to get repaid. Encouraging more borrowing given the scope of the problem I suspect is insane and whilst the world and investing world seems more than willing to feed another twinkie to the 400 lb man who doesn't think or admit he is even fat, the totals being bandied about scare the hell out of me.


If at some stage the global community decided to exit the USA and US bond prices reflected some of what appears to me to be mounting risk due to the size and ability of even the largest economy it could get messy. We have all seen or heard about bond markets collapsing and Argentina before their drastic crash was forced to pay 14% over US government bonds. Not suggesting a blowout of this proportion but something taking the USD currency much lower will be the first bell tolling. Eventual for the US bond market I suspect will not be a crushing number over 20% for someone like Argentina just a mere reflection of the actual CPI and a real rate on bonds of 1-2% which doesn't sound like much and for the US government bonds to be actually below the inflation rate for the 10 year bond rate is somewhat amazing at least to me.


Where stocks go in this is anyone's call but have to suspect despite the talk of this is the bottom and it goes higher the actual ability of the US economy to spend its way out is not what it was in 1996 and Clintons tax plan which had the Social Security issue covered and an increasing surplus as time went on was replaced by Bush's US$2.2 trillion capital gains cuts and then more added each step of the way along with overspending the other side.

Will be an interesting few years either way. Not about to dwell on any of the above. It may happen next week, but for me the course is set and shelf life maximum till a total washout and the debt burden gets even stupider is about 5 years. Right now the raw liabilities are US$85 trillion all up or 6 times plus GDP. Take out the Social security and Medicaid contingent liabilities and US$45- trillion is still one heck of a debt at 3.5 times GDP.


Can't ignore Social security myself as in the US when one is paid you get hit for State taxes and Federal taxes and sometimes local taxes on every pay slip but also along with it is a bill for social security like another tax and when you retire supposedly you are paid a Social Security income reflecting your contributions over time.


Even without this contingent liability and ignoring it, how long Paulson and the guys at Goldmans can hold things together is another issue.


Do not trade off this even if you agree with the views. it may explode it may not explode for 5 years. Just keep this in the back of your mind.



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Part one ...


I have few questions


Is there such a thing as a plunge protection scheme in the USA ?


How far are they going and is it normal ?


Are they flogging a dead horse or basically saying anything and how long has it been active recently ?



As someone as you know who has been a front line trader for all these years, I have no interest whatsoever in exposing some crackpot theory about the bogey man. I am well aware of the natural market and natural market forces and those which are not. I have no axe to grind and have profited very well out of the current volatility and have zero complaints. How I trade is via observation and having a keen observation of the market and 25 years of experience to back this up, lets just say the market has not been behaving in my observation in a normal fashion for over 2 years.


Having been involved in some of the most violent markets since 1983 it is not the nature of the volatility that is my concern but the structure of it and as I said the current state of affairs suits me just fine in terms of making a profit, but I cannot any longer ignore the fact it is not normal and not rational.


Having worked for institutions at fairly senior levels most of my career the following is going to sound at least bizarre or conspiracy theory at best. Such is life.


Is there such a thing at the plunge protection team and what does it mean ?


First off. As a trader one of the jobs of any government in the modern society is to protect its financial system. If their is a run on the currency and it moves it is expected that the central bank in most countries will enter the market directly and stop the fall or rise of the currency and calm things down. If their is a run on a bank the same action will happen. Modern financial systems operate on a system of trust and when confidence in them wanes one must either fix the problem or step in and support the area under attack if its unreasonable that its happening. In modern time we have all seen the highly leveraged hedge funds attack things and sometimes without justification or decent reasoning. Sometimes the attack has been well based and motivated. Important to differentiate between the two. During the Asian financial crisis our currency the AUD was under siege and the currency was in danger of depreciating a vast amount in a short period of time like some of our heavily in debt neighbours and we stood on the precipice of a 20-30% depreciation had the forces been allowed to run riot. Last year vs the low back mid 2001 the currency hit 94 cents vs a low of 0.4778 back then. Obviously the defence was correct.


At times central banks try and defend things that should not be defended at all. One of the reasons for the Asian crisis started was Thailand used all its foreign currency reserves trying to defend the currency when it was at the time debt bloated and the currency was overvalued by at least 50%. Back in 1997 the USD/THB rate was around 25 and when they gave up it exploded to 55. Over a 100% devaluation, or 50% real ... and even now in 2008 with one of the strongest Asian currencies and having got its house in order, it is still way above the pre crash levels at 33.5 THB for one USD or 33% less purchasing power than where it started.


Governments, like people, are not omnipresent and able to correctly pick what should be defended or what must be corrected. History looking back we can see the sheer folly at times of trying to support the insupportable. Most times its national interest, some times it is other reasons. But governments do certainly have the right to protect their markets as they see fit and in fact the obligation to try and do so and protect the standard of living and improve those standards if it can. Most glaringly obvious imbalance in the global community right now is the trade with China. Eventually this will over time disappear to a great extent as they consume more goods but the real crux of the problem lies with their exchange rate being fixed or at present barely floating and having a real purchasing power inside China of about double its exchange rate vs other currencies.


Slowly slowly this is being corrected and the appreciation of this USD/CNY rate whilst the market is in turmoil has been going on at around 1% per month every month irrespective of where the USD has gone. It bounced vs most currencies yet like clockwork every day the rate has gone down and the CNY appreciated. Unnoticed by most mixed up in the frenzy of the financial markets of late, but if anything the rate at which the appreciation is going on seems to have picked up slightly and instead of Western nations enjoying importing deflation as they did during the 1995-2006 period the opposite pressures will now apply. China itself is facing inflation within its borders and some comes from outside pressures if not a lot. Oil for one as a larger and growing consumer of oil the price rising from US$30- to 60 to 90 has hit most nations with the worst CPI numbers for many years. USA certainly has the worst CPI at 4.2% since 1990 and PPI is out of control at 6.5% plus worst since 1984.


Each nation has its own self interest at heart and those of its population. Rightly so. China will continue to revalue as its economy grows and this will ease all by itself the inflation pressures to some extent. If the price of oil remains at US$90 and the revalue at 15% over the next 12 months the fact is the price of oil in real terms falls by 15% for them relieving much of the CPI pressure they face. On the other hand the rest of the world is faced with the very real threat that as they appreciate they will demand more for Chinese produced goods and it will march lockstep with this advance.


Current thinking on this macro side it such a contrast right now that I have never seen the world monetary policies being run is such disarray, EVER. Europe and UK and most other nations are prepared to fight price pressures and inflation at any cost. USA whilst I accept they are slowing down have just cut interest rates by 1.75% after the worst CPI numbers in nearly 20 years and PPI number sin 30 years.


An aside,


So is there a plunge protection team in the USA ? Well in light of the above it doesn't really matter. Its the job of governments to protect things as they see fit.


But the answer is yes. Actually working in the USA when it was formed post 1987 it made sense and what it appears to have become I leave to others to decide. It exists.


Ex. Ord. No. 12631. Working Group on Financial Markets

Sec. 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider http://www.law.cornell.edu/uscode/html/usc...b000-notes.html


'According to credible sources, it has become government policy to "protect" the investment community from the laws of gravity. The government has even admitted as much. Alan Greenspan gave a speech in Lueven, Belgium on the 14th of January, this year, in which he touted the Fed's obligation to bail out banks and private financial institutions not just by printing unlimited amounts of money but also through "direct intervention in market events."'

Rex Rogers, Timely Expose' -- November 1, 1997 http://www.fallstreet.com/plungeprotection.html


The Group was established explicitly in response to events in the financial markets surrounding October 19, 1987 ("Black Monday") to give recommendations for legislative and private sector solutions for "enhancing the integrity, efficiency, orderliness, and competitiveness of [united States] financial markets and maintaining investor confidence http://en.wikipedia.org/wiki/Working_Group...nancial_Markets


b) The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible http://www.rense.com/general52/secretsoftheplunge.htm


Pretty much Zero doubt the body exists. So what ? Well as I mentioned I have noticed a distinct flavor to things of late. Every time the market gets into trouble out ride white knights and since I have profited greatly in recent times I have no axe to grind. However the lengths which this is going to have become so absurd I can only scratch my head at the gullibility of the market at times to swallow it and think it must just be me ? In fact every correction we have had for about two years has had a strange outcome in some ways.


Every time the market sits on a knife edge awaiting some number its almost without exception the expected number comes out better than expected. The market normally operates as down a lift shaft with massive selloffs and back up an escalator. Well the market since Mr Paulson has taken over has done the opposite. Last fall as we just endured the market I don't think had a fall of worse than 2.5% in a single day. Monday the 21st Jan was a US holiday and when the market looked like going as far as 650 points down in rides the Fed. As I said this is to be expected to soothe markets in extreme volatility. So the rise from down 650 to down 100 or so was to be expected off the Fed action cutting rates. Next day the market takes a dump again and nearly the old low, same thing happens again but larger form 350 down to 300 up.


Again one could ascribe all these things to normal market actions. Thing is the two biggest moves this correction in percentage terms were not down days but recoveries off lows. One a mighty 5.5% or double any allowed or seen down day.

Markets historically have these sorts of moves when they have a awful day and largest gain days are usually after the worst loss days. Market takes a 7% dive the next day its up 6%.


Not this time and not the last few market corrections. Its been somewhat amazing the price action and news that has come out. Markets expecting something bad and hey presto out comes a good number. It is of course revised down in latter months but the fact remains for me at least the occurrence in the last 2 years of a surprise number on the upside has been if anything predictable. Always easy to attribute these things to chance and imagine them as explanations. Sadly as you know a few months ago I wrote about the likely worsening CPI and PPI outlook and the inescapable fact the numbers had and would explode. When the market was teetering the numbers took on a surreal nature across the board with import prices paid seeming to lag the spot price not by the normal 6 weeks but 3-4 months. Seasonal adjustments made my call that US inflation exploded sound nutty and stupid. Then in one fell swoop in December the November numbers all came back with a crash.


When oil was hitting a level 50% above the price 6 months prior to be presented with two CPI and PPI reports that showed little or not much inflation I thought I was going mad. Then kaboom.


My belief, however misplaced, is the PPT or "Working Group" has and does use the ability to fustigate numbers to suit the mood of the market. In the end the grim picture will come out as did with CPI and PPI but its vastly different to release a PPI number at 3% for a single month when the stock market is being throttled as opposed to releasing it 7 days before Christmas when its recovered, and most are taking time off for the holiday season.

Possibly even worse was the GDP number released a few months ago which by its nature has an inflation number built into it via the deflator. Basically the change in all the good and services produced in raw terms are added up and then the deflator is used to bring about a real change in GDP after inflation. Since the Department of Labor produces the CPI and PPI numbers and the Dept of Commerce now called Bureau Of economic Analysis produces the GDP number and the use slightly different methods to arrive at the GDP deflator vs the CPI number it was with amazement I saw the headline number reported and read on. What deflator was originally used ? Well 0.8% was the advance number they used to arrive at the mind goggling number for the GDP growth in September. Remember the other US department was estimating a CPI number at the time of around 3.5% and rising. In simple terms an overstating of things by at least 2.5% and since I believed the actual CPI number was in fact higher, anyone with a brain did since the price of oil was topping US$90- at the time to use a deflator lower and 25% of the real one left me with a lot of questions.


Here is the link on page 8 the final deflator used was 1% advance used was 0.8% http://www.bea.gov/newsreleases/national/g...pdf/gdp307f.pdf


Searching for answers I checked the methodology and correlation between the two over the last 10 years. They are basically very much the same thing and the deflator is on average a mere 0.2% below the official CPI number.


So when the markets still reeling from the August rout and sub prime yet to fully rear its head but those well aware of the fact we are presented with a GDP number for the Sept. Quarter of 2007 which shows stunning growth. Stunning.


We are a mere 3 months from when this pig swill was presented and we are now told the US is likely in negative territory and recession hence the cuts in US rates. Minus GDP ?

Now with the deflator, it was just a long list of numbers which came out as unexpectedly strong in the face of a weak market only to be revised back to normal levels a few months later. The non far payrolls have been all over the place with revisions of 100% of the normal expected numbers happening with increasing and distressing frequency.

On the GDP deflator vs the CPI which for a decade were so closely linked with a bare minimum difference its absurd to suggest anything other than what has gone on. With the rise first in equities and house prices we saw no variance whatsoever 2000-2007 . And when confidence is waning out comes a number so absurd its insane. Swallowed hook line and sinker by the market mind you. Any questioning of the US economy in public arena's like the war originally was viewed and treated as unpatriotic.


An interesting paper released by the BEA the ones which produced the bogus deflator numbers in the first place published in November 2007 actually if anything makes the variance between the two even more unexplainable.



Read it and if you can explain how one measure is at 1% and another at 4% it is beyond me. It totally contradicts the last released GDP numbers.


Another classic was the non farm payroll numbers a few months ago when the market was getting slammed. They announced a much stronger gain than expected and when pulled apart one of the strongest sectors ? The financial services sector. Since this was post August and massive layoffs going on and the nations largest mortgage broker was laying off staff by the thousands. I cannot find the link but the numbers of laid off staff announced in the proceeding 6 weeks was I believe well over 50,000 yet the number in the release suggested massive gains in this sector. Absurd and insane.


There is a special working group and what is their mandate and powers ? No one can tell.

My strong suspicion is it involves and goes as far as totally rearranging the economic statistics to suit the market. The belief and coincidence between the two has become inescapable to me at least. It also involves a well mapped out and coordinated plan to come up with fixes. Not unexpected with markets in turmoil. However when the market was shuddering despite the US rate cut this week and looking like breaching new lows. Out comes a report timed to perfection with the Dow being down 350 points that was all about the 6 bond insurers which are in trouble. That's what the 650 point plunge in the Dow was about when people woke up to the fact the second largest of the 6 had been downgraded and put on credit watch for a further downgrade it forced the issue. Reality is for the 6 in trouble their insurance of some non traditional mortgage backed securities has meant in all likelihood they are bankrupt. On the other side is the ratings agencies with two still having AMBAC which wrote off US$5- billion this week rated as AAA. Somewhat a joke when it has a further US$15- billion of highly questionable bonds on its books and a mere US$7- billion I believe left in reserves. On top of the questionable sub prime stuff it insures a further 400 billion of other Muni and different type bonds and I suspect it has little of no capital even if it ignored these other outstandings. Some of these are not a traditional type of Muni bonds and also to a are likely to be a drain on reserves for a portion of them over time due to lack of actual credit quality just like the sub prime paper.


So out pops an announcement at the end of the world, that a rescue package is being arranged. Having looked at their accounts and exposures I am not sure what planet they are on. To cover the likely calls just sub prime I suspect 5 billion is needed for AMBAC alone. Some of the 400 billion other insured debt is highly questionable. So for any investor they are buying a business with not a great name and putting up US$5- billion just to keep it out of the red and likely another US$10- billion and possibly a lot more to keep going. Who in their right mind would do such a deal ?


It is easy to ascribe these miraculous recoveries or funny numbers to the plunge protection team but sadly as nutty as it sounds I have become very sceptical of the whole market process.


The economic side appears to be just too pat for words and its not all that unusual for numbers to be messed with in this way. A seasonal smoothing here or one there and politics plays a large part in any of this. However as a close follower of the economic side for over 20 years I have to say I have lost faith in the official numbers. CPI and cost of living increases I believe we all know are being changed on such a basis they do not represent reality. Infaltion is a mere 3% P/A for the last 5 years yet a lot of things we all use and depend on are not reflected by the CPI index. Easy to do in reality, if we run a car for the family and use 50 litres of fuel a week a few years ago it cost 60 cents per litre and now approaching $1.50 per litre. Still we require to run the kids to school and still use the same 50 litres of fuel. If your a statistician and the weighting for fuel on the CPI back in 2003 was 3% of what households spent on goods and services in 2008 if the weighting is still a mere 3% despite the fact the price is 250% of what it was its easy to write off the 10% last rise at 10% at 3% weighing or a 0.3% CPI increase as opposed to likely a 7% weighting it should be now and a 10% rise hitting the CPI by 0.7%. Vast difference. Anyhow an amusing site is the following one which uses the same methodology and unaltered from 1990 on the raw numbers now and the fact is the CPI reported as we all know is vastly different to reality the outcome is quite different http://www.shadowstats.com/alternate_data


Use a lower CPI number and deflator number and it overstates the GDP and understates the actual price increases.


Nothing I suppose new in any of this but have to say its got out of hand. Totally out of hand.


So what does the plunge protection team do ? No idea. Is it possible as I suspect the numbers are being skewed to suit the market in times of need ? If one looks back at the last 6 months of releases and the revisions along with a chart it gives some real credence to it let alone some of the absurd numbers presented in the face of reality. Yes GPD growth end of Sept. for the quarter ended 30th Sept. was 4.9% and 3 months later we are being told its minus. USD was crashing at the time. Inflation was on the rise yet the reported deflator took a deviation from the lockstep mimicking of the other government department not seen in 10 years.


Some food for thought ... Some quite nutty and out there. Others just plain scary.

11 th Jan 2008

On Friday, Mr Bush convened the so-called Plunge Protection Team for its first known meeting in the Oval Office. The black arts unit - officially the President's Working Group on Financial Markets - was created after the 1987 crash http://www.telegraph.co.uk/money/main.jhtm...7/ccview107.xml


A most amusing site.

The PPT is popular these days. When asked what she would do to help the economy at Monday's debate, the presumptive democratic presidential nominee, Hillary Clinton, urged President Bush to convene a meeting of the Plunge Protection Team http://www.plungeprotectionteam.com/


Who did Paulson work for again ? Who has avoided the mess ?

Since the appointment of Henry Paulson to the helm at the US Treasury, the US stock market has always found a way to defy the law of gravity. During Paulson's short reign, the Dow Jones Industrials (DJI-30) broke an 80-year old record for the longest streak of gains with only three declining days in between. During the first seven months of his tenure, the S&P 500 did not decline by 2%, the second longest-period without a 2% correction since 1964 http://www.financialsense.com/fsu/editoria.../2007/0809.html


At the Federal Open Market Committee meeting on Jan 29-30, 2002, the Federal Reserve System (Greenspan) openly discussed the use of "unconventional methods" to stimulate the economy. Recently, the Financial Times of London quoted an anonymous U.S. Fed official who stated that one of the extraordinary measures "considered" in January 2004 was "buying U.S. equities http://www.rense.com/general52/secretsoftheplunge.htm


Its out there the above. Governments often stand in markets the Hong Kong market during the financial crisis was a prime example.


Continued part 2

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In reply to: kahuna1 on Sunday 27/01/08 09:40am

Hmmmm - K1 , following your line of logic, does that mean it would be prudent for the Government to refit the Christmas Is detention facility so it can cater for an expected influx of economic refugees with much fuller figures than it currently does? http://www.sharescene.com/html/emoticons/tongue.gif


PS: thanks for the Sunday morning ruminations.

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In reply to: kahuna1 on Sunday 27/01/08 07:40am

Another good read K1


I saw a great movie this weekend - Charlie Wilson's War. As I was watching this true story of covert military action, I kept thinking about the PPT and all of the covert financial action they are no doubt up to.


I suppose the biggest concern is blowback.


"Blowback is a term now broadly used in espionage to describe the unintended consequences of covert operations. Blowback typically appears random and without cause, because the public is unaware of the secret operations that provoked it"


I think Charlie Wilson summed up his adventures very well -


"These things happened. They were glorious and they changed the world...

and then we f...ed up the end game"



Let's hope the PPT keeps the end game firmly in mind.

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In reply to: The Ferret on Sunday 27/01/08 08:32pm

Hi Ferret,


Would you care to elaborate about your single word answers ...


Does it exist ? No


And is it messing with us ? No.


First one I think I covered fairly well from its formation in 1988 ann spoken about by Every president since then. Even have the law and its powers and quoted them.


So rather than your single word maybe you could share as to why you don't think it exists ?


I might add two of the Presidential candidates had an argument about using it last week. As to the current administration hmmm I quoted US fed minutes from their reign, Verbatim quotes from the head of the team in October 2006 and so on.


Is it messing with us ?


I went to some lengths to point out its the job of a government to paint a rosy picture.


This however is going far beyond even that. Its lining all your ducks up irrespective of anything and painting that rosy picture.


The market recovered the other day post Fed rate cut the next day they were still worried about the bond insurers .... the NY state officials were launching a rescue package. Timed to the minute and more stories were put out along the same line a group of banks were going to raise US$15- billion and so on.


You know when people pull a trick once I give them the benefit of the doubt. Second time I pick up on it. Most don't in financial markets and with other things. I quite often see the writing on the wall long before it happens. In this case no different I suspect.


Back In Sept Paulson, Head or the US treasury, Ex head of Goldman Sachs, announced the same sort of thing a rescue package for the US bond market ... in Oct it was announced they were near an agreement to save the bond market with a fund amounting to US$100 billion led by some very large banks ... Citigroup was one touted as the leader.


The first mention he made of the package was in MAY 2007 !!


Market took great heart from the first rumors in late Aug of the plan taking shape and the actual announcement in Sept then again in Oct about this rescue package for the US bond markets. In many ways the recovery back then, was off the back of this belief.


So what happened ?


Well Citigroup recorded record losses two quarters in a row, the rescue package appeared to be a figment of someones imagination and Citigroup along with a few others was forced not once but twice to be rescued itself. Citigroup in fact was rescued itself with not one but two capital injections.


Thinking the bond insurers which have acted if anything worse than the banks can be saved is sheer folly. They wrote insurance for 100% of the notes they covered and took premiums , nothing unusual with this that is there job. Waking up to the actual underlying quality of the credit risk they agreed to cover 100% of the losses was rubbish is at present being swept under the carpet. The chances of banks propping up the bond market were 20 times better than saving the insurers because the insurers look at something and asses the risk and charge a policy premium. They are pretty much unable to alter the outcome since the premiums are agreed upon and fixed for the life of the paper up front. So they have a fixed amount of income and no room to sway either way. if the bonds go down they are exposed to the extent of the selling of assets and net proceeds vs 100% of the face value of the paper.


At present the 6 insurers in trouble are I suspect insolvent and the big two i looked very closely at the second largest of them who wrote off US$5- billion this week and its reserves vs remaining exposure and with US$400- billion in varying degree's of Muni bonds and US$15- billion of shocking quality mortgage backed securities the picture is grim.


So when they are still rates at AAA by the two largest credit ratings agencies and then out comes a plan to save them. How can one save something which due to underestimating the risks and taking too low a premium has depleted all its reserves and is likely in the red just on the housing mortgage backed side by around US$5- billion ... then it has zero reserves and in fact Minus US$5- billion yet still has commitments to cover US$400 billion of paper to maturity. Some of which i might add is trading at the 55 cents in the dollar level in the market. Certainly there would appear to be likely some calls on this other non traditional Muni paper over and above the mess already there.


Sorry .... rambling ....



As late as November they still were sprouting it .... and being named ... the December 2007 announcements were of the White house spokesman or un-named official type.


Paulson Sees Rescue Fund by Year's End

Friday November 9, 6:35 pm ET


WASHINGTON (AP) -- Treasury Secretary Henry Paulson said Friday that he still expected a huge rescue fund to help resolve problems in the credit crisis to be operating before the end of this year.




It started in May 2007 the plan to rescue the bonds and During the rout in August the plans became formal and Sept was a flurry of announcements with a formal roadshow in Oct with every official from George W to Paulson to the Fed chief talking about the rescue.


It amounted to nothing ....


Here is the stupid thing about the whole recent announcement.


The very bonds that were meant to be saved and which have died and we so far have seen write-downs amongst the banks alone of US$130- billion. Exactly the same style bonds are the ones being covered by the insurers not for massive amounts but certainly multiples of their current reserves.


Thing is if the insurers are called for the policy they have written and happily taken the premiums most of the 6 in trouble with commitments outside the mortgage side of US$2.4-2.8 trillion of other bonds they cover mainly Muni's, they will be bankrupt. Worse than bankrupt it will require several times even their deplete market cap to get them just back to being square.


The impact will be the likely cover via the insurers on the shonky mortgage bonds may amount to less than 10 cents in the dollar forcing the banks which at best in the Us have not been totally open to declare another wave of losses. Its very nice not to write down a bond because of insurance and value it at 100 cents in the dollar ... until the cover without doubt amounts to at best 40 cents and likely 10 cents.


But how can one save the un-savable ? Only in the USA.


Outcome on any sane look at the rescue of the insurers is a load of hot air at best and at worst the exact same sprouting of stuff which worked last time to save the market and restore confidence back post August and reached a crescendo in Oct and was still being sprouted as late as Dec which in January 2008 with a zillion dead bodies in the banking sector seems stupid at best if not misleading from the start.


The supposed savior of the bond insurers ? Banks and other financial sectors just got hit on their write-downs and had to themselves raise capital outside. They have little if any spare cash given the likely outcome of things. Despite them being offered as the saviors or possible ones its a load of rubbish. Some billionaire ? Well to save the one I looked at it appeared to be beyond saving .... its minus US$5- billion and if any ... ANY of the US$400- billion it covers goes down which given the market prices for some of the paper right now appears likely it will require US$15- billion just to be square and to have adequate reserves the number will be US$25- billion. I didn't look but not sure the man in question has anything even close to this. This is just the saving of the second laregst one and what it will involve.


Where does this leave me ?


It appears a variation of the fabled bond rescue package has been wheeled out for the financial markets consumption. Same people saying the same things about something which never was going to happen .... and is unlikely to eventuate.


Sure other better run insurers will pick up the slack. but bond insurance in the US just got a lot more expensive and whilst some well run bond insurer likely will take over some of the exposure of the ones in trouble should they go down, they will cherry pick what and which parts they choose to cover leaving the mess still there.


In the meantime will the two credit ratings agencies the two biggest steadfastly keep these bond insurers credit ratings at AAA ? It appears so for now.


Certainly for the two largest of them at least. they have allowed a few of the smaller out of the 6 in trouble wither and fall below investment grade ratings but to do so for any of the larger ones .....


Time will tell.


Interested to hear your thoughts ferret as to why No and No ?

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In reply to: kahuna1 on Monday 28/01/08 10:39am

Looks like it has already started to happen.



Insurer Of Bonds Loses Top Rating


The downgrading of Ambac Financial came soon after the bond insurer said it would abandon its plans to raise $1 billion in capital. (By Jb Reed -- Bloomberg News)

Enlarge Photo


By Tomoeh Murakami Tse

Washington Post Staff Writer

Saturday, January 19, 2008; Page D01


NEW YORK, Jan. 18 -- Ambac Financial Group, the nation's second largest insurer of bonds, lost its precious AAA rating from Fitch Ratings on Friday over concerns that the company no longer had enough capital to guarantee billions of dollars in debt now imperiled by the subprime mortgage crisis.


The move to downgrade Ambac to a rating of AA could further roil financial markets, increasing pressure on Wall Street banks that hold this bad debt and making it even more costly for local governments to raise money for public projects.


Ambac and other bond insurers play an obscure but crucial role in capital markets by essentially transferring their ratings to the securities they guarantee. The downgrade of Ambac means many of those securities also will be downgraded, Fitch said.


This could spark a substantial sell-off by institutional investors such as pension funds that can only invest in top-rate securities, causing their value to drop. That in turn would prompt even more selling. As the securities become less valuable, Wall Street firms could be forced to write down billions of dollars on their balance sheets, restating how much their holdings of these securities are worth. The banks, which have already suffered staggering losses, have relied heavily on bond insurance to reduce their exposure to subprime mortgage debt and other complicated securities linked to these loans.


"Everyone thinks they're looking at the cliff over Armageddon," said Ed Rombach, senior derivatives analyst at Thomson Financial. "If you think the write-downs have been bad so far, the next write-downs could be twice as big."


The downgrading of Ambac is also a major blow to municipalities and other government authorities, which are having difficulty raising money for roads, buildings and other projects because of the worsening credit crunch. Some government agencies may find borrowing more costly, while others may not be able to raise money at all.


The troubles of Ambac and other bond insurers are rooted in their decisions during the last decade to move beyond their traditional business of insuring municipal debt into a realm of complicated securities. Much of this was made up of structured debt entailing subprime mortgages.


In downgrading Ambac, Fitch said its decision "reflects the significant uncertainty with respect to the company's franchise, business model and strategic direction."


The move by Fitch, one of three major rating agencies, came hours after Ambac said it would abandon its plans to raise $1 billion in capital. The rating agency said last month that it considered the additional capital as critical. Fitch gave the company no more than six weeks to come up with the funds.


Ambac had said Wednesday it would strengthen its capital base by issuing at least $1 billion in securities. A day later, however, the company said it expected to report a loss of $5.4 billion on its portfolio of credit derivatives and losses of another $1.1 billion on subprime mortgage securities. Ambac also announced its chief executive, Robert J. Genader, had resigned. That same day, Moody's Investor Service signaled it was also considering whether to downgrade Ambac's ratings. Ambac stock plunged 52 percent.


On Friday, the company did an about-face, announcing that "market conditions and other factors" had made raising capital "not an attractive option at this time."


Fitch was out of patience. "There's no reason to wait any longer," said Thomas Abruzzo, managing director at Fitch, in an interview after Ambac was downgraded.


Ambac declined to comment on the decision.


In recent months, shares of some of the biggest bond insurers have been pummeled as rating agencies scrutinized the insurers' ability to cover potential defaults on the mortgage-related bonds they insure, particularly those backed by loans to homebuyers with poor credit. In total, Ambac and six other AAA-rated bond insurers enhance the credit of some $2 trillion worth of debt securities held by Wall Street banks, pension funds, mutual funds and other investors around the globe.


Without its flawless rating, Ambac may now find it nearly impossible to attract business, analysts said. Rombach and others questioned whether Ambac could even stay afloat. Some analysts said the move by Fitch would trigger downgrades by the other two major credit rating agencies, Moody's and Standard & Poor's, which have been reviewing the ratings of Ambac and its peers.


"The Fitch downgrade only exacerbates Ambac's difficulties in their ability to write business as well their ability to access capital or other capital-like instruments," said Dick Smith, managing director of global bond insurance ratings at Standard & Poor's. He said S&P was already focused on those issues as it conducts its review.


Moody's warned Thursday it was also reviewing the ratings of MBIA, the largest bond insurer, citing "growing concern about the potential volatility" in the performance of mortgage-related securities and "the corresponding implications for MBIA's risk-adjusted capital adequacy." Moody's decision came even after MBIA had carried out its own $1 billion debt issue.





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In reply to: davo22 on Monday 28/01/08 10:47am

G'day Everyone,

Looks like the chickens are coming home to roost.

I for one detest the idea, that anyone is even contemplating bailing these insurers out. Isn't that what insurance is about,assesment of risk, and making the decision on whether it is worth assuming those risks? If that's what they do and they can't do it properly-bugger 'em.

If i make a choice and lose money as a consequence, shit happens. Same should apply to them. Any rescue package, IMO is just postponing the inevitable. Bad decision after bad decision has just got to bite sometime. Pity it'll drag the rest of the world markets down with it......I reckon there will be a bit more thought going into cause and affect in the US after all of this is over. one can only hope.


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