Banks advised to walk away from big deals

FT ^ | 02/14/08 | Henny Sender

[TigerLikesRooster]

Banks advised to walk away from big deals By Henny Sender in New York

Published: February 14 2008 22:03 | Last updated: February 14 2008 22:03

Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more high-profile private equity transactions will collapse.

This advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals.

But legal advisers argue that the break-up fees banks would owe in such cases would be far lower than the write-downs they would have to make on their loans, given the current cataclysmic conditions in the capital markets.

“It is the tipping point argument,” said a senior partner at one of the biggest private equity firms, who asked not to be named. “The banks have so many issues with their balance sheets that they are considering a new policy.”

However, such a radical shift could have a dramatic impact on the markets. The presence of private-equity buyers is one factor that has helped boost stock prices.

“If you want to come up with news that could make the Dow drop another 500 or 1,000 points, this would be it,” says one lawyer specialising in private equity issues for a major New York law firm. “But desperate times call for desperate measures.”

So far, leveraged buy-outs have usually collapsed when the private-equity firms involved – including Blackstone and Cerberus – have withdrawn from transactions.

Such moves have occurred as banks have been working behind the scenes to persuade private equity firms to abandon deals. Such indirect approaches are designed to prevent target companies from filing suits seeking to make sure deals close.

However, the chances of banks abandoning buy-out deals – such as those for Clear Channel Communications, the radio station owner and outdoor advertising company, and BCE, the Canada-based telecoms group – are growing as the market prices for the leveraged loans used in such transactions continue to fall.

US regulators are pressing banks to account for these loans at market prices while they keep them on their books.

Already, it is understood that one bank has marked down its share of the loan used in the Clear Channel buy-out to 85 cents on the dollar.

By contrast, lawyers are telling the banks that if they walk away from deals, their biggest liability would be equivalent to the so-called reverse break-up fee that private equity firms pay target companies when deals fail to close. These fees usually amount to about 2 per cent of the total value of a deal, or about $500m in a large buy-out.

Lawyers say there could be other costs for the banks, such as covering the expenses buy-out firms incur while doing their homework on bids.

Further, they do not rule out the possibility that banks could have to pay greater damages in litigation.

What is sure is that banks are giving greater thought to dropping out of deals. “We are already there in terms of the economic pain,” said the head of debt capital markets at one major Wall Street firm. “Banks sitting on $30bn of debt for one deal are looking at $4.5bn of losses. That is enough to play hardball.”

[TigerLikesRooster]

Ping!

[RightWhale]

Walk away fron big deals? That’s un-American. Get the Rocket off the stand in the Senate and investigate this.

[Travis McGee]

“Derivatives have permitted financial risks to be unbundled in ways that have facilitated both their measurement and their management…. As a result, not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.”~~Alan Greenspan, May 2003

"American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."~~Alan Greenspan, February 22, 2004

“The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions.”~~Alan Greenspan, May 2005

"We're not about to go into a situation where (real estate) prices will go down. There is no evidence home prices are going to collapse."~~Alan Greenspan, May 21, 2006

“The damage from the subprime market has been largely contained. Fortunately, the financial system and the economy are strong enough to weather this storm.”Richard Fisher, Federal Reserve Bank of Dallas President, Apr 4, 2007

"All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."~~Fed Chairman Ben Bernanke, May 17, 2007

[nicmarlo]

Wow........some choice quotes there......from some real great brainiac economists!!!

[crghill]

Man I hate the FT

[Travis McGee]

Compare them to the olden daze:

"I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future." ~~E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928

"Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."~~Irving Fisher PhD, leading U.S. economist , New York Times, October 17, 1929

"If recession should threaten serious consequences for business (as is not indicated at present) there is little doubt that the Federal Reserve System would take steps to ease the money market and so check the movement."~~Harvard Economic Society, October 19, 1929

"This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan... that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years." ~~R. W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929

[Travis McGee]

"Man I hate the FT."

"The view is much better down here."

[nicmarlo]

In substance, if not in content, do you see little difference between the “vision” of these people???

I sure don’t.

[Travis McGee]

Nor I.

But there is wisdom to be found.

“Several brokerage houses tumbled; blue-sky investment companies formed during the happy bull market days went to smash, disclosing miserable tales of rascality; over a thousand banks caved in during 1930, as a result of marking down both of real estate and of securities; and in December occurred the largest bank failure in American financial history, the fall of the ill-named Bank of the United States in New York.”

~~"Only Yesterday: An Informal History of the 1920’s" by Fredrick Lewis Allen

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

~~Ludwig von Mises

[nicmarlo]

Want to make bets on whether this government learns from history on credit or on intentionally delaying the inevitable, thereby creating “a final and total catastrophe of the currency system involved?”

I bet they will neither learn nor “voluntarily abandon further credit expansion.”

[Travis McGee]

You can count on them to do exactly the wrong thing. 100%.

Guaran-damn-teed.

[nicmarlo]

I’d say with that bet, you’re sure to win....and “we’re” sure to lose....every time.

[bert]

Let me see, Who do the lawyers support?

Is it the party that claims the economy is crashing? Are the lawyers doing their part by ruining the market ?

Win or lose, lawers make money. They get paid well to offer bad advice that will have strong political effect.

[Allan Bartlett]

The other day, Warren Buffet disclosed bids he made to Ambac, and MBIA. These bids were solely for the muni bond insurance, not credit default swaps, not CDO’s, nothing to do with mortgages. He wants the profitable crown jewels. He doesn’t want the toxic waste that will ultimately bankrupt these companies, not to mention the entire “fiat” system. Wall Street applauded the deal because they may not have to sell Billions $ of munis because they are no longer AAA rated. Buffet is not a stupid man. He is getting in line to scoop up this portion of the business when the insurers get/go downgraded or bankrupt. Both stocks were beaten like redheaded stepchildren in today’s market. In some cases, uninsured bonds are trading higher in price than insured bonds. The bottom line here is; a recession is going to blow out the federal deficit, state and municipal deficits, over-leveraged corporations, homeowners, and consumers. Even if Mr. Buffet succeeds in getting the “muni bonds contract” it’s all a joke anyway. Either these bonds can stand on their own or they cannot. No company, Central bank, or combination of the two can stop what is coming down the tracks. We are talking TRILLIONS! There are $750 Trillion of derivatives outstanding. 3/4 of a QUADRILLION DOLLARS! A Quadrillion. I can’t believe we are using the “quadrillion” number. This monster just got too big.

We currently are experiencing 2 different markets in mortgages. Jumbo rates are about a point higher than conventional rates. Advertised rates are different from available rates. Many applications are turned down for poor credit, others because the appraisals don’t stand up, re-fi’s for too little or negative equity. We have 2 different sets of interest rates. One being the government declared rates, the other being market rates. Guess which rate is more important? That’s right, the EFFECTIVE rates used in the real world. Real world rates have not come down anywhere near as much as “Fed” rates. Also there is a total lack of liquidity where it is needed. If you need money, you can’t get it. If you don’t need it, it is plentiful.

I wrote back in June and July about the prospective credit crunch. I also wrote that “if you don’t know what derivatives are, you will within 6-12 months”. Well, derivatives have bankrupted the system. No ifs, ands, or buts. The situation is systemic. I do not profess to know the exact outcome, but I do know the world will look and feel completely different a year from now. The last six months we have seen denial, we have heard it was “contained”, we heard “ok, now that the banks and brokers have taken writedowns the decks have been cleared”. That was after the first round of writedowns, we heard it again after the second round. We are now in the third round of writedowns, and I submit the surface has not even been scratched. Nothing is being marked to market yet in the credit markets. All it would take is to have JUST ONE sector marked to market and we will witness panic. We have credit default swaps, CDO’s, SIV’s, interest rate derivatives, ARM corporates and municipals. And on and on. If just one sector were truly marked to market, the banking system will not survive 10 days. Possibly not 10 hours, meaning they won’t open the next day. That is how serious this is. This will end in a panic that will put 1929 to shame. I say this because the system will change dramatically, whereas after 1929 it was all about getting back to the way it was before the crash. This time we cannot go back to the past, the currencies must change. They must be backed by something. I am not smart enough to know exactly what the aftermath will look like. I am smart enough to know that precious metals will serve as the foundation to money in some way shape or form. They have for some 5000 years. The opportunity to become a “charter” member of the next banking system is now. Either have wealth in real money or lose your wealth in today’s’ paper currencies!

[groanup]

No company, Central bank, or combination of the two can stop what is coming down the tracks.

Do you have gold to sell?

[Freedom_Is_Not_Free]

C’mon, McGee. You are WAY over-reacting. This is nothing a 4% rate cut can’t fix...

[nicmarlo]

I wrote back in June and July about the prospective credit crunch. I also wrote that “if you don’t know what derivatives are, you will within 6-12 months”. Well, derivatives have bankrupted the system. No ifs, ands, or buts. The situation is systemic. I do not profess to know the exact outcome, but I do know the world will look and feel completely different a year from now. The last six months we have seen denial, we have heard it was “contained”, we heard “ok, now that the banks and brokers have taken writedowns the decks have been cleared”. That was after the first round of writedowns, we heard it again after the second round. We are now in the third round of writedowns, and I submit the surface has not even been scratched. Nothing is being marked to market yet in the credit markets. All it would take is to have JUST ONE sector marked to market and we will witness panic. We have credit default swaps, CDO’s, SIV’s, interest rate derivatives, ARM corporates and municipals. And on and on. If just one sector were truly marked to market, the banking system will not survive 10 days. Possibly not 10 hours, meaning they won’t open the next day. That is how serious this is. This will end in a panic that will put 1929 to shame....

Ping to post #15......he's spot on, with all of it.

[Allan Bartlett]

I’m a commodity broker. I don’t deal in the physical metals myself, but I have a lot of business contacts that do.

[mamelukesabre]

Clear channel buyout??

WHat’s this all about? I’m totally in the dark here. Can someone clue me in?

[groanup]

I own gold (gld) for the simple reason that it is above its 200 day moving average. If it falls under it I'll sell it. I don't buy your gloom and doom and I don't feel that you, as a professional, should be spreading it on a public forum. Some people may take you seriously.

But I'm no thread cop. Que sera sera.

[nicmarlo]

ping to post #15...the entire post. There’s not much more to say-—it is the way he says it is.

[CodeToad]

It is amazing how many rich people place their money with people they barely know.

[nicmarlo]

Although the following article is not concerning Clear Channel, and is dated September 2007, the kind of stuff being discussed in the article below is being repeated with numerous companies. I am trying to find the one concerning Clear Channel that I just read the other day (the arguments against a buy out, filed in court, sounded similar to what is below):

$8 Billion Buyout of D.C. Firm Collapses Biggest Deal to End Since Credit Crisis

David Cho | Washington Post Staff Writer
Saturday, September 22, 2007

The $8 billion buyout of audio-equipment maker Harman International Industries collapsed yesterday, the first major private-equity deal to unravel since the current credit turmoil began and a sobering sign for other big takeovers in the works.

Harman, of the District, said its would-be buyers, Kohlberg Kravis Roberts and Goldman Sachs, accused it of breaching a clause in the contract, allowing them to walk away after paying a $225 million termination fee. Harman denied the accusation, but it did not describe the nature of the alleged breach. The company and the bidders declined to comment further.

[wideminded]

“Several brokerage houses tumbled; blue-sky investment companies formed during the happy bull market days went to smash, disclosing miserable tales of rascality;"

Great writing.

That book is apparently online here.

Wikipedia on Frederick Lewis Allen here.

[nicmarlo]

Here's another article explaining the renegotiations from another perspective.

If Buyout Firms Are So Smart, Why Are They So Wrong?

As the law firm Weil Gotshal & Manges recently noted in a briefing to clients, “even a weak, but plausible” argument that a material financial change has occurred “may provide a buyer with significant leverage in renegotiating a deal.”

I'll try to find the one I read on Clear Channel...I *think* it was on Bloomberg...but am not positive.

[nicmarlo]

This isn't it, but it's close enough; can't find the one I was looking for right now.

Clear Channel Drops on Buyout Worries
January 22, 2008 | Kristen A. Lee, AP Business Writer

Clear Channel Shares Drop As Weak Industry Results Spark Jitters About Pending Buyout Deal

...Clear Channel shares dropped $1.41, or 4.2 percent, to close at $32.14, after hitting a 52-week low of $30.19 early in the session. In after-hours trading, the shares lost another 60 cents at $31.54.

Clear Channel is being taken private by a group led by Thomas H. Lee Partners LP and Bain Capital Partners LLC in a $19.5 billion deal. On Tuesday, the stock was trading nearly 20 percent below the $39.20 per share buyout price, which indicates doubt among investors that the deal will be completed.

The drop occurred following reports that radio industry revenue......

[jiggyboy]

I wonder if this writer has the Bank of America / Countrywide deal in mind. It looks to me like either BofA believes that “dollar cost averaging” for the rest of Countrywide will pay off down the road or they’re simply throwing good money after bad.

I long ago dismissed the general argument that “they’re a big company, therefore they must know what they’re doing” as something that is axiomatic and inarguable. I’ve seen too many examples of absolutely inexplicable business decisions that ended as badly as the most preliminary and cursory analysis predicted they would.

[nicmarlo]

I don't buy your gloom and doom and I don't feel that you, as a professional, should be spreading it on a public forum. Some people may take you seriously. But I'm no thread cop. Que sera sera.

That's a good thing; we wouldn't want to scare anybody about 1) the truth; 2) what they can easily find out from huge banks, like Bank of America; or 3) from surfing the internet, and other forums where people will find postings by other professionals, such as Allan Bartlett, who know exactly what's going on and are discussing it in great detail (all of which just happens to align with what Allan Bartlett said on this thread).

Halgr and Travis, you may be interested in the following article, in case you haven't yet seen it.

US subprime crisis costs global 7.7 trillion dollars
Feb 14, 2008

The meltdown in the US subprime real-estate market has led to a global loss of 7.7 trillion dollars in stock-market value since October, a report by Bank of America showed Thursday.

The crisis, which has spread beyond US shores to banks and other sectors worldwide, is "one of the most vicious in financial history," according to Bank of America chief market strategist Joseph Quinlan.

Quinlan said in the report that the losses are worse than any in the past few decades, including Wall Street's Black Monday of 1987, the 1999 Brazilian real currency crisis and the collapse of hedge fund Long Term Capital Management (LTCM) in 1998.

* * *

The losses were also greater than those suffered after the September 11, 2001, terro attacks, the Asian financial crisis starting in 1997, Argentina's default on its debt in 2001 and the 1994 Mexican peso crisis.

"It could take months or even years before Wall Street and others get a handle on the true cost of the US subprime meltdown and the attendant global credit crunch," Quinlan said.

"While subprime loans were once thought to be relatively small in scale and contained to just one segment of the US financial sector, the opposite has become painfully evident over the past few months."

A report last week by Standard & Poors ratings agency showed global stock markets were walloped with a collective loss of 5.2 trillion dollars in the month of January alone....

[groanup]

Well fine. Take your gold and go hide under your bed while the rest of us go out and make this economy work.

BTW, no "professional" or amateur knows "exactly what's going on". If he did, why would he tell you?

[nicmarlo]

None have claimed to know “exactly” what’s going on....but they aren’t lying about “exactly” what’s going on....like the globalists and Feds are.

[AndyJackson]

Travis, Have you read this paper by Doug Noland, How could Irving Fisher have been so wrong? It is a bit long, but it is a keeper.

[groanup]

None have claimed to know “exactly” what’s going on

Then don't claim it for them.

Listen, I don't want to get in a p***ing match. It really rankles me when so called "experts" predict the end of the financial world. They aren't helping things. We all have a vested interest in preventing panic selling.

I once worked on a government securities desk for a primary dealer. The head of the desk would chop off our heads if we spread rumors over the trading phones. Investing is too psychological for that kind of thing.

Cheers.

[AndyJackson]

He wants the profitable crown jewels.

I am always amused by this part. It is idiot's on the investment side who think that "insurance" on municipal bonds is a fee worth paying. What Buffett is doing is raking off the part of the business where the rewards (the fees) are demonstrably greater than the risks. Want to control your risk on muni bonds? It is easy. Like anything else, diversify your holdings, or buy into a mutual fund. Buying insurance is just making someone else (Buffett) rich.

[AndyJackson]

go out and make this economy work

I am not the first to make this point, but from everything I see going on, part of the cause of our crisis is that there are so many malinvestments, distortions and uneconomic activities that "making it work" is very difficult. The number of parasitic unproductive activities that have a stranglehold on things, including out of control legal and regulatory apprati, are a real problem. That is one of the things that Greenspan's credit bubble kept going, and made worse.

[Travis McGee]

Somebody suggests you invest in a lifeboat, and you immediately challenge his motives.

You will learn, with the rest.

[Travis McGee]

Yes, that short chapter on 1930 and the aftermath is classic reading.

[nicmarlo]

Sticking one head's in the sand doesn't make reality disappear. Coming to the realization, and accepting the fact that a bankrupt government cannot continue to function indefinitely without paying the piper, doesn't make the piper come any quicker than it already will. When you don't make your car payments....and cannot....the repo man is on the way...no matter where, or for how long, you hide the car....the repo guy will get it, eventually. That's what we're looking at, but in the scale of trillions of dollars (if not more). And it's not just in the U.S. It's now GLOBAL because the globalists have got it so that everything is now connected, there are little manufacturing jobs in the U.S. any longer, we have become nothing but a service economy, there are less people living in agricultural areas, there are millions more people dependent upon the government for sustenance (read the: legals in the cities/urban areas; and millions of illegals in same areas). No matter how you slice it, the debt problems aren't going away, even if this government didn't take on more debt by bailing out the banks which may go under because of all the increased bad credit (not just homes, but also repos. in vehicles and other credit problems)...etc., etc., etc.

A panic is bad enough, but you're looking at more than just panic. You're looking at severe financial problems that are based in reality not panic mode.

[Travis McGee]

Take your gold and go hide under your bed while the rest of us go out and make this economy work.

Strap those rosy-colored glasses down tightly, Pollyanna. A storm is coming. (As you know.)

[Travis McGee]

"We all have a vested interest in preventing panic selling."

Is that related to "The situation is contained," AKA "Return to your staterooms, the pumps are working perfectly?"

How is YOUR lifeboat looking, groanup? I'm sure you're well prepared to get off the ship ahead of the rush, while you are still touting equities to the sheeple. Like other touts were pushing ARMs in RE up until the bottom fell out of that one.

Like Mozillo at Countrywide, touting his company's stock while quietly cashing out to the tune of 100s of millions.

Mozillo also had "a vested interest in preventing panic selling." Namely, to cash out before his company crashed.

[Montana4Jesus]

Sorry I keep following you like this Travis but they go so well together...

“This [Federal Reserve Act] establishes the most gigantic trust on earth. When the President [Wilson} signs this bill, the invisible government of the monetary power will be legalized....the worst legislative crime of the ages is perpetrated by this banking and currency bill.”
- Charles A. Lindbergh, Sr. , 1913

“The [Federal Reserve Act] as it stands seems to me to open the way to a vast inflation of the currency... I do not like to think that any law can be passed that will make it possible to submerge the gold standard in a flood of irredeemable paper currency.”
- Henry Cabot Lodge Sr., 1913

“The few who understand the system, will either be so interested from it’s profits or so dependant on it’s favors, that there will be no opposition from that class.”
- Rothschild Brothers of London, 1863

“We have, in this country, one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board. This evil institution has impoverished the people of the United States and has practically bankrupted our government. It has done this through the corrupt practices of the moneyed vultures who control it.”
- Congressman Louis T. McFadden in 1932 (Rep. Pa)

“Some people think the Federal Reserve Banks are the United States government’s institutions.
They are not government institutions. They are private credit monopolies which prey upon the people
of the United States for the benefit of themselves and their foreign swindlers” — Congressional
Record 12595-12603 — Louis T. McFadden, Chairman of the Committee on Banking and
Currency (12 years) June 10, 1932

“A great industrial nation is controlled by it’s system of credit. Our system of credit is concentrated in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the world—no longer a government of free opinion, no longer a government by conviction and vote of the majority, but a government by the opinion and duress of small groups of dominant men.” —President Woodrow Wilson

“I believe that banking institutions are more dangerous to our liberties than standing armies.
Already they have raised up a monied aristocracy that has set the government at defiance. The
issuing power (of money) should be taken away from the banks and restored to the people to
whom it properly belongs.”—Thomas Jefferson, U.S. President.

“If Congress has the right [it doesn’t] to issue paper money [currency], it was given to them to be
used by...[the government] and not to be delegated to individuals or corporations” — President
Andrew Jackson, Vetoed Bank Bill of 1836

“History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and it’s issuance”. — James Madison

“Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create deposits”.- SIR JOSIAH STAMP, (President of the Bank of England in the 1920’s, the second richest man in Britain)

It is a terrible situation when the Government, to insure the National Wealth, must go in debt and submit to ruinous interest charges at the hands of men who control the fictitious value of gold. Interest is the invention of Satan”. - THOMAS A. EDISON

“By this means government may secretly and unobserved, confiscate the wealth of the people,
and not one man in a million will detect the theft.”—John Maynard Keynes (the father of ‘Keynesian Economics’ which our nation now endures) in his book “THE ECONOMIC CONSEQUENCES
OF THE PEACE” (1920).

“Capital must protect itself in every way...Debts must be collected and loans and mortgages
foreclosed as soon as possible. When through a process of law the common people have lost their
homes, they will be more tractable and more easily governed by the strong arm of the law applied
by the central power of leading financiers. People without homes will not quarrel with their leaders.
This is well known among our principal men now engaged in forming an imperialism of capitalism to
govern the world. By dividing the people we can get them to expend their energies in fighting over
questions of no importance to us except as teachers of the common herd.”—
Taken from the Civil Servants’ Year Book, “The Organizer” January 1934.

“It is well that the people of the nation do not understand our banking and monetary system, for
if they did, I believe there would be a revolution before tomorrow morning.” — Henry Ford

[Travis McGee]

Yep, Noland and others had it nailed even then. What we are seeing is nothing less than the final playout of the Keynsians vs the Austrians. "In the long run we are all dead" probably seemed like a decent working philosophy for that childless gay bachelor Keynes in 1936. Even Nixon was still believing it, when he closed the gold window and abrogated Bretton Woods in 1971, saying, "We are all Keynsians now." Tralala, borrow like there is no tomorrow. Prosperity on credit--easy terms. Let Junior pay for our binge--he can always stick the tab on HIS son, and so on, to infinity.

Not quite. Keyne's "long run" is here, and we are not dead.

"Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."

~~Irving Fisher PhD, leading U.S. economist , New York Times, October 17, 1929

"In the long run we are all dead."

~~John Maynard Keynes, 1936

"True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression."

~~Ludwig von Mises

"Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness."

~~Ludwig von Mises

"What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse."

~~Ludwig von Mises

"If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders."

~~Ludwig von Mises

[investigateworld]

Somewhere FerFal is holed up, laughing and saying "Told ya!"

[nicmarlo]

To paraphrase the words of another: There will be a crash when the solution appears that it is more expedient to raise cash through selling off stock than it is to continue servicing debt.

[GOPJ]

All it would take is to have JUST ONE sector marked to market and we will witness panic.

Please give an example.

[Travis McGee]

Great quotes. That one by Stamp was new to me, excellent.

And now it has come to pass: we have for the first time the entire world on fiat “faith-backed” money....and the faith is running mighty low.

Previously, only a few nations at a time wandered into the disaster of pure fiat systems, and when they inevitably collapsed, the rest of the world endured, and in time lifted up the collapsed nations via trade.

This is uncharted water, a global fiat system.

For sure, the solution to be offered post-collapse will be 3 or 4 regional super currencies, and then a single global currency.

It’s going to be an interesting decade, in the Chinese sense.

[Travis McGee]

To paraphrase the words of another: There will be a crash when the solution appears that it is more expedient to raise cash through selling off stock than it is to continue servicing debt.

Add to that the millions of boomers retiring, starting now. As they cash out their 401Ks, and liquidate their mutual fund positions, who exactly will they be selling to? Gen Y's working at Walmart? This can only go one way.

Here is a chart that gives me the willies.

I dabble in TA, but I'm no chartist. Still, this is Frankenstein scary.

[nicmarlo]

As they cash out their 401Ks, and liquidate their mutual fund positions, who exactly will they be selling to? Gen Y's working at Walmart? This can only go one way.

That's exactly right, Travis. That is why I also brought up the fact that, even if the government (that includes the various governments, as in both federal and state) takes on no "additional" debt....they already have past and present obligated debts...and that alone increases the debt totals daily. I read by how much the accumulated daily debt is just on interest (but don't recall at the moment).

This is without increasing debts for proposed: universal health coverage (LA County, California may close its clinics because it can no longer afford to keep them open, lol (gee, I can't imagine why as government keeps saying that "universal health care is cheaper than private health insurance"), payments to illegals and their offspring who they plan to offer amnesty, so these payment amounts will only increase, by the millions of dollars, as more come into this country, combined with, as you noted, baby boomers retiring, and all the rest that would naturally occur.

The debts for the above are besides any "new" debts the feds plan on assuming for bail outs to banks and/or the FDIC.

[Toddsterpatriot]

No company, Central bank, or combination of the two can stop what is coming down the tracks. We are talking TRILLIONS! There are $750 Trillion of derivatives outstanding.

OMG! LOL!

[nicmarlo]

Toad....you're always a "barrel of lols" but never of anything of substance.

According to reliable sources, btw, FDIC-insured institutions have about $8.19 trillion of deposits overall.

You must not have watched this video, toad (from my post on another thread) with T. J. Marta being interviewed. Its approximate 20 minute length was more enlightening than all your posts combined:

VIDEOs:

TJ Marta, US Economic Slow Train Wreck (21:32 minutes)

.."People involved equities don't really understand how badly broken the financial intermediation system is. You take Enron/Worldcom, you take the Internet Bubble, you take LTCM, you take the junk bond crisis, you take the S&L crisis you take the housing crisis of 1990, roll them all into one, and that's what we're looking at." Subprime is a problem, but there's this whole "circle of disaster" and that brings us back to housing...

..."IMO we're going to have to see a bail out...foreclosures are going to continue to rise and that is going to trigger credit events...yes sub-primes are a problem, but it's this whole circle of disaster....we are looking at the credit bubble bursting...which will hit the economy."

Let's talk about who gets a bailout?....Do you mean a government bailout?

"The only people with money right now are foreign governments and the US government....we saw in October the government wouldn't bail out the CIVS....the monolines it appears the government doesn't want to step in...the real question is what private investor wants to touch these?...and if they don't someone's got to step up and I can't imagine anyone other than the US government....the US government itself might be downgraded because of this."

What happens short term to the market if they do not?

There is a whole lot of pain to come before we even get to the monolines. I liken it to Dantes levels of hell....if the monolines blow up, there's the next level of hell...there will be a repricing of municipal bonds they back and then of the CDO's they back...they exist in a liquid market...(~9:07) the CDO's are marked to model or marked to myth, depending on how cynical one is...they are not liquid....when a credit event comes and there's a downgrade of the monoline backing the CDO, the CDO suffers a downgrade itself, and then what you're going to see is a step loss in value and you're also going to see real money investors whose mandate requires them to hold AAA paper suddenly finding themselves holding AA paper and having to unload this paper into a market that has no desire for it.

Can we put a number on this yet?

(~9:42)
We have about $140 billion in CDO's...there was one report put out by one of the major banks that the banking system itself will require an immediate $140 billion cash injection just to maintain capital ratios. Then on top of this, you do have....it's got to be in the hundreds of billions.

(~11:45)
We have this tsunami of various credit events hitting the market....

(~12:31)
the credit issues are so huge...so titanic, almost incomprehensible.

Can you compare it to something else?...

Okay, what I compare it to: you take Enron Worldcom, you take the internet bubble, you take LTCM, you take the junkbond crisis, you take the S&L crisis, you take the housing recession from 1990, roll them up all into one, and that's what we're looking at....

What are you looking at with the economy long-term?

Possibly the 80's, possibly worse.

(~14:40)

...Now we turn to the dollar...look at what the dollar's done over the past year...what we've seen here is at least a bit of stabilization...in light of everything that you've said, why are we seeing that?

Okay, well it's interesting the chart you're showing is one year, if you'd put that chart back to 1973, you would see that we've registered the lows since the end of Bread & Woods (?), which has caused some, including myself, to suggest that we are on the precipice of a dollar crisis at this point....

...with the dollar so cheap foreign funds are buying US assets....

(~17:27)
...the EURO at 150 would be extraordinarily bad for the US dollar....

(~20:10) ...we've had a good run of very easy money and now it's time to pay the piper.

VIDEOs: