18 May 2008

'Where We Have Been and Where We are Going'

Rasputin August 12, 2007

Yesterday evening I posted a long-winded missive on the events of the last few years that have led us to this present period of, um, “uncertainty” in the housing, debt, and stock markets.

This morning I will make a weak and futile attempt to prognosticate where we are going from here. Again, I'll try to keep it brief, but you know how it is once my little runaway Rasputin fingers get to typing along...

First, please allow me to reiterate the crucial points made in yesterday's rant:

-$2 trillion of very suspect MBS have been created by private label securitizers over the last few years and were sold to bahgolders.

-Currently, Fannie and Freddie hold and/or guarantee about $3 trillion in their MBS.

-Also during this time frame the home-equity/ATM securitizers created $600 billion in HELOC-backed MBS.

-The banking system, in addition to snapping up $1 trillion of the MBS that Fannie/Freddie and the private label boys created, also loaned, directly to homedebtors, an additional $3.4 trillion.

Finally, the Wall Street Quants created approximately $600 billion of CDO-sausages, which included MBS as part of their “mystery meat”, and of course CLOs, CMBS, and other grissle, fat and bone.

Again, let's total all this up and see what we have:

Private Label MBS: $2 trillion

Fannie/Freddie: $4 trillion

HELOC: $600 billion

Banks Direct: $3.4 trillion

CDOs: $600 billion

Total: $11 trillion (approx.)

Setting aside the $3.4 trillion in death pledges that the banks are directly sitting on, that leaves about $7 trillion in securitized debt.

Which was stuffed into every:

-Pension fund
-Mutual fund
-Money market fund
-Foreign Central Bank
-God only knows who else

To recap where we are now:

The world is engorged with $7 trillion in highly-suspect MBS, CDOs, CDO-squareds, ad infinitum.

The cash ain't flowin',

The “value” of the MBS/CDOs are plummeting.

Margin calls are going out all over the place. Stuff is being dumped at fire-sale prices—if they can even GET a bid.

Investors in the various tranches are trying to exit the burning building. But the hedgies and investment banks are locking the exits.

Into the fray this week steps the world's central banks. And like pyromaniacs in charge of the fire station, they offer more gasoline “liquidity” to fight the fires they themselves set with their fiat/fractional reserve lending/central banking/securitization/derivatives matches. They have, literally, offered “Infinite Fiat.”

So, we have now blown a multi-trillion dollar (I'm still gonna stick with my $3 trillion prognostication) hole in the Good Ship Real Estate Titanic.

Okay, that sums up yesterday's diatribe as succinctly as I am capable of doing.

Oops, I forgot to add one, little, detail yesterday:

The ENTIRE credit system—not just the mortgage/MBS/CDO-related stuff—has seized up, with LBOs not getting sold, banks refusing to lend to each other, even overnight, and the hedge funds and investment banks scrambling to make margin calls and liquidate positions to meet margin calls. All of which prompted the world's central banks to create a nice, round, quarter of a trillion dollars in “temporary liquidity” on one, 24-hour period to attempt to keep the inter-connected, amplified, edifice from collapsing in on itself.

There, NOW I am finally ready to move forward with my prognostication of what might happen next.

What happens next?


That's right. I stated “Nothing”.

Now, to be fair, I need to extend that one-word sentence to its logical point:

Nothing DIFFERENT, that is.

For, we are so far down the road in this journey to “Infinite Fiat” there is NO turning back—at least voluntarily.

Nope, it's gonna be NOT only “Business as Usual”, but also very much “Business as UNUSUAL”, with the type of action you saw from the governments and CBs on Thursday and Friday torqued up to an extreme level. Yes, extreme even BEYOND the quarter-trillion dollar “Temporary” hot-beef liquidity injection you just witnessed.

By the way, last night I dispelled the MYTH that the Fed “can't” buy anything but U.S. treasuries/agencies, as some posters here have incorrectly insisted is the case. And, at the risk of making this missive massive, I reprint below and excerpt of just what the Fed is authorized to buy, IN THEIR OWN WORDS:


"The Fed could replace Treasury debt in its portfolio with assets such as discount window loans to depository institutions, repurchase agreements with private counterparties, securities of private businesses, debt of state, local or foreign governments, and liabilities of federal agencies or federal government sponsored enterprises, to name several possibilities."

This comes directly from the Richmond, VA Fed and I provided a link to it in the thread where I was asking the esteemed Mr. Moto for some clarification on Fed actions.

Now, back to “We're scroomed!”, er, What will happen next.

Okay, so now “the cat is outta the bag” and even the slow, slovenly, central bankers and governments know we have a genuine, first-class, up-in-your face liquidity crisis going on. And the numbers are HUGE. Huge as in at least:

[$3 trillion in soon-to-be-defaulted home debt, owed by bankrupt sheeple who are sitting in:

Somewhere between 7 million and ten million soon-to-be empty homes.

Trillions more of MBS/CDO/Squared/Cubed/CDS/other derivatives that are more intertwined and inter-tangled than an Appalachian family, and are stuffed into literally every corner of the world's financial system.

$500 billion in LBS sitting on the books of the mezzanine banks, which can't be offloaded onto bagholders

A potential loss of at least $1 trillion per year in mortgage originations (and with it, all the related “Real Estate Industrial Complex industries of sales, building, securitization, furnishings, etc.)

Not to mention a general stock and (other than sovereign, for now) bond market crisis.

So, what do the CBs and governments do?


They monetize.

Now, before the two remaining deflationists in the world jump up and say “NO WAY!!!”, please allow me to softly remind them to sit down, look at that one quarter of a trillion dollar TOMO-Tofu the CBs just swallowed, and then reconsider this before making fools of themselves.

To be fair, though, to the die-hard deflationists, I will modify the above statement to:

They will ATTEMPT to monetize.

And they will ALSO do each and every thing I have been predicting for months on this very board, some of which are happening right now:

Debt forbearance (Which the FDIC woman said to Kudlow was now called “Restructuring” on his show on Thursday. And not just homedebtors either, but rather ALL debtors whether they be corporate, financial, or otherwise.

Continued TOMOs and even POMOs from the CB crowd. Hey, it's ONLY electronic fiat credits, right?

Government-sponsored programs to nationalize entire industries and segments of the economies. “RTC II, the Sequel” comes right to mind for the homedebting sheeple, and “Super Duper Ginnie” comes to mind to buy up ALL the outstanding MBS, should the Fed not want to be coerced into taking them on their balance sheet.

Of course, lots and lots of “jawboning” to keep the sheeps complacent. However, if this should fail and the sheeps start a bank run, then another “bank holiday” will certainly be implemented. And it will ALSO include stopping capital flight, so don't get cute and think you will just move your electronic fiat credits to some off-shore haven. Or even keep them there if they are there now. I won't even get into what will happen to the Gold Hoarding Seditionist crowd. But trust me, it will make Gitmo look like a five-star hotel stay!!!

As all this plays out over the next few months, look for wild market gyrations, tons of back-and-forth debate, panic and fear at all levels, more seizures in various markets (including at least trading curbs on the stock exchanges as well as entire shut downs), corporations refusing to extend credit to customers.

Oh, and did I mention that there might be a problem or two getting our communist and muslim debt-enablers to buy off on more MBS/CDOs? Oops.

In conclusion, I believe that the attempts at monetization will ultimately fail and that not only will about $5 trillion be lopped right off the top of the REGULAR debt pyramid, but also at least $10 trillion or more from “The Great Derivatives Edifice”. Not to mention untold trillions in world GDP.

And maybe a few trade wars, some oil disruptions, and perhaps even a larger, regional war as well, for good measure.

Well, I promised to keep this short. And I obviously lied, but what's new?

In any event this is as clear a picture as my teeny, tiny, paranoid, nihilistic, little Rasputin brain is capable of projecting events out into the future.

You are certainly welcome to offer your own vision of the future.

I am willing to cling to ANYTHING that is less pessimistic than my own prognostication.


(MrSpock): Clearly Earthling Rasputin was a long-winded soul. Notwithstanding his massive missive, his proposed scenario, given nine months ago, seems to be playing out very much as predicted. Going forward, this Vulcan sees only a continuation of the nationalization of the mortgage industry--via overt and covert means--and further devaluation of the U.S. fiat dollar in order for the U.S. to stealthily default on its obligations to its creditors.

This continuing saga is one best view from a far-distant planet.

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