30October,2008

Hayman advisors ~ we doomed, period!

According to HAYMEN advisors, the problem is not because banks don't trust each other - the problem is that THERE IS NO MONEY LEFT FOR THEM TO LEND TO EACH OTHER.

�We have argued for years now that there is not enough money at the bottom of the levered pyramid scheme the world has put together�

In the U.S. alone, with Lehman, AIG, Bear Stearns, Fannie, Freddie, WaMu, IndyMac, Countrywide, and the rest of the companies that have failed to date (any many more "on deck"), there are $8 TRILLLION of assets already in receivership, conservatorship, liquidation, or "parked" with a big brother.

Do you think the Government will be successful in purchasing illiquid assets off of the balance sheets of troubled companies? The odds (and the assets) are against them.

How long and deep will this recession be?

We are experiencing the global deflationary bust of all time. It will deflate the values of just about all assets. Anything and everything we own will decline precipitously in value. We are not perma-bears like some others, but we must be realistic about facing this terrible economic environment. Unlike many, we don't believe the problem is either isolated from the “real� economy, or limited to the U.S. or that the world will be rescued by the invincible Chinese economy.

The world economies have already hit the iceberg

As we all know, what we see on top of the water is only 10-20% of the mass of the full iceberg. In the grand scheme of it all, there is really nothing that can be done. Both the US and the world economy are headed for a financial winter the likes of which we have never seen before (unless you happen to have been alive in 1929).

- �the most frightening chart we have seen is one that compares total credit market debt to U.S. GDP. The average of this ratio over the last 100 years has been around 155%. This ratio peaked first heading into the Great Depression at 260% (after then falling back to 130%) but has now risen to an unprecedented 350%!�

We think we will see 10-12% unemployment, a 4-5% decline in GDP, and the equity markets could drop at least 70% from peak to trough.


THE WORLD HAS LOST HALF OF ITS EQUITY MARKET WEALTH ($29 TRILLION) since last October. The negative wealth effect will be DEVASTATING

In the U.S., we are only just beginning to see the strain of tighter credit on consumer spending. As corporate earnings decrease and workers are laid off, the cycle of delinquencies and defaults will get worse.

This deflationary bust will take MANY YEARS and MANY BANKRUPTCIES to play out

We are but one year into the mother of all credit crunches and two years into a housing decline. Don't be seduced by anyone telling you that “all will be fine� anytime soon.

�...the fundamental flaw in the governmental response is that it is trying to re-lever an already massively overleveraged system in a short-term attempt to halt an unavoidable cycle of asset price deflation. This policy prescription is like treating the withdrawal symptoms of our global credit addiction with another hit of heroin. Like any addict, one hit is never enough and the only question remains is how long it takes the global economy to ask for just one more…�

- To date, some $550 Billion has been written down by the world's financial institutions. In the United States alone, there is $10 TRILLION of "Prime" mortgage debt, $1.5 TRILLION of Alt-A mortgage debt, and $1.2 TRILLION of Subprime mortgage debt. Based on our assumptions, we believe we will see cumulative losses of AT LEAST 25% in Subprime, 20% in Alt-A, and 5% in Prime. Our expected default rates and severities imply that over $2.2 TRILLION of defaulted mortgage loans would result in AT LEAST $1.1 TRILLION of REAL LOSSES in mortgages IN THE U.S. ALONE.
Â
- There are $6 TRILLION of untapped bank lines of credit not included on U.S. bank balance sheets (with very little reserved for them). This represents more than 6x the total equity of the entire U.S. banking system. The banks simply DONT HAVE THE MONEY TO LEND. This decision signed the death warrants of the "independent" broker-dealer model.
  Â
- If we assume that CDS is evenly distributed (although Lehman just proved it isn't), and that we will see S&P's predicted 23% cumulative defaults on speculative grade nonfinancials by 2010, then we will see approximately $2.6 Trillion of CDS in default (we think this number is low). If we use a 60% recovery rate (Lehman's was only 8.625%), we could see at least ANOTHER $1 TRILLION of losses in CDS contracts alone. We would argue that CDS contracts are written on more dubious assets by nature. Â Â Â

�Fannie and Freddie spreads to US Treasury bonds have hit their highest levels EVER today. Now that they are nationalized and explicitly guaranteed, shouldn't they trade at the narrowest spread ever? The bottom line is that there is no money in the global system to buy this stuff. Globally, investors are tapped out, and the leverage in the system has to come down. We have no idea how this is supposed to happen in an “orderly� fashion.�

According to HAYMEN advisors, the problem is not because banks don't trust each other - the problem is that THERE IS NO MONEY LEFT FOR THEM TO LEND TO EACH OTHER.

�We have argued for years now that there is not enough money at the bottom of the levered pyramid scheme the world has put together�

In the U.S. alone, with Lehman, AIG, Bear Stearns, Fannie, Freddie, WaMu, IndyMac, Countrywide, and the rest of the companies that have failed to date (any many more "on deck"), there are $8 TRILLLION of assets already in receivership, conservatorship, liquidation, or "parked" with a big brother.

Do you think the Government will be successful in purchasing illiquid assets off of the balance sheets of troubled companies? The odds (and the assets) are against them.

How long and deep will this recession be?

We are experiencing the global deflationary bust of all time. It will deflate the values of just about all assets. Anything and everything we own will decline precipitously in value. We are not perma-bears like some others, but we must be realistic about facing this terrible economic environment. Unlike many, we don't believe the problem is either isolated from the “real� economy, or limited to the U.S. or that the world will be rescued by the invincible Chinese economy.

The world economies have already hit the iceberg

As we all know, what we see on top of the water is only 10-20% of the mass of the full iceberg. In the grand scheme of it all, there is really nothing that can be done. Both the US and the world economy are headed for a financial winter the likes of which we have never seen before (unless you happen to have been alive in 1929).

- �the most frightening chart we have seen is one that compares total credit market debt to U.S. GDP. The average of this ratio over the last 100 years has been around 155%. This ratio peaked first heading into the Great Depression at 260% (after then falling back to 130%) but has now risen to an unprecedented 350%!�

We think we will see 10-12% unemployment, a 4-5% decline in GDP, and the equity markets could drop at least 70% from peak to trough.


THE WORLD HAS LOST HALF OF ITS EQUITY MARKET WEALTH ($29 TRILLION) since last October. The negative wealth effect will be DEVASTATING

In the U.S., we are only just beginning to see the strain of tighter credit on consumer spending. As corporate earnings decrease and workers are laid off, the cycle of delinquencies and defaults will get worse.

This deflationary bust will take MANY YEARS and MANY BANKRUPTCIES to play out

We are but one year into the mother of all credit crunches and two years into a housing decline. Don't be seduced by anyone telling you that “all will be fine� anytime soon.

�...the fundamental flaw in the governmental response is that it is trying to re-lever an already massively overleveraged system in a short-term attempt to halt an unavoidable cycle of asset price deflation. This policy prescription is like treating the withdrawal symptoms of our global credit addiction with another hit of heroin. Like any addict, one hit is never enough and the only question remains is how long it takes the global economy to ask for just one more…�

- To date, some $550 Billion has been written down by the world's financial institutions. In the United States alone, there is $10 TRILLION of "Prime" mortgage debt, $1.5 TRILLION of Alt-A mortgage debt, and $1.2 TRILLION of Subprime mortgage debt. Based on our assumptions, we believe we will see cumulative losses of AT LEAST 25% in Subprime, 20% in Alt-A, and 5% in Prime. Our expected default rates and severities imply that over $2.2 TRILLION of defaulted mortgage loans would result in AT LEAST $1.1 TRILLION of REAL LOSSES in mortgages IN THE U.S. ALONE.
Â
- There are $6 TRILLION of untapped bank lines of credit not included on U.S. bank balance sheets (with very little reserved for them). This represents more than 6x the total equity of the entire U.S. banking system. The banks simply DONT HAVE THE MONEY TO LEND. This decision signed the death warrants of the "independent" broker-dealer model.
  Â
- If we assume that CDS is evenly distributed (although Lehman just proved it isn't), and that we will see S&P's predicted 23% cumulative defaults on speculative grade nonfinancials by 2010, then we will see approximately $2.6 Trillion of CDS in default (we think this number is low). If we use a 60% recovery rate (Lehman's was only 8.625%), we could see at least ANOTHER $1 TRILLION of losses in CDS contracts alone. We would argue that CDS contracts are written on more dubious assets by nature. Â Â Â

�Fannie and Freddie spreads to US Treasury bonds have hit their highest levels EVER today. Now that they are nationalized and explicitly guaranteed, shouldn't they trade at the narrowest spread ever? The bottom line is that there is no money in the global system to buy this stuff. Globally, investors are tapped out, and the leverage in the system has to come down. We have no idea how this is supposed to happen in an “orderly� fashion.�

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