joetanega

Tracking the Credit Crisis - History & Synchrony

Reading the FT in the mornings on the train from Welling, Kent to Victoria, London gives me about 35 to 40 minutes to take views of the world seen from the lenses of financial journalists who've scoured short-term and long-term facts and presented the jumbled mess of the world into a rain of news with some pattern.

The pattern (trend?) I've noticed in today's FT is that the credit crisis has rippled into the shipping world. This is the real world of products shipped from point A to point Z on the planet Earth, and the letters of credit which should function boringly without any sense of risk or untoward regret have become problematic because the clerk-teller in India, say, has refused credit of another bank because ...because ...who knows whether the bank in question is linked to the Lehman bankruptcy. The Lehman bankruptcy according to the news-pattern was a categorical error of judgment (See John Dizard's (Oct 27, 2008) "Firefighters better save shipping next," FTfm at 13). Dizard's words: "Treasury secretary Hank Paulson's ignorant and clumsy attempt to avoid moral hazard and systemic risk resulted in uncounted quantities of goods piling up on loading docks, and customers living off inventories and consuming less."

My gentle meander through the course of history, however, came from reading Edward Chancellor's (Oc 27, 2008) "History is not exactly repeating itself," FTfm at 28) where he quotes the "brilliant study" by Barrie Wigmore on The Crash and Its Aftermath. In this classic description of a ravaged US economy where everything appears to be surrealistically stopped, Wigmore says, "Shipping docks in the coastal cities lay idle for weeks without a single ship arriving." Dizard in his article says that the Baltic Dry Index (BDI) which trackes the price of shipping dry cargo along key routes has fallen from the day of Lehman's bankruptcy--September 15, 2008 (everyone should remember this date as the exact reference point when a capitalist error caused the Anglo-Saxon model of financial capitalism to fail and fall under the arms of the socialist construction)--when the BDI was 4,949 to 1,149. This is a fall of 76 percent. As in the bursting of any economic bubble, the choices of the market players become digital. Dizard asks in his immitable American way, "Why should they [the hardworking, middle class, average, families who are sitting around the kitchen table playing by the rules] care that some Greek or Lebanese is underwater, so to speak, on his ship?" He answers his own rhetorical query with "How about because what you need to stay middle class and average, or hardworking, is being carried on those ships?"

If Chancellor and Dizard weren't enough to remind me about how important shipping is and so vulnerable to the credit crisis, I came across Robert Wright's (Oct 27, 2008) "Sales of ships for scrap being 'suffocated', FT at 21. He starts off with: "A key safety valve for regulating the world's supply of ships has stopped working in recent weeks, after credit and other problems brought the sale of ships for scrapping to a near halt." Further, "The central problem, according to people invovled, is that many shipbreakers' banks are no longer willing to issue letters of credit-documents assuring the seller's bank that the agreed price for the vessel will be paid. The banks fear that falling scrap values mean their customers will be unwilling to pay the seller the guaranteed sum and the vessel will not cover the guaranteed amount if it is seized as security. Some Indian banks also appear to have refused to honour letters of credit over fears about the value of the ships pledged as security. Vessels were fetching record prices of up to $740 a tonne as recently as September, while the present market price has collapsed to $300."

So, here is the short-long category theory equation of the credit crisis:

Asset-backed Securities (ABS) --> Residential Mortgage-backed Securities (RMBS) --> Sub-prime ($615 bn 2006), Alt-A ($475 bn 2006), and Jumbo ARMS ($395 bn 2006) of which $250 bn subprime ARM) --> $2.75 trn of mortgage-debt is bad ($1.25 trn is subprime, $1 trn alt-A and $500 bn are jumbo ARMs)--> mismanagement at Bear Stearns Asset Management & its bankruptcy $1.7 bn loss Feb 2007 to June 2007-->collapse of ABCP market on August 6-7th 2007-->money market seizure thereafter with retail withdrawals-->official "liquidity" problem declared in banking system with US Fed and US Treasury Secretary allowing "dead mice" of RMBS to be traded for treasury paper Nov 2007-->Bear Stearns "rescued" by JP Morgan with $24 bn guarantee issued by US gov't Feb 2008-->too big to fail argument becomes bank solvency problem with list of banks on "death row" doubling and tripling, until in March 2008 "every bank" appears to be a target for failure-->measures of potential loss from credit crisis is now minimum of $500bn and rizing in slow exponential fashion to $6 trn, the D (depression) word becomes a constant image-->Sept 2008 Wall Street independent investment banks disappear and Lehman Brothers goes bankrupt on September 15, 2008.

Research topics: (1) How to compose fundamental human rights in opposition to dictatorial discretion of governments that act like pirates raiding the long-term value of their shares? (2) How to grow your own vegetables for investment bankers?

ciao
joe

posted by joetanega @ 2:24 AM 0 comments