looks like total meltdown to me… this will only be cached for about 5 days… can only be described as shock and awe of the purest type:
http://www.markit.com/cache/curves/061746b571699856dc9bdb37f1c.png
Those things heading straight south are the Alt-A morgtgage backed securities… not the subprime supercrap that we all knew as supercrap… the stuff that was supposed to weather the storm pretty well, and it just got toasted…
Fraudulent subprime mortgages
Tyler Cowen
The market seems (more or less) competitive on the supply side. So the greater the opportunity for fraud (by lenders), the more lenders will enter the market. This will bid down prices (interest rates on loans). The loan contract will move toward lower price, lower quality. Of course prices are lower on average but for those who end up ripped off the real price, ex post, is much higher.
On average who loses from such a shift? Well, to some extent there is a pooling of heterogeneous tastes into a single market segment. The ones who don’t like the lower price, lower quality equilibrium will be the higher valuation buyers for the contract, that is the wealthier people in the relevant loan class, not the poorer people. The poorer buyers in the market segment might well be better off.
This result does not require buyers to be wary about fraud. It is even possible to get a superior outcome if buyers are totally unaware of prospects for fraud. To the extent buyers are suspicious, they will invest resources in monitoring the behavior of suppliers. Often such monitoring is simply keeping/capturing pecuniary externalities, and thus it is oversupplied relative to a first best. If buyers are fully unaware there will be no socially wasteful monitoring and the lower prices still will arrive.
You might say “Ah, but we cannot dismiss pecuniary externalities when insurance markets are incomplete.” I might say “Ah, but aren’t buyers generally risk-loving in terms of prices”?
The bottom line is this: whenever you see fraud, apply tax incidence analysis to understand the final results.
“There is an old Wall Street saying: the market can remain irrational longer than you can remain solvent…”
Briefly noted in today’s Financial Times:
“Beazer homes, the homebuilder under investigation by the FBI for potential fraud, on Thursday also reported a quarterly loss on costs for lowering the value of its inventory of land. Pulte Homes and Centex, the third and fourth largest US homebuilders, this week said they made quarterly losses for the same reason.” 
Ah yes… today’s ever so juicy news…:
American Home shares plunged 89% after the lender told investors it was seeking an orderly liquidation of its assets, following a series of margin calls that essentially put it out of business.
American Home’s plunge came a day after the implosion of a much bigger player, Sowood Capital Management. The hedge fund collapsed under the weight of different issues – specifically a widening of credit spreads, or the difference between the yields on safe government debt and risky corporate securities.
But even if this week’s blowups aren’t explicitly linked, market observers say they point to a coming reckoning for credit-oriented hedge funds. Rumors are already flying about more hedge funds meeting with huge declines for July, and bid lists circulating through the bond markets. “This stuff is more widely held than just a handful of firms have reported,” Peter Goldman, managing director at the money management firm Chicago Asset Management, says of distressed debt. “I would be surprised if there weren’t more skeletons in the closet.”
The German government-owned development bank that stepped in this week to protect IKB Deutsche Industriebank AG from exposure to the U.S. subprime crisis says its financial obligations totaled €8.1 billion (US$11.1 billion).
The bank, KfW, made the declaration in a filing with the U.S. Securities & Exchange Commission that was dated July 30. A copy of it was retrieved from the SEC’s Web site.
IKB’s problems sprang from its Rhineland Funding investment vehicle’s apparent inability to cover its funding needs due to exposure to U.S. subprime real estate loans, made to borrowers with weak credit histories.
These guys were supposed to be lending to small and medium-sized industrial companies in Europe. Oops. Who could have known 
So much for “containment”:
**Macquarie Bank **has warned that two of its debt funds could face loses of more than A$300m but stressed the funds were not exposed to the US subprime mortgage market.
The Australian investment bank’s problems follow those of hedge fund groups Basis Capital and Absolute Capital, which have both been hit hard by investments linked to the beleaguered subprime mortgage market and underline widening problems in the broader credit market.
Macquarie warned that its funds could lose up to 25 per cent of their value as fallout from the US subprime loan crisis hits Australian shores. The bank’s shares closed down 10.7 per cent at A$73.70 in trading in Sydney Wednesday.
In a statement to the market, Macquarie said the bank’s listed Macquarie Fortress Notes fund and its unlisted Macquarie Fortress Fund had been exposed to an unanticipated surge in volatility in the US credit market. About A$140m in investors’ equity is held in the listed fund and about A$80m in the unlisted one. The funds have total exposure of six times that amount because they are heavily leveraged. Units of the listed Macquarie Fortress fund closed down 24 per cent Wednesday.
”The price movement we have seen in the last week has been unprecedented,” said spokesman Peter Lucas. ”We didn’t expect this to happen.” 
I’m sure Shiller and Taleb will soon start work on revised editions of their books . ‘who could have known?’ hilarious.
And in a piece of understated rumination:
“Most mortgage banking companies will trade weaker over the coming months until the mortgage market stabilizes and liquidity returns,” wrote Paul Miller, an analyst at Friedman Billings Ramsey who cut his 12-month price target on IndyMac by $10 to $22. “We also believe book value will not support mortgage stocks at this point in the credit cycle.”
Analyst speak: translated into english:
“prepare for the worst”
Funny thing… if only they had followed the discussion on the androtics board… (!)
from Clusterfuck Nation by Jim Kunstler
"Last week’s stock market meltdown suggested that a financial sector rigged for the falsification of reality eventually enters a danger zone where reality implacably reasserts itself, expectations dissolve, and all that remains is the sour odor of fraud.
This long episode of market mania, running for seven years, was based on the idea that non-performing loans could be turned into money by removing them from their point of origin and dressing them up in respectable clothes – like taking all the winos in downtown Los Angeles, putting them in Prada suits, and passing them off as the faculty of the Harvard Business School. It was a transparently ludicrous racket and the wonder is that America proved to be so utterly bereft of regulating authority – not to mention plain decency and self-restraint – at every stage.
It’s really hard to account for the stunning failure of responsibility. What you had was a whole industry that surrendered the standards and norms that brought it into being and enabled it to function in the first place. Mortgage lenders stopped requiring house-buyers to qualify for loans; bankers stopped caring what stood behind the paper they issued; dubious loans were bundled and resold like barrels of rotten anchovies – in such numbers that no individual stinking minnow would stand out – and the barrels were traded up the line, leveraged, hedged, fudged, fobbed, and fiddled until, abracadabra, they were transformed into so many Tribeca lofts, Hampton villas, Piaget wristwatches, million-dollar birthday parties, and Gulfstream jets.
It worked for the Goldman Sachs bonus babies, and the private equity scammers, and for the corporate CEOs and their board members, and for the politicians who parlayed their votes into cushy lobbying jobs, and even for the miserable quants in the federal government’s termite mounds of statistical reportage. It even worked for about 18 months for millions of feckless US citizens gulled into contracts for houses they could never hope to pay for, under arrantly false and ruinous terms . . .
Ya know what’s really creepy, unnerving, and… mmmm… raising more question than it answers…
The small fact that this story got NO media coverage in the US mainstream reportage… Financial Times has it as a lead story, New York Times doesn’t say a word…
Isn’t that usually a signal of somebody being a lot more distressed than they’re letting on ?
“The rescue of IKB, a specialist lender based in Düsseldorf, began on Sunday when Peer Steinbrück, German finance minister, called top banking executives to discuss a bail-out. According to people who took part in the conference call, Jochen Sanio, head of Germany’s financial regulator, is said to have warned of the worst banking crisis since 1931”.
Worst banking crisis since 1931 ? That’s a pretty darn tall order there, fella.
Return of the Robber Barons By Paul Craig Roberts
08/02/07 “ICH” – – As the Bush Regime outfits B-2 stealth bombers
with 30,000 pound monster “bunker buster” bombs for its coming attack
on Iran, the US economy continues its 21st century decline. While
profits soar for the armaments industry, the American people continue
to take it on the chin.
The latest report from the Bureau of Labor Statistics shows that the
real wages and salaries of US civilian workers are below those of 5
years ago. It could not be otherwise with US corporations offshoring
good jobs in order to reduce labor costs and, thereby, to convert
wages once paid to Americans into multi-million dollar bonuses paid to
CEOs and other top management.
Good jobs that still remain in the US are increasingly filled with
foreign workers brought in on work visas. Corporate public relations
departments have successfully spread the lie that there is a shortage
of qualified US workers, necessitating the importation into the US of
foreigners. The truth is that the US corporations force their American
employees to train the lower paid foreigners who take their jobs.
Otherwise, the discharged American gets no severance pay. [See, for
example, American Renaissance News: June 2006 Archives
bofa_train_your.php ]
Law firms, such as Cohen & Grigsby, compete in marketing their
services to US corporations on how to evade the law and to replace
their American employees with lower paid foreigners. As Lawrence
Lebowitz, vice president at Cohen & Grisby, explained in the law
firm’s marketing video, “our goal is clearly, not to find a qualified
and interested US worker.”
Meanwhile, US colleges and universities continue to graduate hundreds
of thousands of qualified engineers, IT professionals, and other
professionals who will never have the opportunity to work in the
professions for which they have been trained. America today is like
India of yesteryear, with engineers working as bartenders, taxi cab
drivers, waitresses, and employed in menial work in dog kennels as the
offshoring of US jobs dismantles the ladders of upward mobility for US
citizens.
Over the last year (from June 2006 through June 2007) the US economy
created 1.6 million net private sector jobs. As Charles McMillion of
MBG Information Services reports each month, essentially all of the
new jobs are in low-paid domestic services that do not require a
college education.
The category, “Leisure and hospitality,” accounts for 30% of the new
jobs, of which 387,000 are bartenders and waitresses, 38,000 are
workers in motels and hotels, and 50,000 are employed in entertainment
and recreation.
The category, “Education and health services,” accounts for 35% of the
gain in employment, of which 100,000 are in educational services and
456,000 are in health care and social assistance, principally
ambulatory health care services and hospitals.
“Professional and technical services” accounts for 268,000 of the new
jobs. “Finance and insurance” added 93,000 new jobs, of which about
one quarter are in real estate and about one half are in insurance.
“Transportation and warehousing” added 65,000 jobs, and wholesale and
retail trade added 185,000.
Over the entire year, the US economy created merely 51,000 jobs in
architectural and engineering services, less than the 76,000 jobs
created in management and technical consulting (essentially laid-off
white collar professionals).
Except for a well-connected few graduates, who find their way into
Wall Street investment banks, top law firms, and private medical
practice, American universities today consist of detention centers to
delay for four or five years the entry of American youth into
unskilled domestic services.
Meanwhile the rich are getting much richer and luxuriating in the most
fantastic conspicuous consumption since the Gilded Age. Robert Frank
has dubbed the new American world of the super-rich “Richistan.”
In Richistan there is a two-year waiting list for $50 million 200foot
yachts. In Richistan Rolex watches are considered Wal-Mart junk.
Richistanians sport $736,000 Franck Muller timepieces, sign their
names with $700,000 Mont Blanc jewel-encrusted pens. Their valets,
butlers (with $100,000 salaries), and bodyguards carry the $42,000
Louis Vitton handbags of wives and mistresses.
Richistanians join clubs open only to those with $100 million, pay
$650,000 for golf club memberships, eat $50 hamburgers and $1,000
omelettes, drink $90 a bottle Bling mineral water and down $10,000
“martinis on a rock” (gin or vodka poured over a diamond) at New
York’s Algonquin Hotel.
Who are the Richistanians? They are CEOs who have moved their
companies abroad and converted the wages they formerly paid Americans
into $100 million compensation packages for themselves. They are
investment bankers and hedge fund managers, who created the subprime
mortgage derivatives that currently threaten to collapse the economy.
One of them was paid $1.7 billion last year. The $575 million that
each of 25 other top earners were paid is paltry by comparison, but
unimaginable wealth to everyone else.
Some of the super rich, such as Warren Buffet and Bill Gates, have
benefitted society along with themselves. Both Buffet and Gates are
concerned about the rapidly rising income inequality in the US. They
are aware that America is becoming a feudal society in which the
super-rich compete in conspicuous consumption, while the serfs
struggle merely to survive.
With the real wages and salaries of American civilian workers lower
than 5 years ago, with their debts at all time highs, with the prices
of their main asset–their homes–under pressure from overbuilding and
fraudulent finance, and with scant opportunities to rise for the
children they struggled to educate, Americans face a dim future.
Indeed, their plight is worse than the official statistics indicate.
During the Clinton administration, the Boskin Commission rigged the
inflation measures in order to hold down indexed Social Security
payments to retirees.
Another deceit is the measure called “core inflation.” This measure of
inflation excludes food and energy, two large components of the
average family’s budget. Wall Street and corporations and, therefore,
the media emphasize core inflation, because it holds down cost of
living increases and interest rates. In the second quarter of this
year, the Consumer Price Index (CPI), a more complete measure of
inflation, increased at an annual rate of 5.2% compared to 2.3% for
core inflation.
An examination of how inflation is measured quickly reveals the games
played to deceive the American people. Housing prices are not in the
index. Instead, the rental rate of housing is used as a proxy for
housing prices.
More games are played with the goods and services whose prices
comprise the weighted market basket used to estimate inflation. If
beef prices rise, for example, the index shifts toward lower priced
chicken. Inflation is thus held down by substituting lower priced
products for those whose prices are rising faster. As the weights of
the goods in the basket change, the inflation measure does not reflect
a constant pattern of expenditures. Some economists compare the
substitution used to minimize the measured rate of inflation to
substituting sweaters for fuel oil.
Other deceptions, not all intentional, abound in official US
statistics. Business Week’s June 18 cover story used the recent
important work by Susan N. Houseman to explain that much of the hyped
gains in US productivity and GDP are “phantom gains” that are not
really there.
Other phantom productivity gains are produced by corporations that
shift business costs to consumers by, for example, having callers
listen to advertisements while they wait for a customer service
representative, and by pricing items in the inflation basket according
to the low prices of stores that offer customers no service. The
longer callers can be made to wait, the fewer the customer
representatives the company needs to employ. The loss of service is
not considered in the inflation measure. It shows up instead as a gain
in productivity.
In American today the greatest rewards go to investment bankers, who
collect fees for creating financing packages for debt. These packages
include the tottering subprime mortgage derivatives. Recently, a top
official of the Bank of France acknowledged that the real values of
repackaged debt instruments are unknown to both buyers and sellers.
Many of the derivatives have never been priced by the market.
Think of derivatives as a mutual fund of debt, a combination of good
mortgages, subprime mortgages, credit card debt, auto loans, and who
knows what. Not even institutional buyers know what they are buying or
how to evaluate it. Arcane pricing models are used to produce values,
and pay incentives bias the assigned values upward.
Richistan wealth may prove artificial and crash, bringing an end to
the new Gilded Age. But the plight of the rich in distress will never
compare to the decimation of America’s middle class. The offshoring of
American jobs has destroyed opportunities for generations of
Americans. Never before in our history has the elite had such control
over the government. To run for national office requires many millions
of dollars, the raising of which puts “our” elected representatives
and “our” president himself at the beck and call of the few moneyed
interests that financed the campaigns.
America as the land of opportunity has passed into history.
A book that has gotten notice of late…
Are We Rome?: The Fall of an Empire and the Fate of America by Cullen Murphy
Murphy argues that today as American citizens we are in a historical sluice akin to the one that doomed the Romans… a fundamental shift from being self-perceived as citizens (in the republic of rome) to that of being subjects (as in the roman empire)…
Murphy believes that the transformation of consciousness from the citizen-republic to that of the subject-empire is the most elemental factor.
In his own way, Arnold Toynbee saw two changes that he believed were universal indicators of degenerating societies: one was the rise of gambling, or in the unctuous language of the corporate state, “gaming” (and with that the cult of luck, or as the Romans actually worshipped to some degree, the goddess Fortuna)…
The second indication that all was not well was the rise of mysticism, sort of tied to occultism… such as the profusion of “mystery religions” and endless bizarre cults that dotted the late roman empire… the early christian philosopher Augustine was a cult follower in his early life, and by his own account, something of a PUA of the times, a “deep thinking bad boy”… his life trajectory, if put into modern form, would be as if Tom Cruise suddenly announced he was leaving Hollywood and joining the Trappist order…
Needless to say… this all too obvious Imperial Disconnect has many observers profoundly concerned for the future of America…
Ah yes… how heartwarming… now we are shocked, simply shocked ! to hear that… ummmm… 90% of the loans originating in california and florida were driven by an element of fraud… there’s one shoe left to drop, or let’s say this, one more shoe than we had factored in… and that is the simply appalling QUALITY of much boom driven construction… the boom got every incompetent, half baked, never should have been allowed near a tape measure or a skil-saw dork fingered bozo to hold himself out as a "builder’ or a “contractor”… soooooo… to make matters even more interesting, how many potential buyers are going to start taking a MUCH closer look at what they are paying for.???.. now that flipping isn’t in the equation… and they’re about to find out that most of those ratty shacks that were tarted up with a fresh coat of paint are what they were from the beginning, junk construction paid for with junk debt… basically Potemkin Villages… falling apart as soon as they were finished…
I would add one other thing that is surreal… the mind boggling level of denial about this, every step of the way, by the mainstream media… are they, can they be THAT clueless ? Most of the important day to day observation and reflection was coming out of the blog world, not the MM… which tells us maybe (another macro-inflection on the way ?) the MM is becoming rapidly obsolete as anything other than a vehicle for entertainment ? Even the “new news” is info-tainment, Jon Stewart… and so on… maybe the old media have just become too effing sclerotic, constipated, and basically useless as means of accurate analysis ? Where WERE they when all this was unfolding ?
was it not ever thus? in 2000 people were saying rate hikes were bullish for stocks (and remember greenspan’s new economy cheerleading). even amongst people who do this for a living, critical thinking and the ability to distinguish between good and bad analysis are both rare qualities. there is a peculiarly US trait of paying undue respect to the public announcements of authoritative figures when it comes to the economy - as if they knew very much more than the rest of us and would be able to and motivated to freely discuss this.
I agree the MM hasn’t exactly improved of late, but the decline started a long time ago…
From Reminisces of a Stock Operator…
But don’t worry 
a hundred years later we have Mr Bernanke in place of Mr Morgan.
From CLSA…
Most people would agree that 11
September 2001 changed the world as we know it
and not for the better. In financial terms, we might
look back on 9 August 2007 as the starting point for
a new era in global financial history – an end to the
risk-loving Greenspan years and the beginning of
the New Monetarism’s new reality. Events that
precipitate a central bank as large as the ECB
pumping US$130bn into the money markets in a
single day (that’s 30% more than was added on the
day after 9/11) cannot be discarded lightly.
Yet that is what a number of people around financial
markets who should know better continue to do. “A
liquidity blip”, “a buying opportunity”, and “a shortterm
credit crunch”. For those that have only begun
working in the markets in the last decade it is
possible to forgive the inductive logic behind this
poor advice. For those that have been around for
longer it is simply unforgivable. For the world has
changed but it has only changed back to normality.
The era of risk-loving, no-loss markets is gone, at
least for a generation.