SEA Of RED - 2008 Markets Year In Review

It would be a MASSive understatement to describe 2008 as just a 'tough' year for the GLOBAL Financial Markets and Financial Services Industry. Many are going further than that and are already referring to 2008 as the most difficult and trying U.S. market environment since The Great Depression of the 1930's. Rigorous academic discourse and hyperbole aside, here are some eye-opening STATS courtesy of Bloomberg to tie a ribbon on things + put the 2008 GLOBAL financial FALLout in some perspective :


* Global stock markets lost about 1/2 of their value in 2008, or $30.1 TRILLION !


* In the U.S., $7.2 TRILLION of shareholder value was wiped off the books, as the Standard & Poor’s 500 Index fell 39% through Dec. 30 and the Nasdaq dropped 42%


* The Amex Securities Brokers/Dealers Index (fyi, the Broker/Dealer Index is comprised of 12 of the most widely known firms in the brokerage sector...the ticker is XBD) hit a high of 267.69 on June 1, 2007...as of Dec. 30, 2008, the index stood at 74.26 (down 72%!)


* The wave of writedowns and losses that swamped financial institutions around the world reached $720 Billion this year.


* During 2008, the global financial-services industry announced 220,360 JOB CUTS.


* According to the FDIC, there were 25 Bank FAILURES in 2008, the most in 15 years.


* Lehman Brothers (the artist formerly known as LEH)., with assets of $639 Billion, filed the LARGEST bankruptcy in U.S. history on September 15th, 2008...its creditors may have lost as much as $75 Billion, the firm’s chief restructuring officer said.


* In the Largest U.S. bank failure in history, Seattle-based Washington Mutual (the artist formerly known as WM) collapsed in September with approx $307 Billion in assets.


* New York-based Citigroup Inc. (C), whose shares lost 78% of their value this year, needed $20 Billion in U.S. bailout funds in November on top of an earlier $25 Billion infusion of capital. The government was also forced to guarantee $306 Billion of the bank’s troubled assets.


* The U.S. government was forced to rescue the WORLD's LARGEST insurance company, American International Group (AIG), with a $152.5 Billion package of investments, loans and capital infusions

* General Motors (GM) and Chrysler LLC will get $13.4 Billion in federal loans to stay afloat until President-elect Barack Obama’s administration can devise a rescue plan of its own.


* Overall, the U.S. Federal Government has committed $8.5 TRILLION of stimulus in 2008 in order to jumpstart the U.S. economy


* Global merger activity fell to $2.5 TRILLION in deals announced in 2008 vs. the record 4.1 TRILLION worth of deals announced in 2007 (down 39%)


* Hedge funds lost 18% of their value for the year through November, the worst year since record-keeping began in 1990, according to Chicago-based Hedge Fund Research Inc. Morgan Stanley estimated that, by year end, at least 620 hedge funds will have closed.


* According to Investment Company Institute, a Washington-based firm, individual investors pulled $215.7 Billion from stock market mutual funds during the first 11 months of 2008...this compares to a net inflow of $91 Billion during the same period in 2007



bloomberg.com/apps/news?pid=20601109&sid=ataVotdLreS0



Data Courtesy: Bloomberg

The Fed's December 2008 FOMC Statement

Posted below is The Federal Open Market Committee's STATEMENT following its December 15-16th meeting on U.S. Interest Rate policy :

----------------------------------------------------------------------------

"The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.

Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent."

www.federalreserve.gov/newsevents/press/monetary/

Data Courtesy: FederalReserve.gov

Bernie Madoff's List Of VICTIMS (aka Clients)

VICTIMS Of Bernie Madoff's $50 Billion Ponzi Scheme :




(This list is copied + pasted from: cnbc.com/id/2823)

* Fairfield Greenwich Advisors - An investment management firm...more than half of Fairfield Greenwich's $14.1 billion in assets under management, or about $7.5 Billion was connected to Madoff

* Tremont Capital Management - The fund-of-funds business run by Tremont Capital Management had invested $3.3 Billion with Madoff

* HSBC (HBC) - The British bank has potential exposure of about $1.5 Billion, the Financial Times reported, citing unnamed people close to the situation. The exposure is from loans it provided to institutional clients, mainly hedge funds of funds, that wanted to invest with Madoff, the FT reported.

* Banco Santander (STD) - Spain's largest bank said its investment fund Optimal has a $3.05 Billion (2.33 billion euro) exposure to Madoff Securities.

* Bank Medici - The Austrian bank had two funds with $2.1 Billion (1.5 billion euros) invested with Madoff

* Ascot Partners - According to a Wall Street Journal report, the U.S. hedge fund where former GMAC chairman Jacob Ezra Merkin is a money manager has an exposure of $1.8 Billion.

* Access International Advisors - According to a report by Bloomberg, the New York based investment firm has an exposure of $1.4 Billion.

* AXA (AXA) - The French insurance company said it has negligible exposure to Madoff, well below 100 million euros.

* Barclays (BCS) - Any exposure for British bank Barclays Plc to Madoff would be "minimal,'' a person familiar with the matter said, but Barclays declined to comment.

* Man Group - The United Kingdom hedge fund said it is exposed through RMF, its institutional fund of funds business, which has approximately $360 million invested in two funds that are directly or indirectly sub-advised by Madoff Securities.

* BBVA - Spain's second-largest bank said its international operation has about 30 million euros exposure to Madoff, and it sees a maximum potential loss from Madoff-linked investments of 300 million euros ($404 million).

* Union Bancaire Privee - Swiss bank that invests in funds of hedge funds has lost about 1 billion francs ($850 million), according to Le Temps, citing unnamed banking sources.

* Royal Bank of Scotland (RBS) - Said it had exposure through trading and collateralised lending to funds of hedge funds invested with Madoff, with a potential loss of around 400 million pounds ($597.9 million)

* Natixis - The French investment bank said it could have a 450 million euro ($602 million) indirect exposure to Madoff

* BNP Paribas (BNP) - France's largest listed bank said it has a potential 350 million euro ($464.3 million) exposure.

* Reichmuth & Co. - Swiss private bank said its fund of funds Reichmuth Matterhorn had an exposure to investments linked to Madoff that amounted to about $325 million.

* Nomura Holdings (NMR) - The Japanese brokerage firm said it had a 27.5 billion yen ($303 million) exposure related to Madoff, but the impact on its capital would be limited.

* Unicredit SpA - Italy's second-biggest bank said its own exposure is around 75 million euros ($101 million), while in its Pioneer Investments unit, some funds ``are exposed to Madoff indirectly through feeder funds.''

* Societe Generale - The French bank said its exposure is negligible, below 10 million euros.

* Maxam Capital Management - The Connecticut-based fund has lost about $280 million on funds invested with Madoff, according to a Wall Street Journal report.

* EIM Group - Le Temps reported that EIM Group, a European fund of hedge funds, said it has a $230 million exposure.

* Fairfield Sentry - The $7.3 billion hedge fund run by Walter Noel's Fairfield Greenwich Group had accounts with Madoff Investment Securities.

* Kingate Global Fund - The $2.8 billion hedge fund run by Kingate Management Ltd had invested in Madoff Investment Securities.

* UBS (UBS) - The investment bank unit of the Swiss financial group has a limited and insignificant counterparty exposure, its spokesman told Reuters.

* Benedict Hentsch - Swiss private bank said its exposure to products linked to Madoff amounted to 56 million francs ($47 million), or less than 5 percent of assets under management.

* Bramdean Alternatives - UK asset manager, headed by well-known fund manager Nicola Horlick, said almost 10 percent of its holdings were exposed to Madoff. Bramdean said it had two holdings that maintain trading accounts with Bernard L. Madoff Investment Securities that represented 9.5 percent of its net asset value at end-October.

* Banesto - Said it has insignificant exposure, but declined to disclose the size of exposure.

------------------------------------------------------------------------------

* Please refer to the below Bloomberg article for some background information regarding Bernie Madoff's $50 Billion Wall Street SCANDAL :


bloomberg.com/apps/news?pid=newsarchive&sid=atUk.QnXAvZY


Data Courtesy: CNBC and Bloomberg

China Will Grow Money Supply 17% In 2009

In a monetary policy effort designed to counter slowing domestic growth in the world's 4th Largest economy, China's State Council plans to INCREASE the country's M2 Money Supply by 17% in 2009 (money supply: the total amount of money existing in an economy at a particular time...M2 money supply: those types of monies including all physical cash reserves and banking deposits...FYI + if you're curious re the different classes/types of money supply, please refer to my 3/16/08 post titled 'Components Of Money Supply').

According to the People's Bank Of China, China's Money Supply grew to $6.7 Trillion in November 2008...a 14.8% increase over November 2007.

bloomberg.com/apps/newsablWg2RUlVmk

----------------------------------------------------------------------------

* In addition to boosting its Money Supply, the Chinese government also plans to INCREASE financial institution lending activity by $584 Billion in 2009 (4 Trillion Yuan)

* The Chinese Central Bank's key one year lending rate is currently at 5.58% (down from 7.47% as recently as in September)

bloomberg.com/apps/news?pid=newsarchive&sid=ah_2uEppubgU

Data Courtesy: Bloomberg

New York - 165,000 In Job Losses Thru 2010

Per a CNBC television interview earlier this morning with New York City Comptroller William C. Thompson Jr. (click on the below link for the video interview) :

http://www.cnbc.com/id/28140388

* New York is forecasting additional NY job losses of 165,000 through 2010

* Wall Street job losses are expected to make up about 35,000 (or approx 20%) of the 165,000 jobs lost

* New York state doesn't expect to see a bottom in the current economic downturn until at least the beginning of 2010


Data Courtesy: CNBC

The OMINOUS November 2008 JOBS Report

According to the U.S. Labor Dept's monthly November 2008 JOBS Report:

* The U.S. economy lost 537,000 jobs in November (vs. the consensus forecast for a loss of 'only' 335,000 jobs)...537K represents the country's largest single month JOBS decline in 34 years (December 1974)

* Since the beginning of 2008, the U.S. economy has lost a total of 1.91 million jobs...the 1.9 million jobs lost in the current Housing Bubble-induced RECESSION, which officially began back in December 2007, now exceeds the total amount of job losses that resulted from the 2001 Dot Com RECESSION (1.6 million)

* The current unemployment rate is 6.7%...this is the country's highest unemployment rate since October 1993

* The country's 'under-employment' rate (includes part time workers and those who are without jobs who have been discouraged + stopped looking for work) rose to 12.5% from 11.8%...12.5% is the all-time high for this measure since records began in January 1994

* The average employee's work week shrunk to 33.5 hours...this is the shortest avg work week since records started back in 1964

* In addition to the U.S. economy's ridiculously large loss of 537K jobs in November, the labor department also revised higher its unemployment figures for both September and October. The revisions brought the 3-month job loss total to 1.3 million...this is roughly equal to 2/3 of this year's total job losses and is the 3rd Highest Three-Month Job Loss Total since World War 2

- September: Job losses were revised higher to 403K from 284K (up 119K or 42%)

- October: Job losses were revised higher to 320K from 240K (up 80K or 33%)

Data Courtesy: Bloomberg and CNN Money

A Lights OFF View Of General Electric

A couple of weeks back, a colleague of mine who previously worked in finance for U.S.-based General Electric (GE) sent me a link to the below fascinating Seeking Alpha article titled 'General Electric: Genuine Risk Of Collapse?'. Despite the risk of perhaps providing TOO Negative and dreary of an outlook/view on the current challenges being faced by one of America's most highly regarded institutions (...FYI + according to Yahoo.com/finance, GE employs approx 330,000 employees worldwide), I decided to include the link on ETB because the November 17th dated article was simply too compelling, informative and well-written to ignore.


General-Electric-Genuine-Risk-Of-Collapse


Make NO mistake about it, GE already has (the stock is down 60% year to date to about $16/share) and will continue to face significant operating headwinds in 2009 and perhaps 2010 assuming the current near-consensus forecast of a gloomy, global macroeconomic environment (FYI - The U.S.'s National Bureau of Economic Research just officially announced today that the U.S. economy entered its ongoing recession in December 2007).

---------------------------------------------------------------

* Anecdotally predicting + in terms of consequences, expect General Electric to make some 'Citigroup-esque' sized JOB CUT announcements in order to stay competitive during the Recession (a total of 50,000 in CUTS is definitely NOT out of the question given GE's employee base of 330K).

*Snapshots of GE's Balance Sheet + post 2004 Stock Buyback program:

Data Courtesy: Seeking Alpha + National Bureau of Econ Research

Keeping Tabs On $700 Billion Of TARP

Check out the below informative New York Times link Tracking the $700 Billion worth of funds being ALLOCATED by the U.S. Treasury Department via its controversial Troubled Asset Relief Program (TARP) :

nytimes.com/creditcrisis/recipients/table


* Top 10 Banking TARP Customers :
1. Citigroup (C) - $45 Billion (marketcap = $45 Billion)
2. AIG (AIG) - $40 Billion (mcap = $5B)
3. JPMorgan Chase (JPM) - $25 Billion (mcap = $118B)
4. Wells Fargo (WFC) - $25 Billion (mcap = $96B)
5. Bank Of America (BAC) - $15 Billion (mcap = $82B)
6. Goldman Sachs (GS) - $10 Billion (mcap = $31B)
7. Merrill Lynch (MER) - $10 Billion (mcap = $21B)
8. Morgan Stanley (MS) - $10 Billion (mcap = $16B)
9. PNC (PNC) - $7.7 Billion (mcap = $18B)
10. U.S. Bancorp (USB) - $6.6 Billion (mcap = $47B)


* Top 10 customers account for almost 30% (28% or $195 Billion) of total TARP funds...Citigroup and AIG alone account for over 12% of total TARP spending


* About $410 Billion in total TARP funds remain UNALLOCATED (approx 60%)


Data Courtesy: NY Times
Full Disclosure: I own shares of GS.

India's 'Big Dig' - The Rural ROADS Project

Since 2003, India's government has been working on a Large-scale, domestic project of building a MASSIVE Network of ROADS connecting previously unconnected sections of India's largest and most rural populations. For some perspective, India is adding 62 miles of ROAD EACH day. The project is expected to complete in two years (2010)...once complete, all Indian villages with 1,000 residents or more will have access to 'all-weather' roads (this figure is up from 40% when construction began in 2003).

In terms of stimulating India's slowing economy (by the way, India is still the 2nd fastest growing country in the world...China is #1...some annual IMF numbers are provided below), the ROADS project speaks for itself in terms of job creation and productivity enhancements. Expanding a little further on the idea of productivity enhancements, one should not OVERlook the impact this ROADS project will ultimately have on India's Retail environment and Domestic consumer. The below article details a couple of interesting and culturally significant examples about the various types of consumer productivity gains that can be had courtesy of the ROADS project :


bloomberg.com/apps/news?pid=20601109&sid=anT08lWTqguk&


Per the above link:
* India's National Rural Roads Development Agency is overseeing + in charge of spending for the $27 Billion ROADS infrastructure project...the Rural Roads program is being funded by India's government using revenue from a tax imposed on the sale of diesel fuel

* The International Monetary Fund forecasts India's economy to grow 6.3% in 2009 (vs. 7.8% in 2008)...The IMF expects China's economy to grow 8.5% in 2009 (vs. 9.7% in 2008)

* Domestic consumer spending currently makes up 55% of India's economy (GDP)...in comparison, domestic consumption only accounts for 37% of China's export-heavy economy

* According to Haier Appliances (China's largest home appliances retailer that now has operations in India) :

Only 20% of Indian households own a refrigerator

Only 27% of Indian households own a television

Only 3% of Indian homes have air-conditioning installed



Data Courtesy: Bloomberg

Citigroup Cuts 50,000 Jobs !

Due to the ongoing GLOBAL recession, Citigroup (C) Chief Executive Officer Vikram Pandit announced today his company's intentions to lay off more than 50,000 employees in the 'near term'. The job cuts are a direct result of Citigroup's COST reduction efforts and will enable the major New-York based bank to stay competitive by reducing total company expenses by approximately 20% in 2009 to $50 Billion (versus the $62 Billion they spent during 2008).


Per the below link:
* Citigroup will reduce employee headcount by about 15% to 300K employees worldwide (as of September 30th, 2008, Citigroup employed approx 352,000 employees)

* Citigroup laid off an additional 23,000 employees earlier in 2008

* Even with Citi's loss of about 75K jobs during 2008, Citigroup remains the largest U.S. bank by employee headcount

* According to data compiled by Bloomberg, banks and brokerage firms worldwide have now announced more than 200,000 Job Cuts in the financial sector since the beginning of the subprime mortgage market collapse in 2007 !


bloomberg.com/apps/news?pid=20601087&sid


Data Courtesy: Bloomberg

Buffett's Largest ENERGY Bet - Conoco

According to Berkshire Hathaway's (BRKA) recently disclosed 3rd Quarter 2008 13F SEC Filing, Warren Buffett currently owns 84 million shares of U.S. Oil + Gas producer Conoco Phillips (COP). As a result, Conoco now represents Buffett's LARGEST Energy sector holding and his 5.6% stake makes him the $70 Billion oil company's LARGEST shareholder.


http://www.cnbc.com/id/27723341


Per the above link:
* Conoco Phillips is Berkshire's LARGEST energy sector holding and now accounts for about 7.3% of Berkshire's total U.S. stock portfolio

* Berkshire held 'only' 17.5 million shares of COP as recent as March 31st, 2008...meaning that Buffett's position in Conoco has increased nearly FOUR-fold in just over 6 months (!)

----------------------------------------------------------------------------------

Per Berkshire's 3Q08 13F SEC Filings :

* Buffett reduced stock holdings in: Bank of America (BAC), Carmax (KMX), Home Depot (HD), Lowe's (LOW), United Health Group (UNH), Wells Fargo (WFC) and Wellpoint (WLP)


* Buffett increased stock holdings in: Conoco Phillips (COP), Eaton Corporation (ETN), NRG Energy (NRG), US Bancorp (USB) and Comdisco (CDCO)


* Berkshire's CASH holdings as of 9/30/08 were $33.4 Billion (vs. $47.1 Billion a year ago)

Data Courtesy: CNBC.com
Full Disclosure: I own shares of COP and UNH.

WW 3Q08 Smart Phone Marketshare

According to tech survey firm Canalys, the global Smart Phone market grew 3rd quarter shipments by 28% year over year (from shipping 31 million units in 3Q07 to 40 million units in 3Q08). In terms of Handset marketshare during the most recently completed quarter - Nokia placed first, Apple (maker of the iPhone) took second and Research In Motion (maker of Blackberry) finished third.

* WW 3Q08 Smart Phone Marketshare:
1. Nokia (NOK) - 38.9%
2. Apple (AAPL) - 17.3%
3. Research In Motion (RIMM) - 15.2%
4. Motorola (MOT) - 5.8%
5. HTC - 5.8%
6. Others - 17.0%

http://www.canalys.com/pr/2008/r2008112.htm

Data Courtesy: Canalys + CNNmoney.com
Full Disclosure: I own shares of AAPL.

The U.S. Labor Dept's Oct 2008 JOBS Report

According to the U.S. Labor Department's monthly JOBS Report (October 2008):

* The U.S. economy lost 240,000 jobs in October:
- Manufacturing: Down 90,000
- Construction: Down 49,000
- Professional + Business Services: Down 45,000
- Retail: Down 38,000
- Financial: Down 24,000

* Since the beginning of 2008, the U.S economy has lost a total of 1.2 Million JOBS

* The current unemployment rate is 6.5%...6.5% is the country's highest unemployment rate since March 1994

* More than 1/2 of this year's job losses have occurred during the past 3 months:
- August: Down 127,000
- September: Down 284,000 (largest total since 11/2001)
- October: Down 240,000

Data Courtesy: The Wall Street Journal + U.S. Labor Department

Goldman Reduces 2008/09 S+P 500 Estimates

On Friday, the research arm of Goldman Sachs reduced their annual 2008 and 2009 profit forecasts for companies making up the U.S.'s S+P 500 stock market index. David Kostin, Goldman's lead portfolio strategist, now expects global losses from writedowns to total $1.6 TRILLION through 2011, more than his prior projection of $1.3 TRILLION.

* 2008 estimate: Reduced by 10% to $65/share

* 2009 estimate: Reduced by 9% to $63/share

* Given the S+P's current level of 930 + GS's updated annual 2008 and 2009 earnings estimates, the S+P 500 is currently trading at 14 times 2008 earnings and 15 times 2009 earnings.

bloomberg.com/apps/news?pid=20601087&sid=aX.L37mmsROM

Data Courtesy: Bloomberg

Subprime Slime Checkup

Since the beginning of 2007, banks worldwide have taken $693 Billion in writedowns and losses on loans, CDO's and other investments.

www.bloomberg.com/apps/news

Data Courtesy: Bloomberg

Will President Obama Rescue Chrysler ?

In a recent decision that will surely carry heavy implications for the entire U.S. automobile industry, the Bush administration will NOT be providing additional taxpayer funds (in the tune of approx $8-$10 Billion) to back a Chrysler-General Motors (GM) merger. With that said, it'll be interesting to see in January '09 if a Barack Obama White House administration chooses to reverse stance on this issue and in effect, rescue the smaller Chrysler from insolvency.

-----------------------------------------------------------------------------

Per the below Yahoo Finance article, some interesting Auto Industry related EMPLOYMENT figures that deserve attention:

* 355,000 Americans are directly employed by GM, Chrysler, and Ford

* 4.5 million Americans work in sectors supported by the auto industry

* Over 2 million Americans received healthcare benefits from the "Big 3" (GM, Ford and Chrysler)

* 775,000 retirees and their survivors receive pension payments from the industry

yahoo.com/tech-ticker/article/104817/Paulson-to-GM-Chrysler


Data Courtesy: Yahoo Finance

Hedge Fund DE-Leveraging 101 ?

Below are a couple of poignant Hedge Fund industry facts that may help explain some of the stock market's recent sloppy action. In addition to providing perspective, perhaps this post could be interpreted to contain empirical EVIDENCE supporting Ken Heebner's recent assertions that the global markets are currently undergoing the Largest period of Hedge Fund DE-Leveraging since 1929 ! (FYI - please refer to my 10/09/08 post titled 'Heebner - Largest Margin Call Since 1929' for Heebner's specific comments):


* According to Hedge Fund Research Inc., the hedge fund industry suffered Record Losses during 3Q08 in both Redemptions (aka hedge fund investor withdrawals...minus $31 Billion) and Assets Under Management (minus $210 Billion) !


* According to TrimTabs Investment Research, investors withdrew a RECORD $43 Billion out of hedge funds during September 2008...Hedge funds also lost a RECORD 5.4% during September 2008..the largest single monthly loss for the industry since the 1998 collapse of hedge fund Long Term Capital Management)


* The HFR Global Hedge Fund Index, a benchmark for tracking hedge fund industry performance, is down 19.5% Year To Date...including being down 8.95% in the month of October alone)



Data Courtesy: TrimTabs, Hedge Fund Research Inc. + CNBC

SUBPRIME Securitization Process FLOW

Double-click the below image to view a Process Flow of the SECURITIZATION process courtesy of the The Denver Post :

Data Courtesy: The Denver Post

The $30 TRILLION Securitization GAME

Credit Securitization is the banking process resulting from the bundling of both consumer and commercial loans (including mortgages) into packages of securities. According to Bloomberg, securitization is largely a 'shadow banking system' that funds most of the world's credit cards, car purchases, leveraged buyouts (LBO's) and of course, subprime mortgages. Since 2001, the U.S. created and sold more than $27 TRILLION worth of securitized assets. Per the below insightful Bloomberg article, some noteworthy points related to the now virtually non-existant 'Securitization Game' that previously accounted for as much as 20% of the BANKING industry's Total SALES during the past decade :

bloomberg.com/apps/news?pid=20601109&sid=a0jln3

* SECURITIZATION pools together loans and is intended to 'slice up' the financial risk of loan default...theoretically making borrowing cheaper for everyone (including the issuers - banks). Unfortunately, when abused by banks, the practice helped create and support a dangerous global 'Debt Culture' that enabled people to live beyond their means via easy access to debt that allowed them to purchase luxury cars and homes they otherwise could not afford.


* Before the invention of securitization, banks loaned money, received payments and profited from the difference between what the borrower paid and the bank's funding cost...During the mid-1980s, mortgage bond traders at Salomon Brothers devised a method of lending without using capital, a technique at the heart of securitization. It works by taking anything that has regular payments - mortgages, car loans, aircraft leases, music royalties - and channeling the money to a TRUST that pays bondholders principal and interest


* As the securitization game caught on, consumer borrowing/bank lending activity dramatically increased. According to the U.S. Federal Reserve, U.S. consumer DEBT tripled in the two decades after 1988 to $2.6 TRILLION !


* Securitization's biggest (and perhaps most FATAL) innovation was 'OFF Balance Sheet Accounting'. If a bank couldn't sell a bond or didn't want to, the asset could be sold to a trust within a so-called 'Special Purpose Entity' (SPE), incorporated offshore in a place such as the Cayman Islands or Dublin. Issuing banks used SPE's to shift securitized assets OFF their books/balance sheets !


* With OFF Balance Sheet Accounting, a bank could originate $100 million in loans, sell off some to investors, transfer the rest to a Special Purpose Entity and not have to hold any capital (to protect against default). The profit could be as much as 1.25 % of the amount loaned, or $1.25 million for every $100 million worth of securitized assets issued...According to a former Chief Financial Officer of Lehman Brothers, Brad Hintz, "The banks could turn a low return on equity business into one that doesn't use ANY equity, which was the motivation for this...It becomes almost like a fee business because it requires no capital.''


* According to industry trade group Securities Industry Financial Markets Association, the U.S. created and sold more than $27 TRILLION worth of securitized assets from 2001...for some perspective, that's nearly twice the U.S.'s 2007 GDP of $13.8 TRILLION !


* According to the European Securitization Forum, securitizations in Europe increased almost SIXFOLD between 2000 and 2007, from 78 Billion euros ($98 Billion) to 453 Billion euros ($570 Billion)


* Because of the subprime-related economic BLOW-UP that began mid 2007, sales of securitized assets have fallen off a cliff...In the U.S., mortgage bonds issued by non-government affiliated entities plummeted to $10.8 Billion in the first half of the year, one-twentieth of the $241 Billion sold in the same period in 2007...Sales of European asset-backed securities, including bonds for car loans and credit cards, fell by 40% to 12.7 Billion euros in 2Q08. European CDO sales fell by 2/3 to 10 Billion euros.


Data Courtesy: Bloomberg