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17 comments on The Round-Up: July 3rd 2007

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HeIsSoFly on July 3, 2007 - 2:04pm Permalink | Subthread | Comments top

When the right wing National Post in Canada starts to chime in, that's like bells ringing. Loud.

It's not so much even the stupid investments by pension funds, it's the leverage, the money that's been borrowed to finance those investments. Instead of getting a pension, you'll get an invoice.

Storm clouds rapidly form

Can subprime field troubles be contained?

The warnings are now flowing thick and fast.

Donald Coxe, global portfolio strategist for BMO Financial Group believes the market for fiendishly clever debt instruments will implode like all previous financial fashions from Third World bank loans to derivatives dreamt up by Nobel laureates.

"In this decade it is collateralized debt products that seek to make risk disappear from cash markets into a tower inhabited by investment banks and hedge funds in which the shared language is algorithms," he wrote in his recent publication Basic Points. "Like all past Babels, this one will, at some point, self-destruct."

Collateralized debt obligations are securities backed by pools of bonds, loans or others assets. In this cycle of ultra-low interest rates the "other assets" have quite often been subprime loans which offer higher yields -- for higher risk.

Sales of CDOs soared to more than US$500-billion last year, compared with US$84-billion in 2002, according to data from Morgan Stanley.

Bill Gross, the self-described curmudgeon of credit, and man-aging director at bond management company PIMCO, agrees the inevitable unwinding of the CDO market will be ugly and will ultimately cause a constriction of credit in other markets such as high-yield debt, bank loans or commercial paper.

"Sorry Ben [Bernanke], but derivatives are a two-edged sword," he wrote in his July report. "Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets."

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HeIsSoFly on July 3, 2007 - 3:07pm Permalink | Subthread | Parent | Comments top

By the way, a few hundred million of your pension money goes to speculators. Employees my derrière.

INSIDERS WILL REAP MILLIONS FROM (BELL STOCK OPTIONS) SALE

Bell Canada Inc. insiders stand to reap hundreds of millions of dollars in gains from their stock options and other long-term compensation in the proposed sale of the company to a group led by Ontario Teachers' Pension Plan for $42.75 per share.

Information in company filings shows that, as of March 31, an unspecified number of Bell employees had 23 million stock options outstanding, with an average strike price of $33, the price employees can pay to buy stock during the life of the options.

Since options are expected to automatically vest with the closing of the transaction, the gain will be an average of $9.75 per option, for a total of $224-million. That is a significant improvement over just four months ago, when the stock was trading for $30 and the majority of options held by employees were essentially worthless, after five years of flat performance by the stock.

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GreyZone on July 3, 2007 - 4:03pm Permalink | Subthread | Parent | Comments top

I firmly believe that Westexas is right when he says that peak oil was not the primary cause but was the trigger for the economic meltdown now underway.

But more importantly, we fail to recognize what Hubbert himself stated decades ago - that science and economics only got along because both were undergoing rapid growth from the end of the medieval period to now. But science, bounded by the real world, is not capable of many more doublings whereas the economic world simply assumes doublings forever. Is it any wonder then that the economic system, built upon myths, legends, and lies reaching back to our pre-history in caves, is now facing collapse? Reality refuses to cooperate with the illusion of endless growth any longer.

Maybe we'll get lucky and get a real science in place of economics when this is all done but I am not counting on it.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

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