Thursday, September 27, 2007

ABCP Bailout Plan in Trouble

The so called Montreal bailout is in even more trouble than earlier reported. Looks like in spite of taking advantage of the holders of ABCP (by swapping shirt term for very long term paper), the banks themselves cannot agree on how to proceed. According to the Financial Post they are having trouble reaching an agreement because they looking for their own interests. How surprising!


"Simply put, the source said, the only way for the logjam to end is for the federal government to step in and take control. If that doesn't happen, the consequences for the Canadian economy could be dire", a senior executive lose to the negotiations said.

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Tuesday, September 25, 2007

200 Baffinland Iron Mines Workers Almost Without Winter Supplies Because of ABCP

Baffinland Iron Mines Corp. almost missed its window to ship provisions to 200 workers in the Arctic before winter arrives. The company ran out of money to pay for food, fuel and drilling equipment due to its unpaid ABCP. Without the money, the company had to arrange an emergency line of credit before shipping lanes froze over.

The company had $43.8 million frozen invested in commercial paper with Coventree and others.

Source Bloomberg.

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Friday, September 21, 2007

On The Collapse of CDOs and ABCPs

According to Satyajit Das, a leading expert in credit derivatives and risk management, up to 53% of the global $2.2. trillion commercial paper is now asset-backed, with about 50% of that in mortgages. Earlier this year, the total value of these derivatives of these was about $485 trillion (with a "T"). To keep things in perspective, the total world GDP is about $65 trillion. How is this possible? What will happen when the value of the original housing that was used as collateral drops?

While many years ago banks used to have sufficient funds to cover the loans they made, such as for mortgages, today, banks repackage these loans, as well as credit lines, credit-card balances, and whatever else they "own", as CDOs, collaterized debt obligations. Banks then sell these loans, and the proceeds can then be used as collateral to buy more loans or sell more mortgages.

Pension funds, hedge funds, and Insurance companies bought these CDOs, so that they could generate higher rates if return. These are global entities from all over the world; they borrowed money at ridiculously low rates in Japan and the US (when rates were at 1%) . So, those american subprime loans, who were sold to people who could not afford to buy houses in the first place, ended up in every corner of the planet.

Therefore, in essence borrowed funds bought more borrowed funds. To those tech-oriented, this is like a positive feedback system, one that is self-powered and keeps increasing. A brilliant scheme, where 1 dollar of real stuff is the actual collateral for about $20 or $30 of loans, but what happens when the original mortgage borrowers start to default on their loans? The entire scheme starts to unravel.

Mr. Das is the author of a number of works on derivatives and risk management, and maintains a blog.

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Tuesday, September 18, 2007

Coventree Slashing Workforce By 30%

There it is, Coventree is cutting 30% of its workforce. The company has an estimated $16B of ABCP outstanding. The company is also closing its Denver office and reducing lease space in Toronto.

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Thursday, September 13, 2007

Has the DJIA Really Risen 7% in 2007?

Click on the picture to enlarge.

The Dow Jones Industrial Average has risen from 12,474.52 on Jan 3 2007, to 13,424.88 today, September 13, 2007. That is a nominal gain of 7.62%. However, this gain is only valid if you live in the US, and even so, if you don't take inflation into consideration.

If we take into consideration the Canadian dollar exchange rate, for example, the Canadian investor that bought the index in January has lost 3.81% this year. This is because the CAD has appreciated 11.9% this year versus its American counterpart.

European investors would have done better with a gain of 2.86%. Investors tied to the poor Brazilian currency, which used to be the joke of the world's currencies, would have lost 3.42%! The Real has appreciated 11.4% this year alone (and quite a bit more last year).

Finally, measured against gold, the DJIA fairs the worst. In January 2007, the DJIA would have bought 200.3 shares of the gold ETF GLD. Today, the DJIA only buys 191.6 shares. That is a drop of 4.4%.

Has the DJIA really risen this year? How many liters of milk would it have bought back in January? How many cobs of corn? How many liters of gasoline?

DJIAin CADin EuroIn RealIn GLD




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Tougher Rules on ABCP Rating

Dominion Bond Rating Service, the agency that gave top ratings to issuers of ABCP in Canada, announced that issuers of ABCP will now be required to have "global-style liquidity", meaning the providers have to support the papers in case of ugly market events. This was the original reason that the Canadian ABCP market totally shut down, because bankers which were required to provide emergency support in the case of a "market disruption" did not. The term "disruption" had never been defined, therefore the banks jumped out of the deal and $35B went unpaid. Until yesterday, DBRS was still maintaining its old position that the previous terms and conditions were sufficient, when clearly they were not.


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Wednesday, September 12, 2007

Record Wheat Prices Force Italians to Boycott Spaghetti

Aginflation: wheat prices have just reached multi-year record levels.

And the unthinkable happens: tomorrow, September 13, Italians will boycott pastas, no spaghetti, fettucine, farfalle or rigatoni in Italy, as the country goes on its first-ever pasta strike.

"Angry Italians are downing their forks in response to a 30 per cent price rise in the nation's favourite food, along with steep rises in the price of coffee, mozzarella, bread, biscuits and schoolbooks."

A coffee strike is also planned.

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Just 50 Cool Yachts Are Needed to Reduce Global Carbon Emissions

China builds the equivalent of a new 1,000 megawatt coal plant every 5 days, and India every 2 weeks. Stopping these activities, as well as reducing the developed world's carbon emissions may be a little unrealistic.

In contrast to the futility of turning the world into a carbon-lean machine, Professor Stephen Salter of the University of New Edinburgh has come up with the "cool yachts". These are wind-powered yachts that throw salt from the ocean into areas with low level stratocumulus clouds. Brightening these clouds with sea salt to increase their reflectivity by a mere 3% will be enough to counteract the global warming caused by increased CO2 emissions. All it takes is 50 of these machines to navigate the globe. Each would cost about $500M. Prof. Salter’s boats would be powered entirely by wind but with conventional sails replaced by Flettner rotors — vertical cylinders that rotate as the wind passes over them.

Environmentalists are opposed to the plan because it would keep us from changing our ways and reducing our carbon emissions. The machines promise to save the world for a pittance without making us pay the price for our ways. I say let Prof. Salter's salting machine test his technology.

Prof. Salter is one of the finest engineers" Scotland has ever produced, according to Alex Salmond, Scotland's Firth Minister. He is an authority on energy matters and renewable energy. The UK Environment ministry says that the public may not like the yachts, when it may actually fear that they like them too much.

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Tuesday, September 11, 2007

Aginflation, Food and Agriculture Inflation

Aginflation: China's inflation rate rose to 6.5 per cent in August - the highest in 11 years - driven in part by a 49 per cent surge in the price of pork and meat from the same month a year ago. This inflation has many significant implications, but concentrating on food items only the Financial Post today has a full page chart on food inflation, more or less as follows. The article does mention India and China's populations eating better too as one of the causes.

Oil Price: +157% since 2002
Corn Price: +134% since 2005.
Barley: +51% since 2006
Wheat: +83% since 2006
Soybean: +50% since 2006
Canola: +32% since 2006
Cattle Price +12.5% (cattle displaced to scrublands)
Crop receipts: +25.6% (grain growers' revenue)
Tortillas: +400%
Brewers' Barley: +100% (German beer: +40%)
Piranhas attacks: 40,000 head of Argentinean cattle have died this year alone from bites and starvation (moved to bad lands)
Tractors: Farmers use their fat earnings to buy tractors (see Deer & Co. share price, 200% since 2004.
Mexicans take to the streets to fight tortilla prices
Drinkers protest: Germans are angry about beer prices.

If people go hungry, that is scary. By the way, in China, the PPT is not the Plunge Protection Team, but the "Pork Protection Team".

Here is my Yahoo food portfolio:


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Red Corp CEO Blasts ABCP Process. A Matter of Leadership.

Terry Chandler, CEO of RedCorp Ventures, which has over $100M tied in illiquid ABCP, blasted securities regulators for "allowing the widely traded securities market to implode" and then failing to oversee a proposed restructuring (bailout) by group of large financial institutions which are only "serving their own interests". Well, he got it right about the institutions serving their own interests (by swapping short term debt for long term debt) - and this "bailout" is not a done deal and may still be in trouble - but, Mr Chandler, why did your company invest in ABCP? What does does tell the shareholders about the quality of management?

Mr. Chandler also says "I don't see any leadership coming from this group". Yes, it's a matter of leadership Mr. Chandler.

(From National Post, September 11 print edition).

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Monday, September 10, 2007

$140B in commercial paper due by the end of next week

Looks like the next 10 days will be quite interesting - and critical. Bloomberg reports that $140 billion of commercial paper in Europe need to be refinanced by the end of next week. This may push up yield premiums on corporate bonds and will cause wider corporate spreads. Central banks may have to pump many billions of dollars again into the market. The price of gold can only go one way.

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Thursday, September 6, 2007

Holders of the"Bailed-Out" ABCP Could Lose 50%

The Financial Post reported that the majority (about two thirds) of the $35B of non-bank ABCP in Canada is backed by risky bets on credit default rates that are very far underwater. The losses could be 50C on the dollar (quote from ED Devlin from PIMCO). He says the situation is worse in Canada than in the US. The issuers were leveraged so losses are amplified. They are "leveraged up 10 times and then leveraged again".

The so-called Montreal bailout is in doubt because of this levegage, but it seesm the banks involved in the bailout were the ones who would benefit, by forcing the holders of very short term debt to swap it for long term debt. May be not.

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