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CDO - Compound Damage Orgy

Interest-Rates / US Bonds Jul 12, 2007 - 01:42 PM GMT

By: Jim_Willie_CB

Interest-Rates Collateralized Debt Obligations are the CDO bonds under fire, soon to suffer huge losses, subject of debt downgrades, object of failed auctions. We are talking about hundreds of billion$ in bond losses. A vicious circle has begun, sure to continue for a length of time ten times greater than what is expected, like into 2010. Home values are on the decline, the basis collateral for such asset-backed bonds, some of which hold car loan portfolios also in trouble. Homeowner defaults are on the decline, the basis income for such asset-backed bonds. The foreclosure process will aggravate the already swollen supply of homes. Hedge fund collapse will aggravate the already shaky supply of CDO & mortgage bonds. This is a worst case scenario unfolding on a horrific scale.

Mortgage rates will continue to be reset upward for two more years, a process not ended. The Bear Stearns & Merrill Lynch failed bond auction kicked off the process, described in an article last week. The process continued this week with two blocks of debt downgrades by the sleep debt ratings agencies, Standard & Poor and Moodys. The next painful phase will feature huge portfolio writedowns, reduced bond valuations on the balance sheets, in addition to forced bond sales as billion$ in CDO and mortgage bonds are rendered no longer investment grade. Imagine throwing gasoline on the fire This vicious circle can be outlined loosely.

The backdrop includes a USGovt with mindboggling federal deficits, aggravated by outsized ongoing war costs. The honest annual deficit is of the order $1300 billion, when all the costs and illicit borrowing is tallied, like the off-budget items. My forecast made last year was that by 2007, it would be painfully clear that the weakest national economy on the planet would be in the United States . WE HAVE PRECISELY THAT. For three years, nitwit economic pundits and heretical bank officials boasted that the USEconomy was a viable legitimate ‘Asset Economy' which was fueled by the engine of assets like housing. For three years, the same incompetent policy makers were justifying the ‘Macro Economy' whose credit supply was fueled by Asian and OPEC trade surpluses. Now both economic tenets have been smashed, revealed as empty, each disguised Economic Mythology nonsense. The housing crisis and mortgage debacle are in full swing, worsening each month.

The Asians outside China do not support USTreasury Bonds at all anymore. The Persian Gulf nations are in the gradual process of dismantling the tight US$ peg, the essence of the Petro-Dollar defacto standard. So as the USEconomy and US bond sector are under siege, the USDollar and USTBond are also under siege. Even with no monetary action in a rate hike by the Euro Central Bank this week, the euro currency is pushing into record territory. The British did hike rates, and the pound sterling is also in record territory. A USDollar crisis is unfolding. New Dow index and S&P index highs only reflect preserved purchasing power in stocks, compensating for the lower USDollar. Monetary inflation is running at over 13% in US$ money supply, the real concept of inflation, matched by crazy levels of money growth in Europe and England . We are in Weimar times! As distress broadens and depends, expect even higher money growth!

Here is a list of events, which will continue to occur, continue to wreck havoc, and suffer a repetitive process until official bailout, and probably past that eventual certain event. This list will cycle over and over, in a vicious feedback loop and continual pathogenesis. England is subject to a similar vicious circle. The breakdown will succumb to additional systemic weakness and debilitation. The strength of many factors is growing, not lessening, sure to amplify the power of damaging forces. Talk of a housing recovery, sector stability, lack of contagion, and assured containment will all be replaced by questions of when the destructive process will end, how low will housing prices go, how deep the bond losses will be, and what arenas might be spared. This is a systemic contagion of absolute proportions, in the great housing & bond bust. One could have written this script years ago, since the bust is always inevitable.

All reference below of bonds is to asset-backed bonds, both the dominant mortgage bonds underlying and the packages of CDO bonds, which contain an assortment of securities of various levels of credit quality. Each mortgage bond is rated highest as ‘AAA' or subprime at ‘BBB' with shades in between. The CDO bonds include credit default swaps (insurance for mortgage portfolios), swap options, interest rate swaps (balance short-term & long-term yields), USTBond futures contracts (hedge on rates generally), and so on. These powerful factors are discussed and analyzed in the July issue of the Hat Trick Letter. The order can be rearranged, since so much occurs simultaneously.


  1. •  failed auctions and unsatisfactory public sales of asset-backed bonds
  2. •  debate on value in illiquid opaque markets, driven by models
  3. •  rating agency debt security downgrades
  4. •  forced sale of bonds which lose investment grade status
  5. •  huge writeoffs on balance sheets holding bonds
  6. •  compensatory sales of other bonds to improve debt ratios
  7. •  downgrade of ‘AAA' rated bonds from falling home collateral assets
  8. •  available mortgage funds reduced from collateral sales
  9. •  continued bankruptcy of lending institutions
  10. •  inevitable bankruptcy of a major bank and many home builders
  11. •  return of bonds to broker dealer issuers for non-performance or fraud
  12. •  lawsuits against lenders for predatory practices, misrepresentation
  13. •  Congressional action to clarify liability from fraud and predatory practices
  14. •  hedge fund failure, credit disposition, liquidation of bonds
  15. •  falling housing prices, pressured by heavy unsold home inventory
  16. •  mortgage rates reset upward, ending initial bargains
  17. •  rising mortgage defaults, delinquencies, and foreclosures
  18. •  bankers return foreclosed properties to the market for sale
  19. •  mortgage bonds fail to perform on income from monthly payments
  20. •  base long-term interest rates rise from market conditions
  21. •  tighter lending standards, big pre-payment penalties inhibit refinances
  22. •  stronger homeowners decide to sell so as to avoid going underwater in equity
  23. •  state legislation to attempt to protect homeowners soon to lose homes
  24. •  Congressional threat of ratings agencies and bond issuers for liability

The housing crisis and mortgage debacle has been forecasted in the Hat Trick Letter for over a year, as a groundswell of unbridled credit explosion and irresponsible economic & banking policy. The Greenspan reaction to the 2000 tech/telecom stock bust was to create a housing/mortgage bubble perhaps 20x larger. The losers of the stock bust were much more tilted toward the general public, hundreds of thousands of households, their pensions included. The losers of the much larger double-sided bond bubble will be pension funds, insurance firms, hedge funds, as well as the major players on Wall Street. The bankers, brokers, and dealers are all at risk to suffer huge losses. CDO bonds issued by Goldman Sachs have the highest rate of downgrade so far. All the big banker broker dealers are at risk. They all have exposure.

The US Federal Reserve will sooner or later (probably sooner) decide to bail out the large Wall Street firms, since two of them serve as the functional arms of the governing bodies which run the system. Refer to Goldman Sachs being the US Dept of Treasury, and JPMorgan being the US Federal Reserve. The ultimate bailout will be far above a $ trillion, to be sure. The effect on the USDollar and USTBond will be magnified and profound, pushing up gold & silver prices to where they belong. THE USFED CANNOT STAND BY, SINCE THE VICIOUS CIRCLE WILL FEED UPON ITSELF IN REPEATED CYCLES, EACH MORE POWERFUL, AND THEY KNOW IT !!! An unspeakable degree of capital destruction has begun. Wealth generation from simple inflation has a downside seen in progress.

The systemic risk is slowly being recognized. Denials are increasing at a great pace, regarding ‘contagion' and ‘containment' and ‘spillover' and ‘recession' and more. Historically, such denials are a surefire indication of their realistic threats and current felt risks, sure to occur.


My hip pocket estimate is an initial figure of $2 to 3 trillion in bond losses from CDO plus MBS bonds at a minimum. Match that with $4 to 6 trillion in home equity losses at least . Included in my estimate is the collateral damage of another $1 trillion in losses to high grade mortgage bonds and corporate bonds , since packaged in the same sewage as leveraged CDO bonds. A housing valuation decline CANNOT happen without a corresponding asset-backed bond decline of similar magnitude. Credit derivatives are undermining the USDollar. The ruling elite engineered a bond bubble to trigger a housing boom, in an opportunistic fashion so as to rescue the system from the 2000 tech/telecomm stock bust and recession. In the process, the big brokerage banker brokers seized a chance to sell bonds and earn huge fees, while grossly misrepresenting the quality of many of the bonds. In many instances, junk bonds packaged as ‘AAA' gems. However, they forgot to avoid ownership of their own corrosive bonds, and exposed themselves to hedge fund clients with outsized lines of insane credit. SO THE RULING ELITE WILL EAT A $1 TRILLION PILL THEMSELVES !!!

The Ruling Elite banker broker firms will beseech the USFed to bail them out, saving their hides, for the greater good and benefit and integrity of the system. If a bailout does not occur, three things might occur, all bad. 1) The USDollar might plummet worse (ushering import price rise), 2) the USTBonds might falter badly (higher long-term rates), and 3) gold might jump quickly to $1000 (the monetary crisis barometer). Recall that members of the Fed banking system are within the group of detrimentally affected losers lined up for slaughter. The general non-voting public will want a bailout themselves, BUT WILL NOT RECEIVE IT. ‘Helicopter Ben' is all talk in spreading cash to households. Public outrage will be acute, loud, and replete with righteous indignation. The US Congress will toss crumbs to the new serfs of the land. When all this occurs, when the bailout occurs, the USDollar will plummet. The DX index is already on the edge of the precipice, at the 30-year critical support level. With a delayed reaction, gold & silver will soar !!!

The best graphic of the current distress shows the corporate bond spreads widening, some collateral damage. It also features the value of subprime mortgages across a pool as having suffered a 50% loss. More loss is coming, even to ‘AAA' rated bond securities. Look for the ABX index to head toward the 20 level, all in time, much like falling down the staircase from the kitchen to the basement, with bounces of a human skull off the hard wood. A floor of a USFed sponsored guarantee will save them. Before all the damage is done, and the dust clears, the USFed will guarantee $2 trillion or more in mortgage bonds, which will trigger a direct impact on the USDollar, and possibly the USTreasury Bonds. They will have many motives beyond rescue of buddy Wall Street firms. They will want to avoid contagion to the prime mortgage arena, which could shut down all mortgage funds!!! And they denied contagion!


The canary in the monetary mine continues to be crude oil, now over $73 with its brother Brent over $76. The Petro-Dollar defacto standard might be the first victim in this unfolding mess. If the USDollar is soon to suffer a crushing blow, the financial meter in gold and the commercial meter in crude oil would reflect it. Official central bank gold sales have obstructed the gold price rally. Support from the Persian Gulf nations is absent in this time of need. Perhaps they are concerned about protection from the inflation ravage extended from longstanding USDollar direct association in a vast Protection Racket, enabling the Modern Pharoahs to enhance their billionaire status. The Gulf Cooperation Council is lining up to abandon the US $ peg to their national currencys. See the United Arab Emirate comments by bank chief Al-Suweidi, who is enlisting wider support of a group abandonment of the US $ peg. Full coverage can be found in the July Hat Trick Letter issue, due out late on the weekend of the 15th.


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“I want to congratulate you and thank you for your quick and frankly stated revision on bonds [the 4.0% forecast]. That was my thinking all along, but I must say that your writing was and continues to be a most valuable input to my thinking in the first place. That type of integrity makes me value your opinion all the more and is likely to keep me as a loyal subscriber for years to come.” (ScottD in Pennsylvania )

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By Jim Willie CB
Editor of the “HAT TRICK LETTER”

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Alan Goettemoeller
15 Jul 07, 16:53
Compound Damage Orgy

I believe your article acurately describes the lot to befall us.

How will this contagion spread to the Canadian markets? What would we expect to hit first? Interest rates or Bond failure?

Our system is somewhat differnt, but our economy is so totally linked to the U.S. that it will have to spread.

Are there any web sites with a Canadian forecast?

Thank you

Alan Goettemoeller

22 May 08, 00:24
China earthquake assessment tops 40k

The dying sound from newest week's earthquake in south-west China has risen to 40,075, officials be suffering with said.

Chinese aid workers are struggling to bargain seek for millions who unchaste their homes. exotic medical teams be dressed started arriving in the area.

Tens of thousands more are that time missing, and hopes are fading of bargaining multitudinous people that time aware.

how in the world, Chinese media say a maid was pulled from the rubble 195 hours - or eight days - after the disaster.

It was the ly let go free on Tuesday. Earlier, a man was pulled animated from the remains of a power insinuate after being buried for 179 hours, state media said. Rescuers fed him sweetened incredible inclusive of a tube.

The saving try has now focused on providing victuals, housing and drinking incredible for the millions of people hurt by the 7.9 extent earthquake in Sichuan province.

Rescuers be suffering with launched a concluding feat to search all false area.

On Monday Chinese chief executive Wen Jiabao ordered troops to reach every solitary village and village in the earthquake district within 24 hours.

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