A paper exploring the fallout of the subprime crisis makes the point that, although direct losses may be only (only?) $400 billion, half of these will end up with leveraged institutions in the US - which will in turn cut their lending by $2 trillion. From economists at Morgan Stanley, Goldman Sachs, Chicago and Princeton. Via Calculated Risk - which also has a summary.

Yves Smith grows furious about the rating agencies:

Now the New York Times piece, on page one, is no doubt intended for a broad audience, so it explains (without giving comparative default rates, which would have been useful), that rating agencies grade muni bonds more harshly than corporates:

At every rating, municipal bonds default less often than similarly rated corporate bonds, according to Moody’s. In fact, since 1970, A-rated municipal bonds have defaulted far less frequently than corporate bonds with top triple-A ratings. Furthermore, when municipalities do default, investors usually receive some — or even all — of their money back, unlike in most corporate bankruptcies..... Moody’s estimates that more than half of the market would be rated triple A or double A using the corporate scale. Triple-A securities are considered nearly as safe as Treasury bonds issued by the federal government.

However, the piece notes rather blandly the central conflict of interest: that rating agencies have good reason to have established and perpetuated this double standard...And the rating agencies are resorting to bald-face lies to defend their practices...it's a meal ticket. And some investors might like it because it creates market inefficiencies.

And reflect on the fact that the monolines' business, before they got embroiled in insuring structured products (whence all their current problems) was to earn a fee in exchange for conferring a AAA credit rating on products which, in many cases, and had the rating agencies been doing their jobs properly, would have had one anyway. Essentially, rent-seeking.

Charles Goodhart of the LSE has spotted a similarity: both the current credit crisis and the 1982 developing-nation debt crisis involved Citi in a prominent role (not too much of a coincidence given the bank's size), and, more importantly, both involved Citi chairmen saying something they would very soon come to regret: Walter Wriston in 1982 announced that "countries do not go bankrupt", and Chuck Prince told the FT in July last year: "As long as the music is playing, you've got to get up and dance. We're still dancing."
Citi shareholders must act, Goodhart said: all prospective chairmen should be tested for their quotability, and any with a talent for phrasemaking should be passed over "in favour of someone more boring".

Perhaps they did, according to this paper from the Hudson Institute, which looks at their role in putting together structured mortgage products.

...at Merrill Lynch, which has unilaterally improved the terms on its LYON puttable convertible notes to prevent having to make up to $2.2 billion in redemption payments - it's increased the conversion rate, essentially sweetening its bondholders with its shareholders' money.

Alea points to a short and highly readable paper that describes why bubbles happen in property: it's an illiquid, opaque market that's difficult to short and suffers from infrequent, highly disruptive crashes, and that tempts banks into making lots of leveraged loans... also a very interesting aside on the subject of disaster myopia.

...or, in other words, there's a locally relevant angle to any big news story.

With Eliot Spitzer gone, will the push for a monoline rescue package falter? One blogger (via Felix Salmon at Seeking Alpha) thinks that the loss of his leadership could mean the insurers falling into the hands of less-sympathetic West Coasters.

From Paul Krugman: Betting the Bank

I’m more concerned that despite the extraordinary scale of Mr. Bernanke’s action — to my knowledge, no advanced-country’s central bank has ever exposed itself to this much market risk — the Fed still won’t manage to get a grip on the economy. You see, $400 billion sounds like a lot, but it’s still small compared with the problem.

From Paul Wilmott: This Is No Longer Funny

Human nature is such that very often things have to go from bad to worse to bloody awful before the necessary paradigm shift happens. I hope we are close to that point now.

Who am I kidding? As another hedge fund disappears thanks to mishandling of complex derivatives, I predict that things are going to get even worse.

Bear Stearns and the bailout: Fed bails out Bear Stearns

...history being basically a list of crimes, follies and misfortunes.

As the Fed cuts rates by 75bp (for a total this week of 100bp)...

Nouriel Roubini writes:

This is the worst US financial crisis since the Great Depression and the Fed is treating it as if it was only a liquidity crisis. But this is not just a liquidity crisis; it is rather a credit and insolvency crisis. And it is not the job of the Fed to bail out insolvent non-bank financial institutions. If a bail out should occur this is a fiscal policy action that should be decided by Congress after the relevant equity holders have been wiped out and senior management fired without golden parachutes and huge severance packages.

Bear Stearns was blaming "market rumours" for its problems last week - was it correct? Bloomberg reports (via Alea) that the SEC and the NYSE are investigating the possibility that the bank was talked down deliberately:

Latest rumbles from the Bernanke Money Geyser - borrowings under the PDCF are at $28.8 billion (WOW, comments alea). Just to remind everyone that some or all of that is secured against RMBS.

One is, at least - Jimmy Cayne, the FT reports, sold his entire stake for $61 million at $10.84 yesterday.

These notes are from Douglas Long at Principia Partners, who attended the Geneva ABSummit earlier this month. (Emphasis is, however, mine).

Reaction to the Great Big US Regulatory Reform Plan has been mixed.