(obscure title reference)

Back in June we looked at the ill-fated ARS issue by Jefferson County, Alabama -

Between 2002 and 2004, the governing County Commission issued $3.2 billion in floating-rate debt, predominantly in ARS paper but with smaller holdings in variable-rate demand notes (VRDNs)...

Gotham's finest go into action:

Commodity-market regulators are investigating whether energy-market players are injecting false data into the marketplace to influence perceptions about crude-oil supply and demand...Among the periods the agency is examining, these people say, is a rapid shift in the structure of oil markets in July 2007. Price relationships flipped in a way that was extremely profitable for traders who may have had close knowledge of continuing and rapid drain-off in oil inventories. Oil for near-term delivery had been selling at a discount to oil to be delivered months and years into the future. Suddenly, oil for immediate delivery became much more expensive when a glut of oil at a key hub at Cushing, Okla. rapidly drained.

Peter Madigan wrote on Risk News yesterday about the increasing uncertainty over non-subprime underlyings:

While defaults and delinquencies on subprime mortgages appear to have peaked, losses on prime mortgages and other prime collateral referenced by asset-backed securities (ABS), such as auto loans and credit cards, are expected to keep rising...

Another piece of data to back things up: record mortgage delinquencies in the US. (Via CR)

Naturally, there is far more being written today about the Fannie and Freddie bailout than anyone can assimilate, but a few points:

what's going to happen to GSE shareholders? Paulson's speech includes the warning:

"The federal banking agencies are assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two GSEs, only a limited number of smaller institutions have holdings that are significant compared to their capital. The agencies encourage depository institutions to contact their primary federal regulator if they believe that losses on their holdings of Fannie Mae or Freddie Mac common or preferred shares, whether realized or unrealized, are likely to reduce their regulatory capital below "well capitalized."

Can we get a bit more detail on that? Probably not - OTS is looking into it, and estimated that 2% of thrifts had GSE shareholdings equivalent to 10% or more of Tier One capital.

Normally, of course, banks wouldn't be allowed to hold unlimited amounts of equity as capital; but GSEs were regarded as special. Weren't they just.

Yves Smith points out the damage this could do - estimating that it could cut banks' lending ability by $180 billion. (And adds her surprise that both common and preferred shareholders are being almost wiped out.)

...admittedly it's probably a fairly busy day for most people. But that's all the more reason to be reading Risk! The September issue's just gone up on the website - take a look at Merrill's latest attempt to save itself from its CDO investments, the Risk interdealer rankings and plenty more.

Once you've done that, there are a couple of decent papers from the Fed: this historically erudite look at the Northern Rock failure and this highly readable analysis of the credit crisis.

This stampede happened today...

United Airlines parent UAL Corp. lost almost all its market value after an erroneous report that the company had filed for bankruptcy.

Jean Medina, a spokeswoman for the Chicago-based carrier, said in a telephone interview that the report was incorrect. UAL fell to 1 cent, down $12.29, at 11:07 a.m. New York time in Nasdaq Stock Market composite trading. Trading in UAL's shares was halted.

I would say that this indicates the markets are a little tense today. Nervous, even. One local paper in Florida (of course, it would be Florida, wouldn't it?) mistakenly reposts a six-year-old story saying that UAL has gone into Chapter 11, and suddenly the stock goes through the floor?

The NYSE boasts that "the six massive Corinthian columns across [our] Broad Street façade impart a feeling of substance and stability and, to many, it seems the very embodiment of the nation’s growth and prosperity". Perhaps NASDAQ should consider adding to its website, in large, friendly letters, the words "DON'T PANIC".

Lehman's has announced its turnaround plan - keep selling off the residential mortgages, spin off the commercial real estate, sell a chunk of the investment management division, cut dividends and hope to pull through. (Sounds familiar.)

It was never likely that the US authorities would be prepared for a second bailout in the same week, after all.

Felix Salmon said yesterday that Lehman could be the first major default of the crisis. Or maybe WaMu.

The FT points out that the equity markets are not impressed. Neither are the CDS markets; Lehman ten-years are now at 610 bp and WaMu at 2200bp!

Lehman Crashing Again - down 45% this morning

Lehman Risk Jumps as Default Swap Traders Demand Upfront Fees - Contracts protecting $10 million of Lehman debt for one year cost 13 percent upfront and 5 percent a year, according to CMA prices at 9:50 a.m. in New York.

Lehman End Imminent - I heard the rumour from two sources that Lehman is in its final day or two and Goldman is willing to buy the firm, and the second source, who volunteered the information, is sufficiently well plugged in that I trust the reading. This came from a former senior employee:

A couple friends of mine from LEH trading desk called me this a.m. to say that mgmt has taken employees aside to let them know that the end should come in next 24-48 hours. Ratings agencies apparently told them that the steps were not sufficient to prevent a d/g, and LEH mgmt asked them to hold off for a day or so to give them a chance to resolve situation (with sale of company). Apparently GS is willing buyer, but is buyer of last resort from LEH's perspective, b/c they would keep very few LEH employees.

Maybe we'll have another Sunday afternoon announcement this weekend. Or sooner.

On Monday I mentioned the prospect of problems at US banks which had been using Fannie and Freddie stock as part of their regulatory capital - here's a bit more detail:

PNC Financial Services Group, for instance, warned in a regulatory filing it expects to record a "significant other-than-temporary impairment charge"... with an aggregate cost of $80 million...

LSB Corp., the parent company of River Bank, reported that it expects to record a non-cash charge in the September quarter...

Cascade Financial Corp. warned that it expects to record a non-cash, after-tax charge to its income statement related to its investments in Fannie and Freddie preferred issues for the September quarter. The total potential remaining loss on the company’s investment in the preferred stock is $12.1 million ...

The FT reports that Bank of America, JC Flowers and the Chinese sovereign wealth fund CIC are preparing to buy Lehman "at fire sale prices", while the Treasury stands well back. No bailout this time...

(Fire sale is about right - according to this, Lehman's staff bonus pool is now worth more than the bank itself.)

Seems like a good opportunity to refer to this paper, which is by Brad Setser (who looks like an optimist only because he used to blog next to Nouriel Roubini) and looks at the effect of being a debtor nation:

the U.S. deficit matters for economic and strategic reasons alike. The United States may have more to lose than its creditors if they sell American assets or stop accumulating them at their current pace. This gives creditors potential leverage over U.S. policy. Setser also argues that indebtedness limits America’s ability to influence other countries’ policies, for example through sanctions and lending arrangements.