The Second Wave of Recession: The Damping Down of the Economy.

[stephendare]

http://www.dailymail.co.uk/news/article-1041343/HSBC-profits-fall-28-writes-5-3-billion-bad-investments.html

HSBC profits fall 28% after it writes off £5.3 billion in bad investments

By Becky Barrow
Last updated at 4:41 PM on 04th August 2008

More than one in 10 mortgages are in negative equity or close to being plunged into it, one of the world's biggest banks admitted today.

HSBC said it has seen a shocking 40 per cent jump in the size of loans which are larger than the value of the property.

In the UK, it had £460million of 'negative equity mortgages' in the six months to the end of June, compared to just £330million at the end of December.
But there is also a further £5.2billion of loans where the loan-to-value is 90 per cent or more.

This means they are on the brink of negative equity, and will quickly fall into the trap if house prices keep on falling.

The figures, published yesterday, show the seriousness of the housing market meltdown on homeowners around the world.

In America, a staggering 46 per cent of all HSBC's loans are in negative equity, or close to it.

The situation is much worse in Britain than it is in the rest of the world - 12 per cent in the UK compared to just 1.5 per cent in the rest of Europe.

It comes as HSBC yesterday warned that it is facing 'the most difficult financial markets for several decades.'

In a further blow, the bank said the situation could get even worse in the coming months.

Stephen Green, HSBC's group chairman, said: 'Ultimately the real economy will recover from this crisis, although it may get worse before it gets better.

'Financial markets will not, and should not, return to the status quo ante.'

In the week of the first anniversary of the credit crunch, he said the outlook remains 'highly challenging with significant uncertainty'.

Yesterday it became the latest bank to reveal a sharp fall in profits before tax, down 28 per cent to £5.2billion in the first half of the year, compared to the same period in 2007.

Last week, both Lloyds TSB and HBOS, owner of Halifax, revealed 70 per cent plunges in profit and Alliance & Leicester's dropped 99 per cent.

Banking giant HSBC today warned financial markets were at their toughest 'for several decades' as it reported a 28 per cent fall in its half-year profits.

Britain's biggest bank was forced to write off more than £5.3billion in bad investments, dragging its profits down to £5.2billion (10.25billion dollars).

Its North American arm alone made a loss of £1.42billion (2.8bn dollars) and profits worldwide dropped by almost £2billion.

Chairman Stephen Green said the first half of 2008 saw 'the most difficult financial markets for several decades'.

He added: 'HSBC was not immune from the turmoil. Ultimately the real economy will recover from this crisis, although it may get worse before it gets better.'

[Driven1]

also, WCI Communities (builder here in FL) declared bankruptcy today.

[RiversideGator]

Creative destruction.  Clear out the dead wood and make way for the new growth.

[Doctor_K]

Not quite sure which thread in which to post this, but here goes.

Normally I don't often agree with his pieces and opinions, but this one gave me pause.
http://finance.yahoo.com/tech-ticker/article/83437/Stop-Blaming-the-Shorts!-SEC's-Ban-Hurts-Market-and-Didn't-Help-WaMu-Wachovia?tickers=GE,IBM,CVS,%5EDJI,%5EGSPC,XLF

Stop Blaming the Shorts! SEC's Ban Hurts Market and Didn't Help WaMu, Wachovia
Posted Oct 01, 2008 11:51am EDT by Aaron Task

The SEC is under pressure to extend its "temporary" ban on short selling, which is set to expire tomorrow. By design, the ban has reduced the level of short interest -- but has it really helped?

Most obviously, the ban failed miserably to stem the declines of Washington Mutual and Wachovia (among others). The dismal performance of those stocks amid the ban showed the folly of CEOs blaming loses on short sellers, notes Whitney Tilson, founder and managing partner of T2 Partners and Tilson Mutual Funds.

Tilson, who publicly detailed the risks of owning Washington Mutual, Lehman Brothers and others last spring, said the ban wrongly seeks to punishes people who correctly warned about the dangers of many of the most toxic financial companies.

In addition, the ban has unleashed the law of unintended consequences, such as:

--Removing short-covering (i.e., buying of stock) that normally occurs amid big declines. In other words, Monday's decline may have been worse because of the ban.
--Driving up the price of put options, which traders are now using to express bearish bets (and in turn prompting market makers -- who are exempt from the ban -- to increase their short positions.)
--Hurting the convertible bond market, a $400 billion source of liquidity for companies that has effectively dried up because of the ban, as the WSJ details.

For the record, Tilson, who does believe reinstating the uptick rule would be better than the short-selling ban, which inexplicably encompasses decidedly non-financial names like IBM and CVS.

[fsujax]

Any good news? geez, to read all the post it's as if the world is coming to end. Guess, I better start my vegetable garden in my backyard so I can have food.

[Doctor_K]

LoL - A Victory Garden!  We've got one of those going already, but not because of the economic news.  The wife's big into having her own little plot of paradise.

I didn't post it to further the notion that the world is coming to an end.  Rather, as a counterpoint to the ban on short sells for trading.  Lots of bleak news to go around though - no doubt about that.

[apvbguy]

LoL - A Victory Garden!  We've got one of those going already, but not because of the economic news.  The wife's big into having her own little plot of paradise.

I didn't post it to further the notion that the world is coming to an end.  Rather, as a counterpoint to the ban on short sells for trading.  Lots of bleak news to go around though - no doubt about that.

re short selling: I don't think a complete ban on short selling is right, short selling is a component of trading that should be allowed to continue, that said, I think the uptick rule should be reinstated to discontinue the practice of groups attacking a companies stock and running it down.

Re: gardens, small gardens can help many people save money and have nutritious food for consumption and the gardeners could either give away or sell their surplus food.
I have a grapefruit tree that produces a lot of fruit but nobody in my household like grapefruit, I give them away to my neighbors, delivery and service people and to just about anyone.
up north deer hunters give their surplus meat to food banks and in some places where invasive geese are an issue they are killed and given food banks to. the point is that many people have the room to produce food but farming skills have been lost, it would be great if more foods could be homegrown

[Downtown Dweller]

I am going to post this here, since I have had a few requests... this may help anyone who isn't up on some of these terms stay in the conversation:

Auction Rate Securities: Fixed income securities designed to preserve capital while generally realizing higher rates of return than traditional money market investments (for example, municipal auction rate securities, municipal preferreds and action preferred stock). Interest rates or dividends reset frequently, usually every seven to 49 days, via Dutch auction. The interest or dividends received can be 70% to 100% exempt from federal taxes. Issuers include states, municipalities, corporations, utilities, hospitals, housing finance agencies, student loan finance authorities and universities.

Break the buck: When a money market mutual fund's net asset value drops below $1 per share. Money market funds aren't federally insured like bank deposits; therefore, fund assets have an implied promise to preserve capital at all costs and preserve the $1 floor on share prices. These funds are regulated by the Securities and Exchange Commission; rules restrict what they can invest in based on credit quality and maturities with the hope of ensuring principal stability.

Collateralized Debt Obligation (CDO): An investment-grade security (one with a high bond rating such as BBB) backed by a pool of bonds, loans and other assets. CDOs do not specialize in one type of debt but are often non-mortgage loans or bonds. Similar in structure to a collateralized mortgage obligation (CMO) or collateralized bond obligation (CBO), CDOs are unique in that they represent different types of debt and credit risk. In the case of CDOs, these different types of debt are often referred to as “tranches” or “slices.” Each slice has a different maturity and risk associated with it. The higher the risk, the more the CDO pays.

Commercial Bank: A full-service institution that offers customers deposit, payment and credit services, in addition to other financial services.

Counterparty risk: The risk to each party of a contract that the counterparty will not live up to its contractual obligations. A counterparty is the other party that participates in a financial transaction. Every transaction must have a counterparty for the transaction to go through. More specifically, every buyer of an asset must be paired with a seller that is willing to sell and vice versa.

Credit Default Swap (CDS): A swap* designed to transfer the credit exposure of fixed income products (securities that pay specific interest rates, such as a bond, money market instrument or preferred stock) between parties. The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap. For example, the buyer of a credit swap will be entitled to the par value of the bond by the seller of the swap, should the bond default in its coupon payments.

*Note: a swap traditionally means the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds) or because investment objectives have changed.

Deleverage: A process undertaken by a company in an attempt to reduce its financial leverage, or the degree to which the company is using borrowed money. Financial leverage can be beneficial for a company, but if it becomes too risky or harmful, the company may need to deleverage itself by paying off the amount of debt that it owes.

Derivative: In finance, a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

Investment bank: An individual or institution that acts as an underwriter or agent for corporations and municipalities issuing securities. Most also maintain broker/dealer operations, maintain markets for previously issued securities and offer advisory services to investors. Investment banks also have a large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring. Unlike traditional banks, investment banks do not accept deposits from and provide loans to individuals.

Money market deposit account: A type of savings account offered by banks and credit unions just like regular savings accounts. However, they usually pay higher interest, have higher minimum balance requirements and limit the number of withdrawals per month. As with bank accounts, the money in a money market account is generally insured by the Federal Deposit Insurance Corporation (FDIC) subject to certain limitations. The recent announcement from the U.S. Treasury regarding money market mutual funds does not affect money market deposit accounts or impact FDIC insurance of such deposit accounts.

Money market mutual fund: A fund that invests in a pool of high-quality, short-term, interest-bearing securities. A money market mutual fund is not a bank deposit and is not insured or guaranteed by Bank of America, the FDIC or any other government agency.

Resolution Trust Company (RTC): A U.S. government-owned asset management company charged with liquidating assets (primarily real estate-related assets, including mortgage loans) that had been assets of savings and loan associations declared insolvent by the Office of Thrift Supervision, as a consequence of the savings and loan crisis of the 1980s. In 1995, its duties were transferred to the Savings Association Insurance Fund of the FDIC. Between 1989 and mid 1995, the Resolution Trust Corporation closed or otherwise resolved 747 thrifts with total assets of $394 billion.

Securitization (or securitized assets): The process of distributing risk by aggregating debt instruments (for example, mortgage loans) in a pool, then issuing securities that are backed by the pool and available for purchase by investors in the secondary mortgage market.

Subprime mortgages: A type of mortgage that is sometimes offered to borrowers with a greater-than-average risk of defaulting on the loan. Lending institutions often charge interest on subprime mortgages at a rate that is higher than a conventional mortgage (often referred to as “prime”) to compensate themselves for carrying more risk.

Short sale: A transaction in which an investor sells borrowed stock, betting the stock will decline with the intention of buying it back at a lower price to realize a profit.

Warrant: Certificate given to its stockholders or bondholders by an issuer that allows the holder to purchase a specific amount of its securities at a set price. A warrant can be sold to another investor if the holder chooses not to exercise the warrant.

[RiversideGator]

You have never heard of "creative destruction" before?  That is breathtaking.

For more on this, read Joseph Schumpeter.  You can start here: 
http://en.wikipedia.org/wiki/Joseph_Schumpeter

This will be a good book to start with when you begin to "read economics".
http://www.amazon.com/Capitalism-Socialism-Democracy-Joseph-Schumpeter/dp/0061561614/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1230933616&sr=8-1

[RiversideGator]

So, you have read Capitalism, Socialism, and Democracy by Schumpeter then?