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When the Swiss Say Money's Tight, The Depression's Gone Global

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Okay, people, if the foreclosure rate, the banks closing perfectly good credit card accounts, or the loss of thousands of jobs a month hasn’t made convinced you, this is Earthshaking.  Because, as depressed as the real estate market has been, and as volatile as the stock market has been, bonds have been the conservative investment of choice for large investment fund managers and long-term individual investors.  Secretly, who hasn’t aspired to “retire and clip coupons?”  (Note to the young’uns: tax-free municipal bonds used to have perforations like a sheet of stamps, and each coupon represented a monthly or quarterly interest payment that was like tax-free cash, thus the expression amongst the wealthy, “clipping coupons”; it has nothing to do with 20¢ off a box of Tide).  Now this:

     UBS AG won't buy auction-rate securities that fail to attract enough bidders, joining a growing number of dealers stepping back from the $300 billion market, said a person with direct knowledge of the situation.             The second-biggest underwriter of the securities, whose rates are reset periodically at auctions, notified its 8,200 U.S. brokers of the decision yesterday, said the person, who declined to be identified because the announcement wasn't publicly disclosed. Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Citigroup Inc. allowed auctions to fail … Bank of America Corp. estimated in a report that 80 percent of all auctions of bonds sold by cities, hospitals and student loan agencies were unsuccessful yesterday. That may mean as much as $20 billion of bonds failed to find buyers, based on the $15 billion to $25 billion of auction-rate bonds scheduled for bidding daily…Auctions are failing as confidence in the creditworthiness of insurers backing the securities wanes, and as loss-plagued banks…[Feb. 14 (Bloomberg)]

Yesterday, Warren Buffett, the billionaire head of Berkshire Hathaway Fund offered to personally shore-up the four companies that insure all bonds, and are at risk of having their own credit-worthiness downgraded (which would send a huge ripple of skittishness throughout the economy – a ripple, in my opinion, just waiting to happen).  Mr. Bufett’s offer has been publicly rebuffed, and, yet, such bravado on the part of MBIA and Ambac isn’t making anyone feel the rock solid security they’re trying to convey.  Everyone knows that when the defaults begin in bundled mortgage backed securities, they will not be able to come up with the $800 billion, and then, those holding more traditional bonds, those issued by municipalities and states, will be dependent upon the tax income of those entities, which are dwindling as the home foreclosure rate goes up. 

And the Swiss are having none of it.  So, yesterday, New York City's Health and Hospitals Corp.’s auction of $64.9 million failed.  Likewise, the Port Authority (of New York and New Jersey), saw its auction debt soar to 20 percent on Feb. 12 from 4.3 percent a week ago. 

Meanwhile, the CFO of MBIA, Charles Chaplin (no kidding), has taken his show on the road, telling everyone who’ll listen that everything’s okay, nothing to see over here, have faith.  Earlier this week he announced that they had enough to cover any degree of failure that may occur, and today, he’ll be testifying before Congress that “A bailout of highly credit-worthy companies, who, at most, are at risk of losing the very highest ratings available, is misplaced.”  But no disclosure of details has been made.  So far, this roadshow is all talk, and I, for one would prefer to see the balance sheets.  As the bonds themselves aren’t selling, the interest rate will have to go up to entice buyers.  But that just increases the risk for the insurers.  The problem snowballs.

By the way, did anyone notice that platinum hit $2,000./ounce last night? No wonder. 

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Michael Fox is a writer and economist based in Los Angeles. He has been a corporate controller, professor, and small business entrepreneur. After a life-altering accident, he spent five years learning more about medicine and the healthcare (more...)
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