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Re: SC63

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March 17, 2008 10:41PM

Three Easy Pieces:

The Dollar, Paulson, and Carlyle Capital

The Bedraggled Greenback

So far, so bad. On Wednesday, crude-futures topped $110 for the first time, the dollar slipped to $1.55 per euro, and gold zoomed to a new high of $1,000 per ounce. Yikes. The dollar has been shoved off a cliff and no one knows where it will land. Last week, the G-7 nations announced that if “irrational” prices movements persisted, they would “collectively take suitable measures to calm the financial markets.” Their statement was taken to mean that foreign central banks will secretly intervene in the currency markets to stop the dollar from crashing. But can they do it? Only the Fed can raise interest rates and the market is betting that Bernanke will slash another 75 basis points at its next meeting. That ought to send the sinking greenback to Davey Jones Locker in a hurry.

The dollar has plunged from $.87 on the euro in 2002 to $1.55 on March 12, 2008; losing nearly half its value since Bush took office. And there's no sign of a turnaround. Henry Paulson's “strong dollar” policy is a load of malarkey. The Fed has been pummeling the dollar for the last six years. Why stop now? They've already said they want a cheap dollar to increase exports; now they've got it, along with $110 oil and $6 per gallon milk. Any other bright ideas? Now, living standards will fall, prices will soar, and the public wil get restless. No country ever devalued its way to prosperity, but that doesn't mean we can't be the first. Just look at Zimbabwe; there's a success story, right?

The plan to debase the currency is as loony as invading Iraq and the country will pay dearly for it.

Recently, the Wall Street Journal broke down the relationship between the dollar and oil and revealed the ugly truth; that consumers are getting gouged at the pump because of Bush's policies not Saudi greed:

“Since 2001 the dollar price of oil and gold have run almost in tandem. The price of gold has risen 240% since 2001, while the price of oil has risen 270%. That means that if the dollar had remained “as good as gold” since 2001, oil today would be selling at about $30 a barrel, not $100. Gold has traditionally been a rough proxy for the price level, so the decline of the dollar against gold and oil suggests a US monetary that is supplying too many dollars”.” (“Oil and the Dollar” Wall Street Journal)

There it is in black and white. Bush's dollar policy has taken us where Bin Laden never could; the edge of ruin. The consumer is getting clobbered, the country is slipping into recession, and the greenback is hanging by a thread. Thanks, George.

According to Bloomberg News the dollar has bounced back slightly from its historic lows at $1.56 per euro on the news of possible intervention by foreign banks. But what a humiliation. The dollar is like Blanche Dubois in "A Streetcar Named desire" who “Always depended on the generosity of strangers”. Pretty soon, foreign lenders will get tired of America's reckless behavior and let the dollar shrink to the size of a peso. Why would they care? For now, Japan and the European Central Bank still think the US can be cajoled into acting like a responsible adult and put the ship of state and its currency back on course. But, they're dreaming. There's not an adult in the entire Bush administration. Foreign exporters will have to slow production as demand decreases. We're headed into a defaltionary slump and there's no longer any doubt about it. Bernanke is planning to ride interest rates into the ground just to prove that his nutty Depression-aversion theories have some merit. But, guess what? They don't. In less than a year the greenback will be worth less than a hand-D-wipe.

According to Bloomberg News: Goldman Sachs Group Inc. and Morgan Stanley said coordinated action by policy makers to stem the currency's slide is increasingly likely. In intervention, central banks buy and sell currencies to influence exchange rates. (But) Sentiment remains overwhelmingly dollar negative, though preliminary technical factors warn that a broader period of dollar consolidation may be at hand.

So, the banksters are planning on are rigging the currency markets. What else is new? But do they ever think "outside the box", like doing something honest for a change? Not likely. This is their system and they run it the way they like. Period. But the fate of the poor greenback is out of the Fed's control no matter what the banks do. As the housing bust continues, the credit crisis will worsen and the US will begin a protracted recession. That means that foreign capital will seek other markets where the growth potential is stronger. Bye, bye "purple mountains majesty". When foreign investment packs up and leaves, the dollar will follow the stock market straight into the fish-tank............


The politically-connected Carlyle Capital hedge fund was wheeled into ICU on Thursday unable to make a measly $400 million margin call. Carlyle boasted a $21.7 billion portfolio of AAA-rated residential mortgage-backed securities issued by Freddie Mac and Fannie Mae. So where's the money?

The fund had leveraged its $670 million in equity to 32 times its value. Now the stock has lost over 90 per cent of its value and has defaulted on $16.6 billion of its debt. About $5.7 billion of the defaulted debt has been sold, the Carlyle Group said Thursday.

What is interesting here is the fact that “$5.7 billion of the defaulted debt has been sold” but Carlyle still couldn't pay its paltry $400 million margin call? Why?

Is the $5.7 billion the estimated face-value of the Freddie Mac bonds? If that is the case---and I suspect it is---then we have discovered something very important, that even triple A rated mortgage-backed bonds are worthless. That's a very scary prospect for the many banks, hedge funds, insurance companies, and retirement funds that are currently holding trillions of dollars of these toxic MBS. They could be worth zero, which means we could see a rash of defaults and bankruptcies unlike anything in history.

According to Reuters: “Carlyle Capital shook financial markets last week after it was unable to offer more collateral to protect its $21.7 billion portfolio of residential-mortgage-backed bonds. The banks that had loaned money demanded more collateral, known as a margin call, to cover the gap between the previous value of the securities and their current, lower level.”

Again, this is a very small margin call for a fund of this size that's loaded with Triple A-rated securities. All we want to know is, what they got paid for their Fannie Mae bonds? How much? But the media is not reporting that critical bit of news.

Reuters offers this one revealing clue in a statement issued by Carlyle:

"Overall, it has become apparent to the company that the basis on which lenders are willing to provide financing against the company's collateral has changed so substantially that a successful refinancing is not possible.”

Ah-ha! “Refinancing is not possible”. Not possible at any price regardless of the quality or the rating. That is exactly what we wanted to hear.

Guess what; the subprime meltdown just got a whole lot bigger. As the massive cycle of deleveraging continues for the over-extended hedge funds; Triple A assets will be sold for merely pennies on the dollar sending the faltering banking system into a last, lethal swan dive. Good riddance..............


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