default

This year's Thanksgiving turkey has arrived as a dud. While the U.S. markets were closed over the holiday, Dubai managed to pull the rug from under the global risk trade by announcing a 6 month moratorium on the debt of Dubai World. The state-sponsored Dubai World is an umbrella company that houses a portfolio of businesses, including Nakheel - the famous real estate developer of the Palm Islands.

The chickens are (just) starting to come home to roost...

A brutal risk selloff as Dubai seems to have sparked the "sudden" realization that, you know, stimulus just ain't going to do it all.

Sovereign CDS spreads have been widening since the news, rescheduled conference calls did little for investor confidence and U.S. equity futures have crashed (midnight ET was exciting!) on the order of 4% with crude futures are down 5%. Treasury futures have spiked in inverted sympathy (flight to safety). Spot gold, which was as high as $1191 hours ago has sunk to ~$1140. Japan has intervened following the Yen's 14 year high mark. The Swiss National Bank is rumored to be intervening continually to un-defend the Swiss Franc. Quite a morning so far, and it's just beginning.

Far be it from us to be so cynical as to suggest that financial disclosures might be delayed to fall on the deaf ears of absent markets (Dubai related evidence notwithstanding) but who else might we expect dire tidings from this long weekend? Whither Failure Friday?

The bank that got its ass kicked first in the subprime collapse in 2007 may be the first one again to get the KY treatment from the Dubai implosion.

Are the dominoes about to start falling? From Morgan Stanley's London desk:

Ukrainian Railway defaulted on a Barclays bond. They have another, government guaranteed obligation with DB. If DB accelerates the payment & IF it is then not paid, it will count as a government default.

We are closely following the releases out of S&P and Moody's analysts to see if they have gotten into the office after their leisurely orgy at the nearest Turkish bath insider info leak session. Potentially nothing actionable just yet, but that a government-backed bond can't make its payments, should prompt the IMF apparatchiks to promptly take the next Textron Cessna straight into Kiev (after they get 20 Goldman flu shots each) and spend a few more billions in US taxpayer money and/or sell more gold to quickly stuff even more corpses under the carpet.

Saber rattling about seceding from the Union for this reason or that (we are looking at you, Texas) has heretofore been a cheap political maneuver often motivated by the desire to shine the dim witted light of the mainstream media on some states' rights issue long since stripped away by the Supreme Court. This fact has permitted us to mostly ignore these sorts of pronouncements as casual. That might be a luxury of the past given the emergence of a new and severe phenomenon: crushing state deficits and an already beleaguered lender of last resort. (Read: The Federal Government).

The base case number one takes the view that high yield default rates are peaking and will start to drop from this level now. The rate of unemployment ranges from 10% to 11.5% with this given scenario. In the base case number two, I am using a composite of both peaks in 1991 and 2002 to suggest that default rates may carry upward one percent more. The resulting effect on unemployment targets will range from 11% to 13.5%. In our final analysis base case number three will use the peak at 13% in default rates established in 1991. Unemployment rates in this scenario show a range of 12.5% and 15% before possibly peaking.

Look for the next batch of CRE numbers to be the worst ever as Tishman and BlackRock move the loan backing Stuyvesant Town to special servicing, in essence throwing in the towel, and pushing the affordable home complex into default. According to Fitch the property's worth has plunged from $3 to $1.8 billion. This means that not only Tishman and BlackRock have lost all their value, but Fortress and SL Green who own a $1.4 billion mezz loan in the property are also wiped out. Also, as Fannie and Freddie are the largest holders of the securitized mortgage, look for another set of requests for governmental bailouts out of the nationalized GSE's.

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"Credit performance for CMBS worsened at an accelerated pace this month versus the recent trend. Thirty-plus day delinquencies across the fixed rate universe increased by 41bp, to 5.50%, partly owing to the deterioration of loans that were current but transferred to the special servicer last month. This compares with the trailing three month average of 34bp. The trend of accelerating delinquencies is expected to continue throughout 2009 and early 2010, given the long lag times associated with commercial real estate." - Barclays

Beneath all of the rhetoric, here is the REAL reason by big boys are fighting to keep CDS from being regulated.

Bottom line is that deflation is still the chief threat to the US economy, driven by a relentless contraction in bank and nonbank credit. Until we see a restoration of the market for nonbank finance and a sustained turn in the EAD of the large bank peer group, which accounts for almost 70% of the entire US industry balance sheet, we do not believe that any economic recovery will be meaningful in terms of jobs or asset prices. Indeed, we have to wonder whether the FDIC should even try to impose another assessment on the banking industry to fund failed bank resolutions when the effect of this action is to remove capital from the system and thereby accelerate the shrinkage of the collective balance sheet of US banks.

Stuy Town, which as Zero Hedge wrote about several days ago is in dire straits and a few months away from default, has claimed its first casualty in the face of the Florida pension fund, aka State Board Administration which has disclosed a full loss on its $250 million investment. Next question: is Blackrock still carrying Stuy Town at 100 cents on the dollar for its own LP appeasement purposes (PEs heart FASB looseness)? This piece of information will likely get as much coverage on GE's propaganda central subsidiary as Chrysler missing August sales estimates by almost 20%.

Tishman Speyer's 2006 acquisition of Stuyvesant Town for $5.4 billion apparently is about to turn terminally sour. The "biggest deal for a single American property in modern times" which never managed to be profitable from day one, is on the verge of completely exhausting reserve accounts tied to $3 billion of securitized accounts.The premise - take the 11,227 rent-stabilized units apartment complex and convert them to market-rate. Alas, the timing could not have been worse due to an implosion in the NY rent market, coupled with legal difficulties - to date only 4,350 of the units have been converted to market rate, while the remaining rent-controlled units will likely increase in number due to a recent court ruling.