Financial Skeptic Bulletin, November 2007

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[Nov 30, 2007] Lenders are Rapidly Tightening the Flow of Credit 

Is  $8 billion in funds injected by Feds a drop in a bucket that goes into subprime hole instead of holiday supply credit lines? Are American consumers finally too loaded with debt to buy the next huge plasma-TV? Is NASDAQ slide is connected with credit squeeze as tech. companies are more sensitive to credit conditions ?

Credit flowing to American companies is drying up at a pace not seen in decades, threatening the creation of jobs and the expansion of businesses, while intensifying worries that the economy may be headed for recession.

The combined value of two leading sources of credit — outstanding commercial and industrial bank loans, and short-term loans known as commercial paper — peaked at about $3.3 trillion in August, according to data from the Federal Reserve. By mid-November, such credit was down to $3 trillion, a drop of nearly 9 percent.

Not once in the years since the Fed began tracking such numbers in 1973 has this artery of finance constricted so rapidly. Smaller declines preceded three recessions going back to 1975; at other times such declines tended to occur in conjunction with an economic downturn.

... ... ...

Some of the drop reflects the subsiding in the run of mergers, diminishing the demand for credit by companies buying other companies. Some can be explained by what many economists view as a healthy return to the skeptical scrutinizing of prospective borrowers by banks. But lenders and borrowers from northern Virginia to southern Arizona confirm that the credit tightening has already begun to cut money reaching healthy companies as well, affecting their spending and hiring.

[Nov 30, 2007] Roger Kubarich: This is not a recession, things are not falling apart

The big question is: a crash, or a decade of malaise?

Bloomberg

We have a lot of weak data, but only in a real book or a real recession all data are in the same direction. this economy is in transition from decent growth to slow growth.  

The big issue is the spillover from the subprime to larger economy. The Florida fund fiasco is one example that put fear in a lot of people in the country.

Still there is no recession looming; this is a slow growth looming. But credit costs rise, financial instructions are hoarding cash and turbulence has returned.

[Nov 29, 2007] YouTube - Its Credit and its Crunchy

Nice English humor...

[Nov 28, 2007] Winter (Economic & Market) Watch » Mew Mew Bow Wow

How junk bonds will fare in this mess ? Will margin calls create a mad rush for cash ?

However, having spent over a month in Brazil (Reis up 6% in a month) this year and a month each in China and Turkey last year, I am just not so sure the USD crisis is a reflection of an inferior economy or system, that some how Brazil and China just clean Americans clocks.

Rather, my theory holds that much of the USD current weakness reflects the dishonest policy of American leadership and apparatcheks in dealing with fundamental issues, such as serious inflation. The US has been turned into a playground for hucksters, and lairs. Those Boyz are starting to get canned and be exposed, a process that I believe will be ongoing for several years. Exposing the perps of the American Plague is part of the painful reconciliation process. It eventually restores some credibility. Even as one who has been ripping my country a new one nearly daily on this blog, I would hesitate in making very heavy bets against the USD against the likes of say Brazil, Russia, India or China (BRIC).

In the short run a serious raid or run continues to precipitated by the 75 basis points in harmful blowback rate cuts of the last couple months, a huge policy error. But when crises develop, policies and people shift. The fictitious capital issue is a lost cause, restoring the USD is not. The trade imbalances will correct organically, mostly because the US consumer is shot. As the US consumer fades so will the bid for resources that are so much a part of the current inflationary spiral. The key to stopping the inflationary blowout is the USD itself.  Severe economic weakness will ultimately cause money to flow to institutions and countries that are at least working on credibility issues. I am gong to start reporting on signs of this. One could sure argue that the US is just fundamentally corrupt, but crisis often lays the seeds for change, even if painful. The corrupt free ride game may be about to run it’s course, possibly forced by foreigners.

[Nov 27, 2007] Abu Dhabi Deal Raises Questions About Citigroup's Health

Is City really the most vulnerable of US banks involved in subprime mess? Is this the light at the end of the tunnel or just another step in deterioration of large banks positions ?

Mish's Global Economic Trend Analysis

Questions Raised

• Is Citigroup prepared for the mortgage mess to get far worse?
   
• What about losses on the consumer side as we slide into a severe recession?
   
• What happens when commercial real estate tanks?
   
• What happens when Citigroup needs another $7.5 billion, then another after that?
   
• When does the dividend get cut? (Citigroup denies that it will)
   
• Is Citigroup so bloated that it can afford another massive jobs cut?
   
• If not, then what business units have to be sold to downsize to the new number of employees?

[Nov 23, 2007] Thanksgiving predictions for 2007 :-)

• Subprime concern are overblown but all the next year will still be consumed by the subprime mess.  Subprime is not a primary threat to US economy : it is just manifestation of deeper problems.  Contary to Roger Major banks will get out relatively scattered -- they just does not look good as an investment anymore.  "We might have a better handle on the credit crisis sometime on or around January 1, 2012 . That number was not plucked out of the air. It is based on historical new home sales, historical starts, and mortgage rate resets in conjunction with a consumer led recession."
  • The cost of inflating (and now deflating) of real estate bubble are enormous and current "gestimates" are widely off the mark:
    • $400 billions estimate is at the low end.
    •  "if you factor in rising property taxes, insurance, gasoline prices, etc, while real wages were sinking, even $10 trillion could be conservative by the time all is said and done." See Mish's Global Economic Trend Analysis How Much Will The Credit Crunch Cost
    • $2 Trillion Fallout On The Way Jan Hatzius, Chief US Economist for Goldman Sachs, joins CNBC to discuss his latest analysis that predicts up to $400 billion in losses in the financial markets related to the mortgage debacle eventually reducing lending buy as much as $2 trillion over the next few years. Hatzius now believes that there is a significant risk of recession. {  the question is how large part of losses falls on 401K investors -- NNB  }
  • Commercial real estate is sliding into recession.
• Growth recession is in the cards. Fed's recent forecast is that growth may slow next year to as low as 1.8 percent. That's below inflation and if we assume the margin or error that does not exclude falling into negative territory.
  • Dollar still have a space to plunge. That means falling prestige  that has indirect economic consequences BBC NEWS Business US woes prompt more dollar misery
  • Decoupling might not materialize...
  • Unemployment claims continue to creep up (30 basis points) with 50 basis points significantly increases chances of the recession.

Calculated Risk Roubini on Recoupling

Is a view that the US will experience a lengthy period of sluggish growth, partially offset by devaluation of currency and related improvement in net exports, a plausible view of the future ? Like people from Wall Street like to say "money to be made, sheep to be fleeced" as another wave of expropriation of 401K funds get strength...

...once there is a sharp growth slowdown in China the next victims of this recoupling will be East Asia and commodity exporters.

Calculated Risk

Are we all subprime now ? Subprime is like the weather: when it rains, everybody gets wet.  Aren't not people with prime mortgages who took loans to finance their lifestyle just another class of subprime borrowers? Welcome to the Hotel California...

My new motto—“we are all subprime now”—is an attempt to keep reminding the attention-impaired (that would include but isn’t limited to reporters and politicians) that demonizing “subprime people” isn’t going to prevent you from going there yourself.

The fact is that huge numbers of people who have “prime” mortgage loans couldn’t refi or sell right now to—literally, for some of the uninsured—save their lives. They may well still be making payments on the mortgage, but they’re rapidly approaching upside-down if they’re not there yet, they’ve spent the proceeds of the previous cash-outs that kept up the lifestyle or just kept life together, and if the truth were known about credit card balances, their current FICOs probably aren’t the envy of the neighborhood either.

They are, in short, subprime. They just don’t recognize themselves in the stereotype of the deadbeat serial bankruptcy filer or the undocumented immigrant or the waitress in the McMansion or whatever extreme case you can dredge up and label “typical” for subprime. They are, increasingly, “us.”

The invisible subprimers will do okay if this blows over and they don’t lose their jobs: if and when the RE market recovers, anyone who hung onto the mortgage he has will come out “prime” again. That’s the good news. The bad news is that attributing this solely to your own prudence and good judgment and inherent worth as “not one of those subprime people” is a form of delusion. Subprime is like the weather: when it rains, everybody gets wet. The political pressure for “bailout” measures has a little bit, in my view, to do with bleeding-heart sympathy for the poor and a lot, a whole lot, to do with the dawning recognition of too many middle-class homeowners that, well, we are all subprime now, but nobody’s filling our orders.

I for one fail to understand how the American economy can get by without subprime lenders. Sending everyone with a problem directly to bankruptcy just won't work: that's a recipe for a permanent credit crunch. Where I part company with those who fret that over-regulation of the subprime industry will "hurt the poor" is precisely on the matter of the subprime purchase money market. If people cannot afford to own homes, then encouraging them to buy them anyway with impossible loan terms is not solving that problem. And contracting the refinance function of the subprime industry instead of its purchase function simply produces the kind of situation we have now, where you can be taken in but you can't be taken out.

What I think we should be most worried about is that reaction to the "Home ATM" problem--overconsumption financed by a home equity bubble--will create a long-term backlash against distressed loan take-out financing, because it's cash-out as much as because it's "subprime." Certainly a large number of the over-consumers will have to end up in BK and/or foreclosure; too many people just won't live long enough lifetimes to earn the income they've already spent. But subprime refinancing can have a real utility for the rest of us in the job loss/illness/divorce/bender category, especially when a large RE price correction makes us all upside down.

 

[Nov 23, 2007] Consumer Spending Data Underplays Recession Risk

naked capitalism

An article in Business Week, "The Coming Consumer Crunch," had a bit of information that was news to me. The government, that is the Bureau of Labor Statistics, includes some rather large items in consumer spending that many of us would not include:
 

The reason is that much of what the government counts as consumer spending is not directly controlled by households. For example, the $1.7 trillion in medical costs is counted as consumer spending, but 85% of that is spent by the government and health insurers, not individuals. And $1.5 trillion in "housing services" is listed as part of consumer spending, but for homeowners it really just represents the value of living in a home rather than any spending they can change. It's mainly a bookkeeping convention, not a real outlay.

Most of us think of consumer spending as discretionary items. Yet from a macro level, the way the BLS does it makes sense (although the article alludes to the fact that the imputed rent calculation is of debatable validity), but when people put on their stock jockey hats, they are likely to interpret government announcements in the context of their own experience as consumers.

How does this matter? Per above, "consumer spending" is more inclusive than most realize. So, as the article points out a change in consumer spending, based on the official definition, is going to represent a considerably larger percentage of discretionary spending that the figures imply.

Add to that the fact that there is now considerable inflation in energy prices, much of which is non-discretionary. So the impact of rising energy and food prices alone push up nominal consumer spending without there being any unit growth.

So if consumer spending is going to fall, as the story suggests, by 3%, the impact on companies that live on consumer discretionary purchases will be much worse hit. This alone explains the decline in sales at Starbucks reported earlier in the week.

 

[Nov 21, 2007]  Stand by for “generalised systemic financial meltdown” by Helen Thomas

"...for all the bears out there, crack pipes to the ready, here is your latest hit:" Is not there simply too much lack of transparency (aka "lying") in the financial sector ? How can we avoid real Roosevelt-style reforms that restore checks and balances dismantled by Sir Alan and friends ?   Were not huge rewards dangled in front of very smart people who sit in New York City office buildings and figure out clever ways to evade banking laws and fool other people into buying ever-more-complex paper constructs ?  Will attention of investors focus on banks' capital ratios ?

November 21, 2007 | FT Alphaville

“Gold is for optimists. I’m diversifying into canned goods.”

So said one reader on Felix Salmon’s Market Movers blog, in response to a post on crisis blogging.

The trouble with being the leading harbinger of doom is that, rather like crack, you’re going to need to keep pushing the limits to keep achieving the same highs. So Salmon notes that the über-bears, no longer satisfied with dire predictions of a US recession, have now moved onto heralding a full-blown financial crisis. Only an all-out, systemic meltdown will do.

The bear in question, Nouriel Roubini, has long been positioned firmly on the gloomy side of the outlook scale - but the past week’s batch of predictions has been ominous even by his own dark standards. In fact, they’re nigh on apolcalyptic.

After all, back in March, Roubini was clear - the US landing would be hard, or at best, a growth recession.

Enjoy that sentiment. That’s the good old days.

In July Roubini wrote that the “financial fallout of the worst housing recession in decades is only just beginning.” In August, he noted that in his opinion the market turmoil was “much worst” than the liquidity crisis following LTCM. By September, he had a confession to make: he’d been far too optimistic on housing. And last month, he approvingly relayed a comment from a “senior professional in one of the largest financial institutions in the world”, in whose opinion a “miracle is needed to avoid recession.”

The trouble is that Roubini has a habit of being right - uncannily so in his predictions on US housing.

And so to the latest batch of fun. On housing, the message is largely unchanged - this housing recession will be “worse than any in US history” and the “financial bloodbath” has only just started.

But here’s the catch. Roubini argues that the inevitability, or at least high likelihood, of a US recession is now becoming more widely accepted. He notes the Economist cover story, and that leading Wall Street analysts previously in the soft landing camp have shifted their stance. The debate, says Roubini, has now shifted from ‘if recession’, to ‘how deep, protracted and severe’ such a recession will be.

So for all the bears out there, crack pipes to the ready, here is your latest hit:

I now see the risk of a severe and worsening liquidity and credit crunch leading to a generalized meltdown of the financial system of a severity and magnitude like we have never observed before. In this extreme scenario whose likelihood is increasing we could see a generalized run on some banks; and runs on a couple of weaker (non-bank) broker dealers that may go bankrupt with severe and systemic ripple effects on a mass of highly leveraged derivative instruments that will lead to a seizure of the derivatives markets (think of LTCM to the power of three); a collapse of the ABCP market and a disorderly collapse of the SIVs and conduits; massive losses on money market funds with a run on both those sponsored by banks and those not sponsored by banks (with the latter at even more severe risk as the recent effective bailout of the formers’ losses by theirs sponsoring banks is not available to those not being backed by banks); ever growing defaults and losses ($500 billion plus) in subprime, near prime and prime mortgages with severe known-on effect on the RMBS and CDOs market; massive losses in consumer credit (auto loans, credit cards); severe problems and losses in commercial real estate and related CMBS; the drying up of liquidity and credit in a variety of asset backed securities putting the entire model of securitization at risk; runs on hedge funds and other financial institutions that do not have access to the Fed’s lender of last resort support; a sharp increase in corporate defaults and credit spreads; and a massive process of re-intermediation into the banking system of activities that were until now altogether securitized.

Or in other words, a “generalized systemic financial meltdown.”

[Nov 21, 2007] Mish's Global Economic Trend Analysis

Is not the quote "Trust once lost, is not easily restored" weight of  stocks S&P500 financial companies ?   Will the lack of transparency promoted under Greenspan kill  Wall Street's international credibility ?

Very Expensive Lessons:

• Don't chase yield
• Don't buy something you do not understand
• There is no free lunch
• Rating agencies opinions are essentially worthless because they are never timely enough and because their business model creates enormous credibility as well as conflict of interest issues
• Don't trust Citigroup, Bear Stearns, Merrill Lynch or anyone else hawking debt

That last point is critical. Lack of trust will impact Citigroup, Bear Stearns, and Merrill Lynch's credibility, as well as their ability to raise capital for years to come. Trust once lost, is not easily restored.

[Nov 21, 2007] Apocalypse Now - HUMAN EVENTS by Patrick J. Buchanan

Natural resources boom has strong reasons for existence but at what point boom changed into a mania is unclear...

The scaremongers are not always wrong. The Trojans should have listened to Cassandra. But history shows that the scaremongers are usually wrong.

Parson Malthus predicted mass starvation 250 years ago, as the population was growing geometrically, doubling each generation, while agricultural production was going arithmetically, by 2 percent or so a year. But today, with perhaps 1 percent of our population in full-time food production, we are the best-fed and fattest 300 million people on Earth.

[Nov 21, 2007] Libor soars as credit crunch returns - Telegraph

Is the second round of defaults coming ?  At the same time the dollar's decline already amounts to the biggest default in history, having wiped far more off the value of foreigners' assets than any emerging market has ever done.

The credit crunch is returning in a virulent form ...

Morgan Stanley said that the recent jump in the benchmark London Interbank Offered Rate, which yesterday rose to just under 6.45pc, was ... a major warning sign of pain ahead ... it was Libor's increase in August that signalled the initial impact of the credit crunch.

[Nov 21, 2007] CDO Dumping Ground Still Sinking

Is not ACA is to important to fail ?  

NOVEMBER 19, 2007  |  Barron's

ACA has long been a convenient dumping ground in which major subprime securitizers like Bear Stearns (BSC), Citigroup (C), Merrill Lynch (MER) and some 25 other prominent dealers could pitch billions of dollars of risky obligations for modest premiums. That let them gussy up their balance sheets and shift any potential mark-to-market hits to ACA.

If ACA Capital were to founder, more than $69 billion worth of CDOs, including the $25 billion in subprime paper, would come rumbling back to the Wall Street banks, and likely with heavy attendant losses.

That's why Wall Street has continued to do a brisk business with the beleaguered firm. In the third quarter, ACA insured some $7 billion of subprime collateralized-debt obligations. Even if the company survives for only another couple of quarters, that would stave off the recognition of billions of dollars of losses.

[Nov 20, 2007] Stage is set for a stock crash  By Bill Fleckenstein

Have Wall Street firms foreign offices staffers implicit tattoo "I participated in subprime mortgages scam" on their foreheads ?  Is not horrible smell that  this scam created weight on the Wall Street firms?  Is not this skunk small might threaten survival of some of the biggies ?  Is not it interesting how many scapegoats might be jailed as a result ?  

Nov 12, 2007 | MSN Money

But the stage has been set by the reckless policies pursued by the Greenspan Fed in the past decade and a half. These have enabled the risks to pile up while rewarding folks for ignoring them. The Fed's efforts to stave off small forest fires have guaranteed a gigantic one.

... ... ...

That said, we have a very long way to go in terms of Wall Street finding and acknowledging the real damage from all of this mortgage-related collateral and its offspring.

Also, the insurers of this mortgage paper and other forms of credit insurance don't have nearly enough capital, relative to the policies they've written, so we can expect the credit-rating agencies to issue even more downgrades all across Bondland. That's a recipe for lots of losses inside the financial system.

We are at a moment in time when a crash is far more likely to happen than at any time in years. Does this mean it will happen? No. But it'd be wrong for folks to think a crash isn't possible.

[Nov 20, 2007] BBC NEWS Business Bernanke warns of economic 'drag'

Is not 2 billions loss on subprime mess the result of weak oversight ?

A senior official from Fannie Mae told a conference in Boston that he expected prices to fall 4% next year before flattening out in 2009.

[Nov 20, 2007] FT Alphaville » Blog Archive » Goldman on Citi - SELL before the next $15bn hits

What series of this soap opera are we watching ? How much leading Wall Street firms were making from setting up mortgage securitization deals ?  How badly will their earnings be impacted now when fees has dried up? In not 30% fall like in 2001 in the cards?

Enron's implosion was anything but sudden Chron.com - Houston Chronicle

Those who cannot learn from history are doomed to repeat it. House prices have 13% to 14% to fall from current level [Goldman Sachs, Nov 19, 2007]

Dec. 20, 2005 | Houston Chronicle

Enron's tumble from Wall Street darling to corporate deadbeat seemed precipitous. Now, however, it's clear the fall was a long time coming.

While the company grew rapidly through the 1990s, some of the worst manifestations of its culture -- obsessions with bonuses, the stock price and exotic accounting -- were also growing, and out of control.

Though the corporation's character flaws can be traced to its earliest days, they flourished under top executive Jeff Skilling.

He didn't act in a vacuum. Enron had a distracted, hands-off chairman, a compliant board of directors and an impotent staff of accountants, auditors and lawyers.

But it was Skilling's relentless push for creativity and competitiveness that fostered a growth-at-any-cost culture, drowning out voices of caution and overriding all checks and balances.

Skilling's attorney derides as "ridiculous" any suggestion his client allowed internal controls to be overriden. But interviews with dozens of current and former employees over the past year reveal that the creative aggressiveness Skilling deemed essential to dominating new markets went untempered by good business sense or fiscal discipline. The same decisions lauded as key to the company's future were also key to its demise.

"It was all about taking profits now and worrying about the details later," said one former Enron deal maker. "The Enron system was just ripe for corruption."

Enron's culture wasn't spawned overnight. Its roots go back to the earliest days of the company, before Skilling came aboard.

In 1987, company auditors learned of a billion-dollar oil-trading scandal at the company's Valhalla, N.Y., offices. For years, traders there had falsified transactions to boost volume -- and fatten their bonuses.

Instead of firing the traders and contacting authorities, Chairman Ken Lay and his management team kept them on the payroll and tried to cover up the problems. Lay said the company needed the revenue.

Six months later, however, the traders had dug the hole even deeper and competitors were growing suspicious. If word got out, Enron's trading partners could have demanded the company cover its positions with cash, which it didn't have.

Only then were the traders fired and charged with crimes. Enron narrowly skirted insolvency by bluffing the markets, then slowly unwinding the trades. The company later reported an $85 million loss, but sources say it was probably at least $136 million.

[Nov 17, 2007] Lame Profits Feed Recession Fears - Markets - Market Features

How can profits of S&P 500 companies  contune grow if financial sector is in distress and it is almost a third  of S&P 500 ?

With the third-quarter earnings season nearing a close, the year-over-year profits for Standard & Poor's 500 companies declined 3%, according to Thomson Financial. The drop marks the first quarter in five years that American corporations have recorded an aggregate earnings decline. Thus far, 461 companies in the S&P 500 have reported earnings.

The last time investors experienced a negative quarter was in the first quarter of 2002, when the market logged an 11.5% decline. Profit declines during the recession of 2001 included a third-quarter drop of 21.6% and a 21.5% drop in the fourth quarter.

"Profit declines portend recession if they lead to cutbacks in capital spending and labor," says John Lonski, chief economist at Moody's Investors Service. Lonski believes there is about a 40% chance of recession at this time, as the housing recession continues to spill over into the rest of the economy

FT.com - Columnists - Martin Wolf - Rosy forecasts carry economic health warning

Is the road from subprime mortgages logically leads to subprime currency ?

Small earthquake: few hurt. This is what the International Monetary Fund is saying in its latest World Economic Outlook: world output grew 5.4 per cent last year and will grow 5.2 per cent this year and 4.8 per cent in 2008, only 0.4 percentage points less than expected last July. What conclusion, then, are we to draw? Is a substantial financial shock at the core of the world economy nigh on irrelevant? The answer is: maybe so, but there are also appreciable risks.

According to the IMF, the world is in the midst of a period of growth unrivalled since the early 1970s. Between 2004 and 2008, it forecasts, global growth will average 5.1 per cent a year and the rate of growth of world output per head will average 4 per cent (see chart). The driver of global growth has been emerging economies in general and Asian emerging economies in particular. Between 2004 and 2008, says the IMF, growth of emerging economies will average 7.8 per cent a year, while high-income countries will average only 2.7 per cent. Never before has world growth been so much higher than that of high-income countries.
 

[Nov 17, 2007] U.S. Greenspan `Mess' Risks U.S. Recession, Stiglitz Says (Update1)

``That game is over,'' Stiglitz said. ``As house prices are going down, people are not going to be able to take more money. We are looking at a major slowdown. The impact of that is going to be a very major slowdown, maybe recession.''

Bloomberg.com

Joseph Stiglitz, a Nobel-prize winning economist, said the U.S. economy risks tumbling into recession because of the subprime crisis and a ``mess'' left by former Federal Reserve Chairman Alan Greenspan.

``I'm very pessimistic,'' Stiglitz said in an interview in London today. ``Alan Greenspan really made a mess of all this. He pushed out too much liquidity at the wrong time. He supported the tax cut in 2001, which is the beginning of these problems. He encouraged people to take out variable-rate mortgages.''

Stiglitz said there is a 50 percent chance of a recession in the U.S. and that growth will certainly slow to less than half its 3 percent potential. A worldwide jump in credit costs following the collapse of the subprime mortgage market is choking off finance to American consumers.

The comments add to criticism of Greenspan's 18 years in control of the U.S. central bank. He stepped down in January 2006 after steering the economy through a series of crises, pumping out money to help growth rebound from market slumps in 1987 and 2001.

`Economic Mismanagement'

``The richest country in the world cannot live within its means,'' Stiglitz said. ``It's a real example of macro economic mismanagement. The working out of this global imbalance will cause global problems. The depth of the conviction on free markets in the United States is not very great. We have increased those subsidies, doubled them, under President Bush.''

Lowering interest rates now will help the U.S. economy ``a little bit, not very much,'' Stiglitz said, adding that easing terms on mortgage loans would be like ``kicking the problem further down the road.''

Bush, he said, left ``the standing of America around the world at the lowest it's been'' by refusing to sign up to the Kyoto treaty on global warming and by fighting the war in Iraq.

``It's so important for there to be a global agreement to curtail the use of oil, the use of carbon,'' Stiglitz said. ``The big failure is for the United States not to go along.''

[Nov 17, 2007] Libertarians are True Social Parasites, George Monboit, Oct 23:

"libertarianism" is a belief-system that can only survive when "perpetually subsidized by responsible citizens" of structured governments. It looks like "Conservative economic policy is dead. It committed suicide. "

… Wherever modern humans, living outside the narrow social mores of the clan, are allowed to pursue their genetic interests without constraint, they will hurt other people. They will grab other people's resources, they will dump their waste in other people's habitats, they will cheat, lie, steal and kill. And if they have power and weapons, no one will be able to stop them except those with more power and better weapons. Our genetic inheritance makes us smart enough to see that when the old society breaks down, we should appease those who are more powerful than ourselves, and exploit those who are less powerful. The survival strategies which once ensured cooperation among equals now ensure subservience to those who have broken the social contract.

The democratic challenge, which becomes ever more complex as the scale of human interactions increases, is to mimic the governance system of the small hominid troop. We need a state that rewards us for cooperating and punishes us for cheating and stealing. At the same time we must ensure that the state is also treated like a member of the hominid clan and punished when it acts against the common good. Human welfare, just as it was a million years ago, is guaranteed only by mutual scrutiny and regulation. …

Unless tax-payers' money and public services are available to repair the destruction it causes, libertarianism destroys people's savings, wrecks their lives and trashes their environment. It is the belief system of the free-rider, who is perpetually subsidised by responsible citizens. As biologists we both know what this means. Self-serving as governments might be, the true social parasites are those who demand their dissolution

[Nov 17, 2007] The New Deal and the Great Depression:

[Me:] It proves interesting to reread John Kenneth Galbraith's The Great Crash 1929. It is as though history is being rewritten before our eyes. Substitute hedge funds for "investment trusts" and it reads pretty much parallel. Frightening! I keep hoping to see daylight beyond what I perceive to be a gathering storm. Daylight will indeed be forthcoming [sometime after] a storm, but the interim may be ugly.

The Great Crash 1929
Chapter II, "Something Should Be Done":

"…like all booms, it had to end. When prices stopped rising—when the supply of people who were buying for an increase was exhausted—then ownership on margin would become meaningless and everyone would want to sell. The market wouldn't level out; it would fall precipitately.

"All this being so, the position of the people who had at least nominal responsibility for what was going on was a complex one. One of the oldest puzzles of politics is who is to regulate the regulators. But and equally baffling problem, which has never received the attention it deserves is who is to make wise those who are required to have wisdom.

Some of those in positions of authority wanted the boom to continue. They were making money out of it, and they may have had an intimation of the personal disaster which awaited them when the boom came to an end. "But there were also some who saw, however dimly, that a wild speculation was in progress and that something should be done. For these people, however, every proposal to act raised the same intractable problem. The consequences of successful action seemed almost as terrible as the consequences of inaction, and they could be more horrible for those who took the action.

… "The real choice was between an immediate and deliberately engineered collapse and a more serious disaster later on. Some one would certainly be blamed for the ultimate collapse when it came. "There was no question whatsoever as to who would be blamed should the boom be deliberately deflated. …

… "Clearly the Federal Reserve was less interested in checking speculation than in detaching itself from responsibility for the speculation.


Chapter III, "In Goldman, Sachs We Trust"

… ""The most notable piece of speculative architecture of the late twenties, and the one by which, more than any other device, the public demand for common stocks was satisfied, "was the investment trust or company. The investment trust did not promote new enterprises or enlarge old ones. It merely arranged that people could own stock in old companies through the medium of new ones. …

"Knowledge, manipulative skill, or financial genius were not the only magic of the investment trust. There was also leverage. … Leverage, it was later to develop, works both ways.”

Chapter IV, "The Twilight of Illusion"

… "To a few alarmed observers it seemed as though Wall Street were by way of devouring all the money of the entire world. However, in accordance with the cultural practice, as the summer passed, the sound and responsible spokesmen decried not the increase in brokers’ loans, but those who insisted on attaching significance to this trend. There was a sharp criticism of the prophets of doom." (empahsis added)

[Nov 17, 2007] FT Alphaville » Blog Archive » Hedge this!

What changed if even bank/investment firms economists are beginning to acknowledge that leverage has its downside ? 

[Nov  14, 2007] As Bank Profits Grew, Warning Signs Went Unheeded - New York Times

Is not this "shadow of Enron" that descended on large banks. Is Greenspan's Enron Prize for Distinguished Public Service looks now much more appropriate then it initially looked ? 

What were the signs? Consider how banks make money. They pay low rates on short-term deposits and charge higher rates on long-term loans. So they love what are known as positively sloped yield curves. And they like to see big credit spreads, where risky borrowers are charged much more than safe ones. Put them together, and banks should clean up.

By that light, nothing was going right in 2006 and early this year. The yield curve was inverted, or at best flat. And credit spreads were at historic lows. Risky loans, whether to subprime mortgage borrowers or junk-rated corporations, were readily available at rates that seemed to assume there was only the slightest risk of default.

And yet the bank stocks were buoyant, and so were reported profits.

“We should have been suspicious from the get-go,” said Robert A. Barbera, the chief economist of ITG. “There was financial alchemy at work.”

Instead of being suspicious, many analysts believed that banks had found a new way to prosper. Making a loan and keeping it on the balance sheet until it was repaid was so old-fashioned. It was far better to collect fees for arranging transactions and passing on the risk to others. We did not ask why passing on risks should be so profitable to the risk-passers.

In reality, it was not.

In recent weeks, we have learned of many risks the banks kept. Not only did we not understand them, but there is every indication that senior managements did not either.

Consider “liquidity puts.” Don’t be embarrassed if you have no idea what I am talking about. In a fascinating article in Fortune, Carol Loomis quotes Robert E. Rubin, now the chairman of Citigroup, as saying he had never heard of them until this summer.

What were they? Banks put together collateralized debt obligations, or C.D.O.’s, many of which held subprime mortgage loans as assets. The C.D.O.’s were financed by issuing their own securities, and the risk of mortgage defaults seemed to pass to the people who bought the securities.

But we now learn that some banks also handed out liquidity puts, giving buyers of C.D.O. securities the right to sell them back to the bank if there was no other market for them. That risk may have seemed slight when the securitization market was booming. But now the banks are being forced to buy back securities for more than they are worth.

With such a put in existence, I don’t understand how the banks could get the original loans off their balance sheets. How could they claim they had sold something if they could be forced to buy it back? It will be interesting to see if the Securities and Exchange Commission challenges the accounting.

But even if the accounting was completely proper, it was not very informative. It does not appear that any banks chose to mention the puts to investors before this month. Citigroup had billions of dollars of them, and in the new quarterly report from Bank of America, we learn that it had $2.1 billion of such puts on its books at the end of 2006, a figure that rose to $10 billion by the end of September.

In other words, as the subprime market was starting to falter early this year, the bank stepped up the issuance of such puts. Presumably, that was necessary to “sell” the paper. This week Bank of America announced a $3 billion write-off. A large part of it came from those puts.

There were many other funny ways to bolster profits, like specialized investment vehicles, or SIVs. These creatures bought those C.D.O. securities, paying for them with money borrowed in the commercial paper market.

Just like banks, the SIVs borrowed short and lent long. The spreads might be thin, but they could employ leverage to make narrow margins go a long way. The SIVs did not have much capital, but so long as everyone believed in C.D.O.’s, they did not need it. The banks that set up the vehicles swore they had no continuing interest in them, and so they also vanished from any balance sheet that investors could see. Now they are costing banks money to prop them up.

Jamie Dimon, the chief executive of JPMorgan Chase, told investors this week that “SIVs don’t have a business purpose” and “will go the way of the dinosaur.” Will they take the securitization system with them? The answer to that question may be crucial in determining how soon the financial system recovers.

The most important duty of the Federal Reserve is to preserve the health of the banking system. In the early 1990s, after the last big crisis, it engineered a steep yield curve for years, helping banks to recover. When the smoke clears, the Fed will try to do that again, even if it means significantly higher long-term interest rates.

Higher long-term rates are not what either debt-laden consumers or the depressed housing market really need, of course. But such trade-offs are what come when big risks are taken, and ignored, for too long.

[Nov 10, 2007] naked capitalism CDOs The Ticking Time Bomb

Take an estimated $3.0 trillion in CDO outstandings. Apply a mere 25% loss to them. That's $750 billion, roughly four times greater than mainstream estimates of subprime losses.

And this casts the ratings into even further doubt. What does a triple A mean if, as one wag put it, you can go to lunch and due to a downgrade, you can come back and find that it is now junk? That simply doesn't occur with other instruments in the absence of fraud. So the problem isn't simply that the rating agencies might have come up with overly high ratings when the CDOs were issued because they had overly optimistic estimated for likely defaults. You have the further problem that any downgrade is likely to be dramatic. So even if you believed that your CDOs AAA was really an AAA, you'd still value it less than AAAs on other securities because the downgrade slope is so steep.

Now a fair question is whether the dim view of CDOs is overdone. According to Bloomberg, Morgan Stanley argued that case in a recent research note:

More than $350 billion of collateralized debt obligations comprising asset-backed securities may become ``distressed'' because of credit rating downgrades, Morgan Stanley said in a report today.

``The pace of ABS CDO downgrades will pick up significantly over the next few weeks,'' wrote analysts led by Vishwanath Tirupattur in New York. ``Given the degree of market dislocations and the potential size of the market, there is clearly an opportunity for attentive investors.''...

Bonds are considered distressed when investors demand yields at least 10 percentage points above similar-maturity Treasuries. Morgan Stanley said many of the CDOs of asset-backed securities sold in recent years are trading on an interest-only basis, signaling investors expect to receive little of their original principal back.

I for one would not try to catch that falling safe. While the higher-rated tranches of many CDOs almost certainly have some value, the problem is that these instruments were sold way beyond their natural market due to misplaced confidence in their ratings. Consider how small the market would be if the paper carried no rating.

Moreover, most fixed income investors are professional money managers subject to performance pressure. Even if one of them thought certain CDOs were cheap, he'd still hesitate to buy them out of concern that the prices would drop further before they rallied, and he'd show losses on those positions (and worse, have to explain to his boss and/or clients why he bought CDOs). Very few are going to step in until the market appears to be improving, and between now and then, we are likely to discover there is way too much CDO paper relative to who wants to own it now.

And let's consider an ugly factoid. In its third quarter results, Merrill wrote down its CDO holdings by an estimated 30% or more. These were reported to be almost entirely AAA rated. This does not allow for either the further deterioration, nor the fact that downgrades are proceeding, which will impair value even more.  

Take an estimated $3.0 trillion in CDO outstandings. Apply a mere 25% loss to them. That's $750 billion, roughly four times greater than mainstream estimates of subprime losses.

Now admittedly there is subprime paper included in those CDOs, so there is some double counting, but the CDOs' subprime holdings reportedly contain mainly the BBB/BBB- tranches, which is a portion of the value of the initial RMBS securitization.

Houston, we have a problem.

[Nov 10, 2007] Angry Bear

this article:

President Bush and the current administration have borrowed more money from foreign governments and banks than the previous 42 presidents combined, a group of conservative to moderate Democrats said Friday.

Blue Dog Coalition, which describes itself as a group "focused on fiscal responsibility," called the administration's borrowing practices "astounding."

According to the Treasury Department, from 1776-2000, the first 224 years of U.S. history, 42 U.S. presidents borrowed a combined $1.01 trillion from foreign governments and financial institutions, but in the past four years alone, the Bush administration borrowed $1.05 trillion.

Market.view Roller coaster Economist.com

Are large bulk of subprime-related bonds facing severe downgraded in 2008 ? Looks like classic story with typical end: more people with more money chase fewer investment opportunities crowd into investments that seem to guarantee vast or sure returns -- and get hammered.  Houses can depreciate for years to come...

...28% of the mortgages underlying the 2006 vintage, reports Tim Bond of Barclays Capital, are more than 30 days delinquent and 16% are already in bankruptcy, foreclosure or owned by the mortgage company. In the 2007 vintage, between August and September, there was a 27% jump in the number of loans that were 90 days delinquent.

The dollar Ready for a rout

Angry Bear reader OldVet notes: 

In the financial Blog world of traders and investment managers, there is something known as a “contrarian signal.” That is, a sign that the tide is going to turn in some market. The dollar has been falling steadily for several months, and some 5% in the last month, against major currencies. But one of the most popular “contrarian” signals is that a cover story on the Dollar reaches the front page of the Economist , according to many. A second, slightly more frivolous signal, was that Gisele, the world’s top fashion model from Brazil , refuses to take Dollars for her jobs any more. Plus Jim Rogers, commodities lover and dollar pessimist, has been invited to talk on Bloomberg TV twice recently.

November 8, 2007 | Economist.com

For now, the dollar nightmare is still unlikely. The currency's decline is neither surprising nor, at least until this week, alarmingly rapid. The gaping current-account deficit and interest-rate differentials between America and other big economies point to a weaker currency. The Fed has cut short-term interest rates by 0.75 percentage points in the past two months. Given the scale of the credit mess and rising fears of recession, expectations are growing that the central bank will cut rates once again when its rate-setting committee next meets on December 11th. Elsewhere, central bankers have stood pat or tightened. The Reserve Bank of Australia raised short-term rates to 6.75% on November 6th, citing inflationary pressure. The European Central Bank and the Bank of England met as The Economist went to press on November 8th. Both were expected to keep short-term rates on hold, at 4% and 5.75% respectively.

If cyclical considerations point to a weaker dollar, the most recent nervousness seems to be driven more by structural worries. Judging by the dollar's slump in the wake of the Chinese officials' comments, investors are fretting that central banks in emerging economies will abandon the ailing greenback. In the short term at least, that fear is easily exaggerated. The share of global foreign-exchange reserves held in dollars has fallen in recent years, but only gradually. Central banks are unlikely to accelerate a dollar rout by making dramatic changes in their reserve portfolios. That said, many long-standing dollar bulwarks are looking weaker. Many countries that link their currencies to the dollar, from Arab oil exporters to China, face inflationary pressure. As the greenback slumps, these countries have ever-stronger domestic reasons to allow their currencies to rise.

[Nov 10, 2007] Oil price rise causes global shift in wealth - Washington Post- msnbc.com

It's an interesting idea: to pay for oil with subprime mortgages. It looks like it Kazakhstan got into the mess...

Britain's national average gasoline price topped 1 pound per liter, or about $8 a gallon, for the first time this week because of record oil prices.

... ... ...

But new oil wealth can trickle away even more easily than it comes. Last month, Standard & Poor's downgraded Kazakhstan's credit rating after the country's banks lost billions on purchases of subprime mortgages.

[Nov 10, 2007] Paulson Defends Dollar's Status as Trichet, Flaherty Decry Drop

Past is not a good predictor of the future...

November 10, 2007 | Bloomberg.com

The dollar's standing as the principle holding of central banks was undermined after Xu Jian, a vice director of the People's Bank of China, said this week the dollar is ``losing its status as the world currency.'' China has the world's largest foreign-exchange reserves, totaling $1.4 trillion.

... ... ...

The dollar has stoked American exports amid the worst housing recession since 1991 and threats to consumer spending. The trade deficit unexpectedly narrowed to the smallest since May 2005 in September, the Commerce Department said yesterday.

Adam Cole, head of currency strategy at RBC Capital Markets in London, said officials are unlikely to intervene in the market and buy dollars because its decline hasn't yet become ``disorderly.''

``The market will still assume it has the green light to sell dollars,'' said Cole, who noted the U.S. currency kept falling against the euro even after Trichet's comments.

[Nov 10, 2007] charles hugh smith-Weblog and wEssays

Buying on dips is dangerous in unstable situations. Cheap can be not so cheap in retrospect.

...timely quote from John Kenneth Galbraith's classic book The Great Crash 1929:

A common feature of all these earlier troubles was that having happened, they were over. The worst was reasonably recognizable as such.

The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune.

The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that, there would be still another. In the end, all the money he had was extracted from him and lost. The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains...

The bargains then suffered a ruinous fall. Even the man who waited out all of October and all of November, who saw the volume of trading return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks, would see their value drop to a third or a fourth of the purchase price in the next twenty-four months. The Coolidge bull market was a remarkable phenomenon. The ruthlessness of its liquidation was, in its own way, equally remarkable...

[Nov 9, 2007] FT Alphaville » Blog Archive » SIVs face fight to survive, says Moody’s

The funding problems hurting SIVs are so acute that most managers now do  not expect the industry to survive the current crisis, according to Moody’s. The inability of most vehicles to raise short-term debt led Moody’s late on Wednesday to put the capital notes of a flood of SIVs on review for possible downgrade. Moody’s also downgraded the capital note ratings on a number of weaker SIVs that had been on review, including those for two SIVs run by WestLB, the German bank. But the decision by the agency to put on review the ratings of capital notes issued by some of the biggest bank-run SIVs is even more significant.  These include three run by Citi, two run by HSBC and one by MBIA, the US bond insurer.

[Nov 9, 2007] Bernanke Eats a Large Helping of Crow by Gary North

"Once again, the rule holds: 'Buy on the rumor. Sell on the news.' "

“The banks are in a situation eerily similar to the Japanese banks in 1992. They are sitting on top of visibly bad loans, but they are allowed by bank regulators to keep these bad loans on their books at face value. This lets them stay in the lending business.”
 

Why should the FED care? Because the FED is the front for the banking cartel. The banks have loaned money by the hundreds of billions to borrowers who then put the money into arcane debt instruments that are now visibly unraveling. The bankers have no clue as to how they can get their money back if these debt instruments become insolvent. These instruments are part of the carry trade: borrowed short and lent long. This is what brought down the savings and loan industry in the 1980’s. It threatens to bring down the banks today.

So, Bernanke must talk calmly to Congress in order not to spread panic. He must also take symbolic steps to keep Jim Cramer from going on TV and throwing another tantrum. Why? Because if Cramer is scared, his capital management peers are scared. If his peers are scared, investors who bankroll these carry trade schemes will stop putting in their money. This will end the trade. The banks will then get stiffed.

This almost happened in 1998. The New York FED called in the major banks that had lent Long Term Capital Management its money, which LTCM then had used as margin money in the futures market. The FED strongly suggested that the banks pony up another $3.5 billion to keep LTCM from being forced to unload their positions at fire sale prices. The banks did what was suggested.

This time, the FED is not facing one lone company whose leveraged positions have gone south. The FED is facing an entire segment of the U.S. capital market, which soon may not be able to raise money to keep its CDO (collateralized debt obligation) projects officially solvent. As long as these projects are solvent, the banks don’t have to write off the loans.

The banks are in a situation eerily similar to the Japanese banks in 1992. They are sitting on top of visibly bad loans, but they are allowed by bank regulators to keep these bad loans on their books at face value. This lets them stay in the lending business.

[Nov 9, 2007] The Mess That Greenspan / MadeThe Bernanke Cycle

Is not Greenspan’s boom turning into Bernanke’s bust ? Under Greenspan cycle used to work due to dollarization of former USSR space and Eastern Europe. Now less people wants fresh from the prining press dollars and shelf-life of the product cannot be extended indefinitely...

1. Federal Reserve cuts interest rates
2. Equity markets surge
3. Dollar decline accelerates
4. The price of oil and gold soar
5. Treasury reiterates "strong dollar policy"
6. Housing market problems get worse
7. Credit market problems get worse
8. Dollar decline accelerates
9. The price of oil and gold soar
10. Federal Reserve talks tough on inflation <----- YESTERDAY
11. Treasury reiterates "strong dollar policy"<----- YESTERDAY
12. Equity markets plunge <------------ YOU ARE HERE
13. Go to step 1

[Nov 9, 2007] naked capitalism

Is not this the shadow of Enron ?

...many of these WaMu mortgages were then sold to Fannie Mae and Freddie Mac. They don't do their own due diligence, but they have gory provisions that, among other things, let them return the mortgage to sender if there was fraud. That means WaMu might have to eat a lot of mortgages that probably had low to no equity at the time of issuance, and now that housing is tanking, have good odds of having negative equity.
 

[Nov 9, 2007] Homeowners Feel the Pinch of Lost Equity - New York Times

Death of consumers was predicted so many times that it's boring. I hope this is not true this time too, but there is more facts in this article that in similar publications year or two ago. Still I do not think millionaires are being squeezed in any way and they are the dominant part of consumer spending not a small middle class fish like those mentioned in the paper.  Poor just don't matter. Like Bill Clinton used to say: "It's the plutonomy, stupid" ;-). Citigroup's Ajay Kapur applies the term "plutonomy" to, primarily, the United States, although Britain, Canada and Australia also qualify. He notes that America's richest 1 percent of households own more than half of the nation's stocks and control more wealth ($16 trillion) than the bottom 90 percent. When the richest 20 percent account for almost 60 percent of consumption, you see why rising oil prices have had so little effect on consumption.

From 2004 through 2006, Americans pulled about $840 billion a year out of residential real estate, via sales, home equity lines of credit and refinanced mortgages, according to data presented in an updated working paper by James Kennedy, an economist, and Alan Greenspan, the former Federal Reserve chairman. These so-called home equity withdrawals financed as much as $310 billion a year in personal consumption from 2004 to 2006, according to the data.

... ... ...

Much of the attention in the recent collapse of the housing boom has focused on those in danger of losing their home or facing higher monthly payments in their adjustable mortgages. But the broader effect on the economy is likely to come from the much larger group of homeowners who can no longer count on rising home values to bolster their wealth.

Consumer spending accounts for about 70 percent of all economic activity in the United States, or about $9.8 trillion, so even a slight dip in home borrowing takes huge amounts of money out of the flow. The prospect of a slowdown, combined with the squeeze on households from higher oil costs, is sending shivers through the retail world, as apparel merchants, furniture dealers and electronics stores brace for the possibility that the all-important holiday shopping season will disappoint. Automakers are bemoaning sluggish sales.

“A fall of 2 percent in consumption would be big enough to trigger a recession,” said Christian Menegatti, lead analyst for RGE Monitor, a consulting firm in New York.

 

[Nov 9, 2007] Economic Dreams - Economic Nightmares

Should not be this doom and gloom viewed with the grain of salt? Is not the USA still has one of the most advanced economies in the world and, despite its multiple problems,  one of the most flexible financial system in the world ?  And as for corruption there are probably multiple countries that are able to teach the USA a lesson or two in this area.

[Nov 8, 2007] The Mess That Greenspan Made

If this is a real Greenspan legacy  ?  Was he just an agent of big banks ?  Or this is a polemical simplification of the situation ? Is not a typical down cycle for residential real estate five to seven years ?  

Rep. Ron Paul, R-Texas: "The best way I could describe the problems that we face here in this country, as well as the problem the Federal Reserve faces, is that we are indeed between a rock and a hard place because we have a serious problem but we don't talk about how we got here. We talk about how we're going to "patch it up". The bubble has been burst - we saw what happened after the Nasdaq bubble burst and we don't ask how it was created and then we had a housing bubble and it's deflating and it's spreading.

Yet nobody says, "Where does it come from?" and what is the advice that you generally get? Inflate the currency. They don't say "inflate the currency", they don't say "debase the currency", they don't say "devalue the currency", they don't say "cheat the people who have saved", they say "lower the interest rates". But they never ask you and I never hear you say, "the only way I can lower interest rates is I have to create more money".
...
Unless we get down to the bottom of it and define what inflation is and not look at only prices... this was taught by the free market economists all through the 20th century, they said, "Beware, they will increase the money supply but they will make you concentrate on prices and they will give you CPIs and PPIs and they'll fudge those figures and they'll talk about wage and price controls to solve our problems".

We ignore the fundamental flaw and that is that not only have we had a subprime market in housing, the whole economic system is subprime in that we have artificially low interest rates. And it wasn't under your tenure in office - it's been going on for ten years or longer and now we're bearing the fruits of that policy. A one percent interest rate and that's not a distortion? Instead of looking at consumer prices, that nobody in this country really believes, we need to talk about the distortion, the malinvestment, the misdirection, the bad information that is gotten from artificially low interest rates."

We now return to our regular programming...

[Nov 8, 2007] Bloomberg.com Exclusive

``Be careful what you wish for...''

Washington Mutual, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. spent $25 million in 2004 and 2005 lobbying for a legislative agenda that included changes in bankruptcy laws to protect credit card profits, according to the Center for Responsive Politics, a non-partisan Washington group that tracks political donations.

The banks are still paying for that decision. The surge in foreclosures has cut the value of securities backed by mortgages and led to more than $40 billion of writedowns for U.S. financial institutions....

[Nov 8, 2007] Fed Chairman Says Economy Likely to Slow - New York Times

I do not believe in recession but the economy might be slow pretty close to zero growth. Like Bernanke  "Economy is likely to slow noticeably in the months ahead."

[Nov 8, 2007] Fears rise over spectre of ‘earnings’ recession by Helen Thomas

Nov 08, 2007

Analysts are losing faith in US companies’ ability to rekindle profit growth before the end of the year, raising the prospect of the first “earnings recession” - two consecutive quarters of falling profits - in more than five years.

[Nov 8, 2007] FT Alphaville » Blog Archive » Fundamentals, not liquidity conditions, are behind MBS crash

"CreditSights, in a note to clients on Wednesday, current pricing levels reflect fundamentals, even for the most highly-rated debt. Mortgage securities across the board are overrated and overvalued"

[Nov 08 ] FT Alphaville Credit squeeze, continued by Alida Smith

[Nov 8, 2007] FT.com - Comment & analysis - Comment - The silver lining in America’s subprime cloud

Is spending binge over ? Are retailers in the soup ?  In this a silver lining of suprime mess ?

The housing turmoil has indeed cut a chunk out of investment – residential investment has fallen by $81bn in the three quarters during which the current account deficit declined, and even more compared with the peak of the housing boom earlier last year. Hence a good part of the current account reduction can be directly attributed to the decline in residential investment. Moreover, the decline in housing prices is starting to increase the personal saving rate, as home equity loans are drying up and people are recognising that their housing wealth is not as large as they had expected. When asset prices were rising, households could spend what they earned and still see an increase in their net worth. Sometimes spending even exceeded income. Now, consumption is falling relative to income, so there is more household saving.

... ... ...

The nature of this adjustment has implications for future policy. First, since we cannot rely on the housing slump to reduce the current account without limit, it is important to continue with the three-pronged strategy, which would be good economics even if there were no current account deficits. Second, the decrease in the current account deficit in the US means that other countries will be exporting less and importing more from the US. Unless other components of demand in these countries increase, there will be negative spillovers on the world economy.

... ... ...

To the degree that the improvement in the current account is caused by the housing turmoil, further depreciation of the dollar is less likely. But it is best to let the market decide that.

[Nov 8, 2007] The Mess That Greenspan Made Protect our stock options

From Readers feedback

Back around 1990, I did think that we in the West should have rounded up the communist sympathisers and agents in our midst, and hanged the lot of them. Quite soon I expect to find myself recommending some vigorous and punitive action against the cadre of crooks who seem to run so many corporations these days.

=====

Corporate executives are communist sympathizers?!?

In a backhanded way, you're probably half right. They do seem to be for the socialization of risk, but staunchly for the privatization of profit.

[Nov 7, 2007] Winter (Economic & Market) Watch » Mew Mew Bow Wow

Is fake capital collapsing deflationary?  Is multi-quarter deleveraging process just started ?

Rather, my theory holds that much of the USD current weakness reflects the dishonest policy of American leadership and apparatcheks in dealing with fundamental issues, such as serious inflation. The US has been turned into a playground for hucksters, and lairs. Those Boyz are starting to get canned and be exposed, a process that I believe will be ongoing for several years. Exposing the perps of the American Plague is part of the painful reconciliation process. It eventually restores some credibility.

[Nov 7, 2007] Soros sees serious economic correction  Reuters.co.uk

He correctly called housing crisis in 2006. Is he right now ?  Is overdebted consumer a wild card for 2008 ?

NEW YORK (Reuters) - Billionaire investor George Soros forecast on Monday that the U.S. economy is "on the verge of a very serious economic correction" after decades of overspending.

"We have borrowed an awful lot of money and now the bill is coming to us," he said during a lecture at the New York University, also adding that the war on terror "has thrown America out of the rails."

Asked whether a recession was inevitable, Soros said: "I think we are definitely in for a slowdown that I think will be a bigger slowdown than (Fed Chairman Ben) Bernanke is seeing."

[Nov 7, 2007] N.Y.'s Cuomo alleges appraiser, lender collusion upped home values by Carolyn Said

Were Enron-style "make-money-fast" crimes pervasive in the mortgage industry?
Should Maestro Greenspan be fined for negligence ? 

November 2, 2007 | SF Chronicle

Cuomo said fraudulent appraisal practices were pervasive in the industry. At a news conference announcing the lawsuit, he said lenders, mortgage brokers, real estate agents and others frequently pressured appraisers to "come in with the right number, the number that justifies the transaction" so that everyone in the chain would receive commissions.

"The independence of the appraiser is essential to maintaining the integrity of the mortgage industry," Cuomo said. "First American and eAppraiseIT violated that independence when Washington Mutual strong-armed them into a system designed to rip off homeowners and investors alike. ... By allowing Washington Mutual to hand-pick appraisers who inflated home values, First American helped set the current mortgage crisis in motion."

... ... ...

The lawsuit said lenders do have an incentive to demand inflated appraisals.

The more loans a lender makes, the more profit it generates. Therefore, companies are motivated "to pressure appraisers to reach values that will allow the loan to close," the suit said. Mortgage brokers and lenders' in-house loan originators work on commission so they have "strong personal incentives" to pressure appraisers for high appraisals, the suit said.

... ... ...

Because nearly everyone in real estate is paid on commission, it's in nearly everyone's interest to get a deal done. When an appraisal doesn't "hit the number" - match the agreed-upon price - the deal falls through, and nobody gets paid. But when an appraisal is inflated:

• Home buyers can get hurt because they are overpaying.
• Investors who buy mortgages can get hurt because they have insufficient collateral on those mortgages, which becomes a problem if there is a foreclosure.
• The overall market is hurt because inflated appraisals create artificially high market values.

[Nov. 7, 2007] California appraisers say they're pushed to inflate home prices
 

Ask any real estate appraiser: Being badgered to overstate home prices is a fact of life, they'll say.

"We get pressured every single day to inflate our values," said Dan Tosh, principal at Tosh & Associates, an appraisal firm in Brentwood. "We get people telling us we'll never work again, or they won't pay us because we won't play ball."

"This makes things such as Enron and WorldCom look small by comparison," said Ted Faravelli, executive director of the California Association of Real Estate Appraisers and principal at San Jose's T.E. Faravelli & Associates, an appraisal firm. "It was an epidemic."

In a nationwide survey released early this year, 90 percent of 1,200 appraisers said they had felt "uncomfortable pressure" to adjust property values. Mortgage brokers were named as the most common culprits, followed by real estate agents, consumers, lenders and appraisal management companies. The increase in pressure was dramatic compared with that found in a similar survey in 2003, when 55 percent of appraisers reported feeling pressured.

"Pressure on appraisers reaches pandemic proportions," said David Hutton, senior editor at October Research Corp., the Ohio company that conducted the study. "The New York lawsuit ... may be just the tip of the iceberg."

[Nov. 7, 2007] Banks Face $100 Billion of Writedowns on Level 3 Rule (Update3) By John Glover

S&P500 investors can face steep losses due to the weight of financial stocks in the index.

Nov. 7 | Bloomberg 

U.S. banks and brokers face as much as $100 billion of writedowns because of Level 3 accounting rules, in addition to the losses caused by the subprime credit slump, according to Royal Bank of Scotland Group Plc.

... ... ...

Banks may be forced to write down as much as $64 billion on collateralized debt obligations of securities backed by subprime assets, from about $15 billion so far, Citigroup analysts led by Matt King in London wrote in a report e-mailed today. The data exclude Citigroup's own projected writedowns.

Under FASB terminology, Level 1 means mark-to-market, where an asset's worth is based on a real price. Level 2 is mark-to-model, an estimate based on observable inputs which is used when no quoted prices are available. Level 3 values are based on ``unobservable'' inputs reflecting companies' ``own assumptions'' about the way assets would be priced.

ABX indexes, which investors use to track the subprime-bond market, are showing ``observable levels'' that would wipe out institutions' capital if the benchmark's prices were used to value their Level 3 assets, according to Janjuah.

The indexes have tumbled this year because investors expected rising numbers of borrowers to default on home loans, cutting the cash flowing to the bonds that package the mortgages.

Lehman has the equivalent of 159% of its equity in Level 3 assets, and Bear Stearns has 154%, according to Janjuah's note, titled ``Bob's World: Feast and Famine.''

[Nov 5, 2005] FT Alphaville

In this new reality banks are not very attractive investment....

Real-world lending has been artificially inflated for years and now the brakes are on — if not by the banks themselves, then by the regulators. Forget talk about the credit markets getting back to normal. This could be the new reality.

Citi announced on Sunday night it was currently facing writedowns of between $8bn and $11bn, on top of the dismal numbers already reported in its Q3 statement.

What is truly shocking, however, is the speed at which these losses have been realised.

[Nov 5, 2005] Democrats project broad economic damage of more than $100 billion from foreclosure surge - MSNBC Wire Services - MSNBC.com

Is not 2 millions of foreclosures a conservative estimate ? Alt-A and prime mortgages can also be affected.  And 2 trillion is the figure similar to dot-com bubble burst related losses.  A lot of 401K owners were affected...

The congressional report bases its economic calculations on an estimate of 1.3 million upcoming foreclosures among loans made to people with weak, or subprime, credit. But it also says the number of foreclosures is likely to hit 2 million by the end of 2009, and that a 10% drop in home prices would lead to broader economic losses of $2.3 trillion.

About 70 % of the $100 billion in housing losses will come from declines in the value of properties that are sold off in foreclosure auctions, the report said. The remainder is pegged to declining property values in neighborhoods where foreclosure rates are skyrocketing.

For the vast majority of U.S. households, homes are the largest financial asset, and homeowners' sense of prosperity plummets if housing prices decline. Homeowners in recent years drove the economy by tapping into credit lines tied to the value of their houses to make home improvements, buy flat-screen televisions or cars.

The Democrats' report also says states will lose more than $900 million in property taxes as foreclosures surge. Expected to be hit especially hard are California, Florida, Ohio, New York and Michigan _ states that either had a dramatic surge in housing prices or are coping with especially difficult economic times.

Foreclosure filings across the U.S. nearly doubled last month compared with a year earlier. A total of 223,538 foreclosure filings were reported in September, up from 112,210 in the same month a year ago

[Nov 4, 2007] charles hugh smith-Weblog and wEssays

"How would the stock market respond were "reality" presented instead of the Big Lie, i.e. 60,000 jobs were created, 90,000 less than required by population growth? Do you reckon the markets would be soaring on that report?"

Here is astute contributor Roger's comment:

Did you see the employment (+166K) jobs for October? Happy days are here again!

Statistically created jobs were ONLY 103K. So they may have found evidence that 63K bona fide jobs were created. And construction and financial services jobs grew, even with massive layoffs and firings in mortgage finance jobs.

Happy days are here again! Maybe I can get one of those statistically created jobs so I can get paid but not actually have to work!

/sarcasm off (My first job was shoveling this crap. Some things never change)

These completely bogus jobs reports are proof that propaganda is being willfully generated and passed off as "the truth." How would the stock market respond were "reality" presented instead of the Big Lie, i.e. 60,000 jobs were created, 90,000 less than required by population growth? Do you reckon the markets would be soaring on that report?

I have drawn inspiration today from two frequent contributors, Harun I. and Riley T. Here is Harun's commentary:

The Propaganda Ministry has waged a successful campaign. It has convinced people that apathy is concern, liabilities are assets, inflation doesn’t exist, debt is money and growth, peace is war, terror will be ended by war, and any news is good for stocks. The Prop Min has gotten people to accept that the only way to support soldiers is to keep them in harms way and to suggest otherwise is unpatriotic.

Apparently people also believe that recessions are evil, destruction of purchasing power creates a strong currency, discouraged workers are not unemployed, and that people in this country illegally are entitled to the rights and privileges of legal citizens. All but a few believe the Fed is both omnipotent and omniscient, and craven morons have Ph.D’s or Nobel Prizes so they must be smart and capable of governing effectively.

Now the Prop Min is working on getting us to accept that worthless assets are worth what ever mythical value assumed so long as the assets are never subjected to price discovery in an open market.

How do fundamentals have meaning in an environment where reality and truth have little or no value? How does one prosper and protect that prosperity?

Welcome to the world of the market technician.

[Nov 4, 2007] Investment banks Loss leaders Economist.com

Can banks start to inflate already inflated commodities bubble trying to protect valuations and in the process driving inflation higher ? Did O'Neal fell near the top (of banking stocks valuation) ?

...Nevertheless, investment bankers at Deutsche and Credit Suisse have relied on the banks' “stable” businesses, such as wealth management and private banking, to keep them afloat. The challenge facing them and their brethren is where next to find the juicy returns that they enjoyed before the credit bubble burst. There is already a lot of talk about commodities and currencies. Investments in distressed assets may also provide ironic comfort. Lehman has just launched a $3 billion fund that will buy discounted leveraged loans.

In America, credit-card defaults are ticking up, which will further hurt asset-backed securities. Many subprime-linked instruments have become prohibitively expensive to hedge. Mr O'Neal fell in a falling market, but perhaps nearer the top than the bottom.

[Nov 4, 2007] Are you really such a daredevil Financial News - Yahoo! Finance

Is replay of 2001 in the cards ?

...More turbulence, in other words, is a distinct possibility. And, collectively, investors are heading into this uncertain period with highly aggressive portfolios.

Employees in 401(k) plans recently held nearly 70% of their accounts in stocks, marking their biggest bet on equities since July 2001, according to Hewitt Associates. And, many of those portfolios have gravitated toward some of the riskiest types of stocks.

[Nov 4, 2007] Did Bankruptcy Reform Increase Financial Distress by Laurent Belsie

Can the wave of credit card delinquencies be the next act of this financial drama ? Is this a new form of debt slavery ?

.. the reforms had an unintended effect, contends Michelle J. White in Bankruptcy Reform and Credit Cards (NBER Working Paper No. 13265). While bankruptcy filings dropped, financial distress increased. How did this happen?

....by making it harder for consumers to escape their debts, the new law dramatically reduced lenders' losses from default and bankruptcy. As a result, they started lending more, even to consumers with bad credit. Credit card debt increased more quickly during the past two years than at any time during the previous five years.

Consumers should have responded to the new harsher bankruptcy law by borrowing less, which would have lowered their risk of getting into financial distress. But not all consumers behaved in this rational way. Instead, many behaved shortsightedly and took advantage of the greater availability of credit to borrow more than they could easily handle --- ignoring the risk of financial distress. (Economists refer to this shortsighted behavior as "hyperbolic discounting" - consumers who are hyperbolic discounters intend to start paying off their debts immediately, but each month they consume too much and end up postponing repayment until the following month. So their debts steadily increase.)

The new bankruptcy law exacerbated the problem of shortsighted consumers borrowing too much, because it prevented many of them from using bankruptcy to limit their financial distress. Many consumers in financial distress are unable to file for bankruptcy under the new law, because they cannot afford the costs of filing, cannot meet the new paperwork requirements, or are ineligible. This means that their debts will not be discharged and they will remain vulnerable to creditors' collection calls and to wage garnishment that may take funds they need for basic necessities. Because of the new bankruptcy law, consumers can end up in deeper financial distress than would have been possible before 2005.

Survey evidence presented by White supports the idea that most debtors get into financial distress because of shortsighted behavior, rather than because they behave rationally but experience adverse events. In one survey of bankruptcy filers, 43% pointed to "high debt/misuse of credit cards" as their primary or secondary reason for filing. Another survey in 2006 found that two-thirds of those who sought credit counseling before filing for bankruptcy cited "poor money management/excessive spending" as the reason for their predicament, compared to only 31% who pointed to loss of income or medical bills.

[Nov 04, 2007] naked capitalism

At what stage is the correction, if such news start flowing ? 

Yes, Chuck Prince is expected to resign on Sunday. I'm surprised he lasted this long. He was over when he made his now-infamous remark:

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.

Mind you, this wasn't pre-March 2007, when everything looked rosy. This was in July, when the cracks had started to appear and after the Bear hedge fund crisis. That sort of comment is a hubristic death wish, a willful defiance of the warnings. And the odds most assuredly caught up with Prince.

But for my money, the juicier bit in the Wall Street Journal story on Prince's imminent departure is that Citi may take further writedowns:

People familiar with the matter said the Securities and Exchange Commission is looking into the bank's accounting for its off-balance sheet investment funds that have recently attracted scrutiny.....

The board is expected to discuss whether Citigroup should update the amount of write-downs that it has taken on certain securities to reflect their deteriorating value, according to people familiar with the matter.

The issue has generated intense discussion in the bank's senior ranks in recent days and could potentially result in a significant addition to the $3.55 billion capital-markets hit to third-quarter earnings that Citigroup announced just three weeks ago. The company is expected to file a quarterly report with the SEC next week.

Citigroup is the largest player in the $350 billion SIV market, managing seven of these off-balance sheet vehicles that hold a combined $80 billion in assets. SIVs have issued short-term debt to investors such as money-market funds while buying mortgage-backed securities and other assets that carry a higher yield.

[Nov 3, 2007] Economic Dreams - Economic Nightmares

Was Greenspan a social parasite ?  :-)

[Nov 2, 2007] Question of Solvency at Citigroup

Sometimes the fact that a particular question exists answers another related questions.

November 01, 2007 |

The nightmare scenario - where the market abruptly comes to recognize that the leveraged speculating is hopelessly stuck in illiquid CDO, ABS, MBS, derivative and equities positions - doesn’t seem all that outrageous or distant this week. [emphasis added]

[ Nov 2, 2007] Adventures of a vulture capitalist selling short on Citi - Business - Business

Don't even dream to succeed in this dangerous game :-)

...But what about my short on Citi? I didn't stay long enough. Every time prices would fall they would mysteriously return, sometimes higher. My high wire got too scary. But where was the rest of the world? The vultures were still waiting.

They knew about the PPT team and would wait until the selling overwhelmed any defence they could mount. One can keep the Dow looking sharp by buying a few key shares in times of thin trading and the team knew all the tricks.

It worked till this week. November 1 will be remembered as the day they drove Wall Street down. For me, the game was not worth the candle, but it taught me about risk and convinced me that something a little more pure and eternal was the place to be — so I joined the gold bugs.

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