Debt Rattle, February 1 2008

Updated 1.45 PM

Moody's View Darkens on Bond Insurers

Moody's Investors Service said that it may complete its review of monoline bond insurers by mid- to late February -- a move that may result in downgrades, given the ratings agency's increasingly negative view on the mortgage market. In a conference call Friday morning, Moody's explained that its view of the entire sector is becoming more negative. It said it would be employing more stringent assumptions in assessing the outlook and capital adequacy of firms such as troubled guarantor heavyweights Ambac and MBIA.

The health and viability of the financial guarantors, which insure debt issued from municipalities as well as newfangled securities structured by investment banks known as collateralized debt obligations, has been deeply tested by the stresses in the mortgage market. The fear is that delinquencies in some of the securities these entities provide a backstop for -- which have so far been relatively few -- may begin to ratchet up significantly in the near term.

Moody's said its review will not just take into account how much capital the bond insurers have obtained to shore up their balance sheets, but also the viability of the companies' future business model. TheStreet.com also has noted that capital shortfalls may not be the only concern for guarantors. Bond insurer customers have been reluctant to do business with these firms and the possibility of them being downgraded also may mean that a number of insurers may be vying for the double-A or single-A cut of the monoline business -- a much smaller slice of the bond insurer pie.

Moody's on Thursday increased its loss assumptions for 2006 first-lien mortgages to 21% from 19%. Fitch Ratings on Friday followed that up by releasing a report noting that it also has increased loss expectations on 2006 subprime residential mortgage-backed securities (RMBS) to 21%, and on RMBS originated during first half of 2007 to 26%. The Fitch ratings action impacts about $139 billion of RMBS.

Fitch's rating move follows the downgrade and negative ratings action by Standard & Poor's of some 8,000 RMBS bonds and CDOs on Wednesday. S&P also forecasts a whopping $265 billion in losses on those securities.

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Ilargi: If you thought that the losses and tightening are done now, think again. This crunch will be coming at you from more different directions than you can keep count of, all mutually reinforcing. Positive debt feedback.

The Road Warrior Cliff Dive

China is now in a full court press to export inflation to the US. This is a natural consequence of trying to close the big gap between input and output costs. Apparently their need to rein in out of control resource utilization will mostly be dealt with via blowback from Road Warrior economics.

Because of new cost pressures here, American consumers could see prices increase by as much as 10 percent this year on specific products — including toys, clothing, footwear and other consumer goods — just as the United States faces a possible recession. “China has been the world’s factory and the anchor of the global disconnect between rising material prices and lower consumer prices,” said Dong Tao, an economist for Credit Suisse. “But its heyday is over. We’re going to see higher prices.”

Chinese imports constitute 7.5 percent of spending by Americans on consumer goods, but they make up much bigger shares of several popular categories, including about 80 percent of toys, 85 percent of footwear, and 40 percent of clothing. Even when the market share held by Chinese goods is relatively small, their low prices put pressure on other producers to keep costs down. Whether Chinese factories will succeed in making wholesalers pay more for their goods and whether retailers will be able to pass much of their higher costs on to American consumers is unclear, analysts say. But companies that operate in China or buy from here are already reeling from mounting cost pressures that they say will weaken their profits and could disrupt their supply chains.

The concept of vendor financing from foreign central banks (FCB) has never been stronger however. As part of the January Battle of the Bulge, FCBs pulled out all the stops, with purchases of a stunning $60.1 billion in US Old Maid Cards in just three short weeks. About half of this was in the suspect “federal agencies” category. Total custodial holdings of $2.119 trillion are held just by FCBs. Other foreign institutions hold even more. The notion of a national debt trap, where just the interest paid on debt to foreigners swamps a nation could not be more clear. Strangely at this stage interest rate levels on that debt is minuscule, thus postponing any reckoning.

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Dinallo's Rescue Plan Focuses on Ambac, People Say

New York Insurance Superintendent Eric Dinallo is trying to organize a bank-led rescue of Ambac Financial Group Inc. to prevent downgrades of the bond insurer that may roil credit markets, according to two people briefed on the plan.

Dinallo has organized a group of eight banks including Citigroup Inc. and UBS AG to provide financing, said one of the people, who declined to be identified because the details haven't been completed. ``While we cannot discuss specifics, there are a number of developments relating to the bond insurers,'' Dinallo said in a statement today. ``We are continuing to communicate with all parties to help them reach firm deals as soon as possible.'' Ambac spokesman Peter Poillon didn't return two phone calls seeking comment.

Fitch Ratings stripped Ambac, the second-largest bond insurer, of its AAA rating last month, and Standard & Poor's and Moody's Investors Service Inc. are reviewing their top ratings on the New York-based company. The AAA gives insurers the financial credibility to guarantee bonds issued by state and local governments. Ambac climbed $2.44, or 21 percent, to $14.08 at 1:07 p.m. in New York Stock Exchange composite trading. The company has declined more than 80 percent in the past 12 months.

One of Dinallo's proposals to rescue the company would have banks and securities firms act as reinsurers of bonds and securities that the insurer guarantees, one of the people said. Ambac would pay an upfront fee in return for a promise that the banks would reimburse it if insurance-related losses exceeded an agreed-upon limit, the person said. Another option would be for banks to provide the bond insurer with capital to help it pay claims.

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Ilargi: When credit crunches, it pours. This is what it's all about: nobody wants to lend you a penny anymore.

Bush Subprime Plan Undermined, States Shun Borrowers

President George W. Bush's proposal to help 1 million subprime borrowers avoid foreclosure with tax- exempt bonds has an obstacle: states don't want the risk any more than private lenders do.

The state housing agencies that are already offering mortgage refinancing options are turning away so many applicants that they've had no need to raise funds. Since New York said it would commit $100 million in July, three of the 500 loans envisioned have been made. Massachusetts extended four loans under a $250 million program started in August, and Ohio made just 36 of the thousands anticipated by Governor Ted Strickland.

The reluctance to lend threatens to undermine a pivotal part of the president's plan for alleviating the worst housing slump in 26 years. More than 50 percent of subprime borrowers are being rejected by state programs because their homes have lost too much value or they've accumulated excessive debt, estimates Geoffrey Cooper, emerging markets director at a unit of MGIC Investment Co., the country's biggest mortgage insurer.

"These things are basically public relations gimmicks," said Bruce Marks, chief executive officer of Neighborhood Assistance Corp. of America. The Boston-based nonprofit organization negotiated an agreement with Countrywide Financial Corp., the biggest U.S. home lender, in October to modify rates and terms on $16 billion of subprime mortgages to prevent foreclosure

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Ilargi: Here’s saying banks will face a whole lot more than $60 billion in write-downs before this year is over. How about $600 billion?

Goldman Says Banks May Face $60 Billion in Writedowns

Banks may face additional writedowns of as much as $60 billion this year from investments in commercial real estate and non-traditional residential mortgages, Goldman Sachs Group Inc. analysts said.

Commercial real estate prices may fall 21 percent to 26 percent from current levels, resulting in writedowns for banks of about $20 billion, Goldman Sachs said today in a report. Home price declines will probably drive defaults in non- traditional loans such as Alt-As, which often include limited or no income documentation, resulting in $40 billion in markdowns, the analysts added.

The collapse of the U.S. subprime mortgage market has led to about $146 billion of losses and markdowns at securities firms and banks since the beginning of 2007. Losses may exceed $265 billion as regional U.S. banks, credit unions and overseas financial institutions write down the value of their holdings, Standard & Poor's said this week

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Ilargi: The US needs to create over 200.000 jobs a month just to play even, due to population growth etc.. This ain’t it.

Last pillar of denial is gone

The last pillar to hide behind has fallen. Jobs are being lost in the U.S. economy.

The 17,000 jobs destroyed in January add to the evidence that a recession has begun, but they do not prove the point. One month of hiring cutbacks does not make a recession, but it is a necessary condition. As noted on Thursday, the employment data in December and January are hard to read. Economist Ray Stone calls them the "dirtiest of the entire year," because weather and the usual swings in employment can cloud the underlying reality. But most economists believed weather and the seasonal factors would work in favor of January data that looked better it really was. Uh oh.

The figures released Friday by the Labor Department were grim, relieved only by a decline in the jobless rate. It's a slim reed to hold on to. Employment is falling in almost every sector of the economy. Only the health-care sector, which is immune to the business cycle, was spared completely. Few industries are hiring, or even taking on temporary help. Hours worked are falling. Wages are barely keeping pace with inflation.

All of this is no surprise to those who've been watching the Federal Reserve and Congress scramble to provide support for a fragile economy. Expect more.

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Bush budget would nearly freeze domestic spending

President George W. Bush will propose freezing most domestic spending in his upcoming 2009 budget and will seek big cost savings from government health care programs, a U.S. official said on Thursday. In a more than $3 trillion budget to be unveiled on Monday, Bush wants to limit to less than 1 percent increases in spending on discretionary programs like transportation and education, but excluding national security, the official said.

He will try to extract some $178 billion in savings from Medicare, the health care program for the elderly and disabled, in part by freezing the reimbursement rates for health care providers for three years and requiring wealthier Americans to pay more for prescription drugs. He will also seek $17 billion in savings from Medicaid, the health care program for the poor, according to the official, who declined to be named because the budget has not yet been submitted to Congress.

Bush has been criticized by some members of his own Republican party for tolerating big spending increases in the first several years of his administration. On his watch, the budget shifted from surpluses to deficits that reached a high of $413 billion in 2004. In the last three years, the deficits have narrowed but that is about to change. The budget is expected to forecast deficits of $400 billion for both 2008 and 2009.

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Ilargi: Well, well, look what’s here: the mainstream wakes up to the (Pay-) Option-ARM storm around the corner. That’s only a year later than the rest of us. Must be a sign that it’s starting to hurt. I guess we can call this Just In Time news delivery.

Option ARMs, next chapter in U.S. housing crisis

Option ARMs have existed since the 1980s, but according to a U.S. Federal Deposit Insurance Corporation report, "Outlook Summer 2006," as recently as 2002 they were still quite rare.

Like a normal ARM, the interest rate on one of these loans resets periodically. But the payment option allows you to make a minimum monthly payment instead of the full interest-only payment. The trouble is that the portion you don't pay is added to the principal of the loan, so your mortgage goes up. This process is called negative amortization. "This product is suitable for people with a lot of money who are financially astute," said David Zugheri, president of First Houston Mortgage, which offers loans in 18 U.S. states. "But very few people fit that category and that's why we didn't make many of these loans." Unfortunately, many other lenders did.

According to the Fed, in 2005 $1 trillion in new mortgages were issued, with another $1 trillion in 2006. ARMs made up about half of the total, according to the Mortgage Bankers Association (MBA). The MBA said Option ARMs made up 7.2 percent of all home mortgages in 2005 and 14.4 percent in 2006, giving a total of around $210 billion for those two years alone. "This product has been used by far more borrowers than it was ever intended for," said Brian Chappelle, a partner at mortgage consulting firm Potomac Partners LLC. U.S. regulators tightened standards on Option ARMs in late 2006 and the number of new loans tailed off.

Until then, many mortgage brokers liked Option ARMs as they netted a far higher commission than a safer, fixed-rate loan. "If you're a broker and you can get $4,000 commission for a traditional loan and $12,000 commission for an Option ARM, which one are you going to pick?" said NAMP's Lefevre.
Option ARMs also allowed people to buck the system and buy well beyond their means.

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Ilargi: I’ll say it again: The crunch will be coming at you from many different directions, all mutually reinforcing. Positive debt feedback.

Credit Woes Spread

Write-downs worldwide over the last year have totaled more than $140 billion, and what has been driving the losses isn't improving. Mortgage defaults are rising as home prices are falling. Standard & Poor's on Wednesday forecast losses on investments tied to mortgages could top $265 billion. Those estimates don't include surprises like the $275 million charge from Bristol-Myers. That startling write-down can't be overlooked because it exemplifies the depth of the crisis and where problems could begin to hit next.

Bristol-Myers said it has invested for more than a decade in something known as auction rate securities, which all were highly rated when they were purchased. It was part of a global mania for higher-yielding investment that led everyone from cash-rich companies to central banks in Asia to small regional banks in Germany to buy what turned out to be very risky paper.

The drugmaker's investments have interests in debt securities known as collateralized debt obligations, which consist of pools of residential and commercial mortgages plus credit cards, insurance securitizations and other structured credits. Subprime mortgages make up some of the underlying collateral.

As the credit markets seized up in recent months, Bristol-Myers couldn't sell some of those investments; thus its write-down. The company said more could come if uncertainties in the credit markets continued. A chastened Bristol-Myers CFO Andrew Bonfield said during a conference call with analysts on Thursday that the company has moved 60 percent of its cash into Treasury bills or funds holding Treasurys, and the balance went into bank deposits.

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Ilargi: And again: Many different directions, all mutually reinforcing. Positive debt feedback. This one is ugly.

Hidden Swap Fees by JPMorgan, Morgan Stanley Hit School Boards

James Barker saw no way out. In September 2003, the superintendent of the Erie City School District in Pennsylvania watched helplessly as his buildings began to crumble.
The 81-year-old Roosevelt Middle School was on the verge of being condemned. The district was running out of money to buy new textbooks. And the school board had determined that the 100,000-resident community 125 miles north of Pittsburgh couldn't afford a tax increase.

Then JPMorgan Chase & Co., the second-largest bank in the U.S., made Barker an offer that seemed too good to be true. David DiCarlo, an Erie-based JPMorgan Chase banker, told Barker and the school board on Sept. 4, 2003, that all they had to do was sign papers he said would benefit them if interest rates increased in the future, and the bank would give the district $750,000, a transcript of the board meeting shows.

"You have severe building needs; you have serious academic needs," Barker, 58, says. "It's very hard to ignore the fact that the bank says it will give you cash." So Barker and the board members agreed to the deal.

What New York-based JPMorgan Chase didn't tell them, the transcript shows, was that the bank would get more in fees than the school district would get in cash: $1 million. The complex deal, which placed taxpayer money at risk, was linked to four variables involving interest rates. Three years later, as interest rate benchmarks went the wrong way for the school district, the Erie board paid $2.9 million to JPMorgan to get out of the deal, which officials now say they didn't understand.

"That was like a sucker punch," Barker says. "It's not about the district and the superintendent. It's about resources being sucked out of the classroom. If it's happening here, it's happening in other places."

It is. During the past four years in Pennsylvania alone, banks have pitched at least 500 deals totaling $12 billion like the one JPMorgan Chase sold to Erie, according to records on file with the state Department of Community and Economic Development.

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Ilargi: More background in the publicly acclaimed MBIA hit-comedy:

MBIA Reports Record Losses While Connecticut Investigates

Reuters said that raising capital as MBIA is hoping to do will not be easy, citing rival Ambac Financial Group's failed attempt to raise $1 billion in equity earlier this month.
Raising new funds probably won't be made any easier either by Tuesday's statement by Connecticut State Attorney General Richard Blumenthal that his office has issued subpoenas to all major rating agencies and bond insurers as part of an investigation of industry practices related to subprime mortgage lending.

While none of the financial institutions receiving subpoenas were named, Blumenthal did specifically say that MBIA and Ambac were among those receiving the legal notices.

In an interview reported by Reuters on Tuesday Blumenthal said his office is investigating the role of investment banks in "problematic practices in the ratings and securities areas."
"We have an investigation relating to possible wrongdoing involving the bond insurers and mortgage lenders and also the investment banks, seeking to know whether people buying securities backed by mortgage debt may have been misled by failures to disclose relevant facts on the risks involved," said Blumenthal.

Blumenthal's announcement in turn came on the heels of another disclosure from the Federal Bureau of Investigation (FBI) that it is looking into the activities of 14 financial institutions who are caught up in subprime mortgage losses. None of the companies was identified by the FBI but the guessing game has begun.

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Ilargi: Well, banks are talking about rescue attempts for the monolines. What’s striking in this first one is that all banks, except Citigroup, are foreign banks. As Forbes said yesterday, three banks have 45% of the counterparty exposure, Citigroup, UBS and Merrill Lynch. That puts them in an awkward spot. As for the others, their presence suggests they probably hold a lot of the paper insured by MBIA and Ambac.

Our idea remains that chances of a successful industrywide rescue are remote, though it will certainly be attempted. But what makes a rescue seem so necessary is what will make it ultimately fail: Too much money, too much risk.

Big Banks Form Group to Rescue Bond Insurers

Some of the world's biggest banks have grouped together to rescue mortgage bond insurers, CNBC has learned. The group is working together to negotiate with the mortgage insurers and with Eric Dinallo, the New York state insurance commissioner who is spearheading the rescue effort, a source familiar with the talks said.

The bond insurers, like Ambac and MBIA, which used to insure just municipal bonds, have been burned after backing subprime derivatives. The source said the bank group includes RBS, Wachovia, Barclays, UBS , Societe Generale, BNP Paribas, Dresdner and Citigroup. It couldn't be determined if this is the only banking group formed or if others might also be in the works.

The source also said that the group is engaging Greenhill & Co. as an investment bank to advise it in the talks. Robert Greenhill founded the boutique bank in 1996 after serving as vice chairman of Morgan Stanley and chairman of Smith Barney. He stepped down as CEO of Greenhill last fall, but remains chairman. The source said "these are early days" for the group and would only say that a variety of solutions are being considered.

Meanwhile, a senior treasury official on Thursday applauded recent developments. "I am encouraged by progress in the talks," the official said. "People who weren't talking with each other in the recent past are now getting down to business."

For some, this consortium might recall the failed effort to create a super SIV coalition among banks last fall to handle the commercial paper problem. No one was saying this group would be any more successful. They only said a group of international banks has come together to explore solutions to one of the most vexing problems facing the market.

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Ilargi: A city that purchases $13.9 million in CDO’s “without its consent”, and then sees them drop in value by over 90%. Makes me wonder out very aloud how many cities in the US, and abroad, are in similar positions. In general, the perception of how widespread all trhe mayhem is, remains "poorly developed". But prepare yourself: it's everywhere.

Merrill Lynch to Reimburse Massachusetts City for CDO Purchase

Merrill Lynch Co. agreed to pay Springfield, Massachusetts, $13.9 million to settle a dispute over collateralized debt obligations it sold the city that plunged in value. The money will reimburse Springfield for the cost of the so-called CDOs, securities tied to loans, mortgages and other debts that have been battered as more U.S. homeowners failed to make mortgage payments. New York-based Merrill said it agreed to refund the money after discovering the purchase was made without the city's consent.

Local government agencies from Florida to Washington state have been stung by their purchases of CDOs and other complex securities backed by collateral no one wants. The market for CDOs has frozen up because of surging subprime mortgage defaults that have hurt their credit ratings, making the securities difficult to sell.

Springfield bought its CDOs between April and June of last year from Merrill, according to city records. The value of those securities fell to $1.3 million in November. Massachusetts Secretary of State William Galvin's office subpoenaed documents and sought testimony last month from Merrill regarding the sale of the CDOs. State Attorney General Martha Coakley said her staff "will continue to review this matter to determine if additional action by our office is necessary."

Merrill, the world's largest brokerage, sold Springfield investments in S Coast FD V CDO, TABS CDO, and Centre Square CDO, according to city records. "After carefully reviewing the facts, we have determined the purchases of these securities were made without the express permission of the city," Merrill said in a statement. "As a result, we are making the city whole and we have taken appropriate steps internally to ensure this conduct is not repeated."

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Last year's model: stricken US homeowners confound predictions

As the credit squeeze persists, ratings agencies are being forced to downgrade thousands of securities, after failing to foresee the recent wave of defaults, particularly in subprime loans. On Wednesday night alone, Standard & Poor's downgraded more than 8,000 residential mortgage-related securities worth some $534bn (£268bn, €360bn).

These downgrades have triggered bitter recriminations, amid a wave of losses at asset managers and banks. "Much of the money lost has been held by people who held AAA securities [that were downgraded]," points out Wes Edens, head of Fortress Investment Group, a big hedge fund. "That has caused a tremendous loss of confidence."

But the downgrades have also left policymakers and analysts scrambling to determine what has gone so badly wrong. As this search intensifies, some economists are starting to suspect that the answer lies in a striking recent change in American household choices – a shift that could have important implications for policymakers and investors alike.

In particular, it seems that mathematical models used to predict future default rates, based on past patterns of losses, have gone wrong because they did not adjust to reflect shifts in household behaviour. Or, to put it another way, financiers have been tripped up because they ignored one of the most basic rules of investment, which is usually found in product literature: the past is not always a guide to the future. "There has been a failure in some of the key assumptions which supported our analysis and modelling," Mr McDaniel admits. "The information quality deteriorated in a way that was not appreciated by Moody's or others." Mortgage borrowers, in other words, did not behave as expected.

The issue at stake revolves around so-called delinquency rates, the proportion of people who fall behind on their debt repayments. When American households have faced hard times in previous decades, they tended to default on unsecured loans such as credit cards and car loans first – and stopped paying their mortgage only as a last resort. However, in the last couple of years households have become delinquent on their mortgages much faster than trends in the wider economy might suggest. That is particularly true of the less creditworthy subprime borrowers. More?over, consumers have stopped paying mortgages before they halt payments on their credit cards or automotive loans – turning the traditional delinquency pattern on its head. As a result, mortgage lenders have started to face losses at a much earlier stage than in the past.

"In the past, if a household in America experienced financial problems it tended to go delinquent on its credit cards, but kept on paying its mortgage," says Malcolm Knight, head of the Bank for International Settlements, the central banks' bank. "Now what seems to be happening is that people who have outstanding mortgages that are greater than the value of their home, or have negative amortisation mortgages, keep paying off their credit card balances but hand in the keys to their house?.?.?.?these reactions to financial stress are not taken into account in the credit scoring models that are used to value residential mortgage-backed securities."

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'It's going to be much worse'

You might expect Jim Rogers to be gloating a little bit. After all, the famed investor has been predicting a recession in the U.S. economy for months and shorting the shares of now-tanking Wall Street investment banks for even longer. And with fears of a recession sparking both a worldwide market sell-off and emergency action from Federal Reserve chairman Ben Bernanke, Rogers again looks prescient - just as he has over the past few years as the China-driven commodities boom he predicted almost a decade ago began kicked into high gear. But when I reached him by phone in Singapore the other day there was little hint of celebration in his voice. Instead, he took a serious tone.

"I'm extremely worried," he says. "I have been for a while, but I just see things getting much worse this time around than I expected." To Rogers, a longtime Fed critic, Bernanke's decision to ride to the market's rescue with a 75-basis-point cut in the Fed's benchmark rate only a week before its scheduled meeting (at which time they cut it another 50 basis points) is the latest sign that the central bank isn't willing to provide the fiscal discipline that he thinks the economy desperately needs.

"Conceivably we could have just had recession, hard times, sliding dollar, inflation, etc., but I'm afraid it's going to be much worse," he says. "Bernanke is printing huge amounts of money. He's out of control and the Fed is out of control. We are probably going to have one of the worst recessions we've had since the Second World War. It's not a good scene."

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Why? What? When?

Are we faced with an emergency today? Clearly, the unprecedented actions by the Fed and the administration show they are worried - panicked, even - that the developing economic slowdown portends much worse than a garden-variety recession. Their "sweat" is clearly showing, in sharp contrast to sensible advice ("Never let them see you sweat") and Shakespearean observation ("The lady doth protest too much, methinks").

• Why are they worried? Because the global economy has become so highly financialized that everyone looks to "markets" for their decisions - even their emotional well-being. Mainstream media run live tickers on their stations and sites, and economic news that were once relegated to the back sections are now at the front page. This is a very dangerous dynamic, nestled as it is within a highly complex system.

• What are they worried about? That negative market action will be instantly transmitted via the above dynamic to the "real" economy, resulting in a seizure: slashed consumer spending and mass layoffs. And this holds for the entire world, not just the US, because global markets have become highly correlated.

• How fast could this happen? We already saw last week how quickly global markets can accelerate to the downside. In the era of "just-in-time" everything, the domino effects to the "real" global economy can't be cushioned by inventory builds or delayed production and delivery schedules. Every businessman is now trigger-happy. Perhaps the Fed's rapid-fire cuts will prevent the slowdown from turning into what Mr. Bernanke and the administration fear most. But their fear has me spooked, I'll tell you... To paraphrase FDR: The only thing I have to fear, is their fear itself.

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SRM seeks to block BofA-Countrywide deal

SRM Global Fund, which has a 5.2 percent stake in Countrywide Financial Corp., says Bank of America Corp.'s proposed $4 billion acquisition of Countrywide is severely undervalued. "We strongly believe that the terms of the proposed merger with Bank of America are contrary to the interests of the company's shareholders," a spokesman for the private investment fund says.

Under the terms of the deal, Countrywide shareholders would receive 0.1822 BofA shares for every Countrywide share they hold. That amounts to less than $8 a share. As of Dec. 31, Countrywide's book value was at more than $20 a share, SRM says.

SRM, which is registered in the Cayman Islands, says it intends to vote against the all-stock transaction. It will also ask the Securities and Exchange Commission to investigate movements in Countrywide's stock price in the days before the proposed merger was announced on Jan. 11. The day before, the stock closed at $7.75 per share, significantly higher than its opening price of $5.08 per share. In addition, volume drastically increased, and had been higher for several preceding days.
Countrywide's stock, which traded at a high of $45.19 during the last year, was trading at $6.78 per share Thursday afternoon.

BofA Chief Executive Kenneth Lewis said during a conference in New York Tuesday that Countrywide's financial results were consistent with the bank's due diligence and agreed-upon purchase price. Countrywide on Tuesday reported a loss of $422 million in the fourth quarter. It also said one-third of the subprime mortgages in its portfolio are delinquent.

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Ilargi: Here’s two more to file under Signs of the Times. It will get much harder to get loans, and not just for houses.

JPMorgan Scales Back Home-Equity Lending

JPMorgan Chase is again tightening its lending policies -- this time pulling back from riskier home-equity loans. The New York-based bank is tightening lending standards on home-equity loans made through brokers nationwide, according to a memo sent to mortgage brokers this week and obtained by TheStreet.com.

Starting Monday, the company will no longer make home-equity loans in which the so-called combined loan-to-value ratio of the first mortgage (which may not necessarily be a loan made by Chase) and the home-equity loan equal 100% or greater than the value of the home. The changes are taking into account falling home values and prices in various states that have been hit hard by the mortgage deterioration, the bank said. JPMorgan Chase makes loans directly and through brokers across the country.

"Chase is committed to remaining in the wholesale business and in doing such, finds that we cannot afford to be in a position of lending at or above 100% loan-to-value, especially after accounting for falling home prices," the memo said. New Jersey is one example, it said. JPMorgan Chase is "capping" the combined loan-to-value on home equity loans at 80%. The cap will be even lower in certain hard hit counties.

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Trying to tap into home equity? We'll see

Tens of thousands of homeowners with home equity lines of credit are getting a rude surprise: They've been told by their lender that they can no longer take money out on their credit lines because sinking home prices have left them with little or no equity.

Among the lenders taking such action is Countrywide Financial Corp., which sent 122,000 letters to customers last week telling them they could no longer borrow against their credit lines. In some cases, according to the company, the borrowers are now "upside down" -- the total debt on the home exceeds the market value of the property. Calabasas-based Countrywide, the nation's largest mortgage lender, says it uses computer modeling that factors in changes in home prices to determine which customers will have their money tap shut off.

The cutoffs are coming as a shock to some. "We didn't deserve this," Thaleia Georgiades, a real estate agent in El Dorado, Calif., said Thursday, two days after she and her husband, a builder, learned that their Countrywide credit line had been frozen. "When you are self-employed, that's the money you count on to bridge the gap during tough times. And this is a particularly tough time in both the building and housing industries," Georgiades said.

In Phoenix, Kristen McEntire said she received a letter from San Antonio-based USAA Federal Savings Bank about two months ago saying the credit limit on her home equity line had been slashed by $40,000 because the value of her home had declined. "They froze everything but about $5," she said. "That's what I had left in the line of credit" after the bank's action. A USAA spokesman said the bank had cut credit limits in "a small number of cases" because of lower home values.

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Bernanke hits the joy button

In a little-noticed speech from January 11, Federal Reserve governor and believed Bernanke Fed board ally Frederic S Mishkin described the new, pedal to the metal Fed-cutting paradigm.

Policymakers should be prepared for decisive action in response to financial disruptions. In such circumstances, the most likely outcome - referred to as the modal forecast - for the economy may be fairly benign, but there may be a significant risk of more severe adverse outcomes. In such circumstances, the central bank may prefer to take out insurance by easing the stance of policy further than if the distribution of probable outcomes were perceived as fairly symmetric around the modal forecast.

In English, this ain't your father's Federal Reserve anymore. We're gonna cut and cut (as illustrated by new market predictions of further interest rate cuts for next month and beyond), and the monetary policy time lag be dammed; if we overshoot and a new boom-bust cycle develops, well ...

Why does the Fed do it - why do they keep cutting rates on the markets' command instead of waiting for the time lag to cut in? [Because] the current structure of the socio-political and socio-economic power nexuses of America reacts with absolute outrage to falling stock prices.

Poor children can snack on lead paint chips in schools redolent of overflowing sewerage, and through the night ambulances can crisscross the streets of America's great metropolises looking for emergency rooms that will accept a patient in cardiac arrest without health insurance, but if stocks go down, the panic buttons really get pushed, especially with a newsmedia so longing to report the stories that the critical upper-income demographic finds interesting and appealing.

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Lies, Damn Lies, and the National Association of Realtors

The National Association of Realtorswants you to know that home values usually double every 10 years. They also want you to know that Real Estate is a great way to build wealth. They want you to know that the only people who can possibly do a good job of helping you sell or buy a home, are Realtors(R). They have launched an advertising campaign using TV ads, print ads, billboards, radio commercials, bus shelter signs, and posters, all to tell us, the ignorant public, that 1) we really, really need a Realtor(R); 2) Realtors(R) are terrific, honest human beings; and 3) Now is a Great Time to Buy a House! They don't qualify that statement, so don't try to sue them if you buy a house and lose your shirt - now is a great time to buy - a great time for Realtors(R).

One ad says: "You might be wondering if buying a home right now is a smart financial decision. The fact is, homeownership is key to building long-term wealth, no matter when someone buys." They cite a N.A.R. study as evidence of their claims that real estate is a better investment than stocks. "Thanks to the power of leverage, a homeowner’s return on investment is even more impressive over time. For example, over 10 years, a $10,000 investment in the stock market at a normal 10 percent market rate of return would yield $23,600. The same investment as a down payment on a $200,000 home at a normal appreciation rate of 5 percent would return nearly 5 times the stock market return, at $110,300."

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