Debt Rattle, Happy Bissextile Leap Day 2008

On the East Coast it is now February 29. It is formally called Bissextile Day. There are 97 of them every 400 years.

Have fun in your bissextileness.

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Credit turmoil losses set to top $600-billion

Losses from the global credit market crisis will likely top $600-billion (U.S.), with banks and brokers responsible for more than half of that, UBS said in a note published on Friday. “Our global banks team estimates total industry losses in this financial crisis should reach north of $600-billion, of which listed banks and brokers should account for ‘only' $350-billion,” said Geraud Charpin, a credit strategist at UBS in a note entitled: “Wide Spreads — Here To Stay.”

Some $160-billion of that $350-billion has already been written off, the note said. American International Group Inc. on Thursday posted the biggest quarterly loss in its 89-year history — $5.29-billion — and missed Wall Street forecasts after being hurt by a writedown of securities exposed to bad mortgage investments. “AIG's $15-billion writedown is the clearest indication banks are not the only ones to suffer potential losses,” Mr. Charpin said.

Fears of writedowns have battered equity and credit markets, with rumours of fresh problems emerging almost daily.
As a result, financial credit spreads have sharply underperformed corporate peers and are now at levels where they are pricing in widespread defaults, according to Deutsche Bank.

U.S. Federal Reserve Chairman Ben Bernanke on Thursday warned some small U.S. banks might go under during the current stress, which has been prompted by housing market problems, but that the country's banking system remained solid.

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Ilargi: After downgrading Citigroup last year, Meredith Whitney started to receive death threats. She cost the boys from Brazil billions in market value. What do you think will happen if she continues to talk loud and clear?

Outlook for U.S. banks just got gloomier

The U.S. banking sector is headed for a credit downturn that will be "the worst in generations," featuring widespread defaults on a range of debts and a national house price slide not seen since the Great Depression, says one of the most influential analysts on Wall Street. The banks face massive loan losses -- "far more dramatic" than most bank executives and ratings agencies have forecast -- as the next chapter in financial sector turmoil unfolds, said Meredith Whitney, an analyst with Oppenheimer & Co. Inc.

"We believe loss rates will exceed the highest levels since 1990 by a significant margin," she said in a note Monday. "Bank losses will be the highest in the past 20 plus years as a result of greater numbers of individual defaulting on mortgages and/or other loans and from [loan balances that] are far higher than they were in the last housing cycle."

Ms. Whitney -- who is also a panellist for Fox News and the number two ranked analyst on a Forbes list of top stock pickers for 2007 -- shot to global infamy last year after her gloomy, but accurate, predictions about the scale of subprime problems facing Citigroup Inc. led to a worldwide sell-off of banking stocks.

In Monday's note, the Oppenheimer analyst slashed her already-depressed forecasts of what large U.S. banks will earn in 2008 by 29% and by 13% for 2009, citing concerns about mortgages, credit card balances and other loans. In contrast to Ms. Whitney's pessimistic view, there was some good news Monday for big U.S. banks reeling from US$92-billion in collective writedowns tied to investments in the subprime mortgage market.

The U.S. financial sector was buoyed Monday by an announcement from rating agency Standard & Poor's that it is unlikely to downgrade bond insurer MBIA Inc. any time soon. S&P and other ratings agencies have been reviewing MBIA and its peers after U.S. monolines posted record losses on collateralized debt obligations they guaranteed (CDOs). Banks stood to lose as much as US$70-billion if the CDOs they owned no longer carried an automatic AAA rating because of the insurance.

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Ilargi: "City Limits" is about to acquire a whole new meaning....

Vallejo to unveil deal to avoid bankruptcy

This onetime shipyard city turned Bay Area commuter village appears to have averted a move that is rare in California and across the nation -- declaring bankruptcy. A somber City Council had prepared to vote Thursday evening after putting the bankruptcy issue on the table earlier in the week during an emotional hearing that drew hundreds of concerned residents. But Mayor Osby Davis told a standing-room-only audience that the city had reached an agreement in closed session with labor leaders that would be announced today.

"We've got a tentative agreement, which is good," said Jon Riley, vice president of the International Assn. of Firefighters, Local 1186. "Nobody wanted bankruptcy." City Manager Joseph Tanner had recommended that the council file for Chapter 9 bankruptcy, which would allow the city to renegotiate its debt, but also substantially reduce services for years to come. For residents, the prospects are grim: Potholes left unfixed. Trees not trimmed. Longer waits for police to respond to calls.

"It's a black eye," said Ray Prather, manager of a downtown Army-Navy store. "We worry that people won't want to come to Vallejo when they read about this," Prather said. Civic leaders blame the city's current money woes -- a looming $9.2-million shortfall -- on a downturn in the housing market, flagging efforts to remake its waterfront and the high cost of providing public safety.

Police and firefighters account for 80% of Vallejo's budget, city officials say, due to soaring overtime bills and lucrative union contracts that have boosted base salaries, benefits and retirement plans. In most California cities, the average is about half the budget. Vallejo's dance with insolvency is a historic exception among California cities, experts say.

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Canada's current account in deficit

Canada's current account, the broadest measure of international trade, registered a small deficit in the fourth quarter of 2007, a deeper drop than expected and the first deficit since 1999. Statistics Canada said Friday that in the fourth-quarter the difference between what Canada buys and what it sells to the rest of the world deteriorated by $1.8-billion from the previous three-month period to mark a $513-million deficit, on a seasonally adjusted basis.


Lower exports, hurt by the strong dollar, and a record travel deficit led to the fourth-quarter showing, the first deficit since the second quarter of 1999, the agency said. The current account balance measures goods, services and investment income. For all of 2007, the surplus narrowed sharply to $14.2-billion, compared to $23.6-billion in 2006.

“This narrowing surplus occurred against the backdrop of a Canadian dollar that made strong gains against major foreign currencies in 2007, particularly the American dollar and the British pound,” Statistics Canada said. “This generally made Canada's exports more expensive and its imports cheaper, with consequence for the current account balance.” The goods surplus in the fourth quarter narrowed to $9.3-billion, falling below the $10-billion mark for the first time this decade, as exports dropped more than imports, the statistics gathering agency said. As well, it noted, the deficit on the services side was another record, $5.8-billion.

Canada's capital account, meanwhile, which measures investment, saw the second largest quarterly inflow of foreign direct investment, at $47-billion, second only to the surge at the end of the tech bubble, noted BMO Capital Markets deputy chief economist Douglas Porter. Mr. Porter pointed out that for all of last year, foreign direct investment inflows hit a record $115-billion, representing 7.5 per cent of gross domestic product, and more than double the outflow by Canadian companies investing outside the country.

The net number shows a massive inflow of $62-billion in 2007, he said, the largest on record in dollar amounts but also the highest as a share of GDP.

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The Worst-Case Scenario for Housing

Forecasters say a 40 percent drop in home prices from their peak is possible, though quite unlikely

A year ago, most economists talked in worried tones about the possibility that American home prices could slip after almost doubling during the prior decade. At worst, fretted Wall Street's more bearish forecasters, prices could drop as much as 20 percent from their peak in a more dire version of the last housing downturn during the early 1990s, when new-home sales dipped but existing homes held their value.


Fast-forward to today, and the scope of those concerns looks almost quaint. Home prices are already falling fast (with builders offering huge rebates on new homes), and the only question now is: Just how low can they go?  Forecasts by Moody's Economy.com now use a 20 percent drop in median existing-home prices from their 2005 peak as a baseline, with prices weakening through at least mid-2009. The forecast assumes the United States is already in a mild recession.

And that is the good news. "Our weaker scenario...is a 25 percent decline in prices," says Celia Chen, Moody's director of housing economics. "That would be in the case of a housing and credit crash and still a moderate recession." There are new worst-case whispers as well. "You want the darkest? Forty percent," she says. "There's your apocalypse."

That's right. In Moody's most pessimistic (and most unlikely) scenario, existing-home prices plummet by 40 percent from their peak. A drop like that would certainly plunge the economy into a deep recession, push unemployment to around 9 percent, and hamstring economic growth in a way that could take years to undo. The shock of falling home prices and tight credit markets would spill into everything from consumer spending to business investment.

Ouch. Mix in the huge glut of unsold houses on the market, and such a catastrophe would be a recipe for a huge devaluation of not just homes but other assets, like automobiles. Tight credit would exacerbate the pain, forcing interest rates on bank loans to climb. It would also coincide with a generation of retiring baby boomers who watched home prices soar and pared back their personal savings accordingly, notes Merrill Lynch.

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Ilargi: Look, we live in a democracy. That means you are free to listen to the retarted clown who doubles as the talking hand for the Fed, and believe his every word. You are also free to believe that the Fed is trying to save the US economy.

But not without me telling you that this freak show is liquidating that same economy, and all your assets with it. Let’s hook up here a year from now, and you can tell me who was right; it'll all be done within that year, it'll be too late in February 2009.

In the meantime, just watch how all the wealth they can get their greasy fingers on is being shifted to the banking system, while all the debt moves the opposite direction: the public sector. YOU ARE THE PUBLIC!! You are being saddled with all the debt the gamblers incurred, while they take away all you have left.


Bernanke says US slowdown will eclipse dotcom bust

Federal Reserve chairman Ben Bernanke said that the impact of the current housing-led slowdown in America has the potential to be far deeper than the collapse of the dotcom boom at the start of the decade. The latest news and analysis of the UK and world economy

Mr Bernanke predicted that a combination of fiscal and monetary policy should lead to stronger growth in the second half of 2008. In his second day of semi-annual assessment of the economy on Capitol Hill, Mr Bernanke explained that the decline in home prices is causing a broader set of problems than the end of the technology bubble. Comparing the 2001 slowdown to the economy's current woes, he said: "In fact the effects of the stock market declines were primarily on investments. In this case, consumers are taking the brunt of the effects."

Mr Bernanke also believes the Fed is in a more difficult position to respond now that it was in 2001. However, he does not anticipate a period of stagflation - where stagnant economic growth and inflation coincide - saying that economy's current problems are "nowhere near" the set of issues that led to the stagflatory environment of the 1970's.

Speaking after the US Commerce Department confirmed that the US economy grew by 0.6pc in the last three months of 2007, Mr Bernanke predicted that a combination of fiscal and monetary policy should lead to stronger growth in the second half of the year.

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The Dollar Selloff Continues

The euro extended its advance against the dollar yesterday to another record high after disappointing U.S. jobs data and a repeat performance by Federal Reserve Chairman Ben Bernanke on Capitol Hill. The Fed chief's testimony before the Senate Banking Committee was largely the same as a day earlier before members of the House. He did little to offer relief from recession fears and supported market expectations for a 50-basis-point cut to the benchmark U.S. rate at the next meeting of the policy-setting Federal Open Markets Committee.

The path for U.S. rates has diverged from the euro zone, where the European Central Bank is expected to keep its key rates on hold. Against this backdrop, investors continued to sell the greenback, driving the euro intraday to a fresh high of $1.5231. The dollar also dropped to a new low against the Swiss franc at 1.0485 francs, and got closer to a nearly three-year low against the yen, falling as far as 105.07 yen. Against the emerging-market currencies, the dollar isn't finding much relief as investors seek to profit by using cheap U.S. lending rates to fund bets in riskier assets.

The buck fell to its lowest level against the Colombian peso since 1999 and against the Chilean peso since 1998. The Brazilian real also strengthened for the ninth consecutive session yesterday, rising to a fresh nine-year high against the dollar. "This is follow-through from the move seen all week," said Dan Katzive, foreign-exchange strategist at Credit Suisse Group in New York. "The dollar is undermined by the fact that U.S. yields are continuing to fall relative to other industrial countries."

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US economy risks a 'lost decade' like Japan

The US could be facing a "lost decade" like that suffered by Japan in the 1990s as the markets fail to respond to interest rate cuts and the US Federal Reserve runs out of options, the head of one of the leading private equity firms said today.Tim Collins of Ripplewood Holdings, said the Fed was "running out of policy alternatives" as it attempted to prevent a long recession in the US.

Mr Collins, whose firm has significant expertise in Japan after leading the buyout and turnaround of Japan Telecom, said he believed a "sharp repricing of assets" was the most likely outcome. But he said: "My fear is that we will prolong it and suffer a death of a thousand cuts after we have exhausted all the options."

"Even without a recession and with all of the policy tools available we still have hundreds of billions of dollars of losses." Japan has only recently emerged from a period of zero interest rates. He said the future would not be clear until a recession had laid bare the true state of the financial system. "You have to wait for the tide to go out to see who is wearing a bathing suit," he said.

But the chairman of Ripplewood, which last year completed the $2bn buyout of Readers Digest, rejected the argument, put forward by some at this year's SuperReturn private equity conference in Munich, that Sovereign Wealth Funds would replace struggling banks to provide debt to private equity companies.

"The financial markets operate on the basis of the multiplier effect in the banking system and you cannot replicate that with what is effectively equity, not debt, from sovereign wealth funds."

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Ilargi: In Medieval Europe, there were efficient methods to deal with pathological liars making fortunes off the public good.

Treasury's Paulson Says He Favors a 'Strong Dollar'

Treasury Secretary Henry Paulson said he favors a strong U.S. dollar that over the long term reflects the competitiveness of the world's largest economy. "In my heart and soul, I just know and believe that a strong dollar is in our nation's interest,"Paulson said in response to questions from the audience after a speech in Chicago. "Our economy, like any other, is going to have its ups and downs, but I believe our economy is going to continue to grow this year and that our long-term competitiveness is going to be reflected in the value of the dollar."

The U.S. currency today fell to a record low of $1.5229 versus the euro, as a slowing American economy encouraged bets the Federal Reserve will cut interest rates again. The dollar also reached a 2 1/2-year low of 104.58 yen. The language Paulson used in the dollar's latest slide recalls the phrases he used in November, when the currency was in a three-month decline against the euro and also weakening against the yen.

"They're crossing their fingers on the dollar that it won't go down all that much more,"said David Gilmore, partner at Foreign Exchange Analytics in Essex, Connecticut. "They've got enough other problems to worry about." As the dollar sank to new lows against the euro, President George W. Bush said it should reflect the country's economic fundamentals. The currency has declined in five of the past six years, based on the Federal Reserve's broad dollar index, which compares it with currencies of U.S. trading partners.

"I believe that our economy has got the fundamentals in place for us to grow and continue growing more robustly, hopefully, than we're growing now,"Bush said during a White House press conference. "The value of the dollar will be reflected in the ability for our economy to grow economically. And so we're still for a strong dollar."

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Dollar Falls to Three-Year Low Versus Yen on Fed 'Indifference'

The dollar fell to the lowest level in three years versus the yen on signs the Federal Reserve sees a weakening dollar as helping the U.S. economy. The U.S. currency dropped below 104 yen, to its lowest level since March 2005, after Fed Chairman Ben S. Bernanke said the weaker currency helps cut the trade deficit, and as a report showed Chicago-area business contracted this month. The U.S. Dollar Index, which tracks the currency against six major counterparts, sank to the lowest since its start in 1973.

``It's broad dollar weakness because of concerns about the U.S. economy, U.S. yields, expectations of rate cuts and financial markets,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup Inc. in New York. ``They don't care about the weak dollar. I absolutely believe the market is disappointed'' by Bernanke's comment.

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Ilargi: I suggest you just read the next few excerpts as I put them before you. Personally, I simply fail to grasp the reasoning behind F&F’s record losses morphing into them taking on $100’s of billions more in risk. It looks absurd to me beyond the extent of Kafka . But please, make up your own mind. I can give you a few pointers: those record losses are now, more than ever, guaranteed to grow at record pace. And the government backing means that your tax dollar will now pay for the losses of the private banks that had these mortgages on their sheets before. It’s simply shifting the private banks’ ugly bottomless deep doodoo debt to the public sector. And in case you forgot: you are the public. You’re being robbed.



Fannie and Freddie smile through crisis

Even as the private sector flees the mortgage market, the two money-losing government-backed lenders will take on more risky debt.

The housing bust is handing Fannie Mae and Freddie Mac a fresh chance to rebuild their battered images. But the hefty losses the firms reported this week, and worries about the health of the economy, show it won't be easy. The Office of Federal Housing Enterprise Oversight, which regulates Fannie and Freddie, said Wednesday it would lift portfolio-growth restrictions that have fettered the companies for the past two years.

Lifting the portfolio caps could free Fannie and Freddie to substantially expand their holdings of mortgages and related securities, beyond the $746 billion which each firm is presently allowed to hold. OFHEO said the move rewards the companies for tightening up the lax management policies that led to multibillion-dollar financial restatements and executive shakeups earlier this decade.

But the decision - welcomed by both Fannie and Freddie - also hands policymakers another weapon as they seek to ease the pain of the housing bust, which has left many homeowners in distress. After all, many private investors are fleeing the mortgage market, suggesting that Fannie and Freddie may be stepping into treacherous territory.

Another lender delivered a reminder Thursday of just how sour the mortgage markets have turned. Thornburg Mortgage, which specializes in jumbo loans - mortgages bigger than the ones Fannie and Freddie invest in - said values in the mortgage securities market have dropped so sharply this month that the company might have to sell assets to meet margin calls, even though it doesn't expect to recognize losses on the bonds themselves.

The decision to lift the portfolio caps is a natural one, says Jeffrey Miller, CEO at investment adviser NewArc Investments in Naperville, Ill., because it gives officials an easy way to offer a bit of support to housing prices and ease worries about the health of the economy. "Any solution will have to go through the GSEs," says Miller, referring to Fannie and Freddie as governmet-sponsored enterprises. He notes that the move to expand the mortgage caps shows how policymakers naturally "look to structures that already exist to deal with problems."

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Fannie Mae May Have Financial Rating Cut by Moody's

Fannie Mae, the largest source of money for U.S. home loans, may have its bank financial strength rating cut by Moody's Investors Service because of a record $3.55 billion fourth-quarter loss. The loss "represents a significant deterioration of surplus regulatory capital"from $3.9 billion in December, Moody's said in a statement today. Fannie Mae is likely to have "sizable losses"in the first half of 2008 and may have a net loss for the year.

Fannie Mae, which accounts for at least one in five home loans, is facing the toughest housing slump in a generation, Chief Executive Officer Daniel Mudd said yesterday, forecasting the market won't bottom until 2009. Regulators removed limits on the combined $1.5 trillion mortgage portfolios of Fannie Mae and Freddie Mac yesterday, enabling the companies to increase financing for the housing market.

While Moody's affirmed the Washington-based lender's top Aaa senior-debt rating with a stable outlook, it's reviewing the financial strength rating, which measures the odds of the company needing assistance from shareholders, the government or other external parties. That rating is at B+, the third highest grade.

"A downgrade would raise Fannie's borrowing costs, which would be negative for its shareholders, but would be unlikely to send another shock wave through credit markets,"said Tim Condon, Singapore-based head of research at ING Groep NV.
Fannie Mae lost more than half its market value in the past year as the housing slump deepened. Analysts at Goldman Sachs Group Inc. and Merrill Lynch & Co. cut recommendations to "sell"in the past week on concern that falling home prices will hurt earnings.

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Freddie Falls Further

First it was Fannie Mae and now it's Freddie Mac. Though Freddie's numbers were awful, some help from Washington had investors clamoring for Freddie Mac on Thursday, but the excitement wouldn't last long. The McLean, Va.-based lender said its losses grew to $2.5 billion in the fourth quarter of 2007 as more home loans buckled and expected future woes forced the company to set aside money for looming dark days.

Freddie Mac lost $600 million in the first three quarters of 2007. The worse-than-expected forth-quarter $2.5 billion loss looks massive next to Freddie Mac's $401 million loss in the last three months of 2006. Wall Street analysts had expected a $1.5 billion loss for the quarter. Despite this, investors rallied to the lender during trading on Thursday, but it wasn't enought to keep them interested.The stock closed down 2.4%, or 60 cents at $24.49. Fannie Mae enjoyed a similar spike without the later drop, closing up 2.3%, or 63 cents, at $27.90.

Freddic Mac, the second largest buyer and backer of home mortgages in the U.S., said Thursday that it posted $3.1 billion in losses in 2007, or $5.37 a share, versus earnings of $2.3 billion, or $3 a share, in 2006. Freddie says its 2007 losses are equal to $3.97 per share versus a loss of 73 cents per share in the previous year. This is 70.0% more than analysts' prediction of $2.34 in losses.

"There’s not much positive to cheer the bulls," said Morgan Stanley analyst Kenneth Posner. "Housing data looks poor, prime credit is rapidly deteriorating, and earnings for both government sponsored enterprises are expected to be weak for the foreseeable future."

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Freddie Mac Loss Swells as Mortgage Crisis Deepens

Freddie Mac, the second-biggest provider of U.S. residential mortgage funding, on Thursday said its fourth-quarter loss widened to a record $2.5 billion as the housing crisis worsened.

Freddie Mac, as well as rival Fannie Mae, suffered from soaring defaults on mortgages guaranteed by the two companies as nationwide home prices declined in 2007 for the first time since the Great Depression. The company also warned it expected to lose billions of dollars more in upcoming quarters as the housing market slump deepens and more borrowers fall behind on payments.

Regulators have loosened restrictions on the two government-sponsored enterprises (GSEs) in the hope they will be able to prop up real estate by holding financing costs down for a bigger pool of home buyers. The GSEs hold charters from Congress to boost homeownership. However, the companies' staggering losses and desire to protect capital in a crumbling credit market has curbed their power to stabilize the housing market. Fannie and Freddie have had to raise fees to lenders, which analysts said may extend the credit crunch the GSEs are being asked by Congress to undo.

The mortgage finance companies' capital is strained as they must write down the values of mortgage securities they own and their contracts to guarantee mortgages backing bonds they issue. At the same time, capital is needed to back new investments and rapid growth in their mortgage guarantee businesses. Losses led the companies to raise $13.8 billion through the sale of preferred stock last quarter. "Freddie Mac's ability to maneuver in 2008 is severely limited after fourth-quarter results ate through almost one half the preferred capital raised during the period," Jim Vogel, a strategist at FTN Financial in Memphis, Tennessee, said in a note to clients.

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Fannie Proposes Ban on Lenders' In-House Appraisers

Fannie Mae, the biggest source of financing for U.S. home loans, told lenders it will probably ban their use of appraisals by in-house employees or those arranged by brokers. Fannie Mae distributed the proposal, a response to New York Attorney General Andrew Cuomo's yearlong mortgage probe, to lenders in a "talking points" memo this week, according to a person familiar with the document. The memo was published on American Banker's Web site yesterday.

"It would be a monumental change because it would require a shift in the way that the lending industry does business," said Jonathan Miller, chief executive officer of Manhattan-based appraisal company Miller Samuel Inc. and a longtime proponent of creating a firewall between residential appraisers and mortgage originators. "I think it would be tremendous."
Rising foreclosures on U.S. home loans spurred Cuomo's investigation. He initially subpoenaed appraisers to ask whether mortgage brokers or lenders pressured them to inflate home valuations, which in turn would artificially boost the value of collateral supporting mortgage-backed securities.

"Fannie Mae wishes to cooperate with the New York AG's investigation and, as part of a cooperation agreement, will likely agree to a number of items," according to the memo. The proposed changes include banning Fannie Mae's partners from using appraisers employed by their wholly owned subsidiaries. Mortgage lenders that own appraisal companies include Countrywide Financial Corp., the nation's largest home- loan originator. The restrictions would apply to loans acquired after Sept. 1, according to the memo. Fannie also told lenders that an independent appraisal clearinghouse likely would be established.

About three quarters of residential mortgage appraisals are arranged through brokers who only get paid if a loan closes, Miller said today in a phone interview. He called the practice "laughable" because it creates a financial incentive for mortgage brokers to push appraisers toward higher valuations. Higher appraisals also mean more homeowners qualify to refinance their homes and take cash out, he said.

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No more ABCP writedowns, National Bank vows

National Bank of Canada won't take any more writedowns on its asset-backed commercial paper portfolio, its executives vowed Thursday, unless the restructuring of the ABCP market descends into chaos or the United States plunges into a deep recession.

The bank, which cut the carrying value of its ABCP portfolio by 25 per cent in November and took a $365-million charge, won't be doing that again “unless there is a severe U.S. recession, or a disorderly liquidation of the [market],” chief executive officer Louis Vachon told analysts on a conference call after the release of first quarter results.

The restructuring of the third-party ABCP market is moving forward under the a committee of lenders headed by Toronto lawyer Purdy Crawford, and “we're very confident the process will reach a successful conclusion, said Ricardo Pascoe, co-CEO of the National's investing banking arm. He offered reassurance that a standstill agreement and trading freeze are still in force, despite their official expiration on Feb. 22.

National has more exposure to the troubled ABCP market than any other bank, and now values those holdings, after the writedown, at $1.7-billion While the bank did not take another charge in the quarter, the ABCP crisis continues to make a dent its profits. The bank took a $14-million hit to its bottom line from ABCP financing costs and professional fees in the three months ended Jan. 31

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Bank of Montreal may abandon debt rescue

Facing new writedowns of more than $500-million, BMO is considering quitting group that is restructuring frozen ABCP market

Bank of Montreal has signalled it may pull out of an effort to restructure $33-billion in stranded asset-backed commercial paper, as mounting woes in the global credit market leave the bank facing margin calls of more than $500-million on two of its own ABCP trusts. According to sources, bank officials recently advised the group of ABCP investors seeking a fix for the market, known as the Crawford Committee, that BMO may no longer be able to honour its commitment to contribute to a $14-billion line of credit.

That credit line is the centrepiece of a plan to swap the frozen notes into new long-term bonds. Bank of Montreal's specific commitment to the so-called liquidity line has never been disclosed, but it is one of four Canadian banks that agreed in December to provide as much as $2-billion in total. The remaining $12-billion is backed by a group of international banks.

Global credit markets have sold off so much more since December that financial institutions are facing the renewed prospect of additional losses on such structured products as ABCP. Yet, if banks balk at helping the Crawford Committee, they raise the prospect of a fire sale of assets that would further drive down credit markets and exacerbate losses in other areas of their businesses.

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What bad banking news means to you

Bad news about the banking industry may have you wondering about the safety of your hard earned cash at your own bank. In the past year there have been four bank failures. And the chairman of the Federal Deposit Insurance Corp and banking industry experts foresee many bank failures down the road.

"Regulators are bracing for 100-200 bank failures over the next 12-24 months," says Jaret Seiberg, an analyst with the financial services firm, the Stanford Group. Expected loan losses, the deteriorating housing market and the credit squeeze are blamed for the drop in bank profits. The problem areas will be concentrated in the Rust Belt, in places like Ohio and Michigan and other states like California, Florida and Georgia.

The number of institutions categorized as "problem" institutions by the FDIC has also grown from 50 at the end of 2006 to 76 at the end of last year. But to put that in perspective -- by the end of 1992 -- at the tail end of the banking crisis -- there were 1,063 banks on that "trouble" list says David Barr of the FDIC.

Banking experts say there is one thing that will save your money if your bank goes under. That's FDIC insurance. "It's the gold standard," says banking consultant Bert Ely. "The FDIC has ample resources. It's never been an issue," he says. The FDIC insures deposits in banks and thrift institutions. The federal agency was created during the Great Depression in response to thousands of bank failures. The FDIC maintains that not one depositor has lost a single cent of insured funds since 1934 as a result of a bank failure

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Alt-A Mortgage Securities Tumble, Signaling Losses

Securities backed by Alt-A mortgages and other home loans to borrowers with better-than-subprime credit tumbled this month, causing investment funds to unwind or meet margin calls and signaling larger losses for Wall Street.

London-based Peloton Partners LLP, which owns debt tied to home loans considered safer as well as bets against subprime, is liquidating a $1.8 billion hedge fund. UBS AG and Merrill Lynch & Co., which reported some of the largest of the more than $160 billion of mortgage losses at the world's biggest banks, also hold the securities, according to company statements.

Valuations for AAA rated securities backed by Alt-A loans, deemed between prime and subprime in terms of expected defaults, slumped 10 percent to 15 percent this month, partly because it's so difficult to trade or find prices for them, Thornburg Mortgage Inc., the Santa Fe, New Mexico-based lender and investor, said in a securities filing today.
"There really hasn't been an orderly two-sided market in 2008," Arthur Frank, a mortgage-bond analyst in New York at Deutsche Bank AG, said today in a telephone interview.

Alt-A securities began tumbling on Feb. 14, when UBS disclosed its holdings and speculation began spreading that the Zurich-based company would sell a large amount, Thornburg President Larry Goldstone said in a Bloomberg Radio interview today. Mortgage debt would generally sell for less today than in August, when Thornburg sold $20.5 billion of mostly AAA bonds backed by prime "jumbo" adjustable-rate mortgages at a loss of about $930 million to meet margin calls, he said.

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Sub-prime lands AIG with $11bn write-down

American International Group, the world's largest insurer by assets, has produced its biggest-ever quarterly loss as a public company after taking an $11.12bn (£5.63bn) write-down on investments linked to US sub-prime mortgages.

AIG, best known in the UK as the shirt sponsor of Manchester United, reported a net loss of $5.29bn in the fourth quarter compared to a $3.44bn profit in the same period last year as it wrote down guarantees sold to protect fixed-income investors. The losses came as the insurer wrote down the value of credit-default swaps as a result of the US sub-prime mortgage collapse. AIG shares fell 3.5pc to $48.40. British-born chairman and chief executive Martin Sullivan called the results "clearly unsatisfactory".

The news comes just weeks after AIG said in a regulatory filing that it thought it would have to take a $4.88bn write-down for October and November, after PricewaterhouseCoopers found a "material weakness" in its financial reporting. The filing warned: "AIG is still accumulating market data in order to update its valuation of the portfolio."

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Wachovia, Deutsche Bank Employees Targeted in Probe

A senior Deutsche Bank AG banker and employees at two other firms were notified by the U.S. Justice Department that they are targets in a municipal bid-rigging probe. Patrick Marsh, head of municipal structuring at Deutsche Bank, Germany's biggest bank, disclosed in employment records filed with U.S. regulators that he is a target of the criminal antitrust investigation. Wachovia Corp. and Piper Jaffray Cos. also disclosed in regulatory filings today that they had employees targeted in the investigation.

Justice Department prosecutors and the Securities and Exchange Commission subpoenaed more than a dozen banks and insurers in November 2006 in a search for evidence of bid rigging for investment contracts governments buy using bond sale proceeds and derivatives such as interest-rate swaps. Wachovia in its filing said it received subpoenas from the Justice Department and the SEC.

"This is the beginning of the end of this investigation," said Christopher "Kit" Taylor, executive director from 1978 to 2007 of the Municipal Securities Rulemaking Board, a panel that issues rules on municipal bond deals. "I'm afraid that this is going to add a further taint to a market that otherwise was considered to be very safe, very stable, maybe, even boring."

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Another Rogue Trader Strikes

On Wednesday morning, a U.S.-based MF Global broker blew through the authorized trading limit in his personal account and lost $141 million in wheat futures in a matter of hours. Bermuda-headquartered MF Global, one of the biggest futures brokers with a strong reputation in risk management, blamed the incident on a failure of its retail order computer systems that let the broker take on large positions that exceeded the cash on hand in the account.

The price of failure? MF has to cover the loss, amounting to 6% of its capital. The firm said Thursday it had fired the trader.

Is this starting to sound all too familiar? Last month, Société Générale, the second largest French bank, also admired for its risk management and skill in derivatives trading, reported a $7 billion loss. It says a rogue index futures trader named Jerome Kerviel bypassed internal compliance systems over several months to place an unauthorized $80 billion bet on the direction of European markets

Other firms have been sunk by traders going too far out on the limb. In 2006, Amaranth Advisors, a $9 billion hedge fund, collapsed after its head natural gas trader, Brian Hunter, lost $6.5 billion in a week on bad bets on the direction of gas futures. But at least he had the nod from headquarters. In 1995, the 230-year-old Barings Bank imploded in just three days after the discovery that trader Nick Leeson lost $1.6 billion in unauthorized trading in Nikkei futures over three years.

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Can't Anyone Here Deal with Derivatives?

Merrill Lynch overstated cash flows received from derivatives-financing transactions.

Can anyone figure out how to account for derivatives? Apparently not one of the biggest investment banks in the world. In a Monday regulatory filing, Merrill Lynch disclosed that it would restate previously issued cash-flow statements going back to 2005 to correct errors stemming from an adjustment that "incorrectly reflected cash flows received from certain customer transactions."

That adjustment spawned an overstatement of cash flows received from derivatives-financing transactions and was offset by a corresponding overstatement in cash flows used for trading liabilities, according to the investment banker. The restatement reduces cash provided by financing activities by $22.9 billion in the first nine months of this year. It also cut cash provided by financing activities by $15.7 billion for 2006 and by $4.6 billion for $2005.

The company reported that the error did not affect earnings statements, balance sheets, or other reports. Further, the company’s compliance with any financial covenants under its borrowing facilities was not affected, Merrill stated.

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India's Budget Offering Forgiveness On Farm Debt

With an eye on upcoming elections, India’s Finance Minister Palaniappan Chidambaram waived farm debts and cut personal taxes, in an attempt to boost consumption amid slowing economic growth. In his fifth annual budget presentation, the minister increased exemption limits for personal taxes to 150,000 rupees ($3,755.16), from 110,000 ($2,753.79) rupees, in a nation where only a third of the population pays taxes. He left corporate tax rates and surcharges unchanged.

He also cut excise duties on pharmaceutical goods--exempting AIDS drugs entirely--and small and hybrid cars and abolished duties on wireless data cards. Jewelry exports, which suffered last year as the rupee appreciated against the dollar, also got duty relief on select gems.

Indian automakers were expecting some budget relief after their sales suffered last year because of tightening interest rates. Loans finance a preponderance of the passenger vehicles purchased in India. "The budget was about populist measures, but the finance minister has shown some commitment to financial reforms," said D. K. Joshi, chief economist at Crisil, the Indian arm of ratings agency Standard and Poor's. "He’s given a fillip to growth by reducing excise duties on key sectors like autos, and has put more money to spend into the hands of consumers."

Chidambaram forecast that the fiscal deficit will be 2.5% of GDP for the fiscal year 2009, down from an estimated 3.3% this year. Economic growth for the quarter ended Dec. 31 stood at 8.4%, compared to 8.9% in the previous quarter, the government said Friday. Last fiscal year, GDP growth was 9.6%. Agriculture has "struck a disappointing note," Chidambaram said in Parliament. Growth rates in the primary sector are expected to be about 2.8% for the year ending March 31. Agriculture accounts for the livelihoods of about two-thirds of India’s population, and consequentially has a powerful voting base.

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Ilargi: Oh man, I'm going to have to post this picture. It has no link to anything I do here, but it's simply priceless all by itself: