Debt Rattle, March 13 2008

Ilargi: The news that Carlyle is out of here is not even the biggest story today. That privilege goes to the ever louder rumors of a major bank failure. Is it Bear Stearns, or is that a fake move, intended to steer attention away from the real big fish?

It’s striking that this comes floating to the top at the precise moment when the primary dealers have gotten access to more cheap debt than was ever handed out before. Not even that is enough, apparently. Not that we’re surprised. The Fed's $200 billion window may have been opened this week with the specific purpose of helping Bear Stearns stay alive. Still, measures like that can backfire; they alert people to the fact that problems exist, and make them pose questions.

Meanwhile, every single report on the US economy is as bleak as it is black. Foreclosures rise, retail sales fall, the budget deficit hits another record high, and the dollar keeps hitting new records on a daily basis, low lower goner.

Oh, and by the way, have you noticed the picture that emerges here? Carlyle Capital: leveraged 32 times. Bear Stearns: leveraged 33 times.


Bear buyout countdown

Shares in The Bear Stearns Cos. tumbled 15% this morning amid growing fears that the investment bank, the smallest of Wall Street’s big five, doesn’t have enough capital to survive its own mistakes, and the deepening credit crisis, according to Crain's New York Business.

Though chief executive Alan Schwartz has insisted the firm has ample cash, Bear’s stock has fallen by 27% in the past week and analysts have begun to question whether this fiercely independent company’s days as a standalone are numbered. Bear would likely fetch about $9 billion in a sale, though the price is falling fast.

“Bear is probably going to be forced to find a merger partner,” says Punk Ziegel & Co. analyst Dick Bove. “But at this point, in the state it’s in, no one wants it.” Bear’s problem is that it generates most of its business for selling and trading bonds at a time when investors are shunning all the safest forms of government debt. Its mortgage-backed business has evaporated and investors are worried that the firm may be exposed to large losses since it is a major broker to big hedge funds.

The company reported an $854 million loss — its first ever — in the fourth quarter, and investors are saying it will report similarly punishing first-quarter results next week. Bear has less than $12 billion of capital, yet its balance sheet contains $395 billion of assets, meaning the firm is leveraged to the tune of 33 times over equity. The relatively small capital base means Bear has less capacity to absorb the sort of mortgage-related hits taken at other Wall Street firms.

Investors fear that in recent weeks Bear’s balance sheet has been eroded even further as the firm has taken back on its books hard-to-sell assets that had been collateral for loans to now free-falling hedge funds. Like Carlyle Capital, the bond fund affiliated with private-equity firm Carlyle Group, Bear is being particularly hard hit by margin calls from banks that are nervous about declines in the value of its residential-mortgage-backed securities.

However, Carlyle, a British-based firm with New York executives that trades in Amsterdam, was unable to find a middle ground in negotiations with its lenders late Wednesday, and is now on the verge of collapse after failing to agree a new financing deal with lenders. All this has investors questioning whether 85-year-old Bear can survive.

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Carlyle Sends An Ominous Message

As questions about the value of securities backed by subprime mortgages wash through the markets, investors are becoming wary of anything remotedly related to them. Thus, for a company like Carlyle, the value of holdings of mortgage-backed securities can decline even though there is nothing wrong wtih the loans from which they were made.

"Overall, it has become apparent to the company that the basis on which lenders are willing to provide financing against the company’s collateral has changed so substantially, that a successful refinancing is not possible," Carlyle Capital said in a press release on Thursday. The collapse of Carlyle Capital provided markets with a dismal view of what could follow for leveraged financial services.

"This fund was 32 times leveraged and was going to be one of the first to be hit. However its assets were of class considered to be of sound quality. There will be funds that have lower leverage but higher exposure to risk assets which face the same kind of pressure from margin calls," said Jeroen Van Den Broek, head of credit strategy at ING.

The news, which was seen as a sign of how devastating the credit crisis has been, even for those with assets once considered relatively low-risk, sent shock waves across the European market. The Dow Jones Eurostoxx 50 closed down 1.3%, with the banking sector tumbling 2.7%. American stock prices fell early in the day on the news, though they later recovered on hopes that the mortgage crises could be contained.

"It’s a negative driver in terms of all sorts of asset classes and an indication that leveraged funds and structured credit funds are exposed to a number of problems with asset price falls," said Van Den Broek. He added that when the lender banks seized the bank's assets and put them on the open market, it added to pressure on the pricing of these instruments.

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Is Bear Stearns Doomed?

This week, Bear Stearns finds itself on the front lines of the credit crunch. Rumors permeate Wall Street that BSC faces an impending liquidity crisis. Bear Stearns says the rumors are nonsense. The market says otherwise. Whom do you believe? BSC has had a hellish time of late.

Bear Stearns was "the biggest buyer and packager of mortgage securities in the boom years," according to an article in Forbes. They also don't have the most well diversified business model. Already, they've written off more than $2 billion. The stock is down over 30% in March and over $100 from its 52-week high.

Man, that's ugly
This week, Punk Ziegel & Company analyst Richard Bove lowered his earnings estimates on BSC and cut his price target in half to $45 (the stock closed yesterday at $61.58), suggesting that BSC may not be sufficiently diversified to weather the impending credit storm. Bove also cut 2009 and 2010 estimates on investment banks Goldman Sachs, Lehman Bros., and Morgan Stanley .

In addition, Moody's downgraded much of the mortgage debt on BSC's books, helping to trigger speculation on Wall Street that BCS is facing liquidity problems. There was a general sense that BSC, with its limited business model and high exposure to mortgage-backed securities, might be the next domino to fall in the credit crunch (and the first major investment bank).

Gimme that microphone
Bear Stearns President and Chief Executive Alan Schwartz begged to differ with Wall Street. "There is absolutely no truth to the rumors of liquidity problems," he said, adding that Bear's "balance sheet, liquidity, and capital remain strong." He also said that BSC's first-quarter earnings, to be announced March 20, will fall within analysts' range of forecasts.

On Tuesday, the Federal Reserve acted to help ease the credit crisis and provide mortgage liquidity. The Fed made $200 billion available for financial institutions, lending Treasuries with riskier loans like mortgage-backed securities as collateral.

The market rallied on the news to its biggest single-day gain since 2002. However, Bear Stearns didn't participate in the rally. Many observers believed the Fed moved specifically to help BSC and its possible liquidity problems. Meanwhile, option interest for BSC on the downside has been huge. Far-out-of-the-money puts have seen extremely high trading volume this week, indicating that many investors are willing to bet that Bear's stock price will collapse.

He said, they said
So who's right -- the CEO or the market? They can't both be correct. The market is essentially saying that all hell is about to break loose. The CEO says everything's fine. I really want to believe the CEO. But my experience tells me that while people lie, the market generally doesn't.

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Ilargi: The BBC’s Robert Peston points to a development that few have noticed so far (a few have though). The Fed’s $200+ billion this week is offered in a form, the Term Securities Lending Facility, that separates the 'really big' boys from the 'just big' boys. The option to swap ugly mortgage paper for Treasurys is on the table for primary dealers only.

Hedge funds and other large players have no access to it. For a fund like Carlyle, this may well have been the final nail: their lenders are the primary dealers, who can now seize their mortgage securities and take them to the Fed laundry, instead of lending more to the fund. The banks would be crazy not to: this way they both cut their risk and get cash in hand, something they sorely need. This means that hedge funds all of a sudden have a whole lot more to fear: lenders no longer have a reason to negotiate with them. And they won’t.

So is this an unintended consequence? See, I always find that sort of thing hard to accept, since I don’t think the Fed is run by really stupid people.

The Fed and Carlyle

Carlyle Capital Corporation, the leveraged-mortgage vehicle of the famous, eponymous private-equity firm, said over night that it has been unable to stabilise its financing and that its “lenders will promptly take possession of substantially all of the company’s remaining assets”. So almost within the blink of an eye, a business that had borrowed $21bn from the world’s biggest banks to invest in high-quality mortgage-backed securities will be gone, liquidated, kaput.

Such is the whirlwind blowing through global financial markets. What’s the damage? Well the equity in the business, about $670m, looks as though it will be wiped out. In the scale of credit-crunch losses, that’s an “ouch” rather than a “yikes”. The suppliers of that equity include Carlyle’s own partners. They’re a bit poorer than they were. More worrying is the explanation for why lenders are seizing the assets, which are US government agency AAA-rated residential mortgage-backed securities (RMBS).

Carlyle says: “negotiations deteriorated late on March 12 when, among other things, the pricing service utilized by certain lenders reported a drop in the value of RMBS collateral that is expected to result in additional margin calls”
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That statement will reverberate through global markets today. Why? Well, the point of Tuesday’s dramatic $200bn intervention by the Federal Reserve in mortgage-backed markets was to stabilise the price of US government agency AAA-rated residential mortgage-backed securities and – by implication – to encourage the big banks NOT to seize assets in the way they’ve been doing at Carlyle.

Right now, it’s not clear that the Fed’s medicine has worked. In fact, it’s arguable that the banks’ seizure of Carlyle’s $20bn-odd in assets has actually been encouraged by the Fed's mortgages-for-Treasuries offer. Because the Fed’s new lending emergency lending facility allows the banks to swap mortgage-backed debt for Treasury Bills in a way that Carlyle could not do.

So it would be rational for the banks to take Carlyle’s assets and exchange them for top-quality, liquid US government bonds, rather than leave loans in place to a business, Carlyle, whose assets remained highly illiquid. If that’s the case, there will be some very scared people in hedge-fund land today. Hedge funds that have borrowed from banks against the security of mortgage-backed debt could be about to see their assets sucked into the banking system and their businesses vanish.

It’s a process known as de-leveraging the global financial economy, yet another manifestation of the puncturing of the debt bubble. Many will see it as a healthy cleaning of the Augean stables. But if it is, it certainly won’t be completed in a day – and, as I’ve said many times, it won’t be painless for the rest of us, because de-leveraging also means they'll be less credit for all of us.

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Despite the Federal Reserve's efforts Wall Street fears a big US bank is in trouble

Global stock markets may have cheered the US Federal Reserve yesterday, but on Wall Street the Fed's unprecedented move to pump $280 billion (£140 billion) into global markets was seen as a sure sign that at least one financial institution was struggling to survive. The name on most people's lips was Bear Stearns. Although the Fed billed the co-ordinated rescue as a way of improving liquidity across financial markets, economists and analysts said that the decision appeared to be driven by an urgent need to stave off the collapse of an American bank.

“The only reason the Fed would do this is if they knew one or more of their primary dealers actually wasn't flush with cash and needed funds in a hurry,” Simon Maughan, an analyst with MF Global in London, said. Mr Maughan said that the most likely victim was Bear Stearns, the first bank to run into trouble in the sub-prime crisis and the one that, among all wholesale and investment banks, is most reliant upon the use of mortgage securities for raising funds in the money markets.

“The average financial institution was up 7.5 per cent yesterday after the Fed's actions, but Bear Stearns rose just 1 per cent on massive trading volume,” Mr Maughan said. “The market is telling you it's Bear Stearns.” The Fed's intervention sparked fears of deeper underlying trouble because it came only days after it had made $200 billion (£99 billion) available in emergency funds.

The nature of the financing was also unusual, bankers say, because it was the first time that the Fed had offered to lend Treasury securities in exchange for ordinary AAA-rated mortgage-backed securities as collateral. Chris Whalen, of the financial consultancy Institutional Risk Analytics in New York, said: “The Fed move is confirmation that at least one of the banks is in trouble. A huge part of the banks' inventories are illiquid. If a broker-dealer is illiquid, it dies.”

Speculation has swirled for months about the collapse of an American bank as the credit crisis has escalated and spread from sub-prime to other mortgage-backed securities, treasuries and bonds. As well as Bear Stearns, attention has focused on UBS, the Swiss bank, which has been forced to make more than $18 billion in sub-prime writedowns, and Citigroup, the world's largest financial institution, which has turned to sovereign wealth funds to help to shore up its credit-stricken balance sheet.

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Bear Stearns Falls to Six-Year Low on Concern About Capital

Bear Stearns Cos., the second- largest underwriter of mortgage-backed bonds, fell to a six-year low in New York trading on concern the company lacks sufficient access to capital. Bear Stearns dropped $10.18, or almost 17 percent, to $51.40 at 10:55 a.m. in New York Stock Exchange composite trading, the steepest decline since the 1987 stock-market crash. The New York- based company has lost 42 percent of its market value this year.

Traders have been reluctant to engage in long-term transactions such as credit-default swaps with Bear Stearns as the counterparty, the Wall Street Journal reported today. Chief Executive Officer Alan Schwartz this week denied reports that the firm's access to capital is at risk. Bear Stearns led Wall Street shares lower this year as the world's largest banks and securities firms wrote down $188 billion of assets linked to the subprime mortgage market. The company's fourth-quarter loss of $854 million was its first, and analysts in the past month have lowered expectations for earnings in the first quarter.

Options traders increased their bets today that Bear Stearns shares will continue to decline. The most-active contracts, which give the right to sell the stock at $50 before this month's options expire in a week, almost tripled to $3.40. March $40 puts, the second-most active, more than tripled to $1.30. For those wagers to pay off, the shares must drop by 35 percent from yesterday's closing price in the next five trading sessions.

"People are worried about a catastrophic downside or bankruptcy-type of event that would cut the stock in half," said Henry Schwartz, president of Trade Alert LLC, a New York-based provider of options market analytics. "They're willing to pay an expensive premium for that protection. Almost half the volume is concentrated in out-of-the-money puts."

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Nervous traders wary of Bear Stearns

Wall Street has every interest in making sure that Bear Stearns is healthy. But hedge funds and traders also are trying to protect themselves. Bear executives say they are in no danger of a cash crunch and that the company's capital remains more than adequate. But in a sign of how skittish Wall Street has become in recent months, the New York investment bank is facing increasingly tough trading conditions.

Traders handling certain long-term transactions, such as credit-default swaps, said they were being extra cautious when Bear was the counterparty. In some cases, traders are seeking permission from higher-up before acting. In addition, some clients of rivals like Goldman Sachs, Morgan Stanley, Credit Suisse and Deutsche Bank have asked those firms to be counterparties to Bear in completed transactions. Such a move frees clients from exposure in the event a firm cannot cover its obligations on a trade.

Some hedge funds that use Bear as a prime broker also have been shifting portions of their business to other firms in recent weeks, according to hedge-fund managers and consultants who help pension funds and wealthy people choose where to place their money. A similar shift occurred last northern summer, but Bear soon recovered much of the lost business.

This week, the cost of a five-year policy to protect against default on $US10 million of Bear's debt skyrocketed to a record of about $US655,000 per year - two or three times as much as for rivals, and up from around $US300,000 two weeks ago. That cost declined on Wednesday to $US580,000, according to data from Phoenix Partners. For Lehman Brothers, the same coverage costs $US365,000.[..]

According to Wall Street executives, Bear's fundamental issue is not liquidity or capital as much as the erosion of its business model as a result of the credit crunch. Some traders and analysts, noting the lack of any proof that Bear actually faces a liquidity crisis, have been drawing comparisons to a similar period at Lehman in 1998. The rumour-mongering then nearly sparked a cash crunch. "We know that firms on Wall Street, given the nature of the balance sheet and their need to constantly replace funding, can succumb to liquidity crises even if they're fundamentally solvent," said Merrill Lynch securities analyst Guy Moszkowski.

Still, some of Bear's counterparties are becoming increasingly cautious. At Deutsche Bank, some traders of credit-default swaps and other derivative securities are charging extra when Bear is the counterparty, according to people familiar with the situation. Increasingly, these traders also are charging hedge-fund clients a fee for novations, or situations in which the fund asks Deutsche Bank to take its position as a counterparty to Bear on a particular transaction. One group of traders worked late on Tuesday to review thousands of individual transactions in which Bear was the counterparty, said one person familiar with the situation.

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Market panic after Bear Stearns reports

Panic swept the credit markets on reports of an insolvency crunch at both the US investment bank Bear Stearns and the mortgage giant Fannie Mae, triggering a dramatic surge in default insurance and rumours of yet another emergency rate cut by the US Federal Reserve.

Financial shares plummeted on Wall Street in another day of wild trading as the markets began to fear that the $200bn (£100bn) life-line pledged by the Fed last Friday would not be enough to halt a vicious downward spiral. The Dow Jones index fell 153.54 to close at 11,740.15, breaking through the crucial support line of its January lows.

Credit default swaps (CDS) measuring bankruptcy risk on Bear Stearns debt rocketed from 246 points to 792 on fears that it had been unable to raise capital to cover mortgage losses and was preparing to invoke Chapter 11 bankruptcy protection. The company denied the reports, insisting that it had $8bn of ready credit lines and enough funds to meet its debt obligations for the next year without having to sell assets or take out fresh debt. "There is no truth to the liquidity rumours," said a spokesman.

Lehman Brothers, the biggest mortgage underwriter, was also mauled on leaked reports that it planned to slash its worldwide workforce by 5pc. Lehman CDS contracts leaped 60 points to 395. Almost every indicator of credit stress was flashing warning signals. The CDX index measuring default risk on US investment grade bonds rose to 190 and the iTraxxx Europe touched 150.

Bank of America said the Fed would have to cut rates to 1.5pc by the middle of the year. The futures markets have begun to price in the serious possibility of a 100 basis point drop next week. Goldman Sachs said the Fed chairman, Ben Bernanke, might push through an emergency cut even sooner.

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Carlyle Capital Nears Collapse as Rescue Talks Fail

Carlyle Group's mortgage-bond fund moved a step closer to collapse, saying creditors plan to seize the fund's assets after it failed to meet more than $400 million of margin calls. Concern about the fate of Carlyle Capital Corp., which began to buckle a week ago from the strain of tumbling home-loan assets, helped push the dollar to a 12-year low against the yen today.

The fund said in a statement that it defaulted on about $16.6 billion of debt as of yesterday. Lenders will "promptly" take over all of its remaining assets after it failed to reach an agreement with lenders, Carlyle Capital said. Any remaining debt is expected to go into default "soon", the fund added.

The fund plunged as much as 85 percent in Amsterdam trading. Carlyle Group, co-founded by David Rubenstein, tapped public markets for $300 million in July to fuel the fund just as rising foreclosures caused credit markets to seize up. In the past month, managers led by Peloton Partners LLP have closed at least a dozen funds, sold assets or sought fresh capital as banks tightened lending standards.

"If Carlyle's lenders want their money right away, they'll liquidate the fund," said Hank Calenti, a London-based analyst at RBC Capital Markets. "That will put pressure on already stressed credit markets." Carlyle Capital's plea for refinancing on residential mortgage-backed securities failed late yesterday after a pricing service used by some lenders reported a decrease in the value of the assets, the firm said.

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Carlyle fund fails to reach deal with lenders

The Carlyle Group was forced to admit on Thursday that it had failed to save its troubled $22bn mortgage backed-securities fund less than eight months after floating the heavily leveraged vehicle on Euronext Amsterdam. Carlyle Capital Corporation, 15 per cent owned by employees of the Carlyle Group, said its banks were likely to take possession of its remaining assets and liquidate them after it ran out of cash to meet ever-rising margin calls – demands for more collateral – which exceeded $400m.

The implosion of CCC, which had $31 of debt for every $1 of its own, is a heavy blow to the reputation of Carlyle, one of the world’s biggest private equity groups. Many of the shareholders in CCC are also big investors in Carlyle’s buy-out funds. CCC said in a statement: ”In total, through March 12, the company has defaulted on approximately $16.6bn of its indebtedness. The remaining indebtedness is expected soon to go into default.”

Shares in CCC, which listed in Amsterdam at $19 last July, on Thursday plunged 76 per cent to $0.66 in mid-morning trading. The fund’s collapse is likely to sour relations between Carlyle – one of the biggest sources of fees for Wall Street and the City of London – and the banks that were quick to push it into default. Some banks, such as Lehman Brothers and Deutsche Bank, were quick to liquidate capital and recoup their loans. Others, such as Citigroup, the fund’s biggest creditor, were more patient.

Carlyle sought to secure a standstill agreement to stop banks seizing any more assets, but failed after disagreement over how much more money the private equity firm’s partners should inject to save the fund. The partners have already extended a $150m subordinated loan to CCC from their own money. The talks – led by David Rubenstein, Carlyle’s co-founder – deteriorated further when some banks cut their valuation of its AAA-rated residential mortgage-backed securities, issued by the US government-sponsored Fannie Mae and Freddie Mac, triggering more margin calls.

Carlyle said it had ”participated actively in those negotiations and was prepared to provide substantial additional capital if a successful refinancing could be achieved”. It said $97.5m of margin calls were expected on Friday. ”Overall, it has become apparent to the company that the basis on which lenders are willing to provide financing against the company’s collateral has changed so substantially that a successful refinancing is not possible,” it said.

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Ilargi: I hope, and think, that we have sufficiently warned you about the wall that Britain is about to hit. The new Budget still skirts around the issue, but can no longer deny that it's there, and it's real.

An economic storm will hit the UK whatever Alistair Darling says

Alistair Darling's claim that Britain is well placed to "weather economic storms" was shattered last night as it emerged that the Government is expecting a real fall in house prices and a major drop in City salaries in the coming year.

In a week which saw the UK hit by hurricane-speed winds, the Chancellor was forced to admit in his first Budget that Britain will be buffeted by the credit crunch and impending economic slowdown. He used the annual statement to increase taxes and borrowing to their highest rates for over a decade as it emerged that the slump is set to leave a large dent in the public finances.

Despite repeatedly insisting the UK was better placed than almost all its competitors to face "economic turbulence", Mr Darling was forced to cut his economic growth forecasts, with the Treasury predicting that 2008 could be the weakest year for economic growth since 1992. In a Budget unusually short on headline-grabbing measures, the gloomy prospects for the economy this year and next took centre stage.

The Chancellor said the economy would grow by 2pc this year and 2.5pc the next - a quarter of a percentage point lower in each case than he forecast in October's Pre-Budget Report. While this puts the UK in a rosier position than many of its counterparts, City economists warned that even these downgraded predictions were over-optimistic. The consensus view is for growth of 1.7pc this year and 2pc the next as the effects of the credit crunch feed through to the wider economy.

Mr Darling said: "Turbulence in global financial markets, which started in the US mortgage market, has affected all economies from America to Asia, as well as Europe." However, experts said many of the problems facing the UK in the coming months were home-grown. Alan Clarke, of BNP Paribas, said: "With GDP growth poised to fall off a cliff, inflation to surge to 3pc (or even above) and unemployment likely to rise, the Chancellor is going to find it hard to brag when he provides his next update."

Unusually, the documentation indicated that the Treasury expects house prices to fall in real terms in the coming year, causing the first fall in stamp-duty revenues since 2001. It said that due to "sluggish or flat house price growth, receipts related to property, such as stamp duty land tax, inheritance tax and capital gains tax, are expected to be £2.25bn lower in 2008/09 than in the Pre-Budget Report."

The Treasury also expects to generate less cash from City bonuses, anticipating that income tax receipts will increase at a slower rate than wage inflation in the coming year. As a result it said that it would have to borrow significantly more cash in order to keep its books in balance. Mr Darling raised his borrowing forecast for next year to £43bn - the highest annual deficit since 1996/97. The Treasury said it was raising its borrowing targets by a total of £20bn over the coming years.

Peter Spencer, of the Ernst & Young Item Club, said he expected the eventual borrowing total to be even higher. "It is very likely that he will exceed the record £50bn set by Norman Lamont," he said. "His economic forecasts are decidedly optimistic, prone to a much weaker housing market and high street." The borrowing increase leaves the UK with one of the biggest budget deficits in the Western world, at 2.9pc of gross domestic product in 2008/09. The only major country with a bigger shortfall is the US, however, this is after taking into account the $168bn of tax cuts recently announced George Bush.

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Dollar Trades at Record Low Versus Euro as Fed Plan Disappoints

The dollar traded at a record low against the euro as firms from Citigroup Inc. to Goldman Sachs Group Inc. said the Federal Reserve's plan to inject $200 billion into the banking system may fail to break the freeze in money-market lending.

The U.S. currency plunged yesterday against the euro, yen and Swiss franc, erasing a rally from March 11 when the Fed said it would lend Treasuries to financial institutions and take mortgage debt as collateral. Traders bet the Fed will cut rates by as much as three quarters of a percentage point next week to avert a recession, while the European Central Bank keeps borrowing costs unchanged at 4 percent.

The Fed's plan "doesn't change the fact that U.S. yields are very low relative to the rest of the industrialized world and are likely to remain low for the foreseeable future," Daniel Katzive, a currency strategist at Credit Suisse Group, said in an interview with Bloomberg radio. "That's weighing on the dollar."

The dollar traded at $1.5551 at 6 a.m. in Tokyo. It tumbled 1.4 percent yesterday, the most since January 2006, and touched $1.5571 per euro, the weakest level since the European currency's 1999 debut. The U.S. currency traded at 101.76 yen, within a half-yen of an eight-year low, and at 1.0147 Swiss francs, close to a historic low. The euro traded at 158.26 yen.

The dollar yesterday set a record low versus the euro for the 10th trading day in 12. It has lost 3.6 percent since Feb. 26, when Fed Vice Chairman Donald Kohn said credit-market turmoil and slower growth pose a "greater threat" than inflation, driving the euro above $1.50 for the first time.

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Dollar falls below 100 yen, hits record low vs euro

The dollar fell below the psychologically key 100 yen mark for the first time in over a decade on Thursday, as well as plumbing fresh record lows versus the euro, the Swiss francs and a basket of major currencies.

Investors remained on edge about the ailing U.S. economy and the likely extent of future interest rate cuts as the Federal Reserve battles to stave off a recession. News of troubles at hedge funds and subsequent slumps in equity markets came amid a growing sense that Fed plans to pump hundreds of billions of dollars of liquidity into the banking system will not be enough to prevent further writedowns, losses and possible bankruptcies.



This risk averse environment benefitted the safe haven Swiss franc and low yielding yen. The break of the 100 mark in dollar/yen and the approach of key levels in other currency pairs made markets jittery -- one-week implied volatility in dollar/yen, a key pricing component in currency options, surged to seven-month highs above 20 percent.

"It's a broad fall of the dollar. The economic situation in the U.S. is really black, the market is now expecting more and more cuts from the Fed and we have more and more news of financials experiencing difficulties," said Carole Laulhere, currency strategist at Societe Generale in Paris.

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U.S. Retail Sales Unexpectedly Declined in February

Retail sales in the U.S. unexpectedly fell in February, indicating that declines in payrolls and home values and a surge in energy costs have tipped the economy into a recession. Purchases dropped 0.6 percent last month, led by declines at auto dealers and restaurants, after a 0.4 percent gain in January, the Commerce Department said. Purchases excluding autos declined 0.2 percent.

The biggest job losses in five years and record fuel costs are eroding consumer confidence and spending, which accounts for more than two thirds of the economy. The report may prompt more economists to join a growing number that includes Lehman Brothers Holdings Inc. and JPMorgan Chase & Co. predicting a recession is at hand as Americans cut back.

"It's no wonder the consumer stopped spending," said Chris Rupkey, senior financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York. "Confidence is at recession- type lows." The dollar remained weaker against the yen after the report. Separately, the Labor Department said today that the number of Americans continuing to collect unemployment benefits climbed to the highest level in 2 1/2 years. First-time claims were unchanged at 353,000 last week.

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Foreclosures up 60% in February

Foreclosure filings nationwide jumped 60% in February compared with the same month last year, but they decreased slightly versus January, according to a report released Thursday. RealtyTrac, an online marketer of foreclosure properties, said 223,651 homes got hit with foreclosure filings last month, which include default notices, auction sale notices and bank repossessions. 46,508 of those were lost to bank repossessions, which more than doubled over last year.

The report also indicated that foreclosure filings in February fell 4% compared with January, similar to a 6% decrease that occurred during the same time-span in 2007. The monthly decrease is a "seasonal occurrence," according to Rick Sharga, a RealtyTrac spokesman. Foreclosure rates spike in January when homeowners are saddled with extra debt from the holidays, then settle in February, he said.

The report suggests that efforts from government and consumer groups to combat the rising number of foreclosures have not had a significant impact, according to Jared Bernstein, a senior economist at the Economic Policy Institute.
"I don't see evidence that any of the interventions we've been implementing are having any effect," he said. The report "doesn't show that measures have failed but it's pretty clear that nothing we've undertaken is slowing foreclosures."

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U.S. budget deficit hits record $176-billion

The U.S. government turned in a US$175.56-billion budget deficit for February, a record for any month, as federal spending grew but a slowing economy caused receipts to fall 12.1% from a year earlier, the U.S. Treasury said on Wednesday.

The February deficit soundly beat the previous all-time single-month deficit of US$119.99-billion in February 2007 and also exceeded Wall Street economists' consensus estimate of a US$160.0-billion deficit in a Reuters poll.

February receipts fell to US$105.72-billion from US$120.31-billion in February 2007, the Treasury said as both corporate and individual income tax payments slowed. February outlays grew to US$281.29-billion, a record for February, from US$240.30 billion in February 2007, the Treasury said.

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‘Lopsided’ CDS market poses danger

In February, with the credit markets in turmoil, Highland Capital Management, one of the largest investors in the loans financing private equity buy-outs, decided to hedge its portfolio and bought $500m worth of credit insurance. “Risk management is an intense focus for us here,” Mark Okada, Highland’s co-founder explained at a conference call with investors.

Highland was not alone. Numerous banks and other hedge funds have sought downside protection as the market rout deepens. “When people are frightened, the first place they run is the credit default swap market,” says the head of debt capital markets at one leading Wall Street firm. But the soaring demand for insurance is creating a growing imbalance in the market that may have serious and adverse consequences in the wider financial market.

“The credit default swap market has become lopsided,” says Peter Fisher, co-head of fixed income at BlackRock Financial Management in New York. “It’s not deep and liquid the way we normally think of that — it’s more like an insurance market in which few want to write insurance and many want to buy.” There is good reason for demand to take off as concerns grow that there is likely to be worse to come both in the credit markets and in the real economy. Companies with lower credit ratings have issued more debt than ever before, and in past cycles almost 37 per cent of CCC-rated paper default within three years.

Already, a growing proportion of borrowers are trading at stressed levels in the cash market, or at 1,000 basis points above Treasuries, according to Blackstone. In December, only 8 per cent of the total market was trading at those levels but by February the number had risen to 21 per cent. At the same time, there are problems on the supply side. Many companies who used to sell insurance have left the market, including AIG as well as monolines such as MBIA.

That in turn means that prices may reflect the technical imbalance of supply and demand more than the fundamental prospects of individual firms. “Trading has become thin and volatile,” says Jack Yang, a partner with Highland. Indeed, the price for insurance on many firms suggests that market operators believe they will default in a matter of months. But is that because they are desperately troubled or because there are many more potential buyers of insurance than sellers? However unreal the prices may be, the fear is that they can still have an impact in the real world.

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Canada will barely avoid recession: forecast

There will be no growth in the Canadian economy through the first half of this year, according to a new forecast which suggests Canada will come as close to recession as it can without actually sliding into one, and that at least two provinces, Ontario and Quebec, may actually already be in one now.

The forecast by the University of Toronto's Institute for Policy Analysis is the bleakest so far for the Canadian economy.
It calls for zero growth this quarter and a 0.1% decline in output in the second quarter, narrowly avoiding two consecutive quarters of shrinking output, the most commonly used criteria to define a recession.

And, as such, the relatively weaker industrial economies of Ontario and Quebec will be in at least what some would call a technical recession, said institute economist and forecast co-author Steven Murphy. "Obviously, if we've got a forecast for Canada that's skating as close as you can get to what you would define as a technical recession ... we would have negative quarters for Ontario and Quebec," Murphy said.

While Murphy, like many other economists, argues that a classic recession, such as those last seen in the early 1990s and early 1980s, would be deeper and more prolonged that merely two quarters of marginal declines, he warned that the risks are that the Canadian economy will in fact be weaker than the institute is now forecasting. A major risk is that the U.S. economy, Canada's main export market, continues to weaken more than expected, which it will if oil prices do not ease as the forecast projects, Murphy warned. "There's a real downside to the U.S. forecast," he said.

And the outlook on that front was not bright with oil prices surging to a new record high of more than $110 US Wednesday, reflecting a further retreat in the U.S. dollar, the currency in which oil is priced, which hit a record low against the euro and a one-week low against the Canadian dollar. "Even if oil prices go down, the U.S. could be worse than we expect," he said.

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Recession? We're in one, say U.S. finance chiefs

A U.S. recession has already started and the downturn is likely to last longer than in the recent past, with the economy recovering only late next year, according to a quarterly survey of corporate finance chiefs released on Wednesday.

Fifty-four per cent of the CFOs said the United States is in recession, and another 24% said there is a high likelihood of one starting later this year, according to a Duke University/CFO Magazine survey completed on March 7.

Nearly three-quarters of the CFOs said they were more pessimistic this quarter than in the prior quarter about the U.S. economy, reflecting concerns about consumer spending, turmoil in credit and housing markets, and high energy prices. An index of optimism, which rates the economy on a 1 to 100 scale, is at 52, the lowest in the seven-year history of the index, the survey found.

"The last two recessions lasted only eight months," said Duke professor Campbell Harvey, founding director of the survey. "In contrast, 90% of the CFOs do not believe the economy will turn the corner in 2008. Indeed, many of them believe it will be late 2009 before a recovery takes hold."

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Wachovia: Housing woes are far from over

Wachovia Corp., which continues to defend its $24 billion purchase of a California mortgage lender, said Wednesday the downturn in the nation's housing market is nowhere near over. Speaking to analysts on a Deutsche Bank Securities Inc. conference call, Don Truslow said, "It feels like we have a ways to go."

Using a baseball analogy, Truslow said he didn't know if the downturn was in the third, fourth or fifth inning. He added "we're still before the seventh inning stretch." And if the economy gets worse, "we could find ourselves right now in very early innings of the credit cycle," Truslow said. Wachovia shares fell $1.73, or nearly 6 percent, to $28.05 on Wednesday, closer to the low end of their 52-week range of $25.98 to $57.45.

The Charlotte-based bank, as well as many others, has found itself on shaky ground in the middle of a credit crunch. Last month, Wachovia said it expects to set aside more money for bad loans.

The bank took more than $3.2 billion in write-downs for the second half of 2007 because of the falling value of certain complex investments, amid a housing slump and weakening credit markets. Those investments included collateralized debt obligations, a security often backed by subprime mortgage loans -- or those given to customers with poor credit histories.

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Credit Suisse cuts Wachovia price target

Credit Suisse lowered its price target and earnings estimates of Wachovia Corp, saying that credit deterioration will be worse than expected in the company's consumer portfolio in terms of both severity and frequency of loss. The brokerage cut its price target on Wachovia to $23 from $30 and lowered its first-quarter earnings estimate on the company to 40 cents from 68 cents a share, and for 2008 to $2.60 from $3.50 a share.

The brokerage also cut its earnings estimates for Bank of America Corp to $3.40 from $4.15 a share, citing the capital market turmoil. Credit Suisse said it had increased its loss assumptions for Bank of America although its managed consumer portfolio continues to perform better than expected. Shares of Wachovia were trading down 66 cents at $29.12, while Bank of America shares fell 43 cents to $37.30 in morning trade on the New York Stock Exchan

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Experts: Don't fear the weak dollar

Concerns about the weak dollar are mounting. But even as the greenback sinks to new lows against the euro and other global currencies, some experts say this is not necessarily a bad thing for the U.S. economy. The anemic dollar does pose plenty of hurdles for an economy that some argue is already in a recession. Most notably, the weak dollar is raising more fears about the very visible impact of higher inflation.

Textbook economics suggest that a weaker dollar forces consumers to pay more for imported goods like toys made in China or a bottle of wine from France's Bordeaux region. Moreover, it also drives up the cost of commodities priced in dollars. And unless you've been living under a rock lately, that's already happening across a broad range of commodities including wheat, gold and oil, which now hovers at record levels just below $110 a barrel. But the inflation fears may be a bit overblown.

Late last week, Federal Reserve Governor Frederic Mishkin said in a speech that the dollar's decline only poses a limited inflation threat to the United States, arguing that there is little correlation between consumer inflation and changes in the exchange rate. Still, there are other reasons to be fearful of a weak dollar. If it declines further, it could erode interest by international investors in buying dollar-denominated securities.

Although many foreigners are still buying more U.S. securities than they are selling, there are signs that some overseas investors are slowly shifting away from assets tainted by the greenback, such as U.S. Treasurys. According to the most recent Treasury International Capital report, a monthly reading on foreign investment flows, net foreign purchases of long-term U.S. securities were $69.1 billion in December, down from net purchases of $70.3 billion in November and $118 billion in October.

If this trend continues and overseas investors actually start dumping more securities than they acquire, that could hurt the economy as a sell-off in Treasurys would lead to higher long-term bond rates. That would be a problem since longer-term bond yields have an influence on mortgage rates. Bond prices and yields move in opposite directions.

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Ilargi: How stupid is it to start talking about tighter scrutiny when the house is on fire?

Paulson Proposes More Scrutiny After Mortgage Crisis

Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben S. Bernanke and other U.S. regulators today will propose greater scrutiny of lending in a report on lessons from the mortgage crisis. "Regulators have a role to play in every change," Paulson said in excerpts released by Treasury of a speech he will make at 10 a.m. in Washington on a report by the President's Working Group on Financial Markets.

"They will issue new rules and seek regulatory authorities as needed, evaluate progress, provide guidance and enforce laws, to ensure that implementation follows recommendation." Policy makers have said they aim to address deficiencies in how lenders wrote mortgages, then packaged them into bonds rated by credit ratings firms and sold by securities companies. Consumer advocates and legislators argue that the system failed to ensure that borrowers could repay the loans, and helped deepen a slump that has led to record foreclosures.

"Regulation needs to catch up with innovation and help restore investor confidence, but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it," Paulson said. The Treasury chief said the report will include proposals to strengthen supervision of banks' capital, amid concern they failed to protect against the risks they took investing in subprime assets.

"We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies," Paulson said. "We need these institutions to continue to lend and facilitate economic growth.

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Treasury To Release Analysis of Meltdown

The U.S. Treasury is set to release a report today on what went wrong in the collapse of the subprime mortgage market last year and provide initial indications of how the country's financial regulatory framework should be revamped, according to sources familiar with the announcement.

The report, which is the result of a seven-month effort by the President's Working Group on Financial Markets, will signal a need for greater transparency and other reforms to prevent the kind of sudden downturn that has struck credit markets in recent months -- including the way mortgage lenders package and resell loans on Wall Street.

Abrupt dislocations in those markets have triggered a wider slowdown in the U.S. economy and mounting predictions of a recession. Specific recommendations from Treasury are expected at a later date. These could have a sweeping impact on major segments of Wall Street, from the way mortgages are securitized to the role of credit-rating firms, which evaluate and give a score to such securities.

The Working Group's report is especially significant because it is a collaboration of the government's top economic policymakers, including Treasury Secretary Henry M. Paulson Jr., Federal Reserve Chairman Ben S. Bernanke and Securities and Exchange Commission Chairman Christopher Cox.
Robert Steel, undersecretary for domestic finance, said a press conference scheduled by Treasury for today would release the results of the President's Working Group efforts. Other details were discussed by two people familiar with the matter who spoke on condition of anonymity because they were not authorized to talk about the report.

The group was tasked by President Bush with reexamining the reasons behind the subprime mortgage collapse and, in particular, the role played by credit-ratings agencies, such as Standard & Poor's and Moody's. Since Treasury does not oversee rating firms, any regulatory recommendations for such companies would have to be approved by Congress or the SEC first.

Treasury officials have said in past interviews they expect the practice of rating securities and firms to change. "There will probably be a lot more scrutiny, in a sense, a lot more analysis being done of the underlying credit. And that's probably a good thing," said Phillip Swagel, Treasury's assistant secretary for economic policy in an interview on C-Span in early September.

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Confessions of a Subprime Lender

A former broker on the fraud and greed that plagued his industry.

Over the last six months the public has learned much about the business of subprime lending, the practice that put millions of Americans with low credit scores into homes—which many may soon lose to foreclosure.

Richard Bitner, in contrast, received his subprime education earlier than the rest of us. In 2000 he and some friends founded a Dallas-based subprime mortgage company. For a few years he profited handsomely from this sector's boom, earning a paycheck in the high six figures. In the early days Bitner felt a bit like a modern-day George Bailey, as he helped marginal but deserving buyers achieve homeownership. But as lending standards slipped and mortgage brokers began gaming the system, he began to see more borrowers signing on to mortgages he suspected they couldn't afford.

Disillusioned and realizing the subprime business was becoming less and less profitable, Bitner cashed out of the industry in 2005. And when the subprime market collapsed last year, he decided to tell his story in a new self-published book, "Greed, Fraud & Ignorance: A Subprime Lender's Look at the Mortgage Collapse," which is for sale on his Web site and at Amazon. Today he's promoting the book full-time. "I could afford to take a year off and do this," he says in an interview. "I want some positive change to come from this."

While newspapers and magazines have been chronicling the rampant fraud that filled this industry, Bitner's book conveys the authority of someone who was in the trenches where this dirty work was going on. "Being a subprime lender means living in a world of gray," he writes, as he and his colleagues struggled to guesstimate whether a credit-challenged borrower would really be able to repay the mortgage they were writing.

As Bitner portrays it, a complicated mixture of factors led to the subprime boom and bust. Some of his colleagues credited the Federal Reserve's easy money policy. One friend boasts that Alan Greenspan’s rate cuts during the early 2000s helped him earn more in four years than he had in his entire career. Ratings agencies like Fitch, Moody's and Standard and Poors also played a part by giving investors confidence to buy repackaged securitized mortgages, which gave big mortgage companies seemingly limitless capital to lend out.

His biggest criticisms, though, are reserved for mortgage brokers and appraisers. As Bitner describes it, lenders like his company, which underwrote loans offered up by brokers and resold them to giants like Countrywide, spent much of their workdays trying to spot the stupid tricks brokers routinely used to get unqualified borrowers approved for loans. They'd say a buyer intended to live in a house when it was really an investment property. They'd falsify the buyer's income by having a relative pose as his employer, or use scanners and software to forge W-2 forms. They'd find ways to hide debts (like a car payment) by looking for a credit report that omitted key data. They also routinely gamed the appraisal system, encouraging appraisers to look for "comparables" that were far nicer homes in better neighborhoods—all in an effort to drive up the appraised value of the home they were mortgaging.

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Ilargi: I doubt this. I think they HAVE to come with something, since all parties are free to begin unloading paper starting midnight today, and a lone dissenter would make the entire deal worthless. Tomorrow should be eventful.

Canada ABCP jam close to resolution

The crisis in the non-bank asset-backed commercial-paper market is nearing an end, legal sources say, as the brain trust tasked with restructuring the notes will file papers this week in an Ontario court, seeking a judge's approval to implement the restructuring package agreed to in late December.

A source familiar with what is Canada's largest restructuring ever said, "We're close to the finish line," aided in part by some creative legal manoeuvring to get it before a judge. The court's approval would negate possible legal action and should smooth the way for issuing investors new notes and creating a secondary market for them to trade. The source said "everyone is on board" and lawyers are expected to appear before a judge tomorrow.

It will be quite the feat for the dozens of lawyers and investment bankers who have been working diligently since last August, when the $35-billion non-bank ABCP market froze, after financiers were unable to roll the paper over to new customers and return cash to existing holders. It also could mark the only successful workout of such distressed paper anywhere in the world. A US$100-billion restructuring plan for similar investment vehicles in the United States failed.

Under the agreement, about $3-billion in trusts holding "traditional" or non-synthetic paper -- those containing credit card receivables and car loans -- would be restructured on a series-by-series basis. Investors are expected to receive tracking notes that will have triple A and double A ratings. Synthetic trusts, which amount to $26-billion, will be split into two tranches, MAP1 (about $15-billion) and MAP2 (about $11-billion). Investors in MAP1 will receive a single pooled note or a combination of senior and subordinated notes. Investors in MAP2 will receive senior and subordinated pooled notes. The notes will pay cash interest or interest in kind.

There will also be a $14-billion margin facility to backstop the notes, funded by a blend of pension funds, and foreign and Canadian banks.Word of the court filing comes as a major deadline looms for the restructuring. Under last summer's Montreal Accord, the major banking parties and players in the non-bank ABCP market agreed to a standstill in which no one would act to enforce their rights under various legal documents and contracts.

The extraordinary resolutions that were obtained at the time from the various trusts to facilitate the restructuring under that agreement are set to expire tomorrow. In a release late in February, the committee said "complete information (including sufficient information to enable all investors to make a fully informed decision in respect of the Plan) and details of the approval process will be made available before March 14, 2008," but did not elaborate.

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Shinsei - and other Japanese banks - sell the farm

Selling the farm seems to be a new trend among Japanese banks, while buying Tokyo bank property is becoming the vogue among US investment banks -  at least if Morgan Stanley has anything to do with it. Reuters reports on Thursday that Morgan Stanley is buying the Tokyo headquarters of Shinsei Bank for Y118bn ($1.18bn) which said it is selling the building to help offset losses from US subprime-mortgage related  investments. The bank, which still owes the government more than Y200bn ($2bn) from a bailout in the 1990s, warned Thursday it will fall 70 per cent short of its full-year profit forecast due to widening subprime losses.

Last month, a Morgan Stanley real estate fund bought Citigroup’s 22-story Tokyo headquarters for Y48bn ($444m), reported Bloomberg, and we wouldn’t be surprised if Morgan Stanley was also among interested parties now talking to Resona Bank, Japan’s fourth largest bank, about buying its Tokyo headquarters. Shinsei, meanwhile, is not in the best of health - wrestling also with losses from its consumer finance business and criticism that it has been too slow in repaying public money, notes Reuters. Its shares, which have lost about a third of their value in the past 12 months, fell 5 per cent on Thursday in Tokyo, compared with a 4.7 per cent loss in Tokyo’s index of bank stocks.

Shinsei said it now expects recurring profit for the year ending this month to total Y20bn, well below the Y67bn it had originally forecast. This is the second time Shinsei has cut its forecast for the current business year. The bank said profit of about Y56bn from the sale of its headquarters will lift its net profit for the year to Y65bn, up from the Y50bn it had previously forecast.

Shinsei has not, however, mentioned the interest expressed late last year by Christopher Flowers and his JC Flowers buy-out group, which was seeking to become the biggest shareholder in Shinei with an offer to buy about one third of the bank. It has all gone quiet on that front while Flowers fights other fires in the region and in Europe.

The FT reported last month, for example, that China Investment Corporation, the Chinese sovereign wealth fund, is near an agreement Flowers to put about $4bn (£2bn) into a new fund to invest in ailing financial institutions. Meanwhile, Flowers edges closer to embattled UK life assurer Friends Provident.

What we want to know is what drives Morgan Stanley’s seemingly unshakable faith in the value of Tokyo commercial property. As Bloomberg noted, Morgan Stanley has invested more than $18bn in the Japanese real estate market in the past decade and continues to buy property in the country even after reporting a fourth-quarter loss of $3.56bn, the first in the investment bank’s history.

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