Debt Rattle, March 14 2008 - Part 2

NOTE: Today, the Debt Rattle comes in two parts. Part 1 can be found here (Don't miss it!!) , or via the sidebar. I will update this second part as developments warrant through the day.

Canada's ABCP news is at the bottom of this post, as is a complete list of international banks' losses and writedowns to date.

This is where I get to say "Enjoy", right?

I don't know, though. It's starting to look like we're in full emergency mode: Bear will be sold over the weekend.Or perhaps only their people will, and the shareholders be left with empty hands.

---

Updated 5.00 pm

---

Ilargi: On this late afternoon hour on Friday, I think we need to contemplate that perhaps we've seen a new Wall Street business model: an age-old finance powerhouse today was torn to shreds within 24 hours. Sure, the underlying signs were there much longer, but you just ask some of the shareholders what they think about losing much of their capital in one single day. Rumor has it that Bear Stearns will be sold, as a whole or in pieces, over the weekend.

And if this is indeed the model, look for Merrill Lynch and/or Citigroup to be on the chopping block next week, and for either or both to sink fast.


Bear Stearns Hits the Panic Button

While many Wall Street firms have undergone a tumultuous few months, it isn't much of a surprise that Bear Stearns is the first to really take it on the chin. Bear focused on an area of the market that sits at the forefront of current market turmoil: debt. That focus allowed its stock to jettison faster than other Wall Street shops like Goldman Sachs (NYSE: GS) in past years, yet it's now boomeranging back in its face quicker than many imagined.

At the end of November, Bear Stearns held more than $35 billion in liquid investments -- more than enough to service its short-term debt. Now, a matter of months later, Bear seems to be limping to Uncle Sam just to stay afloat.

Sure enough, the debt market, especially involving mortgages, is in a freefall approaching unprecedented speed. Just in the past week, steep plunges from the likes of Thornburg Mortgage and Carlyle Capital -- institutions thought by many to be conservative and well-capitalized -- have sent investors searching for answers. In the fast-paced world of finance, forget tomorrow; success can be here today, gone today.

With shares now down 75% over the past year, a broken business model, and recent liquidity troubles stoking the flames, Bear's future seems in jeopardy. If the banker can keep its doors open at all, it likely faces a buyout by a rival at some point soon. For investors sitting on big losses and hoping for a rebound, that won't come as welcome news, and it likely fueled some of Friday's plunge.

Friday's events highlight two points that leave investors with more to chew on. The credit crunch could be worse than even the most pessimistic forecasters thought, putting the demise of Wall Street banks on the line. On the upside, the Fed is willing and able to step in and provide help to those banks when times get really tough. Whichever of those two points proves dominant in investors' emotions will likely set the tone for the financial industry over the next several weeks. Grab a cappuccino -- it's going to be a long and bumpy ride ahead.

---

Ilargi: Bear Stearns is a primary dealer. That means it has direct access to Fed “discount windows”, TAF, TSLF etc. The $200-$300 billion injected earlier this week was likely largely for Bear Stearns. It failed miserably. Now the world's largest underwriter of mortgage securities needs funding from JPMorgan, which gets these funds from the same discount window(s). How crazy is that?

This means Bear has no more securities to sell. If I recall well, that is less than one day after its CEO swore that access to funds was no problem. Maybe a shareholder or two should talk to a lawyer about that statement.

Bear Stearns lost 50% of its share value within 30 minutes of trading this morning. Bye bye Bear. JPMorgan will buy Bear for very cheap. But even then, how good a deal is that? A primary dealer that the Fed has rejected is like the financial equivalent of flattened roadkill.


Cheap price vs risk: Will Bear Stearns be bought?

The emergency rescue of Bear Stearns Co Inc. on Friday left observers from all quarters wondering who would be the last man standing at the Wall Street bank. When a Bear Stearns analyst moved to ask a question at a biotechnology investor meeting, Genentech chief executive Arthur Levinson quipped, "There's still somebody here from Bear? Let's give him a hand." "I'm still here," said Bear Stearns analyst Mark Schoenebaum. But pointing to a JPMorgan analyst, he said, "I think I work for Geoff Meacham now."

The rescue by JPMorgan Chase & Co and the Federal Reserve Bank after Bear said its cash position had deteriorated sharply put the word takeover on the tip of tongues all over Wall Street, with JPMorgan seen as a leading contender to buy out Bear Stearns. But while Bear's cheap stock price could attract some suitors keen to buy its mortgage finance and trading assets, its liquidity problems may prevent a deal from being consumated, analysts and bankers said.

Shares of Bear Stearns, the fifth largest U.S. investment bank which has been hard-hit by its heavy exposure to the faltering U.S. mortgage market, fell 40%, reducing its market capitalization to about US$4.1-billion. Bear Stearns chief executive Alan Schwartz said the company is working with Lazard Ltd. to examine its alternatives, but it will focus on protecting customers and "maximizing shareholder value." He said Bear's first-quarter earnings would meet Wall Street expectations.

CNBC reported that Bear Stearns "is actively being shopped." While JPMorgan is "the most likely suspect," CNBC said it was not the only company to receive a pitch to buy the company. "Our view is it would not be a surprise to see a merger announced over the weekend," said Andrew Brenner, senior vice-president of MF Global in New York. The concern for any buyer would be whether Bear Stearns has fully exposed all of its problems or is there another debacle in the offing.

"Looking from the outside you have to ask, Are they at the end of their troubles? That's a very difficult question," said Anthony Sabino, professor of law and business at St. John's University, in New York.
Bankers and analysts rattled off a list of potential suitors but suggested them with caution, saying it's unclear why any company would buy Bear Stearns when they could pursue stronger assets at other banks.

"The question someone would ask if they were in a potential M&A position would be, Shouldn't we just go after the people? Bring the people in rather than by the firm," said Michael Holland, chairman of private investment firm Holland & Co. In addition to JP Morgan, potential buyers include Merrill Lynch & Co Inc and foreign companies such as HSBC Holdings PLC , Barclays PLC and Royal Bank of Scotland PLC, some bankers and analysts said.

"If you think about a company like Bear, they don't have hard assets, just computers, office space and people, and one would imagine that people at Bear are polishing up their resumes," said James Ellman, portfolio manager at Seacliff Capital in San Francisco. "That's how Wall Street works - when a firm is in trouble, clients leave and your best employees leave. We've seen this story many times before," Mr. Ellman said.

---

Fed Invokes Little-Used Authority to Aid Bear Stearns

Federal Reserve Chairman Ben S. Bernanke invoked a law last used four decades ago to keep Bear Stearns Co. from collapsing after the securities firm approached the central bank for emergency funding. The loan to Bear Stearns required a vote today by the Fed's Board of Governors because the company isn't a bank, Fed staff officials said. The central bank is taking on the credit risk from Bear Stearns collateral, lending the funds through JPMorgan Chase & Co. because it's operationally simpler to accomplish than a direct loan, the staff said on condition of anonymity.

Bernanke took advantage of little-used parts of Fed law, added in the 1930s and last utilized in the 1960s, that allows it to loan to corporations and private partnerships with a special Board vote. The Fed chief probably sought to stave off a deeper blow to the financial system from a Bear Stearns collapse, former Fed researcher Keith Hembre said.

"The Fed really doesn't have any obligation to help a non- bank aside from its role or responsibility to keep the financial markets functioning," said Hembre, who helps oversee $107 billion as chief economist at FAF Advisors Inc. in Minneapolis. "They made a judgment, probably an accurate one, that they're not going to function very well if you've got a full-blown crisis with a major Wall Street firm."

The Fed said in a statement that it will "continue to provide liquidity as necessary to promote the orderly functioning of the financial system," repeating reassurances the central bank has made often since credit strains arrived in August. The statement said the Fed Board unanimously approved the arrangement with JPMorgan and Bear Stearns.
The Fed Board typically delegates such discount-window lending authority to its regional reserve banks when it comes to loans to banks.

"There's a clear realization among people both in the official sector and the financial markets that some of the institutions we have built over the last 100 years are not well adapted to the modern 21st century financial system," said former New York Fed research director Stephen Cecchetti. "A lot of what we've been seeing have been creative innovations to deal with problems that the institutions were not built to handle."

---

Bear Stearns Options Show Higher Odds Stock Headed for 'Zero'

Options traders increased bets that Bear Stearns Cos.'s survival is in doubt after Chief Executive Officer Alan Schwartz said the brokerage's cash balance has "significantly deteriorated" in the past day. Implied volatility, a measure of how much investors are paying to insure against further stock-price losses, surpassed 300 for the New York-based firm. That's a level Ambac Financial Group Inc. and Thornburg Mortgage Inc. reached this year when their viability was questioned.

"That type of implied volatility is telling you zero is a distinct possibility" for Bear Stearns shares, said Michael McCarty, an options strategist at Meridian Equity Partners Inc. in New York. Bear Stearns tumbled as much as 53 percent to a nine-year low of $26.85 on the New York Stock Exchange today, the biggest plunge ever. The most-active options yesterday were puts that give the right to sell the stock for $25 through March 20. "That's incredibly aggressive," McCarty said. "Someone was intimately familiar with the timing."

Bear Stearns got emergency funding today from JPMorgan Chase & Co. and the New York Federal Reserve. The New York Fed agreed to provide financing through JPMorgan for up to 28 days, the bank said in a statement. For March $25 puts to pay off, Bear Stearns shares would have to drop 56 percent from yesterday's close of $57. Those contracts surged sixfold in price yesterday to 30 cents. They jumped 12-fold to $3.60 today

---

Bear Stearns Gets Emergency Funds From JPMorgan, Fed

Bear Stearns Cos. shares plummeted a record 53 percent after the New York Federal Reserve and JPMorgan Chase & Co. stepped in to rescue the fifth-largest U.S. securities firm with emergency funding. After denying earlier this week that access to capital was at risk, Bear Stearns said today that its cash position had "significantly deteriorated" in the past 24 hours. The New York Fed agreed to provide financing through JPMorgan for up to 28 days, the bank said in a statement today.

The regulator stepped in to prevent the collapse of the second-biggest underwriter of U.S. mortgage bonds and forestall a potential market panic as losses by banks and brokers reached $195 billion and stocks plunged for a third day this week. JPMorgan, which has suffered fewer losses than rivals during the credit crisis, may end up owning all or part of Bear Stearns, analysts speculated. "I don't think they can afford to let Bear go," said Charles Geisst, the author of "100 Years on Wall Street," referring to the New York Fed bailout. "At this particular moment in time, it would be a devastating blow to the markets."

Bear Stearns acted in response to "market rumors" of a liquidity crisis, Chief Executive Officer Alan Schwartz said in a separate statement. He said earlier this week that the company's "liquidity cushion" was sufficient to weather the credit-market contraction. Traders have been reluctant to engage in long-term transactions with Bear Stearns as the counterparty, the Wall Street Journal reported yesterday.

"We have tried to confront and dispel these rumors and parse fact from fiction," Schwartz said in the New York-based company's statement today. "Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated."
Bear Stearns said it was in talks with New York-based JPMorgan "regarding permanent funding or other alternatives." The broker's shares fell $22.62, or 39.7 percent, to $34.38 at 12 p.m. in New York Stock Exchange composite trading, after sinking as low as $26.85 earlier today. The stock has lost about 60 percent of its value this year.

The Bear Stearns bailout was announced hours before President George W. Bush delivered a speech on the economy. "Our economy obviously is going through a tough time," he said to business and finance leaders at the Economic Club of New York. "In the long run I'm confident our economy will continue to grow because the foundation is solid."

---

JPMorgan may end up buying Bear Stearns outright

The federal government and JPMorgan Chase & Co. teamed up on a bailout of Bear Stearns Cos. on Friday, a last-ditch move to save the investment bank, which acknowledged its dire financial straits after a week of firm denials. Bear Stearns lost half of its value within 30 minutes of the market open.

While it was not clear exactly how much money Chase would pump into Bear, a person familiar with the bailout, who spoke on condition of anonymity because the talks are private, said Chase may end up buying Bear Stearns outright. Bear Stearns said in a statement it is working with JPMorgan Chase to find permanent strategic alternatives to alleviate the liquidity problems, but could not guarantee they would be successful.

JPMorgan Chase is providing secured funding to Bear for 28 days, backstopped by the Federal Reserve Bank of New York. Bear Stearns and the Federal Reserve approached JPMorgan Chase about the financing and a potential deal, according to the source. Rumors have persisted throughout the week that Bear Stearns was facing major liquidity problems, but the investment bank's chief executive initially denied those rumors.

---

Ilargi: Another day, another record. Lately, I have to look at the dates, so I don’t mix them up.

Dollar Falls to Record Low Against Euro, 12-Year Low Versus Yen

The dollar sank to the weakest ever against the euro and to a 12-year low versus the yen after JPMorgan Chase & Co. and the New York Federal Reserve agreed to provide funding to Bear Stearns Cos., signaling credit market losses may widen. The U.S. currency also plunged to below parity with the Swiss franc for the first time.

"The initial reaction is to sell the U.S.: sell the dollar, sell the equities," said Jeff Gladstein, global head of foreign-exchange trading at AIG Financial Products in Wilton, Connecticut. "This is bad news; it's definitely a confirmation of the reality that U.S. financial institutions are having a hard time."

The U.S. currency dropped to 99.75 yen at 10:05 a.m. in New York, touching the weakest since October 1995, from 100.65 yesterday. The dollar plunged to $1.5688 per euro, the weakest since the European currency's debut in 1999. The dollar then settled back to $1.5646 from $1.5635 yesterday. It reached as weak as 0.9988 francs per dollar, from 1.0093 francs yesterday.

The New York Fed will "provide non-recourse, back-to- back" financing for up to 28 days, JPMorgan said in a statement today. Bear Stearns Chief Executive Officer Alan Schwartz said today in a separate statement that the firm's "liquidity position in the last 24 hours had significantly deteriorated."

---

US Faces Severe Recession, Feldstein Says

The United States has entered a recession that could be "substantially more severe" than recent ones, former National Bureau of Economic Research President Martin Feldstein said Friday. "The situation is very bad, the situation is getting worse, and the risks are that it could get very bad," Feldstein said in a speech at the Futures Industry Association meeting in Boca Raton, Florida.

NBER is a private sector group that is considered the arbiter of U.S. business cycles. Feldstein said the federal funds rate is headed for 2 percent from the current 3 percent. He added that lower short-term rates from the Federal Reserve would not have the same impact in the current downturn, in terms of reviving economic activity.

"There isn't much traction in monetary policy these days, I'm afraid, because of a lack of liquidity in the credit markets," he said. The Fed's new credit facility, announced on Tuesday, "can help in a rather small way ... but the underlying risks will remain with the institutions that borrow from the Fed, and this does nothing to change their capital," Feldstein noted.

Feldstein noted "powerful forces (that) will continue to drive inflation higher." And while inflation expectations are still relatively well contained, "you wonder how long that's going to last," he said.

---

Ilargi: Brilliant article, as only the English could do it.

Why Britain can’t weather a global recession

If you had watched the Budget yesterday, without knowing anything else about life in Britain, you might have been convinced that the UK is the place to be if a global recession hits. After all, Britain is well-placed to “weather economic storms”. In fact, it seems Alistair Darling can’t think of a better country to be in right now. Credit crunch? What credit crunch? Britain’ll be just fine, particularly after ten prudent years of Gordon Brown.

Yes indeed, if you were from another planet, you’d be pouring all your money into British assets, happy in the knowledge that the country was safe in the hands of Mr Darling and his colleagues. On the other hand, if like most of us, you haven’t recently landed from Mars, you’ll know that the Chancellor was talking cobblers…

Alistair Darling has clearly learned his Budget delivery lessons from Gordon Brown well. Be boring, is the key one. Trot off a lot of meaningless statistics, selectively compare your performance to other countries, and never ever accept the blame for anything. Here’s the gist of what he said. The global crisis heading our way is all the fault of the US. The credit crunch “started in the American mortgage market” and now here in poor old Blighty, we’ll just have to put up with the problems arising from our US cousins’ profligacy.

So it’s a good thing that here in Britain, thanks to ten years of Gordon Brown, we have such a strong, stable economy. So don’t worry, everything’s going to be fine. By the way, booze is going to get much more expensive, and so is driving. And I’m going to whack a tax on plastic bags if retailers don’t start charging for them. Don’t complain – this is all for your own good.

That’s the executive summary of the speech. But the small print told a different story. The Treasury knows that the UK housing market is in trouble. It expects tax income in 2008/09 from stamp duty, inheritance tax and capital gains tax to be £2.25bn lower than predicted in the Pre-Budget Report. It also expects lower income tax receipts as City bonuses fall.

This is much more realistic. Let’s make something plain here. What we’ve seen in recent years is the blowing up of a massive credit bubble. Britain’s economic ‘success’ has been built on this glut of credit, channelled through the housing market. Our key business sector – the City, basically – is all about shuffling money in various creative ways. Our consumers are more indebted than ever before.

---

US mortgage implosion set to blow Darling's Budget to pieces

Not since Labour's Philip Snowden delivered the Budget in 1930 has any Chancellor offered an accounting more certain to be swept away by hurricane forces of global finance.

Even as Alistair Darling promised 2pc growth this year, the US authorities were battling to head off the implosion of America's $11 trillion (£5.44 trillion) mortgage finance industry and a pair of big-name banks. In the words of former US Treasury Secretary Lawrence Summers, we are facing "the most serious combination of macro-economic and financial stresses in a generation, and possibly, much longer than that."

The emergency action by the US Federal Reserve this week amounts to a back-door nationalisation of the housing loan system. The Fed will now accept $200bn of mortgage debt as collateral. The Rubicon has been crossed. If the rescue fails, the markets know that Fed chief Ben Bernanke will raise the ante to $500bn, or $1 trillion, until the job is done. "The determination of the Fed to fend off financial armageddon cannot be doubted," said Société Générale.

Washington is exploring - and now invoking - measures that have not been on the agenda since the Great Depression, and for a good reason. House prices fell 9.1pc last year. Goldman Sachs fears a 25pc fall from peak to trough, others go as far as 40pc. Some 8.8m US homeowners already face negative equity on their houses, yet the crash is still gathering pace.

This is why the top AAA-rated tier of 2007 sub-prime debt is trading at just 53pc of face value. It is why the two pillars of US mortgage finance - Fannie Mae and Freddie Mac - faced insolvency rumours on Monday. "We're in a vicious downward spiral," said Prof Peter Spencer of York University. "The initiatives are doing little to stop the crisis spreading. Banks are running out of capital. They may have to start shrinking lending by $12bn for every $1bn in losses, so the risk of a credit contraction is incalculable," he said.

The global contagion from America has been fitful so far, with lethal bursts followed by bouts of eerie calm, just like 1930. Canada has stalled. Japan is teetering on the edge of recession. Tokyo's stock market has suffered the worst New Year slide since World War Two, led by Honda, Sony and the export giants that live off the US market. The Nikkei index is down a third since July. The Shanghai bourse has dropped even harder. China is having to jam on the brakes to curb inflation.

Italy has buckled. The economy contracted in the last quarter. The housing bubbles have burst in Spain and Ireland. Unemployment is now jumping across most of the Club Med bloc. This then is the darkening world closing in on Mr Darling. He has few defences. The Brown spending spree over the last five years has led to the worst deterioration in public finances of any major country, according to Standard & Poor's.

The budget deficit is above 3pc of GDP at the top of the cycle - or 2.9pc on Mr Darling's friendly calculator. Germany is in balance. Mr Darling cannot begin to offer the sort of fiscal relief under way in America. Any such move would breach EU deficit limits and push Britain beyond the point of economic respectability, in company with Hungary.

---

Hedge funds now feeling the pain from The Great Unwind

When I was in B-school, on the first day in second-year Finance class, our professor asked us if anyone knew what margin was. Having had a very recent brush myself with the dark side of leverage - been there, done that, took the haircut, in fact - I quickly raised my hand. The professor nodded at me, and I answered: "Margin is when your broker calls you and gives you 24 hours to come up with more money or he'll sell you out." That's pretty much what's happening these days in credit markets.

Banks need to raise capital to absorb some of their off-balance-sheet follies, and since there is no bid for the really sweaty stuff and even high-grade loans and debt securitizations are selling at 80 cents on the dollar, it's way easier for them to squeeze hedgies and private equity Geckos by raising margin requirements. Spreads on bank bonds are at their widest levels in years, making bank borrowing more expensive, even with lower central bank rates and enhanced liquidity facilities like the one announced this week by the Federal Reserve and other G10 central banks (including Canada's).

Besides, banks need to de-leverage their balance sheets as all their subprime chickens come home to roost, so more borrowing isn't much help. Hence the higher margin requirements for their broker, hedge fund and private equity clients, and they are also starting to squeeze operating lines of credit on their big and small-business customers. They'll be coming after individual borrowers, too, cutting credit card limits and personal lines of credit.

Now, say you are our old friend Joe, from Joe's Hedge Fund & Dive Shop down in the Caymans. You raised a billion dollars from credulous institutional investors a few years back, and leveraged it into a $25-billion portfolio of CDOs and mortgage securitizations. Let's assume that you don't even own any subprime paper, that all your holdings are still rock-solid credits. You've financed your portfolio with loans from banks and dealers, secured with your assets. So far, so good. But now, given the recent constant crunching of credit everywhere, your bankers want more collateral against those loans.

Of course, people are no longer lined up to give you money for you to sink into alphabet soup derivatives, so the only way you can get more collateral is by selling some of your assets. Unfortunately, the only bid for even the good stuff is at 80 cents on the dollar. If you sell any, you have to mark everything else to market, and, since you are leveraged 25 to one, all your investors' equity is gone.
Not only is Joe's hedge fund wiped out, he'll probably lose the Dive Shop, too. Liquidating Joe's collateral drives prices even lower, making everybody else's loans look dodgier, so the banks and dealers demand more collateral from them as well, causing more selling. And this particular vicious cycle is just getting started.

At least a dozen hedge funds have gone belly up, restricted withdrawals, hustled for new capital or dumped assets in the past month or so because of margin calls, and there will be many more in the months ahead. Meanwhile, it's also having an effect on the bond market. Bond trading volumes this week have been lousy. It feels like word has come down from the boardrooms to the trading desks that risk of all kinds must be reduced, and thus shorts covered, longs pared, credit exposure trimmed.

---

Insurer Losses From Subprime Approach Katrina Claims

The collapse of the subprime mortgage market will lead to record losses for insurance companies, overtaking Hurricane Katrina, the worst natural disaster in U.S. history. The amount of asset writedowns and credit losses reported by the industry has reached at least $38 billion, just short of the $41.1 billion in claims from Katrina, which killed more than 1,500 people and left more than half of New Orleans homeless in 2005, data compiled by Bloomberg show.

American International Group Inc., the world's biggest insurer, reported the largest quarterly loss in its 89-year history because of the decline in investments linked to mortgages. Chief Executive Officer Martin Sullivan told shareholders last month that more losses are possible amid the most depressed U.S. housing market in a quarter century. The KBW Insurance Index ended 2007 with its worst quarter in five years and fell another 15 percent this year through yesterday.

"This is a bigger event than Katrina,'" said Robert Haines, an insurance analyst at New York-based CreditSights Inc. "This is a much more unprecedented event." After Katrina, companies including Northbrook, Illinois- based Allstate Corp., the largest publicly traded U.S. home insurer, raised rates in disaster-prone areas, bolstering their balance sheets and stock prices. Now, insurers are stuck holding mortgage-related investments in a market where there are so few buyers that it's hard to know what those assets are worth.

AIG topped the list with $6.7 billion of losses from residential mortgage-backed securities and more than $11 billion from so-called credit-default swaps, which protect fixed-income investors. The New York-based company's stock fell the most in 20 years on Feb. 11 after auditors found AIG originally used the wrong formula to value its holdings and understated losses.

New York-based Ambac, the second-largest bond insurer, had about $6 billion of writedowns as credit markets deteriorated. Armonk, New York-based MBIA, the biggest bond insurer, suffered losses of more than $3 billion. The industry tally of $38 billion includes 15 publicly traded companies based in the U.S. and Bermuda, and excludes policyholder-owned insurers and European companies.

---

Dollar's clout sinks worldwide

Antique store owners in lower Manhattan, ticket vendors at India's Taj Mahal and Brazilian business executives heading to China all have one thing in common these days: They don't want U.S. dollars. Hit by a free fall with no end in sight, the once mighty U.S. dollar is no longer just crashing on currency markets and making life more expensive for American tourists and business people abroad; its clout is evaporating worldwide as foreign businesses and individuals turn to other currencies.

Experts say the bleak U.S. economic forecast means it will take years for the greenback to recover its value and prestige. Negative dollar sentiment is growing in nations where the dollar was historically accepted as equal or better than local currency — and dollar aversion is even extending to some quarters in the United States.

At the Taj Mahal, dollars were always legal tender, alongside rupees, for entry into the palace. But because of the falling value of the dollar, the government implemented a rupees-only policy a month ago. Indian merchants catering to tourists have also turned bearish on the dollar. "Gone are the days when we used to run after dollars, holding onto them for rainy days," said Vijay Narain, a tour operator in the city of Agra where the Taj Mahal is located. "Now we prefer the euro. It gives us more riches."

In Bolivia, billboards feature George Washington's image on a $1 bill alongside a bright pink 500 euro note, encouraging savers to turn to the euro to tuck away money earned abroad or sent home in remittances. "If the dollar's going down ... save it in Euros!!!" say the signs popping up around La Paz for Bolivia's Banco Bisa. And in neighboring Brazil, the Confidence Cambio money-changing service was the first to start offering yuan so travelers to China no longer have to change the money into dollars first.

The service is already a hit because Brazil does big business with China, and lots of Brazilians are heading to the Olympics this summer. "Now we tell people not to take dollars when they go abroad, it's better to change it directly to the local currency," said Fabio Agostinho, one of the firm's managing partners. "If people leave here with dollars and go abroad, they lose when they exchange them. It's the same thing whether they're heading to China, Europe or even Argentina."

---

France's sordid housing crisis

Look through some property websites and you can see the advertisements: the phrase you are looking for is contre services - when a room in an apartment is offered, sometimes "free", in exchange for services. Sometimes the service is perfectly innocent - cleaning the apartment or washing clothes, to defray some of the high cost of renting property.

But sometimes it is not: instead the requests are sexual, demeaning, bordering on the perverse. "Sex twice a month," is one blunt demand. Another asks for someone "open in spirit and elsewhere". "Flat in exchange for libertine services," goes another. Ondine Millot - who in her day job is the court correspondent for the French daily paper - spent six months researching these advertisements and the people who place them, for an article which exposed the trade in property-for-sex.

"I was very surprised to find out that this kind of thing was going on," she says. "We called a lot of men, I made something like 50 phone calls. Most of the ads that were 'against services', where no amount was specified for the rent, were men that were looking for sex in exchange for housing." But the problem is not just hidden away on websites.

Take a quick look through the bookshelves of any decent-sized newsagent, and tucked between the biographies of the former French First Lady and the former American First Lady is the extraordinary account of Laura D. Her book, My Dear Studies (Mes Cheres Etudes), details the anonymous young woman's slide from being a fresh-faced undergraduate, to a poverty-stricken student, to a 19-year-old selling her body to pay the rent.

"Laura", when I meet her at her publisher's, is charming, if desperately concerned to keep her identity secret, to spare her parents the horror of knowing how their daughter fell. But she is also angry. It was, she says, the astronomical cost of property that sent her on to the streets. "Rent was over 70% of my budget," she says. "Looking at friends, people I know, they live in places that are unhealthy, squalid. Or they negotiate with landlords who rent them rooms and who sometimes abuse them."

Sex for rent is the extreme end of an extreme problem which is catching swathes of France's most vulnerable people - the young and the poor - in its grip. France, the government admits, is in the grip of its worst housing crisis since the end of World War II. Of course, sky-high property prices are hardly exclusive to France. But some combination of circumstances has left the French - and especially the Parisian - rental market horribly stretched between supply and demand.

---

Gold hits $1,000 on flight from paper currencies

Gold has broken through the psychological barrier of $1,000 an ounce for the first time, propelled by fears of inflation and a worldwide banking crisis. Hedge funds punched the metal higher in a final frenzy of buying as the dollar buckled on global markets, falling to record lows against the euro and Swiss franc.

The latest flight to gold follows the US Federal Reserve's dramatic measures this week to rescue the US mortgage industry, a move seen as evidence that Washington will inflate the money supply to stave off a recession. Peter Hambro, chairman of Peter Hambro Mining, said gold is regaining its historic role as the ultimate store of value as mainstream investors lose confidence in the entire range of paper currencies.

"When the Federal Reserve starts taking 'bus tickets' as collateral as they did this week, people are bound to see this as inflationary. But the problem is not just the dollar. We're living through a period of competitive devaluations across the world. Everybody is trying to stimulate their economy by driving down their own currencies," he said.

The euro has until now been the automatic default currency for funds seeking an alternative to the dollar, but Mr Hambro said the deep split emerging between the North and South of the euro-zone has raised concerns about the long-term viability of monetary union.

---

Commodities Rally Complicates Fed's Battle

With recession bearing down on the U.S. economy, the Federal Reserve's attempt to avert disaster may be creating another asset bubble in gold, oil and other commodities -- at least in the short run. In the long run, early skeptics of the U.S. housing boom say the global boom in commodities markets is for real. But in the near term, the Fed's aggressiveness in easing monetary constraints and pumping emergency cash into a the shell-shocked financial system seem to be juicing those markets.

The trend calls into question Fed Chairman Ben Bernanke's strategy of easing rates in the hope that soaring prices for crude oil and other commodities will slow later this year and keep a lid on expectations for inflation. Jim Rogers, a global investment guru and longtime commodities bull, says the Fed's easy-money policies are driving up prices in oil, precious metals and agricultural products because "they are printing huge amounts of money which makes people flee paper money."

For Rogers, the author of Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market, the recent record lows posted by the U.S. dollar against other major currencies is only "icing on the cake" for the global commodities boom. "[Supply and demand forces] ensure a bull market no matter what happens to the U.S. dollar," says Rogers. "Massive foreign debts [for the U.S.], huge trade deficits, and a central bank printing huge amounts of money sends a loud message to the world that the U.S. does not care about the dollar and will debase it."

For his part, Rogers recently sold his home in New York City for $15.75 million, having reportedly purchased it in 1977 for $107,300. He's now in Singapore, where he's been railing against U.S. monetary policies. He concedes that further economic deterioration in the U.S. and around the world, or a reversal in Fed policy, could spark a temporary selloff in commodities, but he says that would only amount to a "consolidation in a secular bull market."

Just such a consolidation already occurred in crude oil futures trading on the New York Mercantile Exchange in 2006 -- around the same time that the housing bubble began to deflate. Prices hit a peak that spring at over $75 a barrel and tumbled down to around $52 in January 2007, prompting many speculators to declare a premature end to the stunning bull run in energy markets that also began in earnest around the same time that the U.S. residential real estate market kicked into high gear in 2002-03.

The S&P/Case-Shiller U.S. National Home Price Index rose 63% from the start of 2002 to its peak in the second quarter of 2006. During the same period, which began as the Fed was cranking down its short-term rate target to a record low of 1% for a year straight, crude oil prices rocketed up 267%.

---

Buy My House – Please!

The housing slump is cranking out unfit landlords. Take me, for example. The other day I found myself shooing curb pickers away. My previous tenants were supposed to have cleared out the day before. The new tenants were already busy moving in their stuff. My house now held one 8-month old, two parents, three grandparents, two cleaners, two movers, and one locksmith. And me, taking someone else's personal items to the curb.

People were starting to slow down on my rural state road. Some parked, picked up albums, inspected the couch, and tested the sturdiness of the table. They were generally polite and asked if it was for the taking. I was unsure how I was supposed to respond. With no room left on the porch and eight voice-mail messages waiting for the previous tenants, all I could do was keep taking what remained inside straight to the curb. I should not be a landlord. I know that. I am no good with a cordless drill and am too willing to allow late rent arrive even later. I have no business being in this business. Trust me: I want the deed transferred. I really, really want to cover someone's closing costs.

I put my house up for sale in April 2006. A few months earlier, houses in my rural college town had sold for larger sums than anyone could remember. People were shocked at the selling prices that showed up in my agents' comparable sheet: "The Clark house went for over $300,000 – can you believe it?!" Even better, I had bought a house nearby where the real estate was already depressed, so I got a cute little bungalow at a great price. As I bought flowers and staged my place for the open house, I spent my soon-to-come profits in my head.

By now you can guess the rest. I priced it high. Too high. Then I went down. And down. And down. I started getting spastic: I took it off the market for the winter, hired a caretaker, put it back on, this time selling by owner, then relisted it with a new agent. And the price went down. Eventually, the stress of the nonselling house, my depleted bank account, and my now-more-savvy reading of economic forecasts led me to rent the house. I did not get enough to cover mortgage, taxes, and insurance, but I did get enough to cover my wounds. When the lease came to an end, seeing no good morning in America any-time soon, I decided to rent it again, this time for a year.

And that is how I ended up spending the day in the gray sleet, bringing other people's stuff to the curb, half furious at them for not clearing out on time, and half sad, asking curb pickers if they might just come back later (the old tenants did finally show up). No one wants to see their bedside table items on wet winter grass. That day was a very bad one, even if the interest rate on my home equity line of credit went down a quarter point. I'm no landlord.

Hopefully in February 2009, when this lease is up, I will sell my beautiful 1840s farmhouse on 2-1/2 acres of open farmland (interested?). I fantasize about my very own postinaugural ball. I'll wear pearls to the bank. I'll offer mini beef Wellingtons to Amanda at the insurance office, who recently told me that, regrettably, landlord status doubles my premium. Heck, maybe I will offer the current tenants a "rebate" on their last month's rent.

---

Despite Enron, antiquated bank secrecy laws have covered up today’s wrongdoing and regulatory failures

The nation’s bank regulatory system is in urgent need of “a drastic overhaul with disclosure, rather than secrecy, as its basis,” the former top appointed banking and securities regulator for the state of Florida writes.

“Without full disclosure,” predicts Raymond Vickers, “the sorry saga of Enron will be repeated again and again.” “How,” he asks, “can investors be expected to regain confidence in the financial system when they still have no way of knowing what goes on inside the Park Avenue offices of the very same bankers who financed Enron and other such schemes?”

“Antiquated bank secrecy laws,” Vickers adds, “have covered up today’s wrongdoing and regulatory failures, just as effectively as they did during the S&L scandals.”

In an article published in volume 6 of The Long Term View, a journal of opinion published by the Massachusetts School of Law at Andover, Vickers notes that historically banking reform has only followed in the wake of a national calamity, such as the Great Depression. It is urgent, he writes, for bank examination reports and other regulatory records to be released to the public as soon as they are compiled and made available on the Internet “so that a depositor or investor could merely type in the name of a bank and have immediate access to its records.”

“Such a banking-in-the-sunshine law would go far beyond reforming the banking industry, in that it would also purge the system of the bankers and corporate executives responsible for Enron and the other business failures of the 1990s,” Vickers argues. “The disclosure of reckless financing schemes as soon as questionable loans are criticized by regulators would expose irresponsible officials…who are to this day more interested in personal enrichment than in fulfilling their fiduciary obligations to their stockholders.”

---

Ilargi: I have to admit, even I hadn’t fully realized it would be this bad: “$18-billion worth of ABCP assets would translate into a potential rush of up to $180-billion of product onto the market”

We’re looking at losses of over $100 billion, potentially quite a bit more. Pressure on Ottawa and the Bank of Canada to start buying must be huge. However, the substantial involvement of foreign banks makes that hard to sell to Canadians.

Players in ABCP drama agree on terms

The group of investors and banks working to restructure Canada's frozen $33-billion asset-backed commercial paper market is one step closer to a solution after all players signed off late Thursday night on a proposal that's set to go before a judge as soon as Friday morning for approval. All the players in the contentious negotiations agreed on terms of a deal late last night, sources said. Canada's big banks have all agreed to back a credit line to support the restructuring, one key to the proposal.

While a framework had been in place for months to swap the frozen paper for new longer-term notes worsening credit markets made it tough for all the parties involved to agree on how exactly to do it. Now, with time running out before a standstill agreement that kept peace between the players expires at midnight, the restructuring committee will ask a judge to sign off on the plan.

JP Morgan, the investment bank that is advising the committee, has prepared estimates of the values of the assets underlying the ABCP, which average about 80 cents on the dollar, sources said. However, it's unlikely that the new notes will fetch that much in the open market after the swap, which could happen as soon as May. That means holders who are looking to sell the new notes and free up cash that has been frozen since the ABCP market seized up in August will be looking at sizable losses.

---

Canadian Bank Fire Sale

Canadian banks, asset managers and life insurers have been thrown over the side in what can only be described as an indiscriminate sell-off. How bad is it? Well, ridiculous as it may seem, three of the six big Canadian banks are now yielding over 5%. They are Bank of Montreal, which is yielding 6.5% based on the closing price on March 7; CIBC, yielding 5.6%; and National Bank of Canada at 5.1%.

That means their dividend yields are anywhere from 1.5 to 2.8 percentage points above the yield on 10-year Government of Canada bonds (3.65% at time of writing). All the bank stocks, including Royal Bank, Bank of Nova Scotia and Toronto Dominion are down at least 15% from this time a year ago. Other financial sector mainstays such as Power Financial and Sun Life Financial are hitting 52-week lows. (Sun Life is my pick for this issue.)

The best performing Canadian asset management company (Jovian), according to a table compiled by the Globe and Mail, is down 25% from its high while the worst (Mavrix) is off 69%. Frankly, I'm awed at the market's ability to misprice businesses.

---

Look out below if plan fails

Reports warn of Montreal Accord's potential risks

The attempted rescue of an obscure corner of the Canadian financial market - third-party asset-backed commercial paper (ABCP) - is making global financial observers very nervous. The reasons for their worries: if the so-called Montreal Accord - led by major ABCP investors to restructure about $33-billion worth of paper frozen since last August into long-term notes - were to fail, it would have devastating effects far beyond Canada. The world's arthritic credit markets could tighten even further, making it more difficult for corporate borrowers to raise money.

This is the conclusion of two recent reports by credit experts at Bank of America and Citigroup. The former is entitled "Failure is Not an Option." The latter observers: "failure to resolve the Montreal Accord could put severe selling pressure on the market."
Those behind the Montreal Accord -- which is expected to be presented today for court approval -- are confident the restructuring of the ABCP (short-term notes based on pools of assets ranging from credit card payments, to credit derivative contracts) will succeed and that patient investors will get most of the value back in time.

The concern is that if the rescue fails, there will be a forced liquidation of a set of securities accounting for $18-billion, or more than half of assets underlying the ABCP, called leveraged super seniors (LSSs). Because of the way LSSs are structured, the effect of losses would be greatly multiplied. LSSs are a type of product borne from the increasingly complex alchemy that infected financial markets in recent years. LSSs were part of a class of securities known as Collateralized Debt Obligations, or CDOs -backed by pools of assets including credit default swaps, a type of insurance contract taken out on corporate debts.

But CDOs are chopped up into a bundle of securities, each with a hierarchy of credit ratings. If there are defaults, those at the low end get hit first. The last to be affected: "super-seniors," which carry the top ratings. Say a CDO sustained a 35% loss. The supersenior's losses would be limited to anything above 30%, or 5% of the decline.

As returns in credit markets shrank in recent years, superseniors offered tiny returns and investors turned away. So CDO sponsors found a way to juice returns- by leveraging super seniors, on average, by a factor of 10 times. Instead of putting up $70 (the at-risk portion of the super-senior described above) of a CDO with a $100 value, investors might only put up $7. Rather than yielding a five basis point return, the now-leveraged super-senior would pay 50 basis points -half of 1% -over benchmark interest rates, a more compelling return for investors.

But issuers of LSSs put in place "triggers" that would require buyers to ante up more cash if the value of the LSS fell, in order to protect their own downside. In Canada, those triggers are based on market values of the LSSs, not actual default losses. In most cases, the triggers would kick in if net asset values fell to between 40% to 70% of par. They've fallen as low as 55% but now hover just above 60%, according to the two reports.

If the Montreal Accord fails, look out below. Banks that arranged the LSSs would demand cash from the sponsors of the ABCP, which have none to spare. In response, the banks would start unwinding the LSSs by dumping the underlying super seniors on the market at distress prices (or, rather, buy credit default swaps to liquidate the structures). Assuming those LSSs are leveraged at a rate of 10 to 1, that $18-billion worth of ABCP assets would translate into a potential rush of up to $180-billion of product onto the market, which "is almost certainly not deep enough to absorb" such an influx, Citigroup said in its report this week.

That would drive down prices of super seniors and cause extreme turmoil to near-halted credit markets. "Our best guess is that this week's deadline results - yet again - in postponement," said Citigroup. "While unsatisfactory, that is at least preferable to the alternative."

---

Subprime Losses Reach $195 Billion; German Banks Get Hit: Table

The following table shows the $195 billion in asset writedowns and credit losses since the beginning of 2007, including reserves set aside for bad loans, at more than 45 of the world's biggest banks and securities firms. German banks reporting earnings this week said they had further losses related to the U.S. subprime market as the value of the assets they owned fell in February.

The charges stem from the collapse of the U.S. subprime- mortgage market. The figures, from company statements and filings, also reflect some credit losses or writedowns of mortgage assets that aren't subprime. Charges taken on leveraged- loan commitments aren't included. All figures are in billions of U.S. dollars, converted at today's exchange rate if reported in another currency. They are net of financial hedges the firms used to mitigate losses.




* Totals reflect figures before rounding. Some company names have been abbreviated for space.
(a) The difference between writedown and credit loss: Investment banks and the investment-banking units of financial conglomerates mark their assets to market values, whether they're loans, securities or collateralized debt obligations, and label that a "writedown" when values decline. Commercial banks take charge-offs on loans that have defaulted and increase reserves for loans they expect to go bad, which they label "credit losses." Commercial banks can have writedowns on holdings of bonds or CDOs as well.
(b) European banks whose losses are smaller than $1 billion each are in this group: ING Groep, Allied Irish Banks, Bradford & Bingley, Aareal Bank, Deutsche Postbank, Lloyds TSB Group, Standard Chartered, Northern Rock, HBOS, Dexia, WestLB, Commerzbank, NordLB, Rabobank, HVB Group, Landesbank Baden- Wuerttemberg.
(c) Asian banks with writedowns smaller than $1 billion: Bank of China, Mitsubishi UFJ, Sumitomo Mitsui, Shinsei, Sumitomo Trust, Aozora Bank, DBS Group, Australia & New Zealand Banking Group, Abu Dhabi Commercial, Bank Hapoalim, Arab Banking Corp., Fubon Financial.
(d) Canadian banks included in this group: Bank of Montreal, National Bank of Canada, Bank of Nova Scotia, Royal Bank of Canada.

---