Debt Rattle, March 22 2008

Ilargi: “Do not delay – bail a Bear out today!” Sounds funny, till you realize the people who came up with it are the Bear Stearns employees who just lost the value of their shares, and many of whom will soon lose their jobs as well.


US Congress scrutinises bailout of Bear Stearns

The US Congress has begun an inquiry into last weekend’s bailout of Bear Stearns by the Federal Reserve and JPMorgan Chase as Washington grows increasingly concerned that American taxpayers are paying the price for Wall Street’s mistakes.

The inquiry will examine the impact of bailing out Bear Stearns on taxpayers’ money after the Federal Reserve Bank of New York effectively guaranteed $30 billion (£15 billion) of the bank’s bad investments and extended a credit line to JPMorgan Chase as a sweetener to take control of the bank.

Congress is also seeking to ascertain whether the rescue deal is in breach of federal law. JPMorgan is paying almost $240 million with its own shares to take control of Bear Stearns. Henry Waxman, who heads the House Oversight and Government Reform Committee, is leading the inquiry.

At the same time, the Senate Finance Committee announced that it will hold its own inquiry into the bailout. Charles Grassley, a committee member, said: “I’ve instructed my staff to delve into the details of the deal; I want to understand what the downside risk for the taxpayer is and any upside potential.”

Both inquiries are expected to encourage some law firms to try to draw together class-action lawsuits and sue Bear Stearns’s management, led by Alan Schwartz, chief executive. One such firm, Mark & Associates, based in New York, yesterday invited any Bear Stearns shareholder who had lost more than $10,000 to contact it for a “free consultation”.

Meanwhile Joe Lewis, the billionaire Tottenham Hotspur investor, is believed to be trying to elicit a counter offer for Bear Stearns after the bailout, valuing the bank at $2 a share, cost him more than $1 billion on his investment in Bear Stearns shares. Bear Stearns staff have resorted to auctioning off bank memorabilia on eBay to raise funds.

“Be the first to get your paws on classic Bear Stearns memorabilia,” touts the description for one of several stuffed toy bears on sale at a bargain $5.50. “Do not delay – bail a Bear out today!” the ad urges, adding that the first bear purchased comes with a free New York skyscraper worth about $1 billion – depending on availability.

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Fed's Moves Bring Praise, New Scrutiny

The Federal Reserve has taken its boldest action since the Great Depression, invoking rarely used powers in an effort to contain a panic threatening to undermine the economy. The central bank acted with speed the White House and Congress only could envy. The Fed is largely free from many constraints that bog down other policymakers. Also, it is the only U.S. institution with the authority and ability to create money out of thin air.

For now, the steps orchestrated by Chairman Ben Bernanke, in the first critical test of his leadership since succeeding Alan Greenspan in early 2006, are earning praise from the Bush administration, Congress and presidential contenders Barack Obama, Hillary Rodham Clinton and John McCain. But the Fed's moves are raising questions about whether its regulatory powers, established in the early 20th century, need overhauling and whether it took on some responsibilities that Congress and the administration should have shouldered.

In a remarkable week, the Fed:

• engineered the fire sale of bankruptcy-headed Bear Stearns Cos. to J.P. Morgan Chase & Co. with a $30 billion loan.
• offered emergency loans to other securities dealers under terms normally reserved for regulated banks.
• slashed a key short-term interest rate by three quarters of a percentage point, to 2.25 percent. The cut was sixth since September.

These steps followed moves to lend $100 billion in cash to banks and $200 billion in Treasury bonds to cash-strapped investment banks. The goal was to keep the financial system from seizing up. "I spent 35 years on Wall Street, have been a Fed watcher for a long time and I have never seen the potential for a more severe credit crisis than this one," said David Jones, chief economist at DMJ Advisors and a former Wall Street economist. "It looks like we turned the corner precisely because of what the Fed did."

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Ilargi: There was a lot of disbelief a while back when I talked about the potential effect of the trickling down of margin calls. Here’s the English style margin call.

UK: Homes at risk as banks seek more security for credit card debt

Hundreds of thousands of indebted Britons are at risk of losing their homes if they fall behind on their credit card and personal loan repayments after moves by the high street banks to protect their weakening balance sheets. The banks’ increasing concern about the risks of the implosion of Britain’s £1.4 trillion debt mountain has led to a huge surge in the number of court orders moving unsecured debt on to a basis that secures it against a borrower’s home.

Figures from the Courts Service indicate that the use of charging orders by British banks surged by 580 per cent from 2000 to 2006, the most recent year for which figures are available. Industry sources say that the banks’ increasing use of the tactic to safeguard loans that they view as risky has accelerated since the credit crunch began last summer. Charging orders are sought by lenders through the courts when a borrower misses loan or credit card repayments.

If a judge approves the applications, the debt becomes secured against the borrower’s home, to be repaid from the equity of its eventual sale. In extreme cases, lenders who have obtained a charging order apply to the courts to force the sale of the home. Historically, charging orders were used only as a last resort, but solicitors have confirmed that there has been a surge in interest in charging orders. One nationwide law firm that requested anonymity said that it applied for double the number of charging orders in 2007 compared with 2006 for clients that included high street banks.

Michael Green, a partner in Weightmans, another firm of solicitors that specialises in debt recovery, believes that lenders are increasingly “twitchy” about bad debt. He said: “If people default on credit card payments or loans, then banks now want more security.” In 2000 there were 16,014 applications, rising to 92,933 applications in 2006. These have included applications from almost all the high street lenders, including HSBC, Alliance & Leicester, Nationwide and NatWest.

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Ilargi: Read between the li(n)es: The Fed and the Bank of England are actively considering buying mortgage-”backed” securities on a huge scale; for now they’re just mainly doing so on their own. I will continue to refer to this as the Bulgaria Model; down the line it's outright nationalization, whether executed through central banks or Treasury departments. Everyone's home -and land- is owned by the State, and so are all jobs, increasingly.

The ECB is in no position to do anything similar; outright buying of Club Med and Ireland paper would risk breaking up the EU. Germany, Holland and Belgium, for instance, might well see revolt in the streets.

Fed: No Talks on Joint MBS Buying

The U.S. Federal Reserve, responding to press reports, said it is not discussing coordinated purchases of mortgage-backed securities with other central banks. "The Federal Reserve is not involved in discussions with foreign central banks for coordinated buying of MBS," a senior Fed official said.

The Financial Times reported on its web site Friday evening that "central banks on both sides of the Atlantic are actively engaged in discussions about the feasibility of mass purchases of mortgage-backed securities as a possible solution to the credit crisis." The newspaper said the Bank of England appears most enthusiastic to explore the idea, the Fed is open in principle but only as a last resort, and the European Central Bank appears least enthusiastic.

A Bank of England spokesman said: "All central banks, including the Bank of England, have been looking at how to ease the strains in their banking markets. The Bank is not, however, among those reported today to be proposing schemes that would require the taxpayer rather than the banks to assume the credit risk. We can however confirm that we have been examining a number of other options, but it is too early to go into any detail."

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Ilargi: We have warned about the inevitable UK crash for a long time, and incessantly. Now that all horses, cows, pigs, mice and rats have left both the barn and the sinking ship, the US media follow.

Debt-Gorged British Start to Worry That the Party Is Ending

As the United States economy weakens, many Americans are being overwhelmed by personal debt, but Britons are even more profligate. For most of the last decade, consumers here went on a debt-financed spending spree that made them the most indebted rich nation in the world, racking up a record £1.4 trillion in debt ($2.8 trillion) — more than the country’s gross domestic product.

By comparison, personal debt in the United States is $13.8 trillion, including mortgage debt, slightly less than the country’s $14 trillion G.D.P. And while the Federal Reserve in Washington has cut interest rates, in an effort to loosen lenders’ grip on credit, the Bank of England’s interest rate increases last year are trickling through to mortgages at the very time home values are dropping and banks are becoming more reluctant to lend.

Until now, debt has mostly been a good thing for Britain. In the hands of free-spending consumers, it fueled economic growth. The government borrowed heavily in recent years to invest in infrastructure, health and education, creating a virtuous cycle: government spending led to job creation, which led to greater consumer confidence and more spending, which, in turn, stimulated growth.

Economists say Britain’s relationship to debt is complex, but at its core is a phenomenon more akin to recent American history than European trends. As in the United States, a decade-long housing boom and strong economic growth bolstered consumer confidence, creating a perception of wealth almost unknown in countries like Germany and Italy. “Culturally, maybe also because of the defeat in the war, Germans remain reluctant to borrow and banks are often state-owned, pushing less for profits from lending,” said Alistair Milne, a professor at Cass Business School in London.

Since many younger Britons have never lived through a period of slow growth, few now see the need to hold back on borrowing, not to mention saving. “The general mantra is spend now, think later,” said Jason Butler, an adviser at Bloomsbury Financial Planning. “It’s easier to get a loan or a credit card these days than to get a savings product.”

The average British adult has 2.8 credit or debit cards, more than any other country in Europe. A growing number are borrowing to pay for vacations, furniture, even plastic surgery. As a result, Britons are spending more than they earn, racking up a household debt-to-income ratio of 1.62 compared with 1.42 in the United States and 1.09 in Germany.

To her parent’s generation, Ms. Hall said, owing money beyond a mortgage was “shameful,” an admission of living beyond one’s means. Debt was also more difficult to get. That changed in the late 1990s when American lenders, including Citigroup and CapitalOne, pushed into the British market with a panoply of new lending products. Fierce competition among banks meant potential borrowers were suddenly bombarded with advertising and offers for low- or no-interest loans and credit cards.

While Britain’s financial regulators watched the explosion of retail lending from the sidelines, their counterparts in Germany and France were more restrictive. As a result, the British market became the largest and most sophisticated in Europe.

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Credit crunch: it's all over!

Haven't you heard the good news? Yes, that's right - the world financial crisis is over! The bad news is that I'm lying. It's not really over. That was just my little joke, ha ha ha! Then again, that's pretty much the sort of joke the US Federal Reserve and Bank of England have been playing this week, too (Monday: “We've fixed the problem. Just required a little of what we finance experts call liquidity'. All's fine again now. Sleep easy everyone!” Tuesday: “Ha ha ha, we were just kidding yesterday. It's actually WAY worse than we thought”).

You know what? We suspected as much. Because in real life there is no problem that's made better by the addition of liquidity; largely on account of “liquidity” sounding, at best, like a burst pipe in the upstairs bathroom and, at worst, like a euphemism for “wetting the bed”. Actually what the Fed means by injecting liquidity is cutting interest rates in order that everyone can borrow as much money as they want, and thereby - mutatis mutandis (literally, “fingers crossed”) - lubricate the engine of the economy so that it starts motoring smoothly again.

As a result, money today is what economists call “cheap”. Know what the catch is? This handy new supply of “cheap” money turns out to be cheap only if you can prove to the financial authorities who are suddenly dishing it out that you are so financially feckless that you can't be trusted with any sum of cash larger than you could fit into a pistachio shell. If you can prove that, then you can lay your hands on billions. If, on the other hand, you're the kind of person who pays off their bills each month, you'll find money isn't so cheap.

Mortgage lenders and credit card companies aren't interested in knowing you. You're as likely to bag a five-year fixed-rate loan in your high street this afternoon as a Bear Stearns employee is to find an insurer willing to offer him loss-of-employment cover. Here's the other catch: this rescue strategy means that we're entrusting the job of trading the world out of the financial mess to the same people who traded us into the mess in the first place. It's like getting the surgeon who just ran you over while twice over the legal alcohol limit to perform roadside surgery to treat the injuries he just inflicted on you.

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Ilargi: I have talked so much about the ways pension plans make all the wrong moves all the time, no need to add more. Still, some of these moves leave me speechless.

Pension Plans Take Chance on Mortgages

The subprime mortgage crisis has yielded at least one benefit for states: Mortgage-related investments have become so cheap that they are luring some pension funds to buy. Retirement systems in South Carolina and Pennsylvania are nibbling at the securities, betting that they have been beaten down so much that the ones with good credit ratings could yield strong returns later.

South Carolina is looking to buy $100 million of mortgage-related investments for its $30 billion state pension fund. Pennsylvania, which made money off those securities' troubles in its hedge funds last year, is also betting that they can offer long-term returns. But the buying this time is very tentative, and may not presage a broader turnaround in these securities.

For South Carolina, the caution means buying into a managed fund. In Pennsylvania, the outside managers the fund hires are looking for bargains. But in both cases, the states emphasize they're only investing small amounts of their overall portfolios. The bargains are the product of a crisis in the mortgage industry brought on by some lenders taking greater risks by lending to some people who had poor credit histories. The bet was that home values would continue to rise and that these borrowers would be able to refinance before their monthly payments moved higher.

That didn't happen. Home prices fell, the rates on adjustable-rate mortgages ratcheted higher, people began defaulting on their loans, and securities tied to mortgages plummeted in value. Now, some see bargains as investors realize the underlying assets the securities represent are far from worthless. "Some of the securities that have dropped in value were really very solid securities," said Robert Gentzel, a spokesman for the Pennsylvania State Employees' Retirement System.

"This really has no bearing to the fair market value of these assets anymore," agreed Bob Borden, who oversees South Carolina's pension investment decisions. South Carolina has only put $8 million into that fund that includes some subprime mortgages, but Borden expects the rest to go in rapidly as the market swings from extreme fear toward greed.

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Ilargi: Uncle Sam wants you (r money). Badly.

Treasury bonds for $100

Government lowers the minimum price to buy Treasury bonds to $100 from $1,000 in a move to make securities more available to average investors.

The Treasury Department said Friday it plans to lower the minimum investment amount for government bonds in an effort to make them more affordable for average investors. Beginning April 7, people will be able to buy as little as $100 in Treasury marketable bills, notes, bonds and Treasury Inflation-Protected Securities (TIPS). Investors will also be able to purchase these securities in increments of $100. The minimum amount and increment purchase size for Treasurys has been $1,000 since August 1998.

"The new, lower minimum Treasury amount will put marketable securities within reach of more savers and investors in the United States and around the world," said Anthony Ryan, Assistant Secretary of the Treasury for Financial Markets. Treasury securities can be purchased directly from the Treasury by creating a TreasuryDirect account online at treasurydirect.gov or a Legacy Treasury Direct account. Securities can also be obtained on either a competitive or non-competitive basis through bond brokers and dealers.  

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The Lender of Only Resort

The markets staged another Hail Mary rally right from the edge of the precipice this week. The good news apparently centers around the perception that a situation of little lending has been turned around by the creation of a very large lender of only resort, the Federal Reserve. I believe that this will be a strange beast indeed. It will engender highly manipulative behaviors.

Bloomberg: Morgan Stanley and Goldman Sachs Group Inc. said yesterday that they borrowed to “test'’ the new lending facility, while Lehman Brothers Holdings Inc.’s financial chief said the company was using the facility to “show some leadership.'’ The Fed report today showed that the lending averaged $13.4 billion in the week ended yesterday.

In a lender of only resort situation there is huge incentive to force quick, crisis “lending decisions” on the lender. Therefore a climate of constant turmoil and instability will be further encouraged by this arrangement. Trouble will arrive out of nowhere almost daily, as predatory tactics put the big squeeze on some vulnerable foil. Long overdue credit downgrades will “suddenly” materialize from the stooges. Perhaps this situation (hardly noticed in Thursday’s ramp) is the next one, but who knows?

Bloomberg: CIT Group Inc. shares and bonds plunged after the largest independent U.S. commercial finance company fell victim to the freeze in short-term debt markets. The company drew on its entire $7.3 billion of emergency credit lines today after ratings downgrades left it unable to finance itself with commercial paper, or debt due in nine months or less.

After “emergency meetings”, “rescuers” will arrive on the scene to take over with free loans and backstops from the Fed. Key assets will be stripped, and the sludge will be jettisoned on to the next victim or socialized on Aunt Millie’s nephews and nieces. The later’s pension funds will be run down severely in this process. Once successful, those flesh eating bacteria institutions on the lender of only resort’s “favored list”, will turn their attention to other foils.

The goal now is mostly certainly not to bail out the whole financial system, just forget that one right now. That is impossible when fictitious capital can’t be supported. Instead the financial sphere will be rapidly downsized, large layoffs spun as bullish, and power and capital more intensely concentrated. Tattoo this concept on your forehead, because if you thought financial markets were rigged and manipulated before, you ain’t seen nothing yet.

One of the benefits from sky high energy prices for financial Leviathan, Gordan Gecko types is that capital flows to a group of corrupt oil states that can be controlled. If the Pig Men needed some capital from the Milky Way to underwrite or unload some toxic securities, just pick up the phone to some Middle Eastern clerk, and bingo, o dinheiro chega pronto. As you may recall from an earlier post, the recycled trade deficit has dramatically shifted away from Asia and toward petro capital. This has fit well at this late stage, because oil money is more cooperative than many Asian types.

But something has been happening lately. The oil sheiks have been reluctant to play ball in these capital infusion deals, case in point, the Bear Stearns “emergency crisis”. In part, this is because they have been burned by them, and secondly it is because the goal is not to give them too much influence. It’s more about controlling them. Sheiks and middle eastern elites are being asked to play ball on a highly risky and dicey situation, but still to sit in the back row, shut up and mostly just watch.

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World trade decelerates almost to a standstill

Global trade slowed almost to a standstill over the new year, threatening to shrink for the first time since the US economy went into recession in 2001. An indicator produced by the Bureau for Economic Policy Analysis, a Dutch research institute, showed that in the three months to January world trade in goods rose at annualised rate of 0.2 per cent over the previous three months. The equivalent growth rate in the three months to October was 6.9 per cent.

"This is a substantial deceleration," the institute said. "World trade volume growth is on a downward trend." Trade figures tend to be volatile but even on a longer-term smoothed basis, comparing the three-month average with the same period a year earlier, the growth in goods trade is at its lowest since 2003. The data appear to provide further evidence that global economic activity is slowing, as growth in emerging markets has failed to compensate for weaker demand in the US.

The last time annual growth in trade went negative was in 2001, when the shallow US recession that followed the bursting of the technology bubble and the shock of the September 11 attacks caused global commerce to contract. Trade growth is consistently higher on average than overall economic growth but it also tends to be more variable, dropping sharply during recessions.

Julian Jessop, chief international economist at the consultancy Capital Economics, said there were one-off factors that might explain the weakness in world trade in recent months, including disruptions to shipping and damage to Chinese trade caused by the winter storms. However, he added: "Global trade growth tends to do twice whatever global GDP [gross domestic product] is doing, so with the world economy slowing it doesn't surprise me at all that there is a slowdown in trade."

The indicator - which is monitored by economists at the International Monetary Fund and other official bodies - is compiled from official data that are published by both industrialised and emerging market countries. It covers more than 97 per cent of trade in goods, which itself constitutes more than 80 per cent of total world trade.

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Ilargi: The word "vindication" must have acquired a new meaning lately that nobody bothered to tell me about.

Commodities Drop, Rally in Dollar, Stocks Vindicate Bernanke

The biggest commodity collapse in at least five decades may signal Federal Reserve Chairman Ben S. Bernanke has revived confidence in U.S. financial firms. The Standard & Poor's 500 Index posted its first weekly gain in a month, and the dollar leapt from its lowest level since 1973 after the Fed stepped in March 16 to rescue Bear Stearns Cos., the fifth-largest U.S. securities firm, and expanded its role as lender of last resort to embrace the biggest dealers in Treasury notes.

Investors who had poured money into gold, oil and corn, seeking a hedge against inflation and a weak dollar, sold commodities to raise cash or buy stocks. The Reuters/Jefferies CRB Index of 19 commodities tumbled 8.3 percent this week, the most since at least 1956, after touching a record on Feb. 29. "Bernanke took care of the commodity bubble," said Ron Goodis, the retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. "Commodities are coming back to earth. The stock market looks OK, and Bernanke is starting to look a little better."

Concern that the central bank would let inflation get out of control eased after the Fed cut its key interest rate by 0.75 percentage point on March 18, less than the reduction of at least 1 point that investors had expected. "Clearly they've gotten some stability," said Keith Hembre, a former Fed researcher and chief economist at FAF Advisors Inc. in Minneapolis, which oversees more than $107 billion in assets. "You have to stand back and say, for the time being, it looks to be a pretty successful combination of moves that have worked."

Gold had its biggest weekly loss since August 1990 after reaching a record $1,033.90 an ounce on March 17. Oil plunged almost $10 over three days, after rallying to $111.80 a barrel, the highest ever. Corn dropped more than 9 percent for the week, the most since July. Until this week, commodities had outperformed stocks and bonds as the Fed reduced its benchmark rate five times since September, eroding the value of the dollar and fueling concern that inflation would accelerate. This week's rate cut brought the Fed's target for overnight loans among banks down to 2.25 percent.

Because commodities such as oil and gold are priced in dollars, they have risen as the U.S. currency has weakened in response to the Fed's previous rate cuts. Oil, soybeans, platinum and wheat all jumped to records this year. The weighted UBS Bloomberg Constant Maturity Commodity Index of 26 futures has gained more than 20 percent every year since 2001. The index is up 10 percent this year. Gold had rallied as much as 43 percent since Sept. 18, when the policy makers began lowering the federal-funds rate for the first time in four years.

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Bear Stearns collapse sharpens New York state's economic crisis

The implosion of Bear Stearns Cos. Inc. signaled another hefty hit in state revenue and indirectly added to the woes of area businesses. In an unprecedented move last week, the Federal Reserve helped arrange JP Morgan Chase's acquisition of the troubled investment firm for a mere $2 a share, likely saving Bear Stearns from bankruptcy.

But that didn't provide a lifeline for state officials facing a $4.6 billion deficit less than two weeks from a deadline to pass the 2008-09 budget. In fact, it helped trigger Gov. David Paterson's call for $800 million in additional spending cuts and his budget officials' new conclusion that the economy is in recession.

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Few Banks Have Cut Dividends Despite Need For More Capital

Cash-strapped financial firms should rethink their hefty dividends during the subprime crisis to ease capital shortages, says Treasury Secretary Henry Paulson. "We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies," Paulson said last week. But few banks will likely do so unless the healthiest agree to suspend dividends as well as the weakest ones, some observers say.

Financial companies in the S&P 500 plan to issue $70 billion in dividends this year. Total industry payouts will likely be more than double that. Struggling banks could use those funds to shore up capital and liquidity, while healthy institutions could step up lending. But companies risk raising suspicions that their problems are worsening, sparking the market's wrath, says Richard Yamarone, an economist at Argus Research.


"Right now the market is behaving like a wolf pack," he said. "It's looking for the injured rabbit. So any statement about cutting or suspending a dividend, if it hints at distress, would send the wolves in to finish the job." Paulson pledged to beef up oversight of banks' capital and generally toughen regulations to prevent another subprime crisis. Banks could shore up their balance sheets by temporarily curbing dividends now, he said. Paulson isn't pushing a sweeping change to financial-sector dividend policies, Treasury sources say.

A voluntary sectorwide payout moratorium, though, would shield shaky players from further market stigma, says Louis Crandall, chief economist at Wrightson ICAP, the economic research unit of U.K.-based broker ICAP. "Secretary Paulson said that dividend policies need to be considered," he said. "It's a very legitimate question. But ultimately you don't know whether (a moratorium) would bolster (the financial system) confidence or undermine it." Crandall says "tens of billions of dollars could be added to the aggregate capital position of the financial system," depending on how many big banks and securities firms joined a moratorium.

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Alan Greenspan Loses His Mind

Judging by a just-released Washington Post interview, ex-Fed chair Alan Greenspan has gone mad. There is an upside, of course, in that he has delivered the quote of the year so far. Here is Alan, talking in an interview about how misguided his critics are for suggesting that the recently-ended real estate bubble had its roots in the post dot-com bubble low rates. Implicit in this, of course, is that he should have increased rates sooner to arrest the real estate bubble's expansion:

Those who argue that you can incrementally increase interest rates to defuse bubbles ought to try it some time.

Well, there's no denying you can't get any evidence on the matter from Greenspan's career: He avoided raising rates during both bubbles with which he was faced. And Greenspan continues, offering the following:

"If it weren't the subprime crisis it would have been something else," he said. That is because an era was ending that had seen "disinflationary forces" from developing countries such as China and a "protracted period" in which there was an "underpricing of risk."

Really? Really? Greenspan's Fed didn't prick the real estate bubble because it was saving us from another bubble, whatever it was, that would have been worse? What was it? A lava dome under Los Angeles? Sewer gas under New York? Something else? Because it's really hard to imagine what would have been worse than the real estate bubble, but maybe I lack imagination.

But the tricksy Mr. Greenspan doesn't stop there. Having first said that raising rates doesn't prick asset bubbles, and then sneaking around the side of the issue by arguing that another bubble would have formed anyway, he then spun about and said the following:

Even after the Fed starting raising short-term rates, long-term rates did not rise. He said that at the time "it became apparent that we lost control" of long-term interest rates "as did the Bank of England and all the central banks. As a consequence, we had very little ability to put a brake on the rise in home prices."

Oooh, awesomely argued Alan. In short, even if you had raised rates -- which you wouldn't have, because the Fed can't prick bubbles, and because another worse (unnamed) bubble would have happened anyway -- nothing would have happened, because the Fed lost control of long-term rates. You were totally boxed, and anyone who criticizes you is a clueless nitwit for not seeing that.

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Not So Good Friday For Goldman and Lehman

What if the other shoe drops but no one hears? Standard & Poor's analysts tested the tree-falling-in-an-empty-forest scenario, as it lowered the outlooks for Goldman Sachs and Lehman Brothers to negative while markets were closed.

Standard & Poor's analysts Scott Sprinzen and Diane Hinton affirmed their AA-/A-1+ rating for Goldman Sachs Group and A+/A-1 rating for Lehman Brothers Holdings, pointing to strong underlying businesses and acceptable first-quarter earnings. But S&P also lowered the companies' outlooks to "negative" from "stable" on expectations of 20%-to-30% drops in net sales after write-downs going forward.

The analysts also revised their outlook for the U.S. securities industry at large to "negative," meaning there is a one-in-three chance that there will be a rating change in the next two years. Goldman shares closed Thursday ahead by $13.14, or 7.9% , to $179.63 and Lehman stock added $6.42, or 15.2%, at $48.65. Analysts, while acknowledging the Federal Reserve's support for U.S. broker-dealers boosts confidence in capital markets, said negative outlooks for independent securities firms are appropriate since the potential for decreased profitability is still substantial.

The slashed outlook may be especially difficult for Lehman Brothers to stomach. The financial services firm, whose business mix most closely resembles that of virtually collapsed Bear Stearns, has dismissed recent rumors that it's headed down the same ditch as Bear. Analyst Sprinzen says Lehman has done a better job managing its liquidity than Bear. As of Feb. 29, the firm's excess liquidity structure was $34 billion.

"Lehman is among the largest proportionately of the U.S. broker-dealers, and its sources-to-uses ratio is the strongest of the five," Sprinzen said, adding that earnings have held up and Lehman's fixed income business remains profitable despite being directly affected by the economic slowdown and problematic asset-related write-downs.

Sprinzen called Goldman Sachs' leftover mortgage and leveraged finance-related commitments "manageable" and praised the strength of its liquidity position. "However ... the firm's emphasis on trading activities and its aggressive risk appetite leave it open to the possibility that major missteps could ultimately occur, leading to a change in investor sentiments," Sprinzen said.

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Goldman, Lehman Rating Outlook Cut to Negative by S&P

Goldman Sachs Group Inc., the biggest U.S. securities firm, and smaller rival Lehman Brothers Holdings Inc. had their credit-rating outlook cut to negative by Standard & Poor's, which said Wall Street banks' profits may fall as much as 30 percent in the coming year. "Our current expectation is that net revenue could decline" at least 20 percent for independent securities firms, S&P said in a statement today. S&P affirmed its long-term credit rating of AA- for Goldman and A+ for Lehman. Both companies are based in New York.

The Federal Reserve's decision last week to open a lending facility for brokers and provide financial support for JPMorgan Chase & Co.'s emergency takeover of Bear Stearns Cos. "mitigates liquidity concerns," S&P said. "Nonetheless, we see some possibility, were there to be persisting capital markets turmoil and sharply weakening economic conditions, that financial performance could deteriorate significantly."

JPMorgan, the third-largest U.S. bank by assets, agreed March 16 to buy Bear Stearns in an all-stock deal that values the securities firm at $2.52 a share, or $366 million, based on yesterday's closing price. The collapse of Bear Stearns ranks along with Drexel Burnham Lambert Inc. as the biggest in Wall Street history.

Bear Stearns stock, which peaked at $171.51 last year, closed at $30 two days before the firm was forced to accept JPMorgan's terms or face bankruptcy, after customers and lenders abandoned the broker because of concern about a cash shortage. The Fed agreed to provide as much as $30 billion to JPMorgan in order to get the deal done.

Goldman, Lehman and Morgan Stanley, the No. 2 securities firm, reported first-quarter earnings last week that beat analysts' estimates. Goldman's $1.51 billion profit was down 53 percent from the same period last year. Lehman's fell 57 percent to $489 million. Morgan Stanley's earnings declined 42 percent to $1.55 billion.

Lehman shares plummeted almost 20 percent March 17 on speculation that the firm might face the same crisis of confidence among customers and lenders that felled Bear Stearns. Richard Fuld, Lehman's chief executive officer, said the Fed's decision to allow brokers to borrow from the central bank "takes the liquidity issue off the table," and the company's shares surged 46 percent the next day, when it reported earnings.

The "near-term earnings prospects remain at least somewhat brighter", S&P said in its statement today. Goldman, Lehman and Morgan Stanley have "benefited from the strength of equities trading activity," while wealth management and asset management businesses have also "remained relatively strong," the ratings company said.

S&P said it still can't "rule out the possibility that market sentiment will turn more severely against some firms, undermining the effectiveness of even the most extensive preparations against liquidity stresses."

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Ilargi: S&P explains itself, in clouded language. Still, behind and between the positive words, the warning is clear: Lehman and Goldman have too much debt in their books.

Behind S&P's Negative I-Bank Outlook

Why is S&P Ratings revising the outlooks on Lehman and Goldman Sachs to negative given that profit decline is expected and the Fed is providing new liquidity support?

Both Lehman's and Goldman Sachs' first-quarter earnings results were satisfactory for the ratings, despite a largely anticipated revenue slowdown. Furthermore, we anticipate both firms' underlying business strength—particularly from equities, investment banking, and wealth and asset management activities—will continue to support at least adequate companywide profitability.

We also believe their funding and liquidity profiles are strong and that exposures to troubled assets and other exposures are manageable. Newly granted access to the Fed for liquidity purposes should alleviate liquidity concerns. Because of this expectation, we have affirmed the ratings on both companies.

However, we cannot ignore recent negative market behavior, and the companies' business activities could slow more than what the current ratings could now tolerate. As our base case, we expect a year-on-year decline in net revenues (adjusting for writedowns) in the order of 20% to 30%, but we see some risk that earnings results could be significantly weaker and most likely could result in downgrades.

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Moody's, Fitch Weigh Muni Rating Shift on Pressure From States

Moody's Investors Service and Fitch Ratings took steps to address calls by public officials from California to Congress to rate municipal bonds by the same standards as those for debt sold by companies and countries. Moody's started taking comments on its plan to give state and local governments the option to get a so-called global-scale rating, based on the criteria used to assess corporations, for tax-exempt bonds beginning in May. Fitch named Robert Grossman to lead efforts by its public finance unit to explore whether corporate and municipal ratings should be blended.

More than a dozen states, cities and public agencies said in a March 4 letter to Moody's, Fitch and Standard & Poor's that the current system exaggerates the risk municipal borrowers will default on their debt. California and Connecticut officials called Moody's plan a good first step, while criticizing the firm's silence on whether it will cost more.

"We don't want to have to pay extra for the privilege of getting an accurate rating," said Tom Dresslar, spokesman for California State Treasurer Bill Lockyer. "Our ultimate objective remains adoption by all rating agencies of a unified global approach." Moody's already applies its global ratings to taxable municipal bonds -- upon request and for an added cost. The company said it would maintain its existing municipal rankings under the new plan.

At a March 12 hearing on municipal bonds in Washington, U.S. Representative Barney Frank called any extension of the extra cost to tax-exempt bonds "abusive." Laura Levenstein, a senior managing director at Moody's, said at the Capitol Hill hearing that the company hadn't yet determined whether to charge extra for tax-exempt global ratings. Moody's spokesman Thomas Lemmon said yesterday that the question remains unresolved. "We would certainly try to legislate against that, to charge them double to be treated like anybody else," Frank, a Massachusetts Democrat and chairman of House Financial Services Committee, said March 12.

When California sold $250 million of bonds to fund stem- cell research in October, the state paid $46,200 for the municipal scale rating, $25,000 more for the global scale and $6,250 a year for the life of the bond, Dresslar said. Moody's municipal rating on the bonds is A1, while the global scale rating is Aaa. If California, the most-populous U.S. state, had top credit ratings, it might save more than $5 billion over the 30-year life of $61 billion in yet-to-be-sold, voter-approved debt, Lockyer has said.

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S&P defends municipal bond rating system

Standard & Poor's on Friday defended its present system of rating municipal bonds, a day after two rival agencies took steps to resolve criticisms that municipal bonds are held to higher standards than corporate debt. "We believe it is important to have one global ratings scale that is widely understood, which is why we use the same scale across all sectors," S&P spokesman David Wargin said in an email message.

State officials including California Treasurer Bill Lockyer have recently called on the raters to change their procedures, claiming that municipal bonds are now rated much lower than corporate bonds with an equivalent default risk, raising borrowing costs for state and local governments.

S&P's Wargin said municipal bonds are already rated higher than corporate bonds, with about 99 percent of all munis investment-grade, versus only 20 percent of corporate bonds. Fitch Ratings on Thursday said it has assigned Group Managing Director Robert Grossman to look into possible "harmonization" of corporate and public finance ratings.

Moody's Investors Services on Thursday said that beginning in May, it will give global scale ratings, usually reserved for corporations, as well as municipal scale ratings to tax-exempt municipal securities upon issuer request. It will also simplify the conversion table it uses to estimate global ratings for bonds. In a request for comment published on Thursday, Moody's said it gave global scale ratings to taxable municipal securities starting last year, but received "relatively little interest."

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Ilargi: Cluelessness remains a painful sight.

Americans confident in 2009 turnaround

Though times are tough now, Americans believe the economy will bounce back by next year, according to a survey released Friday. A national CNN/Opinion Research Corp. poll found that 60% of respondents think economic conditions in the United States will be "good" next year, as opposed to the 75% who think the economic situation is "poor" now. "Most people realize that the economy has cycles of ups and downs," said Wachovia economist Sam Bullard. "Fortunately, the last two recessions were some of the shortest on record, so in 2009 we should be pulling up out of this."

Of the more than 1,000 American adults surveyed in the poll, conducted March 14-16, 83% said they are "confident" that they will be able to maintain their standards of living next year, and 85% are "confident" they will keep their jobs over the next six months. Americans also showed faith that they would be able to pay off their future debts, with 90% of respondents demonstrating confidence they would be able to meet their monthly mortgage payments for the duration of the mortgage.

Nearly as many Americans - 83% - said they could pay off college loans, car payments, and credit cards in the future. The average amount of credit card debt of those polled was $4,000. "Consumers, in general, are optimists," said Bullard, who believes that increased consumer spending after the tax rebate checks are delivered in the late spring will help boost the economy in the third and fourth quarters of 2008. "Even when they're not optimists, they love shopping," he added.

But Americans are less optimistic about their long-term financial situation. Only 23% felt "very confident" about paying for their children to attend their choice of college. Furthermore, only 29% said they were "very confident" about saving enough money to live comfortably when they retire, and just 44% believe they will be able to retire when they want to. According to the poll, 58% want to retire sometime in their 60s.
Since respondents were uncertain about their long-term prospects, only 34% said they were "very confident" about maintaining their standard of living over the next 10 years, as opposed to 45% who said the same about next year.

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Beijing tax move to boost ailing share prices

Beijing has temporarily suspended the collection of corporate taxes from Chinese mutual funds in an attempt to boost the country's slumping stock prices. China's finance ministry and State Administration of Taxation announced the exemption in a brief statement carried by state media last night but did not say how long the measure would last.

The exemption applies to all income from investment funds from securities markets - including stock and bond trading, and interest or dividends from stock or bond investments - according to state news agency Xinhua. The exemption also applies to investors who receive income from such funds, the notice said.

The move is aimed at shoring up a market that has dropped almost 40 per cent since the historic peak it reached in October and contrasts with the situation a year ago, when officials were casting around for a way to slow a raging bull market. The government raised the stamp duty on all stock trading in May in an attempt to damp its meteoric rise. The market fell more than 15 per cent in the days following the announcement but soon rebounded and ended the year up nearly 100 per cent.

Mutual funds make up the most significant group of institutional investors in China, with more than 350 funds controlling more than $450bn in assets. Cancelling the corporate tax they pay on their investments in securities will boost returns for them and for investors. The corporate tax rate in China can be as high as 33 per cent although there are exemptions and the government has recently lowered the rate for most domestic companies. The mutual fund industry is one of the most open to foreign investors, who are allowed to hold up to 49 per cent in joint ventures with local partners.

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Sovereign funds steer clear of Wall Street

One group conspicuously absent from a last-minute deal to scoop up Bear Stearns on the cheap were the sovereign wealth funds that have recently spent billions of dollars on Wall Street. Given the hundreds of billions of dollars these state-backed funds control, that is bad news for Western firms or any other company hit by the credit crunch that is tightening its grip on the United States and Europe.

The funds look to have steered clear of the deal to rescue the fifth-largest U.S. investment bank, which JPMorgan Chase & Co. agreed to buy for just $2 a share on Sunday -- or one-fifteenth of Bear's stock price on Friday. With no money coming from the Middle East or Asia in the latest deal for a struggling Wall Street bank, analysts said on Monday that sovereign funds are likely to keep away from U.S. financial assets for now.

"We are digesting all the information that is pouring out of the U.S.," said Chairman Sultan bin Sulayem, whose state-owned Dubai World owns 6.6 percent of casino operator MGM Mirage. Asked if he would invest in the United States now, he said: "I don't know." Qatar's prime minister, who heads the country's $60 billion sovereign wealth fund, told Reuters last month he would rather invest in European over U.S. lenders because U.S. bank stocks were likely to fall further on subprime-mortgage writedowns.

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Rescue Puts Fed Credibility on the Line

Far more than at any time before, the Federal Reserve is putting its vast resources and its reputation on the line to rescue Wall Street’s biggest institutions from their far-reaching mistakes. Over the next few months, the central bank will lend hundreds of billions of dollars to banks and investment firms that financed a mountain of mortgages now headed toward default.

No one knows how many financial institutions will be looking for money, or how much they will seek. No one knows how much in hard-to-value securities the central bank, in return, will have to hold as collateral. And no one knows how much the Fed could lose if the borrowers fail to repay their loans or whether hundreds of billions of dollars will ultimately have to come from taxpayers to shield the nation’s financial system from ruin.

In recent weeks, the central bank announced a series of emergency short-term loan programs that totaled about $400 billion (€254 billion). But on Sunday, Fed officials raised the stakes by offering investment banks a new loan program without any explicit size limit. These moves, along with a $30 billion credit line to help JPMorgan Chase take over the failing Bear Stearns, is fraught with more than financial risk.

The biggest danger is damage to the Federal Reserve’s credibility if it is seen as unwilling to let financial institutions face the consequences of their decisions. Central banks have long been acutely sensitive to “moral hazard,” the danger that rescuing investors from their mistakes will simply encourage others to be more reckless in the future.

Fed officials for years have cringed at the mention of a “Greenspan put,” an allusion to the belief of some investors that Alan Greenspan, the former Fed chairman, would use the Fed’s powers to protect them against a plunge in financial markets and provide them with a metaphorical “put” -- an option to unwind their positions at an acceptable price. But the moves undertaken by the current chairman, Ben S. Bernanke, amount to a much bigger insurance policy than anything Mr. Greenspan provided.

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How America's Banks Lost their Reputations

"Until now, financial markets were considered a fast, fair measure of the valuation of securities, but it has collapsed in the areas" affected by the credit crisis, said Manfred Jäger of the German Business Institute (IW). There's now a crisis of faith in the markets that won't be easy to mend. That's why it doesn't surprise Jäger that banks are waiting so long to release figures -- to extent that they can even reliably provide them. "The markets are responding to every new bit of information in an exaggerated manner, depressing share prices."

The high level of nervousness in the markets is also creating a situation in which the banks have less and less room to maneuver at a time when they urgently need money. "If, for example, they call on hedge funds to increase their security, then they are forced to buy bonds. But those purchases push down the value of bonds and the degree of debt climbs. It's a vicious circle," said IW expert Jäger.

But experts claim it is the banks themselves that have created the mess. "They entered into fairly reckless transactions with high-risk loan packages, always trusting that things would go well," said Roland Döhrn of the RWI Essen economic research institute. In order to secure money from markets, the banks also took advantage of loopholes in regulations, he said. "Credit lines for subsidiaries, which then went into speculative finance products, were limited to 364 days -- because after one year, banks are forced to deposit their own capital." So the banks' slide into the crisis was far from coincidental.

"Innovation euphoria" is how Ms. Schäfer, the DIW expert, diplomatically described the reason for the banks' enormous problems. Financial institutions have believed for a long time that they could minimize risk by rolling up all their loans in special packages. Now disillusionment is setting in, as it did after the New Economy balloon deflated. "Although speculation and hyperbole belong to the system," said Schäfer, "a healthy skepticism is always recommended over lofty profits."

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Cliff Notes on Financial Maelstrom

Bear Stearns was fed to the wolves, an easy correct forecast from last early autumn. Denials nowadays constitute confirmations, from mere mention. Their refusal in 1998 during the LongTerm Capital Mgmt bailout to act like a Wall Street team player was the hidden motive to carve them into pieces. One must ask why last Friday it traded around the $30/share price all day long after 10am.

The answer is easy, as they wanted to give insiders a chance to sell most of the 186 million shares, a gift of $5 billion sure to anger many. My view is that JPMorgan took its best assets at discount, tossed much of the damaged assets into their Wall Street garbage can, which is never emptied, never sees any balance sheet, blessed by the US Federal Reserve, protected to new security laws.

If Bear Stearns share holders reject the JPM seizure takeover, then the gem Bear Stearns headquarter building in Manhattan can be bought by JPM for a song. Actually, JPM might have only started the bidding process, sure to result in JPM upping their own bid. BStearns has (or had) 14 thousand workers, most having been paid in stock share bonuses in recent months. The economy in New York City is sure to be badly harmed, worse than already. Wall Street jobs account for 35% of NYCity wages.

The other story not told is that Bear Stearns was dissolved before the wrecked investment bank had a chance to take advantage of the Term Security Lending Facility. It will be made available by the USFed at the end of March. The sleazy hogs on Wall Street wanted to remove one player at that window. The other story not told is that a liquidation of Bear Stearns would inevitably have resulted in a massive credit derivative meltdown.

The consequences cannot be estimated. The derivative upside down pyramid is mammoth. No precedent exists for its partial unwind or dissolution. The pyramid holds together the entire USTreasury complex, attached to interest rate swaps, attached to credit default swaps of various types, and so on. This pyramid is leveraged 70 to 1. The talk is funny though, since the USFed has backstopped only $30 billion in Bear Stearns securities.

What about the other $800 to $1500 billion rancid bonds floating within striking distance to Wall Street and major bank balance sheets? In truth, we might later learn that Bear Stearns helped to bail out JPMorgan, in helping to shore up its credit derivatives, in providing some emergency collateral, soon to bust, to prevent a JPMorgan failure!!! JPMorgan owns $7.778 trillion of credit derivatives, two and half times as much as Citigroup, the same toxic stuff that crippled Citigroup. JPMorgan skated on this one without publicity.

The other story is that Bear Stearns CEO Alan Schwartz assured just last week that all was well, liquidity was adequate, and the company was in good shape. Enron CEO Ken Lay said the same thing. And lest one forgets, Enron and Bear Stearns have a common denominator in JPMorgan being a key player in the operations and agent during the demise of the two firms.


JPM taught Enron everything they knew about offshore special purpose entity firms, yet they escaped all legal challenges by losing clients in court. When the USFed frees JPM from liability on any losses from collateral submitted by Bear Stearns, one has to giggle since the USFed is JPMorgan. Think consolidation of the best bond assets in JPMorgan's hands. Think more damage and consolidation upon the next victim, like Lehman Brothers. Think building the Fed Reserve bank system. The Mussolini Fascist Business Model might be opening a new chapter.

The XBD banker broker dealer stock index had a horrible day on Monday, with some repair on Tuesday and Wednesday. The XBD stock index fell 11% in a visit to hell and back, rendering big technical damage to many component stocks, especially Lehman Brothers. LEH fell by 19% on Monday. Goldman Sachs was down 10% early in the day, closing down 4%. Citigroup lost another 7% after being down almost 10%, UBS lost 11%, Morgan Stanley lost 8%, Merrill Lynch lost 4% after being down 8%. The stock price action tells the wary observer to expect a challenge or near death experience for Lehman Brothers, possibly worse.

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