Debt Rattle, March 25 2008

---

Updated 3.00 pm EDT

---

Ilargi: We’re crawling towards the truth here. It's all way slow, but hey, at least we’re moving. Real losses will be much higher than "even" this report states, but you already knew that if you follow this site. By the way, markets are up today. In view of this Goldman Sachs report, isn't that the joke of the millenium?

Credit crunch losses will hit $1.2 trillion: Goldman Sachs

Goldman Sachs forecasts global credit losses stemming from the current market turmoil will reach $1.2 trillion, with Wall Street accounting for nearly 40% of the losses.

U.S. leveraged institutions, which include banks, brokers-dealers, hedge funds and government-sponsored enterprises, will suffer roughly US$460-billion in credit losses after loan loss provisions, Goldman Sachs economists wrote in a research note released late on Monday.

Losses from this group of players are crucial because they have led to a dramatic pullback in credit availability as they have pared lending to shore up their capital and preserve their capital requirements, they said. Goldman estimated US$120-billion in write-offs have been reported by these leveraged institutions since the credit crunch began last summer.

"U.S. leveraged institutions have written off less than half of the losses associated with the bursting of the credit bubble," they said. "There is light at the end of the tunnel, but it is still rather dim." Of the cumulative losses expected by these leveraged players, bad residential home loans will represent about half, while poor-performing commercial mortgages will represent 15% to 20%.

The rest of the losses will come from credit card loans, car loans, commercial and industrial lending and non-financial corporate bonds, Goldman economists said. Facing more credit losses, leveraged institutions have raised about US$100-billion in new capital from domestic and foreign investors and reduced dividend payouts. This amount is more than three-quarters of the write-offs to date, the report said.

---

Ilargi: What can I say? Remember 1974?

U.S. expectations sink to 34-year low

Consumer confidence took an unexpectedly sharp hit, dropping to a five-year low in March, the Conference Board said on Tuesday, as expectations for the future tumbled to their lowest in 34 years. Consumers continued to fret over job prospects, the Conference Board said, as the labour market continues to tighten amid an economic slowdown brought on by the worst housing slump in a generation.

The Conference Board said its index of consumer sentiment fell in March to 64.5 -- its lowest since March 2003 -- from an upwardly revised 76.4 in February. The median forecast of economists polled by Reuters was for a reading of 73.5 in March. February's index was originally reported at 75.0. The Conference Board, a private business and research organization, said its expectations index fell to 47.9 -- its lowest since January 1974 -- from an upwardly revised 58.0 in February.

In another troubling sign, the measure of "jobs hard to get" rose to 25.1 in March -- the highest since October 2005 -- from a slightly downwardly revised 23.4 in February. The measure of "jobs plentiful" fell to 18.8 in March -- the lowest since November 2004 -- from an upwardly revised 21.5 in February.

"The labour component of the confidence index, especially, is worth pointing out," said Josh Stiles, senior bond strategist at research consultancy Ideaglobal in New York. "Most Americans are stretched right now and not spending at a normal pace. This is significant." On Wall Street, stocks losses extended, while the dollar extended its losses against the Japanese yen. U.S. Treasury bonds, which usually benefit from signs of economic weakness, extended earlier gains following the report.

---

Ilargi: I did see the Wall Street Journal report yesterday, as I wrote. I was going to leave it alone, but BigPicture lays into it once more. It's not just the WSJ, this blatant nonsense is all over the media. I just hope everybody with at least one working neuron now understands what is happening: US home sales were down 23.8% last month.

So why do all media write up that same untruth? Many journalists are undoubtedly simply incompetent, but for others I suspect something else is creeping in: fear.

A drop in home sales by 25%(*) is an utter and downright DISASTER for the US economy, it is a sign of severe danger.

Here's Barron's graph from yesterday again, just to make sure you let it sink in. I know it's not scaled to zero, but look at the grey bars here. That is a cliff, if not an abyss.

In the US, both sales and prices are in a record slump.. No matter what nobody says.


(* A good friend yesterday asked if the NAR had included in its report that February '08 had 3.6% more days, being a Leap Year. I doubt it. That would lift the number over 25%)


How Counter-Productive is Realtor Association Spin?

Some Trade Associations, like the ATA tonnage index, or the Home Builders Index, simply put out the straight dope -- an unvarnished, unblinking look at their industries, so their members can better make informed business decisions with the available data. Other groups massage the data, spin the message, and try to present their info in the most positive light  -- regardless of the underlying data. They seem to believe that if only the public believes things are okay, it will become a self-fulfilling prophecy.

The National Association of Realtors falls into this latter category. They have been calling the bottom in Housing, well, ever since the top 2 1/2 years ago; Their consistent claims of stabilization and price improvements later in the the year -- as prices have continued to slide -- have earned them the title of Worst. Forecasters. Ever. What is more damning, IMHO, is that they are not just wrong, but purposefully misleading for commercial purposes. I believe that is defined as Fraud.

Occasionally, they manage to find success -- but only when a complacent and/or ignorant financial press fails to do its job. Today, we see evidence of that in an embarrassingly incorrect front page story in the Wall Street Journal: Wave of Foreclosures Drives Prices Lower, Lures Buyers. In a front page, 3rd paragraph snafu, the Journal writes:

"On Monday, new data suggested that pressures like these are starting to drive prices low enough to attract some buyers back into the market. Sales of previously occupied homes jumped 2.9% in February from the month before, the National Association of Realtors said, the first increase since July."

As we noted yesterday, that was not what the data stated at all: "Changes from January to February are measuring seasonal differences, not actual improvements in house sales." Can you imagine what it would be like if we reported retail sales from December to January this way? Headlines would misleadingly state: "Retail sales plummet 65%!"  That is why with highly seasonal data series, the preferred methodology is to report year-over-year data -- not month-to-month variations.

And what were those numbers? The year-over-year data for existing home sales were DOWN 23.8% below February 2007 levels. That datapoint never found its way into the WSJ article at all. I cannot recall a more blatant misreporting of fact, or a larger or more embarrassing error in a front page WSJ article, ever.

While the NAR might be high-fiving each other over their successful deception at the Journal, they may wish to reconsider. As we noted over a year ago, many realtors in the field are finding the NAR tactics frustratingly counter-productive. Why? It seems that Realtors were having a hard have time convincing home sellers to price their houses more realistically. Even as home builders were slashing new-home prices to move bloated inventories, "many home sellers are still holding off, hoping - along with FAR and NAR - that prices will start moving back up soon."

Hence, the impact of today's successful deception and incompetence on the part of the WSJ may ultimately be less flexible pricing of homes, negatively impacting sales.

---

Home Prices Continue 5-Month Decline According to New Report

The Standard & Poor's S&P/Case-Shiller Home Price Indices (HPI) for January which were released on Tuesday are reporting further bad news on the home value front.

The HPI which tracks, in two different indices, 10 and 20 metropolitan statistical areas (MSAs) across the United States, reported that the prices of existing family homes nationally continued to decline into the new year. 16 of the 20 MSAs in the larger survey reported record declines, ten of them reaching double digits.

Both the 10-City and the 20-City Composite Indices are now reporting annual declines in excess of 10 percent. The 10-City had a record annual decline of 11.4 percent; the 20-City reported a decline of 10.7 percent.

---

Fed auctions another $50-billion

Fighting to ease a dangerous credit crisis, the U.S. Federal Reserve has provided a total of $260-billion (U.S.) in short-term loans to squeezed banks since December to help them overcome credit problems. The U.S. central bank on Tuesday announced the results of its most recent auction — the eighth since the program started in December — where commercial banks bid to get a slice of $50-billion in short-term loans.

It's part of an ongoing effort by the central bank to provide relief to a spreading credit crunch that has unnerved financial markets. The situation threatens to push the country into a deep recession. Counting the latest auction results announced Tuesday, the Fed has provided a total of $260-billion in short-term loans to banks since December. In the most recent auction — which marked the eighth — commercial banks' paid an interest rate of 2.615 per cent, the lowest rate for any of the auctions of this kind conducted so far.

There were 88 bidders for the latest slice of the $50-billion in 28-day loans. Demand was high. The Fed received bids for $88.9-billion worth of loans. The Fed, around the middle of December, announced it was creating an auction program that would give banks a new way to get short-term loans from the central bank and to help them over the credit hump.

---

Ilargi: We have a downgrading contest on our hands.

Merrill Lynch targeted by earnings downgrades

The embattled financial sector took another hit on Tuesday as JPMorgan Chase and UBS AG cut their earnings forecasts for Merrill Lynch & Co Inc and said they expect the Wall Street firm to disclose more writedowns. In turn, Merrill downgraded regional banks Bank of America, PNC Financial and SunTrust Banks Inc, saying the bursting of the housing bubble will continue to hurt lending and home equity.

The sharply lowered earnings expectations for Merrill stood out, though, dashing whatever confidence had been restored last week after the Federal Reserve helped arrange for JPMorgan to take over Bear Stearns Cos Inc, avoiding a systemic meltdown among banks. "In our view, Merrill Lynch is overexposed to the credit markets, which have been challenging, especially in the areas where Merrill has been most active," JPMorgan analysts Kenneth Worthington and Funda Akarsu wrote in a note.

Merrill shares were down 2 percent to $47.27 near midday, and the banking sector was the biggest drag on the Dow Jones industrial average. JPMorgan forecast Merrill would write down an additional $2.1 billion of subprime debt, leading to a loss in the first quarter. Merrill had $24.4 billion of mortgage-related write-downs in 2007, among the most on Wall Street, according to a Reuters tally.

The earnings forecasts for Merrill and the increasingly negative views on banks are a reminder that the financial sector's troubles as a result of the crisis of confidence in lending markets are far from over, even after JPMorgan on Monday quintupled its offer for Bear Stearns to $10 a share.

---

Ilargi: Jim Sinclair explains once more what we have been saying all along. Derivatives, once they start to unwind, will bring everyone to their knees, and there’s not nearly enough money or credit to do anything about that.

The Financial Destruction Of The Average Man

This weekend’s meeting of four heads of central banks communicates the size of the OTC (Over The Counter) derivative disaster. It is a system that is broken. A bailout will require the printing of trillions of dollars worth of monetary stimulation making Bernanke’s helicopter drop look like chump change. The dollar number of pending derivative bankruptcies is the size of the mountain of garbage paper issued by just those who are to be bailed out.  That number is greater than the total world economies.

There simply isn’t enough money in the world for central banks to buy up the mountain of worthless paper sold by those who need bailouts; all of which made fortunes for their directors, officers and key people. When an OTC derivative fails to perform, notional value becomes real value. The notional value of all OTC derivatives exceeds $500 trillion. Credit default swaps (OTC derivatives) alone account for over $20 trillion dollars of notional value and are failing. Major dealers in these items, Lehman and JP Morgan, had their debt downgraded last week.

Maintaining the AAA rating on debt of public companies primarily issuing default swaps as credit guarantees is a sick JOKE of fabrication. This is a JOKE that in all probability will lead to litigation that destroys the rating companies. You can be absolutely sure that all the biggies have their money out. No one mentions these firms being bailed out are the ones who created this disaster, making billions for their economic sin. You can be sure the big boys have their money out of the now on-the-rocks international institutions.

No one mentions that bailing out the bankers will leave the average man victimized and paying for the pleasure of the economic rape. Meanwhile Derivative Traders (salesmen of perdition, not traders) and their hedge fund managers are all in Greenwich Connecticut with their hundreds of millions and billions, now retired playing tennis on their indoor courts at their waterfront mansions as the mess deepens. Litigation against the officers and directors of these international banking firms, both against the biggies personally as well as the company, will make the biggies occupation one of defending against litigation for the rest of their lives.

For those biggies in these companies who trust no one and therefore have wives with no money will lose everything. Some of them I know. What goes around certainly comes around. Litigation against OTC derivatives are slam-dunk victories for the injured plaintiffs. The biggies will pay. This is the greatest act in history of “Public Be Damned” and “Let them Eat Cake.” It will not come about because in the USA it is already the hottest political potato. The problem is that the plan of the US legislative is down right STUPID. It is an embarrassment that legislators are so publicly moronic when it comes to economics.

The problem that no one is focusing on right now is the tracking of the mortgage itself to the structured product, which has broken down. That means in these items many can’t connect the underlying mortgage to the structured investment product (derivative). So far courts have held that the only entity that can foreclose is the entity that actually lent the money.  The average guy does not know that with an attorney to protect him he has a free house!

The entity that actually lent the money has sold the mortgage and been paid. Therefore where is the incentive for original lender to foreclose? The answer is there is none. Bankers do not help bankers in the same way that sharks do not help sharks. Because of the unthinkable size of the problem it is impossible to construct a Resurrection Trust to buy all these worthless and never to be anything but worthless items. Should any item surface to do this it will destroy all the National currency of the central banks that participate.

Anyone who last week assumed the problem was over and we would be improving from there on out is simply nuts.

---

JPMorgan's Bear bid 'a risky deal', pays $65 per share

JPMorgan Chase & Co's sweetened offer for Bear Stearns Cos Inc carries high risk for JPMorgan, Punk Ziegel analyst Richard Bove said, adding that according to his calculations JPMorgan was paying about $65 per share for Bear excluding the planned issue of new Bear shares.

JPMorgan, facing pressure from disgruntled Bear shareholders, raised its all-stock offer for Bear on Monday to about $10 a share from its original bid of $2 a share. Under the revised deal, JPMorgan will also buy 95 million newly issued Bear Stearns shares. With those shares, JPMorgan would own 39.5 percent of Bear.

Bove's calculation puts the total cost of the deal at $3.44 billion, or about $23.75 per share excluding the new shares. Adding in a likely 12-month loss of $6 billion to combine the companies, the offer price rises to about $65 per share, he said. "Investors believe that JPMorgan is underbidding for Bear Stearns... I do not," said Bove, one of first financial analysts to recommend selling financial stocks.

Including the planned share issue by Bear Stearns, most analysts estimated that the new offer valued Bear at about $2.1 billion. The original offer valued Bear at about $236 million. "What is most disturbing about this deal is that it uses a great deal of Morgan capital to buy a company that is losing market share, in a series of businesses that are declining in size, with a top management team that is best described as sclerotic," Bove wrote in a note to clients.

Every aspect of this transaction is likely to be tested in the courts with JPMorgan paying the bill all the way, he said. "Bear Stearns is a deeply troubled company which would have no value if the Federal Reserve had not stepped in to bail it out," Bove wrote. Bear's prime brokerage business, which caters mainly to hedge funds, is "the key jewel" that JPMorgan needs, Bove added.

"However, it is my understanding that this business' best customers have long since decamped to Goldman Sachs. JPMorgan is going to have to work hard to get these people back," he said.

---

Ilargi: This here may have a global impact; real-life, reality based, mark-to-market valuations of securities are rare. Now there’s a precedent. And Gillian Tett at the Financial Times has taken a closer look than some other analysts, even though an estimate of an average loss of 44% has already been reported by RBC,

Securities estimates revealed in court

The first public price estimates for specific structured credit securities to have emerged since the start of the credit crisis show that values have fallen sharply. Some securities have lost almost a third of their value - even though many were considered to be so safe that they carried top-notch ratings from the credit ratings agencies. Meanwhile, some subprime mortgage-linked securities issued by groups such as UBS have lost almost 95 per cent of their value.

The price estimates were made in a legal filing following a decision by JPMorgan Chase to -publish detailed securities valuations in a Canadian court. The securities are linked to commercial loans and medium-grade mortgages. The estimates are likely to be scrutinised by auditors and regulators since they come at a time when the issue of security pricing has become controversial.

Banks are under pressure from regulators to book losses they have incurred on such instruments. However, trading has virtually dried up in many corners of the credit markets, and it is hard to compare prices for these instruments between banks.

Many regulators and investors fear that banks are still varying in the degree to which they have booked losses on their credit instruments in recent months - not least because it is hard for auditors to compare internal estimates with external benchmarks.

The figures have emerged because the US bank is leading an effort to restructure a group of 20 Canadian structured investment vehicles that issued $32bn of asset-backed commercial paper.

---

Ilargi: Looks like some people have to read the documents a little better.

Canadian Group Urges Caisse to Buy Commercial Paper

A group of Canadian investors wants pension funds such as the Caisse de Depot et Placement du Quebec to buy their insolvent commercial paper to ensure a C$32 billion ($31.4 billion) rescue plan for the debt succeeds, a spokesman for the investors said. Brian Hunter, an oil and gas engineer from Calgary who has about C$658,000 invested in the frozen paper, said he and other investors may be willing to vote in favor of the plan, provided someone buys the debt from them.

"If I was running the Caisse, I would not let this thing go to a vote that I had a chance of losing," Hunter said in a telephone interview today. "It will be a negotiation." A group of institutional investors including the Caisse, which holds more of the frozen paper than any other firm, proposed a plan last week to convert the commercial paper to new notes that mature within nine years.

Canada's largest restructuring requires the support of a majority of individual noteholders, many of whom say they will reject the plan because they can't wait nine years to be repaid on debt that was supposed to mature in 30 to 90 days.
Gilles des Roberts, a Montreal-based spokesman for the Caisse, Canada's biggest pension fund manager, declined to comment. The Caisse holds about C$12.6 billion in the frozen commercial paper.

Hunter, who has assembled a group of disgruntled commercial-paper holders on the social-networking Web site Facebook, says at least 40 investors would consider negotiations to have their paper bought by institutional investors. He also sent a letter to Canaccord Capital Inc., his broker, asking them to repurchase the securities.

Toronto lawyer Purdy Crawford, who led the restructuring, said last week a defeat of the plan would lead to billions of dollars in losses and the forced sale of assets "at very depressed prices." Hunter estimates there are about 1,000 individual investors holding the paper, along with about 110 institutions holding the debt. Many investors, including Hunter, purchased their investment through brokers such as Vancouver-based Canaccord, believing their investment was in safe, money-market funds. In August, when the market for non-bank asset-backed commercial paper froze, Hunter said he was called by his broker who told him his "cash isn't cash anymore."

Canaccord Chief Operating Officer Mark Maybank said in an interview last week that the brokerage doesn't have the money to buy back the C$269 million in commercial paper held by its clients. The value of the commercial paper has dropped to about 56 percent of its original value, RBC Capital Markets analyst Andre-Philippe Hardy wrote today in a note to investors. That's because of a decline in the value of U.S. subprime assets and structured debt securities that make up about half of the frozen paper, the analyst said. He estimated the C$3 billion in paper backed by subprime loans has plunged to about a fifth of its original value.

---

Ilargi: In the real world, some 15% of people in Ohiop are eligible for foodstamps; 10% actually applied for them. But the jobless rate is at 5.3%!! That means scores of people who have jobs still need foodstamps to survive. Isn’t that something?

Food stamp use hits all-time high in Ohio

Amid a sluggish economy, a record 1.1 million Ohioans are getting food stamps, the state’s welfare agency said. That’s about 10 percent of the state’s population. Caseloads have almost doubled since 2001, when an estimated 628,000 people were in the program, according to the Ohio Department of Job and Family Services.

Low wages, unemployment and more expensive groceries, gasoline and other necessities have contributed to financial hardships facing many families. Ohio’s jobless rate is 5.3 percent, up from 4.4 percent in 2001. Caseloads have been increasing for the past seven years, said Brian Harter, spokesman for the Job and Family Services Department, which oversees the food stamp program.

“The economy and loss of manufacturing jobs are at the root of what’s going on. But lately (it’s) the rising cost of transportation and food — people who were barely getting by, are not getting by,” said Jack Frech, director of the Athens County Department of Job and Family Services in southeast Ohio. “It has pressed folks to the edge to have to rely on food stamps.”

Another 500,000 Ohioans are eligible for the program but not enrolled, experts who study poverty say. Those in households that make up to 130 percent of the federal poverty level — $22,880 for a family of three — and with assets no greater than $2,000, in most cases, are eligible for food stamps.

---

'Fedization': Bear's Rescue Presents a Major Moral Hazard

Ladies and gentleman, please welcome a new economic term. As the privately owned New York Federal Reserve starts out on a banking shopping spree, the new twist in the latest systemic crisis of the financial sector shall be called 'Fedization' in contrast to the old-fashioned nationalization that stood at the end of past banking crises. The Federal Reserve has now entered the casino in a sacrilegious way, by taking (in)direct stakes. Forget level playing fields, some investment banks will be more equal than others, withstanding all contrasting official statements to come.

What's next on the shopping list? General Motors, Starbucks coffee served by the Fed or more funny paper for a share in Fannie Mae and Freddie Mac? On Monday the NY Fed announced that it would form a limited liability corporation that will provide another $29 billion in financing for JP Morgan's purchase of Bear Stearns. This LLC will receive $30 billion in assets from JPM as collateral for its loan, financed at the discount rate of 2.5%. The statement says:

At the closing of the merger, the Federal Reserve Bank of New York ("New York Fed") will provide term financing to facilitate JPMorgan Chase & Co.'s acquisition of The Bear Stearns Companies Inc. This action is being taken by the Federal Reserve, with the support of the Treasury Department, to bolster market liquidity and promote orderly market functioning.

The New York Fed will take, through a limited liability company formed for this purpose, control of a portfolio of assets valued at $30 billion as of March 14, 2008. The assets will be pledged as security for $29 billion in term financing from the New York Fed at its primary credit rate.

JPMorgan Chase will bear the first $1 billion of any losses associated with the portfolio and any realized gains will accrue to the New York Fed. BlackRock Financial Management, Inc. will manage the portfolio under guidelines established by the New York Fed designed to minimize disruption to financial markets and maximize recovery value.

This stinks as does the rest of this multi-billion deal where I am still looking for the actual cash involved. So far I can only see several layers of debt. Why is this portfolio valued at prices of March 14? What happened to realtime data? How much is this portfolio worth today? According to the WSJ, taking it from the NY Times, JPM will now exchange 0.21753 shares for every Bear share, effectively quintupling the original offer of 0.05473 shares. No cash here.

The offer was also sweetened with an issue of 95 million new Bear shares JPM will buy until April 8, giving it a 39.5% stake in outstanding shares. No mentioning of cash here either. The WSJ has the full text of the "merger" agreement here. According to it JPM will enact an exception of the NYSE's Shareholder Approval Policy which provides an exception in cases where the delay involved in securing shareholder approval for the issuance would seriously jeopardize the financial viability of the listed company.

While this may be good news to Bear debt holders, this action by the NY Fed raises the question of whether Fedization will be a new precursor in the century-old banking cycle that provides dividends for shareholders in good times and a nationalization of losses at the end of every monetary expansion process. The Fed as a step-in continues to keep the mountains of pretensions markets are helped with since August 2007. Pretensions such as: The Fed pretends the collateral has a value and markets pretend the freshly digitized billions of credit are money.

I also fail to understand what it means that the Fed will absorb the first billion of losses on the collateralized portfolio. Is this an effort to build trust that the Fed actually sees value in this portfolio? Anyhow, I am confident that the new twist in cleaning up the mess will not have been seen for the last time now that the NY Fed has opened the floodgates, with the official encouragement of the US Treasury Dept. There are many more investment banks under the waterline that cannot be nationalized as the state certainly has no function in taking part in what is effectively institutionalized gambling.

---

Bear-faced cheek of Dimon's cheap deal

The topsy-turvy saga of Bear Stearns' sale to JPMorgan Chase was a tale of two weekends. On the night of Sunday March 16, as JPMorgan announced the purchase of Bear for a mere $236m in stock, it looked as if Jamie Dimon, JPMorgan's chairman and chief executive, had engineered a brilliant deal for his bank and shareholders. Backed by a $30bn credit facility from the US Federal Reserve, the agreement saved Bear from bankruptcy and gave JPMorgan a swathe of coveted businesses at a fraction of the price at which they had been valued in the previous days.

Almost exactly a week later, Mr Dimon was forced into a surprising climbdown, raising the offer for Bear by five times, to $10 a share, and agreeing to shoulder $1bn of potential losses from the books of the stricken investment bank. The Fed, which was believed to have supported JPMorgan's low-ball offer because it made the bid appear less of a bail-out of Bear's shareholders, is now facing questions as to whether the new price will stoke moral hazard in future crises.

The Fed declined to comment. Mr Dimon told the Financial Times yesterday that the new deal would benefit all parties. "We are paying more, certainly, but it's got to make sense for us and this makes sense for us and our shareholders." Mr Dimon declined to pinpoint a specific reason for JPMorgan's change of stand, but people close to the situation said that the original deal was undone by a combination of market forces, legal slip-ups and worries about an exodus of Bear's employees.

The stock market's reaction to JPMorgan's original bid of $2 per Bear share was one of disbelief. That remained the case even after a rise in JPMorgan's shares increased its value to about $2.5 per share. For most of last week, Bear's shares remained stubbornly above the offer price - a sign that investors were betting on a higher offer from JPMorgan, or a rival bid. JPMorgan's executives at first dismissed the move as a technical response by the many hedge funds that had been shorting Bear in its final days and rebuffed suggestions that they would raise their offer.

But with large investors such as Joseph Lewis, the UK-born billionaire who stood to lose hundreds of millions of dollars on his 9 per cent stake in Bear, vowing to do anything possible to engineer a higher bid, the momentum began to turn against JPMorgan. At the same time, JPMorgan and its lawyers had become increasingly worried at some of the legal language agreed in the feverish negotiations that preceded their first bid.

Of particular concern was a provision that would force JPMorgan to guarantee Bear's liabilities for a year even if its offer were voted down. The loophole clearly exposed JPMorgan to the risk of being left responsible for losses on positions over which it did not have any control, nor any collateral against. The third factor that pushed the two sides to renegotiate was the prospect of Bear's best executives rushing for the exit.

---

Short-term bets on Bear stock reap rewards

Traders who piled headlong into cheap Bear Stearns shares last week got rewarded on Monday with a windfall when JPMorgan Chase & Co lifted its buyout bid by a five-fold margin. Bear's stock turned into a day trader's playground on March 14, when it announced a deterioration in its liquidity.

On March 17, Bear agreed to a $2 a share deal to sell itself to JPMorgan. That was bumped up on Monday to $10 a share. Hedge funds, arbitrage traders, Bear bondholders and those unwinding short positions were among those said to be buying Bear's stock last week as it traded between $2.84 and $8.50.

The average daily volume traded in Bear's stock over the last 10 days was 96.6 million shares -- nearly equal to Bear's free float of 110 million shares. March 14 saw the biggest spike in volume, with 187 million shares changing hands. "It would seem those who ... stepped into those shares anywhere between $2 and $5 have obviously done very well," said John Augustine, chief investment strategist with Fifth Third investment advisors.

"You now have a whole another set coming in at $10 to $13 a share that wants to do equally as well. Their chances of being equally rewarded are materially less, given the structure of the deal." Of course, for every winner, there's a loser. It is quite possible that some Bear stockholders sold out last week, thinking that getting $3 or so was the best they could do.

They may have an opportunity to recover the difference, said class action lawyer Roger Kirby at Kirby McInerney & Squire. He said he has been approached by Bear shareholders, but not filed any litigation.
But to do that, it would have to be proven that someone at JPMorgan or Bear had known the initial bid was "just testing which way the market wind could blow and they had a backstop plan" to increase, he said. 

---

The Bear Skinning Continues

So now JP Morgan is going to pay $10 per share for Bear Stearns? We can be confident that if the deal doesn’t make enough powerful people happy, it can just be re-jiggered tomorrow. Given the incentives, the law and contracts don’t matter. This is about what people with a license to kill and the ability to require the planet to pay for it want.

Since the citizenry is picking up the tab with an inflation tax, it wouldn’t be fitting that we get a piece of the equity so best not to let it look too rich. That’s us, Mr and Mrs. John Q. Public, all risk, and no reward. So might as well raise the price so the Bear Stearns shareholders can get more. Otherwise the $6 billion litigation budget might have to go up.

Don’t you just feel terrible for Bear Stearns? After years of profiting from systematic ethnic and economic cleansing of America’s neighborhoods and pushing crappy paper globally, they got rolled by the Rockefeller interests. Big financial mafia swallows smaller financial mafia. Old money takes out new money. The centralizers keep centralizing. That’s how they do.

---

U.S. cities grapple with surge in abandoned homes

On Lagrange Street in New England's second-largest city, two brick apartment buildings stand side-by-side in varying stages of decay -- boarded up, "No Trespassing" signs affixed, paint pealing. Across the street, a condominium complex is on the brink. Three of its eight apartments are in foreclosure. Like many cities in the United States where the home vacancy rate has scaled its highest since records began in 1956, the former textile mill city of Worcester in Massachusetts is turning to the courts to fight back.

Their target: banks who abandon properties and who leave behind a glut of empty, dilapidated houses that draw crime, cut tax revenue and depress nearby property values in a market already in a tailspin. "This is the trenches here. We've got to stabilize our community," said Worcester city manager Michael O'Brien in a sidewalk interview outside the foreclosed condominiums on the quiet street in a Hispanic neighborhood.

The city of 175,898 people, a munitions depot during the U.S. Revolutionary War, offers a window into how U.S. cities are grappling with a wave of foreclosures that has pushed the U.S. homeowner vacancy rate to a record 2.8 percent in the fourth quarter of 2007 -- or about 1 million homes. Like many U.S. mayors and city officials, O'Brien blames "predatory" lending practices prevalent in the U.S. property boom for the lion's share of about 4,220 mortgages in his city that are either in, or at risk of, foreclosure.



Syracuse, New York, began selling vacant homes last year for $1 each to non-profit groups who promise to tear them down and renovate them. Last month, Syracuse Mayor Matthew Driscoll extended the deal to private companies. The aim is to get abandoned homes back on the market in one to two years and back on the tax rolls.

"The foreclosure crunch has now meant that no neighborhood is exempt from having a vacant property pop up," said Kerry Quaglia, executive director of Home Headquarters, a non-profit that demolished about 100 homes and renovated 40 last year. Some cities such as Cleveland are developing land banks to buy and either demolish or repair distressed properties.

"Because of the foreclosure crisis we are seeing this incredible glut of inexpensive distressed houses being sold at pennies on the dollar," Cleveland city councilman Tony Brancatelli said in a telephone interview.
"The mortgage companies don't want to hold onto them so they are dumping them on the Internet at a rapid rate. People are buying them 15 to a 100 at a time," he added. "One of the most significant parts of the land bank is stopping this cycle of abandonment."

---

Housing sales drop by double digits for third consecutive month

Single-family home sales plummeted 29 percent in the Albany, N.Y., region in February while prices continued to rise, according to preliminary data released Monday. A total of 431 new and existing homes sold in February through the 11-county Multiple Listing Service compared to 606 in February 2007, according to the Greater Capital Association of Realtors.

Of the six counties highlighted in the report, Schenectady County fared the worst, with closed sales falling 39 percent. Also posting big declines were Albany County (36 percent) and Saratoga County (31 percent). The February decline is the third month in a row in which total sales fell by a double-digit percentage. Total sales fell 19 percent in December and 20 percent in January.

The pattern may continue in the coming months since the total number of contracts for sale in February fell 10 percent. It generally takes up to two months for a sale to proceed from a contract to a closed sale. The GCAR sales totals include newly constructed and existing homes.

When existing homes are isolated from the total, sales in that category fell 31 percent in February, according to James Ader, chief executive officer of GCAR. That compares with a 23.8 percent decline nationally in the sale of existing homes in February, according to the National Association of Realtors.

Even with the steep drop in total sales, prices are still going up in the Albany region as a whole. The median price for the month for new and existing homes, $189,900, was 8 percent higher than in February 2007. The average price increased 6 percent, to $217,947.

The median, which is the halfway point between the highest and lowest price, is a better gauge of the market because the average can fluctuate significantly based on one or two sales. The median price for just existing homes in the region in February was $174,500, a 5.7 percent increase; nationally, the median price for existing homes fell 8.2 percent to $195,900.

---

Mid-Atlantic banks face more loan losses-report

Big Mid-Atlantic banks face more losses from the real estate slump, according to a report on Monday from a regional Federal Reserve that suggests the worst has not passed for the beleaguered banking sector. Prospects of an ever-growing stockpile of bad loans on homes, office buildings and shopping malls will likely force banks to seek additional capital and/or to put aside more money to cover further losses, the Philadelphia Federal Reserve said.

While the latest study focused on banks the regional Fed oversees in three Mid-Atlantic states - Pennsylvania, New Jersey and Delaware, many of them do business across the country. Financial conditions at these large Mid-Atlantic banks worsened across the board in the last quarter of 2007, deteriorating to their weakest levels in 15 years by some measures, the Philadelphia Fed said.

"Large banks may need to increase their provisioning for loan losses in future quarters, reducing income," it said in its quarterly "Banking Brief." Most notably, the return on assets at large Mid-Atlantic banks fell to 0.83 percent in the fourth quarter from 1.09 percent in the third quarter, the report said.

This measure of bank performance deteriorated even more on a national level, underscoring the stress of the housing slump and global credit crunch on the entire U.S. banking system.

---

Brown and Sarkozy to urge banks to admit full losses

The premiers of both the UK and France are to demand that banks disclose all their bad debts, which could amount to a staggering $600bn (£302bn), five times the sum already written off since November, in a bid to bolster confidence in the floundering financial markets.

Gordon Brown and the French President, Nicolas Sarkozy, are to hold a summit in the UK on Thursday, and will use it to pile pressure on the banks in a bid to clarify some of the uncertainty damaging confidence in the current climate. An official at No 10 said that the two leaders would call for "greater transparency in financial markets and, as a first step, full and immediate disclosure of the scale of write-offs by banks."

The official said that the Prime Minister and M. Sarkozy were becoming increasingly concerned that confidence in financial markets "is being affected by uncertainty over the scale of bad debt on banks' books, with some estimates putting this at $600bn".

Banking groups have already written off $125bn (£63bn) in assets worldwide over the past five months, following the onset of the credit crunch. Senior bankers have warned in recent weeks that the disclosed writedowns might just be the tip of the iceberg, although it is impossible to estimate the exact scale of the losses with any degree of confidence.

---

Crony capitalism

The new facility represents a complete break with the past. Previously, discount window borrowing was restricted to regulated depository institutions, and access was always described as "a privilege and not a right". That meant banks could only get access to cover seasonal shortfalls of funds or dire emergency needs, and any borrowing was subject to regulatory disapproval - so-called Federal Reserve "frown" costs. Now, the Fed has apparently made the discount window available to Wall Street as a source of ordinary business finance.

This means the Fed is providing risk capital to the likes of Goldman Sachs at paltry interest rates that confer a significant subsidy. Moreover, the mere right of access enables them to borrow more cheaply from other lenders because of the back-stop reassurance provided by discount window access. It also establishes incentives for future excessive risk-taking.

These subsidies are a travesty. Goldman Sachs, Lehman Brothers, and Morgan Stanley are extraordinarily profitable companies. They have also been the drivers of the worst trends in the American economy over the past generation, pushing excessive CEO pay that has spread like a cancer throughout corporate America, even reaching into universities and non-profits. Additionally, they have pedaled the shareholder value paradigm, that has pushed companies to emphasise short-term gain over long-term investment, and contributed to ripping up America's social contract. Meanwhile, their business model has promoted speculation that is behind repeated asset and commodity price bubbles.

Subsidising these firms is an insult to Main Street. Many families are losing their homes as part of the mortgage crisis. If they had access to 2.5% financing that would not be happening. Likewise, manufacturing firms are being forced to close because of lack of affordable capital, which is destroying jobs and the economic foundation of communities.

The Fed will claim it had to institute these measures to calm Wall Street. That is nonsense. The fair and economically efficient way to deliver emergency liquidity to Wall Street is through an auction facility that is open to all financial firms, and in which participants supply good collateral. Those who need the funds most will bid the highest. That way, taxpayers get properly paid for their support, and the funds go to those who need them most.

Geologists say they learn the most from extreme events like earthquakes that reveal the reality of the earth's crust. For the past 25 years, critics of the Fed have been dismissed, and the Fed's high standing has blinded the reality of its revolving door with Wall Street and its class-based conduct of policy. Now, the Fed's response to Wall Street's panic has revealed the reality of its crony capitalist world. That provides an opening for long-needed reform.

---

Ilargi: Two New York Times pieces. I was just thinking yesterday that no candidate dares touch the banking and housing crisis, but the second article says it’s “one of her major campaign themes”. Krugman doesn’t buy that either.

Taming the Beast

We’re now in the midst of an epic financial crisis, which ought to be at the center of the election debate. But it isn’t.

Now, I don’t expect presidential campaigns to have all the answers to our current crisis — even financial experts are scrambling to keep up with events. But I do think we’re entitled to more answers, and in particular a clearer commitment to financial reform, than we’re getting so far.

In truth, I don’t expect much from John McCain, who has both admitted not knowing much about economics and denied having ever said that. Anyway, lately he’s been busy demonstrating that he doesn’t know much about the Middle East, either.

Yet the McCain campaign’s silence on the financial crisis has disappointed even my low expectations.
And when Mr. McCain’s economic advisers do speak up about the economy’s problems, they don’t inspire confidence. For example, last week one McCain economic adviser — Kevin Hassett, the co-author of “Dow 36,000” — insisted that everything would have been fine if state and local governments hadn’t tried to limit urban sprawl. Honest.

On the Democratic side, it’s somewhat disappointing that Barack Obama, whose campaign has understandably made a point of contrasting his early opposition to the Iraq war with Hillary Clinton’s initial support, has tried to score a twofer by suggesting that the war, in addition to all its other costs, is responsible for our economic troubles.

The war is indeed a grotesque waste of resources, which will place huge long-run burdens on the American public. But it’s just wrong to blame the war for our current economic mess: in the short run, wartime spending actually stimulates the economy. Remember, the lowest unemployment rate America has experienced over the last half-century came at the height of the Vietnam War.

Hillary Clinton has not, as far as I can tell, made any comparably problematic economic claims. But she, like Mr. Obama, has been disappointingly quiet about the key issue: the need to reform our out-of-control financial system.

---

Clinton Calls for $30 Billion for Home Mortgage Crisis

Senator Hillary Rodham Clinton returned to one of her major campaign themes Monday — the economic impact of the home mortgage crisis — and called on Congress to provide $30 billion to help states and communities lessen the number of foreclosures.

In a speech at the University of Pennsylvania, Mrs. Clinton proposed several other moves to deal with foreclosures, like tapping two former chairmen of the Federal Reserve, Alan Greenspan and Paul A. Volcker, and former Treasury Secretary Robert E. Rubin, to lead a “high-level emergency working group” to recommend ways to restructure at-risk mortgages to help avert more foreclosures.

Her speech comes as the mortgage crisis continues to ripple across the economy, threatening the homes of millions of Americans and endangering some of the nation’s leading financial institutions that helped finance these now-troubled mortgages.

As much as she focused on ways to ease the mortgage crisis, Senator Clinton also dwelled on what she called “a crisis of confidence in our country,” and portrayed herself as the candidate best able to address the economic problems of middle-income and economically struggling families. “We need a president who can restore our confidence,” she said. “We need a president who is ready on Day 1 to be commander in chief of our economy.”

---

Wall Street Firms Cut 34,000 Jobs

Wall Street banks hit by mortgage losses and writedowns have cut more than 34,000 jobs in the past nine months, the most since the dot-com boom fizzled in 2001.

Citigroup Inc., Lehman Brothers Holdings Inc. and Morgan Stanley are among the firms that have disclosed headcount reductions so far. After the Internet bubble burst, 39,800 jobs were eliminated during the same period; the number climbed to 90,000 in the next two years, according to the Securities Industry and Financial Markets Association.

The collapse of the subprime mortgage market last year and the ensuing credit contraction have saddled the world's largest financial institutions with at least $200 billion of writedowns and losses. Bear Stearns Cos., once the fifth-biggest U.S. securities firm, became the emblem of panic on Wall Street two weeks ago, when it was forced to submit to an emergency takeover backed by the Federal Reserve as clients and lenders deserted the company.

More bank losses are likely, according to analysts."This crisis is much worse than 2001 and we don't know how long it's going to last," said Jo Bennett, a partner at executive search firm Battalia Winston International in New York. Job cuts "could be more than 100,000 in a few years."

---

Ex-Countrywide chiefs back in business – buying distressed loans

Former executives from Countrywide Financial, the US sub-prime mortgage lender, have set up a new venture aiming to profit from the bursting of the housing bubble that their old firm is blamed for helping to create. A team led by former Countrywide president Stanford Kurland unveiled Private National Mortgage Acceptance Co – PennyMac for short – which will buy up loans whose borrowers have got into financial difficulties.

With mortgage arrears at record levels across the US after millions took on loans that they could not afford, many of the banks that lent to them are facing financial strain. While many home loans were packaged into mortgage-backed securities and other derivatives whose collapse in value has caused chaos in global financial markets, many still reside on the books at the issuing banks. Ben Bernanke, chairman of the Federal Reserve, warned last month that some regional banks are likely to go bust.

PennyMac hopes to benefit from expected fire sales by distressed banks. Mr Kurland said it will work with borrowers to refinance the loans, helping to avoid foreclosure and making the loan more valuable so that it can sell it on at a profit. The company will "work to help both lenders and borrowers, as one step in addressing the US mortgage crisis," he said.

The $2bn venture is being part-funded by BlackRock, the giant fund manager which is itself half-owned by Merrill Lynch, one of the Wall Street institutions worst hit by the credit crisis.
Most senior executives at PennyMac are Countrywide veterans. Mr

---

Mortgage crisis spurring a revival for FHA loans

With the housing downturn and credit crunch in full force, it might be time for home buyers and homeowners to learn more about a federal mortgage program launched during the Great Depression. Loans insured by the Federal Housing Administration fell out of popularity in recent years as subprime mortgages and other alternative financing became readily available and as home prices zoomed past the program's limits.

But with mortgages much harder to get and the maximum FHA loan size sharply increased by recently passed economic stimulus legislation, the program is enjoying a revival. That's especially true in areas with high housing costs, where FHA loan limits have nearly doubled. And for buyers with little money for a down payment — or owners who want to refinance but have little equity — FHA loans might be the only financing available.

"It's renaissance time for the FHA," said Allen Jones, government lending executive for Bank of America Corp. in Washington.

---

Australia: credit crunch has shut down lending

The credit squeeze stemming from the US sub-prime meltdown has crunched non-bank lenders as money markets shut down, a financial services entrepreneur John Kinghorn says. The RAMS Home Loans and Allco founder told The Australian newspaper the sale of RAMS to Westpac was a fait accompli after funding dried up late last year.

“We could no longer fund our business,” Kinghorn says. “The capital markets just closed. They didn’t just slow down, they just shut.” Like most market players, Kinghorn didn’t see the credit crunch coming, but he had the good fortune to float the RAMS business just weeks before turmoil began in earnest, achieving a market cap of $858 million and netting him some $650 million.

“This is the first time ever, I believe, that there is just no money. In the mortgage-backed securities, which is about $50 trillion, there is not one transaction in the world being done.” Kinghorn’s comments have significance far beyond RAMS, with many small non-bank lenders such as Bluestone Group and Macquarie Finance that have relied heavily on mortgage securitisation facing tough times.

---

The market no longer has all the answers

One of the most arresting comments of the past week came from Josef Ackermann, chief executive of Deutsche Bank. "I no longer believe in the market's self-healing power," he said in a speech in Frankfurt. You may dismiss this as namby-pamby Euro-speak from the Swiss-born head of a German bank, except that no one, anywhere, appears to believe in the market's self-healing power any more.

Facing defeat to Margaret Thatcher in 1979, James Callaghan, then Labour prime minister, observed that there were times when the tide of ideas shifted and there was nothing anyone could do about it. "I suspect there is now such a sea-change - and it is for Mrs Thatcher," Callaghan said then. Mrs Thatcher's victory, followed by the election of Ronald Reagan as US president a year later, set off a period of deregulation, privatisation and enterprise that greatly enriched both their countries, influenced policymakers everywhere and, thrillingly, swept away the moribund communist empire.

When Reagan said "the nine most terrifying words in the English language are 'I'm from the government and I'm here to help'," people laughed appreciatively in many languages. Government ownership of industry began to look as archaic as leeching and bloodletting - relics of an age when people knew no better. Private enterprise, competition, consumer choice - these were the ways to organise economies.

Even before the current financial crisis, there were hints that a hands-off approach by government was perhaps not the only way to organise an economy. Russia was not much of an advertisement for a state-controlled economy, but China's government-administered capitalism appeared to be doing fine. The purchase of chunks of western companies by sovereign wealth funds was a worrying sign that governments were buying their way back into free market economies.

And now we have the great financial unravelling - with governments and central bankers playing a role for which past decades have left us unprepared. Many people remember what Callaghan said about the sea-change in ideas. Fewer remember his observation that these changes seemed to happen every 30 years or so, or that he said that 29 years ago.

---

China becoming nation of spenders

China is turning into a nation of spenders as its per capita GDP exceeded the $2,000 mark, which leaves room for bulging domestic demand, a senior official said Monday. Ballooning domestic consumption and upgrading consumption structure since the reform and opening up in 1978 have made China the world's biggest markets for mobile phones, tourism and broadband services, said Yu Guangzhou, vice minister of commerce, at the China Economic Development Forum.

China's domestic consumption has continued to grow at 13.1 percent per annum in the past five years, and it accounted for a bigger slice of GDP growth than investment and export in 2007, for the first time in seven years.
China's per capita GDP reached $2,456 in 2007. However, consumption still took up less than 50 percent of the GDP, 28 percentage points lower than the world average.

China's monthly trade surplus shrank to $8.56 billion in February, roughly one third of the level in the same month last year, mainly due to weakening U.S. demand. Experts say total exports figures will continue to flatten this year as a result of a stronger yuan and the rising cost introduced by tougher labor laws from Jan. 1. That will make its role in GDP growth less important.

Yu reckoned China will jump to be the biggest market for luxury goods, from the current third place, by 2014, snatching 23 percent of the world share.

---

Ilargi: A $1.3 billion writedown is one thing. Losing $83 billion in market value, in the world’s fastest growing market, is something else.

Bank of China 2nd-Half Profit Growth Curbed by Subprime Loss

Bank of China Ltd. posted the smallest second-half profit gain among the nation's 14 publicly traded lenders after writing down $1.3 billion of subprime mortgage investments. Net income at China's third-largest bank climbed 14 percent to 26.7 billion yuan ($3.8 billion) in the six months ended Dec. 31, from 23.35 billion yuan a year ago. The results, beating the average 22.9 billion yuan forecast by 28 analysts, were derived by subtracting first-half earnings profit released by the Beijing-based company today.

Bank of China's market value has dropped by $83 billion since it announced $7.95 billion of subprime-related holdings on Oct. 30, making it Asia's biggest casualty of the U.S. mortgage market collapse. Credit market losses have been a drag on profit growth as the fastest economic expansion in more than a decade drove a boom in loans and fees for China's banks last year.

"You do have more uncertainties with Bank of China than with other Chinese banks," said Samuel Chen, a Hong Kong- based analyst at JPMorgan Chase & Co., before the earnings were announced. Chen rates Bank of China "neutral." The results were released after markets in Hong Kong and Shanghai closed. Bank of China, which is traded on both cities' exchanges, fell below its June 2006 initial public offer price in Hong Kong on March 18 for the first time.

Bank of China jumped 7.3 percent to HK$3.24 today in Hong Kong and climbed 1.2 percent in Shanghai, giving the company a market value of $158 billion, about the same as JPMorgan. Credit Suisse Group analysts this month forecast Bank of China would have to write down the value of its subprime holdings by 30 percent, or $2.4 billion. Bear Stearns Cos. estimated 21.5 billion yuan in losses on such securities for 2007 and 2008.

---

US 'deploys nuclear sub to Persian Gulf'

An American nuclear submarine has crossed the Suez Canal to join the US fleet stationed in the Persian Gulf, Egyptian sources say.

Egyptian officials reported that the nuclear submarine crossed the canal along with a destroyer on Friday and Egyptian forces were put on high alert when the navy convoy was passing through the canal. An American destroyer recently left the Persian Gulf, heading towards the Mediterranean Sea; earlier Thursday, a US Navy rescue ship crossed the canal to enter the Red Sea.

The deployment comes as recent reports allege that US Vice President Dick Cheney is seeking to rally the support of Middle Eastern states for launching an attack on Iran. This is while US officials deny that Cheney's Mideast tour is linked to a possible military attack on Iran.

According to the latest reports, in recent months a major part of the US Navy has been deployed in and around the Persian Gulf. The fleet is armed with nuclear weapons and cruise missiles and carries hundreds of aircraft and rapid reaction forces.

---