Debt Rattle, March 27 2008

Ilargi: As we approach the close of the first quarter, the numbers just keep getting worse, and not just in the US. Looking at the money markets, it’s glaringly obvious that none of the trillions of dollars in credit injections by central banks has worked so far. Indeed, as one analyst puts it: ”The funding crisis is more acute then ever before”.

For the third day in a row, I want to point to the most recent reports on US real estate, because I think it has to made very clear, to counter the misleading headlines in the press.

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Existing home sales: down 23.8%. New home sales: down 29.8%.

US HOUSING HAS COLLAPSED !!!

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There is no realistic other way to interpret this. It doesn't matter what the media try to make you believe. Every single party in the real estate food chain is leveraged to the hilt, from borrowers to lenders to securitizers to investors. There is no resilience in the system, and certainly not for 25%-30% plunges within one year.

It's over. The rest of the economy will collapse along with housing. It already does that. Just look at the numbers in the articles below. And try to prepare. Please do.

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Washington sends in cavalry to fight off full-blown crisis

The US is sending in the -cavalry to fight the crisis in the credit and housing markets - unleashing government-sponsored enterprises to buy and hold mortgage-backed securities (MBS) for which there is little private demand.

The move marks a new stage in the policy response to the credit crisis, in which the US government is increasingly deploying all the tools at its disposal - short of an outright public purchase of mortgage securities - to prevent a full-blown credit crunch.

It also marks an expansion of what Michael Feroli, an economist at JPMorgan, calls the "socialisation of housing finance" in the US - ever greater reliance on Fannie Mae, Freddie Mac and the Federal Home Loan Banks to sustain the flow of funds into the crisis-hit housing sector.

These governmentsponsored enterprises are housing agencies chartered by act of Congress. They are not legally part of the public sector but the market believes their debt is implicitly guaranteed by the government, allowing them to borrow cheaply.

Regulators this week gave the FHLB - a network of bank co-operatives founded in the Great Depression - permission to double investments in MBS for two years. The Federal Housing Finance Board, which regulates the FHLB, said this "could provide well in excess of $100bn (€63bn, £50bn) in additional liquidity" to the MBS market.

The move followed last week's decision to reduce the capital surcharge imposed on Fannie Mae and Freddie Mac, allowing these housing finance companies to buy or guarantee more debt. The Office of Federal Housing Oversight, which regulates Fannie and Freddie, said this would "provide up to $200bn of immediate liquidity" to the mortgage markets.

The decisions - while taken seperately by independent regulators - were orchestrated by Hank Paulson, the US treasury secretary, who pressed the GSEs and their regulators to find ways to provide more support to markets that would not require legislation.

Economists said the government is, in effect, encouraging Fannie, Freddie and the FHLB to increase their leverage and exploit the perceived government guarantee to raise funds and buy and hold mortgage securities - offsetting to some degree the deleveraging taking place in the private financial sector.

This is a policy change for the Treasury, which before the credit crisis had focused on the risk that GSE borrowing poses to taxpayers. Officials do not believe the GSEs will have any difficulty to raising additional funds.

"The Federal Home Loan Banks are able to raise enormous amounts of money in the capital markets," says Joseph McKenzie, deputy chief economist at the Federal Housing Finance Board. Their asset level "can expand and contract like an accordion."

The deployment of the GSEs creates a new source of demand for MBS and mitigates the danger of a downward spiral of forced sales. "It has proven quite successful" at reducing the risk premium on MBS guaranteed by Fannie and Freddie, says Peter Hooper, chief economist at Deutsche Bank Securities. "This is clearly an effective weapon in policymakers' arsenal."

However, the direct impact of GSE buying may not be as great as some believe. The mortgage market is huge, and the GSEs' incentives are not perfectly aligned with policymakers' objectives.

Bert Ely, a critic of Fannie and Freddie, said thechanges would encourage the firms to hold more securities on the balance sheet - taking on more interest rate risk - rather than take on more credit risk in housing. Analysts said the bigger public benefit would come if and when Fannie and Freddie deliver on their commitment to raise new capital.

"That is an unambiguously good thing," said Mr Feroli of JPMorgan. The FHLB, meanwhile, are unlikely to ramp up their investments quickly. John Price, chairman of the FHLB presidents' council, told the FT that they were "cautious" by nature and close to statutory leverage limits. "There is not a lot of elbow room for us to bulk up on those securities," he said.

Some analysts believe the FHLB will increase investments by only about $30bn, compared to the $100bn cited by their regulator. Yet unleashing the GSEs might prove more significant than the numbers suggest. To many analysts the move indicates that the US is willing to deploy an increasingly broad-based and unorthodox set of policies to fight the credit crisis.

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US economy slowed dramatically at the end of 2007

Corporate profits fall 3.3%, even excluding subprime write-downs

The U.S. economy downshifted abruptly in the fourth quarter, growing at a 0.6% annual rate, the slowest pace since late 2002, the Commerce Department estimated Thursday.

The 0.6% estimate for gross domestic product, unrevised from the previous two estimates, was exactly as forecast by economists surveyed by MarketWatch. By contrast, GDP grew at a 4.9% annual rate in the third quarter. The final estimate for fourth-quarter GDP contained little that was new, aside from fresh data on corporate profits: After-tax profits from current production fell $37.9 billion, or 3.3% quarterly, to an annualized $1.11 trillion. Net cash flow fell $55.7 billion, or 4.4%.

Financial industries' profits fell $104.6 billion on an annualized basis before taxes, even without any of the massive write-downs triggered by losses in subprime mortgages. Write-downs are treated as balance-sheet items, not as profits or losses from current production. Nonfinancial industries' profits fell $30.7 billion annualized, including $26.6 billion in energy companies and $27.6 billion in wholesale trade.

Corporate profits after taxes are up 3.3% compared with a year ago, according to the government's data. The fourth-quarter figures are likely to have little impact on markets or on policymakers, who are intently focused on maintaining liquidity in the financial markets and on reviving an economy that appears to be sinking into recession. For the current quarter, which ends Monday, economists expect growth to be flat.

For the second quarter, economists expect GDP to fall 1%.

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Ilargi: "Nationally, prices fell over the past year at a rate of $338 per week"

Yes, grasshopper, every homeowner in the US, on average, lost $338 every week over the past year on their home ($17,576 over the year). In California, that number was $2788, ($144.976 in total). Every week, for a year, living in your home cost that much. On average. Do numbers like that make it easier to understand what is going on? If not, what else can I do to make you wake up?

California freefall: Home prices down 26% in February

Signs of distress are piling up in the California housing market, where prices are falling at three times the national rate of decline.

--Statewide, median sales prices fell by a stunning 26% from year-ago levels in February, with home prices dropping at a rate of nearly $3,000 a week, the California Association of Realtors reports. Further, the CAR says the Fed's interest rate-cutting campaign "will have little near-term direct effect on the housing market."

--In the San Fernando Valley, losing a home to foreclosure is now almost as common for families as buying a home. The L.A. Daily News: "During January and February, there were 1,084 foreclosures and 1,335 sales of houses and condos in Valley communities from Glendale to Calabasas, according to the San Fernando Valley Economic Research Center at California State University, Northridge."

"It's bad. It's really bad," market analyst Nima Nattagh told the Daily News. The California Association of Realtors  reports median prices fell 27.2% from year-ago levels in the hard-hit Inland Empire east of Los Angeles, 30.9% in Sacramento, and 39.1% in Santa Barbara County.

On a percentage basis, the California price meltdown is more than three times as severe as the national decline of 8.2% in median prices reported this week by the National Association of Realtors. On an absolute basis, the California meltdown is even more severe: Nationally, prices fell over the past year at a rate of $338 per week; in California, prices fell at a rate of $2,788 per week.

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Jim Rogers on Investment Bank Bail Outs and the Federal Reserve

A year ago, a share of The Bear Stearns Cos. Inc. would have cost you $150. Yesterday, the shares closed at $10.94 - and that’s after they soared 90% from Monday's opening bell price on news that JPMorgan Chase & Co. (JPM) had boosted its bid. The "why" has already been discussed, but no one seems to be concerned about the "how" right now, particularly where white knight JPMorgan and the U.S. Federal Reserve are concerned.

On the surface, this tie-up is being billed as a bailout to avert another crisis on Wall Street. However, upon closer examination I think it’s more evidence that the Fed suffers from "attention to deficits disorder." I put this very question to Jim Rogers during an exclusive interview last Saturday in Singapore. Mr. Rogers stated:

I’ve read the Federal Reserve Act. Nowhere in it does it say you’re supposed to bail out Wall Street. Their mandate was to have a sound currency and it was later expanded to help employment. But nowhere does it say you’re supposed to bail out investment banks.

Then, as Rogers is well noted for doing, he put it more bluntly:

You don’t see a bunch of 29-year old cotton farmers driving around in Maseratis and flying in private planes to exotic places.

He continued:

You see a lot of guys on Wall Street doing that and the idea that we’re supposed to bail them out is ludicrous. I don’t see any of those guys sending their bonus checks back. Huge amounts of money were made in the debt market we know now incorrectly, if not fraudulently… and now we’re supposed to bail them out?

"It’s insanity," Rogers said.

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Lehman's stock drops amid rumors

Shares of Lehman Brothers fell by nearly 10 percent in early New York trading on Thursday on rumors that the fourth largest U.S. investment bank could see a run on the bank similar to what happened to Bear Stearns, traders said. Declines in Lehman's shares on Thursday are "all being tied to fears of Bear Stearns," said Robert Bolton, head trader for Mendon Capital Advisors in Rochester, New York. "Does another broker dealer go the route of Bear Stearns with regard to their solvency and the like."

A Lehman spokeswoman called the rumors "totally unfounded," which contributed to the stock taking back much of its losses. Kerrie Cohen, a spokeswoman for Lehman Brothers, said, "There are a lot of rumors in the marketplace that are totally unfounded. We are suspicious that the rumors are being promulgated by short sellers of our stock that have an economic self interest."

At midday, Lehman shares were down 4.28 percent at $40.67 on the New York Stock Exchange, after falling as low at $38.36.
The U.K.'s Times reported on March 19 that the U.S. Securities and Exchange Commission (SEC) was probing whether hedge funds and other market players deliberately circulated false rumors about Lehman Brothers to push the company's shares lower. Investors have been skittish about investment banking shares since the middle of the month when Bear Stearns Cos Inc experienced a run on the bank amid fears that its mortgage exposure could leave it insolvent.

Other traders, who declined to be identified, echoed Bolton's assessment for the reason behind the drop in Lehman's shares. In addition, large bearish bets on Lehman in options markets contributed to selling pressure, some traders said. Lou Brien, a strategist with DRW Trading Group in Chicago, said there had been a rumor on Thursday that Lehman was close to making an announcement, which contributed to the shares selling off, but the announcement proved to be about the bank hiring a new co-head of global institutional distribution, after which shares recovered.

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If the bailout comes, watch for a dollar dive

If the United States bails out the financial system by buying mortgage debt directly, the price just might be surging inflation and a dollar crisis. Calls are increasing for the government, either directly or via the Federal Reserve, to cut the knot of the credit crisis at a stroke by buying up mortgages that banks and investment banks are finding difficult to finance.

If the United States bought mortgage debt at or very near 100 cents on the dollar, despite the fact that much of it is trading well below that, it would allow banks to pay back loans used to finance these holdings.
If done in sufficient size, say $800 billion or $1 trillion, it would relieve the terrible pressure on bank balance sheets and allow other credit markets, like those for corporate loans, to return to something approaching equilibrium.

That in turn would make Fed monetary policy more effective in the sense that banks would be able to increase lending and pass on interest rate reductions. Of course this is a radical step, and way beyond the Fed's already extraordinary policy of swapping mortgages held by banks and some investment banks for easy to finance Treasuries.

It is also hugely risky in terms of the Fed's obligation to maintain stable prices. Putting aside moral hazard -- many foolish borrowers and lenders would thus be given a free ride -- and depending on how such a bailout was done, it could stoke inflation to levels intolerable to foreign creditors, provoking a sharp fall in the dollar as they sought safety elsewhere. Such a bailout would either have to be paid for by taxes, which seems unlikely, or would involve issuing more government debt or effectively expanding the money supply.

"There would be an inflationary impact because of the huge introduction of credit," said Philip Gisdakis, strategist at Unicredit in Munich. "It's not $50 billion; we are talking about more like $1 trillion. This injection of capital you need will have consequences for the U.S. economy."

A bailout of that size is very likely to stoke inflation, which is already uncomfortably high, by effectively creating more dollars and putting them into circulation. "If it's too big there will have to be an element of monetisation, with the Fed financing it," said Tim Drayson, economist at ABN AMRO in London. "Monetisation is rising from what was a small likelihood to what is now an increasing risk."

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JPMorganChase mortgage memo pushes 'Cheats & Tricks'

The bank says it never backed the strategies, which detail how to get an iffy loan approved

A newly surfaced memo from banking giant JPMorgan Chase provides a rare glimpse into the mentality that fueled the mortgage crisis.
The memo's title says it all: "Zippy Cheats & Tricks." It is a primer on how to get risky mortgage loans approved by Zippy, Chase's in-house automated loan underwriting system. The secret to approval? Inflate the borrowers' income or otherwise falsify their loan application.

The document, a copy of which was obtained by The Oregonian, bears a Chase corporate logo. But it's unclear how widely it was circulated or used within Chase. Bank spokesman Tom Kelly confirmed that the "Cheats & Tricks" memo was e-mailed from Chase but added that it does not reflect Chase corporate policy. "This is not how we do things," he said. "We continue to investigate" the memo, Kelly said. "That kind of document would neither be condoned or tolerated."

The March e-mail was sent by Tammy Lish, a former Chase account representative in Portland. Chase fired her days after discovering she had sent it. "I did not write it," Lish said. "It was sent to me by another (Chase) rep in another office along with some other documents that were more step-by-step customer training documents."

Even if the memo was penned by a single employee, it illustrates an attitude prevalent in certain corners of the mortgage industry during the boom years. In the face of sustained and significant home price increases, much of the industry veered away from traditional notions of safe and sound lending. Loan volume became as important as loan quality, particularly for the rank and file typically paid on commission.

During the boom, it was common for lenders and brokers to get paid more for risky subprime loans than for 30-year fixed-rate loans because the higher-interest loans fetched a higher price on Wall Street.

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Ilargi: Note: see here the way in which the US is nationalizing the financial system. FIrst, the FHLB sees its powers, credit and leverage expanded across the spectrum, on government (read: taxpayer) credit, and then it turns around and uses that new-found guarantee to take over formerly private industries.

And no, private industry won't complain too much; it has sucked out of this egg what there was to be sucked. This kind of Bulgarian take-over allows the industry to write over its debts to the public sector.

US-backed banks to fill insurance breach

The Federal Home Loan Banking system, a government-sponsored network of US banks, is seeking to enter the so-called “monoline” insurance market to help local governments that have been hurt by the credit market storm. In particular, some banks in the network want to offer their top-notch credit ratings to municipal infrastructure projects – and thus fulfil the role traditionally taken by monoline insurance groups such as MBIA.

The move has been sparked by a recent crisis at the large monoline groups which has made it more ?difficult for local US governments to obtain credit guarantees – and thus raise funds. “This [offer of credit support] would be to address a market failure, or an absence of the market – that is what Government State Enterprises [such as the FHLB network] are for,” John Price, president of the Federal Home Loan Bank of Pittsburgh, and current chairman of the 12-strong banking network, told the Financial Times.

“Essentially we would be lending our [credit rating] to small projects,” he said, stressing that the projects would be “things such as a $6m hospital deal, that type of size”. The plans are likely to be welcomed by many local US politicians, since municipalities across the US have faced an unexpected funding crisis in recent weeks as a result of the monoline woes.

However, the move is also likely to trigger further debate about the degree to which policymakers are now turning to state, or quasi-state, entities to stabilise the financial sector – and thus replace market functions with public intervention.

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Moody’s takes axe to CDO ratings

Moody’s Investors Service unleashed a wave of ratings downgrades and negative outlooks on more than $25bn worth of complex credit products on Wednesday due to continued deterioration in the underlying assets.

The ratings actions, which affected more than 250 tranches from more than 40 deals, were mostly taken on collateralised debt obligations backed by other kinds of complex debt such as mortgage backed bonds or other CDOs. Such structured finance CDOs have been the worst affected segment of the market for complex debt products. More than 2,000 securities had suffered downgrades this year before Wednesday’s actions from Moody’s.

Structured finance CDOs became increasingly important in the last stage of growth for the broader CDO and securitisation industry because they could be used to repackage bits of these other deals when they proved more difficult to sell.

Moody’s said the vast majority of the deals downgraded on Wednesday were on review for further downgrades.

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Banks Prepare $2 Trillion in Lending Cuts

Peloton Partners LLP liquidated a $1.8 billion London hedge fund, gadget-retailer Sharper Image Corp. filed for bankruptcy -- and Monica Tomasso is paying 35 percent interest to expand her school-lunch business. The global credit crisis is squeezing businesses from the biggest, like Peloton, whose fund collapsed this month after banks demanded repayment of loans used to bet on mortgage securities, to the smallest, such as Tomasso, 34, whose Health e-Lunch Kids Inc. sells 6,000 meals a month online to parents in Fairfax, Virginia.

Credit is drying up as lenders, staggered by losses, try to raise capital and clamp down on financing for a U.S. economy that likely is in recession, economists at Goldman Sachs Group Inc. said in a March 7 report. The supply of credit for businesses and consumers may decline $2 trillion, the report said, equivalent to 7 percent of household, corporate and government debt.

"Financial markets and banks in particular are reliant on trust and confidence," said Charles Bobrinskoy, vice chairman of Chicago-based Ariel Capital Management LLC, which oversees $13 billion. "When people start to lose that trust and confidence, they stop providing liquidity to each other, and that has all kinds of negative ramifications." Losses on home mortgages may reach $500 billion and as much as $656 billion on commercial real estate, other business loans, credit cards and autos, the Goldman report said.

San Francisco-based Sharper Image felt the effects as it filed for bankruptcy last month, partly because Wells Fargo & Co. couldn't persuade other banks to buy pieces of a $10 million loan, according to a filing. Tomasso turned to her credit cards to help finance lunch boxes, bags, and Web site development when a dozen banks rejected her loan application. After the tab reached $100,000, she began talks with a private-equity investor who may take a stake in the business, which has annual revenue of $400,000.

"Bank of America tells you it's the bank of opportunity," said Tomasso, referring to an advertising slogan of one of the lenders that she says declined her application. "That's not been proven true." Bank of America Corp. spokesman Scott Silvestri said the company doesn't comment on specific customers. "We're open for business and continue to make loans across all product lines," he said. "Obviously, we're being prudent in ensuring that we're taking the right risks."

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Iceland contagion may spread far and wide

As Iceland goes, so go the Baltics, the Balkans, Hungary, Turkey, and perhaps South Africa. All are living far beyond their means, plugging the gaping holes in their accounts with fickle flows of foreign finance. All have let credit grow far above the safe "speed limit", some exceeding 50pc a year.

For Iceland, the high-wire act of the last five years may have finally reached its limits. The central bank was forced to raise interest rates to 15pc this week in an emergency move to halt the collapse of krona, which has fallen 18pc since mid-March. The country's all-conquering banks - led by Kaupthing, Glitnir, and Landsbanki - have pushed the asset base of the Icelandic banking system to a world record of eight times GDP, tapping the global capital markets to launch Viking raids across Britain, Scandinavia and beyond.

This spigot of easy credit has now been turned off. The spreads on Icelandic bank debt have risen above 800 basis points, near levels seen in Bear Stearns' debt before the Federal Reserve's rescue. Which raises a thorny question: Is the Icelandic government - which presides over an economy the size of Bristol - big enough to underpin its encephalitic banks if push ever comes to shove?

"There are clearly limits to what the government can do," said Paul Rawkins, an Iceland expert at Fitch Ratings. "If the government tried to raise billions in the markets it would damage its own credit worthiness. In any case, these debts are in foreign currencies. The central bank has just $2bn (£1bn) in reserves," he said. The banks insist they are well capitalised, with enough liquidity to tide them through to 2009. If the credit crunch subsides, the issue will never be put the test.

But Iceland is more than just a Nordic hedge fund masquerading as a country. It is also the first of the deficit states to succumb to investor flight, sending an early warning signal of potential troubles across a great swathe of Eastern Europe and the Mediterranean. Turkey is first in line for any stress test, said Neil Schering, an East Europe expert at Capital Economics.

"I wouldn't want to keep any money in the Turkish lira: the puzzle is how it has stayed so high for so long. There are huge imbalances in the economy. The current account deficit is nearly 8pc of GDP, and the chief prosecutor is trying to shut down the government," he said, referring to last week's court move to ban the ruling Islamic AKP party, as well as the president and prime minister, for alleged breach of the country's secular laws.

Turkey has a foreign debt of $276bn. The Istanbul bank YapiKredi says Turkish companies may have great difficulty raising some $48bn of fresh loans needed this year to stay afloat. Until now the country has been the darling of the yen 'carry trade', offering irresistible yields to Japan's army of investors. But the yen's surge in recent weeks has played havoc with these flows. The unwinding of yen positions has undoubtedly been key factor in the sudden capital flight from Iceland this month.

Fitch said countries that run current account deficits above 10pc of GDP for any length time almost always come to grief. East Asia's debt crisis in 1997 erupted before any state reached double digits. Iceland's deficit is now 16pc of GDP. Latvia is at 25pc, Bulgaria 19pc, Georgia 18pc, Estonia 16pc, Lithuania 14pc, Romania 14pc and Serbia 13pc. The region will need $337bn in foreign loans this year.

Borrowing in foreign currencies was all the rage in the heady days of the credit bubble. Most mortgages in Hungary over the last two years have been in Swiss francs, with the Balkans and Poland not far behind. This is now turning into slow torture. The franc has risen 5pc against the euro since October. The real level of the debt is ratcheting up.

The foreign debts have reached 122pc of GDP in Latvia, 101pc in Estonia and 73pc in Lithuania, mostly in euros. For now the debtors are shielded by fixed exchange rates in Europe's ERM system, but this could make the shock even worse should the currency pegs start to snap. "It's all looks like a pretty ugly cocktail," said Mr Schering. "The good side is that the Baltic banks are not exposed to toxic mortgage securities, and a lot of them are owned by foreign banks, so they are protected."

Ed Parker, head of Fitch for Eastern Europe, said the agency had already downgraded Latvia to BBB+ and issued a further alert in January. Turkey is even lower at BB-. "There's now a risk of psychological contagion from Iceland. People are starting to look more closely at all these countries. The deficits were easy to fund in times of abundant liquidity, but we think the global credit crunch is going to make it a lot harder," he said. "The history of financial crises suggests that it can be dangerous to think 'it's different this time'."

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Credit crunch hits UK economy as banks get tough

British banks slashed the number of new home loans by a third in February compared to a year ago and sales of big ticket items fell sharply in March, in signs that the credit crunch impact is spreading beyond the hard-hit financial sector. Mortgage lenders have tightened up loan terms in response to a global credit crisis that has made money more expensive on financial markets despite lower official borrowing costs.

Central banks have tried to alleviate the squeeze by pumping cash into the system under less strict terms than is normal. But figures from the British Bankers' Association on Thursday showed those measures have done little to stop the crunch feeding into the real economy, with mortgage approvals at near-record lows last month and down by an annual 33 percent.

"In view of the credit squeeze, the accompanying tightening in mortgage lending standards, as well as fears of further house price falls, the subdued level of mortgage demand in February should be no surprise," said Seema Shah, a property economist at Capital Economics.

"Even interest rate cuts are unlikely to have much impact on the housing market as mortgage rates are falling less quickly than base rates." The Bank of England is widely expected to trim interest rates by 25 basis points to 5 percent in April or May and Governor Mervyn King indicated on Wednesday that the credit crunch had left policymakers more predisposed to cutting rates.

But commercial banks still appear reluctant to lend to each other, worried over what toxic debt may be lurking on balance sheets in light of the U.S. subprime mortgage crisis. The interbank cost of borrowing three-month sterling funds rose again on Thursday, nudging above 6 percent to hit its highest level this year.

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Money-Market Rates Rise; Banks Fail to Quell Concern

The cost of borrowing in euros and pounds rose to the highest since last year after central bank offers of emergency cash failed to ease money-market tensions as the end of the quarter approached.

The three-month London interbank offered rate, or Libor, for euros increased 1 basis point to 4.73 percent, the highest level since Dec. 27, the British Bankers' Association said today. The comparable pound rate climbed above 6 percent for the first time this year.

"Money markets have seized up again and by some measures the funding crisis is more acute then ever before," Christoph Rieger, a fixed-income strategist in Frankfurt at Dresdner Kleinwort, wrote in a note to clients today. The European Central Bank said today it's ready to inject more cash into money markets to ease a lending crisis that's threatening to undermine economic growth. The Swiss National Bank offered three-month funds today to promote lending. Financial institutions are hoarding cash after more than $200 billion of losses linked to U.S. subprime mortgages.

The ECB and the Federal Reserve this week provided extra emergency funds in a bid to stem surging money-market rates. The Bank of England injected 13.6 billion pounds ($27 billion) of additional cash today. "The ECB continues to closely monitor liquidity conditions and notes tensions in short-term rates as the end-of-quarter approaches," the Frankfurt-based bank said in a statement. While liquidity conditions are "ample," the ECB "stands ready to provide additional liquidity if needed," it said.

The difference between the rate banks charge for three-month euro loans relative to the overnight indexed swap rate showed a decline in the availability of cash today. The so-called Libor-OIS spread widened 2 basis points to 72 basis points, within 1 basis point of its widest this year. It averaged 6 basis points in the first half of 2007.

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ECB Says It Stands Ready To Inject Additional Liquidity

The European Central Bank Thursday said it will continue "to closely monitor liquidity conditions" in light of tensions in the interbank euro money markets, and stands ready to inject extra funds if needed. The ECB "notes tensions in short-term rates as the end-of-quarter approaches, notwithstanding the ample liquidity conditions," it said in an unscheduled announcement. Such surprise statements have, in the past, often preceded a quick-tender of one-day funds.

Euro interbank money markets have seized up again since the collapse of U.S. investment bank Bear Sterns Cos. earlier this month. Fixings of Euribor, or the Euro Interbank Offered Rate at which banks lend funds to each other, have nudged higher, approaching levels last seen during the height of the financial market crisis last year. The three-month Euribor rate broke above the 4.70% threshold Wednesday and was set at 4.728% Thursday. By contrast, the contract fixed at 4.386% a month ago.

Overnight money market rates Thursday also continue to exceed the ECB's comfort level of around 4%. At 1015 GMT, overnight rates were at 4.14%-4.26%, compared with 4.04%-4.15% ahead of the ECB's statement. It is unlikely that rates will fall before banks close the quarter on Monday, traders said. The ECB aims to steady overnight cash rates in line with the minimum bid rate at its main refinancing operations.

The ECB is likely to launch a quick tender early Friday, and may revisit the market on Monday, traders said. "It'd help if they'd provide support over and beyond the quarter-end," said a Frankfurt-based dealer. Others agree, noting that the provision of four-day money through a quick-tender would help to ease rates.

The ECB announcement comes just two days after the bank pumped €50 billion more than estimated into money markets in its regular refinancing operation, and provided $15 billion in fresh dollar funds to cash-hungry banks.

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Merrill, UBS to Post Losses, Writedowns, Oppenheimer's Whitney Says

Merrill Lynch & Co. and UBS AG probably will report first-quarter losses because of writedowns on the value of debt securities, said Oppenheimer & Co. analyst Meredith Whitney, lowering earlier estimates. Merrill may post a loss of $3 per share and write down $6 billion of assets, Whitney wrote in a report dated yesterday. Zurich-based UBS will lose $2.75 per share after writing down about $11 billion, she said.

"We expect the brokers and banks to take another round of writedowns on their mortgage-related positions," said Whitney, who correctly predicted two months in advance that Citigroup Inc. would reduce its dividend to preserve capital. Whitney has grown more pessimistic as credit losses and mortgage writedowns for banks worldwide reach more than $208 billion.
UBS, down 43 percent this year, rose 2.3 percent to 30 francs in Swiss trading.

Merrill Lynch fell 1.8 percent in early New York trading to $43.60. Both banks declined yesterday when Whitney raised her forecast for Citigroup's loss and predicted lower earnings estimates and share prices across the industry. "We believe Merrill Lynch will go through the disruptive step of true structural reorganization or right sizing that will dominate the bulk of 2008," she wrote. Whitney has an "underperform" recommendation on shares of Merrill Lynch, the third-biggest U.S. securities firm.

Sanford C. Bernstein & Co also cut Merrill's first-quarter earnings estimate today to a loss of $1.60 per share, from an earlier estimate of $1.30 profit, saying the firm may write down $4.5 billion on collateralized debt obligations. Bernstein estimated Merrill will earn $1.18 per share in 2008, compared with a previous estimate of $4.10.

Whitney had estimated a first-quarter profit of 72 cents per share for UBS. After cutting that prediction, she also reduced her 2008 earnings estimate to 45 cents from $3.70. Whitney rates the Swiss bank's stock "underperform."

Whitney said March 25 that Citigroup, the largest U.S. bank, may write down $13.1 billion of assets in the first quarter and its loss in the period could be four times bigger than previously forecast. The bank fell the most in the Dow Jones Industrial Average yesterday and led financials to their biggest retreat in almost two weeks.

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FGIC: mortgage losses exceed legal limits

Bond insurer FGIC Corp said on Wednesday that its exposure to mortgage losses exceeded legal risk limits and it may raise loss reserves due to litigation related to stricken German bank IKB. FGIC, the parent of bond insurer Financial Guaranty Insurance Co, earlier this month filed a lawsuit accusing German state-owned IKB of fraud in providing incomplete information on $1.9 billion of debt that FGIC agreed to insure.

FGIC in a statement also said it has a substantially reduced capital and surplus position through December 31. As a result, insured exposures exceeded risk limits required by New York state insurance law, the New York-based company said. "This is a bombshell," said Rob Haines, senior insurance analyst at CreditSights in New York. "They are actually in violation of New York insurance law. If they don't remediate this, the state has the ability to take control of the company." Haines estimated that FGIC would need to raise about $2 billion to stabilize the company.

A spokesman for New York Insurance Superintendent Eric Dinallo said they were reviewing the new FGIC information and declined to comment. FGIC in notes to its consolidated financial statements said it plans to submit a plan to the New York superintendent to reduce its risk. FGIC also said it has voluntarily ceased writing new business to preserve capital.

"Management is assessing whether the loss reserve related to the commitment agreement needs to be adjusted in the future to reflect the impact of these developments," FGIC said in a statement. "Any such adjustment could be material." Bond insurers have been facing increasing pressure on their ratings as some companies expanded into insuring complex debt tied to deteriorating U.S. mortgages.

The bond insurers were not alone in overreaching. Once a little-known lender, IKB took center stage last year as Germany's first subprime casualty when its investments in the market for the risky U.S. mortgages soured. The affair has become an embarrassment for Germany as a banking center. The government has stepped in to try to save IKB from collapse. The bank is due to hold its annual general meeting on Thursday in Duesseldorf.

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Fitch Cuts FGIC, Subsidiary Ratings

Fitch Ratings on Wednesday cut the debt ratings of FGIC Corp. and its subsidiaries following a review of the bond insurance company's finances. The move affects bond-insurance subsidiaries Financial Guaranty Insurance Company's and FGIC UK's insurer financial strength ratings, which were cut to "BBB" from "AA," and remain investment grade. FGIC Corp.'s long-term issuer rating was also lowered, to "BB" from "A," pushing the rating into "junk" status.

"The downgrade on FGIC is based on Fitch's updated assessment of the company's capital position, a review by Fitch of FGIC's updated business plan, consideration of various qualitative ratings factors, and an update on Fitch's current views of U.S. subprime related risks," the credit rating firm said. The outlook for the company remains negative, Fitch added.

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KPMG allowed fraud at New Century, report says

Auditor KPMG either initiated accounting fraud at New Century Financial Corp or stood idly by as the failed subprime mortgage lender committed fraud in 2005 and 2006, an independent report requested by the U.S. Department of Justice shows.

Once the second-largest U.S. subprime lender, New Century filed for Chapter 11 bankruptcy protection last April 2, and was one of the first major casualties of the current U.S. housing crisis, which has roiled global financial markets. It had been one of the largest U.S. providers of home loans to people with poor credit.

The 581-page report by court examiner Michael Missal concluded that New Century "engaged in a number of significant improper and imprudent practices related to its loan originations, operations, and financial reporting." KPMG contributed to some of these accounting and financial errors "by enabling them to persist and, in some instances, precipitating the company's departures from applicable accounting standards," Missal concluded.

"We strongly disagree with the report's allegations," KPMG spokesman Dan Ginsburg said in a phone interview. "We believe that an objective review of the facts and circumstances will affirm our position." More than 450 companies and individuals who have filed claims against the Irvine, California-based New Century may be able to sue KPMG for professional negligence based on KPMG's breach of its professional standard of care, Missal wrote.

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Fed May Gain Influence From Crisis at SEC's Expense

America's financial system faces its biggest overhaul since the Great Depression as officials weigh lessons from the credit-market rout and the near collapse of Bear Stearns Cos. Federal Reserve policy makers are redefining which companies are vital to the flow of credit, an area once the sole domain of commercial banks, and which institutions pose risks to the entire economy if they fail.

Treasury Secretary Henry Paulson said in a speech yesterday that the Fed should broaden its oversight to include Wall Street investment firms, now regulated by the Securities and Exchange Commission. Former regulators predict the changes will see the Fed accrue influence at the expense of the SEC, which was created by President Franklin Roosevelt to make rules for dealers and stock exchanges. The Fed is taking almost $30 billion in assets off Bear Stearns's balance sheet to encourage JPMorgan Chase & Co. to buy the firm, even though Bear's main supervisor is the SEC.

"This is tectonic," said Ralph Ferrara, a former general counsel at the SEC, and now a partner at Dewey & LeBoeuf LLP in Washington. "We no longer want to have a balkanized response to a national crisis." In 2006, New York Fed President Timothy Geithner, saw the need to "revisit" the Fed's authority. In a panel discussion on Sept. 26 of that year, he said the Fed supervised a "diminished" portion of the system as securities firms and hedge funds grew in influence. Paulson is finishing his own review.

The SEC will be so diminished that it "will be given a nice view of the Potomac from whatever floor of the comprehensive financial services regulator they are given," said Ferrara.

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Judge orders banks to fund Clear Channel buyout

A Texas judge ordered banks to fund the proposed $19 billion buyout of Clear Channel Communications by two private-equity firms, the San Antonio radio broadcaster said in a statement on Thursday. District Court Judge John D. Gabriel of Bexar County, Texas, granted a temporary restraining order against the banks, Clear Channel said. "He found in favor of Clear Channel's claim that irreparable harm would result if the banks were not immediately enjoined from tortiously interfering with the merger agreement," the company said.

"Accordingly, Judge Gabriel ordered that the banks, among other things, must not 'interfere with or thwart consummation of the merger agreement' by refusing to fund the merger transaction, insisting on terms that are inconsistent with the commitment letter, or refusing to act in good faith in the drafting of definitive loan documents," the company added. Clear Channel has agreed to be purchased by Thomas H. Lee Partners and Bain Capital.

But lenders including Citigroup, Morgan Stanley, Deutsche Bank, Credit Suisse, Royal Bank of Scotland and Wachovia have declined to provide the financing that they once said they would issue. "It seems clear that lenders' remorse set in when credit markets worsened," Bain and Thomas H. Lee said in a statement Wednesday. "Now they are trying to walk away from their commitment letter which clearly states that they bear all the risk that conditions in the debt markets might change."

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Banks Bleeding Value And Hiding Desperation as US Housing Slump Continues

If consumers – on average – are strapped for cash to pay current expenses, they will max out their credit card debt (thus further increasing the risk of loan defaults), and cut back on discretionary purchases. Since they are unable to borrow against the value of their home, many consumers have no way to sustain their prior lifestyle. Let's face it. For them, monthly income will be less than monthly expenses. There are only two ways out: bankruptcy and/or create a new downscale lifestyle.

For some, that means spending less on shelter. The monthly cost of owning a home must be competitive with the monthly cost of renting a home. In California the median down payment for property purchases in 2005, 2006 and early 2007 was less than 17%. Most of these loans are under water. With no equity left, buyers are now able to treat monthly home mortgage and tax costs as rent.

Under pressure to cut their cost of living, and with the need to re-allocate monthly income from housing to food and fuel, consumers will be forced to consider less expensive shelter. This is both a direct and an indirect result of high oil and natural gas prices, increasing world demand for more and higher quality food, the inflationary impact of America 's ethanol program, and the shortfall of current agricultural production.

In effect, Banks have become property managers. They “rent” to the buyer. If the value of the house goes up, the buyer can cash out the additional equity by refinancing the mortgage or taking out a second loan. If the value of the property does not change or declines, the buyer may chose to walk away from the loan.

Under existing accounting rules, Banks can cook the books by claiming income long before actual cash comes in the door. Option loan income includes interest which has not been paid, but merely added to the balance of the loan. Earnings from mortgage backed securities can be booked as income long before they are earned. Banks have considerable flexibility when it comes to identifying the status of bad debt. Add these items up, and a bank may face asset losses that exceed reserve capital.

It would appear to be imprudent to claim this will be a short and mild recession. Conventional economics looks at dead data and assumes the numbers look good for a quick recovery. Cultural economists, like me, look at what is happening to consumer lifestyles. And that picture is not good. Higher food and fuel costs do force a reallocation of consumer financial resources. They will have to spend less on other non-discretionary purchases – like housing.

They will have less free cash to spend for discretionary purchases. A return to more conservative financing rules, and relatively weak real estate values, have effectively eliminated the use of home equity financing as a sort of savings account that can be tapped at will for more cash.

No. The collapse of our financial markets is not over. The value of debt financed assets (fixed asset deflation) will continue to deteriorate until intrinsic value roughly equals the underlying debt.

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Ilargi: Maybe I should write a book.

Book publishers are bullish on the economy -- as a subject, that is

About a year ago, one of America's bestselling business books was Michael Corbett's "Find It, Fix It, Flip It!: Make Millions in Real Estate -- One House at a Time." Today, one of the hot finance titles picked up for publication is Stephen Leeb's "Game Over: How the Collapsing Economy Will Shrink Your Wealth by 50% Unless You Know What to Do."

As the U.S. economy deteriorates and millions wrestle with questions about their faltering 401(k)s and when -- or if -- to cash out long-term stock investments, major publishers are scrambling to cash in. They're working feverishly to find the next "big book" that reflects a more sobering view of the economy and offers solutions to help Americans survive the current fiscal woes.

In a 48-hour period last week, Penguin Portfolio outhustled rival publishers to make a preemptive buy of "The New New Deal" by financial guru Eric Janszen; Doubleday and HarperCollins beat the drums about their forthcoming books on the Bear Stearns Cos. collapse; and Business Plus, an imprint of Grand Central, jumped at the chance to acquire Leeb's title, which makes no bones about the health of the nation's economy.

"The next 10 to 15 years are going to severely test America in a way we haven't been tested before," said Leeb, president of investment firm Leeb Capital Management Inc. and publisher of the Complete Investor newsletter. "My book isn't doom and gloom," Leeb said. "It doesn't say, 'Pack up all the canned goods and head to the country.' But there's no painless way out of this mess. The problem is people are in a state of denial. The music has stopped, and we're still dancing."

The message, said Grand Central publisher Rick Wolff, is that "these problems aren't going away, and it's not some kind of gee-whiz concern. The old economy is like a video game. It's over." All of these new business books will sound an alarm. But most won't be appearing until 2009, so publishers are rushing to reissue older titles that predicted worsening conditions and seem relevant now.

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The Desperation Of The World's Central Banks

Much has been made of mortgage CDOs (a form of derivative) as the root of the credit crisis, but where a real danger has been looming is in that of the credit default swap market (another derivative). A credit default swap allows a buyer of corporate bonds to insure against default risk by passing that risk onto a seller of the CDS for a premium. So just as you hit an insurance company for the replacement cost if your house burns down, a buyer of a CDS should be able to hit a seller for the cost if a company in which it has bought debt goes under and the loan is not retrieved.

But what happens if the seller of the CDS hasn't got the money?

In this environment, that scenario is eminently possible. For as there has been a propensity for extreme levels of leverage on everything else in this market, the CDS market is no exception. This time what the leverage translates to is that a lot more CDSs have been sold on any particular company than the actual amount of the underlying debt. This is a bit like everyone you know also taking out insurance against only your house burning down, and then everyone expecting to collect the same payout from the insurance company - the house's value multiplied many times.

Had Bear Stearns been allowed to go down, what would have been the ramifications for the seller of CDSs over the firm? Spreads on a Bear CDS jumped from 246 basis points over Treasury to 792 basis points over Treasury two Thursdays ago alone. Now that Bear has been rescued, that spread has dropped to 175 points. But no one is really sure just how many times the default insurance would have been multiplied prior to the Bear "run", and as such how many sellers of the CDSs would have themselves been bankrupted by their leveraged exposures. This would in turn have possibly bankrupted the buyers of the CDS who would have been left high and dry with worthless Bear Stearns debt, just like the investment bankers in 1987 Hong Kong.

And it doesn't stop there. If Bear had gone down, the spreads on all other CDSs would have blown out substantially, prompting an overwhelming need for a reduction in risky positions. This would have had yet another cascade effect through the financial market. A Barclays report last week suggested the potential losses from one CDS breakdown alone could total US$80 billion, but the ramifications across the whole market could be much, much greater. So far the world has focused on some US$125 billion in CDO write-downs.

Twenty years ago the Fed could have easily let Bear Stearns go. But the growth of the derivatives market in the meantime has meant that every bank, investment bank, broker and hedge fund has outstanding derivative positions so interwoven as to make today's Wall Street look like a bowl of spaghetti. If one goes, they could all go.

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Asian Central Banks Look to Invest Reserves in Region

Central banks from 16 Asian nations may invest more of their $1 trillion of foreign reserves in the region's debt as Federal Reserve interest-rate cuts reduce returns on U.S. assets. "This is something that most of us, that are not yet investing in, will be looking at," Bangko Sentral ng Pilipinas Governor Amando Tetangco said in a March 23 interview in Jakarta.

There can be "some kind of shift" to Asian sovereign bonds, Central Bank of Sri Lanka Governor Ajith Nivard Cabraal said in a separate interview on March 22, after a weekend meeting of policy makers from the region. Asian countries pummeled by a financial crisis in 1997-98 have spent the past decade hoarding reserves to help protect their economies from external disturbances. A looming U.S. recession means the world's biggest economy may no longer be the best place for the region to invest those funds.

Indonesia's 10-year dollar-denominated bonds, for example, have a yield of 6.06 percent compared with 3.33 percent for similar maturity U.S. Treasuries. Local-currency Philippine debt maturing in 2018 yielded 7.16 percent as of March 19. "Given the volatility in the U.S. dollar, some diversification won't hurt," said David Cohen, an economist at Action Economics in Singapore. "Even if the U.S. does slide into a recession, continued growth in places like China" may help maintain economic expansion in the region.

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China banks learn to say no to risky deals-

Chinese banks, widely considered as possible buyers of more U.S. financial assets amid the snowballing credit crisis, are becoming picky and cautious due to increasing concerns about investment risks.

After China's state-controlled CITIC Securities narrowly avoided taking a bath on a proposed investment in the ailing Bear Stearns Cos Inc, the Chinese government is insisting that any major foreign investment by state entities gets approval from the cabinet before a final deal can be reached, according to sources with direct knowledge of the situation. Even before that, there had been increased nervousness about doing bank deals.

China Construction Bank (CCB), one of the country's Big Four banks, has turned down nearly 30 proposals of possible acquisitions over the past year, including opportunities to buy stakes in troubled U.S. home mortgage lender Countrywide Financial Corp and British bank Northern Rock, the sources said.

CCB, China's top real estate lender, was invited by Goldman Sachs Group Inc late last year to join bids for Countrywide, the biggest U.S. home loan issuer, said the sources, who declined to be identified because they weren't authorized to speak on the record. CCB turned down Goldman Sachs' proposal after the Chinese bank decided that an equity investment in Countrywide would be too risky for the Chinese bank to bear.

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Garth Turner . The boom goes bust: Canadian Housing

How different is the Canadian experience from the conditions that caused the U.S. housing meltdown? Not enough.

 Imagine listing your home for sale, but there are no buyers. You drop the price. Again. And again. The house across the street's now for sale. And the one two doors down, plus a dozen others in a two-block radius. Nothing's selling, and every time one home is reduced, all are affected. This property used to represent wealth. Now it's a wealth trap. Most of what you have is here, and with each day passed, it diminishes.

Imagine your first home - a dream in granite and stainless. You bought it from the region's largest builder, for 1.5 per cent down - enough to cover closing costs - and mortgaged the rest. Months later, the economy turns abruptly. Your spouse loses his job and the monthly payments - mortgage, taxes, utilities - are crushing. You decide to sell, but the realtor tells you the market's also turned. Your mortgage is now slightly greater than the value of the home. After paying commission, you'll have no house, no equity, and still owe the bank more than $20,000. How could this have happened?

Far-fetched? Hardly. For millions of middle-class Americans, this is a reality as housing values collapse in the first nation-wide housing meltdown since the Depression. In some markets, prices have crashed 30 per cent. In Phoenix, there are more than 20,000 new homes, vacant, unsold and unwanted. In suburban Detroit, million-dollar properties can't fetch buyers at $300,000. Downtown, prices plunged in the first two months of 2008 by 54 per cent, to a median of $22,000.

Canadians, strangely, believe this country's immune from the housing contagion sweeping America. The myth results from three powerful forces. Denial tops the list, no doubt the result of having more than 80 per cent of our net worth in one asset, the family home. Add to that the excellent communications job done by the real estate lobby -- mortgage-lending bank economists and the CEOs of real estate marketing companies -- who claim home values will rise forever. Finally, our belief the Americans screwed up by giving subprime mortgages to unworthy people so they could buy unaffordable homes.

But this is not so. In researching my book, Greater Fool, I was reminded again of why all booms end badly. The inflating real estate market to the south became unsustainable when average prices exceeded the ability of average families to buy homes. This inflation in turn was the result of policy decisions made after 9/11 which gave America (and Canada) the lowest interest rates in a generation.

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Ilargi: Canada may be rich in natural resources, but functioning braincells in not one of them. Ontario's Finance Minister lives in a very deep time warp.

Finance minister putting his money on banks

Duncan cites financial sector for `robust' revenues, pledges $4 million for Toronto centre of excellence

Finance Minister Dwight Duncan is banking on growth in the financial services industry to help Ontario weather any looming economic storm. The morning after unveiling the province's $96.2 billion budget Duncan took his message to Bay Street, telling a predominantly business audience that he wants Ontarians to "celebrate" banks. "Where I come from, we celebrate the auto industry – even today with its challenges," the Windsor-Tecumseh MPP said yesterday.

"Here we have this enormous (financial services) sector with an enormous competitive advantage – more than 50,000 new jobs since 2003 – centred right here in Toronto," he said. "It's growing (and) ... one of the reasons our revenues have been robust is because of the successful performance of the financial services sector. We have to do everything we can to promote those sectors that will benefit the province, create jobs and investments."

To that end, he announced the government would spend $4 million over three years to create a Centre of Excellence for Education in Financial Services in co-operation with seven Toronto universities and colleges. "The idea is to create a virtual, region-wide network of educators, researchers, financial service professionals, government partners, and exports in innovation and technology," Duncan told about 400 people at a joint Canadian and Empire Club breakfast at the Fairmont Royal York Hotel.

"They will work collaboratively to ensure the sector attracts and develops the best and brightest talent to financial services in Ontario," he said, to applause from the audience. "We know it will further strengthen Toronto's global hub for financial services education and training." Duncan praised former Progressive Conservative finance minister Janet Ecker, now president of the Toronto Financial Services Alliance, for driving the initiative.

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