Debt Rattle, March 29 2008: Under the cloak of a crisis

Ilargi: As I’ve said a few times before, the nationalization of mortgage lenders’ debt wil go through three agencies: the GSE’s (Fannie and Freddie), the Federal Home Loan Banks, and the Federal Housing Administration. The numbers revealed so far, just in the past week, are $200 billion, $150 billion and $400 billion in extra credit space, respectively.

That almost makes the $100 billion Fed auction next week seem like an afterthought. But not so fast. That same Fed is set to take over control of even more aspects of the US economy. And no matter how you see the calls for more government involvement, it should be clear that the Fed is not the government.

America is about to hand over even the last few bits of control over its wallet to a group of private bankers. As usual, this happens under the cloak of a crisis; the 1907 crash led to the call for a strong central bank. 100 years later, democratic oversight of the nation's finances is about to vanish in its entirety.


Treasury’s Plan Would Give Fed Wide New Power

The Treasury Department will propose on Monday that Congress give the Federal Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.

The proposal is part of a sweeping blueprint to overhaul the nation’s hodgepodge of financial regulatory agencies, which many experts say failed to recognize rampant excesses in mortgage lending until after they set off what is now the worst financial calamity in decades.

Democratic lawmakers are all but certain to say the proposal does not go far enough in restricting the kinds of practices that caused the financial crisis. Many of the proposals, like those that would consolidate regulatory agencies, have nothing to do with the turmoil in financial markets. And some of the proposals could actually reduce regulation.

According to a summary provided by the administration, the plan would consolidate an alphabet soup of banking and securities regulators into a powerful trio of overseers responsible for everything from banks and brokerage firms to hedge funds and private equity firms. While the plan could expose Wall Street investment banks and hedge funds to greater scrutiny, it carefully avoids a call for tighter regulation.

The plan would not rein in practices that have been linked to the housing and mortgage crisis, like packaging risky subprime mortgages into securities carrying the highest ratings. The plan would give the Fed some authority over Wall Street firms, but only when an investment bank’s practices threatened the entire financial system.

And the plan does not recommend tighter rules over the vast and largely unregulated markets for risk sharing and hedging, like credit default swaps, which are supposed to insure lenders against loss but became a speculative instrument themselves and gave many institutions a false sense of security.

The proposal began last year as an effort by Henry M. Paulson Jr., secretary of the Treasury, to make American financial markets more competitive against overseas markets by modernizing a creaky regulatory system. His goal was to streamline the different and sometimes clashing rules for commercial banks, savings and loans and nonbank mortgage lenders.

“I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every 5 to 10 years,” Mr. Paulson will say in a speech on Monday, according to a draft. “I am suggesting that we should and can have a structure that is designed for the world we live in, one that is more flexible.”

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Fed Offers $100 Billion More to Banks

The Federal Reserve announced Friday it will auction an additional $100 billion in April to cash-strapped banks as it continues to combat the effects of a credit crisis. The central bank said it would make $50 billion available at each of two auctions, on April 7 and April 21.

Through the end of March, the Fed has provided $260 billion in short-term loans to commercial banks through the innovative auction process. It also has employed Depression-era provisions to provide money to investment banks. All the moves have been designed to cope with a serious financial crisis that has roiled U.S. and global markets and caused the near-collapse of Bear Stearns Cos., the nation's fifth largest investment bank.

The Fed has been holding auctions every two weeks since December to provide short-term loans to commercial banks. It started with auctions of $20 billion, then pushed the level to $30 billion, and in early March raised the auction amount to $50 billion as the credit shortage grew more severe. In announcing the move to $50 billion last month, the Fed said it would continue the auctions for at least the next six months, unless credit conditions show they are no longer needed.

The auctions are just one of a series of unorthodox steps the Fed has taken to battle the current crisis. The biggest of those moves was an announcement that it was allowing investment banks to borrow directly from the Fed. Previously, only commercial banks, which face tighter regulations, had that privilege. The Fed also said it would make available $30 billion in financing to support the sale of troubled Bear Stearns to JP Morgan Chase & Co., hoping to prevent a bankruptcy that could have rocked Wall Street.

"The Fed has worked some positive magic," said Mark Zandi, chief economist at Moody's Economy.com. "At least the panic has subsided as the risk of another major failure has receded given that financial institutions now have access to a lot of cash through the various lending facilities the Fed has established."

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FHA May Aid Those 'Underwater' on Loans

The Bush administration is considering regulatory changes to aid homeowners who owe more money on their mortgages than their homes are worth, people familiar with the proposal said. The Department of Housing and Urban Development plan would enable homeowners who are "underwater" on their mortgages to qualify for a partial backstop through HUD's Federal Housing Administration, these people said.

HUD Secretary Alphonso Jackson "is examining the potential for FHA to be a solution for these borrowers," Treasury Secretary Henry Paulson said Wednesday. The FHA is central to multiple plans to revitalize the housing market and prevent foreclosures. Meanwhile, Democrats are trying to pass legislation that would allow the FHA to insure up to an additional $400 billion in mortgages by requiring lenders to take partial losses on loans and refinance borrowers into more affordable products.

HUD's proposal is likely to be much smaller in scale and is expected to offer partial insurance for certain borrowers, leaving lenders on the hook for some losses. Lenders, real-estate agents, and other housing-industry officials have complained to HUD that FHA's current framework makes it too difficult for homeowners to qualify, partly because FHA won't accept homeowners who have missed a payment in the previous six months.

HUD's new plan, recently submitted to the White House's Office of Management and Budget, would allow many more people to qualify, though it still is unclear how. The OMB must review the proposal and approve it. In an interview last week with the Washington Times, Mr. Jackson said the plan he submitted to the White House would provide partial insurance for certain loans in areas where house prices are falling.

"I just made a proposal this morning to the White House for those loans that are underwater," Mr. Jackson said, according to the Washington Times. "We will insure 80 to 85% of the loan -- give ourselves some leeway even if it falls a little more."

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Bush Readies Mortgage Aid Plan

The Bush administration is finalizing details of a plan to rescue thousands of homeowners at risk of foreclosure by helping them refinance into more affordable mortgages backed by public funds, government officials said.

The proposal is aimed at assisting borrowers who owe their banks more than their homes are worth because of plummeting prices, an issue at the heart of the nation's housing crisis. Under the plan, the Federal Housing Administration would encourage lenders to forgive a portion of those loans and issue new, smaller mortgages in exchange for the financial backing of the federal government.

The plan is similar to elements in legislation proposed two weeks ago by Barney Frank (D-Mass.), who chairs the House Financial Services Committee, officials said. Administration officials said they believe they can accomplish some of the same goals through regulatory changes, though important details have yet to be nailed down.

If enacted, the plan would mark the first time the White House has committed federal dollars to help the most hard-pressed borrowers, people struggling to repay loans that are huge relative to their incomes and the diminished value of their homes. That may offer encouragement to the banking industry and help silence Democrats, who have accused the White House of rescuing Wall Street investment banks while ignoring distressed homeowners. But it could agitate conservatives, who are likely to view the FHA plan as yet another government bailout.

Senior officials in several parts of the administration described the plan on condition of anonymity because the specifics are still being worked out. It is unclear when the plan will be formally unveiled, though one official said it was unlikely to happen before the president returns from a trip to Europe next week.

"The administration for a long time had the idealists and the pragmatists. And because the market conditions are what they are right now, the pragmatists are looking at this and saying, 'How can we achieve something?' And they seem to be having more sway," said Francis Creighton, vice president for government affairs at the Mortgage Bankers Association, which has been working with Frank on his proposal.

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Ilargi: In any industry, when business drops 50%, danger signs are flashing. In the credit industry, that is even more true; debt has to be rolled over, constantly. Maybe firms can hang on a bit longer, but business would have to pick up in the very near future, or else many are marked as dead.

What is sure to happen are lay-offs on such a massive scale that Wall Street will start to resemble a ghost town.

Credit crunch takes heavy toll on global debt issuance

Global debt issuance collapsed in the first quarter as the credit crunch took its toll on new deals in all sectors from structured finance and riskier high-yield bonds and loans right up to sturdy investment-grade corporate debt, according to new data. Total debt market volumes were $1,030bn in the first quarter, a 48 per cent drop compared with the same quarter a year ago, while total syndicated loan market volumes were $599.bn, a 47 per cent drop versus the same period last year, according to Dealogic, the data provider.

The numbers illustrate how the withdrawal of liquidity from the world's debt markets in the wake of the turmoil that began in the US mortgage markets has affected everything from the safest corporate borrower to the most risky private equity backed leveraged buy-out deal. Structured finance markets, which cover mortgage-backed bonds and complex products such as collateralised debt obligations, unsurprisingly suffered the worst contractions.

Globally, new deal volumes of just $81.5bn were 89 per cent less than the first quarter of 2007. This volume was the lowest since the first quarter of 1996. The outlook for bankers' jobs in this sector was also put under a cloud with news that revenues generated by structured finance were the lowest since the third quarter of 1995, when a fraction of today's armies of professionals worked in the field.

Bankers and analysts said the outlook for most areas of the debt markets remained fairly bleak for the next quarter and probably the rest of the year. Suki Mann, credit strategist at SG CIB, said that the investment grade companies in Europe, which have been least immediately harmed by the credit crisis so far, would continue to shy away from issuing new debt while markets remained so rocky.

"We think corporates can continue to hang on," he said. "Their liquidity position remains quite strong and banks in Europe continue to lend on a bilateral basis." Within the loan markets, the leveraged loans that fund private equity buy-outs saw the biggest declines, with volumes down 84 per cent to just $46.9bn worldwide compared with the first quarter of 2007.

The capital problems and overhang of large, aggressively structured deals from before the credit crunch allowed a number of different banks to leap up the league tables compared with the common roster of names of recent years.

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The Chop Shop Economy

The air is escaping from the little multi-hundred billion dollar balloon Bush administration floated to resolve sunken credit markets. Meanwhile, news on the economy, in the past week especially, has been massaged within an inch of its news cycle life. We're not getting the whole story, by half.

Lifting the housing industry from its sharpest contraction seems to be the primary political focus of both Democrats and Republicans. The news media appears to be having difficulty parsing the differences. Let's start with a simple explanation. The first step of the free-market acolytes within the Bush administration involves nationalization.

That is what Federal Reserve chief Ben Bernanke did, authorizing the use of derivative debt tied to mortgages as collateral for loans to banks. US Treasury Secretary Paulson has said, the unprecedented step is "temporary", an "emergency response" to avert a financial meltdown, but journalists need to measure the two hundred billion against the ocean of toxic derivatives whose owners now have reason to come calling for charity. It is on the order of trillions.

Taken as a whole, the US financial system was turned into a chop shop where stolen property is taken to be dismantled and sold off piecemeal. That Republicans, the party of fiscal conservatism and limited government, presided over the unravelling of fiscal common sense is astounding. Today, the Bush administration is engaged in a highly risky gamble through monetary policy: that the consumer can withstand more inflation so long as housing markets are jump started in the process.

A more cynical view is that allowing inflation to rise while home values decline will establish some sort of lower order, miserable equilibrium that will allow Republicans to hold onto political power. In response, we get more fictions-- like the weak American dollar will lift exports and the fortunes of the economy.

Paul Craig Roberts wrote recently, "According to the latest US statistics as reported in the February 28 issue of Manufacturing and Technology News, in 2007 imports were 14 percent of US GDP and US manufacturing comprised 12% of US GDP. A country whose imports exceed its industrial production cannot close its trade deficit by exporting more."

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Keeping U.S. Financial Markets Competitive

The plan to overhaul the regulation of U.S. financial markets that Treasury Secretary Henry Paulson will announce on Monday morning is as broad and sweeping as it is overdue. It has been in the works for a year, and predates the present crisis in credit and mortgage markets that started last August. That, though, has given urgency and focus to the work as well as providing an unwanted dress rehearsal for the envisioned expanded role of the Federal Reserve as the primary regulator of market stability.

It will take far longer than a year for the Paulson blueprint to become reality, or at least to become a reality in full -- and it does present both "short- " and "intermediate-term" recommendations, as well as an "optimal" regulatory regime. America's financial system of financial regulation has developed piecemeal, usually in response to episodic financial instability. Some of it dates back to aftermath of the Great Crash of 1929; the Fed itself was set up in 1913; national bank charters date to 1863.

It is also divided between state and federal governments. The result has been a warren of vested interests, both in the financial services industry and Congress, that has proved resistant to change. Regulatory gaps have opened that fleet-footed financial firms have been able to slip through. And the system as a whole has fallen behind the fast-evolving complexities of the financial market, particularly in the past thee decades when liberalization and globalization have transformed both the markets and their participants.

Some of Paulson's reforms will be pushing on an open door in Congress, where many have pointed to lax regulation, particularly of mortgage origination and sales, as being a root cause of the present crisis. "In broad outlines, we agree with large parts of Secretary Paulson's plan," Sen. Charles Schumer, D-N.Y., chairman of the Joint Economic Committee, said in a statement. "He is on the money when he calls for a more unified regulatory structure, although we would prefer a single regulator to the three he proposes."

As well as making the Fed the centerpiece of market stabilization and giving it the information gathering powers across all financial institutions to let it set up an early warning system of pending problems, Paulson's plan would give the Fed regulatory authority over all financial institutions that operate with government guarantees such as deposit insurance for banks. A new regulatory agency would oversee consumer protection issues, while the Office of Thrift Supervision, which supervises thrift institutions, would be folded into the Office of the Comptroller of the Currency, which regulates commercial banks.

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How to crack the credit crunch

Financial reformers have a chance to give stressed-out markets a desperately needed reality check. This month's near collapse of Bear Stearns has brought new urgency to the debate about how to shore up the financial sector. Fears that another firm will implode, and the observation that individuals have reaped millions of dollars in pursuit of policies that led their employers to the edge of the abyss, are fueling a drive to strengthen oversight of financial firms.

U.S. Rep. Barney Frank has called for a program of "sensible regulation" that could involve the creation of a systemic risk watchdog. In an opinion piece published Friday in The Wall Street Journal, U.S. Sen. Charles Schumer laid out six points that legislators must consider in undertaking any overhaul.

"We need to rethink the regulatory framework that governs our financial system," Schumer writes. He says it may be time to consider replacing the current alphabet soup of overlapping federal regulatory agencies, such as the Securities and Exchange Commission and the Commodity Futures Trading Commission, with the U.K. model of "a single strong, effective financial regulator, focused on results and not rules, with the power to act."

The government took an important first step this weekend with Saturday's release of the Treasury's Blueprint for Financial Regulatory Reform. Treasury Secretary Henry Paulson, who is due to announce the plan in a speech Monday, says the key to any long-lasting reform is to update a regulatory framework that was largely put in place in response to the Great Depression.

For now, he wants to make sure existing regulators such as the Federal Reserve communicate better with peers such as the SEC in responding to crises. Eventually, he proposes, Congress should create separate agencies that would be in charge of market stability regulation, safety and soundness regulation associated with government guarantees, and business conduct regulation. He stresses that any recommendations are only a starting point for decisions that will be made by legislators.

"This model is intended to begin a discussion about rethinking the current regulatory structure and its goals," the Treasury Department summary of the blueprint says. "It is not intended to be viewed as altering regulatory authorities within the current regulatory framework."

But some observers say any attempt at financial reform, no matter what structure it takes, will work only if it vests the power to act with investors - by helping them to make sense of the complex, hard-to-value companies and securities that are at the root of the past year's tumult. Enhancing transparency won't be easy, but it's the necessary first step to any recovery.

"This is an information crisis," says Joseph Mason, a finance professor at Drexel University in Philadelphia and a former economist at the Office of the Comptroller of the Currency. He says the market's fearful contortions "aren't going to stop till we get the information" about which institutions are facing more losses.

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SEC Investigates Trading in Lehman Shares

U.S. regulators are investigating whether traders spread false rumors about Lehman Brothers Holdings Inc.'s financial soundness to profit from a drop in the company's share price, two people familiar with the probe said.

The Securities and Exchange Commission has expanded an inquiry into whether investors including hedge funds tried to manipulate Bear Stearns Cos. stock to also review a decline in Lehman's shares, said the people, who declined to be identified because the inquiry isn't public. The Lehman probe examines short sales of the company's stock, one of the people said.

Lehman, the fourth-largest U.S. securities firm, has tumbled 26 percent this month amid speculation that Wall Street firms can't fund their operations. A run on Bear Stearns two weeks ago forced the fifth-largest U.S. securities firm to sell itself to JPMorgan Chase & Co. at a fraction of its market value with financial support from the Federal Reserve.

"It makes a lot of sense to me to look at Lehman if you see the same movements," said Tamar Frankel, a law professor at Boston University. "If someone is spreading baseless or misleading rumors in order to profit from the impact on the market, that's really a threat to the system."

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Only 29 Percent of Americans Approve of a Government-Led Mortgage Bailout

Rasmussen Reports has conducted several polls that center on the mortgage crisis. Between March 19 and March 20, they surveyed 1,000 adults to see how many Americans think homeowners and banks should be helped out by the federal government. Here's what they found:

Should Homeowners Who Borrowed More Than They Could Afford Be Helped Out By the Federal Government?
Of the 1,000 adults who responded to this question in Rasmussen's telephone survey, the majority said that the federal government should not help out homeowners who borrowed more than they could afford. Twenty-nine percent disagreed, saying the government should offer assistance, and 17 percent didn't know how to respond to the question.

Should Banks That Made Bad Loans Be Helped Out By the Federal Government?
Survey respondents were not as sympathetic to banks. Sixty-one percent those who answered the question thought banks should not be helped out by the federal government. Fifteen percent of people felt government action was appropriate and 23 percent were undecided.

Republicans vs. Democrats
When survey respondents were separated according to the political party they supported, the results were slightly different. Democrats were much more supportive of government assistance than Republicans. The Democrats were almost evenly divided on the idea of help for homeowners. Sixty-seven percent of Republicans, on the other hand, were against assisting homeowners who borrowed too much.

Fifty-five percent of respondents who are not affiliated with either party also opposed government help for homeowners. When it comes to helping banks that made bad loans, only 53 percent of Democrats said they were opposed a government-led bailout of banks compared to 68 percent of Republicans. Sixty four percent of respondents with no affiliation were also opposed to a bailout of banks.

Other Mortgage Bailout Surveys
Rasmussen Reports has conducted other polls relating to the mortgage mess over the last few months. Not much has changed from poll to poll. In a separate survey conducted in December of 2007, only 27 percent of people thought the government should assist people who couldn't make payments. In the same survey, 57 percent of respondents said troubled homeowners should buy a smaller house instead of looking for government help.

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Rubin Advises Quick Action to Fix Economic Crises

Citigroup executive Robert Rubin says proposals by the top three presidential candidates and others to attempt to fix the housing and credit crises sound sensible and could be effective. The former Treasury secretary for President Clinton tells Robert Siegel the key is "to sort through them and sort through them quickly, make decisions quickly and act quickly."

At the center of the economic downturn, says Rubin, is the decline in home prices, which he calls "exceedingly significant." Consumption over the past decade, he says, was largely driven by borrowing against home values, adding "when home prices fall people feel less affluent and that can affect the psychology of investors."

With regard to the negative equity situation that many homeowners face, Rubin looks for banks to write-down mortgages to levels commensurate with the real value of the homes. He says it's a "financially better solution" for banks than foreclosing. By most estimates, lenders lose 20 percent to 25 percent of the value of houses through the foreclosure process alone.

Renegotiated mortgages would permit families to remain in their homes and cut bank losses to a degree. Rubin says he suspects some public funds would probably be necessary, in the form of subsidies for homeowners, but not for lenders, which Rubin says should suffer a loss.

In the short run, Rubin has three general recommendations: Continuing to do what's sensible to stimulate the economy, increasing the availability of new mortgages for people who want to buy homes and creating measures to address the large numbers of troubled mortgages over the next year or two

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Warning Signs Seen in Rising Credit Card Delinquencies

While not ready to sound the alarm, CreditSights sees warning signs in the rising rate of credit card debt delinquencies. In a new survey of US credit card Asset-Backed Security collateral performance, CreditSights finds and that pool performance has deteriorated significantly over the course of the last eight months.

“Despite that deterioration, however, credit card ABS collateral delinquencies are still well within the normal historical range, and the ratings on credit card ABS senior tranches appear to be safe for now.”

While issuance and excess spread levels do help to offset concerns about rising delinquencies, we find some worrying evidence that delinquencies are rising more rapidly than what might have been historically normal given recent trends in unemployment.

“We would grant that the most recent unemployment data have been surprisingly low, so in the coming months we may simply see unemployment rise, validating the recent steep rise in delinquencies. But if something else is going on, especially if there has been some structural change in the behaviour of credit card borrowers that has made them more likely to default than they historically would have been given current economic conditions, then credit card ABS bondholders may have a more bumpy ride ahead than they might have expected.”


Stripping out master trusts which did not exist in 2001, CreditSights finds that most master trusts are approaching their mid-2001 delinquency levels, and one (the MBNA/BofA trust) is now well above that mid-01 level. Only the Discover master trust is still enjoying delinquency rates well below its 2001 levels.

“Combining all six of the older credit card ABS master trusts’ delinquency rates into a simple average of the six, we find that average delinquency rates have jumped sharply over the last eight months, from an index reading of just under 70 (where the delinquency rate index stood at 100 as of May 2001) to a reading of 89.5 today.

While that leaves average delinquency rates below their mid-2001 levels, and still well below the record index reading high of 114 in Early 2002, the increase since July 2007 has still been severe. It took 21 months - from April 2004 to January 2006 - to get this index level from just over 90 to just under 70. It has taken only eight months, however, for the index to jump from just under 70 back to around 90.”

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Philadelphia City Council Suspends Foreclosure Sales, Calls for a Six Month Moratorium

Housing Wire has learned that the City Council of Philadelphia passed a resolution Thursday afternoon calling for the Sheriff’s Department to immediately suspend all foreclosure sales in the county scheduled for April — essentially imposing a 30-day “pause” on any foreclosures that had been scheduled to be auctioned off during the month (foreclosure sales are held monthly).

The resolution also calls for the Sheriff to seek an additional six month moratorium through the courts, according to a private memo released by a local law firm in the Philadelphia area and obtained by HW. It’s unclear at this time what reaction the Philadelphia Sherriff’s office has to the city’s proposed resolution. Calls for comment were not immediately returned.

Attorneys that spoke with Housing Wire said that they believe the actions of the City Council to be a blatant abuse and violation of existing state law. “These actions, as proposed, will obviously cause a major disruption to the practice of mortgage foreclosure law in Philadelphia County, which handles the largest volume of foreclosures in the State of Pennsylvania,” the memo said.

One source, an attorney outside of the state, wondered if the city was also planning on paying for costs associated with delaying the sales. “Is the good city of Philadelphia also planning on paying investors for excess property maintenance, and assuming the increased risk of theft and property damage, too?,” the source said, who asked not to be named.

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ECB Will Offer Six-Month Loans

The European Central Bank expanded its playbook by announcing it will offer six-month loans to financial institutions for the first time, in a fresh sign of the depth of policy makers' worries about the health of the banking system. Hoping to encourage banks in the euro area to lend to one another for longer periods, the ECB said Friday that it will offer a total of €50 billion ($78.88 billion) in six-month loans at two separate auctions, the first of which will be Wednesday.

In a further bid to calm lenders, the ECB said it will renew for a second time €100 billion in extra three-month loans it initially made in November and December. The ECB's moves come as central bankers on both sides of the Atlantic are struggling to find the best way to unclog money markets when banks are hoarding cash for their own needs and balking at lending to one another.

The Bank of England, under pressure from bankers to ease the pain, is considering new measures that could mimic the U.S. Federal Reserve's recent move to offer government bonds in exchange for often hard-to-value mortgage-backed securities. The cost for United Kingdom banks to borrow sterling funds from each other for three months rose to just more than 6% Friday, its highest since Dec. 28 and up from 5.7% a month ago.

In Washington on Friday, the Fed scheduled two more auctions at which it will offer loans to banks through its Term Auction Facility, one for April 7 and the other for April 21. Each auction is for $50 billion. The TAF was created in December as an alternative to the traditional Fed discount window, and the Fed has said it plans to conduct auctions every other week until pressures in money markets dissipate.

Both U.K. commercial banks and the Bank of England are watching the rise in interbank lending rates closely, cognizant that it increases the chance that a U.K. financial firm dependent on wholesale borrowing could encounter serious problems, said a person familiar with the situation. ECB policy makers also worry that continental banks haven't disclosed the depth of their exposure to troubled mortgage investments.

The credit crunch is choking the U.K. economic-growth engines that are most vulnerable to a reduction in the supply of cheap loans, and consumers are taking note. Economic data released Friday showed the U.K.'s financial-services sector and its housing market are being hammered by the credit crunch. It isn't clear, however, whether the difficulties experienced by those sectors are having an impact on the wider economy.

The BOE, which has been criticized for failing to help banks when tensions first erupted in August, has already made some significant concessions, offering extra three-month loans against a broader range of collateral, including mortgage-backed securities.

Now, though, bankers are asking for more action. In daily conversations with the Bank of England and the U.K.'s Financial Services Authority, bankers have discussed whether the U.K. central bank could offer a guarantee that it will continue providing longer-term loans against lesser collateral, as it began doing in December. Another option: Set up a mechanism, much like the Fed's security-lending facility, in which the central bank would accept hard-to-trade mortgage securities as collateral for loans of government bonds.

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IMF to Cut Euro-Area Growth Forecast Below 1.4%

The International Monetary Fund will pare its forecast for 2008 economic growth in the euro area to below 1.4 percent next month, De Tijd reported today, citing Luc Everaert, who heads the IMF's regional studies unit in Europe.

The new projection for economic growth in the 15 nations that share the euro currency will be "slightly lower" than the 1.4 percent the fund forecasts for economic growth in Belgium this year, the newspaper quoted Everaert as saying at a press conference in Brussels yesterday.

The IMF yesterday cut its forecast for economic growth in Belgium from an earlier prediction of 1.6 percent in January, citing a "worsening" international environment and "less favorable" financing conditions for businesses. The fund, which on Jan. 29 projected euro-area growth of 1.6 percent this year, will publish its new growth forecast on April 9, according to a statement on its Web site.

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Goodbye to rip-off Britain

With the crunch coming, the articial inflation in the economy will soon be exposed

There is a guy, does business up town, doesn't use his car much, bit of a novice when it comes to scooting around London. Anyway, a few weeks back he has complications with late meetings so, for a couple of days, he drives in. First time, schoolboy error, he forgets to pay the congestion charge, incurs a £60 fine right there. His parking for the day comes to roughly £40 in an NCP.

Next time, he remembers the congestion charge, but leaves his car on the street, doing the parking meter tango, feeding it, moving it, feeding it, moving it, £8 here, £6 there, until finally he gets really busy, overruns by five minutes and, bang, a £100 penalty. He reckons the whole experience, with petrol, of two days' motoring will have cost close to £300. He's a wealthy man, he can afford it; but suppose he was an ordinary working stiff from the sticks, bringing in the average wage? That could be his disposable income, after the mortgage, gone. For two innocent, pretty harmless, mistakes. This is why Gordon Brown is in trouble.

The economy is false. The economy is a lie. The economy is a fictional set of numbers cooked up during a boom period that is almost over, and six months from now nothing will add up. The cost of a parking ticket grew to be completely disproportionate in relation to the offence committed because everyone was sawing it off, so nobody cared. Some twerp slapped a sticker demanding one hundred notes for a minuscule oversight on your windscreen and you knew it was preposterous, but you could afford it.

And now you can't. And now you are going to realise how overpriced and bogus the minutiae of British life are, and Gordon is panicking because there is no way he can make this sustainable; yet the artifice of commerce and government relies on your expanding wallet.

If, while waiting for the clampers to arrive, having paid your £100 release fee plus £60 fine plus VAT, you pop into Starbucks for a cup of coffee, you will be charged close on £2. For coffee. Think about it, because so few have. We read about sub-prime mortgage markets and global credit squeezes and receive the deep thoughts of financial experts that have caught a cold in every recession for the past 50 years, which is why the benefits from your endowment mortgage will just about cover a self-assembly greenhouse from Homebase, but nobody notices the details.

Coffee, two quid. No rationalisation. No justification. In a recession, nobody can drop two quid for a hot drink three times a day, five days a week. Bottled water the same: £1.60 for 500ml to take away at Caffè Nero on Monday. And everyone has a sip. Our lives are full of inflated expenses that are propping up Brown's fairyland economy and, when the penny drops, this crash will be the mightiest ever. No wonder he looks scared.

Brown got away with murder because he was Chancellor in the days when chimps could make money. In May 1999, he sold half the country's gold reserves during a 20-year low in the market at an average price of $275 an ounce. Yesterday morning the price of gold was approximately $946 an ounce. Brown bought euros instead, which have done well, but even so the cost to the nation of this mistake is measured in billions; and the only reason it has not been immortalised as a catastrophe in the same way as, say, Black Wednesday is because the population has been too busy hiring personal trainers and eating fancy crisps (chardonnay wine vinegar flavour, firecracker lobster flavour, patatas bravas, have you people gone nuts?) to care.

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Ilargi: I just LOVE that line:"The decline in the dollar has very good momentum."

Dollar Falls Most Versus Euro Since 2006 on Central Bank Rates

The dollar dropped the most against the euro in more than two years as traders increased bets the Federal Reserve will cut borrowing costs further to avoid a recession while the European Central Bank holds rates steady.
The currency came within a cent of the all-time low this week before a Labor Department report on April 4 forecast to show U.S. employers cut jobs for a third straight month. The pound declined to a record versus the euro as March consumer confidence in the U.K. slumped to a 15-year low.

"Numbers from the U.S. show the economy is worse than most people expected, while numbers from Europe have been better than expected," said Tom Fitzpatrick, global head of currency strategy in New York at Citigroup Global Markets Inc., the world's third-biggest currency trader.

"The decline in the dollar has very good momentum."

The dollar fell 2.4 percent to $1.5796 per euro yesterday, from $1.5431 on March 21. It's the biggest decline since January 2006. The U.S. currency dropped 2.7 percent against the euro on March 25-26, the biggest two-day decline since January 2001, after reports unexpectedly showed U.S. durable-goods orders fell in February while German and French business confidence increased this month. The dollar fell to $1.5903 against the euro on March 17, the lowest since Europe's currency made its debut in 1999.

The Turkish lira was the biggest loser against the dollar this week among the 177 currencies tracked by Bloomberg before a March 31 hearing on a suit brought by the chief prosecutor to shut down the ruling party for undermining secularism. The lira fell 4.3 percent to 1.3043 per dollar after touching 1.3059 yesterday, its lowest level since Sept. 10.

The Norwegian krone was the biggest gainer versus the dollar this week, rising 3 percent, as the price of crude oil surged. Norway is the world's fifth-biggest exporter. The pound fell yesterday to a record of 79.29 pence against the euro on the decline in consumer confidence and a separate report showing U.K. housing prices advanced in March at the slowest pace in more than a decade.

The 15-member euro fell short of breaking the all-time high against the dollar as gauges traders use to predict changes in prices showed gains were too fast to be sustained.

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India’s love affair with gold tarnishing

As India’s voracious appetite for gold wanes, producers of the precious metal are taking heed. Indian consumers buy about 25 per cent of the world’s gold, the vast majority of which is imported, making the country the largest market for the metal.

Globally, investors have poured into gold, seeking refuge from?the?deflating dollar, which has hit record lows against the euro. Fears of an economic slowdown in the US, sky-high oil prices, and fallout from the subprime crisis have driven demand for gold as a safe haven. But with the recent volatility in gold prices, which have hit more than $1,000 per troy ounce, investors have become nervous and sales of gold in India have fallen sharply.

Demand for gold in India plummeted 64 per cent year-on-year in the fourth quarter after growing 40 per cent in the first three quarters of last year. According to James Burton, chief executive of the World Gold Council, the global miners’ group, in the first half of 2007 India was on track to buy more than 1,000 tonnes of gold for the year, but demand “tailed off at the end of the year”, as gold prices rose.

Jewellers in India have been particularly hard hit and tell of subdued sales as consumers baulk at high prices. Even families of marrying couples, traditionally obliged to drape newlyweds in the precious metal, are passing on family heirlooms instead of buying new gold.

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S&P Cuts FGIC Rating to 'Junk'

Standard & Poor's Ratings Services cut Financial Guaranty Insurance Co. to "junk" status, saying the company "has failed to implement a strategic plan to re-establish itself as a viable operating entity."

S&P said the underlying rating of bonds ensured by FGIC may well be stronger than those of the insurer after this downgrade -- basically saying FGIC's insurance is worthless. The move follows a cut to junk status by Fitch Ratings on Wednesday.

FGIC, which guaranteed many bonds that have run into trouble as the credit markets seized up, recently suspended writing new business in order to generate badly need new capital, which it has been unable to raise from investors. Adding to its woes the company was recently notified that its exposure to potential losses exceeds New York State regulatory limits, which cold lead to serious consequences if not corrected.

"Our increased concerns over regulatory and managerial issues have led us to a downgrade to the speculatively level," also-known-as junk, S&P wrote. "Unlike many of its peers, FGIC has been unsuccessful so far in raising new external capital." S&P warned that future ratings cuts deeper into junk could be on the way. The ratings agency discontinued coverage on all of the "public finance and corporate transactions" insured by FGIC that do not have an underlying public rating.

FGIC lost $1.89 billion in the fourth quarter, mostly because of a $1.71 billion mark-to-market loss on derivatives it wrote on securities backed in large part by subprime mortgages. Bond insurers have argued that mark-to-market losses represent changes in the market value of their derivatives and are likely to largely reverse themselves over time.

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Aftershocks at Bear Stearns

In a week it was all gone: Bear Stearns' reputation, culture, identity; the savings of many of its 14,000 employees; and possibly their jobs, too. "The speed of the collapse was traumatic," says one banker who has worked at Bear for a decade. "People aren't jumping out of windows," he says. "But we are all kind of anxious."

A year ago Bear Stearns was worth about $20billion. On Mar. 14 it was worth $3.6billion and fighting for its survival. Two days later JPMorgan Chase, egged on by the Federal Reserve, agreed to buy the 85-year-old investment bank for $2 a share, or $236 million. On Mar.24, JPMorgan, under fire for unseemly opportunism, quintupled the offer to $10 a share, or $1.2 billion.

But whether the bank was sold for $2 or $10 a share hardly mattered to many of Bear Stearns' employees who were regularly given stock and owned about a third of the company. In a chilling sign of things to come, local papers reported that the morning after the deal was announced, a real estate broker positioned himself outside Bear Stearns' Madison Avenue headquarters, offering his services to those who might need to sell their homes quickly.

A comedown of such magnitude would be traumatic for any organization. But Bear Stearns was a Wall Street outlier. Although the country's fifth-largest investment bank, Bear still considered itself the scrappy underdog. A former chief executive, Ace Greenberg, liked to say Bear hired people who were poor, smart, and had a deep desire to become rich. It was a place of sharp elbows, but if you succeeded you were part of a family.

Already, people are comparing Bear Stearns' collapse to that of a certain Houston energy trader that imploded a few years ago. "Among employees, I am seeing a similar sense of distrust as we witnessed after Enron," says Alden M. Cass, a psychologist who counsels Wall Street executives. Cass says he has received more inquires about his services from inside Bear than usual this past week.

The circumstances around Bear Stearns' demise are unusual enough that employees aren't sure who they should hold most responsible: James E. Cayne, the chairman, or Alan D. Schwartz, the chief executive; James Dimon, the head of JPMorgan; or maybe Ben Bernanke and the Fed. "Everyone believes they were robbed. And no one knows who to blame," says a managing director who has worked at Bear for four years.

There is one person some are still looking to with hope: Joseph Lewis, the British investor who owns an 8% stake in Bear Stearns. He said in a filing with the Securities & Exchange Commission he would try to block the deal. Employees "are holding on to him like he's a savior," says Cass. "He's giving them a sense of control."

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No picnic

Bear offers some attractive franchises, for instance in prime brokerage, clearing and energy. But not everyone is convinced these are worth the effort. Prime brokerage has been haemorrhaging clients to Goldman Sachs and others. Morale at other businesses is said to be rock-bottom.

So JPMorgan may not be getting a bargain after all, reckons Dick Bove of Punk Ziegel. He points out that the total cost of the deal, adding in the $6 billion charge (but excluding the new share issue), is around $65 per share. Hardly a snip.



The assumption that JPMorgan is strong enough to absorb Bear may also be tested soon. Certainly, the bank is in better shape than its arch-rival Citigroup, having largely avoided the most toxic subprime securities. But its mix of businesses suggests plenty of pain to come. The bank is heavily exposed to rising corporate defaults. It is also big in home-equity loans, which are souring at an alarming rate.

More importantly, it is a giant in the over-the-counter derivatives market, and number one by a long way in credit-default swaps. With such a large derivatives book, the bank can withstand losses of only 15 basis points (hundredths of a percentage point) across its positions before eating through its regulatory risk-based capital, according to Institutional Risk Analytics (IRA), a research firm.

These positions are, like those of America's housing giants, Freddie Mac and Fannie Mae, too big to hedge effectively, IRA says. It also calculates that JPMorgan needs almost five times its current capital to cover its economic risks.

The bank hotly disputes this. It points out that its actual exposure to derivatives, at $67 billion, is a mere thousandth of the notional value of the trades. But this is still a big number. And the backdrop remains bleak: this week Goldman put banks' eventual credit losses at an eye-watering $460 billion. Mr Dimon is likely to face some worrying distractions as he integrates what is left of Bear.

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Crawford must make retail ABCP holders whole

Over the next four weeks, lawyer Purdy Crawford needs to turn up $269-million, and hand it over to retail investors in frozen asset-backed commercial paper. Mr. Crawford can talk bravely about cutting some sort of a deal with 1,800 individuals who had the misfortune of parking their savings in this triple-A rated paper back in August, as he did Wednesday at a Canadian Club luncheon in Toronto.

But he has to realize that there is only one set of terms acceptable to this crowd, very few of whom were in the Canadian Club crowd. The retired priests and engineers and various other hard-working types who've had their savings frozen for seven long months want payment in full. And they want their money soon. They're after the same 100-cents-on the dollar deal that National Bank gave to its ABCP-owning individual clients, back when this crisis broke in August. That rescue saw the bank buy back $2-billion of paper.

This crowd wants to be made whole the way Manulife Financial made good its clients in 2005, after steering them into $235-million worth of hedge fund Portus, which subsequently went belly-up. Who came blame them? Fair or unfair, Mr. Purdy needs to deliver on the precedent set by National Bank and Manulife. The alternative is that a $33-billion restructuring blows up because owners of less than 1 per cent of the assets voted it down.

The fate of the ABCP rescue plan really rests with about 1,4000 clients of Canaccord Capital. If this group can be brought onside, approval of the package is a slam dunk - it requires a thumbs-up from 50 per cent of all investors who vote. The problem is that Canaccord claims it doesn't have the $269-million needed to take out its clients at 100 cents on the dollar. The paper is likely worth about 60 cents on the dollar, if it were to actually trade.

Mr. Crawford is focusing his efforts on managing down expectations from individuals. He warned Wednesday that retail holders of ABCP should guard against overplaying their hands. Here's where a lifetime of deal-making can lead a fellow astray. In Mr. Crawford's world, as a rainmaker at law firm Osler Hoskin & Harcourt and as CEO of Imasco, executives and lawyers push and prod and scream and cajole as they negotiate deals. Everyone gets close to the brink, but knows not to go over. The respected securities lawyer needs to realize this Bay Street experience means nothing on Main Street.

ABCP holders are angry. They've got class action lawyers urging them to fight. And they've got good reason not to trust the financial institutions that put them into this commercial paper in the first place. These investors see no reason to compromiise, given the precedent set by National Bank. There is no indication these investors know or care about the larger threat to capital markets. Pure spite could push the ABCP rescue over the brink.

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Moody's gives its highest rating to $12 billion of ABCP in four CIBC-trusts

Moody's Investors Service has assigned its highest short-term rating to nearly $12 billion of asset-backed commercial paper within four trusts managed by Canadian Imperial Bank of Commerce. ABCP is a type of short-term debt that is backed by assets such as credit card receivables and sometimes lending agreements that provide some guarantee that the principal will be repaid.

Moody's gave its Prime-1 rating to several series of notes issued by trusts known as Macro, Smart, Safe, and Sound. As of February, they had outstanding notes worth C$2.12 billion, C$3.81 billion, C$2.67 billion and C$2.87 billion, respectively. Although all four trusts include at least some mortgages among their assets, none of them are subprime U.S. mortgages, all are Canadian mortgages and most are prime mortgages, making them low-risk for defaults.

Each of the trusts also has a liquidity facility, or loan agreement, through CIBC that is available to be drawn to redeem maturing ABCP as needed. The paper that Moody's rated for CIBC isn't part of the $32-billion in third-party ABCP that has been stranded since last August, when concerns about rising defaults on U.S. subprime mortgages destroyed investor confidence in the structured securities.

Some of that paper also had liquidity facilities as well but the agreements were such that the banks who had acted as guarantors when notes matured were able to decline payments to the noteholders, which included businesses, pensions and individuals. A committee headed by Toronto lawyer Purdy Crawford is still working on a plan that would at least partially rescue the Canadian third-party ABCP.

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Ilargi: Canada’s rating agency DBRS has so far escaped most of the scrutiny showered on Moody’s, Fitch and S&P’s. Well, its time has come.

DBRS has its neck on the line in this rescue plan

Nearly eight months into the Great Canadian Debt Fiasco, the injuries are only getting worse. Canaccord Capital, the largest independent broker, has a bruised reputation. National Bank of Canada and the Caisse de dépôt et placement du Québec, pillars of Quebec finance, are wearing twin black eyes.

Bank of Nova Scotia is covered in mud. And let's not forget the ones hurting the most: 1,800 individuals, plus some corporations, pension funds and others, whose pain can be measured in one number: $32-billion. That's the amount they put into asset-backed commercial paper that was supposedly ultra-safe. The odds of recovering all of their money seem slim.

They are upset. Who can blame them? Much of the anger is directed at Canaccord, the biggest seller of the stuff. Perhaps more ought to be aimed at credit rater DBRS Ltd., which told everyone ABCP was low risk. But DBRS is a key link in Purdy Crawford's effort to rescue some of that $32-billion. If the rating agency screws up again, there's going to be trouble..

ACBP investors are being asked to trade their locked-up short-term paper for longer-term bonds. To grossly oversimplify: Some of the new bonds are backed by real assets - mortgages and such that are not in default and will be repaid. Others are backed ... well, by hope. Or by derivative contracts that might pay off but might also turn out to be worthless.

A perfect solution, it's not. But at least there will be a market for the new bonds and those who need the cash can sell (albeit at a significant loss). That's when the really fun part will begin. How do you value a bond when you can't understand what's behind it?

With corporate bonds, you can look at debt levels, cash flow, interest coverage. With a government bond you can take the measure of inflation, tax revenue and deficits. But many ABCP trusts are highly complicated. Without a mathematics degree, putting a price on them is tough. An average person will have to rely on - gasp - a credit rating. Without one, the market for these notes might not be very liquid. It might be hard for ABCP holders to get a decent price.

So Mr. Crawford asked the credit agencies to step up: Put a letter grade on these new bonds so that those nice folks from Sarnia can sell and put an end to this nightmare. Forget it, said Moody's. No thanks, said Standard & Poor's. Both firms have been battered by their own public relations fiascoes. They don't need another headache.

So the burden falls on DBRS, which helped create the commercial paper mess in the first place, to be part of the solution. The early indications are that at least two of the new sets of bonds will be given a double-A rating - the same as the government of Ontario. (Some of the other restructured ABCP notes - subordinated notes, lower down the food chain - won't be rated at all by DBRS.) This should raise an alarm. A double-A rating, obviously, is meant for blue-chip bonds. Double-A means it's very likely you'll get your money back in the end. It doesn't say anything about volatility or at what price they will trade at between now and maturity. It doesn't guarantee that the credit markets won't go to hell in the meantime.

For a corporate bond, this may not matter. But since a lot of ABCP is based on leveraged bets on credit prices, price volatility does matter. If credit prices fall far enough - that is, if spreads get high enough - it could lead to a margin call and guaranteed losses (this is the scenario Mr. Crawford has been working to avoid). Under the restructuring plan, the odds of triggering a margin call are lower - "significantly more remote," says Huston Loke of DBRS. But they're not zero.

Given the record, who would trust DBRS to figure out what's a "remote" possibility? This is a time when the impossible seems to be happening twice a week. A month ago, the idea that Bear Stearns could be driven to the brink of insolvency, then sold for $10 (U.S.) a share, would have seemed remote. A decade ago, Long-Term Capital collapsed precisely because its genius managers made highly leveraged bets that could not go wrong, unless the unimaginable happened. And then it did.

The point: In times of financial distress, academic mathematical models don't work so well in the real world. Yet DBRS, having failed in its first attempt to assess the risks in asset-backed paper, is turning to the models again. What if this time, "double-A" turns out to be as much of a mirage as those original ratings were? Then DBRS will have only compounded the hit to its reputation. A credit agency that can't competently rate risk has no reason to exist.

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