Debt Rattle, April 14 2008: Marked down as dead

Dorothea Lange 1938- Children in a democracy

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Please see also today's Small change with global consequences

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Ilargi: Look, it’s exceedingly simple: in order to cling on to the money and power they presently hold, bankers need profits and politicians need donations. Both are best served by the present global agriculture situation, in which a handful of multinationals dictate everything that goes on in food markets.

That is why nothing will change; all their words are empty. They will keep on talking while millions starve, which is soon, and then they’ll talk some more. Millions have been marked down as dead. If and when basic human needs are traded in financial markets, the inevitable result is expendable people. Not only are you as much to blame for that as everybody else, including these "leaders", you are also set to become the next victims. Right here where you live.

It is also extremely cynical that it’s the World Bank and IMF which try hard to sound so worried over world hunger; these two organizations have done more to create that hunger than any other single institution or corporation.

What the world needs more than anything is new leaders. Well, actually, no, getting rid of the present ones is even more important. Meanwhile, try on this statement for size, which for many, certainly in the US, must sound like blasphemy: ”If we think that solving or emerging from the crisis means going back to the configuration of growth before the crisis, we would be making a mistake...”.


Food Inflation, Riots Spark Worries for World Leaders

Finance ministers gathered this weekend to grapple with the global financial crisis also struggled with a problem that has plagued the world periodically since before the time of the Pharaohs: food shortages. Surging commodity prices have pushed up global food prices 83% in the past three years, according to the World Bank -- putting huge stress on some of the world's poorest nations.

Even as the ministers met, Haiti's Prime Minister Jacques Edouard Alexis was resigning after a week in which that tiny country's capital was racked by rioting over higher prices for staples like rice and beans. Rioting in response to soaring food prices recently has broken out in Egypt, Cameroon, Ivory Coast, Senegal and Ethiopia. In Pakistan and Thailand, army troops have been deployed to deter food theft from fields and warehouses.

World Bank President Robert Zoellick warned in a recent speech that 33 countries are at risk of social upheaval because of rising food prices. Those could include Indonesia, Yemen, Ghana, Uzbekistan and the Philippines. In countries where buying food requires half to three-quarters of a poor person's income, "there is no margin for survival," he said.

Many policy makers at the weekend meetings of the International Monetary Fund and World Bank agreed that the problem is severe. Among other targets, they singled out U.S. policies pushing corn-based ethanol and other biofuels as deepening the woes. "When millions of people are going hungry, it's a crime against humanity that food should be diverted to biofuels," said India's finance minister, Palaniappan Chidambaram, in an interview. Turkey's finance minister, Mehmet Simsek, said the use of food for biofuels is "appalling."

James Connaughton, chairman of the White House's council on environmental quality, said biofuels are only one contributor to rising food prices. Rising prices for energy and electricity also contribute, as does strong demand for food from big developing countries like China. But beyond taking shots at the U.S., there was little agreement this weekend on what should be done.

Mr. Zoellick pushed the ministers to focus on the food issue in a dramatic Thursday news conference at which he held up a 2-kilogram (4.4-pound) bag of rice, which he said would now cost poor families in Bangladesh half their daily income. He kept up the pressure over the weekend. In a Sunday news briefing, he said, "We have to put our money where our mouth is now -- so that we can put food into hungry mouths."

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World economic leaders act to counter financial, food crises

World economic leaders have taken steps to alleviate the worst financial shock in decades and a food price crisis that is sparking deadly unrest in developing countries. In three days of meetings that ended Sunday, finance ministers and central bankers grappled with the credit squeeze and inflation emergencies against the backdrop of an apparent US recession and a sharply slowing global economy.

The Group of Seven industrialized countries set the alarmed tone on the eve of the annual spring meetings of the 185-nation International Monetary Fund and its sister institution, the World Bank. Confronted by what the IMF head says is the worst financial crisis since the 1930s Great Depression, finance chiefs from Britain, Canada, France, Germany, Italy, Japan and the United States decided only greater transparency in the financial system could restore normalcy to the markets.

The G7 endorsed recommendations from an international forum and set for some of them a deadline for implementation unprecedented in its brevity -- 100 days. Recommendation is a "gentle word," said Bank of Italy governor Mario Draghi, who also chairs the Financial Stability Forum that made the proposals. "In fact some of these recommendations are actually policy decisions." The sudden nosedive in the global economy after several years of robust growth "even six months ago would have been unthinkable," he added.

At the October meetings of the G7, the IMF and World Bank, the market turmoil that had erupted in August from rising defaults in the US high-risk subprime home loan sector was largely viewed as a contained event that did not threaten the broader world economy. With the credit squeeze still spreading, the IMF recently warned that the US economy, the world's biggest, was entering a recession and world growth was deteriorating so sharply a global recession was also in view.

The IMF estimated the crisis would cost the global financial system nearly one trillion dollars. The IMF on Saturday wrapped up its meeting with a call for "strong action and close cooperation" to combat the financial crisis. "Policymakers should continue to respond to the challenge of dealing with the financial crisis and supporting activity, while making sure that inflation is kept under control," said the IMF, whose core mission is to promote global financial stability. "While each country's situation is different, coherent action must be taken."

The IMF and World Bank urged efforts to address the food crisis that is stoking violence and political instability, and the longer term needs of development and poverty reduction, the bank's main function. And Italian Finance Minister Tommaso Padoa-Schioppa warned in an interview published Monday that only changes in the standard of living of people around the world in the coming years would have a major impact on financial stability.

"If we think that solving or emerging from the crisis means going back to the configuration of growth before the crisis, we would be making a mistake because we were on an unsustainable path," he told The Financial Times.

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Fixing credit problems will not fix economy

Fixing the problems to do with the credit crunch will not by itself put the global economy back on track, Italian Finance Minister Tommaso Padoa-Schioppa said in an interview published Monday. Speaking to the Financial Times in Washington after a meeting of the International Monetary Fund, Padoa-Schioppa added that changes in the standard of living of people around the world in the coming years would have a major impact on financial stability.

"If we think that solving or emerging from the crisis means going back to the configuration of growth before the crisis, we would be making a mistake because we were on an unsustainable path," he told the business daily. He continued: "The contribution of the US economy to global growth may decrease in the next five years compared with the past five years -- Europe is alread growing faster than the US, although I doubt Europe can make up for (slower US growth) completely."

Padoa-Schioppa said that as emerging economies grew faster and larger, the effect on financial stability for the changing numbers of people with high standards of living would be very pronounced. "We know how the world economy can function, how things can go, with seven billion humans and with 15 percent of them with high living standards, but we don't know how it will function when that 15 percent rises towards 50 percent," he said. "The adjustment the world needs to accommodate this evolution may create enormous problems in price stability, exchange rates and trade.

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Ilargi: I've talked extensively about the financial coup d'état that's in the works in America, with the Fed planning to use -unlimited- public funds to prop up -sheer limitless- gambling losses. This here is very much part of that scheme.

I can’t say it better than Aaron Krowne does:

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"The financial crisis will affect market structure and pricing for at least a decade and lead to greater regulatory powers for central banks in areas at the centre of the turmoil, analysts at JP Morgan said."

The coup is complete

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Crisis to affect markets for a decade: JP Morgan

The financial crisis will affect market structure and pricing for at least a decade and lead to greater regulatory powers for central banks in areas at the centre of the turmoil, analysts at JP Morgan said. "Market participants and regulators will focus intensely on controlling the risks that were at the core of the crisis," analysts led by Jan Loeys and Margaret Cannella wrote in a note on Monday.

These risks include lending standards in mortgages, leverage in the funding of securitized products, and the use of short-term financing for illiquid long-term assets outside of the regulated banking sector. This will change behavior for market participants "for at least a decade," they wrote, in line with fallout from previous crises. "We had the NASDAQ, we had LTCM, we had the various forms of emerging-market crises in the '90s, we had the real estate crisis of 20 years ago: In most of these the direct impact on the behavior of the parties involved lasted more than 10 years," Loeys told Reuters in a telephone interview.

"It looks like it takes a generation for the memory to fade and for the same mistakes to be made again." He noted, for instance, that global equity markets remained extremely cheap on all risk measures even five to six years after the end of the dotcom crash. As a result of these changes in behavior, banks will become "bigger, safer and somewhat less profitable" as they will retain more assets on balance sheet, the analysts wrote.

Securitization will be reduced, and no longer rely on short-term funding structures that assumed liquidity as a given, although it will survive, they said. Meanwhile, premia for term, liquidity and credit risk will be higher on average over the next cycle, they said. JP Morgan is regarded as having steered a relatively steady course through the credit crisis, turning a profit last year where others posted huge losses. It took centre stage in March as it announced a deal to buy Bear Stearns, averting a collapse that could have set off fresh turmoil in already battered financial markets.

The biggest change as a result of the crisis will be in regulation, Loeys said, with the focus on the off-balance sheet structures that the financial world has created. "This looks like a recession caused by financial markets, which clearly policy makers are not going to take kindly to ... There will be a lot of follow-up," Loeys said.

"This was a run on the securitized world. The bank regulation and the structure of the supervisory system was created for a banking world of taking deposits and making loans. That world has moved towards capital markets, which were regulated from the point of view of consumer protection, but not from a systemic stability point of view," he said. "Banks did not have the tools to try to protect the capital market from its own excesses."

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Ilargi: Keep in mind that what’s happening here is exactly what went on last week with Citigroup’s sale of $12 billion in LBO debt. That is to say, these banks don’t actually sell anything. They instead offer credit to private equity firms, which these then use to “purchase” the banks’ bad debt. How about I give you money to buy my house?

For Citi and Deutsche, it’s crucial to get those debts off their sheets, so they no longer have reserve requirements related to them. To achieve that, they're willing to take huge losses. It's called desperation, and the whole thing is nothing but a stale cheap magician's sleight of hand. Officially, they pretend to take a 10% haircut. In reality, it’s much more. How much more, is hidden in the terms of the credit they provide to the private firms.

Deutsche Bank Seeking Buyers for LBO Debt

Deutsche Bank AG, Germany's biggest lender, is seeking buyers for its backlog of unsold leveraged buyout loans after amassing more of the debt than any of its rivals, two people with knowledge of the plans said. The Frankfurt-based bank had 36.2 billion euros ($57 billion) of LBO loans at the end of 2007, including 15.3 billion euros it already lent, according to its annual report published last month. Deutsche Bank is looking to sell only those loans it has already provided, said one of the people. Both declined to be identified because the plans are private.

Deutsche Bank has about a quarter of the $200 billion of leveraged buyout debt held by banks worldwide, according to a report last week by BNP Paribas SA. New York-based Citigroup Inc., which BNP says has the second-biggest share at $43 billion, has been in talks to sell $12 billion of loans at a loss to Apollo Management LP, Blackstone Group LP and TPG Inc., a person briefed on the matter said last week.

"It would be good news for Deutsche Bank if it succeeds in selling at least a significant part of its leveraged finance loan portfolio," Konrad Becker, an analyst at Merck Finck & Co. in Munich, said in a note to clients. "It could mean that there is again a market for leveraged finance loans after months of nearly no activity." Oonagh Baerveldt, a London-based spokeswoman for Deutsche Bank, declined to comment.

The Wall Street Journal earlier today said Deutsche Bank is trying to sell between $15 billion and $20 billion of loans and is in talks with New York-based Blackstone, Apollo in New York, TPG in Fort Worth, Texas, and Boston-based Bain Capital LLC's Sankaty Advisors. The paper cited two unidentified people with knowledge of the situation.

Buyout firms borrow to finance about two-thirds of the cost of acquisitions. Banks that underwrite the loans earn fees to compensate for the risk of having to take on any debt they can't sell. Their fees shrink if the value of the debt falls below 100 percent of face value. Leveraged, or high-yield, loans are rated below Baa3 by Moody's Investors Service and BBB- by S&P. Deutsche Bank will sell the loans if it gets a price it considers fair, one of the people told Bloomberg. The loans are unlikely to be sold in one package, the person said.

The leveraged loan market seized up after losses on U.S. subprime mortgage bonds caused investors to shun all but the safest government debt. Prices for U.S. leveraged loans fell to a record low of 86.3 cents on the dollar in February, before rising to 90.4 cents last week, according to Standard & Poor's. Banks in Europe are clearing a backlog of unsold buyout loans at a slower pace than in the U.S. because underwriters are assigning unrealistic prices to the debt, according to an S&P report last week. Investors in the U.S. on average were offered 0.5 percentage point more interest than their European counterparts in the second half of 2007, the analysts said.

Banks in Europe took five months to reduce their unsold LBO loans by 13 percent to 66 billion euros as of January, according to S&P data. In the U.S., banks cut their backlog by more than 36 percent to $152 billion in the same period, according to S&P. Deutsche Bank led eight underwriters left holding as much as 8 billion pounds ($15.8 billion) of loans to finance the acquisition of U.K. drugstore chain Alliance Boots by Kohlberg Kravis Roberts & Co. after they couldn't find buyers for the debt in July.

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Investors fear for US bank losses

Wall Street is bracing itself for a week dominated by news of large losses, multibillion dollar writedowns and thousands of job cuts as Citigroup and Merrill Lynch, two of the worst casualties of the credit crunch, report results.
Investors and bankers fear that another set of dire numbers by the two lenders will reverse the slight improvement in sentiment in recent weeks and quash hopes of an end to the financial turmoil soon.

“It is all on Citi and Merrill. If they are unable to show investors that they are moving past their current problems, we could be in for a long spring and summer,” a senior Wall Street executive said last week. First-quarter results at the two banks are expected to be hit by huge markdowns on their portfolios of mortgage-backed securities and leveraged loans.

Citi is likely to report a writedown of more than $10bn, while Merrill Lynch could suffer a writedown of more than $7bn, according to analysts. The writedowns will push Citi into its second consecutive quarterly loss, with analysts expecting a net loss of $5.7bn, or $0.95 a share, after its $9.8bn net loss in the last quarter of 2007. Merrill Lynch is also likely to record a second quarter in the red, with an estimated loss of $520m, or $1.33 a share, according to analysts polled by Reuters Estimates.

Vikram Pandit, Citi’s chief executive, is working on a cost-cutting plan that could cut more than 25,000 of the company’s 370,000 employees. John Thain, his counterpart at Merrill Lynch, is also in the throes of a restructuring that could axe more than 2,000 jobs. Wall Street firms are estimated to have cut more than 34,000 jobs since the onset of the credit crunch but experts believe much more is to come.

Kenneth Moelis, a former UBS executive, told Bloomberg television last week that Wall Street might have to shrink its workforce by about 35 per cent following the collapse in the buy-out and takeover markets. Mr Pandit is also under pressure to rein in the big increases in costs that took place under his predecessor, Chuck Prince. Citi’s information technology infrastructure is one of his main targets, people close to the situation say. In a recent move, Mr Pandit centralised IT spending decisions in New York.

JPMorgan Chase, which has fared better than many of its rivals, also reports this week. Analysts expect a near-halving in profits from the previous year.

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Goldman Strategists Say U.S. Earnings Are 'Awful'

An "awful" start to the first- quarter U.S. earnings season is a "harbinger of things to come" that will push stocks lower, according to Goldman Sachs Group Inc. "Early signs are awful," a team led by New York-based David Kostin, Goldman's U.S. investment strategist, wrote in a note today.

"We expect generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor's 500 Index lower in coming weeks." The S&P 500, the benchmark index for American equities, dropped 2.7 percent last week after General Electric Co. said the credit-market crisis caused an unexpected earnings decline, while slowing economic growth and rising energy prices eroded profit at United Parcel Service Inc. and Alcoa Inc. Futures on the S&P 500 lost 0.1 percent at 10:50 a.m. in London.

Analysts surveyed by Bloomberg have cut their projections for first-quarter earnings at S&P 500 companies every week since Jan. 4. They now predict a 12.3 percent drop, compared with an estimate for an increase of 4.7 percent at the start of 2008.

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Banks set to stumble again

When Citigroup and Merrill Lynch each fessed up to nearly $10 billion in losses last quarter, investors believed the companies had finally scrubbed their books clean. Those hopes were a bit premature. "The fourth quarter felt like the kitchen sink [quarter]," said Jaime Peters, a bank stock analyst at Morningstar. "We are going to find out it necessarily wasn't."

Citi and Merrill are among a group of major financial firms due to deliver ugly results for the first quarter in the coming week. The first quarter was marked by the near collapse of Bear Stearns, continued credit market woes and increased signs that the U.S. economy is indeed in a recession.

Of the six banks and brokers scheduled to report results in the next few days, three are expected to post a loss - Merrill Lynch, Citigroup and Washington Mutual, according to estimates from earnings tracker Thomson Financial. JPMorgan Chase, Wells Fargo and Wachovia are expected to report a drop in earnings from a year ago. And Bank of America is also forecast to report a steep decline in earnings from a year ago when it releases its results on April 21.

Overall, analysts anticipate that the banks' results won't be quite as bad as they were when they announced grim fourth-quarter results three months ago. But banks still find themselves squeezed by many of the same problems that plagued them at the end of 2007. Citi and Merrill are expected to announce yet another series of writedowns due to eroding values of mortgage-backed securities and leveraged loan portfolios.

Other areas have started to show increasing signs of deterioration as well. Home equity loans, for example, have become a source of trouble for banks as housing prices continue to spiral lower. "Home equity is a well-telegraphed problem story right now," JPMorgan Chase bank analyst Vivek Juneja said in a recent conference call about the outlook for the financial services industry in 2008. "The question simply there is how bad do losses get. The numbers, in some cases, are disastrous," he added.

To make matters worse, consumer spending has slowed and unemployment has ticked up - driving bigger losses in banks' consumer-related businesses such as credit card, small business and even their commercial real estate portfolios. As a result, banks are having to set aside more money for potential loan losses. Washington Mutual revealed on Tuesday that it had to set aside approximately $3.5 billion in loan loss provisions. Goldman Sachs analysts warned Friday that WaMu could see that number climb to $14 billion by year end.

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Banking on more Wall Street pain

An unexpected loss from Wachovia could be the latest drag on U.S. markets Monday. U.S. stock futures turned sharply lower following the financial results from Wachovia, pointing to another rough start for stocks. Stocks were battered Friday by much weaker than expected earnings and a cut in guidance from corporate bellwether General Electric. All three major indexes posted more than 2% losses on the day.

Wachovia, one of the the nation's five largest banks, reported a loss of 20 cents a share, down from earnings of $1.20 a share a year earlier. Analysts surveyed by First Call had forecast earnings of 40 cents a share. The Charlotte-based bank, which made the ill-timed purchase of mortgage lender Golden West Financial in 2006, also slashed its dividend by 41% to 37.5 cents a quarter, in an effort to preserve capital, and announced plans to raise additional capital through a public offering.

The results from Wachovia, which came five days earlier than previously expected, kick off a busy week for results from banks and Wall Street firms that is expected to bring another round of bad news, with Citigroup, Merrill Lynch and Washington Mutual all expected to report losses later in the week.

One Wall Street firms reporting bad news late Friday was Bear Stearns, which said in a Securities and Exchange Commission filing that its assets under management shrunk 20% since the end of November, and stock and fixed income trading has plummeted to "well less" than half of activity levels in 2007 during the first three months of this year.

The week could also bring word of the long-rumored deal to combine Delta Air Lines and Northwest Airlines into what would be the world's largest airline. Published reports say that deal could be announced by Tuesday.

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Policymakers join forces to repair battered markets

The world's leading western industrial nations will today begin a 100-day programme of crash repairs to the global financial system after being warned by a group of leading central bankers and regulators that the turmoil is far from over.
Amid signs that the effects of the sub-prime mortgage crisis in the US are spreading to other parts of their economies, the G7 nations pledged to complete the first stage of the reforms by the time they meet in Japan in June.

The blueprint has been drawn up by the Basle-based Financial Stability Forum (FSF), a gathering of central bankers and regulators, which said at the weekend that there was an urgent need to rein in the speculative activities of banks and other financial institutions. Mario Draghi, governor of the Bank of Italy and chairman of the FSF, said a recognition that the financial system had been undermined by "perverse incentives" was making reform possible. He said: "If we go back eight or nine months some of this [reform work] was unthinkable. Now it's changed and it's done."

In the first stage of the reforms, G7 countries have agreed that financial institutions in their countries should fully and promptly disclose their exposure to risk and write-downs, and give a fair value for complex and illiquid products. They have also accepted the need for better accounting standards and a strengthening of risk-management processes at individual institutions, monitored by more vigilant supervision by regulators. The next stage of the reforms will include more stringent capital requirements to limit reckless lending by banks when there is the risk of a credit bubble developing.

By the end of the year, the G7 is seeking to form tailor-made "colleges of supervisors" for each of the world's leading international banks, which would be in direct contact on a regular basis with their top management. Pleas by the commercial banks to be spared tougher regulation were rejected. Finance ministers, central bankers and regulators believe the length and depth of the crisis requires action. Timothy Geithner, New York Federal Reserve Bank president, said: "We have to find a better balance between market discipline and regulation in our financial system, a better balance between efficiency and innovation and reserves and stability."

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Ilargi:
1/ No, oil is not terribly expensive. The US dollar is terribly low.
2/ No, of course retail sales didn’t really go up in the US. What’s going on is that Americans use a lot of gasoline. And the US dollar is terribly low.

U.S. Economy: Retail Sales Rise on Gain in Gasoline

Americans spent less on furniture, clothing and appliances in March as the economy faltered and more of their money went to pay for gasoline and food. Retail sales rose 0.2 percent, the Commerce Department said today in Washington. Economists surveyed by Bloomberg News had forecast no change. The figures also showed purchases excluding gas were unchanged. Companies' stocks of unsold goods rose 0.6 percent in February as sales dropped, a separate report showed.

Consumer spending, which accounts for more than two-thirds of the economy, is waning as households struggle with an 11 percent jump in gas prices this year to $3.37 a gallon, a rising jobless rate and a slump in home values. Investors anticipate that the Federal Reserve will cut its benchmark interest rate at least a quarter point this month to alleviate the economic downturn.

"Spending is pretty sluggish," said Kevin Logan, senior market economist at Dresdner Kleinwort in New York, who correctly forecast the sales figure less autos. "If you're getting an inflationary increase in gasoline and food, that would mask the true weakness in consumer spending. This is consistent with recessionary conditions."

Treasury securities, which had risen earlier in the day, lost their gains as the retail sales report beat economists' estimates. Yields on benchmark 10-year notes were at 3.47 percent at 10:51 a.m. in New York, little changed from last week's close. The Standard & Poor's 500 retailing index advanced 0.3 percent, to 388.76.

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A Fraud For The Ages - And How You Know You're Being Lied To.....

Their lips are moving.

Let's start with the simple:

"By the end of July, the G-7 wants financial companies to fully' disclose in mid-year earnings reports their investments that are at risk of loss. Firms should also establish 'fair-value estimates' for the complex assets that investors have shunned and boost their capital as needed, the G- 7 said.

Regulators must revise liquidity risk management rules, improve accounting standards for off-balance-sheet units and enhance guidance on how assets are fairly valued, the group said. International panels of supervisors will also be formed by the end of this year for each of the largest global financial companies."

Liars. Here are a few things that Bernanke actually said:

"Ben Bernanke, chairman of the Federal Reserve, has laid the blame for the credit crunch on the ratings agencies, the investors in sub-prime securities who believed them, and inappropriate incentive structures." (honest, its not my fault, even though I was warned and let the banks play in the unregulated derivative pool - Lie #1)

"There is nothing fundamentally broken on Wall Street that a little regulation and incentives for participants to be slightly more honest couldn't fix, said Federal Reserve Chairman Ben Bernanke said Thursday." ("slightly more honest"? You mean actual honesty is not part of what you stand for Ben? Thanks for telling us - in print.)

So now that we have established that Mr. Bernanke not only will tolerate intentional deceit from the banking system but is actually encouraging it - just as long as there's "a little less" of it, can we have an indictment or impeachment handed up by the Congress please?

After all, he's now admitted that he recognizes that Wall Street is laced with fraud and intentional deception but that its ok with him and The Federal Reserve, and in fact they'll even make loans to liars, so long as they lie "a little bit less."

The "G7" says it will not "sit by and watch the dollar continue to slide."

Really? Are you prepared to find a way to remove Bernanke and bring in a Fed Chair that will insure that we actually get the truth? If not, then the dollar will continue to slide because in point of fact the problem is one of confidence, and Bernanke has said, publicly, that he is just fine with lying so long as "there's a little less of it."

How much confidence do you have in a known liar?

Wachovia is both trying to secure capital and is tightening standards for mortgages. Or are they? Its tough to tell but this this is the sort of deterioration that is being cited:

"The proportion of U.S. borrowers at least 30 days late on their payments rose to 4.5 percent in March, compared with about 2.9 percent in the same period a year ago, according to data collected by credit reporting bureau Equifax Inc. and analyzed by Moody's Economy.com. Mark Zandi, chief economist at the Moody's unit, yesterday called the report 'astonishingly bad.'"

Uh, yeah. 4.5% overall delinquent eh? That, by the way, is an increase of 55% year/over/year.

Congratulations bankers, this is what happens when you're a "little less honest."

In a special act of stupidity, we now have this comment on the bond market:

"The dollar isn't the only casualty of the Federal Reserve's rescue of seized-up credit markets. Bond traders are finding there is nothing special about Treasuries anymore, now that the Fed accepts substitutes for government securities as collateral -- having concluded it wasn't enough to reduce the benchmark interest rate for overnight bank loans six times since September."

Let me decode this bit of Orwellian-speak - its not that mortgage securities have come back to "normal" levels, its that Treasuries are now considered "contaminated" and worth less - a lot less - than they used to be.

A casual reader might think that this is good news, but only if you have a brain the size of a pea. Its like arguing that if I am driving a car with a smashed in door, the solution to my car being worth less than yours is for me to T-bone you so you have a smashed door too.

Down this road lies disaster and a potential bond market dislocation, which, by the way, is what Depressions are made of.

You might want to stop looking the other way when people lie Ben, and "a little bit more honest" won't do

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World equity markets hit hard in Q1 - S&P

Standard & Poor's said the world's emerging and developed equity markets were hit hard during the first quarter of 2008, losing 10.56 percent and 8.95 percent respectively during the first three months of the year. 'Near record commodity prices, 10-year U.S. Treasury rates approaching their lowest level, a struggling dollar, and the potential global impact of a perceived U.S. recession all fuelled market volatility and uncertainty during the first quarter,' said Howard Silverblatt, senior index analyst at S&P.

Of the 26 developed markets, only Luxembourg gained ground during the first quarter, climbing 2.09 percent. The hardest hit developed equity markets over the period were Iceland (-32.36 percent), Hong Kong (-18.07 percent) and Greece (-14.90 percent). As for emerging world equity markets, 15 of the 26 countries lost ground. Best performers were Morocco (+23.81 percent), Pakistan (+10.25 percent), and Chile (+8.50 percent).

The worst performers among emerging equity markets were Turkey (-36.62 percent), India (-28.55 percent) and China (-24.65 percent). For March, world equity markets lost 1.09 percent and emerging equity markets fell 5.11 percent. Eight of the ten sectors posted losses with only Industrials (0.19 percent) and Consumer Staples (2.65 percent) posting gains.

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Wachovia posts loss; plans to raise $7 billion

Wachovia is the latest big bank to batten down the hatches by slashing its dividend, boosting loss reserves and raising capital. The Charlotte, N.C., company made those moves Monday after it posted a first-quarter loss of $350 million, or 20 cents a share, reversing the year-ago profit of $2.3 billion, or $1.20 a share. Analysts on Wall Street had been looking for a 40-cent profit.

Why the big shortfall? The latest quarter includes a $2.8 billion provision for possible credit losses, up from $1.5 billion in the fourth quarter and $177 million a year ago. Charge-offs, reflecting current credit losses, were $765 million. The big credit loss provision reflects deterioration in the residential mortgage market, Wachovia said. The bank said in a filing that it expects charge-offs and additional reserves of $3.2 billion to $3.8 billion for 2008 and $2.4 billion to $2.8 billion for 2009.

In response to the first-quarter loss and further expected problems in the mortgage markets, Wachovia set plans to raise $7 billion by selling common and preferred shares. It also cut its quarterly dividend to 37.5 cents from 64 cents, trimming the dividend yield on its shares to 5.4% from 9.2%. Wachovia had been due to report earnings Thursday, but it moved that date up to serve up the news of the capital raising and the increasing credit losses.

“I’m deeply disappointed with our first quarter results, but I am confident we’re taking prudent and appropriate actions in this challenging period to restore Wachovia to a more profitable path,” CEO Ken Thompson said. “The precipitous decline in housing market conditions and unprecedented changes in consumer behavior prompted us to update our credit reserve modeling and rely less heavily on historical trends to forecast losses. As a result, we have substantially increased our reserves.”

Investors aren’t taking a shine to the moves so far, however. While Lehman Brothers shares soared a few weeks ago after the company’s $4 billion sale of preferred stock quieted rumors about the brokerage firm’s liquidity situation, Wachovia was off 10% in early trading Monday.

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Ilargi: Not only is the New York Times consistently 6 months or more behind The Automatic Earth in signaling developments, which is bad enough all by itself. What’s worse is the ongoing bitter lie that “nobody could have foreseen this”.

Housing Woes in U.S. Spread Around Globe

The collapse of the housing bubble in the United States is mutating into a global phenomenon, with real estate prices swooning from the Irish countryside and the Spanish coast to Baltic seaports and even parts of northern India. This synchronized global slowdown, which has become increasingly stark in recent months, is hobbling economic growth worldwide, affecting not just homes but jobs as well.

In Ireland, Spain, Britain and elsewhere, housing markets that soared over the last decade are falling back to earth. Property analysts predict that some countries, like this one, will face an even more wrenching adjustment than that of the United States, including the possibility that the downturn could become a wholesale collapse. To some extent, the world’s problems are a result of American contagion.



As home financing and credit tightens in response to the crisis that began in the subprime mortgage market, analysts worry that other countries could suffer the mortgage defaults and foreclosures that have afflicted California, Florida and other states. Citing the reverberations of the American housing bust and credit squeeze, the International Monetary Fund last Wednesday cut its forecast for global economic growth this year and warned that the malaise could extend into 2009.

“The problems in the U.S. are being transmitted to Europe,” said Michael Ball, professor of urban and property economics at the University of Reading in Britain, who studies housing prices. “What’s happening now is an awful lot more grief than we expected.” For countries like Ireland, where prices were even more inflated than in the United States, it has been a painful education, as homeowners learn the American vocabulary of misery.

Once-sizzling housing markets in Eastern Europe and the Baltic states are cooling rapidly, as nervous Western Europeans stop buying investment properties in Warsaw, Tallinn, Estonia and other real estate Klondikes. Further east, in India and southern China, prices are no longer surging. With stock markets down sharply after reaching heady levels, people do not have as much cash to buy property. Sales of apartments in Hong Kong, a normally hyperactive market, have slowed recently, with prices for mass-market flats starting to drop.

In New Delhi and other parts of northern India, prices have fallen 20 percent over the last year. Sanjay Dutt, an executive director in the Mumbai office of Cushman & Wakefield, the real estate firm, describes it as an erosion of confidence. Much of the retrenchment seems to be following the basic law of gravity: what goes up must come down. With low interest rates helping to inflate housing bubbles in many countries, economists said the confluence of falling prices was predictable, if unsettling.

This is not the first housing downturn to cross borders, but its reverberations have been amplified by the integration of financial markets. When faulty American mortgages end up on the books of European banks, the problems of the United States aggravate the world’s problems. Consider Britain, which had one of Europe’s most robust housing markets, with less of an oversupply than in Ireland or Spain. Then last summer came the subprime crisis across the Atlantic.

Within two months, mortgage approvals dropped 31 percent, compared with the previous year. And by March, average housing prices had fallen 2.5 percent, the largest monthly decline since 1992. “The boom in house prices was actually much bigger here than in the U.S.,” said Kelvin Davidson, an economist at Capital Economics in London. “If anything, people should be more worried than in the U.S.”

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UK bank denies cash-raising reports

Sunday papers said Citigroup had been asked to help with a rights issue to raise hundreds of millions of pounds. But a statement from the bank said that it had a strong capital base and, "had funded its business activities through 2008 and into 2009". Bradford & Bingley is Britain's biggest buy-to-let lender.

Its share price has fallen by more than 35% so far this year as one of the lenders that took a higher proportion of its funding from wholesale money markets rather than savers. But recently it has been concentrating on attracting savers. Its statement said, "Contrary to press speculation today, Bradford & Bingley announces that it is not intending to issue equity capital by way of a rights issue or otherwise. "In the current market environment, the Board will naturally continue to monitor closely the balance sheet strength of the business and its funding plans."

In November, the bank sold a commercial property loan portfolio to GE Real Estate for £2bn, and its housing association loan book to Dexia for about £2.2bn. Bradford & Bingley will release interim results on the day of its annual general meeting, which is on 22 April. Its chief executive, Steven Crawshaw is also the chairman of the Council of Mortgage Lenders. He warned last week that mortgage lending this year could fall to half of last year's levels unless the Bank of England provides additional funding.

Senior banking executives are meeting Gordon Brown and Alistair Darling at Downing Street on Tuesday to discuss what to do about the mortgage market. Mortgage products are being withdrawn rapidly by lenders that either want to reduce their exposure to the housing market or cannot cope with the demand as other banks withdraw.

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Iceland to back commercial banks against speculators

The government of Iceland is prepared to support commercial banks in the North Atlantic nation against speculators, reports said Monday. The commercial banks Kaupthing, Glitnir and Landsbanki have in recent weeks been reported to have been targeted by hedge funds and international speculators.

"We are ready to stand next to them against the attacks they are under," Foreign Minister Ingibjorg Solrun Gisladottir told the Danish newspaper Berlingske Tidende. Reykjavik was also prepared to defend its currency that has dropped some 20 per cent this year, the minister said in the interview. In a move to shore up the currency and brake inflation that was over 8 per cent in March, the central bank last week raised its key interest rate to 15.5 per cent.

The foreign minister said there was "reason for concern when hedge funds attack the Icelandic banks." Gisladottir said that compared to other international banks, the Icelandic banks had been "more careful" and have for instance stayed clear of the subprime loans that have rocked the US financial system. "Iceland has basically a healthy economy. We are debt-free and there is a surplus in the state budget. The banks are also basically healthy," the minister said.

The current deficit in the balance of payments was attributed to large investments in a hydroelectric project and aluminum smelter in eastern Iceland, she said. An effect of the financial turbulence in Iceland has been a shift towards a more positive stance to future membership in the European Union, but the government has no such plans, Gisladottir said, adding she personally favoured membership in the bloc.

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Iceland’s Deep Freeze

Until last year, Iceland’s economic track record in this decade had been phenomenal—its annual growth rate averaged close to four per cent over the past decade, and its per-capita gross national income is now higher than that of the U.S. This year, though, the country’s currency, the króna, has fallen twenty-two per cent against the euro; the economy has stagnated; and a global rating agency has put the nation’s three major banks on a credit watch. Now analysts are wondering whether the new Nordic Tiger will end up, instead, as “the Bear Stearns of the North Atlantic.”

So how did Iceland get in so much trouble? That’s the odd part of the story: it isn’t because its banks gambled on the worthless subprime securities that helped undo Bear Stearns and so many others. Iceland’s banks prudently avoided the subprime market, even as they embarked on a lending boom at home and expanded abroad. What got Iceland in trouble was something more subtle: its banks got their money primarily from international investors, making the Icelandic miracle heavily dependent on foreign capital.

In normal times, this might not have mattered, given the country’s solid economic fundamentals. But these aren’t normal times. The subprime crisis, in which investors realized that they had greatly underestimated the risks of lending to people with bad credit, has spawned a wider credit crunch: investors now suspect disaster behind every door, and even seemingly solid borrowers find credit much harder to come by. The subprime crisis was an earthquake that caused a tsunami: the quake has done plenty of damage on its own, but the tsunami looks set to do even more.

Iceland has been swamped by that tsunami because it trusted in the availability of global credit in time for that credit to evaporate. And the fact that Iceland has been so dependent on foreign investors makes those investors even more skittish about investing there: in markets, weakness often begets weakness. Further, the country’s troubles have made it a potential target for speculators seeking to drive down the value of its currency and perhaps cause a run on the banks.

The country went overboard with spending and borrowing—between 2000 and 2007, domestic credit in the Icelandic banking system more than quadrupled as a share of G.D.P. And relying on foreign money to fuel that kind of frenzy is foolish, since it puts you at the mercy of fickle foreign investors. But Icelanders can be forgiven for wondering if they’ve really been any more reckless than many other countries—most obviously the U.S., which relies heavily on foreign capital to fund home buying and profligate consumption, and whose banking system is rife with reckless lending.

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Ilargi: Little by little, not unlike the proverbial peeling of an onion, the true state of Germany’s banking system is unveiled. Remember, they have 100 days left to do this. better hurry.

German State Premier Resigns Over Bank's Near Collapse

Saxony's state premier, Georg Milbradt, resigned on Monday, April 14, over criticism of how he handled a state banking crisis. He nominated Stanislaw Tillich, also a member of Angela Merkel's CDU, as his successor. Milbradt resigned his functions both as Saxony state premier and chairman of the Saxon Christian Democratic Union (CDU). He had been under fire within his for months, ever since the virtual collapse of Saxony's state bank.

"I have decided to hand over my official functions, because an orderly and harmonious transition is especially important to me -- and to prevent injuries -- to me and others," the 63-year-old said on Monday in Dresden.
"Now is the right time," he added, indicating he would step down at the end of May.

The bank, Sachsen LB, had accumulated massive liabilities from speculating in so-called structured-finance products linked to US home mortgages. It had to be sold to another bank to save it and the bank's entire management board lost their jobs. The state remains liable for most of Sachsen LB's losses, which could amount to 1.2 billion euros ($1.9 billion), according to Siegfried Jaschinski, chief of the bank's new owner, LBBW.
 
Milbradt, who has been premier since 2002, tried to put a positive spin on his handling of the bank crisis on Monday, saying he had prevented further damage to the state. "Today it would no longer have been possible to save the jobs in Leipzig and merge the bank with the LBBW," he said.
 
Milbradt also faced heavy criticism over private investments he and his wife carried out through Sachsen LB. Critics dubbed them dubious, though the state government said they were legal. The Social Democrats, the CDU's coalition partner in the state, have demanded an explanation from Milbradt, who has consistently rejected making a statement.

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German Taxpayers Forced to Cover Risk of Banks' Folly

The talk is still of government guarantees, but huge subprime-related losses at several German state-owned banks could soon start hitting taxpayers where it hurts: the pocketbook. The writedowns continue to mount and, in a worst case scenario, could leave taxpayers with a bill as high as €30 billion.

Writedowns from the global financial crisis spurred by the American subprime meltdown are mounting in Germany, causing the deepest financial crisis seen here in decades. The fact that some of the banks that have proven most vulnerable to the crisis are partly owned by the federal government and German states, has meant that taxpayers are being forced to dig into their pockets as the banks plead for bailouts. And the guarantees the government is being forced to provide, to ensure the banks don't go bankrupt, are exposing the German people to even greater risks.

Throughout the crisis, banks and politicians have sought to downplay the scope of the losses, but the risks continue to mount. Only seven weeks ago, the governor of the state of Bavaria, Günther Beckstein, was painting a rosy picture of the state-owned bank BayernLB. He talked about the "unpleasant burdens" borne by the bank, which is half-owned by the state of Bavaria, and of the "painful downside." Anyone who is active in the international capital market, Beckstein said, should expect "to lose money sometimes."

That was on Feb. 13, the day BayernLB reported writedowns of €1.9 billion ($3 billion) as a result of the financial crisis. The bank made it clear that "everything has been digested," and Beckstein emphasized: "This is not WestLB." The governor's message was clear: In our state, the taxpayer will not be made to suffer for the failures of bank executives. After all, WestLB, based in the state of North Rhine-Westphalia, was only saved a few days earlier with the help of an additional government guarantee of €3 billion ($4.7 billion).

Last week, Beckstein found himself asking his state parliament to approve a loan guarantee of its own. BayernLB's writedowns had ballooned to a total of €4.3 billion by late March. This means that taxpayers are now being forced to assume the risks for the fourth state-owned bank in Germany. Three of the banks, WestLB, Saxony-based Sachsen LB and BayernLB, are publicly owned. The federal government is the most important shareholder in a fourth troubled bank, IKB Deutsche Industriebank. Just how much taxpayers will end up paying for the banks' irresponsible business dealings still remains completely unclear, especially as the bill contains a diversity of items.

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Trapped on Planet Bail-out — Bad Science Fiction

The great Polish writer, Stanislaw Lem (he wrote the novel ‘Solaris’) developed a theory of fiction writing based upon the idea that no matter how far-fetched the story or how wild the setting, that it should nevertheless be internally consistent down to the tiniest detail. Then and only then, will the far-fetched or even the impossible not only become believable, but also make a world we could live in.

The same thing may well be said about corporate/state media coverage of events [..] as it attempts to reconcile the ‘plot’ with the total lack of continuity (as they say in movie circles) between scenes. Thus as the Channel 4 News’ email notice demonstrates,

“Economy: age of easy regulation over: Mervyn King has made significant comments as governor of the Bank of England to the Treasury Select Committee — the age of easy regulation is over. The regulator, the FSA, has come in for significant criticism over Nothern Rock. Interest rates are up in Iceland to 15 per cent. Icelandic owned companies, many with significant Russian participation, own a significant slab of the commerce on the British high street. There’s lots more to throw into the financial cooking bowl. The mixer has churned and Faisal Islam has a considered account of where we are now.
— Channel 4’s daily email, 26 March, 2008

‘Easy regulation’ is the corporate media’s way of saying no regulation whatsoever, and the fantasy continues. And to reinforce the illusion, on BBC’s Radio 4 News (3 April, 2008), we heard a ‘commentator’ tell us that one year ago nobody could have predicted the financial meltdown caused by the complete lack of regulation of the finance ‘industry’, or as it is so innacurately described, the ‘credit crunch.’ Of course it depends who the BBC spoke to one year ago but obviously whoever it that person was, they were both reading from the same script. 

Thus the universe the BBC and the rest of the corporate media live in doesn’t obey the same laws as the ones you and me have to live by. So for example, I heard another ‘law’ of capital yet again regurgitated on the Beeb telling me that the “invisible hand of the market”had failed us, though who this ‘hand’ actually belongs to was not mentioned nor why this magical potion failed so dramatically to do its stuff. Come to that, it’s not as if we haven’t lived through these events many, many times before and every time it’s been the ‘invisible’ but publicly financed bank account that’s bailed out Private Capital. So Public Ownership is okay on Planet Bail-Out as long as it benefits Private Capital.

So it’s not merely the outright lies used by the Beeb and the rest of the ‘Street of Shame’ as Private Eye so accurately describes the mass media, as the fact that the devil himself lives in all the details of the ‘reality’ created by them. Is it any wonder therefore that for most of us, it’s not merely the miraculous workings of the ‘market’ that are kept invisible eg, the fantasmagorical hand but the entire damn thing!

Now you may well wonder how and why the Beeb and its cohorts get away with perpetrating such outlandish fantasies but simple fact is that no other interpretation of events ever gets a look in and when in doubt a swift retreat to 18th century musings about ‘invisible’ this and ‘invisible’ that fills in all the embarrassing gaps in the ‘news’.

Then you realise that ‘investors’ (in reality, mostly gigantic stock portfolios owned by insurance companies and administered by accountants) are no more than crude gamblers dependent on that other fantasy, ‘sentiment’. Forget the computer programs and the army of ‘analysts’, at the end of the day, it’s a bunch dead heads, hooked on money, working the ‘invisible’ market. ‘Sentiment’ is newsspeak for total subjectivity, in other words the entire ball of wax, the so-called global economy is total chaos, with every component—the banks, insurance companies et al—all competing in a complete free-for-all.

Hanging it all together ‘for us’ (unless you look very closely) are the corporate media who reinforce the chaos at every step of the way through their use of the ‘small details’. They’re not lies exactly but they might as well be, for they no more explain events than the fabled ’invisible hand’ does. But what they do achieve is to fill in all the embarrassing ‘gaps’ in the picture as for example the BBC comment about the UK being the world’s “touchstone” for all those other ‘democracies’.

Taken collectively, it resembles one of those painting by numbers kits: ‘Market Meltdown?’ Use #7; ‘Credit Crunch?’ Use #11; ‘Bankruptcy?’ Use #13 and so on. They’ve been doing it for decades so they know what number to use without even thinking about it.

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You Thought You Had an Equity Line

It was the nation’s lending institutions and mortgage originators that got us into this credit mess, but it is consumers, taxpayers and those companies’ shareholders who will end up shouldering most of the costs. The latest example of this is in the mass freezing of home equity lines of credit going on across the country.

Reeling from losses on their wretched loan decisions of recent years, lenders are preventing borrowers with pristine credit and significant equity in their homes from tapping into credit lines that they paid dearly to secure. In the last 30 days, lenders have sent several hundred thousand letters advising borrowers that their home equity lines of credit are frozen, estimated Michael A. Kratzer, president of FeeDisclosure.com, a Web site intended to help consumers reduce fees on home loans.

Major lenders — including Washington Mutual, IndyMac Bank and the Greenpoint Mortgage Unit of Capital One — say that declining property values are prompting the decisions to cut off credit. Banks have the right, of course, to rescind these credit lines at any time under the terms of the contracts they struck with borrowers. And as home prices have tumbled in many parts of the country, banks are undoubtedly trying to protect themselves from exposure to additional losses.

But these actions are being taken even in areas where property prices are rising, Mr. Kratzer said. What’s worse, the letters provide no explanation for how the lenders determined that the property values underlying the equity lines had fallen. Frozen home equity lines will surely intensify the consumer spending downturn and put added pressure on an already weak economy. Indeed, on Friday, consumer confidence as measured by the University of Michigan plummeted to its lowest level since 1982.

The drop was attributed mostly to higher fuel and food costs, but consumers’ views on their current and expected personal financial situations dropped to their lowest readings since November 1982 and April 1980, respectively.

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Fannie warns homeowners who walk away

The country's two largest sources of mortgage money have a blunt warning for anyone thinking about joining the growing "walkaway" trend, where homeowners stop making payments and months later send the house keys back to their lender: You will feel the pain.

On March 31, Fannie Mae sent out new guidelines to lenders intended for walkaways and other foreclosure situations. Fannie will now prohibit foreclosed borrowers from getting another mortgage through the giant investor for five years, unless there are "documented extenuating circumstances." In those cases, the mortgage prohibition is for three years.

Even after five years, borrowers with foreclosures in their files will be required to make at least a 10 percent down payment, and will need minimum FICO credit scores of 680. Freddie Mac, Fannie's rival, counts foreclosures as major credit blots for seven years, and a senior official said the company is now aggressively pursuing some walkaway borrowers "to preserve our deficiency rights" where permitted under state law.

The walkaway trend is particularly noteworthy in former housing boom markets - including California, Florida and Nevada - where many homeowners find themselves upside down on their loans, owing tens of thousands more than the current market value of their houses. If they invested little or nothing in down payments, some owners reason, continuing to make payments - even if they can afford to - may be throwing good money after bad.

Fair Isaac Corp. of Minneapolis, developer of the FICO scores used in most mortgage transactions, is unhappy at any suggestion that a foreclosure could be minimized or wiped away in a short period of time. Its scoring model counts foreclosure as a long-standing and severe event, nearly comparable with bankruptcy, with negative consequences for all forms of credit that walkaways might seek to obtain. That includes credit card applications, auto loans, student loans - and even insurance and employment.

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Fewer large corporations audited by IRS

The tax audit rates of the largest companies are less than half what they were 20 years ago while more small and mid-size businesses are coming under scrutiny, according to an organization that monitors the Internal Revenue Service. The Syracuse University-based Transactional Records Access Clearinghouse described what it said was a "historic collapse" in audits for corporations holding assets of $250 million or more.

About 26 percent of them were audited in the 2007 budget year compared with 34 percent in 2006 and 43 percent in 2005. The IRS did not dispute the numbers, based on agency data. But it strongly disagreed with suggestions it was easing oversight of the biggest corporations. Enforcement revenues from large companies rose by one-third in 2007 from the previous year, from $10.6 billion to $14.2 billion, said IRS Deputy Commissioner Barry Shott, who heads the Large and Mid-Size Business Division.

While the number of examinations has declined, "what we are doing is focusing our resources better on where the noncompliance is," Shott said in an interview with The Associated Press. Shott said the focus in recent years has been on tax shelters and `extraordinarily complicated" partnerships and S corporations where shareholders, rather than the company, must report income or losses. Last year the IRS examined 17,700 S corporations, compared with 14,000 the previous year, and 12,200 partnerships, compared with 9,800.

But the TRAC report concluded that the IRS also was concentrating on regular small and mid-sized companies to boost audit numbers. "Moving the focus of the corporate auditors away from the large corporations and toward the smaller ones has been quite effective when it came to increasing the overall number of these kinds of audits but actually was counterproductive in financial terms," the researchers said.

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So many questions about People’s Bank of China reserve growth

The closer you look at the latest PBoC reserves numbers the more surprising they seem.  Headline reserve growth of $154 billion in the first quarter of 2008 is an astonishing number by any standard and suggests that the PBoC’s ability to manage monetary policy must be under ferocious strain, but it turns out that net foreign currency inflows purchased either by the PBoC or by its proxies may have been much, much higher.  How can they manage?
 
Let’s go through these first-quarter reserve numbers again.  Here is what I think we know with reasonable certainty:
 
1.        For the first three months of 2008 reserve growth was $61.6 billion in January, $57.3 billion in February, and 35.0 billion in March.  This adds up to $153.9 billion.
 
2.        The trade surplus for the first three months of the year was $19.5 billion in January, $8.6 in February, and $13.6 billion in March, for a grand total of $41.6 billion.
 
3.        FDI contributed $11.0 billion in January, $6.9 billion in February, and $9.5 billion in March.  These add up to $27.4 billion.
 
There are other things that we know increased the value of PBoC reserves.  We don’t have precise numbers but we can make reasonably accurate estimates.
 
1.        It is pretty certain that at least part of the PBoC reserves are held in currencies other than US dollars – most experts estimate this portion to be about 30% of reserves, a number that jibes with estimates by CFR’s Brad Setser and Stone & McCarthy’s Logan Wright, two of my favorite experts on the topic.  Logan went through the numbers and tells me that he believes that valuation gains, which occur as the dollar declines against other currencies in the PBoC portfolio, accounted for $10 billion in January, $10 billion in February, and $18 billion in March.  This totals to $38 billion.
 
2.        The PBoC also earns interest on its portfolio.  We are given zero information on the composition of the PBoC portfolio, but let’s assume (a safe assumption) that most of it is in government bonds.  That would add approximately 1% a quarter in interest income, or just under $16 billion for the first quarter of 2008.
 
Now for the part about which we are not sure but have some pretty good circumstantial evidence.  Headline reserve growth may have underestimated the amount of dollars which the PBoC was forced to buy for several reasons.  
 
In January, the PBoC hiked minimum required reserves by 0.5%, and they did so again in March.  This necessarily resulted in an increase in the amount banks had to deposit at the PBoC, which we can reasonably reliably estimate to be the RMB equivalent of $22 billion and $24 billion respectively. 
 
There is a strong circumstantial and market gossip that banks were “asked” to redenominate these deposits in dollars.  They would do so by effecting a series of accounting transactions.  As I understand it, the banks would sell RMB to the PBoC and purchase dollars, which would then be deposited as reserves, instead of RMB.  This accounting transaction would cause a net reduction in RMB assets on the banks’ balance sheets of the RMB equivalent of about $45 billion, and a net increase in dollar assets of $45 billion.  The banks now have more exposure to a declining dollar, unless they have a currency hedge with the PBoC.
 
The opposite occurs at the PBoC.  Their dollar assets decline by $45 billion.  Had this transaction not taken place, in other words, the PBoC’s headline reserve growth for the first quarter would have been $199 billion, not $154 billion.  Because the banks were forced, in effect, to take on $45 billion of the PBoC’s role, they saved the PBoC from being forced to record $45 billion more reserves, but they did not prevent the PBoC from buying these in the market.  In fact the act of redenominating had no impact on either the amount the PBoC needed to sterilize (although of course the reserve requirement hike did) or on the net amount of foreign currency inflow that had to be purchased by the PBoC.

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