Debt Rattle, April 18 2008: The world’s biggest sucker

Ilargi: Ever more billions disappear. Today it’s Citi and Merrill Lynch, tomorrow it’ll be their neighbours. But it doesn’t matter anymore. Shares go up. Citi reports $5.1 billion in losses, on top of $13 billion in writedowns, and its stock goes up by 8%. It's a whole new world.

And you're thinking: how did that happen? Well, take a look at the media quotes this morning:

• "People are getting the idea that the Federal Reserve may not have much more easing to do.”
  
• "I think the worst is largely behind us."
  
• "Losses appear to have peaked."

So why don’t you go out there, and buy buy buy spend spend spend.

Before doing so, though, may I suggest you take a moment to go back to yesterday’s Debt Rattle, and carefully read what Frank Veneroso, Market Strategist for the Global Policy Committee of Allianz Dresdner Asset Management, has to say. Veneroso predicts $2 trillion in losses, on US loans alone. That does not include losses in the rest of the world (Britain is in terrible shape, Germany starts to crumble), and it does not take into account losses on derivatives and other fancy "instruments".

You let that sink in for a minute, and then you go stand in front of the mirror, and tell yourself only about 10% of these losses have been admitted and reported to date.

When you’re done with that, go ahead and pick up the phone and call your broker. Sure, you may be the world’s biggest ever sucker, but you can take comfort in the idea that you’re not alone.


Germany is in shock as subprime gets worse

Germany is mired so deep in the subprime crisis that its entire banking structure is under threat of collapse. As writedowns continue to mount and government guarantees wear thin, experts warn that losses could soon reach €30bn (£24bn) - and possibly more. It is the long-suffering German taxpayer who will be handed the final bill, just at a time when German industry and employment as a whole is on the up.

'The subprime meltdown has caused the deepest financial crisis in Germany in decades,' wrote the influential news magazine Der Spiegel this week. To a people with memories of another crash, that of 1929, helping to propel the Nazis to power and Germany to ruin, the spectre of a replay of those dark times is grim indeed. Throughout the crisis, banks and politicians have sought to downplay the scope of the losses, but the risks continued to mount.

Just weeks ago the governor of the state of Bavaria, Günther Beckstein, put on a brave face about 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'. The same day, the bank reported writedowns of nearly €2bn. Days earlier WestLB in North Rhine-Westphalia needed a government guarantee of €3bn to stay open.

Now BayernLB has exposed its true losses: €4.3bn. Beckstein had to go cap in hand to his own parliament to ask for a loan. Saxony-based Sachsen LB has subprime debts to the tune of €2.8bn while the government-owned industrial lender IKB Deutschland is in the subprime hole to the tune of €7.2bn. Germany's Landesbanks were in trouble before the subprime earthquake hit: now they are in danger of imploding.

A cosy system of politicised banks putting profits before common sense led to their provincial bosses, in the words of Deutsche Bank chief Josef Ackermann, 'taking risks beyond their capacity and competence'. The subprime crisis has revealed a wider truth about the Landesbanks: they're simply not very good. Originally founded to act as wholesale financiers alongside state-owned regional savings banks, when their state guarantee was abolished in 2005, under pressure from Brussels, they found it harder to obtain cheap new funding and had to scour for higher-yielding assets.

They plunged into the murky waters of collaterised debt obligations without bothering to check if they could see the bottom. Now they are drowning. Germany also has far too many banks, around 2200 in all, which has a depressing effect on the industry's profitability and has led to speculation that massive consolidation will have to come.

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Freddie Mac Super-Sizes Its Program

Freddie Mac is lending a jumbo hand to a group of major U.S. banks, offering to buy as much as $15 billion in mortgages that used to be too big for its program. On Thursday, Freddie Mac said it would purchase home loans of up to $729,000 from lenders including Wells Fargo, JPMorgan Chase, Citigroup, and Washington Mutual.

Investors were pleased with Freddie's plan. The company's shares added 3.9%, or $1.01, to reach $26.81, on Thursday.
Until February, Freddie Mac and Fannie Mae, two companies that began life as government agencies but that now operate in the private-sector, were forbidden to acquire mortgages of more than $417,000.

The companies buy home loans that conform to their size limits and other rules and package them into mortgage-backed securities that are sold to investors. Other kinds of loans were also packaged into securities -- with sometimes disastrous consequences -- but those that do not conform to the Fannie and Freddie rules are considered riskier investments.

In many American markets, $417,000 is barely enough to buy a parking space, let alone living quarters, so when Congress and President George Bush decided to stimulate the American economy in February -- seeking to forestall an impending recession rooted at least in part in problems in the mortgage market -- they raised the limit to $729,000 for the rest of this year. Freddie has dubbed loans between the old cap and the new as "conforming jumbo" mortgages.

Brad German, a spokesperson for Freddie Mac told Forbes.com that "the forward commitments to buy these loans will provide stability to the rates that lenders can offer and will provide liquidity to credit-starved markets." German said that because banks know that Freddie will buy these larger loans, confidence will be restored in a currently volatile market environment.

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Ilargi: The following article talks about inflation. That is, as we've said a thousand times here, not the correct term. Price increases are not equal to inflation. To get a better understanding of why, look at this chart:


In the past year, the pound sterling lost about 1/6th, or 16.5%, of its value vs the Euro, which is more than food prices went up in Britain (15.5%). That is of course not to say that this doesn't hurt in England, don't get me wrong. But a spade is a spade; let's get our terminology right, or we're bound to have confusing conversations all down the line.

UK: Double-digit price increases

The true, devastating scale of rising prices is revealed today - by the new Daily Mail Cost of Living Index. It shows that families are having to find more than £100 a month extra this year to cope with increases in the cost of food, heat, light and transport.

According to the official Consumer Price Index measure, inflation is running at only 2.5%. Yet the Mail's index finds that food costs alone are rising at 15.5% a year - more than six times the official rate. And there are double-digit increases in other 'must-pay' essentials such as petrol, gas and electricity. Many families need to find more than £1,200 extra a year just to stand still. Once higher mortgage costs are added, millions are having to pay out at least another £2,000 a year to keep their heads above water.

The Bank of England's chief economist Charlie Bean admitted last night that higher food and energy costs are likely to push Consumer Price Index inflation to over 3% this year. Yet this rate fails to reflect the real problems in homes up and down the country because it includes the cost of luxury items such as flat-screen TVs, whose prices are falling. It also fails to take increased housing costs into account.

The Mail's new index has been compiled in association with the price comparison websites uSwitch.com and MySupermarket.co.uk. It will be published monthly to chart the burden of 'must pay' bills as families struggle to keep afloat in the midst of an uncertain economic period. The figures suggest that a household spending £100 a week on food in 2007 will now have to find another £66 a month or £800 a year. Unleaded petrol is up by 16.5% while diesel has soared by 23.3% in a year - putting up the annual cost of motoring by an average of more than £200.

Gas and electricity are up by more than 12%, adding an average of £100 a year to the cost of keeping the lights on and staying warm. Increases in train fares, council tax, water and insurance for home and car threaten to tip household budgets into the red. Uswitch director of consumer policy Ann Robinson said: 'We are feeling the strain of food and petrol prices rising at their fastest rate since records began.

'It's crunch time for UK households as we face a downturn in the economy, belowinflation pay rises and the reality of having less money in our pockets. We are working harder, but are certainly not getting any wealthier. We have less spending money than at any time over the last ten years, yet bills are rocketing.'

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Ilargi: Don't look now, sucker, but while you're on the phone with your broker, the mortgage lenders have found a new lease on life: your wallet.

The politicians responsible for this, and that would be every single Congressman and every member of the Bush cabal, starting with the likes of Barney Frank, should be jailed and put on trial for treason.Yes, treason. Read this piece, read the whole article at Forbes, and let the numbers sink in.

This whole housing market collapse started when lenders couldn't sell their stinking securities to professional investors anymore. The reason for that is that they are not worth anything. And now, g-d fcuking damnthem!!, Washington secretly provides a whole new group of investors to buy worthless paper: you and you and you. This is nothing but deeply and severely criminal behavior, treason!!, and it's starting to get me mad.

Trillions of dollars in losses are being transferred to your balance sheet, now, as we speak, today, here, and what do you do about it? I know what you do, you look at the Dow Jones, and it's up, and you say the worst is over, you stupid fcuk. The Dow is up because it has found new funds: yours, and your children's, and their children's, and I tell you, it'll all be spent well before Christmas this year, and end up in the pockets of Wall Street and Congress. And then what?

So what are you going to do? Call your Congressman? Well, that should help, right?

Either someone halts this insanity, this grand theft that should be punishable by painfully slow-grinding guillotine, or we will very very soon start filling up Halliburton's poorhouses and concentration camps on US soil with you and me and our families and friends.

FHA's Risky Business

In the wake of the subprime mortgage debacle, who on Earth would loan to "first-time home buyers whose high rents left them strapped for cash" or borrowers "with strong current incomes but not a lot of savings"? Wells Fargo says it will--with a little help from the federal government.Touted as a savior in the housing crisis by Congress and the White House, the Federal Housing Administration is being turned into a bank's best friend. Major U.S. lenders are again aggressively enticing risky borrowers, offering FHA-backed mortgages with attractive terms and as little as 3% down. Meanwhile, the agency watches as its liabilities balloon.

As a result, the nation's mortgage market is quietly undergoing a radical and potentially risky transformation that shifts liability for hundreds of billions of dollars on to the government's books. "FHA delinquencies tend to be quite high," says Alex Pollock, a fellow at the American Enterprise Institute and former president of the Federal Home Loan Bank of Chicago. "They are substantially higher than the prime market--not as high as the subprime market, but nonetheless quite high. You're in a sector of the market that is by definition risky."

Bill Glavin, special assistant to FHA Commissioner Brian Montgomery, says the FHA has been "inundated" with requests by business-strapped banks to become FHA-certified lenders. He expects the FHA to increase loan volume by 168.2% in fiscal year 2008 (ended September 30), insuring 1.14 million loans, up from 425,000 in 2007. The agency expects to guarantee $224 billion worth of loans in 2008.

On Thursday, Ginnie Mae--a government-owned company with more than two-thirds of its securities portfolio comprised of FHA-backed loans--announced a 114% surge in volume. They issued $39.1 billion in the first quarter of 2008, up from $18.3 billion during the same period last year. The company also expects its total portfolio of outstanding securities to grow to more than $600 billion by the end of the year, reflecting a 35.2% increase from the $443.8 held by Ginnie in 2007.

From Wells Fargo to Countrywide, lenders see opportunity, driving the numbers. Bank of America Government Lending Executive Allen Jones says his company is "actively promoting" FHA-insured loans through "all of its sales channels." Jones expects the percentage of BofA mortgages insured by the FHA to be 30% to 35% by the end of the year, up from just 2% in 2006.

The FHA's growing role in the mortgage market "will clearly fill the void of subprime financing," says Vicki Wagner, an analyst at Standard & Poor's. Wagner said an FHA loan "by definition, looks and acts like a subprime loan." The FHA's admirable, longstanding aim, of course, is to help home buyers snag keys to their American Dreams. Throughout the housing boom, more than 80% of FHA-insured loans went to buyers with less than 5% equity in their homes.

In the early years of the boom, this was a safe bet. A $200,000 home might be purchased with a $190,000 loan--a 95% loan. In a few years, the home price might rise to $250,000, meaning the borrower has a 25% equity stake in the home. That's about the same portion of a loan that a private mortgage insurer would vouch for, even though FHA backs its loans 100%.

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Authorities lose patience with collapsing dollar

Jean-Claude Juncker, the EU's 'Mr Euro', has given the clearest warning to date that the world authorities may take action to halt the collapse of the dollar and undercut commodity speculation by hedge funds.Momentum traders have blithely ignored last week's accord by the G7 powers, which described "sharp fluctuations in major currencies" as a threat to economic and financial stability.

The euro has surged to fresh records this week, touching $1.5982 against the dollar and £0.8098 against sterling yesterday. "I don't have the impression that financial markets and other actors have correctly and entirely understood the message of the G7 meeting," he said.

Mr Juncker, who doubles as Luxembourg premier and chair of eurozone financiers, told the Luxembourg press that he had been invited to the White House last week just before the G7 at the urgent request of President George Bush. The two leaders discussed the dangers of rising "protectionism" in Europe. Mr Juncker warned that matters could get out of hand unless America took steps to halt the slide in the dollar.

World central banks last intervened eight years ago - with mixed success - buying euros in September 2000 to support the fledgling currency through its worst crisis. David Woo, currency chief at Barclays Capital, said the Europeans and Americans are talking past each other. Whatever the G7 wording, Washington is happy to watch the dollar slide. "They are not going to worry unless there is a knock-on effect on US equity or bond prices. So far that hasn't happened. There are no signs that the dollar decline has turned disorderly," he said.

European industry has managed to live with the high euro so far, but the damage of major currency shifts can take years to surface. "The moment will come where the exchange rate level will start to cause serious harm to the European economy," said Mr Juncker. Louis Gallois, head of the Airbus group EADS, said his company is already taking dramatic steps to shift plant to the dollar-zone. "The euro at its current level is asphyxiating a large part of European industry by shaving export margins," he said.

The European Central Bank revealed in its monthly report that foreign direct investment (FDI) into the euro zone has contracted by €269bn over the last two years. Foreigners are gradually winding down operations. This will have powerful long-term effects. Otmar Issing, the ECB's former 'High Priest', said the single currency had started well but could face a "disastrous outcome" if the eurozone failed to embrace a flexible market system. "The 'single-size' monetary policy would simply not fit at all. In such a scenario, the single currency would risk straining cohesion " he warned in a new book, 'The Euro'.

This is already occurring. North and South have diverged further. While Germany and Holland have prospered under the strong euro, most of southern Europe and Ireland is in trouble. Current account deficits have reached 9.2pc of GDP in Spain and may touch 15pc in Greece. The European Commission's economists fear that the loss of competitiveness against Germany over the last decade may have passed the point of no return. At best, these countries face years of belt-tightening as their property booms deflate.

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Auction-Bond Probes Widen as Cuomo Subpoenas 18 Firms

Regulators are widening their probes into the collapse of the auction-rate securities market as state regulators from New York to Washington scrutinize how Wall Street peddled the bonds to investors and issuers. New York Attorney General Andrew Cuomo subpoenaed 18 banks and securities firms including UBS AG and Merrill Lynch & Co. in an investigation that could lead to criminal charges, a person familiar with the probe said yesterday.

Officials from nine other states formed a task force to determine whether brokers misrepresented the debt as an alternative to money-market investments when they sold it to individuals. "To have subpoenas and the threat of criminal investigations raised suggests that somebody has made up their mind that there really are abuses there," said Donald Langevoort, a former Securities and Exchange Commission attorney who now teaches securities law at Georgetown University in Washington. "It certainly suggests something more than regulatory curiosity."

Officials are increasing their scrutiny after the $330 billion auction-rate market seized up in February amid the fallout from the subprime mortgage slump, leaving some issuers paying rates as high as 20 percent and investors frozen in the debt. The SEC said last week it is working with the Financial Industry Regulatory Authority to examine firms' disclosures to clients who purchased the bonds.

"We're all getting complaints on a daily basis from retail investors and they all have the same the story: they were told by their brokers these were safe as cash and they're not," said Bryan Lantagne, the securities division director for Massachusetts Secretary of State William Galvin and head of the task force. In New York, Cuomo is also asking for information about how bankers persuaded borrowers to issue the bonds and how the securities firms decided when to stop bidding in mid-February, the person familiar with the probe said. Dealers had routinely bought unwanted bonds at auctions to prevent failures for two decades.[..]

When an auction fails, rates are set at a penalty level spelled out in bond documents and investors who wanted to sell are left holding the securities. More than 60 percent of public auctions held each day since Feb. 13 have failed, according to Bloomberg data. The average rate on seven-day securities jumped as high as 6.89 percent on Feb. 20 from 3.65 percent on average last year. It has since declined to 5.14 percent.

"I don't think anyone ever imagined that these auctions would fail," said Jorge Irizarry, president of the Government Development Bank of Puerto Rico, whose interest costs rose to as high as 12 percent on failed auction debt. Puerto Rico is planning to convert all of its $643 million in auction bonds to other securities by month-end, joining states, cities, hospitals and colleges who have converted or are planning to replace at least $43.1 billion of the securities by next month, according to data compiled by Bloomberg.

Citigroup Inc., the biggest underwriter of municipal auction debt from 2000 to 2007, this week predicted the market will "cease to exist." "Obviously we would never go into the auction-rate market again," said David Verinder, chief financial officer at Sarasota Memorial Hospital in Sarasota, Florida, which recently converted $165 million in auction debt.

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Royal Bank of Scotland in fresh cash plea

Britain's second biggest bank is to make a plea to the City to try to raise billions of pounds to help shore up its finances, which have been hit by the global credit crisis.The Royal Bank of Scotland is to launch a rights issue for at least £5 billion.

It is the first major British bank to concede that it needs large amounts of extra money and it is expected to trigger a wave of others appealing to shareholders for help. However, the move, disclosed by City sources to The Daily Telegraph is expected to lead to pressure on Sir Fred Goodwin, one of the City's most respected bankers, who may now face calls from RBS shareholders to step aside as chief executive.

The Financial Services Authority (FSA) is understood to be involved in detailed discussions with the banks over the rights issues and the Treasury is thought to have been made aware of the situation. RBS, which owns NatWest and has about 30 million customers around the world, has become the latest lender to raise its rates, increasing the cost of its fixed-rate mortgages by up to 0.85 per cent.

It now charges an arrangement fee of £999 for all loans and, while two of the deals have been reduced by up to 0.1 per cent, other rates have been increased by between 0.05 per cent and 0.85 per cent. An RBS spokesman said: "Fixed rate mortgages are available to customers on a rolling basis and are regularly reviewed and updated in line with competitors, as a matter of course." RBS declined to comment on its rights issue plan.

News of the bank's plan came after Gordon Brown said lenders must disclose the scale of their debt. It followed a warning from an adviser to Prime Minister that house prices could fall by up to 25 per cent over the next two years if mortgage lenders continue to increase their rates following the credit crisis.

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Citigroup Reports $5.11 Billion Loss on Writedowns, Credit Costs

Citigroup Inc. posted a $5.11 billion loss, less than analysts' most pessimistic estimates, sending shares of the biggest U.S. bank by assets up as much as 7 percent in New York trading. The company said it plans to cut 9,000 more jobs. The first-quarter net loss of $1.02 a share compared with the $1.66 loss predicted by Merrill Lynch & Co's Guy Moszkowksi, Institutional Investor's top-rated brokerage analyst.

Citigroup reported almost $16 billion of writedowns and increased bad loan reserves as customers fell behind on home, car and credit-card payments. Moszkowski had predicted an $18 billion writedown. U.S. index futures rose and the dollar advanced against the euro after Citigroup announced the results, fueling investor optimism that the credit-market contraction may be easing.

"I think the worst is largely behind us," Malcolm Polley, who manages $1 billion as president of Stewart Capital Advisors LLC, in Indiana, Pennsylvania, said in a Bloomberg radio interview. Citigroup climbed $1.51, or 6.3 percent, to $25.54 at 9:36 a.m. in New York Stock Exchange composite trading, after surging as high as $25.80 earlier today.

The bank's writedowns and credit losses from the collapse of the subprime mortgage market now total almost $40 billion, more than Zurich-based UBS AG and Merrill. Vikram Pandit, Citigroup's chief executive officer, has bailed out about 10 investment funds, replaced his chief risk officer and raised $30 billion to replenish capital since he succeeded Charles O. "Chuck" Prince in December. Pandit's finance chief, Gary Crittenden, said today that the bank would eliminate 9,000 jobs in the next twelve months. That includes 2,000 of the 6,200 cuts the bank has already announced.

Revenue fell 48 percent to $13.2 billion, compared with the average estimate of $11.1 billion from analysts surveyed by Bloomberg. Results included $7.6 billion of writedowns and credit costs on mortgages and bonds, $1.5 billion on leveraged buyout loans and $1.5 billion on auction-rate securities. The bank wrote down the value of assets it absorbed last year from so-called structured investment vehicles by $212 million.

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Financial giants begin City jobs bloodbath

The City bloodbath began today as two financial giants axed 1,300 jobs. Bankers suffering in the credit crunch were also prepared for the figure to double tomorrow. UBS announced it would cut 900 staff at its Liverpool Street headquarters by June and Merrill Lynch said it would shed 4,000 jobs worldwide. Sources said that up to 400 of its 4,500 London staff would go.

Employees of Citigroup, the world's biggest bank, are now preparing for the axe as sources said it was likely to lay off 1,000 London staff when its first quarter results are published tomorrow. The cuts are the first confirmation of the scale of the job losses facing the City, estimated this week at 40,000 by JP Morgan - more than one in 10 of all workers. It will fuel mounting fears of a recession, led by a City downturn. Commentator David Buik of BGC Partners said: "The job cuts were inevitable and more banks will follow suit, starting with Citigroup tomorrow."

Chancellor Alistair Darling was today finalising details of a package aimed at averting the threat of a downturn by unblocking the money markets. The move, if successful, would allow banks to borrow money from each other more easily, opening the way for the deals, on which the City depends, getting back on track. Interviewed in America today, Gordon Brown admitted that the world is in "quite a big economic downturn".

He said people were "automatically blaming" governments for the economic problems but vowed to ensure Britain pulled through the financial difficulties. He told American National Public Radio: "People's automatic reaction to that, as you see in America, as you see in Europe, is to blame the government of the day for not getting things right." Mr Brown also insisted that the position in Britainwas very different from that in the US.

"We are certainly an economy that is continuing to grow," he said, adding: "We have relatively low inflation, we have relatively low interest rates and relatively low debt." In a keynote speech tomorrow in Boston, Mr Brown will call for reform of the international institutions, including the UN and the World Bank. He said the latter should be "a bank for the environment" as well as act as an early warning system for economic shocks.

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Merrill Posts Wide Loss, Plans to Cut 3,000 Jobs

Merrill Lynch, badly hurt by its foray into risky securities, on Thursday reported a loss of nearly $2 billion in the first quarter and said it would cut 3,000 jobs over the next three months. Earnings at the third-largest investment bank were dragged down by $6.5 billion in write-downs as the firm restated the value of its troubled assets, including mortgages and leveraged loans to companies with heavy debt.

The adjustments bring Merrill's write-downs for the past three quarters to more than $30 billion. Revenue fell 69 percent, to $2.9 billion. In reporting its third straight quarterly loss, the bank said its exposure to collateralized debt obligations, responsible for much of the meltdown in credit markets, actually increased in the first three months of the year. This is partly because the steps Merrill had taken to hedge, or reduce the risk of falling prices, had failed.

Taken together with grim earnings reports this week from Wachovia, J.P. Morgan Chase and Wells Fargo, Merrill's results indicate that the credit crisis is far from over. "It's going to take time," said Bernard Baumohl, managing director of the Economic Outlook Group. "We are really stuck in sluggish economic activity."

Despite Merrill's results, which were worse than most analysts' expectations, its shares rose more than 4 percent Thursday. This is an indication of how low the bar had been set for a beleaguered financial sector that has repeatedly reported disastrous earnings, analysts said. "The market is relieved that Merrill's numbers weren't worse," said Frederic V. Malek, chairman and founder of Thayer Capital, a District-based private-equity firm.

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Merrill should raise up to US$10-billion more, perhaps through sale of Bloomberg: Goldman

Merrill Lynch & Co. should raise an additional US$5 to US$10-billion in capital to bolster its balance sheet, Goldman Sachs said on Friday. After posting its third consecutive quarterly loss, which came in at US$2.20 per share, compared to the consensus’ loss of US$1.99, Merrill’s book value per share has fallen by more than 40% in just three quarters, analyst William Tanona told clients in a note.

It has raised roughly US$13-billion of equity capital during this period and has taken write-downs of about US$32-billion. “Management has suggested that it does not plan to raise any additional common equity; however, we would not be surprised to see the firm raise alternative sources of capital such as a preferred or sell certain assets such as Bloomberg,” the Goldman analyst said.

He added that Merrill will likely reduce its exposure to higher risk asset clases in coming quarters as management tries to delever its balance sheet. It the meantime, investors may see depressed earnings as this happens.

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Selling in Short Treasurys Continues

Two-year Treasurys were bashed again Friday, continuing their week-long losing streak on a changing rate-cut outlook, rising stock futures and continued climbs in short-term funding costs. A less dire report card from Citigroup Inc. sent a positive spin into stock futures Friday, further undermining safe-haven flows into Treasurys.

Reduced risk aversion prompted investors to reallocate their assets -- moving away from Treasurys and tiptoeing back into stocks, corporate bonds and mortgage-backed securities. As a result, selling was seen across the board ranging from T-bills to the 10- and 30-year sectors. The two- and five-year notes were also pressured ahead of sales of same-maturity government debt next week, traders said. Rising supply tends to depress bond prices and push up yields further.

Yields on the two-year notes, which move inversely to prices, have rebounded sharply from the low of 1.236% on March 17, which is the weakest level since mid-2003. Yields on five- and 10-year notes have also recovered from their lowest levels since 2003, set last month.

"Things are stacked against the Treasury market," said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York. "People are getting the idea that the Federal Reserve may not have much more easing to do. The earning story is not a big disaster. Stocks are doing well which reversed some of the flight-to-quality bid," he added. "All these pushed bond prices lower and flatten the yield curve."

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British banks must be told to clean up their acts

After the bail-out and nationalisation of Northern Rock, we now have a dramatic sequel in the shape of the proposed multi-billion pound rescue of all Britain's mortgage lenders. Over the past fortnight there has been no more baleful sight than that of the so called Masters of the Universe - some of the best-paid banking executives in Britain - seeking taxpayer help.

After all, they are responsible for what the International Monetary Fund has described as the biggest financial crisis since the Great Depression. They have been trooping in and out of meetings with the Bank of England, the Treasury, the Group of Seven in Washington and No 10 with begging bowls in their hands. The problem arises from the fact that the banks and financial institutions have become very distrustful of each other, fearing undeclared losses on their balance sheets. So, for the last eight months they have been refusing to lend each other money on the wholesale markets.

As a result, banks are now trying to hold the government to ransom. While the Bank of England has reacted to the financial crisis by slowly lowering its official bank rate (from 5.75% to 5%, with further cuts expected), mortgage lenders have refused to follow its lead and have, instead, been pushing interest rates on mortgages relentlessly upwards, while also imposing all kinds of expensive arrangement fees.

This reluctance to pass on the Bank of England's reductions has developed because the different interest rates in the inter-bank markets, where banks lend to each other, have remained marooned at a shade under 6% - a full point above the base rate.

Therefore, bank bosses are telling the government that they will only cut the cost of mortgages - as Gordon Brown has requested - if the Bank of England (on behalf of the government) writes them a huge cheque for an estimated £40bn. At present, the banks hold large portfolios of mortgages but are short of ready cash. The proposal is that they swap some of those mortgages for a large temporary government loan.

This would ease the log-jam in the money markets and allow them to pass on lower interest rates to householders. Only then would they be in a position to help prevent the threatened housing crash and rebuild consumer confidence.
Of course, they are exploiting the fact that New Labour is in political disarray, as a result of the deteriorating economy and public disaffection with its handling of the credit crisis, and believe it has no choice but to capitulate.

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If it’s broke, fix it - but how?

The failures of the western financial models

The worst outcome of the current financial crisis would be a return to the status quo ante that produced the pathologies, anomalies and contradictions that are its root causes. I believe that the Western model of financial capitalism - a convex combination of relationships-based financial capitalism and transactions-based financial capitalism - has, in its most recent manifestations (those developed since the great liberalisations of the 1980s), managed to enhance the worst features of these two ideal-types and to suppress the best.

This period has been characterised by a steady increase in the relative dominance of the transactions-based financial capitalism model in the overall financial arrangements of the world, most spectacularly in the US, the UK, and such smaller countries like New Zealand and Iceland, somewhat less in most of continental Europe and elsewhere.

The key policy issues created by the recent excesses of the financial sector, once the immediate financial crisis has been euthanised, are those of governance and regulation. Governance issues include prominently the question of remuneration for top managers and superstars. I will not address this issue here. Regulation (and public ownership) inevitably become issues in all industries where widespread, systemically significant externalities, free rider problems and public goods features ensure that decentralised, competitive outcomes are inefficient.

They are especially acute in the area of financial intermediation, because leverage permits the scaling up of financial activity to astronomical levels in no time at all. The damage that can be done by a rogue individual, a rogue firm or a rogue instrument is unparalleled among legal business activities.

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Let Britain’s housing bubble burst

What has happened to British phlegm? Instead of greeting news of falling house prices and tightening lending with aplomb, people shriek that the sky is falling. Steven Crawshaw, chairman of the Council of Mortgage Lenders, warns that it is “a real possibility ... that net lending in 2008 could reach only half last year’s level unless additional funds become available”. Smaller mortgage lenders, dependent on their ability to sell mortage-backed securities, could even be forced out of the market. In sum, the time has come for a bail-out.

I have three answers to this cacophony of special pleading: first, anybody who thinks it is a duty of the state to help keep housing expensive is crazy; second, policymakers should respond only to clear market failures; and, third, with a floating exchange rate and an independent central bank, the UK can weather the storm if it keeps its head.

It is high time the British realised a people cannot become rich by selling ever more expensive houses to one another. According to the International Monetary Fund’s latest World Economic Outlook UK house prices are more overvalued, relative to economic fundamentals, than those of almost any other high-income country. At long last, investors in mortgage-backed securities, all too aware of what has happened in the US, have realised the dangers in the UK.

They must understand that it becomes extraordinarily difficult to know what such securities are worth as soon as house prices start to fall. They must also be aware that UK house prices have risen by a good 150 per cent since 1996, in real terms. Indeed, It would take a 25 per cent fall in real prices to put them on to the 1971-2007 trend line, last hit in January 2002. Such a decline is conceivable. Prices might overshoot downwards, but they are nowhere near that position now.

Peter Spencer, chief economist of the Ernst & Young Item club, argues that the government should step in, by borrowing to fund the mortgage market. With great respect, I think this notion is mad. It is wrong for the government to fund people to purchase houses at what may well prove the beginning of a long slide in prices. It is tantamount to the financial debauching of minors. As important, if you believe, as I do, that house prices probably must fall, it is better for this adjustment to be swift than be dragged out over many years.

So should the government do nothing at all? No. Since mid-March, spreads between rates on interbank and official three-month and six-month lending have been some 20 to 25 basis points higher in the UK than in the US or eurozone. This, it is argued, reflects the illiquidity of mortgage-backed securities. Lenders, argues Mr Crawshaw, hoard cash because they are not sure whether they will be able to borrow in future.

Whatever the source of the problem, a case exists for further action by the Bank of England in its role as lender of last resort. At present, it is working, in conjunction with the Treasury, on a scheme to swap high-grade mortgage-backed securities for government debt for terms of one to three years, after a sensible “haircut”. But credit risk would still remain with the banks.

This facility would be available at all times, but would be limited to securities created up to the end of last year. All that is now needed is for the Treasury to agree to create the needed gilts. The aim of this would be to remove liquidity constraints, not provide a bail-out or reopen the market in mortage-backed securities. The latter may well be gone forever, as can happen to markets in lemons.

In all, this looks sensible. If it succeeds, net mortgage lending may remain lower than before. Yet even if it were to halve, as some fear, the nominal stock of outstanding mortgage debt would grow by a bit over 4 per cent this year, or much the same rate as nominal gross domestic product. The idea that the stock should grow faster than GDP forever is nonsense.
After house prices peak, I would expect the ratio to fall, not just cease rising. Those arguing for still higher growth in net mortgage lending are arguing that the government must subsidise even more house-price inflation and the lenders who have fuelled it. This is demented.

Yet, some will protest, this is a recipe for a recession. This is false. Even the IMF argues that the economy will continue to grow this year and next, at about 1.6 per cent. After 62 quarters of sustained growth, would that be a tragedy? Moreover, the real reason for slower growth is the need to hit the inflation target. The country needs lower inflation, whereupon the Bank will have room to cut interest rates.

The adjustment of the economy towards exports and away from domestic spending is now, at last, under way. Fortunately, the exchange rate is taking much of the strain. In eight months, competitiveness has improved by 16 per cent against the UK’s eurozone partners, something Spain or Italy will only achieve painfully, after years of disinflation.

A combination of close attention to the liquidity logjam and flexible monetary policy is all that is needed. It is not the government’s job to reflate house-price bubbles. It would have been a good idea if it had done more to prevent them, instead. Now it must let events undo that mistake, rather than try to compound i

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U.S. rice futures leap to record

U.S. rice futures set a fresh record high on Friday, surging by more than 4 per cent as a scramble to bolster stockpiles of Asia's staple food showed little signs of abating. Chicago Board of Trade corn futures were steady, holding just below a record high set on Thursday as traders eyed a modest setback in the crude oil prices, and wheat markets showed mixed trends with the U.S. edging up but Europe slightly down.

U.S. July rough rice futures rose to $24.670 (U.S.) a hundredweight, a fourth successive record high, taking this year's gains to nearly 78 per cent after unease over shrinking food supplies prompted several suppliers to cut back on exports. Analysts have warned that the world faces high rice prices for the foreseeable future. “Rice's rise shouldn't be seen as temporary, but part of the bull market that has hit commodities across the board,” said Akio Shibata, director at Marubeni Research Institute in Tokyo.

“It is likely to stabilize at a high level, or even move higher,” he said. “Supply just cannot keep up with demand.” Tightening supplies were evident in the Philippines, the world's biggest rice importer, where authorities received offers for only 325,750 tonnes of rice in a tender for 500,000 tonnes, the third time in a row it has failed to secure the full amount.
“Countries are racing to ensure they have enough supplies to feed their own population, and exporting only the surplus,” Mr. Shibata said.

On top of that, rice planting in several U.S. states, including top producer Arkansas, is off to a slow start due to overly wet conditions. Although the United States is not a major exporter, many buyers are looking to U.S. shipments to partly make up for curbed output from Vietnam, India and elsewhere.

In Chicago trading on Thursday, rice futures had risen by their maximum allowed limit of 75 cents. The limit was expanded to $1.15 for Friday trading. Rice is leading the commodities charge this year, picking up from wheat, which doubled between September and February this year before falling back by around 30 per cent.

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Housing sales tumble across Canada

The biggest housing boom in more than 50 years appears to be out of steam as sales tumbled in all major cities this winter and listings surged in Western Canada. Sales of existing homes cooled in almost all major markets – including Toronto, Calgary and Vancouver – in the first quarter of 2008, according to figures released yesterday by the Canadian Real Estate Association.

At the same time, a glut of sellers entered the markets in the West, sending new listings to their highest level on record. The first-quarter data prompted one prominent Bay Street economist to declare the end of the most robust housing cycle of the post war era.

“Canada's six-year housing market boom is officially over. Aside from a few choice prairie locales, sales are melting faster than this year's snowpack,” Douglas Porter, deputy chief economist at BMO Nesbitt Burns, said in a research note.

In the first three months of the year, 75,467 resale units changed hands, a 13-per-cent drop from the first quarter of 2007, according to CREA. Sales fell 18.7 per cent in March from a year earlier, the largest year-to-year decline in unadjusted home sales since January, 1998, when activity dropped 28 per cent from the year before. These figures have not been seasonally adjusted. In contrast to the weakening sales, new listings soared to a record 154,217 units in the January-March period.

Nasty winter weather in cities, including the country's largest resale home market, Toronto, almost certainly hurt sales in the first three months, Mr. Porter said in an interview. However double-digit declines in “more markets than you can shake a stick at” suggest a trend with deeper roots, he said. What will go down as a “housing boom for the history books” actually started nearly 10 years ago, according to a recent presentation by Adrienne Warren, senior economist at the Bank of Nova Scotia.

It's a cycle that has blasted past expectations in both its length and scope, leaving almost no Canadian market untouched and fuelled by everything from soaring demand in Vancouver to Newfoundland's offshore oil sector. Underpinned by strong economic conditions, including historically low unemployment and interest rates, average inflation-adjusted home prices have soared by 65 per cent in the period from 1998 to 2007. This easily tops the 32- to 56-per-cent appreciation of the past three housing booms of the 1960s, 1970s and 1980s, each of which lasted for five or six years.

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Canadian pension funds log three quarters of losses

The turmoil in world equity markets dealt Canadian pension plans a third straight quarter of losses, RBC Dexia Investor Services says, although the weakening of the loonie during the period helped dull the pain. The value of funds monitored by the Toronto investor services and custody firm slipped by 1.9 per cent during the first quarter, it said Friday, bringing losses for the 12 months ending March 31 to 2.7 per cent.

Global equities were the hardest hit asset class, although a weaker loonie softened the blow for unhedged Canadian-based investors, Dexia said. “The MSCI World Index plunged 11.9 per cent in local currency terms,” said Don McDougall, the firm's director of advisory services. “Performance nearly matched the index, but Canadian pensions lost only 5.5 per cent once exchange rates are taken into account.”

The Canadian dollar fell by almost 7 per cent against a basket of world currencies, including 2.7 per cent against the U.S. dollar, 10 per cent against the euro and 13 per cent against the Japanese yen, Dexia said. The Canadian stock market also fell, dropping 2.8 per cent during the first quarter. Strong commodity prices helped cushion the blow, with record prices for gold and oil pushing the materials subindex of the SPTSX composite index up 7.3 per cent and energy stocks up 1.2 per cent.

The only trouble is, said Mr. McDougall, that Canadian pension plans had “unfortunately. . .generally reined in their exposure to both growth sectors.”

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Morgan Spurlock's search for Osama bin Laden

In his new documentary, Morgan Spurlock sets out to succeed where the U.S. government has failed for seven years: finding the hiding place of Osama bin Laden. Early in the movie, the filmmaker jokes that he was inspired by American action pictures, in which lone heroes solve the most enormous problems.

So, with a camera crew, Spurlock travels to (mostly) Muslim countries, wanders the streets and villages, and asks people, "Do you know where Osama is hiding?" The result is called "Where in the World Is Osama bin Laden?"

The film is partly a gimmick - it envisions Spurlock's quest as something like a video game, complete with cartoon images of a hip-hopping Bin Laden. But it also has a profoundly serious side because the interviewees tell us a great deal about America's standing in the world after years of the so-called war on terror.

Spurlock decided to make the film when his wife became pregnant, and he tried to think of what he could do to ensure a safe future for his child. Putting an end to the world's biggest terrorist threat seemed like a good start.
The filmmaker made his mark in 2004 with the influential documentary "Super Size Me," in which he famously lived for a month on a McDonald's-only diet. This did absolutely nothing good for his health - his doctor found signs of damage to Spurlock's liver, among other problems.

The film's success led to Spurlock's documentary TV series, "30 Days," which begins its third season on FX in June. It's a fish-out-of-water show, in which conflicting viewpoints are brought together: In one forthcoming episode, a hunter from North Carolina moves in for a month with a Los Angeles family of animal-rights activists. Spurlock spoke by phone from New York.

Q: You survived the hamburger binge. How's your liver?
A: It's good. My wife did a good job of cleaning me out and getting me back in shape. She got my liver function, my cholesterol - everything - back to normal.

Q: How would you summarize the effect of the war on terror on the world's view of America?
A: There's a war on terror here in the United States to keep Americans safe, and there hasn't been another attack since 9/11. And that's a positive thing. But what's happening outside the country is that we've lost the PR war on terror. The world looks at the United States not as a beacon of democracy anymore, not as a peacekeeper. The United States is viewed as an aggressor, as a country that wants to dominate others. People see us as the country that wants to eradicate Islam. This is not a positive thing. And, believe me, as you're sitting there hearing people say this, it's really hard to hear, as an American.

Q: Sometimes people say this kind of documentary is just preaching to the converted.
A: I don't agree with that assumption. (Some) people who went to see "Super Size Me" had never seen a documentary in their lives. The goal with this movie is to try to reach a broad audience, an audience that doesn't read the newspapers every day. And even for people who do, I think there's something new here, in terms of the people we interview - I don't get to see those people on the news; I don't get to hear their stories. There's no bent to this (film), no political viewpoint. It's not a film about red states and blue states. It's a film that looks ahead. It's about what's next.

Q: Do you worry that viewers might take umbrage at the comic parts of the movie, like the cartoon of bin Laden dancing?
A: We're not trying to make fun of anything. I think what the film does is make things accessible. The film tries to demystify Osama, to take some power away from him, from being this scary figure. Lily Tomlin said years ago - and I'm paraphrasing - you have to find humor in everything, because in finding humor you find humanity.

Q: One reviewer took you to task for the scene in which you enter the ultra-Orthodox Jewish neighborhood and are basically chased out by some hostile men. The writer implied, "What did you expect?"
A: Well, we didn't expect that. Even our producer didn't expect that. We were very taken aback. The best thing about that scene is the guy who makes it a point to come up to me and say, "The majority of people here don't think like (the men who were hostile)." There were a few people, like four or five, who were really causing the whole hubbub. Don't perceive us to be like these few people, he was saying. And I think there's a similar point going through the whole film.

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