Tuesday, April 22, 2008

Debt Rattle, April 22 2008: Rien ne va plus


Dorothea Lange: Street Demonstration San Francisco 1933


Ilargi: All the big finance players are doing the same thing these days: they're desperately seeking money. And you know that when all players are looking for the same card, some will have to fold their hand.

Royal Bank of Scotland and Bank of America look shaky, Germany bails out yet another bank (their fifth) and Citi is under sniper fire, ready to be fed to the sharks in bite-size chunks. Someone real big will go down soon.

Calls for an end to food speculation get louder, but I assure you it is way too late for that, even if there were a political will, which isn't even there. It will get very ugly, I'm afraid.

NOTE: I will be on the road for the next few days. Debt rattles may be posted at different times; I can't guarantee the 11.00 am EDT routine.


Update 2.25 pm EDT
Ilargi: No matter how obvious this gets, they all keep on eyeing a revival. Hope springs as eternal as stupidity.

U.S. Home Sales Plunge 19.3%, Prices down 7.7%
The sky isn't falling but home prices are, and the plunge in the value of U.S. homes combined with tighter mortgage-lending standards is making Americans even more reticent about buying.

On Tuesday, the National Association of Realtors reported a worse than expected 2.0% drop in sales of existing single-family homes and condominiums in March to a seasonally adjusted annual rate of 4.93 million units compared to February. Compared to a year ago, sales were off 19.3%. The median price of a home sold last month dropped to $200,700, a decline of 7.7% from the median price a year ago.

Joseph A. LaVorgna, chief economist at Standard & Poor's said in a note to investors Tuesday that falling home prices aren't such a bad thing, "On one hand they are causing negative wealth effects and forcing some new mortgages underwater; but on the other hand, this is a necessary, albeit unpleasant, prescription for restimulating housing demand," he said. Sales were expected to drop 1.6% to a seasonally adjusted annual rate of 4.95 million units, down from 5.03 million in February, according to the consensus forecast of Wall Street economists surveyed by Thomson Financial.

Lawrence Yun, the chief economist of the National Association of Realtors, said that a tightening of lending practices was stymieing some home shoppers, counterbalancing relatively low mortgage rates. "At the same time, many buyers continue to bide their time with a large number of homes to choose from, while other potential buyers remain on the sidelines."

February homes sales were down nearly 24% from a year earlier. Sales of existing homes fell nearly 13.0% in 2007 to 5.65 million, the biggest decline in 25 years. The median sales price for single-family homes and condominiums dropped 8.2% in February from a year ago, settling at $195,900. The median price for single-family homes was down 8.7% from a year ago, the biggest decline in four decades.




Japan's hunger becomes a dire warning for other nations
Mariko Watanabe admits she could have chosen a better time to take up baking. This week, when the Tokyo housewife visited her local Ito-Yokado supermarket to buy butter to make a cake, she found the shelves bare. "I went to another supermarket, and then another, and there was no butter at those either. Everywhere I went there were notices saying Japan has run out of butter. I couldn't believe it — this is the first time in my life I've wanted to try baking cakes and I can't get any butter," said the frustrated cook.

Japan's acute butter shortage, which has confounded bakeries, restaurants and now families across the country, is the latest unforeseen result of the global agricultural commodities crisis. A sharp increase in the cost of imported cattle feed and a decline in milk imports, both of which are typically provided in large part by Australia, have prevented dairy farmers from keeping pace with demand. While soaring food prices have triggered rioting among the starving millions of the third world, in wealthy Japan they have forced a pampered population to contemplate the shocking possibility of a long-term — perhaps permanent — reduction in the quality and quantity of its food.

A 130% rise in the global cost of wheat in the past year, caused partly by surging demand from China and India and a huge injection of speculative funds into wheat futures, has forced the Government to hit flour millers with three rounds of stiff mark-ups. The latest — a 30% increase this month — has given rise to speculation that Japan, which relies on imports for 90% of its annual wheat consumption, is no longer on the brink of a food crisis, but has fallen off the cliff.

According to one government poll, 80% of Japanese are frightened about what the future holds for their food supply. Last week, as the prices of wheat and barley continued their relentless climb, the Japanese Government discovered it had exhausted its ¥230 billion ($A2.37 billion) budget for the grains with two months remaining. It was forced to call on an emergency ¥55 billion reserve to ensure it could continue feeding the nation. "This was the first time the Government has had to take such drastic action since the war," said Akio Shibata, an expert on food imports, who warned the Agriculture Ministry two years ago that Japan would have to cut back drastically on its sophisticated diet if it did not become more self-sufficient.

In the wake of the decision this week by Kazakhstan, the world's fifth biggest wheat exporter, to join Russia, Ukraine and Argentina in stopping exports to satisfy domestic demand, the situation in Japan is expected to worsen. Bakeries, forced to increase prices by up to 30% in the past year, are warning that the trend will continue. Manufacturers of miso, a culinary staple, are preparing to pass on the bump in costs caused by the rising price of soybeans and cooking oil. And the nation's largest brewer, Kirin, is lifting beer prices for the first time in almost two decades to account for the soaring cost of barley.

"In the past, Japan was a rich country with a powerful yen that could easily buy cheap imports such as wheat, corn and soybeans," said Mr Shibata, who directs the Marubeni Research Institute in Tokyo. "But with enormous competition from the booming Chinese and Indian economies, that's changed forever. You also need to take into account recent developments, including the damage to crops caused by drought and other disasters in exporting countries like Australia," where the value of wheat exports has tumbled from $3.49 billion to $2.77 billion in the past three years.




We Regret to Inform You…
When climate change and peak oil thinkers run out of other things to worry about, there’s always the endless, inevitable debates about whether we are facing a “fast crash” or a “slow grind.”  And I admit, I’m worried about my fellow environmentalists - because I think they are about to lose their favorite distraction.  The thing is, we have an answer - no more need for discussion.  Fast crash wins.  And we’re in it now.

Wait a minute, you argue - that’s not right.  If we were in a fast crash we’d be well on our way to living in a Kunstler novel.  But we’ve still got cars, we’ve got food, things are slowing down, but at worst this looks like a slow grind - but the crazy lady at the blog is saying fast crash?!?!? Before you argue with me (and you are both welcome and encouraged to), I’d like to post something a bit out of my usual style - it is simply a description of what has happened with food and energy in the last year - that’s all it is. 

Then tell me what you think - because it wasn’t until I began to write this introduction to the present food situation that I suddenly was struck by the fact that even a fast crash doesn’t always look fast when you live it - new normals arise and you can assimilate faster than you can panic in many ways. So here we are - the “We regret to inform you that what you have imagined to be “civilization” is now falling apart” post.  

See if it strikes you the way it struck me.  I would note two things.  The first is that the general political consensus is that neither the food nor energy crisis will do anything but grow more acute anytime soon - we’re really in the early stages.  And that this only covers the first 4 months of 2008 - what do you think will be the end?

In early 2008, the world’s food and energy train came off the rails.  What was startling was that it didn’t happen gradually or linearly - instead, things simply fell apart at an astounding rate, faster than anyone could have predicted. 




The Ponzi Smokin’ Gun
‘Ponzi’ finance units must increase its outstanding debt in order to meet its financial obligations.” –Hyman Minsky

A severe spike in home equity lines of credit (HELOC) delinquencies is the smokin’ gun that points directly at Ponzi finance as the culprit in the whole Emperor wears no clothes edifice. Readers should bear in mind that it was only in the first quarter that lenders suddenly made the discovery that housing prices were the key determinant in loan performance. At that point these geniuses rolled out “new models”, their trained monkeys re-jiggered the dials and presto, came the conclusion that HELOC lines of credit needed to be frozen, or even called.

This is very big news as HELOCs were one of the primary illusions for debt slaves to stay in the rob Peter to pay Paul Ponzi game. That makes the March performance on HELOCs stunning and extremely bearish. Unlike house foreclosures, the recoveries on these second lein loans (about $1.2 trillion outstanding) will often be zero.
Standard & Poor’s said delinquencies on home-equity lines of credit issued in 2005 and 2006 shot up in March, underscoring continued trouble in the U.S. economy. S&P said that 9.19% of lines issued in 2005 and 11.45% of loans issued in 2006 are delinquent, up 6.49% and 6.51% from February.

The other source of Ponzi finance, the cash out refi, has also slowed measurably. In fact, I would suggest that even the reduced estimates shown on this chart are too high if banks are applying the new lending models. A cash out today removes a mortgage that might be considered relatively safe and puts it right into the boiling cauldron.




Speaking of credit and default exposure, we once again see Fannie Mae and Freddie Mac playing their smoke and mirror accounting games with the regulators. When you see this going on it is important to step back a minute, and compare even the bogus reported capital to Fannie and Freddie’s total exposure. In the case of Fannie, the regulator is pretending to be on top of it with this talk of a billion here and there.

The reality is that Fannie has “reported” capital of $42.7 billion against a retained portfolio of $719 billion. $41 billion of that is subprime, 90% of which is 2006-07 vintage. $32 billion is Alt A, of which 40% is 2006-07 vintage. According to the bookkeepin’ rules, losses do not affect regulatory capital unless deemed “other than temporary”. What a hoot, these GSE can play that trick as long as nobody really asks. Fannie also has an implied obligation on $2.96 TRILLION of agencies it has issued and rubber stamped.

Will debt slaves choked off from the aforementioned HELOC Ponzi source now default en masse on Fannie’s $719 billion and Freddie’s $703 billion AND foreign central bank’s monster $922.7 billion (custodial holdings) portfolios of agency paper? Can these three players who alone hold $2.345 trillion in mortgages pretend the tide doesn’t exist?




New threat: loan losses
The next earnings nightmare for banks has begun. Until now, losses at many banks have come from multibillion dollar write-downs on toxic debt. But analysts believe the costs of building bad-loan reserves could cause just as much pain -- and for a lot more banks. Banks establish bad-loan reserves as a cushion against expected losses on defaulted loans. Additions to these reserves, called "provisions," get booked as an expense in a bank's income statement and reduce earnings. Now, as the economic downturn starts to bite, rising defaults are prompting banks to add larger sums to the reserves, a development that has hurt first-quarter earnings at some lenders.

Bank of America Corp. is the most recent victim. The bank's first-quarter earnings, reported Monday, were worse than expected because of a $6 billion addition to its loan-loss reserve. That expense dwarfed the bank's $1.31 billion of trading-related losses in the quarter -- an indication that reserve building is taking over from write-downs as the newest big threat to earnings. To be sure, investors have been expecting bank earnings to get whacked by bad-loan reserves. But, as Bank of America's first-quarter numbers show, that expense can cause a lot more pain than the market anticipates. And, if defaults continue to rise, banks may have to make large, earnings-depleting additions to their reserves for several quarters.

"It's a good thing that banks have started to reserve more," says Kevin Fitzsimmons, banks analyst at Sandler O'Neill & Partners. "The bad news is that they are going to need those reserves." The size of the provisions is based on a bank's analysis of default history and forecasts of the loans on its balance sheet. Provisions build up the reserve, but when a bank decides a loan is uncollectible, the loss on that loan is realized. That realized loss -- or "charge-off" -- is subtracted from the reserve, making it smaller. So if a bank had a loan-loss reserve of $100 million at the end of the fourth quarter and $25 million of charge-offs, it would need a $25 million provision to take it back up to $100 million.

But if that bank thought loan defaults were going to get worse, it might want to add more than that to take the reserve above $100 million. While Bank of America shocked investors with a big provision Monday, it may have some benefit if it convinced investors that management is being conservative and taking its lumps when it should. Two yardsticks make it look like Bank of America is girding itself well amid the credit storm: First, its loan-loss reserve was equivalent to 1.71% of loans and leases at the end of the first quarter, up from 1.33% at the end of the fourth quarter. And its $6 billion provision was well in excess of its $2.72 billion of annualized charge-offs in the period.

If defaults at Bank of America continue to go up, it may turn out to be under-reserved. "Based on what we know today and what we're seeing in the market, we believe our reserves are adequate," a BofA spokesman says. Wells Fargo reported earnings April 16. Oppenheimer analyst Meredith Whitney argued Monday that Wells Fargo's bad-loan reserve looked too low. A Wells Fargo spokeswoman declined to comment on the report but referred to the bank's first-quarter earnings statement, which said: "We believe the allowance was adequate for losses inherent in the loan portfolio at March 31, 2008."




Bank of England Has 'Slim' Chance of Lowering Mortgage Rates
Bank of England Governor Mervyn King's offer to swap bonds for mortgage securities won't fulfill the government's promise to help homebuyers, former policy maker Charles Goodhart said. "The likelihood of getting the mortgage market going again is slim," said Goodhart, a founding member of the Monetary Policy Committee and now a professor at the London School of Economics, in a telephone interview yesterday. "This just prevents things from getting worse. It's a backstop."

King, backed by Prime Minister Gordon Brown, is encouraging lenders to pass on the Bank of England's interest-rate cuts and thaw a mortgage market that's frozen up over the past month. Failure will exacerbate the worst housing downturn since 1992 and risk pushing the economy into a recession. The Bank of England said yesterday it will exchange about 50 billion pounds ($100 billion) of government bonds for mortgage securities, mimicking a swap of $200 billion worth of securities by the U.S. Federal Reserve last month. Brown, whose popularity fell the most on record in a newspaper poll published April 13, said "we will make sure there is enough liquidity in the economy to make sure people can buy their own houses."

While Goodhart says the Bank of England's plan doesn't back up that guarantee, it may do enough to take the sting out of any economic slowdown. "The credit crunch will still hit the economy, but it might have hurt more if it weren't for these measures," said Goodhart, 71, who served on the MPC from 1997 to 2000. "The measures prevent the risk of a possible recession becoming a depression." Goodhart is the author of "Goodhart's Law," which holds that targeting monetary aggregates as a surrogate for inflation is futile.

U.K. Chancellor of the Exchequer Alistair Darling will meet mortgage executives at 3 p.m. today in London and so far there are few signs of a coordinated effort to slash lending rates. While Abbey National, Britain's second-largest mortgage lender, said yesterday it's reducing rates on some adjustable loans, it also raised them for borrowers who make deposits of less than 10 percent.

Northern Rock Plc, the mortgage lender nationalized this year, cut its rates for home loans by 0.1 percentage points.
Trend Reversal "The improved liquidity is unlikely to reverse the trend to higher mortgage costs we have seen in recent weeks," said Michael Coogan, director general of the Council for Mortgage Lenders, in an e-mailed note yesterday. "The recent trend of mortgage products being removed and mortgage prices increasing for new customers will be affected more by how Libor responds."




Gordon Brown's Future at Stake in Credit Crisis
The Bank of England (BoE) has launched an unprecedented £50 billion ($99.8 billion) plan today to bail out Britain’s ailing banking system and help to ease the tightening mortgage market. The BoE confirmed on Monday morning that it would allow lenders to swap assets for government-backed bonds in an attempt to restore confidence and ease the effects of the global credit crunch. The BoE will let banks swap United Kingdom and European mortgage-backed assets in for safer government bonds, which banks can then use to raise money.

The program coincides with media reports that Britain's second-largest bank, Royal Bank of Scotland, is expected to announce writedowns of up to £7 billion and a major capital hike in the wake of the credit crisis. German business newspapers say the latest intervention by British authorities in the banking system, which followed the nationalization of troubled mortgage lender Northern Rock earlier this year, shows that Prime Minister Gordon Brown's political future is on the line as a result of the credit crunch.

The commentators also say that the days of so-called universal banks, which offer the full range of banking services from investment banking to asset management, may be numbered. In the world of finance, the shots are henceforth going to be called by the financial investors who have been bailing out troubled banks around the world, and these investors will ruthlessly split up institutions and sell off parts of them in order to get a decent return on their investment.

Business daily Financial Times Deutschland writes:
"Now it's finally official: the credit crisis has reached the British government with full force. The banks are negotiating unorthodox emergency measures with the government -- as has been happening on Wall Street for months." "For the first timer a major British commercial bank is joining the club of the worst victims of the crisis: Royal Bank of Scotland (RBS) is likely to announce losses of around €5 billion and a record capital hike of more than €12 billion."

"So far the government and the Bank of England have given a confused picture: Central Bank governor Mervyn King initially refused to provide emergency loans in the crisis and stressed the need for market solutions, but he ended up having to intervene. BoE was forced to step in to rescue mortgage lender Northern Rock, which has since been nationalized."

"The plan now negotiated in 10 Downing Street shows the extent to which the other, more solid financial institutions are creaking as well. The banks are having big problems refinancing themselves through medium-term debt. As a result, mortgages have become scarce and expensive, which in turn is hurting the real estate market which is already cooling off after a long boom."

Business daily Handelsblatt writes:
"So far, bankers have only been whispering it. But at the annual general meeting of the Royal Bank of Scotland next week it will emerge as fact: The British, one of the big players in the European banking market, need money. That in itself is nothing new these days -- and yet it is the harbinger of a new and different banking world from the one we have known. In the future a new set of people will be giving the orders in the world of banking: the financial investors."

"The investors who have taken stakes in financial institutions in the course of this crisis, such as state investment funds for example, have been bitterly disappointed by the performance of share prices so far. They will be tough and ruthless in ensuring that universal banks with investment banking, private and corporate banking and asset management businesses will be split up and partly sold off. The only thing that will matter is the return they were hoping for."




Union calls for Citigroup break-up
One of America’s largest unions will on Tuesday call for a break-up of Citigroup in a move that underlines the challenges faced by the beleaguered financial services group’s management. The American Federation of State County and Municipal Employees (Afscme) plans to call on other investors at Tuesday’s annual shareholder meeting to support a split between Citi’s investment banking and commercial banking divisions, union officials say.

Afscme, which has 1.4m members and is the largest public employee and health workers union in the US, said: “The Afscme Employees Pension Fund long has had concerns about the viability of the Citi business model and thinks that now is the time for a bold plan to restructure the company. “The company operates more like a run-down department store than a financial supermarket.” The union’s challenge to Citi is a departure from its usual concerns with social and governance issues and highlights labour organisations’ growing activism against the companies worst hit by the credit crunch.

Afscme owns a small stake in Citi and has not tabled a formal proposal calling for a break-up. As a result, Citi’s executives, led by Vikram Pandit, chief executive, are almost certain to brush off its demands, arguing that the company’s universal banking model is in the best interests of shareholders. But the union’s stance could embolden other critics.

Citi has been under fire from shareholders and analysts after being hit hard by the credit crunch and being forced to raise over $30bn to shore up its balance sheet. On Friday, the company reported its second consecutive quarterly loss, marked by nearly $16bn in writedowns and credit losses. Last month, John Reed, one of the architects of the 1998 merger that created Citigroup, said the deal had turned out to be a “mistake” that had failed to deliver value for customers, investors and employees. Others have argued that Citi’s sprawling global operations are too complex to manage and should be streamlined by disposals and job cuts.

Citi declined to comment on Sunday but Mr Pandit has argued its model is not broken and its problems can be overcome.
In a recent interview, he told the Financial Times: “The great thing about Citi is its universal banking model. You just can’t simply take deposits, you have to do something with them and you can’t run trading businesses if you can’t fund them.” Mr Pandit’s hand has been strengthened by a recovery in Citi’s share price, up more than 20 per cent over the past month




Bank of America Hit by Consumer Woes
Bank of America Corp., hammered by ballooning losses on home-equity loans and other credit exposure, reported a 77% plunge in first-quarter profit and delivered a glum forecast for the rest of this year. Deteriorating credit quality in the quarter forced the largest U.S. consumer bank by market capitalization into a buildup of provisions for credit losses, to $6.01 billion, in anticipation of further trouble in its portfolios closely tied to the housing market -- home-equity, small business and home builders.

The Charlotte, N.C., bank also took write-downs of $1.47 billion on its collateralized debt obligations and $439 million for leveraged loans. The worse-than-expected results reflect growing pressure on U.S. consumers as the credit crisis deepens and raises questions about how sound the bank's consumer orientation is. In a conference call with analysts and investors, Chairman and Chief Executive Officer Kenneth D. Lewis said the bank predicts "minimal [U.S. gross domestic product] growth, if not contraction in the second quarter, and only a slight pickup in the second half of 2008." In an interview, Mr. Lewis said, "We're in a mild recession as we speak."

The bank's stock fell 95 cents, or 2.5%, to $37.61 in 4 p.m. New York Stock Exchange composite trading on Monday, contributing to the Dow Jones Industrial Average's slight decline. The stock is down 29% from the 52-week high of $52.96 that was hit on Oct. 11. Despite the dismal outlook for the rest of the year, Mr. Lewis said the bank wouldn't consider a dividend cut to raise capital unless the economy falls into a "prolonged recession," a turn of events he doesn't expect. Should the bank need to raise capital, it would consider first an issue of preferred stock, he said.

Mr. Lewis also clarified Bank of America's plans for its investment in China Construction Bank, in which it owns a 9.9% stake. "It's likely we will increase our investment in CCB sometime this year," he said. Bank of America has an option to purchase up to a 19.9% stake in CCB. As for selling portions of its stake in CCB, "we're talking to the Chinese to determine what level they would want us to be and then also over what time they would want us to monetize the profit should we elect to do so," Mr. Lewis said. Under its agreement with CCB, Bank of America says it can't sell any portion of its stake until the fourth quarter.




RBS to Sell $24 Billion in Shares After Markdowns
Royal Bank of Scotland Group Plc, the U.K.'s second-biggest lender, will sell 12 billion pounds ($23.7 billion) of new shares to investors to boost capital depleted by writedowns. RBS fell as much as 5.7 percent in London trading today after saying it marked down 5.9 billion pounds of assets and will cut the 2008 dividend. Chairman Tom McKillop defended Chief Executive Officer Fred Goodwin, saying "our executive team has all the ability to steer the bank through this tricky period in financial markets."

RBS's capital cushion has shrunk after credit markdowns and its part in last year's 72 billion-euro ($114 billion) purchase, mostly in cash, of ABN Amro Holding NV with partners Banco Santander SA and Fortis. The Edinburgh-based company said the outlook still is "inevitably clouded" by market turmoil sparked by the U.S. subprime mortgage market meltdown.

"They have overpaid for acquisitions and have had a weak capital base but there's nothing in this statement which confesses that they have made significant mistakes over recent years," said Simon Maughan, an analyst at MF Global Securities Ltd. in London. "We would like to see disposals from the global banking and markets portfolio which got them into trouble." RBS has lost almost half of its market value in the credit turmoil of the past year.

The world's biggest financial companies have posted $290 billion in asset writedowns and credit losses in the past year and announced plans to raise $163 billion by selling stakes. RBS paid "a very high price" for ABN Amro, buying the investment banking and Asian units for 14.3 billion euros ($22.7 billion), McKillop said on a conference call with reporters today. "We increased our exposure to wholesale markets at what has turned out to be an unfortunate time." Moody's Investors Services said today it may downgrade the B+ financial strength rating and the Aaa senior debt and deposit ratings of Royal Bank of Scotland Plc and the Aa1 senior debt rating of the group.

The review "reflects concern about RBS's exposure to volatile capital markets, as also shown by the magnitude of writedowns on credit market exposures, against the ongoing implementation and execution risk of the ABN Amro acquisition and the heightened uncertainty with regards to the U.K. economy," Moody's said in a statement. The company has sold holdings including a stake in Southern Water to shore up its finances. It has also cut 200 investment- banking jobs and said today it will lay off more people than expected as it absorbs ABN Amro. It plans to issue 11 new shares for every 18 existing shares at 200 pence a share.

It will raise 4 billion pounds in asset disposals and plans to raise its Tier 1 capital ratio, a measure of capital strength, to more than 8 percent from 7.3 percent and its core equity Tier 1 ratio to more than 6 percent from 4.5 percent by the end of the year, it also said. The company would consider selling its insurance unit, which includes the Direct Line and Churchill brands, Goodwin said on the call with journalists. It won't sell "undervalued" assets in a "fire sale," he said. Searches are underway to recruit three non-executive directors, the company said.




Call Goes Out to Rein In Grain Speculators
Food's surging cost has coincided with unprecedented levels of financial speculation in grain-futures markets. Now consumers and Farm Belt market participants hurt by more-volatile prices are asking Washington to rein in increasingly powerful commodity investors. A hearing Tuesday in Washington before the Commodity Futures Trading Commission starts a new round of scrutiny into the popularity of agricultural futures, a once a quieter arena that for years was dominated largely by big producers and consumers of crops and their banks trying to manage price risks.

The commission's official stance and that of many of the exchanges, however, is likely to disappoint many consumer groups. The CFTC's economist plans to state at the hearing that the agency doesn't believe financial investors are driving up grain prices -- tightening supply and rising demand are. The agency has made the same case with rising oil prices. Grain buyers and others involved in the market are complaining of sporadic irregularities in wheat and other agriculture futures markets, in which cash prices for crops didn't match the price of futures contracts at key delivery times.

This helped prompt a closed-door sit-down in Chicago this month. Several grain exchanges, including CME Group Inc., parent of the Chicago Board of Trade; the Minneapolis Grain Exchange; and the Kansas City Board of Trade, invited grain-market participants to express their concerns. Some grain buyers say speculators' big bets on relatively small grain exchanges, especially recently, are pushing up prices for ordinary consumers. "When you get a huge influx of speculative money, as happened in December and January, the price inflates beyond what the fundamentals would dictate and creates a sort of balloon," Daren Coppock, chief executive of the National Association of Wheat Growers, said in an interview. "The rules of the game need to be changed to make the market function better."

Higher grain prices and increased volatility have also made it difficult for some farmers to sell their future crops more than a few months in advance, as grain elevators refuse to buy a farmer's crop unless the farmer can deliver the physical grains within as few as 30 days. That has crimped their ability to lock in gains and manage other price risks such as the escalating costs of land and fertilizer. "Farmers were saying, 'I've got great marketing opportunities, but I can no longer lock in my sale.' That's a wakeup call for everybody," said Tom Coyle, chairman of the National Grain and Feed Association and vice president and general manager of the Chicago grain-handling and trading unit of Nidera Holdings BV, a Dutch grain merchant.

As with energy markets a few years ago, pension funds and hedge funds have flocked to grain investments as the supply of farm acreage and crop output shrinks relative to the growing global population and new demands for crops for biofuels and food. Many such investors make predominantly bullish bets. Pension funds, endowments and other large institutions allocate small percentages of their total assets to commodities as a long-term diversification tool and hedge against inflation, because commodities prices tend to go up when the rest of the economy is hurt by rising costs.

The most popular way to make such allocations is to invest in baskets of commodity futures, or index-linked funds. Ben Dell, an analyst at Sanford C. Bernstein & Co., estimates that investors have poured roughly $175 billion to $200 billion into commodity-linked index funds since 2001. Dan Basse, president of AgResource Co., an agriculture market-research company in Chicago, said that in some grain futures markets the influx of cash by index investors is enough to buy two years' worth of the total U.S. harvest in some given crops.

In 2007 and early 2008, prices of wheat, corn, rice and soybeans, among other crops, have escalated along with energy and other natural resources. Since the start of 2007, wheat futures are up 69%, soybeans have risen 92%, corn is up 49% and rice is up 131% on the Chicago Board of Trade




Regulator says increased speculation is not behind surging commodity markets
A U.S. government regulator says speculative trading is not the primary culpritbehind surging prices of corn, wheat and other crops that have rattled farmers and food producers. An official at the Commodity Futures Trading Commission said Monday commodities markets are functioning properly, despite almost daily jolts in prices for foodstuffs. "Our economists have looked at all the data available ... and there doesn't appear that any inordinate speculation has caused prices to move," said Commissioner Bart Chilton.

Chilton, one of the CFTC's four commissioners, said the historic conditions are likely due to a host of factors, including weather conditions that have shrunk harvests, smaller grain inventories and the declining value of the dollar. Chilton expressed little enthusiasm for limiting speculation in the markets, saying it could have unintended consequences. "These markets have to work for all the participants," Chilton said. "If you don't have speculators in the markets, there's no liquidity and you don't have a market."

The investment community greeted the commissioner's remarks with approval. Dennis Gartman, editor of a commodities letter for investors, agreed that there are multiple reasons for higher prices — but speculation is not one of them. Gartman and others have become increasingly wary of government intervention after several lawmakers criticized excessive speculation in energy and other commodities. "It is an election year," Gartman said. "To think you won't have senators and congressmen blaming high prices of things on speculators is naive."

With institutional investors pouring money into commodity markets at a time of stock market uncertainty, farmers have charged that speculation is driving up the cost of basic crops and making it harder for commercial buyers and sellers of grain to use the exchanges as a tool for limiting their exposure to price volatility. The futures trading commission is scheduled to meet with farmers, food processors and investors Tuesday to discuss the reasons for the turbulent markets.

Groups representing farmers and food producers have asked regulators to consider limiting speculation to return predictability to the markets, which they say have been stoked for two years by profit-hungry investors. This month, corn futures have closed at an average of $5.80, more than 140 percent above the $2.38 prices recorded in April 2006, according to analysis of Chicago Board of Trade data by consulting firm DTN. Wheat has jumped by 144 percent from an average of $3.46 in 2006 to $8.45.

According to the American Bakers Association, flour prices are up 50 percent since January. And the average price of a loaf of white bread rose 16 cents from February 2007 to February 2008, according to the Bureau of Labor Statistics. While higher prices would seem to benefit suppliers, the gains mean farmers have to put more money down to hedge themselves against future risks. Farmers use the futures markets to buy contracts to sell their crops at a specified price, avoiding potential drops in prices at a later date. They are required to put down a margin deposit of the contract's total value when they purchase the agreement. With the value of contracts rising to historic levels, some farmers have found themselves with more cash tied up in margin calls than their crop is worth.




Düsseldorfer Hypo Rescued by Bank Group After Crisis
Duesseldorfer Hypothekenbank AG, the closely held German public-sector lender, was bailed out by a group of banks, at least the fifth lender in the country to get emergency aid since the collapse of the U.S. subprime market. The BdB banking association bought Duesseldorfer Hypo from the Schuppli family and aims to sell it to a new owner, it said in an e-mailed statement late yesterday. The bank, which has a balance sheet of 26.7 billion euros ($42.4 billion), has booked 8.5 million euros in writedowns on asset-backed securities since last year. It doesn't own subprime loans, it said.

The takeover will ensure that the bank can continue to redeem its Pfandbrief bonds, which are covered bonds with stricter regulations, the association said. The Schuppli family injected 150 million euros into the bank since last year to finance a restructuring plan to expand mortgage lending and do less public financing. "This is pretty dramatic," said Dirk Becker, a senior banking analyst at Landsbanki Kepler in Frankfurt. "German banks still have the advantage that they can raise money with Pfandbriefs, so it's a necessary step to stabilize the lender and protect the Pfandbrief market."

The BdB banking association represents more than 220 private banks in Germany. Members including Deutsche Bank AG and Commerzbank AG contribute to the so-called deposit guarantee fund, which is being used to buy Duesseldorfer Hypo. The fund helps secure customer savings and stabilize German banks in times of crisis. "This will help overcome the difficulties that the institute has run into in the current tense market environment," the banking association said.

Writedowns and lower demand for public-sector financing almost erased profit at Duesseldorfer Hypo last year, after earnings of 22 million euros in 2006. The bank's assets aren't at risk and it will continue "business as usual," management board member Friedrich Munsberg said in a telephone interview. He declined to provide details about difficulties at the bank.

German financial-market regulator BaFin earlier this month ordered Weserbank AG to stop doing business as it ran out of money, making it the first German bank to close since the subprime crisis started. BaFin has welcomed the BdB's latest move and doesn't plan regulatory measures, BdB said. The German banking association doesn't expect Duesseldorfer Hypo to be closed, it said.




UBS details subprime losses
UBS admitted on Monday half of the $18.7bn writedowns it suffered last year on US subprime securities had stemmed from the decision by traders in its investment banking division to hold, rather than repackage and sell, one particular category of security linked to US residential mortgages. Contrary to most expectations, the UBS report reveals Dillon Read Capital Management, the in-house hedge fund closed in May 2007, accounted for only 16 per cent of last year’s writedowns. Most analysts had believed DRCM was the main culprit.

In a damning 50-page report ahead of tomorrow’s shareholders’ meeting, the bank admitted it overturned a strategy to hold and repackage so-called “Super Senior” tranches of collateralised debt obligations in favour of holding them permanently on its own books. The decision, which contrasted with UBS’s traditional role as a middleman, was the single main factor behind the losses that turned UBS into the biggest European casualty of the subprime crisis. UBS says it was made because traders, benefiting from cheap funding thanks to the group’s big private banking business, thought they could make more money holding such securities than passing them on to clients.

Matters were exacerbated by operations on another part of the bank’s CDO desk, the so-called CDO “warehouse”, where securities were stored and repackaged, normally over a period of up to four months. Although such operations were subject to risk assessment procedures, “there were no aggregate notional limits on the sum of the CDO warehouse pipeline and retained pipeline positions”, according to the report.

“The fixed income division was focused on revenue maximisation regardless of risk with no limits on balance sheet usage, and bonuses were paid regardless of the damage done to the UBS franchise long term,” noted Peter Thorne, analyst at Helvea, the Swiss brokerage. UBS said the writedowns had arisen in three areas. About two thirds arose from the CDO desk – with the overwhelming bulk coming from the ill-fated Super Senior strategy.

A further 16 per cent stemmed from DRCM, while some 10 per cent derived from the bank’s treasury operations. Positions held by smaller or more specialised units in the investment bank accounted for the remainder. However, the report confirms earlier statements from the bank that DRCM proved far more taxing to create than expected.




U.K. Derivative Markets Lack Transparency, CFTC's Chilton Says
The U.K. derivatives industry lacks transparency and the regulator, the Financial Services Authority, needs a "strong effort" to pursue market manipulation, the U.S. Commodity Futures Trading Commission's Bart Chilton said.
The FSA relies too heavily on exchanges to regulate markets and there needs to be "greater oversight and enforcement," Chilton, one of four commissioners at the CFTC, said in e-mailed comments to Bloomberg today. Chilton was in London to discuss the mutual recognition of U.K. and U.S.-registered options and futures so they can be traded in both markets.

"While I strongly support greater harmonization efforts, I will oppose any weakening of U.S. oversight in order to accommodate a less stringent regulator," Chilton said in his e- mail. "I am generally concerned about a lack of transparency and the need for greater oversight and enforcement by the FSA of the derivatives industry." The London-based FSA in January said it decided against publishing the holdings of investors such as hedge funds in London's commodity markets, citing costs. The CFTC publishes a weekly report showing such holdings in the markets it oversees.

"We have a risk-based approach that suits our markets," Teresa La Thangue, a spokeswoman for the FSA, said today by phone from London. She declined to comment further. The FSA regulates the London Metal Exchange, the world's largest marketplace for industrial metals, the ICE Futures exchange and Euronext.Liffe. The FSA has at least 25 people monitoring the commodities markets, according to La Thangue.

Commodity investments, including those from hedge funds, rose by more than a fifth in the first quarter to $400 billion, Citigroup Inc. estimated April 7. The expansion of financial investors in commodity markets has raised the risk of market abuse and failure, the FSA said in March 2007. "Those largest market participants in the derivatives industry can actually impact what consumers pay for goods -- everything from how much motor fuel to the price of bread costs," Chilton said.




Auction-Rate Market Shrinks by 18% Amid State Probes
The U.S. auction-rate bond market is starting to disappear. At least $58.9 billion, or 18 percent of the securities outstanding in January, have been redeemed or will be converted by states, cities, hospitals and closed-end mutual-funds, data compiled by Bloomberg show. Citigroup Inc. predicted last week that the $330 billion market, which started to unravel in February, will "cease to exist."

Borrowers are replacing bonds whose yields are set through periodic auctions after the market's collapse raised taxpayers' debt costs to as high as 20 percent, kept investors from selling their holdings and sparked probes by at least 10 states and the Securities and Exchange Commission. Municipalities from New York to California sold bonds during the past two months to refinance auction debt as investors took advantage of tax-exempt yields that rose to a half-percentage point above taxable Treasuries.

"The fixed-rate bond market has improved massively, but it's still cheap," said R.J. Gallo, who manages $870 million of municipal securities for Federated Investors in Pittsburgh. "The auction-rate market has improved substantially, but those levels are still high relative to where fixed-coupon bonds are." Yields on 10-year top-rated tax-exempt debt ended last week just 0.03 percentage point higher than the rate on the Treasury note, according to Municipal Market Advisors, reflecting waning concern that auction-rate refinancings would overwhelm demand.

"We got so shockingly cheap that people noticed, and there was a good bit of buying," Gallo said. Yields on 10-year, tax- exempt debt had averaged about 0.6 percentage point less than Treasuries over the past seven years. For two decades, auction-rate bonds allowed local governments, hospitals, and closed-end funds to issue securities maturing in as long as 40 years at short-term rates that reset typically every seven, 28 or 35 days through bidding managed by securities firms.

Investors and dealers began to abandon the market in February amid concern that the creditworthiness of companies insuring the bonds was deteriorating because of losses from guaranteeing debt backed by subprime mortgages. More than 60 percent of the thousands of auctions conducted each month have failed since Feb. 13, data compiled by Bloomberg show. The average rate on seven-day municipal auctions soared to 6.89 percent Feb. 20 from 3.63 percent a month earlier, according to the Securities Industry and Financial Markets Association. The rate fell to 4.62 percent as of April 16, the lowest in 10 weeks, the latest data show.




The trillion-dollar mortgage time bomb
Among the nightmares lurking around the corner for the already battered housing and credit markets would be a meltdown at mortgage financing giants Fannie Mae and Freddie Mac. Although few are predicting an imminent need for a bailout just yet, credit rating agency Standard & Poor's recently placed an estimated price tag on this worst case scenario -- $420 billion to $1.1 trillion of taxpayer's money.

This dwarfs how much it cost to help banks during the savings and loan crisis of the late 1980's and early 1990's. That cost taxpayers about $250 billion in today's dollars. S&P added that saving Fannie and Freddie might cost so much that the federal government's AAA credit rating, the top possible rating, might even be at risk. If that was lost, then all federal government borrowing would become more expensive. Fannie Mae and Freddie Mac both help the mortgage market function by purchasing pools of loans and packaging them into securities.

So it is crucial for the mortgage industry for the two agencies to continue functioning smoothly. The two companies are known as government-sponsored entities because they have Congressional charters, which implies that the federal government is behind them. According to a statement from Freddie, the firm said the S&P report was just "a scenario analysis, not a prediction" and added that "Freddie Mac remains a well capitalized company." Victoria Wagner, a S&P credit analyst who worked on the report, said S&P isn't predicting that Fannie and Freddie would necessarily need a bailout at this time.

But she and other analysts are concerned about the impact more problems could have on the mortgage market since the two companies have become increasingly important to the health of the industry. Both companies are forecast to report more losses this year due to declining home prices and rising mortgage defaults. Wagner pointed out that at the end of January, 82% of all mortgages in the U.S. were backed by one of the firms, up from only 46% in the second quarter of 2007.

Fannie and Freddie primarily back so-called conforming loans, those made to borrowers with good credit and large down payments. But even limited exposure to subprime loans hasn't stopped them from running up huge losses as home prices tumbled and foreclosures soared. And Fannie and Freddie's role in the mortgage and real estate markets is likely to grow, as Congress recently allowed them to back larger mortgages, up to $729,750, up from the previous limit of $417,000.

The Office of Federal Housing Enterprise Oversight (OFHEO), which regulates both firms, also recently lowered the capital requirements for Fannie and Freddie in an effort to pump $200 billion more into the credit markets. The new loan limits will increase the risks and losses for Fannie and Freddie, said Wagner and other experts. The high priced markets where homeowners and buyers need larger loans are now the ones seeing steep home price declines.

And the default rates on larger loans are greater than the smaller loans that had previously been the core of their business. "I don't think the message is a bailout is necessary or imminent," Wagner said. "But they're facing this increased role at a time that their own credit performance is suffering from the rifts in the housing and mortgage markets. They're both projecting much higher losses than we've seen in some time."




How to Rob an African Nation
The lobby of the Hotel Miramar in São Tomé would be the perfect set for a tropical spy thriller. It is the best hotel in town, which doesn't mean much, but its air-conditioned lobby, complete with colorful sofas and green potted plants, has become an important meeting place for everyone who has some sort of business on this curious island: profiteers and their assistants, representatives of foreign governments and international organizations and a host of shady characters. Good and bad people congregate in the lobby of the Hotel Miramar, but telling them apart isn't easy.

There are the US Navy troops who march through the lobby every morning and board a bus outside to build a radar station (as everyone knows). In the breakfast room, two women and a man stare silently at their laptops; they're members of a World Bank delegation in São Tomé to meet with government ministers. Then there are the men in faded T-shirts who people say are CIA agents, although that isn't necessarily true. Rumors are commonplace. The islands of São Tomé and Príncipe make up a single sovereign country, population 160,000. Until a few years ago the islands' only claim to fame were Marilyn Monroe postage stamps, fraudulent sex hotlines and a key export crop, cacao.

That was until oil was discovered under the sea floor off the country's coast. It could be a blessing or a curse for this tiny nation; and it seems to have made everyone crazy. On the world map, São Tomé and Príncipe are two barely detectable spots in the Gulf of Guinea, almost exactly on the equator, 200 kilometers (124 miles) off the coast of Gabon. The nation is peaceful and democratic and desperately poor. Its inhabitants survive on foreign aid and international loans. Aside from a small cacao crop, the country has no significant products.

The São Toméans could hardly believe their luck when seismic studies completed in the 1990s revealed an enormous reserve of 11 billion barrels of oil just off their coast. They were rich! São Toméans could suddenly dream of becoming a sort of African Brunei, a rich and tiny nation where people could lead carefree lives. Manna from heaven! Then the rest of the world clued in. Companies from the United States, China, Norway and Canada sent teams to the islands, and foreign governments -- in particular the United States and São Tomé's big neighbor, Nigeria -- began to show interest.

A wealth of natural resources isn't always good for a poor country. It's called the "paradox of plenty," and unfortunate examples proliferate in São Tomé's immediate neighborhood. One is Nigeria, a major oil producer ruled by the corrupt regime of President Olusegun Obasanjo until 2007. Then there's Equatorial Guinea, whose brutal dictator Teodoro Obiang Nguema keeps his people in poverty; and Gabon, where the upper class has almost completely squandered the country's oil wealth; and, of course, Angola, still suffering from the effects of its long civil war.


24 comments:

Anonymous said...

Whenever you post pictures from the depression era it strikes me how well dressed the men in the food lines are. Pictures of today's bread lines full of middle class people will no doubt look like white trash because that is what we have become as a nation. At least that is what I see at the grocery store.

EBrown said...

And their hats! I'm always struck by the rapidity with which hats went from a necessity to entirely out of style...

el_pollo said...

_________________________________________
Riddle:

Why do all the new investment bank high rise offices have sealed windows?

Answer:

Because they know their buddies at the Fed will bail out their speculation loses at taxpayer expense.

Anonymous said...

I think our hats say it all: baseball caps, corporate logo's or cheesy sayings, one size fits all, synthetic materials, disposable, worn askew, made in China, sold at Walmart, only removed for the national anthem at games.

For comparison: fedoras, sized, wool, durable, worn with dignity, made in America, bought at a local clothes shop, removed in the presence of ladies.

This suggests why the greater depression will be greater and more depressing.

el_pollo said...

Well, baseball caps may not be classy, but as one who has to get down and dirty with physical work in the tropics where head covering is essential, they sure are practical.

shargash said...

"Calls for an end to food speculation get louder..."

This is not directed at you, Ilargi, but people's blaming high prices on speculation is just driving me nuts. If speculation were the cause of rising food prices, supply would be adequate, but people would be unable to afford the food. Rising prices reduce demand. The only effect they have on supply is to increase supply, after whatever the lag time for bringing new supply online is.

Supply is not adequate. Japan has no butter. The Phillipines can't buy as much rice as they want, and Bangladesh can't buy it at all. Costco is restricting the quantity of rice it allows its customers to buy. Some months ago (during the "hard red wheat" price rise), some restaurant supply companies couldn't get flour.

We have a crisis that may result in the deaths of millions of people. Blaming the crisis on speculation is head-in-the-sands denial.

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ric said...

Reading Sharon Astyk’s wonderful blog: We Regret to Inform You, put me in mind of our friend, George Harrison and his song Bangladesh. What would he sing now?

My friend came to me, with sadness in his eyes
He told me that he wanted help
Before his country dies

Although I couldn't feel the pain, I knew I had to try
Now I'm asking all of you
To help us save some lives

Bangla Desh, Bangla Desh
Where so many people are dying fast
And it sure looks like a mess
I've never seen such distress
Now won't you lend your hand and understand
Relieve the people of Bangla Desh

Bangla Desh, Bangla Desh
Such a great disaster - I don't understand
But it sure looks like a mess
I've never known such distress
Now please don't turn away, I want to hear you say
Relieve the people of Bangla Desh
Relieve Bangla Desh

Stoneleigh said...

Shargash,

Granted supply is tight, but speculation is nevertheless having a significant effect. Essentially, once supply becomes sufficiently tight and a fear of shortages develops, a psychological shift to a hoarding mentality develops, and that makes it much more difficult than it would otherwise be to keep the market supplied. When you add large flows of hot money to the equation, the situation deteriorates further.

Speculators will drive volatility - a price peak now, likely followed by a price collapse (both of which they can profit from). This kind of activity will wreak havoc with the normal business of producing food (or other commodities). Commodity peaks, like equity bottoms, are driven by fear and therefore tend to be sharp spikes followed by rapid reversals. IMO the commodity complex is peaking about now and significant price falls are coming in the not too distant future.

scandia said...

stoneleigh, You speak of " hot money". A while back I read an article about money laundering and its very bad affect on the financial system. I don't think you meant hot as in illegal. What do you mean by " hot "? Does anyone have any thoughts on the money laundering issue? Not that things are not complicated and opaque enough above board!

snuffy said...

I still see sugar cheap.I just used 175lb to feed bees,and it ran me 70$.I have found it at half that price ,but I have to purchase 1000 lb at a time.Which I intend to do,soon.

I have decided to try beekeeping as a sideline,as the products are needed at all times,and if develop a successful symbiosis with the little girls,my orchard,and wallet will benefit.

The food shortage stuff has been long predicted,but your notion that this is a fast crash gave me a pause .You may be right,what will it be like in 6-8 months?I think crunch time will come soon,in such a way that everyone will know its game over

I have a good canvas hat not too stylish,to keep the sun off,and the rain off my glasses.Baseball hats are for work...you have to be careful...putting one on drops you I.Q. 30 points...

ric said...

Scandia,
I'm not sure what Stoneleigh means by "hot money" either.

However, I believe it's important we recognize the role of organized crime in our financial systems. As the former CIA Director, William Colby, writes:

"The Latin American drug cartels have stretched their tentacles much deeper into our lives than most people believe. It's possible they are calling the shots at all levels of government."

Fitts wrote Narco-Dollars
for Beginners
"How the Money Works"
in the Illicit Drug Trade
to help describe the matter. When I was a kid I naively assumed Wall Street helped finance business. Now, it seems to me Wall Street is a game insider's use to suck money out of individuals, businesses, and governments. Since organized crime runs the most profitable businesses on the planet, it makes sense to me these insiders would be interested in these profits.

scandia said...

Ric, Thanks for the reading tip on Narco dollars...I'll ask my library to get it for me.
Anyone see the " Three amigos" photo this morning in NYTimes. With shovels digging our graves! Yikes! Whomever set up the photo-op forgot the baseball caps.

Bigelow said...

What gives? Did you delete my post?

ric said...

Just click on the title, Sandia--it'll take you right there. :-)

ilargi said...

no. bigelow. no delete

goritsas said...

ilargi,

My post yesterday went south. No delete too?

goritsas said...

ilargi,

Houston, you may have a problem. Using the link "publish this post" at the bottom of the "review this post" submit doesn't seem to work. If one scrolls back up to the top of the page and uses the bright orange publish button all is well.

Bigelow said...

I really want to understand this. Doesn't sound like they are that far apart.

Shedlock comments on Noland’s recent “Setting the Backdrop for Stage Two” in Deflation In A Fiat Regime?

“I was asked by professor Lance Lewis (and many others) to reply to on a post by Doug Noland called Setting the Backdrop for Stage Two. Before reviewing Noland's post I would first like to comment on this statement made by Professor Lewis: " I have never been one to believe you can have a true deflation with a fiat currency."”

Stoneleigh said...

By 'hot money' I mean large speculative financial flows - money that floods into a market chasing momentum and then leaves just as quickly, pulling the plug behind it. For example, Mexico lost a quarter of its reserves in six hours as money was pulled out of the country by those who had got wind of the coming peso crisis. Capital is so mobile and can react so quickly that real systems can be profoundly destabilized by its movements.

That's what's happening in the commodity markets at the moment - they're being overwhelmed by speculative flows, which is creating uncertainty and volatility. When the commodity complex tops, as I would argue will be soon, we should see a price collapse that is likely to trash the sector, at great cost to all.

Stoneleigh said...

Goritsas,

You're right that the 'publish' link at the bottom of the preview box isn't working. I noticed that recently as well. For the time being, use the orange 'publish your comment' box near the top right-hand side.

Stoneleigh said...

Ilargi is on the road at the moment and I'm trying to figure out how to put up today's Debt Rattle. Please bear with me - computers are not my forte.

Stoneleigh said...

FWIW, Ilargi and I never delete anything that isn't obviously spam. Also, editing comments (as someone one asked if we did) isn't even possible in this format.

Stoneleigh said...

Bigelow,

In short, I agree with Mish's take on Doug Noland's article. I put Mish's piece in today's Debt Rattle and I'll comment on it there.