Debt Rattle, April 5 2008

Food Line, FDR Memorial

Ilargi: As the markets went into a genuine bear rally -which nobody recognizes as such-, psychology changed with it. The media and their experts "call" market bottoms, and attention for negative news evaporates. We can even see that in our numbers here at The Automatic Earth.

In reality, as societies, and as individual taxpayers, we have had the worst week in a very long time, either since 1971 -end of the gold standard-, since 1933, the New Deal, or even, if you will, since 1913, when the Fed system was legalized.

The illegal power grab by the Fed, as expressed in the “salvation” of Bear Stearns, was pushed through Congress with hardly a critical word. The illegal now has a distinct shine of legality. Whether you call it socialism or -corporate- fascism doesn’t make much difference. The financial system in the US now has explicit permission to shift all its trillions in gambling debts onto the comatose citizens of the country. The $30 billion for Bear was just the beginning.

While there may still be some hope that Europe will resist such extreme lawlessness, we start to see “official” indications -this time through the IMF- that the housing and mortgage situation in many EU countries is in potentially worse shape than in the US. This is no surprise to our regular readers.

Now the next question arises: what will happen across the Atlantic when all that overvaluation starts to unwind?


Overvaluated housing not limited to U.S.:
Netherlands, Britain, Australia, Ireland, France, Denmark and Norway

As a weakening housing market appears to be dragging the U.S. economy into recession, the International Monetary Fund warned this week that home prices in other industrial countries were even more overvalued. In its World Economic Outlook report, the IMF also concluded that central banks should pay close attention to home prices and consider raising interest rates when prices are rising rapidly.

That conclusion is directly contrary to the established policy of most central banks, including the U.S. Federal Reserve Board, which ignores home prices when they are expanding. In the current credit crisis, which began with problems in the subprime mortgage market, the Fed has moved aggressively to lower interest rates.

"A central bank that wants to stabilize the economy is better served by responding to house prices, both when they go up and when they go down," said Roberto Cardarelli, a senior economist with the IMF. He said that was particularly important in countries with relatively open mortgage markets, like the United States, which make it easy for homeowners to get access to cash when prices are rising.

The fund looked at trends in housing prices and mortgage debt in 17 countries, and attempted to assess how much of the price changes could be attributed to economic fundamentals, including trends in personal income, demographics and interest rates. It concluded that in mid-2007, house prices in the United States were 11 percent higher than fundamentals would justify.

That overvaluation was barely a third as high as in Ireland, where the IMF estimates that house prices were 32 percent higher than fundamentals would support. The Netherlands, Britain, Australia, France and Norway all showed overvaluations of at least 20 percent. On the other end of the spectrum, the IMF concluded that homes were undervalued in Canada and Austria.

Cardarelli pointed out that, adjusted for overall inflation, home prices rose at a slower rate in the United States in this decade than they did in many other countries, with the mid-2007 figure up 42 percent from the first quarter of 2000. Comparable figures included gains of 95 percent in Spain, 90 percent in Britain and 85 percent in France. Mortgage debt has shot up over recent decades in many countries, but there remain sharp variations as some markets make it much harder to borrow or restrict the loan-to-value ratio of mortgage loans.

In the United States, total mortgage debt more than doubled, as a percentage of gross domestic product, going from 34 percent in 1983 to 45 percent in 1990 and then to 76 percent in 2006. But the increases were much greater in some countries. In the Netherlands, the mortgage indebtedness hit 98 percent of GDP, and in Denmark it rose to 101 percent.

Perhaps not coincidentally, when the IMF put together an index of mortgage markets, the most liberal in terms of lending standards was the United States, followed by Denmark and the Netherlands.

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The American People have failed to stand up

Basically what we have here is this:

• The Fed has illegitimately picked your pocket - that of The American Taxpayer - with their $29 billion "backstop", but you can't know what you bought with the money.
  
• That "PUT" has made lending risk-free for banks, as any losses will simply be eaten by you the taxpayer, which means that these very same banks can, have and will continue to extend risk. WITNESS WACHOVIA STILL ADVERTISING PAY OPTION MORTGAGES. There is no risk of business failure for them in unsound lending AS YOU WILL BE BILLED FOR THEIR LOSSES.

And you, The American People, have failed to stand up and put a stop to it. Freedom isn't free and there are times when you have only days or even hours to put a stop to the institutionalization of something that will destroy your economic future along with that of your children and grandchildren.

This was one of those times - indeed, it was a watershed moment that has not been seen in a generation. The American Public failed the test, and now we have put forward precedent that all you have to do is claim "systemic risk" and even when that risk is denied by the person with the most intimate knowledge of that risk under oath, the transaction in question will be permitted and the costs will be shifted to you, the taxpayer.

The stupidity of this is beyond words, but I can't make people act in their own best interest. I can only point out when you will be robbed blind if you do not act immediately to put a stop to it. America faced one of these tests the other day, and America, as a nation, failed.

Those of you who tried to talk to your friends and neighbors were called nutcases, conspiracy freaks, fruits and all sorts of other nasty names. I've seen it, you've seen it. Yet now we have in Jamie Dimon's own words that JP Morgan, the firm "most" intertwined with Bear Stearns, had no systemic risk from a Bear Bankruptcy and would be, in his words, "just fine."

Conspiracy nut or just plain right? It doesn't matter now - the hearings are over, the opportunity to force the unwind of this transaction gone. The actions of The Fed and JP Morgan have been institutionalized and confirmed by Congress, setting a precedent to charge off the loss of ALL lenders from here on and forever to the taxpayer's account. That is exactly what is going to happen.

THE RISK OF MARKET FAILURE BY ALL LENDERS IS NOW BORNE BY THE TAXPAYER. ALL LENDERS. GET THAT THROUGH YOUR HEAD, BECAUSE IT DOES NOT APPLY TO YOU AS A CITIZEN, BUT IT DOES APPLY TO EVERY BANK AND FINANCIAL INSTITUTION THAT OPERATES IN THE UNITED STATES.

The worse news is that this does nothing about the economic problems or the housing correction (nor can it), so in addition to the recession and the damage that will do to our economy and your economic future you will also get to eat the costs of the fraud that these lenders foisted off on homeowners and investors.

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Return of Marking to Myths!

As we all know, the G7 financial authorities are fighting tooth and nail to rescue their financial systems. The bottom line of it is that they are INSOLVENT and require balance sheet repair of epic proportions. It will require a combination of MONEY printing, hocus pocus, smoke and mirrors and changing the rules -- whether it be the changing of balance sheet requirements at Fannie and Freddie, the expansion of the home loan banks, term lending facilities of one sort or another or opening the borrowing windows at the fed wider and wider in terms of eligible securities of participants (investment banks) which can access the lending.

In the last 6 weeks we have seen over 1 trillion dollars in combination of all of these things added to the pool of liquidity to underpin asset markets.  Now comes the latest twist: “The return of marking to model” which was ended last November. Tedbits wrote about it at the time and it has bitten the banks and financial industry’s balance sheets HARD.

So the SEC, bowing to pressure from their masters: Congress, The Fed, The Treasury, the Plunge Protection Team and the banking and brokerage industries, has revised the regulatory guidelines for applying SFAS rule number 157. This rule required marking to market when there are observable prices of hard-to-price and almost impossible-to-sell over the counter securities (CDO’s, CMO’s, MBS, etc). Here is a chart that illustrates the problem:

This is a picture of financial industry and banks’ balance sheets VAPORIZING before our very eyes. So what do the financial and banking authorities do? What else? Rewrite the regulatory guidance in respect to how to value them for REGULATORY reporting purposes. The SEC has issued an opinion letter informing financial and banking companies of how to deal with these thorny balance sheet and accounting compliance issues by telling them if they have a problem with the mark to market valuations then declare the prices as the result of forced liquidation and ignore them.

And how did they sidestep the horrendous losses due to be reported in the next three weeks from the 1st quarter? By backdating the interpretative notice back to January 1. Abracadabra: poof and money reappears on the balance sheets, hocus pocus of the highest order. That rule saw the light of day for a total of 45 days!!! Now it’s history.

Now, instead of marking to market from REAL trades, they say those prices are “myths” and represent not the true nature of the prices of those securities, as they were the result of FORCED liquidation and margin calls. Now white is black and black is white as we move further into the lands of George Orwell and his prophetic book 1984. By moving this back to marking to myths they have RESTORED billions of Dollars to bank and financial balance sheets with the stroke of a pen, if not in reality. 

In conclusion: NOTHING has changed, not one thing. When the main stream financial media advertises the views of the main stream banks and brokers, understand they are setting you up for a haircut and they are the barber fleecing you like a sheep. These people deal in the land of paper and paper is in a bear market and will remain so till this “Crack-Up Boom” runs its course. But they still must pretend that their decades in the sun (1980 until just last year) have now run their course. Their customers are in for a rough ride as they follow their investment advisor’s guidance to their demise. 

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Fed Loosens Capital Rules for JPM

Up to $220 billion of Bear Stearns assets can be excluded from J.P.Morgan’s risk-weighted assets.
Up to $400 billion of Bear Stearns assets can be excluded from the denominator of the tier 1 leverage capital ratio.
JPMC also has requested that the Board provide JPMC with relief from the Board’s risk-based and leverage capital guidelines for bank holding companies.

Specifically, JPMC has requested that the Board permit JPMC, for a period of 18 months, to exclude from its total risk-weighted assets (the denominator ofthe risk based capital ratios) any risk-weighted assets associated with the assets and other exposures of Bear Stearns, for purposes of applying the risk-based capital guidelines to the bank holding company.

In addition, JPMC has asked the Board to permit JPMC, for a period of 18 months, to exclude from the denominator of its tier 1 leverage capital ratio any balance-sheet assets of Bear Stearns acquired by JPMC, for purposes of applying the leverage capital guidelines to the bank holding company.

The Board has authority to provide exemptions from its risk-based and leverage capital guidelines for bank holding companies. JPMC has agreed to several conditions that would limit the scope ofthe relief request.
First, JPMC proposes to exclude from its risk-weighted assets, for purposes of applying the Board’s risk-based capital guidelines for bank holding companies, the risk-weighted assets of Bear Steams existing on the date of acquisition of Bear Stearns by JPMC, up to a total amount not to exceed $220 billion.

Second, JPMC proposes to exclude from the denominator of its tier 1 leverage capital ratio, for purposes of applying the Board’s tier 1 leverage capital guidelines for bank holding companies, the assets of Bear Stearns existing on the date of acquisition of Bear Stearns by JPMC, up to an amount not to exceed $400 billion.

These regulatory capital exemptions would assist JPMC in acquiring and stabilizing Bear Stearns and would facilitate the orderly integration of Bear Stearns with and into JPMC. The Board notes that (i) JPMC would be well capitalized upon consummation of the acquisition of Bear Stearns, even without the regulatory capital relief provided by the exemptions; and (ii) JPMC has committed to remain well capitalized during the term of the exemptions, even without the regulatory capital relief provided by the exemptions.

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The beginning of the end of securitization

SIVs Appear To Be DEAD! HEEEELLLOO!!!

SCORE ONE FOR THE GOOD GUYS!

To those of you who say that PETITIONS DON'T WORK and BLOGGING DOESN'T WORK and NOBODY LISTENS.

It appears that the FASB has removed the concept of QSPEs, which is the enabling "piece" to make off-balance-sheet securitizations possible, from the FASB set of regulations, specifically, FAS 140.

This appears to have happened TODAY.

As such it appears that all financial institutions will have to reclaim all SIVs back onto their balance sheets no later than the start of 2009.

This is a watershed event, in that these vehicles, when they are reclaimed onto bank balance sheets, is likely to lead to the P/Es of these firms skyrocketing north, and consequently, a far more realistic view of both share price AND capitalization.

In short Investment Banks have ~6 months to get their act together and their capital up, and then they are going to have to start integrating these vehicles back onto their consolidated financial statements.

Click here for full FASB declaration

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Ilargi: Essential info for US homeowners:

Mr Mortgage - Big Banks Home Equity Exposure Revealed

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Prepare for a very nasty hangover

Hope springs eternal. Pundits have been saying that the worst may be over following the panic surrounding Bear Stearns’ near-collapse. But there is little evidence of the sort of “washout level of gloom required to clear the air”, as Ambrose Evans-Pritchard puts it in The Daily Telegraph. Global earnings, for instance, are still expected to rise by 11% this year and US S&P 500 profits by 15%. It seems “people are so eager to make the transition from late-cycle to early-cycle growth they’ve leapfrogged over the recession in between”, says Merrill Lynch’s Peter Bernstein. 

On the credit front there is scant sign of tension easing. Banks continue to hoard cash: interbank rates are at their highest levels this year. No wonder, then, that US mortgage rates remain “stubbornly high” despite the Fed’s rate cuts, says Julie Creswell in the International Herald Tribune. In the housing market, the root cause of the credit crunch, price falls are accelerating and there is no sign of a bottom. Given how lending standards deteriorated in 2005-2007, an “enormous wave” of defaults and foreclosures is “just beginning” to break, says T2 Partners.

Until housing bottoms out – which may require intervention by regulators and governments – and banks can assess the scale of their losses, jitters are likely to continue. UBS this week warned of another $19bn of writedowns in the first quarter, having lost $18bn last year. And with securities related to car, credit card, student and leveraged loans set to slide as the economy worsens, there will be plenty more bad news dribbling out and eroding confidence over the next few months. Goldman Sachs is pencilling in global losses of $1.1trn. 

Moreover, the sheer scale of the run-up in housing and debt over the past few years suggests that the unwinding process is far from over. “The imbalances are the kind that take years, not months, to correct,” as Authers says. Financial services’ share of the economy has doubled over the past 50 years. House prices across ten major cities more than doubled between 2000 and 2006 alone. Americans’ personal saving rate, 12% in the early 1980s, dropped below zero in 2005. 

Over the past 25 years household debt has doubled as a proportion of GDP; as a percentage of disposable income it has hit 130%, rocketing from below 100% in 2000. Between 2001 and 2007, debt by this measure jumped by more than in the previous 40 years combined, notes David Rosenberg of Merrill Lynch, who also points out that “it is a truly grim situation” when the consumer sector spends more servicing the $14trn of debt on its balance sheet than it does on food. Of disposable income, 13.2% goes on the latter; 14.3% on the former. 

The turmoil in the markets ultimately reflects the fact that an economic bubble, “financed by ridiculously loose monetary policy”, is now “unravelling”, says Albert Edwards of Société Générale. For amid all the fuss about reckless borrowing by consumers and careless lending by banks, it was ultimately the Fed under Alan Greenspan that created the conditions for the debt binge of the past few years with historically low interest rates. 

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Ilargi: The FASB -Financial Accounting Standards Board- has dropped a bombshell in the heart of the finance industry. As it looks now, investment banks have a few months left to take back specail investment vehicles on their books. No More off-balance-sheet for these instruments. We’ll have to see how far-ranging this will turn out to be, but don’t forget that securitization is the cornerstone of the present financial system, the mother of all leverage.

Brown warns on global cash crisis

Gordon Brown said institutions such as the World Bank and United Nations need reform to tackle the double threat of economic turmoil and climate change. He is hosting the two-day gathering in Watford attended by delegates including ex-US president Bill Clinton and Australian PM Kevin Rudd.

Speaking at the start of the Progressive Governance conference of centre-left leaders and politicians, Mr Brown said that the old institutions established in the aftermath of World War II were now unable to cope. "We now have to reshape our global rules and global institutions for this new era," he said.

"We are facing a global financial crisis which is probably the first truly global financial crisis of the modern world. "We have to reform our global financial institutions. It is absolutely clear that the national supervision that we have is inadequate and we need a global agreement." The prime minister said the International Monetary Fund (IMF) needed complete re-structuring so it could act as an "early warning system" for the international economy.

He said the World Bank should help developing nations move towards cleaner economic development.
Mr Brown also suggested there should be an international reserve force of volunteers ready to help rebuild countries such as Rwanda and Bosnia following global crises.

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European unions protest on pay as inflation bites

Trade unions protested over corporate greed and the "poverty wages" of more than 30 million workers in Europe as politicians and central bankers meeting in Slovenia on Saturday urged wage restraint to combat inflation. At a time when food and energy prices are surging worldwide, the European Trade Union Confederation sought to mobilise up to 35,000 people for a rally in Slovenia's capital on Saturday to denounce a decline in spending power and demand better pay.

Company profits have risen for more than a decade, but the share of wealth going into wages has shrunk and the divide has widened between those at the top and bottom, ETUC, an umbrella body for unions across the continent, said. "This is a campaign launched in some anger and with real commitment," ETUC leader John Monks said ahead of the rally.

Finance ministers and central bank chiefs of the 27 European Union countries met to discuss a deteriorating economic outlook at what were once the bear-hunting quarters of late communist dictator Josip Broz Tito, in Brdo, 25 km outside Ljubljana. They sounded the alarm over inflation -- which hit a record annual rate of 3.4 percent in the EU in March -- pushed higher in large part by the prise of oil and surging costs of food.

European Central Bank Governor Jean-Claude Trichet said that keeping a lid on labour costs would be "absolutely decisive" in fighting inflation and that a five percent pay rise for German public sector employees in 2008 should not be copied elsewhere.
"It would be an enormous mistake to imitate Germany," said Trichet, stressing that German public sector workers had gone without any pay rise in the past two years and that others had not shown such restraint.

More unusually, the euro zone's chief inflation-fighter got hearty support from politicians too who were at pains to say that the fight against inflation was the best way to defend people's spending power.

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Employment Collapse: A "Marginally Attached" Reality Check

First the summary: Biggest losses in five years: The unemployment rate jumped more than some expected in the report out today -- up 3/10th's of one percent in March:

The unemployment rate rose from 4.8 to 5.1 percent in March, and nonfarm payroll employment continued to trend down (-80,000), the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Over the past 3 months, payroll employment has declined by 232,000. In March, employment continued to fall in construction, manufacturing, and employment services, while health care, food services, and mining added jobs. Average hourly earnings rose by 5 cents, or 0.3 percent, over the month.

Over the month, unemployment rates rose for adult men (to 4.6 percent), adult women (4.6 percent), and Hispanics (6.9 percent). The jobless rates edged up for blacks (to 9.0 percent) and whites (4.5 percent), while the rate for teenagers (15.8 percent) was essentially unchanged. The unemployment rate for Asians was 3.6 percent, not seasonally adjusted. In March, the number of persons unemployed because they lost jobs increased by 300,000 to 4.2 million. Over the past 12 months, the number of unemployed job losers has increased by 914,000.

The civilian labor force rose to 153.8 million over the month, offsetting a decline in the prior month. The labor force participation rate was 66.0 percent in March and has remained at or near that level since last spring. Total employ- ment held at 146.0 million. The employment-population ratio was little changed over the month at 62.6 percent. The ratio was down from its most recent peak of 63.4 percent in December 2006.

The number of persons who worked part time for economic reasons, at 4.9 million in March, was little changed over the month, but has risen by 629,000 over the past 12 months. This category includes persons who indicated that they were working part time because their hours had been cut back or because they were unable to find full-time jobs.

Now, a nickel's worth of analysis here.  First, the Labor Department let's on that there were really another 1.4 million people who were 'marginally attached' to the workforce.

"About 1.4 million persons (not seasonally adjusted) were marginally attached to the labor force in March. These individuals wanted and were available for work and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.   (<--- Can you believe this??? -gu)
Among the marginally attached, there were 401,000 discouraged workers in March, about the same as a year earlier. Discouraged workers are defined as persons not currently looking for work specifically because they believed no jobs were available for them. The other 951,000 persons classified as marginally attached to the labor force in March cited reasons such as school attendance or family responsibilities."

Hand me the calculator and a bottle of Jack, please? Add the admitted 7.815 million unemployed to the 1.4 million 'marginally attached that they didn't bother to count as 'unemployed' and we get 9.215 million, which on a workforce of 153.784 million pencils out to an RCH under six percent unemployment rate but it gets even worse because if you add the table A-12 (unadjusted) U6 (*Underemployed like PhD's flipping burgers) you get an unemployment or severely underemployed rate of about 15.3%.

And that's with a war going to keep the economy on life support!Welcome to the Greater/Second Depression I've been writing about... Did the linguistics or did they not say employment collapse in March?  80,000 jobs is close enough to collapse for us...

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Democrats Call for New Aid Package as 80,000 Jobs Are Cut

The nation’s employers eliminated tens of thousands of jobs for the third month in a row, the government reported Friday, and top Democrats immediately called for new measures to help suffering American workers.

After the early-morning report from the Bureau of Labor Statistics that 80,000 jobs had disappeared in March, the speaker of the House, Nancy Pelosi, said she would propose a second economic stimulus package. Hers would supplement the $150 billion in tax rebates scheduled to be mailed to millions of Americans beginning next month.

The presidential candidates, already divided over how to alleviate the mortgage and housing crisis, divided again over how to generate jobs and help the unemployed. In separate statements Friday morning, Senators Hillary Rodham Clinton and Barack Obama supported another stimulus package and an extension of unemployment benefits, among other measures. In contrast, John McCain, acknowledging that “many Americans are hurting,” said that lower taxes and less regulation would generate jobs.

“People have been focused on the housing crisis, and rightly so,” said Andrew Stettner, a policy analyst at the National Employment Law Project, “but now the deterioration in the job market should be demanding much more attention from policy makers.” The job losses this year are roughly equal to those that disappeared in the early months of the last recession, in 2001.

Recognizing that employment was weakening, Ben S. Bernanke, the Federal Reserve chairman, testified on Wednesday that “a recession is possible,” but not necessarily upon us. Wall Street took a dimmer view after Friday’s report. “These job numbers strengthen the case materially that we are in a recession,” said Edward McKelvey, senior United States economist at Goldman Sachs. “They remove all but a sliver of doubt that the economy is contracting.”

In March, the unemployment rate rose three-tenths of a percentage point, to 5.1 percent, its highest level since September 2005, after Hurricane Katrina. The majority were men and women searching unsuccessfully for jobs after a layoff or they were temporary workers unable to move to a next job, the Bureau of Labor Statistics reported. The job losses were widespread across industries and service companies.

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Economic Structure and the "Liquidationist Thesis"

Regrettably, efforts by the Federal Reserve and Washington politicians to sustain the U.S. Bubble Economy are doomed to failure. It's not that they are necessarily the wrong policies. More to the point, the basic premise that our economy is sound and growth sustainable is seriously flawed.

We've experienced a protracted and historic Credit inflation and it will not be possible to keep asset prices, incomes, corporate cash flows, and spending levitated at current levels. The type and scope of Credit growth required today has become infeasible. Sustaining housing inflation and consumption has turned unachievable. I'm all for long-overdue legislative reform. Who isn't? But I'll say I heard nothing this week that came close to addressing the key issues.

We have longstanding societal biases that place too much emphasis on housing and the stock market, while we operate with ingrained policymaking biases advocating unregulated finance underpinned by aggressive activist central banking and government market intervention. In a 20-year period of momentous financial innovation, our combination of "biases" proved an overly potent mix. And it is worth noting that Wall Street security/dealer balance sheets expanded three-fold in the eight years after the repeal of the (Depression-era) Glass-Steagall Act.

The focus at the Fed and in Washington is to sustain housing, the stock market, and inflated asset prices generally - to maintain the consumption and services-based Bubble Economy. Bernanke believes that if financial company failures can be averted - and with the recapitalization of the U.S. financial sector as necessary - sufficient "money" creation will preclude deflationary forces from gaining a foothold.

He assures us the Fed will not allow double digit price declines, despite the reality that such price moves have engulfed real estate markets. And while the federal government "printing presses" will be working overtime going forward, it is also apparent that a key facet of Washington's strategy is to "subcontract" the task of "printing" to Fannie, Freddie, the FHLB, the banking system, and "money funds" - sectors that can today issue "money"-like debt instruments with the explicit or implied stamp of federal government (taxpayer) backing.

Basically, the strategy is to substitute government-backed debt for the now discredited Wall Street-backed finance. I'm the first one to admit that this desperate undertaking stopped financial implosion in its tracks. However, the problem with this whole approach - because of our "societal," financial, and policymaking biases - is that our Credit system will just be throwing greater amounts of (government-supported) debt on top of fragile Credit Structures underpinned largely by home mortgages.

Wall Street-backed finance buckled specifically because this ("Ponzi Finance") debt structure was untenable the day increasing amounts of speculative Credit were no longer forthcoming. The underlying inventory of houses doesn't have the capacity to generate debt service - only the mortgagees taking on greater amounts of debt. The underlying Economic Structure is now THE serious issue. The last thing our system needs right now is trillions more mortgage debt, although it would work somewhat to sustain consumption and our "services-based" Bubble Economy.

The inherent problem with a finance, housing, consumption, and "services"-dictated Economic Structure is that it inherently generates excessive debt backed by little of real tangible value or economic wealth-creating capacity. It may appear an "economic miracle," but for only as long as increasing amounts of Credit are forthcoming. At the end of the day, one is left with an extremely fragile Structure both financially and economically.

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Politics and abandoned pets sideswiped Wall Street reform

The U.S. government never dreamed its long-awaited proposals to reform the fragmented U.S. financial regulatory system would get sideswiped by the swelling ranks of abandoned pets across America. The Treasury Department's well-laid plans to make the U.S. more competitive against its foreign brethren, for example London and Hong Kong, had the unfortunate timing to hit up against the worst financial crisis in the U.S. in decades.

Overzealous regulation and red tape had deemed Wall Street unattractive in the estimation of issuers, which have been staying away in droves from U.S. public markets. But while Treasurer Henry M. Paulson tinkered with ideas to make the U.S. more attractive by modernizing the Depression-era patchwork of financial regulatory structure with heady ideas designed to consolidate and eliminate institutions and agencies, Americans were abandoning their properties - and their pets - in record numbers, courtesy of the escalating credit and mortgage crisis.

All those risky subprime mortgage loans companies had made over the past few years and then shipped to Wall Street to package into complex securities bearing high ratings were coming home to roost. Stunningly, in a country addicted to borrowing, American homeowners have been walking away from their properties, unable to afford the crippling costs and the "foreclosure pet" phenomenon has given rise to very sympathetic, public casualties.

The mortgage meltdown has provided a showcase for politicians to be seen to be doing something in the face of a crisis. Congress, which is controlled by the Democrats, wants instant relief for people who got tangled up in the subprime mortgage mess and who are in danger of losing their homes. The Republican White House wants that too, but not if it means even more red tape and rules.
With an election on the horizon, it's little wonder Mr. Paulson's great vision was morphed into a three-pronged regulatory blueprint with short-, intermediate- and long-term goals, the latter of which few political analysts or industry observers believe will ever become law.

It will take years of political bargaining and relative economic calm to get consensus on consolidating the hodge-podge of seven regulators currently littering the banking and securities industries into a powerful trio of overseers, including the U.S. Federal Reserve, a new financial regulator and a third agency for consumer protection and business practices. These three new bodies would be responsible for everything from banks, brokerage firms, hedge funds and private equity firms, and greater scrutiny than ever before.

In other words, the Americans want to create a financial services regulator with the power to assess risk across numerous sectors of the market. Fuelling all this angst is the unprecedented rise in lending - largely unregulated - that is taking place outside the banking system. Those mortgage brokers and their subprime loans are completely unregulated. No wonder U.S. legislators have reached for their legislative arsenal.

In the U.S., the mortgage crisis is compounded by recession fears and a deepening credit squeeze. As long as pets are left behind in animal shelters while their owners get their financial houses in order, the U.S. government's efforts to restore confidence may amount to more quick fixes than it had ever bargained for.

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What went wrong at UBS?

While the housing slump has come to dominate presidential debates in America and has sent Wall Street into a tailspin, the consequences of millions of foreclosures across the United States are also being felt far overseas. Nowhere is that more true than in this serene land of snowy peaks, ice cold lakes and staid banks long considered to be among the most cautious in the world.

Until now, that is. That's because UBS, Switzerland's biggest bank with $2.8 trillion in assets, made an astonishingly large bet on subprime mortgage securities. At one point, that wager topped $100 billion, a gambit the bank lost. UBS has already been forced to write down about $37 billion of that financial dice roll - more than Citigroup, more than Merrill Lynch, more than any other bank in the world.

In the past week, after enduring months of fierce criticism, Ospel abruptly resigned as chairman, and Peter Kurer, chief counsel at UBS, was nominated to replace him. Shares rallied on the news, but that's cold comfort to people like Klemenz, who have watched the stock drop by half since last summer. "People now question UBS's ability to manage risk and judge just what a conservative investment is," said Dirk Hoffmann-Becking, an analyst with Sanford Bernstein in London.

UBS bought mortgage-backed securities on Wall Street, rather than making loans directly to American home buyers with bad credit histories and no assets, but that's a distinction lost on the Swiss public. "A large part of the population thinks we did what Countrywide did," said Marcel Rohner, the chief executive of UBS, referring to the troubled California company that is the largest American mortgage lender. "People think we gave subprime mortgages in the U.S. We did not."

Maybe not, but even after the huge write-downs, UBS still has more than $30 billion in exposure to securities linked to the kind of risky home loans Countrywide and other lenders doled out when home prices were still rising. And there's no guarantee the losses have been staunched. "We still have positions, and I can't foretell the future," Rohner acknowledged. "The real issue is that if liquidity dries up, there is no way out."

Even UBS's wealth management arm, which is the most popular private bank in the world for wealthy people seeking safety and discretion and has $1.8 trillion in assets, has seen its global luster dimmed by the American losses. These days, the bank's executives around the globe are rushing to reassure customers and clients that UBS is here to stay, and to make sure that they understand it doesn't face the kind of deeper threats that brought down Bear Stearns last month.

That's especially true in the United States, where UBS employs roughly 30,000 people, slightly more than in Switzerland itself. In New York, UBS's top investment bankers say they are scrambling to make sure competitors don't use dour headlines about the subprime debacle to pick off potential clients. UBS executives also insist the bank has no plans to pull back from the American market, despite pressure from many Swiss shareholders to do so.

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The Forbidden Financial Topic: U.S. National Debt

try to explain the simple workings of finance, debt and economics to the uninformed, and you'll be accused of being a doomsayer, a pessimist, or -- the worst insult in today's fear-based society -- unpatriotic! How dare you point out the economic truths that will soon bring this country's federal government to its knees! Such blatant truths shall not be tolerated... especially not in a country whose entire financial system is based on a cascade of fictional financial instruments propped up by nothing more than wishful thinking and Enron-style accounting fraud.

Let me translate all this for you in serious terms: The United States is already broke. The Federal Reserve is destroying the currency. The U.S. dollar will soon be virtually worthless. There is no saving the dollar, and there's no saving the savings of any U.S. citizen foolish enough to be holding dollars when the music stops. The Federal Reserve has already decided to do anything in its power to save the rich bankers; even if it means destroying the value of all the dollars held by hard-working Americans. The day will come, folks, when your savings accounts will all be "recalibrated" and you'll be given ten cents on the dollar while the Fed slinks away with 90% of your savings, using it to bail out overpaid bank owners.

And the federal government? Under a long string of presidential crooks -- Democratic and Republican alike -- it has decided to pursue a dangerous experiment called, "What happens if we never pay our debtors while running up more debt?" That experiment, not surprisingly, will end in the financial demise of this nation.

These aren't careless predictions, by the way. These are simple observations the follow the fundamentals. Why are the nations of the world fleeing the U.S. Treasury debt auctions? Why are dollars increasingly worthless everywhere except in the United States itself? The answer is because the Fed is hyperinflating the currency to save the banks, even while the government is snorting yet more crack and spending unprecedented levels of increasingly-worthless dollars on drugs and war (or, as they call it, "medication and defense").

Hence the bumper sticker: Annoy everyone. Explain the national debt. People don't want to hear this. They'd rather imagine none of these problems exist; that debt doesn't matter; that unlimited dollars can be created out of nothing with zero impact on peoples' savings; that the U.S. government is wise enough to avert financial disaster. These are the hopes of the deluded. These are precisely the ramblings of Enron's accountants before the crash, or dot-com stock pushers before that crash. They're the slobbering blatherings of all the people who said housing prices will never fall, and therefore everyone will get rich off the never-ending housing price booms!

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Takeover of Bear Stearns gets approval from NYSE

Bear Stearns Cos. was another step closer to its takeover by JPMorgan Chase & Co. after the troubled investment bank received approval from the New York Stock Exchange for a share issuance. Bear Stearns now has the OK to issue 95 million shares of its common stock to JPMorgan. On Monday, both banks received formal approval from the Federal Reserve Board -- which helped to engineer the deal late last month.

Bear Stearns had to petition the NYSE to allow the stock transfer to happen because most acquisitions require shareholder approval. The investment bank was able to bypass that because -- without approval -- its financial position would be put in jeopardy. The closing of the sale of the shares is expected to occur by around Tuesday. In addition to the 11.5 million Bear Stearns shares that JPMorgan already owns, the latest agreement would boost its stake in the company to 44.9 percent.

JPMorgan plans to continue buying Bear Stearns shares on the open market or in private transactions, increasing its stake to as much as 49.5 percent. On March 16, in a surprise deal that sent shock waves throughout the global markets, JPMorgan announced plans to buy Bear Stearns for a low price of $236.2 million -- or $2 a share.

In an attempt to appease angry Bear Stearns shareholders, the nation's third-largest bank revamped the offer one week later to $10 a share, with the Federal Reserve Bank of New York promising to help finance the deal. Earlier this week, Fed Chairman Ben Bernanke said the central bank was forced to broker a deal because the collapse of Bear Stearns could have been disastrous for the U.S. financial system.

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MBIA Loses AAA Insurer Rating From Fitch Over Capital

Fitch Ratings cut MBIA Inc.'s insurance unit to AA from AAA, saying the bond insurer no longer has enough capital to warrant the top ranking. MBIA, the world's largest financial guarantor, would need as much as $3.8 billion more in capital to deserve an AAA, New York-based Fitch said today in a report. The outlook is negative, Fitch said.

Fitch issued the new, lower rating even though Armonk, New York-based MBIA asked the ratings company last month to stop assessing its credit worthiness. The two companies disagree over how much capital MBIA needs to absorb losses on the bonds it insures. Moody's Investors Service and Standard & Poor's both affirmed their AAA ratings earlier this year. "It will be difficult for MBIA to stabilize its credit trend until the company can more effectively limit the downside risk" from collateralized debt obligations, Fitch said. The long-term rating of MBIA Inc. was cut to A from AA, Fitch said.

"We respectfully disagree with Fitch's conclusions," MBIA Chief Financial Officer Chuck Chaplin said today in a statement. "MBIA has a balance sheet that is among the strongest in the industry with over $17 billion in claims-paying resources, and has a high quality insured portfolio." MBIA shares closed down 68 cents, or 4.8 percent, to $13.61 in New York Stock Exchange Composite trading. The stock has declined 27 percent this year.

MBIA raised $2.6 billion in capital through a bond offering and the sale of a stake to Warburg Pincus LLC, eliminated its dividend and stopped guaranteeing asset-backed securities for six months. Those decisions prompted Moody's and S&P to keep their top ratings for MBIA. Fitch continued its review. Fitch has rated MBIA's insurance unit since at least 2000, according to data compiled by Bloomberg. S&P and Moody's have rated the company since at least 1987, the data show. "It's tough for a rating agency to downgrade a bond insurer, to take away the AAA rating," said Mark Adelson, founding member of Adelson & Jacob Consulting in Long Island City, New York.

The capital MBIA raised has yet to be contributed to its insurance company and could be diverted to meet obligations at the holding company, Fitch said in its report. MBIA's holding company engages in transactions that may require it to post collateral, creating a rising demand for cash, Fitch said. MBIA's suspension of its structured finance business, which includes CDOs and asset-backed securities, may help to boost the company's rating back to AAA in the future, Fitch said today.

MBIA will have losses on CDOs backed by subprime mortgages of as much as $4.9 billion after taking into account that they will be paid over time, Fitch said. The analysis assumes that subprime mortgages backing securities sold in 2006 will experience losses of 21 percent and those originated in 2007 will lose 26 percent, Fitch said.

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Australia: Home owners held hostage by exit fees

Home buyers trying to escape their loans early are being hit with extortionate fees of up to $7500, Australia's corporate watchdog has revealed. Amid widespread anger over interest rate rises exceeding those imposed by the Reserve Bank, a report by the Australian Securities and Investments Commission reveals that Australian home buyers face some of the highest "early mortgage termination" fees in the world — as well as a complex array of other fees and charges.

Early termination fees have been blamed for dampening competition in the banking sector by making it prohibitively expensive for disgruntled home owners to switch to cheaper loans. Confirming that banks and their smaller rivals are reaping profits from the practice, the report found that early mortgage termination fees now account for 42% of total fees raised by the sector — more than double the 19% share in 1995.

Some of the worst offenders are the small, non-bank lenders. A home buyer prematurely ending a $250,000 basic mortgage after three years from these lenders could be hit with an exit fee of $7580, or $2665 on average, the report found. After adding other fees and charges, such as account-keeping fees and establishment fees paid over the three-year period, some home buyers with loans from the non-bank sector are paying as much as $9000 — equivalent to $250 a month.

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Rice prices up more than 10% on Friday

Rice prices rose more than 10 per cent on Friday to an all-time high as African countries joined south-east Asian importers in the race to head off social unrest by securing supplies from the limited number of exporters that remain in the international market, The Financial Times reports.

According to the FT, prices have more than doubled since January, resulting in riots and soldiers overseeing supplies in some emerging nations. Leading exporting countries, including Vietnam, India, China and Egypt, have banned foreign sales. The price hike risks stoking further inflation in emerging countries, already suffering from record oil prices and surging agricultural commodity prices, the paper reports.

Thai medium-quality rice, a global benchmark, traded at about $US850 a tonne on Friday, up from $US760 a tonne last week, while the price of top-quality aromatic rice breaking the $US1,000-a-tonne level for the first time, traders said. In Chicago, meanwhile, US rice futures hit an all-time high of $US20.45 per 100 pounds.

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Canadian IPO market crumbles

The bottom fell out of the initial public offerings market in the first quarter of 2008, with new issues in Canada plunging to a value of $148 million, the lowest quarterly total in a decade, a PricewaterhouseCoopers said yesterday. The 20 new issues were one fewer than the 21 from the corresponding quarter a year ago, but yielded only half the value recorded in 2007.

“The same confluence of events that weighed down the market in 2007 continues to be a factor in 2008,” said Ross Sinclair, national leader of PwC’s IPO and income trust services. “A lack of investment alternatives to replace the popular income trusts, equity market volatility, credit market turmoil and gloomy economic outlook in the U.S. all appeared to conspire against the market for new issues,” Sinclair said.

“It will take the return of solid, established companies with premium issues to show the way out of this phase of the IPO market.” Only three new issues, with a combined value of $113, were introduced on the TSX during the quarter, compared with five issues garnering $191 million previously. The Venture Exchange delivered 14 IPOs worth $31 million, a sharp drop from the $89 million that 13 new issues produced in 2007. The three remaining issues were sold on the Canadian Trading and Quotation System Inc. exchange.

The largest new issue on the TSX was the $50 million IPO of Pristine Power Inc. Mining companies accounted for 16 of the 20 new offerings on all exchanges.

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Ilargi: As I said last week, Crawford and his committee have no other option left but to make darn sure small investors receive 100% of their money, or the entire deal is dead, and lawsuits become the tool of the trade.

Purdy first admitted he had no clue who the small investors were, and now there’s this: the sudden appearance of more firms that sold ABCP to their clients. He didn’t know the sellers either! What on earth have these guys done in the past half year?

Caisse faces demands to lead bailout

Proposal calls on Quebec pension fund to backstop notes held by small investors

Caisse de dépôt et placement du Québec has been asked to play a lead role in a bailout plan of retail investors heading into the weekend, after the ABCP bailout committee received an earful during three stormy days of public hearings. The dilemma for the Caisse, which is the biggest holder of frozen commercial paper, is it wants to avoid being seen by its own members as subsidizing other investors as the expense of its own.

The possible arrangement would offer much-needed relief to Canaccord Capital Inc. and give it a way to help the 1,400 clients it has who are holding the paper without doing too much damage to its balance sheet. One likely framework for a deal is to have a big investor, potentially the Caisse, buy up the roughly $400-million of paper that's in the hands of individual investors at what is deemed to be a market price of perhaps 50 cents on the dollar.

Then Canaccord, the brokerage whose clients hold much of the paper at issue, banks and other market players could create a fund to top up investors to as close to 100 cents on the dollar as possible. "That's one type of proposal under discussion," said a person familiar with the talks.

Momentum for a deal to help individual investors has increased since they ratcheted up the pressure by lambasting the $33-billion restructuring proposal put forward by a committee of big ABCP holders in a series of public meetings. The resistance culminated in Vancouver on Wednesday where most attendees indicated to committee chairman Purdy Crawford that they wouldn't support the deal in an April 25 vote unless someone provided more money.

The clear indication that, without a deal for small investors, the restructuring is in serious danger has helped to break of some of the log jams that had slowed talks. Still, sources said no final deal has yet been reached, though an agreement could come as soon as next week. There are a number of factors complicating the talks. One of the biggest is the sudden appearance of more firms that sold ABCP to their clients.

A first step is to find a buyer for the individual investors' paper, and so far no purchaser has committed. Sources said the Caisse has been approached, as have other large institutional investors. The Caisse has a big incentive to participate. As the largest single holder of frozen ABCP at about $13-billion, it has the most to lose if the restructuring fails. One issue for the Caisse is it wants to avoid the perception that Quebec pensioners are subsidizing investors elsewhere in the country. But if it got a good enough deal on the paper purchase, the fund could argue it's making a savvy investment.

"La Caisse has a fiduciary duty to always act in the best interest of its depositors," said Caisse spokesman Mark Boutet. "Under no circumstances will it take part in any transaction that would give a financial advantage to a third party at the detriment of its own depositors."

After a buyer is found, Canaccord and other parties to the restructuring would have to decide how much to top up the sale price, with the goal being to get as close to 100 cents on the dollar as possible. Canaccord has said it will participate, but that it cannot fund the whole top-up, and shouldn't have to because it was a dealer that didn't even charge investors a fee for selling ABCP and wasn't responsible for the mess in the market.

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Who is to blame?

"Anything less than 100% is just simply going to be unacceptable, so they're going to have to go back and sweeten the pot," said Craig Haaf, a retail investor in British Columbia. If the potential payout falls short, he said, "why not take our chances scuttling the deal and going after Canaccord now with a class-action lawsuit?"

There are many other retail investors eager to pass on a similar message to the media, which are lapping up the David versus Goliath story. But is Canaccord really the evil ogre that it has been painted as this week? Or is the broker just one of a number of players in a broken-down process, the patsy for a shame-faced Bay Street that collectively shares the blame for a failing that has created a made-in-Canada crisis?

"People have the feeling smaller guys are being left out or got shafted," said a source from Scotia Capital with intimate knowledge of the workings of the ABCP market. "I think they're just trying to play up that angle, which I would if I was them, too. Everybody thought [ABCP] was still safe. You could put your mother in it."

Canaccord's stock price has certainly taken a beating since its role in the crisis first became apparent. Its shares have fallen from a 52-week high of $25.92 to $10.20 yesterday, erasing $739-million off the company's market capitalization.

Chairman and founder Peter Brown sent an e-mail to his staff this week saying Canaccord would be "severely impacted" if it tried to buy back the investments it sold to retail clients, who own about $140-million of Canaccord's $269-million in total ABCP client holdings. There was some speculation on the Street that the company would have to seek outside help to solve its problems.

TD Newcrest analyst Doug Brown put out a research note that included the estimate Canaccord could pay its clients about $50-million before it would have to issue new equity. The company is also facing some serious reputational damage. Its relationship with some clients is surely beyond repair, and Canaccord appears to accept some of the responsibility for sorting out the mess.

"[ABCP] was supposed to be liquid, low risk assets," acknowledged Colin Kilgour, an expert on ABCP who was recently hired by Canaccord as a consultant. "The investors don't want cute solutions. I think Canaccord knows that."

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