Debt Rattle, May 13 2008: That ticking sound gets louder and faster

Dorothea Lange: "A Place To Call Home" August 1939
Youngest little girl of motherless family. Toppenish in the Yakima Valley of Washington State

Ilargi: Increasingly, I find myself wondering what exactly the good signs are that push up Wall Street these days. Look at the first article on Citigroup, and the difference between Meredith Whitney’s view and that of Dick Bove. That’s night and day right there.

Whitney: "They don't have the revenue power, they don't have the earnings power in so many of their businesses. Even Stephen Hawking could not pull this off."

Bove: "The turnaround has the potential to be so significant that it could carry this stock to multiples of its current price."

Needless to say, my money’s on Whitney. Bove has turned into just another industry cheerleader, with below zero credibility. WIth so much nonsense flying around, that's a deep shame.


Citi's Pandit Faces 'Impossible Feat,' Whitney Says

Citigroup Inc. Chief Executive Officer Vikram Pandit faces an "impossible feat" in turning around the biggest U.S. bank as it faces "seismic" costs to restructure, Oppenheimer & Co. analyst Meredith Whitney said.
Citigroup will be forced to announce the sale of major businesses toward the end of this year or in early 2009, Whitney, who recommends investors sell the shares, said in a Bloomberg TV interview today. One of the units could be Banamex, the company's Mexican branch, she said.

Whitney, 38, correctly predicted on Oct. 31 that New York- based Citigroup would cut its dividend to shore up capital after mortgage-related writedowns. Pandit on May 9 outlined plans to sell $400 billion in assets at the bank, which has booked more than $40 billion of credit losses and writedowns since the subprime mortgage market collapsed last year.

"I think it's an impossible feat," Whitney said. "They don't have the revenue power, they don't have the earnings power in so many of their businesses. Even Stephen Hawking could not pull this off," she said, referring to the British physicist.

Whitney said she expects Citigroup, which lost a record $10 billion in the fourth quarter, to post "de minimis" profit during the next three to five years. She repeated her prediction that Pandit would be forced to lower the dividend again, and didn't give an estimate for restructuring costs. She estimated a loss this year of 45 cents a share. Citigroup has lost 20 percent this year.

Pandit's plan, which he presented at a Citigroup analyst and investor meeting, includes shedding $400 billion of assets during the next three years and cutting $15 billion in costs. He also forecast annual revenue growth of 9 percent. "The presentation was glaringly light on actual mechanics, and run-rate earnings figures seemed to cherry pick revenue and credit scenarios from recent years," Whitney wrote in a note today. Pandit "set no delivery date as far as execution," she wrote.

Richard Bove, an analyst at Ladenburg Thalmann & Co., disagrees with Whitney on prospects for Citigroup. "The turnaround has the potential to be so significant that it could carry this stock to multiples of its current price," Bove, who advises investors to buy the shares, wrote in a note today.

Citigroup's "single greatest challenge" is the company's "antiquated and disparate systems and technology," Whitney wrote in her note. Not only will the restructuring be "almost prohibitively expensive," it will also "come during a time when revenues will be under significant pressure," she said.

Pandit will spend at least three years trying to get Citigroup's systems to work together, Whitney said, pointing to integration efforts in recent years at Wells Fargo & Co. and JPMorgan Chase & Co. "The credit outlooks and the loss assumptions for banks across the board are way too low," Whitney said in the interview. "The outlook for earnings across the board is going to be much worse than people expect."

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Ilargi: Note: the numbers below are from the NAR, who haven't been caught telling anything truthful in a very long time. If you want to know how much more home prices are really dropping, scroll down to Tax assessors boggled by housing dip.

US Housing Prices Show Biggest Loss On Record

The median price for a single-family home in the U.S. dropped 7.7 percent in the first quarter, the biggest decline in at least 29 years, as values tumbled in two- thirds of U.S. cities, the National Association of Realtors said.

The median, the point at which half the homes sold for more and half for less, was $196,300, down from $212,600 a year ago, the largest decline in records going back to 1979. Sales of single-family houses and condominiums fell 22 percent to 4.95 million at an annualized pace, the slowest in a decade, the Chicago-based group said in separate reports today.

Home prices are falling as foreclosed properties reduce the value of nearby real estate, said Lawrence Yun, the realtor group's chief economist. U.S. foreclosure filings more than doubled in the first quarter from a year earlier, Irvine, California-based RealtyTrac Inc., a seller of foreclosure data, said in a study released April 29. "Foreclosures throw more supply on the market and accelerate the price declines that have already taken place," said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut.

Homeowners who live near a house repossessed by a lender will see their property values drop an average of $5,000, according to the Center for Responsible Lending. Nationally, foreclosures will result in $202 billion of lost real estate value, the Durham, North Carolina-based group said. There were 4.06 million U.S. homes for sale at the end of March, 40,000 more than the prior month, the Realtors association said in an April 22 report. At the current sales pace, that represented 9.9 months' worth, up from 9.6 months' worth at the end of February.

"Prices have fallen in neighborhoods with a wide prevalence of subprime loans, because more foreclosed properties are being sold at discounted prices," Yun said in today's report. The median price for a single-family home fell in 100 of 149 metropolitan areas studied by the Realtors group. The biggest declines were in Sacramento, the capital of California, which had a 29 percent drop, followed by the metropolitan area around Riverside and San Bernardino, with a decline of 28 percent.

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Investor says HSBC undervalued loss by $30 billion

Knight Vinke, the activist investor, launched a fresh attack on HSBC yesterday, accusing Europe's biggest bank of flattering its US sub-prime losses by failing to write down $30 billion (£15 billion) worth of mortgage assets. The broadside came as HSBC revealed a $3.2 billion first-quarter writedown on loans by its US business to poor Americans.

HSBC's investment bank also took a $2.6 billion writedown on credit investments for the first three months, pushing the group's total losses on sub-prime to $25 billion. The bank was bearish on the outlook for the United States, predicting a recession as increasing numbers of Americans defaulted on home and personal loans in the first quarter. HSBC, a big lender in America through HSBC Finance Corporation, said that US house prices would continue to fall into 2009.

Michael Geoghegan, HSBC's chief executive, refused to call the end of loan impairments. “I would say we're in a lull at the moment. The growth in impairments has slowed a little, but that may well be seasonal . . . I can't say if it'll go up or if it'll go down,” he said.

Knight Vinke said that HSBC should have been gloomier about its own prospects. The fund manager, which has been agitating for HSBC to sell HFC, said that the group was the only large bank not to make a fair value adjustment on its loans to customers and other banks.

If HSBC accounted for the loans at their market value, they would be worth almost $30 billion less than $1,218 billion book value that the bank ascribes them, Knight Vinke said. Of that loss, about $23 billion comes from HFC. Taking the writedown would have pushed HSBC into a $5 billion loss last year instead of a $24 billion pre-tax profit, the fund manager said.

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Ilargi: Yes, grasshoppers, as I've said so many times, litigation will raise the financial market stakes to whole new levels. No matter how high the lawyers' fees, they become a mere afterthought when you're facing a loss of $50 billion or more.

Perhaps litigation is the only power left that can force Wall Street, as well as the Fed and the government, to regain a glimmer of honesty.

CDO debt could pose renewed danger for banks

Just when Wall Street firms thought the worst of the credit crisis was over, investors in funky mortgage-tainted debt may unleash a fresh bout of pain for embattled banks like Citigroup, UBS, Lehman Brothers and Bank of America.

Investment managers, including GSC Group, which buy bonds in arcane securities known as asset-backed collateralized debt obligations, are looking to force Wall Street banks to take back onto their balance sheets a big chunk of the $380 billion in mortgage loans used to back these CDOs. Mortgage lenders, including Countrywide Financial and Thornburg Mortgage, are also being targeted.

These investors are reviewing agreements tied to the arrangement of these mortgage securities to determine if the banks and lenders misrepresented the quality of the underlying collateral supporting these securities. Due to the language embedded in many CDO deals, bondholders can return the securities to the so-called depositor or bank at 100 percent of their original investment if they can prove that there was fraud involved in originating the mortgage.

Investors are growing emboldened because fraud claims are becoming more prevalent over these loans as it's discovered that borrowers lied about their incomes or that lenders turned a blind eye. Posing a sticky issue for those seeking to force their investments back onto the banks is the fact that many of these CDO offerings weren't created with clear-cut contractual language that stipulates under what conditions payouts would occur.

"It's not enough to prove that a defaulted loan was deficient in underwriting but you have to prove that the reason that it defaulted is tied to the deficiency," said Joshua Rosner, a financial consultant at Graham Fisher & Co. It's rare for bondholders to take such action given the potential legal costs and the strain a move like this could have on an investor's relationship with a Wall Street bank.

However, many investment managers are facing billions in losses, and things are widely expected to get worse, one CDO manager told The Post. Investors are said to be targeting specifically banks and mortgage firms that can pony up cash rather than going after struggling firms such as the now-bankrupt New Century Financial. "This is going to become a bigger and bigger problem," Rosner said.

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SEC notifies JPMorgan of possible charges

JPMorgan Chase & Co. says the Securities and Exchange Commission may bring civil charges against the bank related to the bidding of instruments tied to municipal bonds.

JPMorgan said in a regulatory filing late Monday that the Philadelphia regional office of the SEC sent the bank a "Wells notice" telling the bank that it is "considering recommending that the Commission bring an enforcement action" against JPMorgan's securities division.

The regulators alleged that the division "violated the federal securities laws 'in connection with the bidding of various financial instruments associated with municipal securities.' " Municipal securities are bonds issued by states, cities or other government entities.

U.S. regulators have been probing the possibility of bid-rigging in the municipal bond markets, and has contacted a number of financial services companies about their municipal securities activities.

JPMorgan did not say in the filing whether the notice was related to bidding practices at Bear Stearns Cos., which JPMorgan is in the midst of acquiring. In April, Bear Stearns said the SEC was considering a civil injunctive action or an administrative hearing regarding the company's bidding process with municipal securities.

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JPMorgan, Bear Stearns: More Smoke from Wall Street

Yesterday, JP Morgan CEO Jamie Dimon made a few statements that I just couldn’t let slip past my propaganda radar. First, when asked about the current credit crisis, he stated that he felt it “appears to be three-quarters over.”

I’m not sure how he can conclude that, given the enormous leverage banks still have, as well as hundreds of billions of sub-prime, ARMs, and Alt-A mortgages set to expire over the next 2-3 years. Certainly, while much of the fate of sub-primes will be resolved by 2009, there are many other problems brewing.

Remember, the bond insurers are still a mess, and municipalities nationwide are just beginning to feel the effects of drastically reduced property tax revenues. Without some big backing from the banks, I can’t see how the bond insurers will be able to pony up adequate funds when certain munis go in default.

I have little doubt that over the next two years, many cities that will default on their debt. I expect to see huge defaults in certain municipal bonds from Detroit and Cleveland and most likely several other cities before it’s all said and done. This could easily expand into a statewide problem. California has already declared a state of fiscal emergency due to an expected deficit of around $20 billion over the next 12-15 months. That’s California. Can you imagine the potential problems faced by states like Ohio, Michigan, Illinois, and Pennsylvania?

If you haven’t already looked at some short strategies for munis, I’d say now is a good time to be doing so – just when the powers that be it are starting to spread the myth of a recovery in the credit crisis. Maybe Dimon is being honest about the credit crisis – for his bank. But in no way is the end near for the others.

I suppose when you are the recipient of an $18 billion gift from the Fed (i.e. Bear Stearns with virtually no risk of a net loss, it’s natural to start feeling good. The fact is that Bear Stearns was NOT bailed out by the Fed. A bailout would have meant that the Fed opened its printing presses to Bear. In fact, I would say that the JPM deal with the Fed will go down as one of the biggest heists in U.S. financial history.

Why do I say this? Well, first consider that, after the Fed issued $30 billion to help deal with potential liabilities at Bear Stearns, it stated that JP Morgan would only be exposed to a maximum of $1 billion in losses. So if JP Morgan loses the remaining $29 billion, they are free and clear. Taxpayers will be stuck holding the bill.

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Bankers Scurrying for Cover Will Sock Muni Issuers

We will pay.

The shrinking of the municipal bond industry means it is going to cost more for states and localities to borrow money. That means the tolls, fees and taxes that support the debt are all going to have to rise. You can't expect two of the top 10 underwriters of bonds to disappear without consequences. UBS AG said it was getting out of the municipal bond business on May 6. Bear Stearns Cos. is being absorbed by JPMorgan Chase & Co.

We don't quite know how these two events are going to play out -- UBS is apparently transferring a number of municipal bond traders into its wealth-management division -- but taking away two major bidders can't be good news. We are probably just at the beginning of the cycle of layoffs, cutbacks through attrition and more outright exits. Banks are going to be looking at who makes the money, and if the municipal bond department isn't, you can guess the rest.

There's also the element of "me, too,'' in the slaughter to come. Put aside the Bear Stearns takeover. The municipal bond department there was known to be very efficient in its doings. But now that UBS has decided to subtract a line of business, it becomes that much easier for the next big bank to do so. After Salomon Brothers, the No. 1 underwriter of munis, did the same thing in October 1987, two banks followed suit before the year was out.

That was just the beginning of the industry's sere season. The layoffs and consolidations continued until -- well, basically until the turn of the century. In 2002, I assigned a reporter to write a story about how municipal bond departments were finally adding people.

That story contained this note of explanation: "At the time Salomon Brothers dropped out of the business, underwriting spreads in municipals had fallen to about 1 1/2 percent of a bond issue's par value, from over 2 percent. Today, the figure is closer to 1/2 percent. On initial public offerings -- when there are IPOs -- bankers can make between 3 percent and 7 percent.''

At the time nobody disputed the numbers. That spread estimate is probably even lower today. The article observed that bankers could increase their compensation by selling issuers such things as interest rate swaps, among other goodies, in connection with their bond issues. The neat thing about the municipal bond business is that once you win it, you tend to have an inside track on all future business, if you do the job reasonably well.

Now that the bloodshed has begun, the real question is: When will it stop? The answer is directly linked to the government's case against the municipal bond industry, or, as it was billed in November 2006 when it first came to light, "anticompetitive practices'' in the business.

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EU to launch assault on bankers' bonuses

A group of key EU finance ministers will today launch an assault on the rewards earned by bankers and top managers in a move that poses a potential threat to the City of London.

A confidential document prepared for the gathering in Brussels finds the "short-term" pay structure of modern capitalism has become deformed, causing firms to take on "excessive risk" without regard to the interests of stakeholders or society. While there is no concrete legislation on the table, ministers are eyeing curbs on stock options, bonuses and golden parachutes.

The move is a clear sign that the EU noose is tightening on bankers, funds and corporate elites that have enjoyed light-touch regulation. Today's meeting is being held under the auspices of the Eurogroup, the quasi-official club of eurozone finance ministers. The forum excludes Britain and free market allies from Eastern Europe.

Shutting out Chancellor Alistair Darling enables Berlin and Paris to create a head of steam behind possible legislation that could undermine London's competitiveness as the world's leading financial centre. The text for the meeting - leaked to Spanish newspaper El Pais - indicts the Anglo-Saxon market model as a danger to global financial stability and castigates firms for chasing "immediate profits at the cost of massive sackings".

The loose plans are part of a slew of proposals floated in Europe over recent months aimed at disciplining the market. Ideas have included a pan-European regulator, curbs on private equity and restraints on sovereign wealth funds. None has yet crystalised into a draft EU directive.

EU governments are paying close attention to a law going to the Dutch parliament this month. It imposes a 30pc supertax on pay packages above €500,000 (£398,000) and limits bonuses and stock options to 100pc of pay - far below the windfalls made by UK-based traders and bankers at the height of the credit bubble.

Ruth Lea, director of Global Vision, said critics of the City have seized on the credit crisis and Britain's current travails to ram through changes that extend EU power over economic policy. "Brussels has been waiting for this moment. It is typical that they should hold the meeting in the Eurogroup so they can lay out all the groundwork in advance. It is the classic thin-end-of-the-wedge method. None of these new proposals is going to help Europe: they will simply drive business to Hong Kong, Singapore and the States," she said.

The EU impetus is coming from both Left and Right. Germany's Christian Democrat Chancellor, Angela Merkel, has called for a crackdown on the "fat cat" abuses after Porsche chief Wendelin Wiedeking pocketed €60m last year. Mrs Merkel's Socialist partners (SPD) want a €1m cap on pay that can be deducted from corporate tax.

Ieke Van Den Burg, MEP, the Dutch Labour leader in Brussels, said three reports are going through the European Parliament exploring curbs on hedge funds, private equity and the bonus system. "The short-term focus of the industry has been disastrous. Private equity has left companies crushed by high debt, and people are very angry at what has happened. We want to control the levels of leverage and make sure they are forced to keep more of the risk," she said.

Mrs Van Den Burg said pay-offs at ABN Amro following the takeover by the Royal Bank of Scotland had caused a storm in Holland. They were a key factor leading to the country's new legislation.

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Bernanke Says Fed to Boost Loans to Banks as Needed

Federal Reserve Chairman Ben S. Bernanke said financial markets remain unsettled and the central bank will increase its auctions of cash to banks as needed. While markets have improved, they remain "far from normal," Bernanke said today in the text of a speech to an Atlanta Fed conference at Sea Island, Georgia.

"We stand ready to increase the size of the auctions if further warranted by financial developments." Bernanke's comments contrast with those by Treasury Secretary Henry Paulson and Wall Street leaders including Vikram Pandit, chief executive officer of Citigroup Inc., who say the worst of the credit crisis is over. The Fed chief said it will take "some time" for financial firms to resolve the crisis by raising new capital and strengthening their management of risk.

The flight from risk since August has made financial institutions reluctant to lend to each other, driving up banks' borrowing costs. The central bank has made its own balance sheet available to both banks and bond dealers through three new lending tools, and an expansion of existing programs. Bernanke said the Fed's efforts have yielded "some improvement," while also noting that the steps raise questions regarding moral hazard, or protecting those who take on risk.

The central bank's extension of the federal safety net raised questions about whether the government should now use taxpayer money to stem mortgage foreclosures, the primary cause of market distress. "A central bank that is too quick to act as a liquidity provider of last resort risks inducing moral hazard," Bernanke said. The belief that the Fed is always standing by would give "financial institutions and their creditors less incentive to pursue suitable strategies for managing liquidity risk and more incentive to take such risks."

Bernanke didn't discuss the path of interest rates or the outlook for the economy. The Federal Open Market Committee last month cut its benchmark rate by a quarter point to 2 percent and signaled it's ready for a pause after seven reductions. Cleveland Fed President Sandra Pianalto said in a speech in Paris today that consumer prices are rising faster than she'd like and that inflation is a "key risk" to the economic outlook. Pianalto is a voter on the FOMC this year.

Kansas City Fed President Thomas Hoenig, San Francisco Fed chief Janet Yellen, Richard Fisher of the Dallas Fed and Charles Evans from Chicago are also scheduled to speak today. Bernanke spoke via satellite. The Fed chairman said federal banking agencies are trying to address moral hazard through a review of "policies and guidance regarding liquidity risk management to determine what improvements can be made."

"Future liquidity planning will have to take into account the possibility of a sudden loss of substantial amounts of secured financing," Bernanke said. "Ultimately, market participants themselves must address the fundamental sources of financial strains -- through deleveraging, raising new capital, and improving risk management."

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Rubenstein Says 'Enormous' Bank Losses Unrecognized

U.S. and European banks and financial institutions have "enormous losses" from bad loans they haven't yet recognized and may have a harder time wooing sovereign-fund rescuers, Carlyle Group Chairman David Rubenstein said.

"Based on information I see," it will take at least a year before all losses are realized, and some financial institutions may fail, Rubenstein said at a breakfast meeting of the Institute for Education Public Policy Roundtable in Washington. He didn't name any companies. "The sovereign wealth funds are not likely to jump into the fray again to bail out these institutions," Rubenstein said. "Many financial institutions aren't going to be able to survive as independent institutions."

Rubenstein said sovereign wealth funds are becoming wary after losing $25 billion on their investments in struggling banks and securities firms worldwide. Financial institutions worldwide have recorded $329.2 billion in credit losses and writedowns and raised $246.6 billion in capital since the beginning of 2007. Rubenstein said about $60 billion of that capital was provided by sovereign funds last fall, and their investments today are worth about $35 billion.

On April 28 at a conference in Baltimore, Rubenstein said financial institutions and financial assets are "the single greatest investment opportunities" in the U.S. and "a lot of private-equity firms like ours are going to try to make investments in these firms." Sovereign wealth funds and private-equity firms typically have different investment goals.

Sovereign funds usually buy a minority stake in a quest for share-price appreciation, while private-equity firms often assume an ownership role and try to rebuild distressed companies. Rubenstein said today that the industry and broader economy aren't likely to turn around until early next year. "The truth is, we're in some kind of economic slowdown," Rubenstein said. "I don't think it's going to be over for quite a while."

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Ilargi: I won’t comment on each separate article coming from England, but oh boy, things are falling apart fast and hard over there. I still don’t get the impression that the Brits understand -at all- what they’re in for. And I think British banks on the whole are in far worse shape than they try to make you believe.


Sterling falls as house price gloom deepens

Sterling fell against the dollar and the euro after a report showed that the housing market is in its worst state for 30 years as a record number of estate agents reported falling property prices. The Royal Institution of Chartered Surveyors (RICS) said 82 per cent of estate agents in the UK had seen a drop in prices since the start of the year, with just one per cent reporting a rise.

The ratio is the worst since records began in 1978, and means that the housing slump is even more widespread than during the crash of the early 1990s. The survey also showed the number of completed property sales "falling off a cliff" in April, in the words of one expert, because fewer properties are coming on the market and potential buyers are struggling to get mortgages.

The news drove sterling down below $1.95 and also saw it weaken against the euro. Analysts have predicted dire consequences for the wider economy, with around 4,000 estate agents already made redundant and sales of white goods, furniture and other household items likely to drop sharply with fewer people moving home.

Simon Rubinsohn, chief economist for the RICS, said: "We have gone back through our records and the proportion of surveyors reporting a fall in property prices is the worst since we started doing a monthly survey in 1978. "House prices are falling right across the country. Even during the house price crash of the early 1990s some parts of the country didn't take as much of a beating.

"At the same time, the number of completed sales is falling off a cliff, because people don't want to put their houses on the market while prices are falling, and people who want to buy property are struggling to get a mortgage."

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Minister's housing market fears exposed

The full extent of the government's fears over the state of the housing market were laid bare today. A document prepared by housing minister Caroline Flint reveals that ministers do not know "how bad it will get" and stresses the need for "effective measures against the risk that it does get worse".

Flint was pictured with the papers on her way to Downing Street for the weekly cabinet meeting. The document, headed "Caroline Flint - speaking notes", had a sticker attached which said "Papers for cabinet meeting 13 May 2008". The photographs of Flint's notes were enlarged by Sky News to reveal their contents. The minister's notes contained a caution that "at best", house prices are set to fall by 5% to 10% and that housebuilding was "stalling".

"New starts are already down 10% from a year ago. Housebuilders are predicting further falls," it warned. Flint's notes highlighted the rise in mortgage defaults, after figures last week showed that threats of repossession had hit their highest level since the early 1990s. But Flint insisted that the number of actual repossessions was still only a third of that in 1991.

The document points out that demand for housing is still strong, but "the market is being affected by the global credit crunch, which is making it difficult for many who would like to buy to do so". "We can't know how bad it will get. But we need to plan now to put in place effective measures against the risk that it does get worse and to prepare for the upturn," it adds.

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Alliance & Leicester to pull £4bn from UK mortgage market

Alliance & Leicester is on course to reduce its mortgage book by 10pc this year, pulling as much as £4bn out of the market in a move that will add to the shortage of deals for home buyers. Britain's seventh largest mortgage lender revealed today that its mortgage balance fell £1.5bn in the first four months of year to £41.2bn.

According to Collins Stewart analyst Alex Potter, the call equates to an "annualised rate of near-10pc... worse than our expectation of 4pc falls" on December's £42.7bn mortgage book. In its trading update ahead of the annual meeting, the bank said its profit margin had tumbled to 0.95pc compared with 1.26pc in the first half of last year before the credit crunch struck.

The margin improved slightly on the 0.93pc of the previous three months and the bank said it was on target to average around 1pc for the whole of 2008. A&L, which has been worst hit after Northern Rock by the seizure in wholesale markets, has raised another three months' worth of funding since December that should will cover it into "the second quarter of 2009".

At one point, bankers feared A&L would run out of funds like Northern Rock but it has worked hard to secure its funding position - recently securitising £17bn of mortgage assets into two vehicles, Bracken and Langton, to sell to investors. A&L added that it has "around £6bn of liquidity in the form of cash and deposits at other banks".

However, the cost of raising the funds is punitive - with "strategic funding costs" reaching £49m in the four months and on target to reach "£150m" against £23m before the credit crunch. Mr Potter said: "We had assumed £120m of added funding costs, the run-rate so far has been £150m even with mortgage balances falling faster than expected. This will lead to earnings downgrades, we feel."

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UK homes for sale number rises to above 1million

More than one million unsold properties are on the market, as homeowners take the longest time on record to sell their homes. There are 1.03 million properties up for sale in Britain – a 15 per cent increase on a year ago. There are 25 million homes in Britain.

The figure, calculated by Rightmove, the property website that covers nine out of 10 of all homes on the market, highlights how the property slow down is affecting everyone trying to sell their home. A year ago the average time for selling a house was 71 days. This has climbed by a full two weeks, with sellers needing 85 days to find a buyer house, according to Rightmove. This is the longest time the company has recorded for this time of year.

Property experts are worried that while prices have fallen only a little compared with a year ago, the number of housing transactions have slumped substantially, causing severe difficulties for the wider economy. The Daily Telegraph disclosed last week how an estimated 1,000 estate agent branches have closed since the start of the year.

This week, the Royal Institution of Chartered Surveyors will publish figures that are expected to show that the housing market is at its worst state since 1978 when the trade body started its monthly study of surveyors and estate agents. Richard Graves, an estate agent in Bridlington, East Yorkshire, said: "There are very few buyers coming in through the door, and viewings are well down.

"Properties are taking three to four months to sell, and there are a fair few that have been on the market for over a year. They were probably over-priced with and the sellers have missed the boat." After a decade of unbroken house price rises – making property increasingly unaffordable – the boom has come shuddering to an end over the last couple of months, as mortgage companies pulled their most generous offers and increased their rates.

This has made getting onto the housing ladder and moving home more difficult for many people. A first-time buyer now needs £25,000 on average as a lump sup to buy a property because of the requirement to hand over a large deposit, as well as stamp duty and other fees. Robert Bell, who owns a four estate agency offices in Lincolnshire, said: "We usually sell about 15 properties each month but business is down 80 per cent compared with a year ago.

"It really is doom and gloom out there. People are not prepared to buy a house if they think it is going to be worth less in a month's time. "The only houses selling are either exceptional value or are being sold by people who have to move. And all the while there is a steady flow of properties coming onto the market."

A quarter of new houses are being sold at a loss as building firms struggle to find buyers. A leaked report from the House Builders Federation, reported in a Sunday newspaper, suggested that sales of new homes has fallen by two-thirds in the past two weeks compared with the same period last year.

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Ilargi: I think it is inevitable that we will soon start to see a flood of writedowns, losses, rights issues and capital injections in European banks.

Crédit Agricole considers $9 billion rights issue

European banks continue to be severely hurt by the credit crunch, with France's Crédit Agricole forced today to say it is considering a €5.9bn (£4.7bn) rights issue to shore up its capital base. France's biggest retail bank said it would write down €1.2bn on sub-prime assets at its investment bank Calyon and carry out a radical downsizing of the business headed by Marc Litzler.

CA, once linked with a partial takeover of rival Société Générale after it suffered huge losses partly caused by rogue trader Jérôme Kerviel, said its net profit in the first quarter would be down two-thirds at €892m. Its shares fell more than 4% this morning. CA is known as the "green" bank because of its roots in agriculture. Its board meets tomorrow to decide on the rights issue, which is designed to keep the bank's Tier 1 capital ratio, a measure of a bank's strength, at 8.5%.

SocGen, meanwhile, today wrote down a further €1.2bn in the first quarter and said its gross operating income fell 24.4% to €1.77bn. But the figures were better than expected, and the bank insisted it had "demonstrated its resilience and ability to bounce back" during the quarter after the Kerviel debacle. Net earnings fell 23.4% to €1.1bn. The bank, which has completed a €5.5bn capital-raising exercise, is expected to come under renewed fire this month when a committee of three independent directors delivers its final report into the Kerviel fraud, which cost it €4.9bn.

Separately, Belgian-Dutch bank Fortis reported a 31% drop in first-quarter net income to €808m after taking a net €380m hit from the sub-prime crisis. This more than offset the gain of €319m from the acquisition of the retail and wealth management activities of rival ABN-Amro in the takeover led by RBS.

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'We Want to Join OPEC and Make Oil Cheaper'

Lula: We discovered immense oil reserves 273 kilometers (170 miles) off the coast, at a depth of 2,140 meters (7,021 feet) and under a 5,000-meter (16,404-foot) layer of salt and rock. We have the know-how to exploit these reserves. We expect to start test-drilling in March and start producing oil in 2010. Then Brazil will become a major oil exporter. We want to join OPEC and try to make oil cheaper.
SPIEGEL: Until recently, you were praising sugar producers as the new national heroes. Brazil has placed its bets on ethanol, derived from sugarcane, as the fuel of the future. But in Europe biofuel is now seen as ecologically suspect.
Lula: Brazil has 33 years of experience with biofuels. The cars that are built in our country come with engines that can run on mixtures of gasoline and ethanol. They reduce CO2 emissions considerably. The sugarcane plantations are cut for five years in a row. While the plants are growing, they capture carbon dioxide. The production is so cheap that it has no competition.
SPIEGEL: There have recently been riots, from Haiti to India, over rising prices for staple foods. Doesn't the farming of biomass for fuel jeopardize grain production?
Lula: I can certainly understand that Europeans would have such doubts. But this argument applies to neither Brazilian sugarcane nor our palm oil. The production of fuel from basic food commodities is, in fact, unjustifiable. But it is the United States that uses corn for biofuel, which is then no longer available for food, while the Europeans derive energy from sugar beets, rapeseed and wheat.

I have always told my European friends that it isn't worth restructuring their well-organized agricultural systems to produce biofuel. We, and the Africans, can do a much better job of it. The European Union should give the Third World a chance to produce biofuel. Besides, we should not forget that the higher cost of petroleum and fertilizers also contributes to the higher price of food. This is glossed over.
SPIEGEL: But the expansion of farmland for sugarcane takes away space for corn and soybean fields.
Lula: We have an abundance of land -- 280 million hectares (692 million acres) of farmland -- as well as plenty of sun and water. Sugarcane is grown on only 3 percent of this area. Rich countries should stop subsidizing their own agriculture and lift their high import tariffs.
SPIEGEL: The governor of the state of Mato Grosso, the world's largest soybean producer, has said that more rainforest will have to be cut down to cover the demand for food, especially in China. Does high consumption of meat and soybeans in emerging economies lead to destruction of the environment in Brazil?
Lula: That isn't true. The Amazon region isn't very well suited for cattle pastureland. And the soil isn't good for sugarcane or soybeans either.
SPIEGEL: And yet the illegal slashing and burning continues.
Lula: We have tightened our controls. Deforestation has declined by almost 60 percent in Brazil. But more than 22 million people live in the Amazon region. They too want to eat, drive cars and use refrigerators.

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Ilargi: Yesterday, Mike Shedlock wrote about the article below, in Tax Assessors Nightmare . And while he makes a lot of good points, I think he misses the biggest problem, or at least the right emphasis, as does the Atlanta Journal Constitution.

It’s not the tax assessors who bear the brunt of the problem here, it’s the City Councils, and the operating budgets they calculated based on home prices that now turn out to be 300%-700% percent higher than what is real and realistic.

And that touches on something I have talked about a lot before. Property values in Atlanta, and in many other cities in the US, are coming down so hard that there is no way these cities will survive as going concerns in their present organizational structures. Property taxes are a huge part of their income, and those are going up in smoke.

This is a process that is now picking up so much speed, we’ll likely see a first group of US cities turning to Chapter 11 this year, a move that will be accompanied by more pink slips than we wish to imagine. Mish rightly states that home values are determined by what they sell for, not what someone writes on a piece of paper. We now see homes not being sold because property taxes are higher than the purchase price!

An additional note: a report like this puts home price indexes such as the Case/Shiller Index in a very shrill and bleak light. The reality out on the street is far worse than the numbers reported.

A second additional note: property taxes are just one of the issues for municipalities. Bond issuance is another. So are investments in toxic securities. And that’s not all. More soon.

Tax assessors boggled by housing dip

For less than the price of a decent used car, you can buy a home in Atlanta today. Actually, real estate agents list a dozen choices for $10,000 or less. Step up in price to $20,000 and your choices expand 10 fold. The prices seem absurd but they are part of a real estate market suffering with rampant foreclosures, mortgage fraud, abandoned investor properties, a collapsing mortgage industry and other ills.

The market is unlike anything seen in metro Atlanta in years and it has local tax assessors and appraisers as confused as anyone. What is the value of a lot if no one can get a loan to buy it? How should you value a home that sits on the market for a year with no offers? When a neighborhood has several foreclosures, short sales and abandoned properties, do they set the market?

The training and rules for mass appraisal say taxable values should be set at fair market value or at the price for a sale between a "willing buyer and willing seller." Distressed sales, foreclosures and short sales are not supposed to count toward setting taxable values. Therein lies the problem for tax assessors. As Fulton's chief appraiser, Burt Manning finds it hard to believe any parcel in Fulton is worth less than $10,000. Still, real estate listings prove they are.

"We are trying to understand all these things," said Manning. "What's the right answer? We don't know. It's tough. I've got entire neighborhoods where all I've got is distressed sales. I don't have any good sales." In fact, seven of Atlanta's least-expensive homes are listed on average for $8,800 but taxed at an average value of nearly $93,000. The cheapest, at 336 Adelle Street in the Lakewood area, comes in at $5,900. Tax records list its value at $101,700.

The problems are pronounced in areas like West End, Lakewood and Vine City. Wayne Flanagan, a RE/MAX agent who sells bank-owned properties, said in zip codes like 30310 and 30315 values have taken a nosedive faster than public officials can account for. "There are some price ranges like $20,000-$80,000 where 90 percent of the properties on the market are foreclosures," Flanagan said. "You've got one bank competing against another. It's a spiraling situation, downward."

The agent said when tax values and true values are way apart, it can keep properties from selling and further depress values. Flanagan said he'd had a $95,000 deal on a duplex fall through recently because it was being taxed at $300,000. The buyer didn't want to be saddled with taxes at that level. "They (government officials) are going to have to take a look at this," Flanagan said. "We are experiencing some of the same problems as Detroit, taxes are so high they drive down value."

Fulton noted the downturn in its 2008 values by marking down about 86,000 properties a total of nearly $364 million. Manning said in a typical year, Fulton tallies about 27,000 sales assessors consider as valid to set tax values. This year he counted only 20,000 due to the increase in distressed sales. "I am less uncomfortable with values than I've been in a long time," Manning said. "These are unusual times."

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Ilargi: If the boomer generation think they’ll be allowed to rest on their plush rich laurels, while their children and grandchildren break their backs scratching out a living, I suggest they think again.

Boomers better prepare to give up a lot of what they have now, voluntarily, or it will be taken away from them with brute force. Survival of the fittest and all that.

Here Come the Millennials

An important aspect of the presidential race so far has been the generational divide, with Barack Obama doing very well with younger voters and Hillary Clinton drawing strong support from those who are older. A similar split can be expected in a general election race between Senator Obama and John McCain. However the election ultimately turns out, the Obama campaign has tapped into a constituency that holds powerful implications for the future of American politics.

The youngest of these voters, those ranging in age from roughly the late teens to the early 30s, are part of the so-called millennial generation. This is a generation that is in danger of being left out of the American dream -- the first American generation to do less well economically than their parents. And that economic uncertainty appears to have played a big role in shaping their views of government and politics.

A number of studies, including new ones by the Center for American Progress in Washington and by Demos, a progressive think tank in New York, have shown that Americans in this age group are faced with a variety of challenges that are tougher than those faced by young adults over the past few decades. Among the challenges are worsening job prospects, lower rates of health insurance coverage and higher levels of debt.

We know that the generation immediately preceding the Millennials is struggling. Men who are now in their 30s, the prime age for raising a family, earn less money than members of their fathers’ generation did at the same age. In 1974, the median income for men in their 30s (using today’s inflation-adjusted dollars) was about $40,000. The figure for men in their 30s now is $35,000.

It’s not hard to understand why surveys show that overwhelming percentages of Americans believe the country is on the wrong track. The American dream is on life support. Polls show that dwindling numbers of Americans (in some cases as few as a third of all respondents) believe their children will end up better off than they are.

The upshot of all this is ominous for conservatives. The number of young people in the millennial generation (loosely defined as those born in the 1980s and 90s) is somewhere between 80 million and 95 million. That represents a ton of potential votes -- in this election and years to come. And the American Progress study shows that those young people do not feel that they have been treated kindly by conservative policies or principles.

According to the study: “Millennials mostly reject the conservative viewpoint that government is the problem, and that free markets always produce the best results for society. Indeed, Millennials’ views are more progressive than those of other age groups today, and are more progressive than previous generations when they were younger.”

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The Ticking Credit Card Time Bomb

 For those holding out hope that the American economy can miraculously avoid a long and deep recession consumer credit is often viewed as the wonder drug that can cure all manner of economic ills. As such, this week’s report showing $15 billion growth in consumer credit was widely heralded as proof of America’s economic strength and resilience.

However, we are now suffering the after effects of too much debt, and our salvation cannot be found in more of the same.  Credit card debt, which now stands at whopping $957 billion nationally (approximately $3,000 for every citizen) has, in recent years taken on a different role in American life.

While in the past cards were used primarily to purchase big ticket items, spreading out costs over many months, they are now increasingly used to bridge the gap between cost of living and the diminishing purchasing power of Americans who have been taxed mercilessly by inflation.

By buying with available credit instead of unavailable cash, consumers are not simply postponing the pain of higher prices, but compounding it by adding interest to the cost of everyday purchases. In addition, as home equity credit is now unavailable to fund large purchases, many consumers are turning to non-deductible, higher cost credit card debt as the last remaining life line. As such, credit card debt compounds steadily, and for many borrowers, becomes increasingly impossible to pay down.

The statistics tell the tale. According to Equifax, a credit card analysis firm, people have been buying more with their credit cards but paying down less. As a result average balances jumped nearly 9% in 2007 and delinquency rates recently hit a 4-year high of 4.5%.  Also, the reliance on credit cards is preventing some of the markets salutary forces from working.

With credit always an option, domestic demand remains strong despite rising prices. Absent the option of putting more costly gasoline on their credit cards, Americans might have actually been forced to cut back on their consumption, taking some of the upward pressure off gas prices.  It should be painfully obvious that expanded consumer credit is not evidence of improvement, but simply, deterioration.

Unfortunately, when it comes to understanding the economy, there is little common sense on display. By going even deeper into debt just to make ends meet, American consumers are digging themselves, and our entire economy, into an even greater economic hole and laying the foundation for the next major credit debacle.

It’s fitting that just as both Treasury Secretary Paulson and JP Morgan CEO Jamie Dimon declared that the worst of the crisis has past, we are on the verge of kicking the whole thing into a much higher gear! My guess is that many Americas continue to run up massive credit card debt because they have little intention of every paying it off.

Since many who are underwater on the home loans, and behind on the auto and student loans see bankruptcy as a foregone conclusion, they see no downside to pilling on as much debt as possible while the taps remain open. 

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Ilargi: A nice graph from Charles Hugh Smith. The article is somewhat less impressive, I find. When people talk about declining ”financially valuable sealife”, that tells me they don’t understand what goes on.

When Long Cycles and Depletions Intersect

If I had to summarize our plight, I would plot it thusly: The fourway intersection of a long financial cycle's nadir, a rising peak of geopolitical instability and the depletions of fossil fuels and other non-cyclical resources: sealife, soil, water, species, rain forests, etc.



Many of you are familiar with "long-wave" cycle analysis; one insightful financial cycle was identified by the Russian economist Kondratieff. Here is a depiction of the cycle, which maps a 60-70 year long cycle of credit expansion and contraction:



Depletions are not cyclical. Stuff which gets used up/killed off doesn't regenerate. A number of other things don't regenerate, at least not within human lifespans or perhaps ever: ground water, rain forests (a monoculture tree farm is not a rain forest), species which are ground down to extinction, even soil.

There is a continent-sized area of floating plastic in the North Pacific which will not disappear for a long time because plastic degrades very slowly. We can assume the area is only growing in size and density of waste. A preponderence of evidence suggest that much of the financially valuable sealife on Earth is in essentially terminal decline due to overfishing and habitat destruction.

If a few wild tuna survive, we cannot say the species is extinct, but as a "harvestable commodity" tuna will be depleted. Uranium and other metals will contiue to exist, but not in financially viable concentrations. The energy required to extract them will exceed their value. At some point this may well be true of oil. It's still there in small pockets, but it takes more energy to extract it than it contains.

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