Debt Rattle, May 16 2008: What Goes Up

Dorothea Lange: Migrant Daughter - November 1936
Daughter of migrant Tennessee coal miner. Living in American River camp near Sacramento, California.

Ilargi: An important yet mostly neglected little "detail" that will come home to roost, and big time.

It's much easier to borrow the first $260 billion than the second. And banks like Citi and Merrill already pay 7-8-9% over some of the capital injections they have received from foreign sovereign funds, with the Federal Funds rate, to which they also have access, standing at 2%. Paying a 4-5% dividend with money over which you pay 8% interest is a set-up that won't last long.

That's why Citi announced last week it will sell off $400 billion in assets; their access to capital is drying up fast. The main question is: how much will they get for those assets? My little man inside says it will be less than $200 billion, perhaps much less. Diminishing returns OR receding horizons?

Raising Capital Getting Harder For Banks

Banks have raised $260 billion or so worldwide to offset subprime-mortgage related losses — easing the credit crisis — but must tap even more money to get back to business as usual. But finding big investors willing to pony up cash won't be easy. Banks — and their shareholders — may have to pay a steep price.

Just how much more capital banks will need is unclear. Their balance sheets are in flux because the value of complex securities backed by troubled loans could stay depressed or recover. Bank write-downs tied to the housing bust have topped $330 billion globally, a Bank of America report says. Aside from offsetting losses, banks need cash infusions to restart lending. For every dollar in assets, banks typically lend out $10 or $15.

The most likely scenario, say observers, is that banks will have to take more painful steps to raise cash, mainly highly dilutive common-share offerings. Early on in the credit crisis, banks went hat-in-hand soliciting foreign governments for capital. But, sovereign wealth funds have provided less money of late.

In November, Citigroup raised $7.5 billion from the Abu Dhabi Investment Authority of the United Arab Emirates. UBS took in $10 billion from the Government of Singapore Investment Corp. Merrill Lynch shored up its balance sheet selling $6.6 billion in convertible securities to the Kuwait Investment Authority and $5 billion in common stock to Singapore's Temasek.

While Citi has raised $44.1 billion, it still needs another $10 billion to $15 billion to shore up its balance sheet, says Oppenheimer analyst Meredith Whitney. Citi has said it wants to slash assets by more than $400 bil over the next three years. Those deals were cut before banks began disclosing the full extent of their mortgage-related investments. Sovereign wealth funds are still losing money on some of their big bets, and are wary of doubling down until it is clear the housing market has bottomed, analysts say.

Falling share prices have increased the cost of raising new capital, analysts say. One hurdle to raising more money from foreign government funds involves the terms of deals struck late last year as the credit crisis unfolded. Banks agreed to compensate the funds if the banks sold more stock at lower prices. Usually a bank gets less capital from the foreign fund involved in the first deal, or gives the fund more convertible stock, further diluting common shareholders.

"You're caught in a bit of a bind if you've signed one of those agreements," Hintz said. "You probably can't go back there too many times." Citigroup, UBS and Merrill Lynch signed deals with reset adjustments, says a Bank of America report.

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Ilargi: Banks are still financing the acquisition of their own toxic debt, at huge discount, by third parties. What more do we need to know?

Blackstone Says Markets May Be in 'Eye of Hurricane'

Blackstone Group LP President Tony James said banks are mistaken if they think credit markets have begun a sustained recovery. "It's not clear to me if it's a permanent upswing, as I think many of the banks are saying, or the eye of the hurricane," James told reporters on a conference call today.

High-yield, high-risk loan prices have climbed from a low of 86.3 cents on the dollar in February to 92.42 cents after banks whittled down a backlog of buyout debt to less than $100 billion from more than $300 billion last year. Banks still must find a way to sell loans and bonds backing the takeovers of telephone company BCE Inc. and Clear Channel Communications Inc.

Private equity firms Bain Capital LLC and Thomas H. Lee Partners LP, which are buying Clear Channel, had sued Citigroup Inc. and five other banks for trying to back out of financing the deal. San Antonio-based Clear Channel, the largest U.S. radio broadcaster, said this week it settled the legal fight by agreeing to a reduced buyout price of $17.9 billion, 8.2 percent less than the Boston-based buyout firms agreed to pay last year.

"The Clear Channel deal moving forward was a blow to the banks," James said on the call, noting credit prices have moved down two or three points since the legal fight ended. "The next big event will be BCE, which is even bigger than Clear Channel."

Montreal-based BCE, Canada's largest telephone carrier, agreed to a C$51.7 billion ($50.7 billion) buyout by an investor group led by the Ontario Teachers' Pension Plan. Three of the banks that committed funding to the Clear Channel bid -- Citigroup, Royal Bank of Scotland Group Plc and Deutsche Bank AG -- are also financing the BCE transaction.

Banks are willing to lend for acquisitions, though "I would not call it aggressive but they are open for business," James said. "It's got materially better," he said. New York-based Blackstone has committed to buy $7 billion of high-risk, high yield loans from banks in the past 45 days at discount to face value, James said. Banks are willing to finance those transactions, he said.

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Ilargi: The scheme of using public funds to trick people into buying overpriced property acquires more criminal intent by the day. Just ask yourself in whose interest all this is. Certainly not the buyer: without the government support, the houses would undoubtedly be cheaper.

Fannie Mae to Drop 'Money Down' Requirements in Worst Hit Areas

Fannie Mae, the largest U.S. mortgage- finance provider, will stop requiring bigger down payments in regions where home prices are dropping, responding to criticism from consumer groups who said the company was exacerbating the housing slump. The policy, adopted in December, will now end June 1, Washington-based Fannie Mae said today in a statement.

The government-chartered company said it can handle the higher risks because it's changing the computer models it uses to asses whether it will accept specific loans. "This new down payment policy reinforces our goal to support successful home-owning," Marianne Sullivan, senior vice president for single-family credit policy and risk management, said in the statement.

Fannie Mae and McLean, Virginia-based Freddie Mac, the biggest sources of money for U.S. mortgages, had been tightening lending standard to limit losses, also introducing new fees on riskier loans and raising required credit scores. More than 80 housing advocates, mostly small community groups, sent letters to Fannie Mae Chief Executive Officer Daniel Mudd and Freddie Mac CEO Richard Syron last month asking for the policies to be withdrawn.

The changes affect most of the densely populated parts of the U.S. where house prices have fallen. Fannie Mae reported a first-quarter loss of $2.19 billion May 6 amid rising homeowner defaults, and said that it will cut its dividend and raise $6 billion in capital as it grapples with the worst housing market since the Great Depression.

Under the new policy, borrowers approved by Fannie Mae's automated underwriting program will be able to borrow up to 97 percent of the value of their homes, the company said. Other loans will be accepted with loan-to-value ratios of up to 95 percent, the company said.

Congress created Fannie Mae and Freddie Mac to increase mortgage financing and provide market stability. The companies, which own or guarantee more than 40 percent of the $12 trillion in U.S. residential mortgage debt, profit by holding mortgage assets that yield more than their debt costs, and from fees charged to guarantee bonds they create out of loans.

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Ilargi: Don’t miss this video.

Scenes of monkeys running around during the greatest housing crash in human history

Who says C-span is boring. I flipping love it! Monkeys I tell ya. Monkeys.
Why wasn't this debate going on years ago, when it could have done some good? Memo to DC: It's too late. Let the market correct. And try to make sure it doesn't happen again.

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Ilargi: The NAHB Home Builders Confidence Index is historically an eerily close predictor of what’s in store for the US economy.

Home builder sentiment nears record low in May

Home builder sentiment fell for the first time in four months in May, edging closer to the record low set in December, as market conditions continued to worsen, an industry group said on Thursday.

The National Association of Home Builders said its preliminary NAHB/Wells Fargo Housing Market Index fell to 19 from 20 in April, within one point of the record low of 18 set in December. The gauge started in January 1985.

The turn for the worse is indicative of the struggle home builders are facing as they grapple with the worst U.S. housing market downturn since the Great Depression. "We hear anecdotes that in some regions in particular in California the supply coming to the market from home builders is now smaller than the supply coming from foreclosures," said Torsten Slok, senior economist at Deutsche Bank in New York.

The situation in the housing market remains gloomy and the home builders seem to be waiting for the foreclosure "tsunami" to pass, Slok said. "The bright spot here is that we could see foreclosures peak over the coming quarters as a result of government initiatives and lower interest rates and that would be helpful to the home builders currently sitting on the sidelines," Slok said.

The May index came in one point below expectations based on a Reuters survey of economists. Readings below 50 indicate more builders view market conditions as poor than favorable. 

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U.S. Builders Broke Ground on Fewest Houses Since '91

Construction of U.S. single-family houses in April dropped to the lowest level in 17 years, even as building of condominiums and townhouses rebounded. Builders broke ground on 692,000 single-family homes at an annual rate, the fewest since January 1991, the Commerce Department said today in Washington. Total housing starts jumped 8.2 percent to 1.032 million as construction of multifamily units rose 36 percent following a 35 percent drop in March.

"You cannot take the headline starts number seriously because of the increase in the multifamily number," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York, who had the closest estimate in a Bloomberg News survey. "The trends are horrific" because "why would you spend money to buy a depreciating asset?" he said.

Lower prices and other incentives have yet to revive demand for houses, indicating builders will need to come up with even more discounts to attract buyers. Stricter lending rules, job losses and growing pessimism about the economy signal sales will not rebound quickly. Treasuries dropped in the minute after the release, before retracing some of the losses later. Yields on benchmark 10-year notes rose to 3.89 percent at 8:56 a.m. in New York, from 3.82 percent late yesterday.

Building permits, a sign of future construction, rose 4.9 percent to a 978,000 pace, reflecting gains in both single- and multifamily units. Economists forecast starts would fall to an annual pace of 939,000, according to the median 73 projections in a Bloomberg News survey. Estimates ranged from 875,000 to 1 million. Building permits were projected to fall to a 915,000 annual rate, according to the Bloomberg survey.

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Industrial Output Fell Sharply in April, Led by Auto Production Cuts

The nation’s industrial output plunged in April, reflecting big cutbacks in automaking and other manufacturing industries. The Federal Reserve reported on Thursday that industrial production dropped 0.7 percent last month, more than double the decline that economists had expected.

Manufacturing output fell by 0.8 percent. Half of that weakness came from large cutbacks in auto production because of falling demand for new cars and problems related to a strike at a parts supplier for General Motors. The drop in overall production matched a 0.7 percent decline in February and followed a weak 0.2 percent increase in March. It pushed the industrial operating rate to its lowest point in more than two years.

Factories, mines and utilities operated at 79.7 percent of capacity last month. It was the first time the operating rate had been below 80 percent since October 2005, when it stood at 79.8 percent because of disruptions from the Gulf Coast hurricanes. Output in the mining sector declined by 0.8 percent last month, while output at utilities edged up by 0.3 percent.

In other economic news, the Labor Department reported on Thursday that applications for jobless benefits rose by 6,000 last week, to 371,000. The gain was in line with expectations. The weak economy has resulted in four consecutive months of job losses, often a sign that a recession has started. The April drop was just one-fourth the size of job losses in March, however, giving hope that the current economic slowdown might not be as severe as the last two recessions.

The increase of 6,000 claims applications last week was the smallest one-week move in about two months. Claims have been unusually volatile in recent weeks, reflecting strike-related layoffs in the auto industry and trouble the government had in seasonally adjusting the data to take into account an unusually early Easter.

For the week ended May 3, the total number of people receiving unemployment benefits rose by 28,000, to 3.06 million. It was the third consecutive week that this figure had been above three million, another sign that the weak economy is having an adverse effect on the labor market.

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Oil Rises to Record Above $127 on Goldman Outlook, China Demand

Crude oil rose above $127 a barrel for the first time after Goldman Sachs Group Inc. raised its oil price forecast amid speculation Chinese diesel purchases will strain limited supplies. Goldman boosted its crude-oil price forecast for the second half of this year to $141 a barrel, from $107, citing supply constraints.

Chinese traders many increase diesel fuel imports to run generators after State Grid Corp. of China said 0.5 percent of China's total power capacity remains shut after an earthquake on May 12. "The raised forecast from Goldman has come on top of buying from China, while political risks elsewhere stoke up fears over supply," said Robert Montefusco, a broker at Sucden (U.K.) Ltd. in London. "Funds are coming back into the market, driving prices to new records."

Crude oil for June delivery rose as much as $3.31, or 2.7 percent, to $127.43 a barrel in electronic trading on the New York Mercantile Exchange. It was at $126.76 a barrel at 1:34 p.m. London time. U.S. President George W. Bush will ask Saudi Arabia to increase oil production to help lower prices during a visit to Riyadh this weekend, White House spokeswoman Dana Perino told reporters traveling on Air Force One.

"You'll probably see some effect from the earthquake as they'll need energy to rebuild the parts that were destroyed," said Thina Saltvedt, an analyst at Nordea Bank AB in Oslo. "There's also a lot of political risk, as we've seen with the production shut-in in Nigeria." About 500,000 barrels a day will remain shut in by militant attacks in Nigeria for the "foreseeable future," the International Energy Agency said on May 13.

A gasoline pipeline explosion that killed about 100 people in Nigeria yesterday prompted concerns of further supply disruption. The fire was caused accidentally during construction work, according to Nigeria's Civil Defense Corps. Brent crude oil for July settlement gained as much as $3.22, or 2.6 percent, to $125.85 a barrel on the ICE Futures Europe exchange. It was at $125.36 at 1:34 p.m. London time.

"The main driver for the oil market is still distillates," said Tetsu Emori, fund manager at Astmax Ltd. in Tokyo. The damage "is quite unbelievable. Generators will be necessary to produce electricity and in that case diesel should be a very important material."

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US-Saudi oil axis faces day of truth

When President George Bush went to see Saudi Arabia's King Abdullah in January to plead for higher oil output, he was politely rebuffed. The rematch today is likely to be a great deal more strained. If the Saudis deny help once again, they risk incalculable damage to their strategic alliance with Washington.

The price of crude has rocketed by over $30 a barrel since that last fruitless meeting, briefly touching the once unthinkable level of $127. Goldman Sachs fears a "super-spike" to $200 a barrel this year. Asked what he would tell King Abdullah this time, Mr Bush said caustically: "the price is even higher." Indeed, it is, especially the political price.

The US-Saudi tango has been on thin ice ever since the terrorist attacks of 9/11. Sixteen of the hijackers were Saudi nationals. The Bush family has cleaved closely to the Saudi monarchy, but strong factions in Washington see Riyadh's Wahabi monarchy as part of the Mid-East problem-- not the solution.

Saudi Arabia's one saving grace -- in the eyes of US critics -- is that it has over the years been willing to cap extreme surges in the price of oil, deploying its power as the world's swing producer. This time Riyadh is giving no ground. Oil minister Ali al-Naimi insists that there is plenty of oil about, blaming the latest spike on "the internal logic of the financial markets”, meaning hedge funds and speculators.

The US Congress gave its riposte this week. New York Senator Charles Schumer is pushing for sanctions against Saudi Arabia, targeting $1.4bn in sales of bomb kits, light armoured vehicles, as well as gear for AWACS aircraft and F-15 fighters. "You need our arms, but we need you to cooperate and not strangle American consumers. "Saudi Arabia could do a lot more than they have done," he said.

The Democrats are also pushing legislation that would penalize the OPEC producers cartel for "anti-competitiveness practices". The Bush White House has rolled its eyes in exasperation at such blunt methods, but hot feelings are aroused in American public discourse. There have been calls for a food blockade of the Arabian peninsular on the US talk radio circuit. "Let them eat sand", has been the rallying cry of the shock-jocks.

OPEC has -- in effect -- cut production repeatedly. The Saudis have let their output fall from 9.5m to 8.5m bpd over the last two years, camouflaging the move behind the accession of Ecuador and Angola to the group (which boosted nominal supply). OPEC failed to compensate for a 330,000 bpd drop in Nigerian production in April, allowing the market to tighten further.

Dr Fadhil Chalabi, a former OPEC secretary-general and now director of the Centre for Global Energy Studies, said the Saudis have roughly 2m barrels per day of scare capacity. Three quarters is heavy sulfurous crude that requires special refineries, which are already working flat out. "They have about half a million barrels a day of good crude that they could put on the market. The puzzle is why they are not doing it.

The soaring price is obviously telling us that the world needs more oil,"he said. "I can't understand why the Saudis would risk their strategic relationship with the US over this. "They need the US more than ever given the growing influence of Iran in the region," he said. One clue comes from the March bulletin of OAPEC, the Arab sub-group of the OPEC producers' cartel. It notes sourly that President Bush is aiming to reduce US dependency on oil imports "particularly from the Middle East”, by 75pc by the year 2025.

"This has created some ambiguity in the US position on the future of oil consumption," it said. Touchee. King Abdullah's retort to the Bush speech was to announce that Saudi Arabia would stop developing big projects after the Khurais field comes on stream in next year with 1.2m bpd, leaving the country's oil in the ground for future generations.

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Libor discussions continue in London

The British Bankers' Association is discussing its Libor interbank rate-setting process with major central banks, including the U.S. Federal Reserve, as it reviews the procedure, a BBA spokesman said on Friday. The BBA has submitted a paper reviewing the Libor rate setting process to an advisory committee which will decide on May 30 whether to amend how the rates are fixed.

“We've had discussions with the Bank of England, Federal Reserve and other central banks,” said BBA spokesman John Letizia. Banks are currently under funding and capital pressures not seen for decades. As a result the daily benchmark Libor rates – bank-to-bank borrowing costs for a range of currencies over a range of maturities – are historically high, spreads over secured lending rates are wide, and the market is seriously distorted and coming under increasing scrutiny.

The Wall St Journal reported on Friday that several Fed officials have been in contact with London traders who play a role in setting the rate. Citing a person familiar with the situation, the paper said the Fed stressed the need to ensure a high level of market confidence in the rate system.

“First and foremost the Fed would want an accurate reflection of what's going on in term markets,” said Nomura rate strategist Sean Maloney. “It's likely they want a better idea of where these markets are at so they can get their policy apparatus geared up to bring them into line with what is a more normal type of spread valuation.”

Before the credit crisis erupted in August, money market funds lent money out to banks for up to three months like clockwork. This was a fundamental part of the functioning of the interbank markets and Libor is also used as a base to price a vast range of syndicated loans and derivatives.

But now, money market funds are lending less to fewer market participants for shorter periods, meaning the pool of excess cash that banks have to recycle beyond overnight maturities is drying up. Critics of Libor (London interbank offered rates) say the market has become seriously distorted during the credit crisis as it is based on perceived borrowing costs rather than actual completed trades.

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The Dollar and Its Rally Need Real Support

Jeffrey Frankel, professor of economics at Harvard's Kennedy School of Government, published a study last year with his colleague, Mennzie Chin, predicting that the euro will begin to displace the dollar as the leading international currency by 2022. They pointed to the fate of the British pound, which lost the top spot on the totem pole of world currencies during World War II, as a guide.

"As some wonder whether the United States might now have embarked on a path of 'imperial over-reach,' following the British Empire down a road of widening budget deficits and overly ambitious military adventures in the Muslim world, the fate of the pound is perhaps a useful caution," wrote Frankel and Chin in their report. Recently, the authors revised their estimated date for the "tipping point" of the dollar's decline to 2015 as the U.S. housing and credit crisis brought its value to record lows.

"Euroland, as measured by current exchange rates, has become a bigger economy than the U.S. within the last six months," says Frankel in explaining the change. "That's a consequence of the depreciation of the dollar." Multinational companies, from General Electric to Google, have shown far better operating results in overseas markets than in the U.S. Investors, in turn, have increasingly shifted their focus toward opportunities overseas.

In this climate, it's hard to find any substantive policy measures in place that justify the Bush Administration's strategy of communicating support of a strong dollar. The government's main lever for influencing the value of the currency is the monetary policies of the Federal Reserve. Since the outbreak of the credit crisis last summer, the central bank has slashed its short-term interest rate target by 325 basis points, which means it has been expanding the money supply and devaluing the dollar.

On the fiscal side, tax receipts are shrinking amid a slowing economy while spending shows no sign of abatement between two wars raging in the Middle East, a fiscal stimulus package for consumers and rumblings of a bailout for mortgage borrowers facing foreclosure. Government deficits at the federal and state levels are headed for big increases. Although the U.S. trade deficit has been reduced -- it was measured at $58.2 billion in March -- government deficits at the federal and state levels are headed for big increases.

The U.S. Treasury used to intervene in currency markets on occasion to influence the value of the dollar by buying and selling various currencies. While various foreign governments regularly engage in such intervention, the U.S. has abandoned the practice completely in this decade. "The strong dollar policy has lost all meaning," says Frankel. "The only reason for the mantra from the White House now is that if they deviate from it in the slightest way, then it gets written up as a story and the markets have a big reaction to it."

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Iceland Receives Emergency $2.3 Billion to Aid Krona

Iceland received an emergency loan facility from Nordic central banks to shore up the krona and avert an economic collapse. The currency, which has tumbled as much as 26 percent against the euro this year, rallied 4.8 percent after Denmark, Sweden and Norway agreed to provide the loan facility of 1.5 billion euros ($2.3 billion).

"Iceland must be thrilled," said Lars Christensen, senior emerging markets strategist at Danske bank A/A. It will "help stabilize the financial markets, but not the basic imbalances of the Icelandic economy." The loan will effectively almost double Iceland's foreign currency reserves, enabling it to shore up the currency and halt a series of interest rate increases that the central bank forecasts will push the economy into recession next year. The inflation rate rose to an 18-year high of 11.8 percent in April, even after Sedlabanki pushed its key rate to a record 15.5 percent.

The global credit crunch has driven down the krona on concern the Atlantic island's commercial banks may seek help from Sedlabanki, which doesn't have the funds to bail them out. Its foreign currency reserves totaled 206.8 billion kronur ($2.8 billion) at the end of April. The country's three biggest banks have combined assets of 11.4 trillion kronur, or nine times the size of the economy. At the biggest lender, Kaupthing Bank Hf, foreign currency holdings made up 87 percent of assets.

"People have been speculating on whether we were capable of doing something if the unexpected happens, so this will hopefully relieve any doubts," Icelandic Finance Minister Arni Mathiesen said in a telephone interview from Reykjavki. The central bank plans to further raise its reserves through other loan facilities or government bond sales, said Sturla Palsson, director of Sedlabanki's international and market operations department.

"It's definitely important to bolster the reserves further," Palsson said. "The bank will announce what it has decided to do after further agreements have been signed."

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Merrill Tries to Temper the Pollyannas in Its Ranks

Sometimes Wall Street seems a bit like the make-believe Lake Wobegon: Most stocks are above average, and it is always a good time to buy. At least that is the impression you might get from stock analysts who recommend where you should put your money. Even in bad times, the Street’s army of analysts rarely shout “sell.” In fact, they rarely utter the S word at all.

But Merrill Lynch, the nation’s largest brokerage firm, unveiled a new system on Tuesday for rating stocks that suggests Wall Street finally may be mustering up its courage to say “sell” more often. Starting in June, Merrill will require that its analysts assign “underperform” ratings to 1 out of every 5 stocks they cover. About 12 percent fall into that category now. It’s a tectonic shift for Merrill, the so-called thundering herd whose insignia, a bull, symbolizes the natural exuberance of the market place.

The move underscores an industrywide effort to inject a healthy dose of skepticism into stock research at a volatile and uncertain time for the markets, the broader economy and Wall Street banks themselves. Professional money managers and everyday investors alike are struggling to decide whether the recent rebound in the financial markets — the Standard & Poor’s 500-stock index is up 10.6 percent since early March — will fade or turn out to be the start of a broad, sustained recovery.

But researchers are struggling to gain investors’ trust and safeguard their own jobs. Six years ago, big banks paid $1.4 billion to settle claims that analysts hyped stocks to win lucrative banking deals, but researchers as a group still seem reluctant to advise people to do anything but hold on to stocks or buy more of them.

Today, after the Nasdaq bust and the outbreak of the deepest financial crisis since the Depression, only about 5 percent of all stock recommendations on Wall Street advise investors to sell, according to Bloomberg. That is up from less than 2 percent back in the heady days of the dot-com boom.

James L. Melcher, a hedge fund manager, said the changes Merrill was making appeared to have “merit,” but he added that they were unlikely to eliminate Wall Street’s tendency to be optimistic or to resolve the inherent conflicts of interest in the investment banking business. “I don’t think that is likely to change any more than you would expect human nature to change,” said Mr. Melcher, president of Balestra Capital.

Merrill Lynch, not surprisingly, disagrees with that view. Candace Browning, president of Merrill Lynch Global Research, says that her analysts’ work “serves an important function in the capital markets” and that the changes would make investing recommendations from the firm even more useful.

“What the new system basically does is it forces analysts to rank their stocks top to bottom,” she said. The bank analyzed stock performance over a decade and determined that from 1997 through 2007, on average, 37 percent of stocks in the MSCI world index and 40 percent of stocks in the Standard and Poor’s 500-stock index declined each year.

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For Wall Street Workers, Ax Falls Quietly

People on Wall Street seem to be vanishing overnight. Thousands are losing their jobs as hard-pressed banks cut deep. But while layoffs are nothing new in the financial industry (they come with almost every downturn), this round seems different: it is eerily quiet. So quiet, in fact, that people refer to these cuts as stealth layoffs.

Some bosses hardly say a word after people are fired. At Citigroup, Goldman Sachs and Morgan Stanley, for example, the first clue that someone is gone can be e-mail messages that are returned to senders from a former colleague’s inactivated corporate address. While the financial markets have found a bit of a footing lately, banks are pushing ahead with plans for some of the deepest job reductions in years. Since last summer, banks worldwide have announced plans to cut 65,000 employees.

But exactly how many jobs have been or will be eliminated is unclear. In the past, banks typically made sharp reductions all at once. After the 1987 stock market crash, for example, employees were herded into conference rooms and dismissed en masse.
This time, companies are making many small cuts over the course of weeks or even months. Some people who have lost jobs, and many more struggling to hold them, say banks are keeping employees in the dark about the size and timing of layoffs.

Citigroup, for example, said last year that it would eliminate 17,000 jobs, or about 5 percent of its work force. Then in January, Citi said it would dismiss 4,200 more people. In April, it said an additional 8,700 would go. By contrast, after the financial upheaval of 1998, when many Wall Street banks pared payrolls, Citigroup eliminated 10,600 jobs, or about 6 percent of its work force at the time.

The idea that banks will slowly wield the knife again and again unnerves many employees. People know the cuts are coming — they just don’t know when or where. “Nobody knows who is coming in; nobody knows who is going out,” said JoAnne Kennedy, who was laid off by JPMorgan Chase this year. “They want to keep it all as quiet as possible.”

At Goldman Sachs, low performers were dismissed from January through March. A few weeks later, the bank quietly began letting more people go. All told, Goldman is axing about 8 percent of its work force, although incoming employees this summer will make up for some of that loss. At Merrill Lynch, 1,100 people were laid off early this year, mostly in mortgage-related businesses. But in April, the firm announced 2,900 more cuts.

JPMorgan Chase said last fall that it would lay off 100 people in its fixed-income division and then followed up with several smaller rounds of cuts in other parts of the bank. The casualties will keep mounting as JPMorgan melds with Bear Stearns, the troubled investment bank it is buying.

Starting at the top, JPMorgan executives are eliminating jobs at their own bank, redeploying some people to other divisions and replacing others with Bear Stearns workers. As many as 5,500 Bear Stearns employees and 4,000 JPMorgan workers could lose their jobs before it is over.

When Bank of America dismissed some bankers recently, it told them that their annual bonuses had been almost wiped out and that their personal belongings would arrive in the mail. The bank announced many of the layoffs on Feb. 13, two days before many employees would be able to start cashing out stock options.

“People will try to delay them for as long as possible,” Meredith Whitney, the banking analyst at Oppenheimer & Company, said of the layoffs, which she thinks are far from over. “It cuts to the bone.”

Banks and brokerage firms generally pay out about 50 percent of their revenue to employees as salaries and bonuses. Last year that percentage leapt to 70 percent, even as business began to dry up. Ms. Whitney estimates that on average banks announced plans to reduce their work forces by 5 to 8 percent. They probably will have to cut at least twice that amount, she said.

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Pressure mounts on Barclays to strengthen its capital position

Barclays conceded yesterday that it was under increasing pressure to raise capital as investors said the bank's attempt to get by with a thinner buffer than rivals was untenable. The bank insisted that it was in a stronger position than competitors who had announced rights issues because it remained profitable so far this year.

But analysts and investors believe that the bank's favoured option for raising capital – an injection from a sovereign investor – is now inevitable. Chris Lucas, the finance director, faced a barrage of questions from analysts about the bank's capital and its lower credit crunch losses compared with competitors.

Mr Lucas said Barclays' core tier one capital ratio could dip under 5 per cent by the end of the first half, below Barclays' 5.25 per cent target and adrift of the 6 per cent benchmark set by Royal Bank of Scotland and HBOS in announcing their rights issues.

Mr Lucas insisted that just because others were aiming for a 6 per cent core buffer, it did not follow that Barclays' business required it. Mr Lucas said: "The important thing is that if we do it [raise capital] it will be for the benefit of us and our shareholders rather than market sentiment. But we have to acknowledge what the market is saying and what the regulators are saying and we can't swim against that tide."

Banks are under inc-reased pressure from the Financial Services Authority and the Bank of England to declare losses, recapitalise and shore up confidence in the financial system. After the Bank of England's dire warning on inflation and a raft of similarly gloomy data for the UK, Barclays' wait-and-see position looks tenuous.

A fund manager who holds Barclays shares said: "They will be disadvantaged competitively without some new capital at some stage. Unless something significantly nasty happens in the near future it will be hard for them to come back and do a rights issue. We will probably see another major [sovereign] shareholder turn up or one or two of the existing ones will take more stock."

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Growing Number of Affluent Homeowners Can No Longer Afford Their Mortgages

For sale: Spacious home outfitted with six bedrooms, 5 1/2 baths, granite countertops, stainless-steel kitchen appliances, a three-car garage, exercise room and wet bar -- all for $875,000 in the Red Cedar West subdivision of Leesburg where houses once sold for $1-million-plus. "I thought I'd try to take advantage of the low prices in the foreclosure market," said Ryan Magazine, who owns a Leesburg carwash and signed a contract on the foreclosed property as an upgrade to his previous home.

"Right now is a great opportunity to get a house." The foreclosure signs that have been sprouting up in less-affluent communities since 2006 are beginning to appear in the well-off suburbs, attached to houses that once cost $1 million or more. Although those kinds of homes are in the minority now, real estate agents predict the numbers will swell. In Loudoun County, 60 houses priced over $750,000 are among the 932 foreclosures and short sales -- an exit strategy of selling the house at a loss with the bank's blessing to avoid foreclosure.

Affluent neighborhoods have been able to stave off foreclosure longer, but the effects of once-popular loans, such as adjustable-rate and interest-only mortgages, are beginning to take their toll, economists and real estate agents said. The consequences are being seen in places such as Loudoun County, where the rapidly expanding population and income levels meant razing dairy farms for new subdivisions over the past two decades, as well as Fairfax and Montgomery counties, where new subdivisions proliferated and demand drove up prices.

"We're seeing the first group of people who got in way too high and bought at the top of the marketplace in the middle of 2005 and end of 2006," said Tony Arko, an agent with Market Advantage Real Estate who co-writes the blog Loudoun Foreclosures. While the expanding subprime market enabled lower-income borrowers with uncertain credit histories to buy and refinance property, interest-only mortgages allowed middle- and upper-income home buyers -- and investors -- to buy beyond their purchasing power, said Robert E. Lang, director of the Metropolitan Institute at Virginia Tech in Alexandria.

"Who would have imagined that people would use this as an excuse to heavily leverage themselves?" said Lang, noting that higher-income people found ways to buy bigger, more expensive houses, endangering themselves just as lower-income, first-time buyers did. "And now they're caught in the same way."

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UK banks stock is low and it is easy to understand why

The conventional wisdom in financial markets is that the time to move back into bank stocks is just after a slew of rights issues has depressed prices. In the past week, Royal Bank of Scotland, HBOS and Barclays have all fallen by around 10pc, and most of the banks in obvious need of capital due to credit losses have either announced or completed rights issues.

There are, however, good reasons not to give the UK banking sector the benefit of the doubt. At the best of times, as Anthony Bolton, the fund manager who ran Fidelity's Special Situations fund for many years, observes, banks "are the most opaque of all companies". With a building materials company, you more or less know that, barring fraud, the right amount of stock is there.

With a bank, it is much harder for investors to understand the assets on the balance sheet; and in the course of the credit crisis, it has transpired that the banks themselves experienced severe difficulties in this area.
Banks are now, to be fair, trying hard to give better information to investors. Maybe that's being a bit too fair: rather, having just written down huge slugs of their assets, their "trust us, we've got very sophisticated models in place" attitude was wearing thin.

Still, banks' disclosure has improved dramatically in the past nine months. The trouble is that disclosure and clarity are not the same thing. Some banks still don't look very well capitalised. Barclays, which has raised some new capital but hasn't resorted to a rights issue, admitted yesterday that it will miss one of its capital ratio targets at the end of its first half.

Yet, as Citigroup analyst Simon Samuels pointed out on a conference call, you would think that, cyclically and structurally, now is the time for banks to be operate with capital above target levels. "Even if Barclays achieves its intention for the Equity Tier 1 ratio 'to be at least at our target level in time', it would remain in the bottom 10pc of European banks on this measure and significantly below its UK peers," Citi observed in a research note.

The FTSE 350 banks index has fallen nearly 30pc in the past year, compared with just 6pc for the market as a whole; HBOS and RBS are yielding more than 11pc. They may look cheap - but not cheap enough. Yields are misleading, if banks have to raise capital to pay their dividends.

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Bank of England 'must abandon inflation target or crucify consumer'

The Bank of England will "crucify" consumers unless the Treasury lets it abandon its inflation target, one of Britain's leading economic authorities has warned. The Government must consider re-writing the Monetary Policy Committee's remit or leave the UK to face an unnecessarily deep and painful economic slump, according to Peter Spencer, chief economist of Ernst & Young Item Club.
 
The controversial call comes only days after Consumer Price Index inflation hit 3pc and the Bank's Governor, Mervyn King, poured cold water on hopes he would cut borrowing costs a number of times before the end of the year. Prof Spencer said it was becoming increasingly clear that controlling certain volatile elements of the CPI is beyond the Bank, and the Treasury had assigned it the wrong target.

"The consumer will have to be crucified in order to meet the inflation target as it stands at the moment," he said. "Inevitably, if we stick with the current remit we will need to keep interest rates at or around 5pc for a good 12 months to get inflation back on track. There's a very big 'if' there - the Chancellor should have a very good look at the specification of monetary policy."

The Bank must keep CPI inflation to within a percentage point of 2pc, or have to write a public letter of explanation to the Chancellor. Mr King warned this week that he would have to write "a number of open letters" in the coming months, as record oil and food prices push inflation towards 4pc.

However, Prof Spencer said the Bank should instead target "core inflation", which excludes volatile items such as food and energy prices. He said it should aim to keep this measure - currently 1.4pc - close to 1.5pc. "In retrospect, it would have been a far better target than either CPI or RPI," he said. "The only pity is that the Government didn't consider this when it last switched the target."

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Mackenzie Valley Pipeline faces new setback

The Mackenzie gas pipeline has been slapped with a new significant regulatory setback, delaying the $16.2-billion project by at least a year and highlighting the increasing roadblocks facing companies seeking to develop major oil and gas projects.

The joint federal and provincial panel evaluating the environmental impact of the giant pipeline now won't publish its report on the Mackenzie project until some time next year. The panel, known as the Joint Review Panel or JRP, had been scheduled to publish the review – which is needed for the project to go forward – in October.

The setback is the second big regulatory blow this week for Imperial Oil Ltd., which is taking the lead in developing the Mackenzie pipeline and will be one of the main suppliers. On Wednesday, the Calgary-based company received a court ruling delaying its $8-billion Kearl oil sands mine for at least several months, a decision that stemmed from an error by the government regulatory panel.

For the energy industry, regulatory reviews are becoming more rigorous and projects are facing greater scrutiny. That's ramping up costs, as companies seek to meet the stricter standards to ensure their new developments are approved.
Imperial had planned to finish building the pipeline by 2009, but has been hit with a series of complex and frustrating hurdles that have set back its plans to bring Arctic gas to North American markets.

While the company has been trying to build Mackenzie since 2004, it has yet to resolve aboriginal land access issues or the financial terms for constructing the massive project with the government. Meanwhile, the JRP, an independent body appointed by the Minster of Environment, was originally supposed to publish its impact report on the potential pipeline by August, 2007.

But the scale of the task has consistently forced it to push that deadline back, meaning the group is now about two years behind schedule, delaying Imperial from resolving the other regulatory issues that surround the development. The JRP's report won't appear this year because of the vast amounts of information that the panel needs to go through, said Annette Bourgeois-Bent, manager of communications for the Northern Gas Project Secretariat, a body created to assist with the regulatory process for Mackenzie.

Companies participating in the pipeline said they were aware that the report was likely to be delayed, but hadn't been informed of the reasons why. “We've had no indication, and at this point don't understand the reasons for the delay,” said Imperial spokesman Pius Rolheiser.

While he added that it is too early to evaluate the impact of the adjournment on the overall timeline for Mackenzie, and emphasized that Imperial is still committed to the project, Mr. Rolheiser said that “a delay is not a positive or desirable … not many things in life get less expensive over time. It wouldn't be accurate to say that we are pleased.”

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