Debt Rattle, May 6 2008: Let the sentence fit the crime

Dorothea Lange: 535-07-5248 and Wife - Oregon, August 1939.
"Unemployed lumber worker goes with his wife to the bean harvest.
Note Social Security number tattooed on his arm."

Ilargi: In Fannie and Freddie, we’re witnesses to a great crime in the making. How many businesses can you think of that, after suffering record losses, are deliberately pushed into ever higher risks and ever even-deeper losses by their own government?

And don't talk to me of good faith, don’t try telling me that Bernanke and the White House cabal are innocently setting this up, or that they’re doing it to save the US housing market. They know very well what the inevitable sequel to this X-rated B-movie is.

There’ll be a bail-out so huge that the $29 billion for Bear Stearns will look like your 5-year-old’s pocket change. All the big banks will transfer as much of their toxic paper to F&F as they think they can legally get away with it.

And when that is done, it’s your turn to pay up.


Fannie Mae ready to 'feast' on housing bust

Fannie Mae shares took off after the mortgage lender said it expects to "feast" on opportunities created by the housing crisis.CEO Daniel Mudd told analysts on a Tuesday morning conference call that the sharp decline in house prices will mean rising credit losses for Fannie Mae this year and next.

Credit costs hit $3.2 billion in the first quarter, up from $3 billion in the fourth quarter, as defaults rose and recoveries on foreclosed properties fell. Those costs saddled Fannie with a $2.2 billion first-quarter loss, helping to explain why the company moved Tuesday to raise $6 billion in new capital and cut its dividend by 29%.

The latest setback marked Fannie's third straight quarterly loss. But losses don't tell the whole story, Mudd and other Fannie execs emphasized. They said Fannie's ability to raise prices and grab market share, in the wake of the collapse of many private mortgage firms, will help to compensate shareholders for their pain. "We've got to get across a bridge where we don't miss the opportunities we have," Mudd said on Tuesday's call. "We will feast off this book of business we are putting on."

For instance, Fannie said the fees it takes to guarantee loans, as described by its weighted average G-fee, were up 24% in March from 2007 levels. Meanwhile, guaranty fee income rose to $1.75 billion in the first quarter from $1.1 billion a year earlier. Net revenue, reflecting guaranty, interest and other income, surged to $3.78 billion from $2.73 billion a year earlier. Like other financial institutions, Fannie is benefiting from the Fed's rate-cutting spree, which has created a bigger spread between the rates at which the company borrows and lends.

"Returns on our new business are well in excess of the cost of capital," finance chief Stephen Swad said. Shares rose 6% in early afternoon trading as investors digested the comments. Fannie said the latest quarter was also hit by a $4.4 billion mark-to-market writedown of the company's derivatives and trading books, but Fannie said it has adopted new hedge accounting rules that it believes should reduce mark-to-market volatility in coming quarters.

Fannie also got more good news on the regulatory front, as its regulator, the Office of Federal Housing Enterprise Oversight, lifted a 2006 consent order tied to Fannie's accounting scandal earlier this decade. Once Fannie completes its $6 billion capital-raising effort, OFHEO will trim the firm's required surplus over minimum capital to 15% from 20%, giving Fannie additional capacity to make and guarantee loans. Mudd said the capital-raising move will let Fannie "go into the belly of this cycle" with $17 billion more capital than regulators require.

Having excess capital now is crucial for Fannie, because the company expects the housing bust to deepen over the next year and a half, Mudd said. The company said Tuesday it now expects to see U.S. house prices fall 15%-19% peak to trough, including a 7%-9% decline this year. Fannie had earlier forecast a 2008 house-price decline of 5%-7%.

The combination of falling house prices, rising defaults and heavy leverage has some observers wondering how Fannie can be so optimistic. Peter Schiff, president at broker-dealer EuroPacific Capital in Darien, Conn., and a longtime critic of America's fiscal laxity, says he believes falling real estate prices will bankrupt Fannie and sibling Freddie Mac, given their thin capital cushions amounting to just 5% of assets. "There's no way to avoid it," he says.

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Bernanke sees big role for Fannie and Freddie

Fed chief Ben Bernanke sees a big role for Fannie Mae and Freddie Mac in resolving the U.S. housing crisis. Speaking at a Columbia Business School dinner Monday night, Bernanke said the government-sponsored mortgage investors should “move quickly to raise significant new capital” to aid the housing market, Bloomberg reports.

Bernanke also spoke in support of proposals that would have lenders forgiving parts of struggling homeowners’ loans and make Federal Housing Administration refinancings more widely available.

Calls for new capital at the big mortgage companies are nothing new. The director of Fannie and Freddie’s main regulator, James Lockhart of the Office of Federal Housing Enterprise Oversight, said in March that the companies may raise as much as $20 billion in new capital as part of a deal freeing them to expand their purchases of mortgage securities.

The firms raised some $15 billion at the end of 2007 via preferred stock sales to replenish their coffers after two quarters of hefty losses tied to souring mortgages. Fannie Mae’s first-quarter earnings, due out Tuesday morning and expected to show a third straight quarterly loss, may offer a clue as to how much money the firms will need to raise.

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Doubts Raised on Mortgage Agencies as Losses Mount

As home prices continue their free fall and banks shy away from lending, Washington officials have increasingly relied on two giant mortgage companies — Fannie Mae and Freddie Mac — to keep the housing market afloat.

But with mortgage defaults and foreclosures rising, Bush administration officials, regulators and lawmakers are nervously asking whether these two companies, would-be saviors of the housing market, will soon need saving themselves.

The companies, which say fears that they might falter are baseless, have recently received broad new powers and billions of dollars of investing authority from the federal government. And as Wall Street all but abandons the mortgage business, Fannie Mae and Freddie Mac now overwhelmingly dominate it, handling more than 80 percent of all mortgages bought by investors in the first quarter of this year. That is more than double their market share in 2006.

But some financial experts worry that the companies are dangerously close to the edge, especially if home prices go through another steep decline. Their combined cushion of $83 billion — the capital that their regulator requires them to hold — underpins a colossal $5 trillion in debt and other financial commitments.

The companies, which were created by Congress but are owned by investors, suffered more than $9 billion in mortgage-related losses last year, and analysts expect those losses to grow this year. Fannie Mae is to release its latest financial results on Tuesday and Freddie Mac is to report earnings next week.

Click to enlarge
The companies are sitting on as much as $19 billion in additional losses that they have not yet fully acknowledged, analysts say. If either company stumbled, the mortgage business could lose its only lubricant, potentially causing the housing market to plummet and the credit markets to freeze up completely. And if Fannie or Freddie fail, taxpayers would probably have to bail them out at a staggering cost.

“We’ve taken tremendous risks by loosening these companies’ purse strings,” said Senator Mel Martinez, Republican of Florida and a former secretary of housing and urban development. “They could cause an economywide meltdown if they got into real trouble and leave the public on the hook for billions.”

Concerns over the companies’ finances have prompted a fierce behind-the-scenes battle between nervous government officials and the two companies. Bush administration officials, the Federal Reserve and lawmakers all believe that the companies’ financial safety cushion is far too thin and have pleaded with them to raise more capital from investors.

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Troubling Tribble Tuesday?

Let's do the math as a "back of the envelope" exercise; all rounded off here, all combined:

• Fannie and Freddie's credit book exposure (guaranteed paper) is about $3.5 trillion
  
• Their outstanding debt is $1.5 trillion
  
• Their held mortgages (as investments) are another $1.5 trillion
  
• Their core capital (that which they have to operate on and cover losses on any of the above) is $80 billion

Now let's apply some estimates. If 2% of the credit book exposure (mortgages + guaranteed paper) explodes and has a recovery of 50%, it will generate $50 billion in direct losses. This is approximately what Countrywide Financial is reporting on its conforming paper at present. But remember, Fannie and Freddie have an unknown exposure to liar loans - subprime and ALT-A paper that was not fully documented, had appraisal, income or asset fraud involved in the "underwriting."

If that "performs" similar to some of the WaMu securitizations that we've been able to to dig into via a Bloomberg terminal, then these loss estimates are insanely optimistic. Some of these securitizations are showing 20%+ of the loans in the pool REO'd, foreclosed and disposed or in bankruptcy within six months of origination! It is entirely reasonable to expect that losses on those pools will exceed 15% of the principal value, assuming that 30% ultimately foreclose and the recovery averages 50%. Any HELOCs or second lines on these loans are zeros - guaranteed.

The question then becomes one of their mix - that is, how much of that crap is on their balance sheets and has been guaranteed?
The contamination potential here is serious, it is real, and it is under appreciated. If, for example, 10% of their credit book is contaminated in this fashion, it will roughly double the losses ultimately taken, completely wiping out these firms' core capital.

In other words, it will bankrupt them both.

$6 billion in new capital being raised? Ha! Fannie and Freddie need to double their core capital in order to be reasonably certain they can weather this storm, and they also need to cease accepting anything other than fully-documented paper with no more than an 80% LTV and 36% DTI - no piggybacks, no PMI, no games, no nothing.

Let me repeat: It remains my contention and belief that Fannie, and likely Freddie as well, are both "short to zero" candidates as I do not expect either of these firms to take these actions, nor do I expect our lawmakers to force them to both recognize losses as they occur and act prudently in what they buy. When your cash flow runs out you're dead (games or no games), and when your credit book is over $2 trillion.....

Therefore, my position on their stock is that they're a potential short to zero (but fraught with risk due to the tremendous "sticksave" games that are likely to be played) and if you own any of their bonds you better get rid of them now while they're both liquid and likely to fetch par, because once the truth of their "non-performing-but-we-call-it-performing" paper turns on them and devours their free cash flow you'll take an enormous haircut, and you sure as hell didn't buy this paper with the intention of taking risk!

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Fannie Mae to Raise $6 Billion in Capital After Loss

Fannie Mae, the largest U.S. mortgage- finance company, reported a wider loss than analysts estimated, cut its dividend and said it will raise $6 billion in capital as the worst housing slump since the Great Depression deepens. The Washington-based company tumbled as much as 12 percent in early trading and said its credit-market losses will be worse next year.

The first-quarter net loss was $2.19 billion, or $2.57 a share, compared with a loss of 64 cents a share anticipated by analysts, the average of 12 estimates from a Bloomberg survey. The "severe weakness" in the housing market was worse than expected in the quarter and will continue this year, Chief Executive Officer Daniel Mudd said in a statement. The new capital may help the company weather credit and derivative losses that rose fivefold to $8.9 billion.

The money raised may still not be enough if the housing slump continues into 2009, said Ajay Rajadhyaksha, head of fixed-income strategy for Barclays Capital. "They are now starting to realize the fact that their credit losses will be considerably higher than they were in 2007," said Rajadhyaksha, who is based in New York. "Things in the housing and credit markets are deteriorating very fast and this will not be the last capital raising this year."

Fannie Mae said home price declines this year are exceeding its estimates and attributed the larger share of its credit losses to certain types of loans in California, Florida, Michigan and Ohio. The government-chartered company, which sold $7 billion of preferred stock in December, may need as much as $15 billion to cope with the delinquencies and foreclosures, analysts said. The company will begin a $4 billion sale of common and convertible preferred shares today as part of the $6 billion in capital raising, according to a statement.

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Fannie Sparks Bid for Treasurys

A miserable quarterly report from Fannie Mae sent investors into the comfort of low-risk government debt Tuesday. Fannie Mae swung to a first-quarter loss of $2.19 billion, or $2.57 a share, from a year-earlier profit of $961 million, or 85 cents, as the company recorded a much larger provision for credit losses in the latest period.

The federally-chartered company said it will cut its dividend and raise $6 billion in capital amid the worst housing slump in decades. The largest U.S. home buyer also expects "severe weakness" in the housing market to continue in 2008. Fannie Mae now expects 2008 home prices to decline 7% to 9% on a national basis, with significant regional differences in the rate of home price declines.

The news pushed down U.S. stock futures and widened short-term swap spreads and pushed Treasurys from two-, five- and 10-year maturities to session highs. The two-year notes, which have been battered over the past few weeks, were the biggest winner. "There is good buying in the front end and some traders are worried about the tightening of front end credit" following the poor earnings report, said Michael Franzese, head of government bond trading in New York at Standard Chartered.

The benchmark yield curve, or the yield gap between two- and 10-year Treasurys, widened to 147 basis points from 143 basis points Monday. Long-dated Treasurys continue to underperform as investors brace for the upcoming $21 billion sales of 10- and 30-year government debt. The Treasury Department is slated to auction $15 billion 10-year notes Wednesday followed by $6 billion sale of 30-year bonds a day later. Rising supply tends to suppress bond prices and push up yields.

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Has Europe Declared War on the Weak Dollar?

When Jean-Claude Juncker, Luxembourg's premier and the chair of Europe's finance ministers, announced on April 23 that "financial markets and other actors [had not] correctly and entirely understood the message of the [recent] G7 meeting," his words went essentially unheeded. The Daily Telegraph's Ambrose Evans-Pritchard put that message in clear language.

"[Juncker], he said, "has given the clearest warning to date that the world authorities may take action to halt the collapse of the dollar and undercut commodity speculation by hedge funds."

Prior to Juncker's comments French Finance Minister Christine Lagarde likened the recent G-7 stance to the 1985 Plaza Accord when the industrialized nations agreed to "coordinated intervention" to drive down the dollar. When asked whether the G7 statement might hint at a new coordinated intervention, Lagarde replied "the future will tell."

Behind the explicit message to the hedge funds and other "actors," stood an implicit message to the United States: The rapid decline of the dollar was about to be challenged. Europe would no longer tolerate its effect on European industry. Europe, in effect, was declaring war on the weak U.S. dollar.

Black: USD/Euro - Red: Gold

As you can see, there is a discernible pattern in the chart. The last four sharp declines in the euro and gold have occurred at precisely 2AM Mountain time, or 9AM London time -- the first clue that these might not be random market events. The most recent (May 1) followed the announcement by the Fed it was lowering interest rates and that it stood ready to lower them further in the weeks to come. Adding to the intrigue, the first two instances appear to have been successful attempts to keep the euro from transcending the $1.60 mark.

These events, carried out in the London market in each instance at the open, go beyond giving the appearance of something unusual going on in the dollar/euro market. It seems that someone is intent on delivering a message, and that someone could very well be the European Union. So what might all of this mean for gold?

The chart above shows the lockstep relationship between gold and the euro since the first signs of intervention on April 18. Obviously, gold has been hurt by the dollar/euro action, but I do not believe that Europe is directly attacking gold. Its interest is in the euro. Instead gold is suffering collateral damage tracking lower as the dollar has tracked higher.

It remains to be seen if gold will continue its lockstep relationship with the euro in the future particularly if it becomes generally known that what we are witnessing is indeed a coordinated, official-sector policy.

Gold had already begun to decline long before the Lagarde-Juncker warning, so the action in the dollar/euro market has simply added impetus to the trend already in place. Don't forget that as late as August of 2007, gold was trading in the $650 range. From there it vaulted to a high of $1011 (London Fix) in roughly a six month period. That is a fairly strong and rapid run-up by any standard. A correction was overdue."

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U.S. April Business Bankruptcy Filings Increase 49%

U.S. business bankruptcy filings in April increased 49 percent from a year earlier, the biggest gain so far this year, as the slowing economy prompted more companies to shut down. Business filings rose to 5,173 during the month, according to statistics compiled from court records by Jupiter eSources LLC in Oklahoma City. Total bankruptcy filings, including those by individuals, were up 31 percent from a year earlier to 93,096, the group said.

Signs of distress, such as bankruptcies and foreclosures, are rising as economic growth has slowed to its weakest pace since the last recession in 2001. The economy lost jobs in April for the fourth month in a row, for a total of 260,000 jobs cuts so far this year. The latest casualty is Tropicana Entertainment LLC, the owner of 11 casinos that filed for bankruptcy reorganization last night. Tropicana blamed its filing in part on a $2.1 billion cash acquisition of five casinos two years ago which company President Scott Butera said represented, in retrospect, the "height of the real estate market."

"When you go into a downturn, the cyclical industries tend to get hit," said Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado. "Any sudden downshift in growth will generate rises in these numbers." As the U.S. faces its worst housing recession in a quarter century, almost 650,000 properties were in some stage of foreclosure during the final quarter of 2007, up 112 percent from a year earlier, Irvine, California-based RealtyTrac, which monitors foreclosures, said last week.

Foreclosures and bankruptcies alike are rising as falling home prices make it harder for those in the U.S. to refinance before adjustable-rate mortgages reset. Median prices for existing homes fell in 22 metropolitan areas in February, down 7.7 percent from a year earlier, the National Association of Realtors said April 22.

Tougher lending standards are also making it harder for small businesses and homeowners to stay afloat. The Federal Reserve said yesterday the proportion of U.S. banks making it tougher for companies and consumers to borrow approached a record in the past three months as the credit crunch deepened

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FDIC Can Take Up To 99 Years To Pay!

  Okay.... here's the deal. I am in my bank today talking with my banker who also happens to be the bank manager and personal friend and has been with this major bank for over 20 years. We are shooting the breeze after I had been in to make a deposit. We are talking about the financial stability issues in light of the Bear Stearns fiasco.

After my mom's death this past Christmas, I set-up an estate account with my bank in an FDIC insured account. Anyway, I was telling him that rather than taking her $125,000.00 and putting $100K in one bank and the 25K in another bank so it would all be insured, I figured if the world ever got to a point where my bank (a MAJOR bank) went under, we would be dodging missiles from Iran and it really wouldn't matter much anyway.

Then he tells me, "You know FDIC can take up to 99 YEARS to pay a claim don't you?" Of course, this blows me away and my DR mentality kicks in and start pursuing this further with him. He then accesses the FDIC WEBSITE where the FDIC discounts this RUMOR and then he goes on to explain that this is something FDIC is doing to dispel any panic and to insure that the general public doesn’t get alarmed.

I then say to him ”Okay, so do you have any proof?” He tells me he has a document, as do all branch managers of his bank as well as any FDIC bank or institution, that spells this out and what to do in the event of any event that caused a closure of a entire bank. I asked if I could see this but he refused as the bank has cameras and would capture him opening up a secure EYES ONLY area. I told him that I had never heard of this before.

He said that relatively few people have as it is something that is kept close to the vest by FDIC other than their rumor spin. He gives me a scary scenario. A small bank goes under.... no problem. But what if some National Emergency took place and rocked the financial institutions of the US off their feet and, let’s say, Wells Fargo or Chase goes under. He then says to me ”Do you really not think the FDIC would have something in place to allow them to stretch their liability in the event of a catastrophe?”

The bottom line, anyone who is under the false impression that their money is going to be paid IMMEDIATELY if their bank goes under, is not taking all the possible circumstances that would prevent immediate payment. So we finished up our conversation of family and friends and I left the bank. I went to the FDIC WEBSITE and spent several hours and could find nothing more than them dispelling the RUMOR.

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Sprott Hedge Fund IPO May Signal Top of Canada Commodity Rally

Sprott Asset Management Inc.'s initial public offering this week will make a billionaire of the hedge fund company's founder, spurring speculation Canada's decade-old commodities boom is ending, investors say. Eric Sprott's bets on gold and oil pushed his Toronto-based flagship fund to an average return of 27 percent a year since 1998, more than three times the gain of Canada's Standard & Poor's/TSX Composite Index. The fund bought mining stock Thompson Creek Metals Co. in 2006 prior to a rally that lifted it tenfold.

Sprott is cashing out eight years after forming the company that made him one of Canada's best-known speculators. The C$230 million ($226 million) IPO is reminiscent of last June's share sale of U.S. private-equity firm Blackstone Group LP, said Stephen Jarislowsky, chief executive officer of Jarislowsky Fraser Ltd. in Montreal. That IPO preceded a 56 percent decline in monthly takeover volume in the U.S. "When the LBO firms went public, the next day, the game was up," said Jarislowsky, whose firm manages about $56 billion.

"Why is he going public? If it's going that well, why would you let anybody in on it? Why doesn't he just sell to his partners?" Insiders led by Sprott filed last month to sell as much as 15 percent of the company, which manages C$6.9 billion in mutual funds and hedge funds. Sprott Asset plans to sell as many as 23 million shares, according to the sale documents. The founder's 78 percent stake would be worth about C$1.17 billion at C$10 a share, the mid-range of the estimated offering price. The shares are expected to be sold on May 7.

The deal, led by Cormark Securities Inc. and TD Securities Inc., may be the biggest IPO in Canada in five months, helping to revive the market for share sales. Neither Sprott nor any other executive at the firm were able to comment, Sprott's assistant Lydia d'Alessio said. A chartered accountant from Ottawa, Sprott, 63, has been managing money for about 35 years. He started as an analyst at Merrill Lynch Canada Inc. and founded Sprott Securities Ltd., now called Cormark, in Toronto in 1981, before selling it to its employees in 2002. Sprott Asset Management was formed in 2000.

Sprott was paid C$83.8 million last year plus a share of more than C$570,000 in rent for his art collection. In 2001, he endowed the Sprott School of Business at his alma mater, Ottawa's Carleton University, with C$10 million. Sprott espouses the "Peak Oil" theory that says new supply is insufficient to replace declining production. He devoted his April newsletter to the topic. The September issue stated simply, "Buy Gold."

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Rent-free homeowners keep economy from stumbling

This year, 93,000 California homeowners received a Notice of Default, meaning they had not paid their mortgage for at least 3 months.  Since last September, 145,000 borrowers have the privilege of living rent-free.

If we assume the average mortgage payment is $1500, and the average borrower lives rent-free for 9 months from stopping a mortgage payment to being booted out of his home after the auction, that is (145K * $ 1500 * 9) = about $ 2 billion.  Californians have an extra $ 2 billion to spend, because they don't have a mortgage payment.  I wonder how bad our budget situation would be, without this boost!  (I didn't even add all those not paying their HOA dues or property taxes, but I've seen $25K and up annual property taxes go unpaid for several years.)

So California alone is adding $ 2 billion in additional spending to the economy, as these "mortgage free" homeowners get to use their mortgage payment on movies, clothes, trips, etc. No wonder the economy is not turning down as quickly as economists had expected.  

Every dollar not paid on the mortgage, is a loss on another bank's balance sheet, but a gain to a retailer somewhere.  The losses are quietly piling up on the banks' books.  Just because there has not been a front-page story about bank losses in a few weeks, does not mean all is well.  We have to remember, that each foreclosure reported in the news, is another loss to a bank's balance sheet. I also realize that banks are hoarding their bank owned properties. I counted 6000 REOs on property tax records last week, but only 2200 listed for sale on the MLS:  that leaves about 4000 bank owned homes that are being hidden by the banks.

No wonder our inventory has stood steady below 20,000 homes for a few years now.  Sellers who are upside down live rent-free for 9 months instead of going on the market for sale sellers who have equity choose to "stay put" or rent their homes, and banks are hoarding homes to prevent taking losses.  All this adds to up to a lot of hidden losses, which will come into the pipeline eventually. 

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Economic Troubles Affect the Vegas Strip

For decades, this gambling center seemed nearly immune to the economic swings of the rest of the country. But these days, the city built on excess is seeing a troubling sign: moderation. Gambling revenue and hotel occupancy are down. Resorts are slashing room rates and offering coupons or free nights.

Casino operators are firing hundreds of workers, and their stock prices have plummeted since October. Credit is drying up for hotel and condominium projects planned before the slowdown arrived. Even the people still coming to Las Vegas are spending less. Julia Lee, 27, of Los Angeles said she normally brings $10,000 on her trips here to play blackjack. As Ms. Lee picked up show tickets the other night, she said she had brought less than half that on this trip. “My parents are in real estate, and we’re worried,” she said.

So are this city’s hoteliers, retailers, wedding chapel operators and anyone else who depends on the extravagance of gamblers and tourists. The spending declines are relatively modest, a few percentage points here and there. But Las Vegas has a huge inventory of new casinos and hotels due for completion in the next few years, and a long national recession could send the city reeling.

The Las Vegas outlook would be far worse if not for foreign visitors. They are taking advantage of the low dollar to savor the fare of celebrity chefs like Alex Stratta and to snap up goods that might cost twice as much in Europe. To manage the slowdown, Las Vegas is revving up an overseas marketing campaign, and in the United States, it is pitching spontaneous Vegas escapes. “Do it without thinking!” says one television spot.

But representing only 13 percent of visitors, foreigners can take up only so much slack. Deutsche Bank recently started foreclosure on a $760 million construction loan for the Cosmopolitan Resort and Casino, a partly built project in the heart of the Las Vegas Strip. Crown Las Vegas, a bullet-shaped hotel and casino resort that was supposed to become the tallest building in the city, was scrapped a few weeks ago for lack of financing.

One of the most prominent Las Vegas casino operators, Tropicana Entertainment, said Monday it would seek bankruptcy protection. The company, beset by financial difficulties, made cutbacks at a casino in Atlantic City that prompted New Jersey regulators to strip it of its license there; that set off a cascade of fresh financial problems.

Other multibillion-dollar Las Vegas projects are facing delays or have been put up for sale because of tightening credit and changing Wall Street perceptions about the city. The city’s resort properties already have 130,000 rooms, and Wall Street — which financed much of the recent boom — is worried that Las Vegas cannot absorb the 40,000 more that are on the drawing board or under construction.

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Ilargi: Commercial real estate, which has been overlooked as a problem maker so far, is about to sink many developers, builders and local banks. The larger banks will gobble up the smaller fish, laughing, all the way to the.....

Regulators cite construction loan fears

Loans to homebuilders and other developers are the latest slice of the credit market under duress, and analysts say banks could face hundreds of millions of dollars in losses as a result. As commercial and residential real-estate prices decline, banks of all sizes face a growing number of loan defaults from builders unable to sell houses, and from developers whose malls and other properties turned out to be less desirable than anticipated.

These problems, if they worsen, are likely to rattle shaky credit markets and could cause more banks to fail in the coming years. They come after the prolonged real estate boom made such lending seem exceptionally safe, and default rates had been low. Those seemingly safe loans are proving to be anything but secure. For example, Dallas-based Comerica Inc. set aside $108 million for loan losses in the fourth quarter of 2007, primarily because of bad real estate development loans the bank made, particularly in California and Michigan.

Construction and development loans are loans made to builders for properties such as strip malls, office buildings and residential developments. They have been a key source of profit for small and midsize banks. The percentage of those loans that are 90 or more days past due rose to nearly 3.2 percent at the end of 2007, up from less than 1 percent a year earlier, and is now at levels not seen since the early 1990s, according to the Federal Deposit Insurance Corp.

At a community bankers' conference on Wednesday, FDIC Chairman Sheila Bair said banks that were cautious about their lending should be able to weather the slowdown. Those that weren't so careful won't be so lucky. "If you competed fiercely for deals, turned a blind eye to the loose terms that were available in the market or took on significant undiversified concentrations, you may well get hurt if we have a sustained slowdown in real estate," she said, according to remarks prepared for the Orlando, Fla. meeting.

Other regulators agree. Comptroller of the Currency John C. Dugan told lawmakers Tuesday that "smaller banks that have exceptionally large concentrations in commercial real estate loans -- and there are many of them -- face real challenges in those parts of the country where real estate markets have slowed significantly."

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Banks squeezing credit to consumers, businesses

Consumers and businesses found it harder to borrow money over the past three months, the Federal Reserve reported Monday, a sign that the historic credit crunch now hitting the economy is still worsening despite Herculean efforts by the Fed.

More than half of the banks surveyed by the Fed said they had tightened the screws on commercial and industrial loans, commercial real estate loans, residential mortgages, and home-equity lines of credit. Large numbers of banks tightened standards for other types of loans, including consumer credit cards. Almost no banks eased credit terms for any type of loan, the Fed said in its quarterly senior loan officer survey.

The credit squeeze has moved far beyond the subprime segment to affect nearly every borrower. Tighter credit could slow economic growth, especially consumer spending, economists say. Lack of credit could sink the commercial real estate market as well. "The significant tightening of standards for consumer loans is probably the ugliest news of this report," wrote Harm Bandholz, an economist for UniCredit Markets. "Investment will continue to shrink, while private consumption growth will come to a halt or even turn negative" in the second quarter.

The crunch showed few signs of abating. The net fractions of banks reporting tighter lending standards "were close to, or above, historical highs for nearly all loan categories in the survey," the Fed said. The survey was conducted in early April, covering the prior three months, "one of the more difficult periods in banking history, as fundamental deterioration was accompanied by disrupted funding markets and some asset flight," wrote Steven Wieting, an economist for Citigroup Global Markets.

Banks said they were restricting credit because of worries about the economy, worries about risk or illiquid markets, and worries about their own fragile capital position. Banks were increasing interest-rate spreads, requiring more documentation, demanding more collateral, or requiring co-signers and or covenants before granting credit. Consumers are being hit hardest by the stricter lending practices, the survey showed.

Standards for all types of mortgages tightened even further, while a record 25% of banks said they were less willing to make consumer installment loans. Standards for home-equity loans and credit cards were also much tougher. Fewer banks expected to make student loans in the coming year. The commercial real estate market has also been hit hard. Nearly 80% of banks tightened standards for commercial real estate loans, just down from the record 80.3% that tightened in the previous quarter.

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What Uncle Sam Gives in Rebates, OPEC Takes

Wal-Mart and OPEC are battling for the tax rebates the U.S. government began handing out last week. The result may be a draw for the economy. While consumers might spend enough of the $117 billion stimulus at retailers to keep the U.S. economy afloat in the months ahead, the boost from their purchases will be diluted by gasoline prices at $3.62 a gallon and rising.

The upshot: The U.S. might avoid an outright contraction in the second quarter and still be saddled with sluggish growth typical of Europe, which expanded at a 0.9 percent annual pace in the six quarters following a 2001 recession. "It feels like the U.S. is taking a European holiday," says Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York. "We're in for a long period of growth hugging 1 percent."

Since President George W. Bush signed the stimulus package in February to much fanfare, the price of a gallon of gasoline has risen 64 cents, according to AAA, the nation's largest automobile club. That's boosting the coffers of the Organization of Petroleum Exporting Countries while robbing consumers of nearly $23 billion in spending power on a quarterly basis.

Food prices, too, have climbed at an annual rate of 5.1 percent since the start of the year, meaning another possible $5 billion or so bite out of consumers' buying potential. The increases will eat into the $25 billion to $50 billion economists expect the rebates to add to spending in the coming months. Personal consumption accounts for more than two-thirds of the U.S. economy.

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Gasoline prices: consumers and politicians respond

The trend is clear: demand is down and complaints are up.U.S. sales of cars manufactured in North America actually rose 1.3% in April 2008 compared with the same month the previous year.

Data source: Wardsauto.com

But sales of domestic light trucks, which includes the once-almighty SUV category, fell 20.6% in April, even more dramatic than the 18.3% drop between March 2007 and March 2008. Combined sales of domestic and imported cars now outnumber light trucks by a significant margin, the first time that's happened since I've been collecting these numbers in 2003.

Data source: Wardsauto.com
U.S. gasoline consumption since January has averaged 1% lower than the first four months of 2007, another quite unusual development:


U.S. finished motor gasoline produce supplied, 4-week averages, in thousands of barrels per day. Most recent year in red, previous year in blue. Data source: EIA
None of which has been accomplished without significant complaining, to which two of our three presidential candidates have willingly hearkened, proposing a cut in the 18.4-cent-per-gallon federal gasoline tax. Although I could easily imagine circumstances in which an 18 cent cut in gasoline prices would not much affect the quantity demanded, my inference from the evidence above is that at the moment, price relief might well bring a measurable boost to demand.

Proponents of a gasoline tax cut have an important task explaining where the necessary additional gasoline supply will come from. I think the most natural expectation is that it would come from increased imports which could be diverted to the U.S. if we offered a higher price, though that of course would mean that much of the intended benefits of the gas tax holiday would in fact go to foreign suppliers.

Such considerations leave me endorsing a statement recently signed by many of my colleagues that reducing the gasoline tax would be an inappropriate and ineffective response to the current situation.
To which advice Hillary Clinton has bravely responded:

I'm not going to put my lot in with economists.

And to which Bryan Caplin even more bravely declares I'll shill for Hillary:

1. The American people want to "do something," and Hillary's tax cut will at least do little harm....
2. If (due to highly inelastic short-run supply) 100% of the tax cut goes to producers, that's not a bad thing. It helps to balance out the long-run disincentive effects of populist measures....
3. The short-run elasticity of supply is probably near-zero for the world market, but Hillary's tax cut affects only the U.S. So as I argued previously, American consumers will at least get a moderate piece of the tax cut.

It's nice to see that we have some economists with a sufficient number of hands to be able to lend one to Clinton and McCain.

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How would Europe cope if a big bank collapsed in its midst?

When Northern Rock ran into disaster last September, it was not only panicky British depositors who queued up to withdraw their savings from the stricken mortgage lender. In Dublin hundreds of Irish depositors did too. They were soothed only when Alistair Darling, Britain's chancellor of the exchequer, told them that in the case of Northern Rock, the deposit-insurance scheme applied on both sides of the border.

In the European Union (EU), the implications of that bank run have given a new urgency to efforts to harmonise the system of deposit insurance. EU banks have an automatic “passport” to operate branches in other member states. But there is so little clarity about how foreign depositors would be treated in the event of a bank failure that regulators fear a cross-border panic could easily erupt.

Even before the Northern Rock affair, European Commission experts were working on improvements to a 1994 directive that sets minimum standards for deposit insurance. Currently, the law is confusing. It stipulates that a scheme should cover a minimum of €20,000 ($31,200). However, it allows countries to decide on things such as co-insurance (ie, the depositor bears some of the risk); whether the scheme has paid-in funds; or whether it relies on the remaining healthy banks to chip in after a failure.

In the EU no two countries' systems are the same. Harmonisation is hard to pull off, however. Since 2003, Nordea, a bank forged from mergers in Sweden, Norway, Finland and Denmark, has been negotiating with different deposit-insurance schemes in the four countries. All are pre-funded, but at different levels. Nordea contributes to all four. It wants to become a Societas Europaea, which would give it residence in Sweden, with branches rather than subsidiaries in the other countries. But Sweden's neighbours will not let it transfer the deposit-insurance contributions it has made to them to Sweden.

If this is all so thorny in Scandinavia, it could be even worse farther south. Members of the European Forum of Deposit Insurers recently met in Italy to discuss fixes. They made six suggestions, including speeding up payouts, ideally to a few days. They put particular emphasis on ensuring the public was better informed. This is just the start. Some advocates of harmonised deposit insurance want something similar to America's Federal Deposit Insurance Corporation (FDIC), which pays out within a day or so.

Others point to countries such as Australia and New Zealand, which have none at all, relying on robust supervision of banks, and the discrimination of depositors. In both countries, as in America, supervisors have powers to step in long before a bank defaults and to appoint an administrator.

Switzerland, a small country that is home to two global banks, has a capped deposit-insurance scheme—a maximum of SFr4 billion ($4 billion) for any bank that goes bust. Only deposits within Switzerland are covered. The European directive does not give EU members such discretion. Nor does EU bank regulation allow for early intervention. Talk of setting up a pan-European FDIC has not got much official support.

There are too many physical and philosophical differences between member states, and it would be expensive, says an EU expert. The FDIC has resources of around $52 billion. Pre-funded schemes in the EU total a mere €13 billion.

It is a popular fallacy, however, that a deposit-insurance scheme can stem every banking crisis.The presence of a safety net is meant to give people enough confidence not to start a run in the first place.

If they do, even the best-funded scheme may be insufficient to stop it. In that case, it is up to the government to decide whether the bank is worth saving. If it is, the more back-up it provides, the better.

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Ilargi: A delightfully juicy case, which may go on for a while. Nothing should surprise us in a country that elects Berlusconi again and again as prime minister. Wall Street and the Italian mob, now there’s a team.

Parmalat Seeking $2.2 Billion From Citigroup at Trial

Parmalat SpA, the Italian dairy company that collapsed in 2003, is seeking $2.2 billion in damages from Citigroup Inc. at a civil trial in New Jersey, a company lawyer told a judge today. Parmalat Chief Executive Officer Enrico Bondi seeks to prove that Citigroup, the largest U.S. bank by assets, aided and abetted larceny by corrupt insiders at Parmalat.

Lawyers for both companies met today in a pre-trial hearing before state Superior Court Judge Jonathan Harris in Hackensack. Parmalat, which collapsed five years ago in Italy's largest bankruptcy, initially sued Citigroup in 2004, seeking $10 billion in damages. Harris narrowed the case on April 15, dismissing Parmalat's claims of fraud, conspiracy, racketeering, unjust enrichment and deepening insolvency.

"We will be asking the jury for approximately $2.2 billion," Parmalat attorney Kenneth Chiate told Harris. Citigroup, based in New York, is seeking $699 million in damages on its counterclaims of fraud and theft, bank attorney John Baughman told the judge. Jury selection is expected tomorrow. Harris said he would tell jurors that the trial will probably last through the end of July. Lawyers for both sides said they had been unable so far to reach a settlement.

Harris denied Citigroup's request to bar Parmalat from seeking to introduce more than 500 documents, including Italian police reports and statements by corrupt insiders, on the grounds that they were impermissible hearsay. Parmalat seeks to use the documents to help show that insiders looted the company. The judge ruled that he would consider the evidence on a document-by-document basis.

In a separate criminal trial in Parma, Italy, Parmalat founder Calisto Tanzi and other former executives are among 54 people on trial for fraudulent bankruptcy. Parma prosecutors have sought indictments against 12 current and former employees. Nine of them expected to testify in New Jersey.

One Citigroup banker is on trial in Milan with executives from other banks on charges that they manipulated the market by withholding information about Parmalat's finances. All of the bankers deny wrongdoing. Harris denied a request by Citigroup to prevent Parmalat lawyers from asking the bank's witnesses in the Italian cases about criminal proceedings there.

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Indonesia May Leave OPEC in 2009 as Oil Output Drops

Indonesia, the only OPEC member in Southeast Asia, may leave the group as early as next year because shrinking production has made the country a net importer of oil. "We are now studying the option," Energy Minister Purnomo Yusgiantoro told reporters in Jakarta today. The government may leave the Organization of Petroleum Exporting Countries in 2009 because it has paid its membership fee for this year, he said.

Indonesia has been weighing leaving the body since at least 2005 as output at aging wells declined and investment in exploration slowed. At a meeting yesterday, officials discussed withdrawing from OPEC for as long as the country's production remains below 1 million barrels of oil a day, state news agency Antara reported today, citing President Susilo Bambang Yudhoyono.

"If Indonesia leaves, it doesn't make a big difference to OPEC as it only highlights the country's declining production to the market," said Tony Regan, an energy consultant with Nexant Ltd. in Singapore. "Nothing will change in terms of their imports and exports." OPEC members account for 40 percent of the world's oil supply.

Southeast Asia's biggest economy imports about one-third of its oil product needs because it lacks adequate refining capacity and faces falling oil output. The Indonesian government has lowered its oil sales estimate for 2008 to 927,000 barrels a day from 950,000 barrels a day last year. Indonesia's crude output likely fell to 859,853 barrels a day in April from 867,516 barrels a day in March, oil and gas regulator BPMigas said on April 29.

The country plans to sell 7 million barrels of oil, or half of its stockpile, this year to increase government revenue as crude prices reached a record, Purnomo said on April 29. This may add $665 million to state coffers, on the assumption that Indonesia's oil price averages $95 a barrel this year, as stated in the budget.

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The Rise of the Rest

Americans are glum at the moment. No, I mean really glum. In April, a new poll revealed that 81 percent of the American people believe that the country is on the "wrong track." In the 25 years that pollsters have asked this question, last month's response was by far the most negative. Other polls, asking similar questions, found levels of gloom that were even more alarming, often at 30- and 40-year highs.

There are reasons to be pessimistic—a financial panic and looming recession, a seemingly endless war in Iraq, and the ongoing threat of terrorism. But the facts on the ground—unemployment numbers, foreclosure rates, deaths from terror attacks—are simply not dire enough to explain the present atmosphere of malaise.

American anxiety springs from something much deeper, a sense that large and disruptive forces are coursing through the world. In almost every industry, in every aspect of life, it feels like the patterns of the past are being scrambled. "Whirl is king, having driven out Zeus," wrote Aristophanes 2,400 years ago. And—for the first time in living memory—the United States does not seem to be leading the charge. Americans see that a new world is coming into being, but fear it is one being shaped in distant lands and by foreign people.

Look around. The world's tallest building is in Taipei, and will soon be in Dubai. Its largest publicly traded company is in Beijing. Its biggest refinery is being constructed in India. Its largest passenger airplane is built in Europe. The largest investment fund on the planet is in Abu Dhabi; the biggest movie industry is Bollywood, not Hollywood. Once quintessentially American icons have been usurped by the natives. The largest Ferris wheel is in Singapore. The largest casino is in Macao, which overtook Las Vegas in gambling revenues last year.

America no longer dominates even its favorite sport, shopping. The Mall of America in Minnesota once boasted that it was the largest shopping mall in the world. Today it wouldn't make the top ten. In the most recent rankings, only two of the world's ten richest people are American. These lists are arbitrary and a bit silly, but consider that only ten years ago, the United States would have serenely topped almost every one of these categories.

These factoids reflect a seismic shift in power and attitudes. It is one that I sense when I travel around the world. In America, we are still debating the nature and extent of anti-Americanism. One side says that the problem is real and worrying and that we must woo the world back. The other says this is the inevitable price of power and that many of these countries are envious—and vaguely French—so we can safely ignore their griping. But while we argue over why they hate us, "they" have moved on, and are now far more interested in other, more dynamic parts of the globe. The world has shifted from anti-Americanism to post-Americanism.

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Slavery and Involuntary Servitude

The Thirteenth Amendment of the Constitution, adopted at the end of the civil War in 1865, abolished slavery, but this same amendment expressly permits prison slavery and involuntary servitude.

AMENDMENT XIII – SECTION 1
Neither slavery nor involuntary servitude, except as punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.

The United States has less than 5 percent of the world’s population and almost 25 percent of the world’s prisoners. Are Americans more criminal than other folks? Or are there incentives that give the US the dubious honor of leading the world in prison population.

Prison labor has its roots in slavery. After the 1861–1865 Civil War a system of "hiring out prisoners" was introduced in order to continue the slavery tradition. Freed slaves were charged with not carrying out their sharecropping commitments (cultivating someone else’s land in exchange for part of the harvest) or petty thievery – which were almost never proven – and were then "hired out" for cotton picking, working in mines and building railroads.

The tradition continues. The nation needs a way to fill the prisons which provide a source of cheap labor. Surely the criminal justice system can be of help here, and indeed they are. Gerry Spence, the famed criminal lawyer, in his book From Freedom To Slavery, tells us: "I found that the minions of the law – the special agents of the FBI – to be men who proved themselves not only fully capable, but also utterly willing to manufacture evidence, to conceal crucial evidence and even to change the rules that governed life and death if, in the prosecution of the accused, it seemed expedient to do so."

Well surely the court judges are concerned with justice? Spence: "We are told that our judges, charged with constitutional obligations, insure equal justice for all. That, too, is a myth. The function of the law is not to provide justice or to preserve freedom. The function of the law is to keep those who hold power, in power." Now the law enforcement authorities don't do this all by themselves. For one thing, they have onerous laws to help them. It is instructive to look at the state of California in this regard.

The California Prison system is the third largest penal system in the country, costing $5.7 billion dollars a year and housing over 170,000 inmates. Since 1980 the number of California prisons has tripled and the number of inmates has jumped significantly. In the past few years controversies involving prison expansion, sky-rocketing costs, and claims of mismanagement and inmate abuse have put the California prison system under heightened public scrutiny.
What caused prisons to be a growth industry in California? Did Californians suddenly become lawless?

We need look no further than the CCPOA, the California Correctional Peace Officers Association. "The Power this prison guards’ union wields inside our prisons, legislative chambers and governor's office disturbs me. It should disturb every citizen."
~ Judith Tannenbaum, formerly an English teacher at San Quentin State Prison

The CCPOA is the biggest contributor to political campaigns in California. The CCPOA gives twice as much in political contributions as the California Teachers Association, yet it is one-tenth its size. In 1998, the CCPOA gave over $2 million to Governor Gray Davis, $763,000 to the media, and over $100,000 to Proposition 184, the 3 Strikes law. The 3 Strikes law mandated that convicted felons with one prior felony got twice the normal sentence for their 2nd strike, and convicted felons with two or more prior felonies would get at least 3 times the normal sentence or 25 years (whichever is more) for their 3rd strike. The CCCPOA has a vested interest in locking up more and more Californians for longer sentences.

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Thailand backs off on "OPEC-style" rice cartel

Thailand, the world's biggest rice exporter, backed off its unpopular "OPEC-style" rice cartel proposal on Tuesday and offered to host a forum of top producing nations to boost supplies and yields. "If Thailand was going to set up a rice cartel to fix the price, that would worsen food security," Foreign Minister Noppadon Pattama told reporters after a lunch with diplomats from six rice-producing countries.

Noppadon said he floated an idea of establishing an international agency to share information on rice production and productivity, called the "Council on Rice Trade Cooperation" instead of a price-setting body. Noppadon said Thailand, whose rice exports account for a third of the world's total, would host the first meeting in two to three months if the six countries -- China, India, Pakistan, Cambodia, Myanmar and Vietnam -- agreed.

Thai Prime Minister Samak Sundaravej told visiting Myanmar Prime Minister Thein Sein last week he would like to revive the long-dormant idea of a price-setting body, involving Thailand, Vietnam, Myanmar, Laos and Cambodia. But economic analysts and traders said the proposal would go nowhere because of the inability of governments to cooperate with each other and control farmers' output.

Samak said Thein Sein had agreed in principle to the idea, but the Burmese general did not speak to reporters. Myanmar has resumed limited rice exports this year, mainly to South Asia, after several years off the market, trade sources say. The five Southeast Asian nations produce a combined 60 million tonnes of milled rice each year, about 14 percent of world output. But only Thailand, the world's No. 1 rice exporter, and Vietnam have major surpluses.

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