Wednesday, May 7, 2008

Debt Rattle, May 7 2008: The New Logic

Dorothea Lange: Flat broke - August 1936.
Family between Dallas and Austin, Texas. The people have left their home and connections in South Texas, and hope to reach the Arkansas Delta for work in the cotton fields. Penniless people. No food and three gallons of gas in the tank. The father is trying to repair a tire. Three children. Father says, "It's tough but life's tough anyway you take it."

Ilargi: Numbers numbers numbers.

$6+ trillion of shaky, overvalued assets on Wall Street. $3+ trillion in loans on Fannie Mae’s book, against $42 billion in capital, and a fair value estimate of net assets that dropped by 2/3rd, to $12 billion. And yet, its required capital cushion went from 20% to 15% yesterday, and will soon drop to 10%. Huge losses, leading to increasing leverage and large gains in share prices. The new logic.

50%+ of 2006 homebuyers already underwater, and almost half of all 2005 and 2007 buyers. Hundreds of thousands of home equity credit lines withdrawn by lenders, even from those with (near) perfect FICO scores. Oil at $200 before Christmas. UK utility bills set to rise 30-40% this year. US interest rates to surge to 7%+ before the elections.

A new housing "relief" bill to lead to $20+ billion in new losses, while lowly derivatives traders make $4 million a year, and get drugs, vacations and hookers as added perks.

Remind me again: what exactly is it that we so deperately need to save here, and why?

Merrill Level 3 Assets Surge Nearly 70% To $82.4 Billion In Q1
Merrill is getting very good at the number one game on Wall Street, ‘Hide the Mortgages’. When worthless mortgage paper is presenting a problem to your financial sitaution, move them to your Level 3 books, mark them at par or better and put out a press release saying ‘we don’t need to raise anymore capital’.

Merrill’s top competitors in this game are Goldman, Lehman, Citi, Chase, Morgan, Bear etc. The usual suspects…the ones (other than Citi) that posted ‘really great earnings’ last quarter. Merrill says it’s most difficult to value Level 3 ’assets’ jumped big-time in Q1.  It’s ratio of Level 3 to total assets rose to 8 percent from 5 percent. What they didn’t tell you was that Level 3 ‘assets’ as a percent of shareholder equity was 130%. Good de-leveraging job guys!

But, what about your $770 BILLION in Level 2 ‘assets’ John? Maybe they are not all ’illiquid’ as are the Level 3 assets, but are they really worth par? Level 3 is where most have stuck the subprime, home equity, alt-a etc paper, however, Level 2 also contains certain residential and commercial mortgages.

So, this is what being “80% done with the credit crisis” looks like. Untradable, marked-to-myth assets surge, as banks neatly get their books in order putting all their toxins on their Level 3 books, awaiting the day the Fed comes in and saves everyone? But until that day comes and even as the Fed, Treasury and the banks themselves preach ‘deleveraging’, the banks are levering up.

Level 3 ‘assets’ among the many of the nations largest US banks add up to nearly $500 BILLION! That is more than the Fed has left! “. But wait a minute. What the heck are those Level 2 assets?’ Finding a bid for those in this market is likely as to close to impossible as a Level 3 ‘asset’ bid.

BUT THOSE ASSETS ADD UP TO NEARLY $5.5 TRILLION!  That makes the Fed’s $400 Billion or so they have left look miniscule. This makes the news released simultaneously regarding Merrill being investigated by various Gov’t agencies for their part in the Auction-Rate Securities nightmare look trivial.

This is an absolute disaster in the making. The Fed does not have enough reserves to take care of many of the nations largest banks, who as you can see, are OVER their ears on Level 2 and Level 3 ‘assets’, of which much has not been able to be priced for months. Much of it never will.

Ilargi: Pants on Fire no.1

Bush to seek OPEC oil production increase
President George W. Bush during his visit to Saudi Arabia next week will again ask OPEC to increase oil production, a senior White House official said on Wednesday as soaring oil prices hit new record highs. Bush will visit Saudi Arabia on May 16 during a trip to the Middle East and will have a message for oil suppliers similar to his January trip.

"Suppliers of oil as they consider their pricing policies and as they consider their production targets need to take into account the economic health of the global community," White House national security adviser Stephen Hadley said.

The price of U.S. crude oil hit a record $123.80 a barrel on Wednesday at the New York Mercantile Exchange. Rising oil prices will be passed on to consumers at the pump in higher gasoline costs. Asked whether Bush would seek an increase in production from OPEC during his talks with Saudi officials, Hadley replied: "I am confident he will. He has in the past."

Bush in January failed to convince OPEC to increase production, and the oil group held production steady. "I am confident he'll use that opportunity during this trip and will probably do so again in the future, as long as the current situation of high demand, high prices and tight supply continues," Hadley told reporters during a briefing on Bush's May 13-18 trip that will include stops in Israel and Egypt.

Bush will also have a message for domestic consumption, that the United States must diversify into other sources of energy and needs to increase its own oil production capacity, Hadley said. "Capacity is limited in the Middle East. There are limits to how much that production can be ramped up without enormous investments of dollars and enormous investments of time," Hadley said.

Ilargi: Pants on Fire no.2

Paulson sees end of credit crunch
US Treasury Secretary Henry Paulson has said that the worst of the credit crunch may have passed. He said the financial market turmoil that has led to massive losses at Wall Street banks had eased.
"We're closer to the end of this than the beginning," Mr Paulson told the Associated Press news agency.

However, he acknowledged that the US economy was still facing tough times as people coped with soaring petrol prices and a weak job market. He said rising energy prices could limit the effect of a $168bn (£86bn) package to stimulate the economy through tax rebates.

"Obviously, the high price of gasoline is unwelcome and is a challenge and is a headwind," he said. The rebate cheques reached bank accounts last week. Oil prices have hit a record level of $123 a barrel and this has been reflected in pump prices.

Many economists expect the US to fall into a recession this year as a housing slump and market turmoil take their toll on the wider economy. But Mr Paulson said he expected the economy to improve this year as the tax rebates get businesses and consumers spending again.

"We will get some help from the stimulus," Mr Paulson said. "Later this year, I expect growth will pick up."

Ilargi: Pants on Fire no.3

Realtor study predicts sales growth
A National Association of Realtors study shows house sales remained soft in March, but the organization is forecasting sales will begin to improve over the summer. The NAR's Pending Home Sales Index dropped 1 percent to 83 in March and was 20.1 percent lower than the March 2007 index of 103.9.

NAR Chief Economist Lawrence Yun says the extent of an expected recovery depends on better access to affordable loans. "Things are beginning to improve, but the availability of affordable mortgages is uneven around the country and sometimes within metropolitan areas," Yun says.

"As anticipated, we continue to look for a soft first half of the year, for both housing and the economy, before notable improvements in the second half. Some time is needed for FHA and new conforming jumbo loans to become widely available."

Existing-home sales are projected to rise from an annual pace of 4.95 million in the first quarter to 5.82 million in the fourth quarter, NAR said. Existing-home sales are likely to total 5.39 million, and then rise 6.1 percent to 5.72 million next year.

"Although more than half of local markets are expected to see price growth this year, the aggregate existing-home price will decline 2.4 percent in 2008, driven by a relatively few markets that are very oversupplied," Yun says. NAR projects a median sales price of $213,700 and a 4.1 percent jump to $222,600 in 2009.

New-home sales are expected to fall 30.9 percent to 536,000 in 2008 before rising 10.1 percent to 590,000 in 2009. Housing starts, including multifamily units, will probably drop 29.5 percent to 955,000 in 2008, and then rise 1.3 percent to 967,000 next year, NAR predicted. The median new-home price is estimated to fall 3.7 percent to $238,000 in 2008, then rise 5.4 percent in 2009 to $250,900.

Ilargi: Pants on Fire no.4

SEC to Make Banks Reveal Capital, Liquidity Levels
The U.S. Securities and Exchange Commission will require investment banks to disclose their capital and liquidity levels after the agency was criticized for regulatory failings in the wake of the Bear Stearns Cos. collapse. Wall Street firms declined on the news.

"One of the lessons learned from the Bear Stearns experience is that in a crisis of confidence, there is great need for reliable, current information about capital and liquidity," SEC Chairman Christopher Cox told reporters in Washington today. "Making that information public can certainly help."

The SEC is re-evaluating its oversight of securities firms after the Federal Reserve had to help rescue New York-based Bear Stearns in March to prevent a market panic amid a worldwide credit contraction. Concern that Bear Stearns was running short of cash prompted customers and lenders to desert the firm in March, forcing it to accept a takeover by JPMorgan Chase & Co.

Data on capital and liquidity will be required this year "in terms that the market can readily understand and digest," Cox said in a speech today before the Securities Traders Association in Washington. The SEC already collects much of this information without giving it to the public, he said.

The five biggest Wall Street firms had their largest share- price declines in at least a month. Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, led the way, losing $2.67, or 5.8 percent, to $43.64 as of $:31 p.m. in New York Stock Exchange trading. Merrill Lynch & Co., the third-largest U.S. securities firm, fell $2.87, or 5.6 percent, to $48.48. Bear Stearns slipped 57 cents, or 5.3 percent, to $10.27. Among larger rivals, Morgan Stanley declined $1.84 to $47.21, and Goldman Sachs Group Inc. lost $7.85 to $189.76.

U.S. Consumer Debt Rises More Than Forecast in March
U.S. consumer borrowing jumped more than double the amount economists forecast in March, indicating a slowing economy is forcing Americans to accumulate credit-card and other forms of debt. Consumer credit increased by $15.3 billion for the month to $2.56 trillion, the biggest monthly rise since November, the Federal Reserve said today in Washington.

In February, credit rose by $6.5 billion, previously reported as an increase of $5.2 billion. The Fed's report doesn't cover borrowing secured by real estate, such as home-equity loans. Consumers are turning to credit cards after banks tightened standards for home-equity loans and other borrowing. The March figures brought U.S. consumer borrowing in the first quarter to $34 billion, the most since the first three months of 2001, when the economy entered its last official recession.

"Consumers are strapped as incomes are not keeping up with inflation and this is leading them to rely increasingly on credit to see them through the worst housing downturn since the Great Depression," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi in New York. "The days of extracting cash from one's home to spend on goods and services are long gone."

Economists forecast an increase of $6 billion in consumer credit for March, according to the median of 34 estimates in a survey conducted by Bloomberg News. By category, revolving debt such as credit cards rose $6.3 billion during March and non-revolving debt, including auto loans, increased $9 billion for the month, according to the Fed's statistics.

Total borrowing, a key element of consumer spending, increased at a 7.2 percent annual rate in March after rising at a 3.1 percent pace during February, the Fed said. Household spending grew at the slowest pace since the 2001 recession in the first quarter, according to Commerce Department statistics. Consumer spending accounts for about two-thirds of economic growth.

A Fed report two days ago showed the proportion of banks making it tougher for companies and consumers to borrow approached a record in the past three months. About half of U.S. banks said they tightened terms on existing home-equity loans, mainly because of declines in home values below appraised values, as well as increased defaults and changes in borrowers' finances, according to the Fed's quarterly survey of senior loan officers released May 5.

Oil could hit $200 in 'super-spike'
Oil prices threaten to hit $200 a barrel in a final "super-spike" over coming months as producers fail to keep pace with blistering demand from China and the Middle East, according to a controversial report by Goldman Sachs.

"We believe the current energy crisis may be coming to a head. A 'super-spike' end game may be in the early stages of playing out," said Arjun Murti, the bank's energy strategist. Goldman Sachs said a chronic lack of supply would lead to a "dramatic and continuous rise in oil prices", followed at some point by a sharp fall in oil demand as consumers retrench.

US crude prices hit a fresh high of $122.35 a barrel yesterday as rebel attacks on Shell installations in Nigeria and tensions in northern Iraq continued to strain markets already caught in a crunch. Prices have doubled over the last year in what amounts to a massive transfer of wealth from the Atlantic region to the rising commodity powers.

This week's jump in prices comes despite the partial recovery of the dollar against the euro, suggesting that alleged investor appetite for oil as a sort of "anti-dollar" is no longer driving the market - if it ever was. Prices have now surged by more than $50 a barrel since the credit crisis began.

The market has shrugged off the effects of a housing slump in the United States, Canada, Britain and Spain. The oil boom has revealed just how much the world has changed from the days when the OECD club of rich countries invariably dictated the oil price.

Petrol prices in China and most Mid-East countries are held down by state controls, insulating demand from the effect of the global downturn. Between them, they account for the lion's share of extra oil use over the last two years. OECD consumption has been flat since 2004.

Goldman Sachs said the spare capacity of the OPEC cartel is already near "minimal" levels. There is a risk that Saudi Arabia will fail to meet output targets, suffering the same sorts of setbacks that have plagued Western oil companies. Non-OPEC producers have lurched from one disappointment to another. Russia's output fell 150,000 barrels per day in April compared to a year earlier, confirming warnings from industry leaders that Russia's oil infrastructure is woefully deficient.

"The possibility of $150-$200 per barrel seems increasingly likely over the next six to 24 months. A gradual rally in prices is likely to be longer-lasting than a sharp sudden spike," said Goldman Sachs.

More than half of 2006 home-buyers now underwater
Home prices posted their worst quarterly performance in over a decade during the first quarter, according to a report released Tuesday morning by real estate information Web site More than half of those who purchased a home in 2006 now owe more on their mortgage than their home is worth, the company said — surely ominous news for mortgage execs fretting over the potential for so-called borrower “walk-aways.”

Home values in the first quarter of 2008 fell 1.6 percent from the fourth quarter and 7.7 percent from the year-ago quarter, marking the most significant year-over-year decline in the past 12 years, Zillow said. The company’s own index of median housing values fell to $213,000 during the quarter, the lowest median price estimate recorded by the firm since the second quarter of 2005. Zillow’s home value report is based on data from 160 metropolitan statistical areas.

With the exception of Dallas, which returned a one percent year-over-year gain, 30 major markets tracked by Zillow declined from a year ago, with the majority falling back to the median values of three to four years ago. For example, first quarter home values in the Boston area were the equivalent to levels last seen in the second quarter of 2003, down 16 percent from the peak, which occurred in the third quarter of 2005.

Values in the Los Angeles MSA have declined to 2004 levels, down 19 percent from the market high recorded in the second quarter of 2006. The Detroit area has been hardest hit, retreating to value levels of 1998, down 24 percent from the market peak in the fourth quarter of 2005. Stunning numbers, but perhaps more troublesome is what these sort of price declines in key housing markets mean for millions of borrowers.

Of homeowners nationwide who purchased when U.S. home values peaked in 2006, one out of every two (51.6%) now owes more on their mortgage than their home is currently worth, Zillow said. For those who purchased in 2005 and 2007, the situation is only modestly better with nearly 42 percent and 45 percent, respectively, facing negative equity. By comparison, 16 percent of those who purchased in 2004 have negative equity, as do 7 percent of those who purchased in 2003.

For homeowners who purchased in some of the most volatile markets, such as many parts of California and Florida, as well as Phoenix and Las Vegas, rates of negative equity can be twice the national median and, in some cases, as high as 95 percent. For example, in the first quarter, Zillow said that Las Vegas home values fell 25 percent year-over-year and nine out of 10 (89.9%) homeowners who purchased in 2006, when the median down payment was 2 percent, now owe more than their home is worth.

Despite the incredible price drops in many key markets, Zillow also said Tuesday that nearly 3 in 4 borrowers believe their home has increased in value over the past 12 months — yes, really — which means that many homeowners clearly have not yet come to terms with market reality.

Ilargi: Fannie Mae has $3 trillion in loans in its book, and a "capital cushion" requirement of 15%. Yet, its capital is at $42.7 billion. I think my math must be worse than I already feared it was.

Fannie Mae sees sharper home-price declines, loses $2.2B
The steeper slide in home prices is accelerating the pace of foreclosures, Fannie Mae said Tuesday as it outlined plans for shoring up its finances following a $2.2 billion first quarter loss. While the nation's largest buyer of home loans will slice its dividend and attempt to raise $6 billion, mostly by issuing new shares, federal regulators loosened Fannie's capital requirements as the government looks for ways to bolster the housing market.

Moody's Investors Service downgraded the company's financial strength rating because of the potential for further losses from soured home loans over the next two years, but investors pushed Fannie's shares higher, in anticipation of the bigger role Fannie will play in the mortgage market. Fannie's president and CEO, Daniel Mudd, said during a conference call with analysts that "right now we are in the belly of the cycle," meaning losses from defaulted mortgages are likely to worsen next year.

Mudd said home prices in the January-March period fell "faster than anyone anticipated," and the company now foresees a nationwide drop of 7 percent to 9 percent in 2008. Previously, Fannie had been looking this year for a drop of 5 percent to 7 percent. As a result, Fannie said it expects to lose money this year on 13 to 17 of every 1,000 mortgages held on its $3 trillion book, up from its earlier expectation of 11 to 15 and a steep increase from four to six in 2007.

Despite the gloomy outlook, Fannie's federal regulator, the Office of Federal Housing Enterprise Oversight said it will reduce the capital cushion the company has to maintain. After it raises an anticipated $6 billion in a stock sale, Fannie will be required to keep surplus capital of 15 percent of their total mortgage debt, down from the current 20 percent. Another five-point cut will come in September, provided there is "no material adverse change" in the company's regulatory compliance.

Fannie's capital was at $42.7 billion as of March 31, down from $45.4 billion at year-end 2007.

Washboard Wednesday
Ok, let's start with Fannie. They have a horrific loss, right? Fair value of their assets cut by 2/3rds? Dilution out the ying-yang? So why does the stock take a rocket ride north? Simple - OFHEO (their regulator) loosened their capital constraints.

Now wait a second. Fannie did say that their credit losses were expected to significantly increase through 2008 and 2009! So let me see if I get this right - Fannie is going to increase leverage into a declining credit environment - lever up into worsening economic conditions for their business?

Is it just me or does that sound particularly insane to anyone else? Never mind the idea of buying a stock when the company says they're going to pull something like that? That, by the way, sparked a broad-based rally in the markets. It wasn't strong, but it was there, and it turned what was a red tape into a green one. The idiocy of this market knows no boundaries.

Let me remind you that if you're betting that the government will "bail out" Fannie if they blow up, that they "bailed out" Bear Stearns too, and it got you 1/10th of your stock price in the process. How's a 90% loss - or worse - sound? Not good? Then what the hell were you doing buying the stock? "Heh, the house is on fire!! I know - I know - let's put it out with this bucket of GASOLINE!"

Now let's talk about the next ticking nuclear device - FHLB "advances". The FHLB system is the Federal Home Loan Bank system, and has been the funding source for hundreds of billions of dollars worth of mortgages since the secondary markets seized - including a huge amount out to Countrywide, which of course, as we know, made a lot of "liar loans" and didn't tell anyone that's what they were. The other big participants? Banks like WaMu and Wells. Oh boy, all the poster children of California and Florida.

I wonder how much RISK the FHLB system is under right now? They do have a "superlien" against the assets of said banks....... but......

Fannie's Alt-A Issue
Fannie Mae is supposed to be prime, but its reporting some issues with loans involving less than perfect credit. On Tuesday, Fannie Mae executives told analysts that 43.0%, or $946 million, of the $2.2 billion in losses incurred during the first quarter involved Alt-A loans. They also said that the company's "Alt-A book will continue to drive an outsize portion of our overall credit losses." Fannie also reported $344.6 billion current Alt-A exposure and a limited strategy for stemming future losses.

These types of loans are attractive to lenders because the rates are higher than rates on prime classified mortgages, but they are still backed by borrowers with stronger credit ratings than subprime borrowers. However, with the higher rates comes additional risk for lenders because there is a lack of documentation--including limited proof of the borrower's income.

Fannie's Chief Executive Daniel Muddacknowedged that underwriting wasn't what it should have been during the mortgage market's heyday, saying that every company has a got part of their book that worries them most, and "In our case, it's the Alt-A book and we are focused on that." Mudd said that the Alt-A vintages performing most poorly in a four-year average book were late '05, '06 or early '07. That is, notably, most of the time.

Fannie Chief Financial Officer Steve Swad made a point of distinguishing between Fannie's Alt-A book, which outperformed PLS Alt-A securities in the market. Swad said that for the 2005 through 2007 vintages, cumulative default rates in Fannie's Alt-A book were about one-half the default rates in the overall PLS Alt-A market.

Swad also said that geography played a role in Fannie's credit situation, with Florida and California representing 32.0% of Fannie's total Alt-A assets. These two areas were the hottest buy-up areas and though dubbed "subprime" hotspots, they were really "Alt-A eruptions."

Why Ask Why? Buy Fannie, Buy, Buy!
Fannie Mae said it lost more than $2 billion in the first quarter. It says it will continue to lose money, and needs more money to fund operations as it continues to lose money. The market’s response? It’s all good. Shares of the beleaguered buyer of U.S. loans advanced smartly in trading Tuesday, gaining 5.5% after the company announced a loss of $2.57 a share, and added that the fair value of its net assets fell by nearly $24 billion to $12.2 billion.

It also cut its dividend to boot, to 25 cents a share, beginning in the third quarter; it paid out 35 cents a share in the first quarter. “We’re losing money, cutting the dividend, and raising capital, so buy this stock,” said Bill Schultz, chief investment officer at McQueen, Ball & Associates in Bethlehem, Pa., surmising how Fannie might pitch itself to stock investors. His firm does not own the stock.

Some analysts believe the impetus for buying shares now is a regulatory one, pointing to large rescue packages making the rounds in Congress that would limit foreclosures. In addition, BlackRock Inc.’s agreement to buy $15 billion in mortgage assets from UBS AG suggests some investors are dipping a toe in the water, however tentatively. “It could be that there’s some degree of comfort that the underlying credit risks are being addressed from a legislative point of view,” says K. Daniel Libby, senior portfolio manager of Sands Brothers Asset Management’s fund of hedge funds.

“Also, for BlackRock to have bought a large portfolio from UBS…suggests they’re starting to see some clarity ahead.”
But that clarity may not extend to Fannie itself, Mr. Libby says. Stephen Swad, chief financial officer at Fannie, said on a conference call that the company was “not able to give more visibility at this time” regarding when credit losses will peak.

They expect home-price declines of 7% to 9% in 2008, an increase from earlier projections, but CEO Daniel Mudd tried to assuage investors by saying “we are in the belly of the cycle.” He said capital markets are recovering — and the adjustments now need to merely work their way through the consumer and commercial sectors.

That may take a long time, but investors appear to be betting that it will happen, if only because it has to happen. “It’s almost like you need them, that there’s a bottom or a put on the operations of the company, because it’s more valuable to keep them functioning than to put pressure on them to constrain their mortgage-buying ability,” Mr. Schultz says.

Fannie Mae Capital Rules Relaxed; Share Sale Planned
Fannie Mae's regulator will reduce restrictions on the largest financer of home loans, even after a wider-than-expected loss forced the company to raise capital and reduce its dividend. Fannie Mae rose 8.9 percent after the Office of Federal Housing Enterprise Oversight said it will lower surplus capital requirements to 15 percent from 20 percent to allow the company to buy and guarantee more mortgages, its biggest source of profit.

Washington-based Fannie Mae reported a $2.19 billion loss, cut the dividend for the second time in six months and said it plans to raise $6 billion to increase capital. Ofheo is giving Fannie Mae and Freddie Mac more freedom to boost their mortgage portfolios and alleviate the worst housing slump since the Great Depression. The companies last quarter accounted for 81 percent of the home-loan market that other firms fled.

The money raised will enable Fannie Mae to "emerge from this crisis" in a stronger position, Chief Executive Officer Daniel Mudd said. "With a weak housing market, for God's sake, we need Fannie Mae and Freddie Mac to work," said Andrew Parmentier, a managing director at Friedman Billings Ramsey & Co. in Arlington, Virginia. The first-quarter net loss was $2.57 a share, Fannie Mae said in a statement today. Analysts were anticipating a loss of 64 cents, the average of 12 estimates from a Bloomberg survey.

Credit and derivative losses rose fivefold to $8.9 billion, Fannie Mae said in a statement. The government-chartered company cut its dividend to 25 cents after lowering it to 35 cents from 50 cents last year. Fannie Mae will begin a $4 billion sale of common and convertible preferred shares today. Fannie Mae told analysts to expect bigger credit losses in 2009 and said it sees U.S. home prices falling 7 percent to 9 percent this year, up from its previous estimate of 5 percent to 7 percent.

Executives see U.S. home prices eventually tumbling by an average of as much as 19 percent before starting to recover.
"There are certain things that we can't control, like home prices and the overall condition of the economy, and until they improve, they will be a drag on our old book," Chief Business Operator Rob Levin told analysts during a conference call today.

"They are now starting to realize the fact that their credit losses will be considerably higher than they were in 2007," said Ajay Rajadhyaksha, head of fixed-income strategy for Barclays Capital, who is based in New York. "Things in the housing and credit markets are deteriorating very fast."

Ilargi: This sort of development, I’m afraid, is about to hit the US nationwide, fast and furious. Once property and sales taxes start dropping for real, and remember there’s a time lag there, thousands of budgets will come up way short. So far we’ve seen only Jefferson County, Vallejo and California’s $20 billion deficit, but it won’t stop there. There’s no way back, it has to unwind. The last-resort option of issuing ever more bonds is largely off the table.

Vallejo, California, Officials Vote for Bankruptcy
Vallejo, California's city council voted to go into bankruptcy, saying the city doesn't have enough money to pay its bills after talks with labor unions failed to win salary concessions from fire fighters and police.

The city council's unanimous decision makes the San Francisco suburb the largest city in California to file for bankruptcy and the first local government in the state to seek protection from creditors because it ran out of money amid the worst housing slump in the U.S. in 26 years.

The city of 117,000 is facing ballooning labor costs and declining housing-related tax revenue that have left it near insolvency. The city expects a $16 million deficit for the coming fiscal year that starts July 1. Under bankruptcy protection, city services would keep running. It would freeze all creditor claims while officials devise a plan for emerging from bankruptcy.

"Nobody wants bankruptcy but there doesn't appear to be a whole lot of options left," said city councilwoman Joanne Schivley. "We are going to be out of money by June 30. It's all a numbers game now." City and labor union officials have been meeting since January to revise the existing contracts. The unions have balked at pay cuts.

By filing for bankruptcy, Vallejo is asking a judge to step in and force salary concessions from the labor unions. Once the city files its petition, a federal bankruptcy judge must decide whether the city is actually insolvent. If so, the case can proceed. If the judge rules Vallejo isn't legally broke, the case would be dismissed, said the city's bankruptcy attorney Marc Levinson of Orrick, Herrington & Sutcliffe.

The fiscal strains afflicting Vallejo are reverberating across the U.S., as a housing slump and slowing economy curb revenue for states and local governments. U.S. state sales-tax collections fell in the first quarter for the first time in six years, according to a study by the Nelson A. Rockefeller Institute of Government in Albany, New York.

California Governor Arnold Schwarzenegger's office predicted the state's budget deficit may reach $20 billion, more than twice the size of previous estimates and enough to account for nearly one-fifth of the budget. States overall expect to have at least $26 billion less than they need to pay bills in the next budget year, according to an April report by the National Conference of State Legislatures.

Foreclosure bill opens US government to undue risks-FHA
Proposed legislation to expand the Federal Housing Administration's mortgage insurance program may be too far-reaching and open the government to undue risks, Federal Housing Commissioner Brian Montgomery said on Tuesday.

The U.S. House of Representatives Financial Services Committee chaired by Rep. Barney Frank last week approved a sweeping bill to enable the government to finance $300 billion in distressed mortgages to help two million homeowners avoid foreclosure.

An expansion of an FHA program already in place, called FHA Secure, would create fewer chances that taxpayers would foot the bill for the riskiest mortgages, Montgomery said during a panel discussion at a Mortgage Bankers Association conference.

"We are all trying to do the same thing ... but we want to make sure we are not doing it on the backs of the taxpayers," he said. The Frank plan "really throws the barn door open," he told a sparse crowd at the Boston MBA conference.

The mortgage industry continues to undergo a wrenching correction that has produced record rates of foreclosure and a downward spiral in home prices. The dire state of the market was palpable at the MBA's annual secondary markets conference, where attendance is off by more than 50 percent from 2007.

According to Frank, a Massachusetts Democrat, the new FHA program could cost the government up to $6 billion. Analysts at Citigroup calculated the Frank proposal could cost the government as much as $20 billion, but profits may reach $31 billion if homeowners do not re-default past expectations.

Countrywide Takes Away Home-Equity Credit Lines in Las Vegas
Countrywide Financial Corp. has suspended the home equity credit lines of almost all its Las Vegas customers, including the $60,000 Christopher Whipple says he needed to expand his cell-phone accessories business.

"I hope this doesn't break me," the 35-year-old retailer said. His credit score was 790 out of a possible 850, putting him in the top 40 percent of borrowers. "It's going to hurt more than I thought."

Since January, Countrywide, Bank of America Corp., Washington Mutual Inc. and IndyMac Bancorp Inc. have frozen about 600,000 equity credit lines nationwide, said Michael Kratzer, president of a Bankrate Inc.-owned Web site that's fielding consumer complaints. The lenders are targeting borrowers in cities where property values are falling, including Las Vegas, Chicago and Los Angeles, he said.

Frozen credit and real estate declines are putting a chill on spending and hurting the economy. In February, taxable sales in Clark County, Nevada, which includes Las Vegas, fell 3.1 percent from a year earlier, dropping 13 percent at furniture stores and 6 percent for durable-goods wholesalers. In the same month, as it became harder to borrow money across the U.S., consumer spending rose at the slowest pace in more than a year.

"It's really putting borrowers in a panic," said Kratzer, president of in North Palm Beach, Florida. The amount of credit frozen nationally may be $6 billion, based on an assumption that the 600,000 borrowers each had $10,000 available, he said.

LOOK OUT!! Home Equity Line Suspensions Go Countrywide…City by City!
If you have a Home Equity Line of Credit (HELOC) with unused credit, you may not have access to that credit for long. A few months back Countrywide led the pack by suspending 122,000 borrowers from tapping their lines and now they have suspended ALL lines in the city of Las Vegas, Nevada. Other ‘bubble’ cities are being targeted across the nation.

Since January, Countrywide, WAMU, BofA, IndyMacBank and Wells have frozen hundred’s of thousands of HELOC’s preventing home owners access to money they thought was available. Many use these lines for home improvement, business, college tuition etc and now, have been left out in the lurch.

Home equity lines to 100% of the home’s value with little verification of income or employment were common until mid 2007. Nearly every large bank in the nation made these loans hand over fist. They were hell-bent on making it as easy as possible for you to spend every penny of equity in your home.

Now that values are down sharply across the nation and we are learning very quickly that the ‘negative equity’ (owing more than your home is worth) is the leading cause of mortgage default, lenders are in a panic. First, most have stopped making HELOC’s over 80% loan-to-value and to get one, you must be a near-perfect borrower.

For the banks, these loans present a major problem because they make up such a large percentage of the balance sheet at banks such as Wells Fargo, BofA, Chase, National City, Countrywide and IndyMac. In foreclosure, the second mortgage lender rarely gets a penny because homes sell at such reduced prices and the first mortgage holder gets it all.

Because of this, many second mortgage lenders are not even foreclosing, rather using more traditional means of collecting. As a matter of fact, Home Equity Loans are being modified by large banks right now for those borrowers in distress. I am hearing of significant principal balance reductions.

Senator Schumer Urges Bank of America to Reconsider Countrywide Bid
Bank of America Corp. should consider cutting the $4 billion price it plans to pay for Countrywide Financial Corp. if the mortgage company's past profits were based on bad lending practices, U.S. Senator Charles Schumer said.

"These latest revelations should make Bank of America think even harder about how they want to proceed," the New York Democrat said in prepared remarks before a Senate hearing today on how Countrywide treats borrowers who've fallen behind on loans. "These practices will not be allowed to continue."

Schumer, 57, accused mortgage lenders of boosting fees charged to borrowers who are already in bankruptcy. He called the practices "death by a thousand fees," and said Congress is considering legislation to increase penalties on "bad-actor lenders." Investors have speculated that Bank of America may seek better terms or cancel its takeover of Countrywide because housing markets and the mortgage lender's performance have deteriorated since the January accord.

Friedman, Billings, Ramsey Group Inc. analyst Paul Miller said Bank of America should walk away because Countrywide's loan portfolio would be a "drag on earnings." He sparked a decline in Countrywide's stock yesterday after cutting his rating on the lender.

"Schumer wants to send a message to Countrywide that they had poor business practices," said Sean Egan, managing director of Egan-Jones Ratings Co. in Haverford, Pennsylvania. "Even though the share price is down dramatically, a little more pain might be a reminder that they didn't treat mortgagees particularly well."

Schumer criticized Bank of America in March for pay packages that he called excessive. Bank of America agreed to pay David Sambol, Countrywide's president, $28 million to stay with the company. Today, Schumer raised the possibility of asking for a Federal Trade Commission review of certain loans.

His remarks were "completely over the top," said David Lykken, founder of Austin-Texas-based industry consulting firm Mortgage Banking Solutions. "When a senator makes a comment on a publicly traded company involved in the middle of a pending merger transaction, you have to wonder where his interest lies."

U.S. bank actions offset Fed efforts to boost liquidity
Banks’ reluctance to lend could delay the impact of looser U.S. monetary policy, warns National Bank Financial in a research note. “Since the housing bubble started to deflate and securitization activity slowed to a crawl, U.S. lenders have been turning more prudent. Lenders are renewing with the conservative lending practices of the old days (such as significant down payments requirements for mortgages and acceptable credit scores),” NBF observes.

It reports that, according to the latest quarterly Senior Loan Officers’ Survey from the U.S. Federal Reserve, the percentage of U.S. banks tightening standards for large and medium commercial and industrial loans has jumped from 32.2% in January to 55.4% in April. “More disturbing, the proportion of banks tightening C&I lending rates increased to an unprecedented 71.0% compared to 43.6% in January,” it notes.

And, “In commercial real estate, 78.6% of U.S. banks said they tightened lending standards, the highest level since the index inception in 1990. For residential loans, about 62.3% of U.S. had tightened their lending standards on prime mortgages while 75.6% had done so for nontraditional residential mortgage loans.” “Making it tougher for companies and consumers to borrow results in a bottom-up tightening, which partly counters the Fed’s easing campaign,” NBF cautions.

“The risk at this point is that, if U.S. banks lending practices continue to offset Fed actions, the usual nine to 12 months monetary policy transmission lag could lengthen to 18-24 months. If so, the economic recovery could be delayed further down the road than what is currently expected by investors.”

UBS Faces U.S. Tax Evasion Probe; Employee Detained
UBS AG, Switzerland's biggest bank, said the U.S. Department of Justice is investigating whether the firm helped clients evade U.S. taxes. One senior bank employee was "briefly detained" by U.S. authorities as a "material witness," the firm said in an e- mailed statement.

The Financial Times reported that the employee was Martin Liechti, the Zurich-based head of UBS's wealth management business in the Americas. Rohini Pragasam, a UBS spokeswoman in New York, declined to comment on the FT report. Liechti could not immediately be reached for comment. The U.S. Securities and Exchange Commission is also investigating whether UBS employees in Switzerland who advised U.S. clients failed to register with the agency as required, according to the bank's statement.

Battered by $17.3 billion of first-quarter losses at its investment-banking unit, UBS said yesterday it plans to cut 5,500 jobs. The company said clients withdrew a net $12.2 billion from its asset- and wealth-management divisions. Chief Executive Officer Marcel Rohner told analysts he expects "tough business conditions," which already caused $38 billion of markdowns, to continue. Prosecutors in Mannheim, Germany, are considering opening a criminal probe into allegations that UBS offered Germans help in hiding funds from local tax authorities, the Mannheim Prosecutors' Office said March 31.

UBS is also among banks investigated by U.S. state officials into how they marketed auction-rate bonds to investors. Auction- rate failures led to surging costs for some borrowers after dealers stopped bidding for bonds investors didn't want.
UBS announced yesterday that it will exit the U.S. municipal bond market as part of an overhaul of its investment banking operations. The $2.6 trillion municipal market had its worst start in 12 years in the first quarter.

BlackRock to buy $15B subprime debt from UBS
New York-based asset management firm BlackRock Inc. is to purchase a portfolio of subprime mortgage debt from UBS AG for $15 billion, with details of the deal to be announced when the Swiss bank releases its operating results for the first quarter later Tuesday, according to a media report.

BlackRock is purchasing the debt at a 25% discount from its face value of $20 billion, the Financial Times reported Tuesday, without saying where it got the information. The debt will be placed in a new fund that will be marketed to investors, the report said. UBS will hold a minority interest in the new fund and will be able to participate in any gains.

The deal represents a contrarian bet the worst may be over in the credit markets and comes of the heels of recent mortgage asset purchases by Goldman Sachs, private equity firm TPG and hedge funds, the report said.

Services slowdown adds to UK economic fears
Britain's services industry expanded at the slowest rate in five years last month, adding to pressure on the Bank of England to cut interest rates this week. The Chartered Institute of Purchasing and Supply's monthly index declined to 50.4, the lowest since March 2003 in April, from a reading of 52.1 in March.

Matthew Sharratt, an economist at Bank of America, said of the UK economy "This is not the worst of it. We still have some way to go." The news comes as oil hit the $121 mark for the first time in a move that experts warn may snuff out any post-credit crisis economic recovery. The influential Ernst & Young Item Club warned that rising oil prices may force it to slash its growth forecast for next year dramatically, and could cause inflation to as much as double.

US crude futures for June delivery rose to a record $121.49 a barrel during morning trading in New York after breaching the $120-a-barrel mark yesterday. The increase is expected to push petrol pump prices higher in the coming weeks.

If oil prices remain at their current levels the Item Club warned that it will have to cut its economic growth forecast for next year from 1.5pc to an anaemic 1.3pc. Inflation would also be higher than 3pc for the next three years, it added.

The news is a further blow for Alistair Darling, whose Budget forecasts - which include a projection of 2.25pc economic growth next year - have been widely derided by economists. Hetal Mehta, of the Item Club, said: "If [the oil price] hits $200 per barrel, as one Opec minister recently predicted, then frankly all bets may well be off."

UK utility bills likely to rise another 30-40 per cent
Oil prices again hit new records yesterday, making the once implausible Goldman Sachs forecast of a "super-cycle" that would drive them to $200 a barrel or more seem alarmingly credible. They also provide a major headache for the Bank of England's Monetary Policy Committee, which meets this week for its monthly deliberations on interest rates.

The fast slowing economy would argue for another cut, as indeed in some respects would the deflationary effect of higher energy prices. More money spent on petrol and utility bills means less for other things at a time when credit is no longer available to mitigate the consequent squeeze on disposable incomes. Unfortunately, higher oil prices also add to inflation.

Whereas the current inflationary spike was expected to ease by the second half of this year, this now looks much less certain. Next week's Quarterly Inflation Report is likely to point to a worsening medium-term outlook for inflation. Energy retailers are already warning that unless the oil price eases soon, consumers should brace themselves for gas and electricity prices some 30 to 40 per cent higher going into next winter than current, already inflated levels.

The Government is powerless to prevent these rises, despite the clear political damage it is doing to Labour at the ballot box. Retail prices are determined by the wholesale market. If Britain isn't prepared to pay the market price, the oil and gas will simply go somewhere which is.

Subsidising energy prices through the public purse, as occurs in some countries, is not a realistic option for Britain. Higher utility bills might be painful to electoral prospects, but it is still better that the big, bad oil and utility companies get at least some of the blame than that the Government gets all of it by raising taxes to pay for a subsidy.

Meanwhile, virtually everything else seems to be going up in price too, from food to mortgages, and thanks to the weak pound, even flat-screen TVs and cheap clothing from China. There is only so far retailers can go in protecting the public from these inflationary shocks by absorbing the effect in their profit margins.

About the only thing not inflating merrily away is wages, which though a consolation for the MPC, encouraging it to believe there will be no second round inflationary effects from oil, food and goods, looks like a sick joke to everyone else. Disposable incomes seem ever more squeezed.

European Retail Sales Drop by Record on Rising Costs
European retail sales declined 1.6 percent in March, the most since at least 1995 and twice as much as economists forecast, as soaring fuel and food costs sapped consumer spending. The drop in euro-area retail sales from the year-earlier month is the largest since the data series began more than a decade ago, the European Union's statistics office in Luxembourg said today.

From the prior month, sales declined 0.4 percent. Economists had forecast a 0.7 percent annual decline and a gain of 0.2 percent from the previous month, according to Bloomberg News surveys. A doubling of crude-oil prices in the past 12 months and soaring prices for food such as wheat and rice have undermined consumer sentiment across the 15 nations that use the euro.

The European Central Bank, which meets tomorrow to decide on interest rates, has refused to follow its counterparts in the U.S. and the U.K. in lowering borrowing costs after inflation surged since August, reaching a 16-year high of 3.6 percent in March. "This is pretty grim," said Ken Wattret, senior economist at BNP Paribas in London.

"The big picture has been very weak for some time and up until this point the ECB has been in denial. They keep on cheerleading the improvement in consumption, but it simply hasn't happened." Retailers have "never before faced so many challenges," Jose Luis Duran, chairman of Carrefour SA, the world's second- biggest retailer, said April 9. "Inflation is a big issue," he said, adding that the increase in costs is outstripping the gain in prices charged by retailers.

Ikea, the largest home-furnishings seller, is cutting back expansion plans as economic growth slows and prices increase, Chief Executive Officer Anders Dahlvig said the same day. Even unemployment at a record low has failed to spur spending. Confidence among households in France dropped to a record low last month, while a European Commission index of sentiment in the euro area also fell in April.

Commerzbank profit down 54%, cautious on 2008
Commerzbank, Germany's second- largest bank by assets, on Wednesday reported a 54% drop in first-quarter net profit and downgraded its outlook for the year as it took further subprime and leveraged-loan write-downs. Commerzbank, said its net profit fell to 280 million euros ($433 million) in the quarter from 609 million euros a year earlier. Pretax profit fell 55% to 410 million euros, just ahead of the 404 million euro consensus.

The group took write-downs of 244 million euros, similar to the levels seen in its last two quarters, but well below the scale of losses seen at some European banks such as German rival Deutsche Bank. Commerzbank was also much more cautious about its profit outlook for 2008. In its last update the bank said it was aiming to match the profit it made in 2007, but on Wednesday Commerzbank admitted it "could be very difficult to reach the good result of the previous year."

While the 2008 comments could be seen as an "implicit profit warning," the bank stuck to its medium-term goal for a return on equity of more than 15%, said analysts at Keefe, Bruyette & Woods. The broker added that Commerzbank's core businesses of banking for private customers and small- and medium-sized businesses as well as its Central and Eastern Europe divisions all posted solid results. Shares in the group gained 1.4% in early Frankfurt trading, while other European banks traded broadly lower.

Of the latest write-downs, Commerzbank said 179 million euros were taken in its asset-backed securities portfolio, including 109 million euros on securitized U.S. real estate loans and 70 million euros from U.S. companies' structured bonds. The remaining 65 million euros of write-downs was attributed to the bank's trading book, resulting in a 43% drop in trading profit to 173 million euros, though this figure still beat market expectations.

EU Commissioner Wants Far-Reaching New Powers for Brussels
EU Economic and Monetary Affairs Commissioner Joaquin Almunia wants the European Commission to have more clout in all areas of economic policy. In the future, the Commission should be able to supervise and coordinate reform efforts in the countries of the euro zone, in order to promote more competition in Europe's product and services markets, including the market for financial services.

The proposals are contained in a report marking the 10-year anniversary of the euro which Almunia will present on Wednesday. In the report, which has been seen by SPIEGEL, Almunia says the Commission should also have a hand in determining "adequate wage developments, flexibility and security on labor markets." He also recommends setting up an early warning system for economic crises within the euro zone, so that counter-measures can be taken in time.

According to the new proposals, the Commission would also represent the countries of the euro zone in international organizations such as the G-7 group of the leading industrialized countries and the International Monetary Fund, instead of individual countries representing themselves. "Unfortunately, the euro area's external representation remains fragmented and the coordination among euro-area countries (is) insufficient," Almunia feels.

"The existence of a single monetary and exchange rate policy in the euro area ... makes it natural and efficient for the euro area to speak with a single voice," the report reads. "This would strengthen the area's international negotiating power." In the report, the commissioner expresses satisfaction with the euro's achievements so far. "Overall, European Monetary Union has brought the macroeconomic stability it was hoped to bring -- and more."

Draining national prosperity
It is perhaps disappointing for bears that a crisis may not occur immediately, but there can be no question that the vigorous monetary and fiscal medicine administered by the Ben Bernanke Federal Reserve and the George W Bush administration will have its effect. Indeed, far from declining in the second quarter, as has been confidently predicted, gross domestic product may even tick up a bit, boosted by monetary and fiscal stimulus, perhaps to around 2% or 1% after population increase has been taken into account.

At some point, a crisis will arrive. Inflation in the eurozone, China and India is already at levels deemed unacceptable, while even Japan has positive inflation for the first time in many years. In the United States, the producer price index increased 6.9% in the year to March, while that for crude goods increased more than 30%. Like a bowling ball swallowed by a python, that inflation will move through the economic system and eventually be reflected in consumer prices.

Indeed, it may already be showing up there; the seasonally unadjusted consumer price index for March was up 0.9% (an annual rate of around 11%) and only a heroic seasonal adjustment of 0.6%, double the next-largest seasonal adjustment for any month in the last 10 years, brought the figure down to an acceptable 0.3%.

The Bureau of Labor Statistics explains on its website that its seasonal adjustment methodology changed in January; should it be the case that this is being used to suppress consumer price inflation, even the dozier members of the media will come to notice after another couple of months have passed.

In any case, it is likely that by the latter part of 2008, consumer price inflation in the US will be running at more than 10% and that even the heroic mavens at the BLS will be unable to suppress that information completely (though on past form they will undoubtedly try.) There will come a point at which the irresistible force of gradually increasing GDP and continually optimistic stock market will meet the immovable object of consumer price figures that can no longer be ignored.

At that point, the US will suffer not merely a monetary crisis but a political crisis. President Bush, with his refusal to see recession, Treasury Secretary Hank Paulson, with his background in an institution (Goldman Sachs) and a market (the Wall Street of 1995-2007) that together bear a very substantial responsibility for the problem, and Bush’s Fed appointee (chairman Bernanke), with his continual insistence that inflation is imminently about to disappear, will be discredited by reality and unable to provide leadership.

Awkwardly, it is more likely than not that the crisis point will occur before November, so there will be no fresh-faced president-elect to take control of the situation. Almost certainly, it will prove impossible to put the entire US economy on ice until January 20, 2009, so the financial markets themselves, probably the Treasury bond market, will take control. With the US Treasury’s funding need in the fiscal years 2008 and 2009 already around $500 billion in each year, hiccups in the bond market have an almost immediate way of making themselves felt.

To avoid a collapse in the bond market and a catastrophic decline in the dollar as foreign central banks withdraw their money, short-term interest rates will have to be raised very quickly to at least 3% above the then prevailing level of inflation. That would imply a level of 7-8% today, but probably considerably more by the time the crisis hits.

Ilargi: Nice from Bloomberg. Ever wonder how all those trillions in derivatives are traded? This is how:

Credit Seizure? $6 Million Pay Turns on Massaged Relationships
In the course of a three-and-a-half- hour dinner at Manhattan's Smith & Wollensky steakhouse, Emil Assentato went from also-ran to the top of the world's fastest- growing credit market. By the end of the meal, Assentato, 58, the head of Cie. Financiere Tradition's North American securities business who races cars on weekends, had persuaded more than a dozen credit- derivatives brokers led by Donald Fewer and Michael Babcock to defect from rival GFI Group Inc., court documents allege.

In the end, 21 would leave for Tradition with the promise of $130 million over three to five years, about $6 million apiece. Tradition's attack did more than decimate GFI's credit-default swap desk. It also raised the bar for the "extraordinary" pay commanded by derivatives brokers who match buyers and sellers between banks, according to affidavits filed by New York-based GFI in a suit against Tradition.

As Wall Street buckles under the biggest credit-market losses in history, brokerage firms are seeking to tap the $10 billion of fees generated by middlemen, who spend as much as $500 million a year entertaining traders with strippers, football games and evenings at trendy Manhattan bars, based on court records and interviews with industry officials. "It's astounding that people get paid that much to be intermediaries," said William Cohan, a former investment banker with Lazard Ltd. in New York and now an author of books on Wall Street.

So-called interdealer brokers pair bids and offers between the world's largest banks in derivatives markets that have no public exchanges such as credit-default swaps and interest-rate products. Unlike traders and investment bankers, the brokers don't take on risk or devise trading strategies for their clients.

As the notional amount of credit-default swaps ballooned from less than $1 trillion in 2001 to $62.2 trillion last year, the brokers became more valuable. According to the International Swaps and Derivatives Association, the amount outstanding expanded 81 percent in 2007. Interest-rate swaps grew 34 percent to $285.7 trillion and equity derivatives gained 39 percent to $10 trillion.

Fees for brokerages, including GFI, ICAP Plc, Tullett Prebon Plc, Creditex Group Inc. and Cantor Fitzgerald LP's BGC Partners Inc., may rise as much as 20 percent to $12 billion next year, according to Citigroup Inc. analyst Donald Fandetti. A Morgan Stanley trader who wanted to reduce his exposure to General Electric Co. debt by buying credit-default swaps would telephone a credit-default swaps broker, who would then find a trader at another bank to take the other side of the deal. A broker enables both to retain anonymity. "They're just matching up trades," Cohan said.

Some brokers make more than customers at top-tier investment banks, based on numbers supplied by Options Group, a recruiting and consulting firm in New York. The average managing director on the credit-derivatives trading desk at a Wall Street firm, such as Morgan Stanley or Goldman Sachs Group Inc., earned between $1.5 million and $1.8 million. A head trader is paid about $4 million in salary and bonuses, according to Options Group.

Demand for brokers comes while Wall Street eliminates 65,000 jobs to compensate for a slump in sales and trading of asset- backed securities and high-yield corporate debt. Credit-default swaps skirted the freeze in credit markets that began with the collapse of subprime-mortgage securities in July as investors and traders used the instruments to bet on potential losses for companies from Bear Stearns Cos. to Ambac Financial Group Inc. to Tribune Co.

GFI handled as much as 40 percent of the credit-derivatives trades between the world's banks in 2007, collecting $318 million in revenue, according to Citigroup's Fandetti. Derivatives are financial instruments linked to stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or weather.

"It's all about relationships," said Andy Nybo, a senior analyst at Tabb Group in New York, who analyzes market structures and exchanges. "It's more than a phone call. You invite him to a Yankees game. It's tight-knit and built on entertainment and social interaction." The entertainment can go further than expensive restaurants and bars. According to a complaint filed by former Tradition broker Brett DiLiberto in the Southern District of New York and made available on electronic databases, the firm "regularly paid prostitutes to entertain traders."

DiLiberto, as part of his job, frequently "visited brothels masquerading as massage parlors," and was "required as part of his entertaining duties to retain other prostitution services," according to the complaint. DiLiberto also said he went on a January fishing trip to Costa Rica in 2006 that was an "extended orgy." On one occasion, DiLiberto said he was recalled from vacation to attend a "customer drinking and drug party."

Investigating Wall St. Crime
There is a time in the life of every writer when you find yourself fearing that you have become a robo call phone machine—repeating the same message over and over with diminishing results. That’s how I felt after eight months of silence after labeling the credit crisis a “subcrime” scandal, lashing out at the fraudulent activity at its core and calling for the investigation and prosecution of wrong doers.

Almost no media outlets accepted this way of framing the problem, although, as usual, the British press was ahead of its American cousins in putting the blame on the bankers, not the borrowers. When the FBI announced a probe of 14 mortgage companies, I thought that finally some investigators were on the case. But then, word leaked that they were only going after small fish, even as big banks reported losses in the billions.

Bank robberies have always been up the FBI’s alley, and after all, this is a bank heist case, perhaps one of the biggest in history. Only it was the banks that were doing the heisting. The New York Times reported on May 5th that a new criminal investigation was finally underway.

A G-Man explained anonymously: “The latest inquiry is broader and deeper…. This is a look at the mortgage industry across the board, and it has gotten a lot more momentum in recent weeks because of the banks’ earnings shortfall.” At last, institutional fraud may be on the agenda.

At last, deeper questions are being asked. There have been some Congressional hearings, but so far none have risen to a Watergate type level prompting in-depth investigations fueled by subpoenas. Slowly, oh so slowly, news outlets are recognizing this is a big crime story, one they missed for years, or at least since 2002 when subprime securities started being packaged for sale

France Eyes Massive Expansion of its Oceans
France already controls 11 million square kilometers of the world's oceans, second only to the US. Now they want more, demanding the equivalent of three Germanys all in one gulp. It's part of a rush to divvy up the world's oceans by this time next year.

Oil reserves are running out, gas prices are soaring. France's government is reacting to the dwindling energy supply much like Russia and Great Britain: the government is laying claim to vast stretches of the world's oceans. In France's case, the claims span the globe: from French Guyana in South America to Africa and across the Indian Ocean.

Paris would like to see its Exclusive Economic Zone (EEZ) -- defined by international law as the ocean extending 200 nautical miles, or 370 kilometers, off a state's coasts -- expanded by almost a million square kilometers. That's three times as big as Germany, according to researcher Walter Roest of the French Research Institute for Exploitation of the Sea (IFRMER) in Brest.

Like many other states, the French government will be arguing in the next year that its geographic features in many cases extend far beyond the 370 kilometer zone. At most, that could mean an extension of its EEZ to 650 kilometers past the coastline. Right now, France claims more than 11 million square kilometers of the world's oceans -- the second largest in the world, after the United States.

May 13, 2009 is the deadline for countries to submit territorial claims to the United Nation's Commission on the Limits of the Continental Shelf (CLCS). A handful of governments have been scrambling to prepare the way for claims down the road by sending out exploration missions and establishing outposts in remote parts of the globe.

France presented its first application to expand its economic zone to the CLCS in 2006. The request included the Bay of Biscay between France and Spain and the Celtic Sea, which France shares with Ireland and Great Britain. Last year, France followed that with an application to expand the waters of French Guyana and a host of African islands. The latest request concerns the Kerguelen Islands near Antarctica and the Crozet Islands, which lie hundreds of kilometers south of Madagascar.

France isn't alone. Fifty other states could potentially apply to expand their EEZs. In the medium and long term, they all hope to take advantage of untapped oil, mineral and natural gas resources under the ocean's depths.

Georgia says "very close" to war with Russia
Russia's deployment of extra troops in the breakaway Georgian region of Abkhazia has brought the prospect of war "very close", a minister of ex-Soviet Georgia said on Tuesday. Separately, in comments certain to fan rising tension between Moscow and Tbilisi, the "foreign minister" of the breakaway Black Sea region was quoted as saying it was ready to hand over military control to Russia.

"We literally have to avert war," Temur Iakobashvili, a Georgian State Minister, told reporters in Brussels. Asked how close to such a war the situation was, he replied: "Very close, because we know Russians very well." "We know what the signals are when you see propaganda waged against Georgia. We see Russian troops entering our territories on the basis of false information," he said.

At a banking event in Madrid, Vice Finance Minister Dimitri Gvindadze said the Georgian economy was holding up despite the tensions. However ratings agency Fitch said a conflict would likely hit Georgia's ratings but not immediately Russia's. "Obviously if we have an unfreezing of the conflict that will be extremely negative for the country (Georgia) and would lead to negative ratings action," Fitch's Edward Parker told Reuters in London.

Georgia, a vital energy transit route in the Caucasus region, has angered Russia, its former Soviet master with which it shares a land border, by seeking NATO membership. Russia has said its troop build-up is needed to counter what it says are Georgian plans to attack Abkhazia, a sliver of land by the Black Sea, and has accused Tbilisi of trying to suck the West into a war -- allegations Georgia rejects.

Tensions have been steadily mounting and escalated after Georgia accused Russia of shooting down one of its drones over Abkhazia in April, a claim Russia denied. An extra Russian contingent began arriving in Abkhazia last week. Moscow has not said how many troops would be added but said the total would remain within the 3,000 limit allowed under a United Nations-brokered ceasefire agreement signed in 1994. Diplomats expect the reinforcement to be of the order of 1,200.

Russian soldiers acting as peacekeepers patrol areas between Georgian and Abkhazian forces but handing full military control of the breakaway province to the Kremlin would alarm both the Georgian government and its allies in the West.

US diplomat: 100,000 may have died in Myanmar cyclone
Bodies floated in flood waters and survivors tried to reach dry ground on boats using blankets as sails, while the top U.S. diplomat in Myanmar said Wednesday that up to 100,000 people may have died in the devastating cyclone. Hungry crowds stormed the few shops that opened in the country's stricken Irrawaddy delta, sparking fist fights, according to Paul Risley, a spokesman for the U.N. World Food Program in neighboring Thailand.

Shari Villarosa, who heads the U.S. Embassy in Myanmar, said food and water are running short in the delta area and called the situation there "increasingly horrendous." "There is a very real risk of disease outbreaks as long as this continues," Villarosa told reporters. State media in Myanmar, also known as Burma, reported that nearly 23,000 people died when Cyclone Nargis blasted the country's western coast on Saturday and more than 42,000 others were missing.

U.N. humanitarian chief John Holmes said Thursday that the cyclone's death toll may rise "very significantly." The military junta normally restricts the access of foreign officials and organizations to the country, and aid groups were struggling to deliver relief goods.

Internal U.N. documents obtained by The Associated Press showed growing frustrations at foot-dragging by the junta, which has kept the impoverished nation isolated for five decades to maintain its iron-fisted control. "Visas are still a problem. It is not clear when it will be sorted out," according to the minutes of a meeting of the U.N. task force coordinating relief for Myanmar in Bangkok, Thailand on Wednesday.

U.N. Secretary-General Ban Ki-moon urged Myanmar's government to speed up the arrival of aid workers and relief supplies "in every way possible." State television in military-ruled Myanmar, though, said that the government would accept aid from any country and that help had arrived Wednesday from Japan, Bangladesh, Laos, Thailand, China, India and Singapore.


el_pollo said...

"A new housing "relief" bill to lead to $20+ billion in new losses, while lowly derivatives traders make $4 million a year, and get drugs, vacations and hookers as added perks.

Remind me again: what exactly is it that we so deperately need to save here, and why?"

¡Save the hookahs!

Question from yesterday's F&F and also last week. Could you elaborate on how you see the federal bail-out going down with the F&F's? I see it as the Fed trading treasuries for toxic waste on a 1 to 1 basis. Theoretically a 30 day load that will be renewed until the Second Coming or perhaps the Rapture. So with all this toxic was converted to the closest thing that passes for real money here and now, why should this two private corporations be shorted to zero by the canny )canine) investor?

Re dollar steroid injection. The ECB or its paid minions waited until 10:00 am London time today. Maybe their reflexes are slowing or they have to dig deeper in their hole.

Ilargi said...

el pollo.

Karl explains it well, I think, above, in Washboarding Wednesday (I might have used waterboarding).

The toxic swapping is already on. Once the bottom gives, all shareholders will be left with -near- empty bags and hands and pockets, while the rest of the losses will go to the Treasury, likely via the Fed.

A substantial part of Fannie's losses was in derivatives, and there may be much more to come, there's huge leverage. What the true market value of Fannie's $3 trillion book is, remains to be seen. It could be overwhelmingly ugly.

The Fed has maybe $400 billion left, and that won't cut it; not that they will let go of that. And I don't see anyone printing a trillion dollars either, since that would sink the dollar so hard, Wall Street would be dragged down with it.

The only thing left is for your grandchildren to pay, or for the army to go out and pillage around the globe.

Iowa Boy said...

This has to end in repudiation. It'll be the only way out. Right now we seem to be in a bagholder selection phase ... but if the bagholders have the will to grab the source of the pain, hold it under the water, and wait for the bubbles to stop, what then?

TenThousandMileMargin said...

Up until now I've argued somewhat stubbornly that the fate of the US dollar is to slide down, down, down as the reality of the current mess sets in.

However, yesterday while reading Elaine Supkis I had an epiphany. I'm going to have to eat all my previous words.

Japan built up the worlds biggest currency reserve by feverishly printing yen and buying dollars to hold down the value of it's currency so it could run a trade surplus with the USA.

China followed the same game plan and has been resisting pressure to let the yuan appreciate.

As the Euro has risen against the dollar, both nations have been intervening to keep their currencies weak.

Well, it looks like that will be the gameplan for everyone going forward. The Chinese, Japanese, Germans - everyone wants a cheap currency so they can keep exporting to the US. The Germans have been holding back for fear of inflation, but it looks like they've reached the point where they can't take any more Euro appreciation.

So it's time to pull together and tie all currencies to the plunging dollar, so it has nothing left to fall against. As long as the Chinese, Japanese and Europeans are prepared to print more money and buy more dollars, they can ensure that all currencies sink at the same rate and exchange rates don't change.

The resulting global inflation will probably lead to a few million people dying of starvation,
but for the Fed it's a get-out-of-jail-free card. Doesn't matter how irresponsible they are, how much they expand their balance sheet with money borrowed from Treasury, doesn't matter if Congress approves a trillion dollar operating deficit and another 3 trillion to shore up Fannie Mae, there's no piper to pay as the all the major players will keep buying dollars so they can keep exporting to the USA.

"Currency losses" aren't an issue because they are buying greenbacks with funny money anyway. It's strategic - they aren't finished canabalising our industrial base yet.

Stoneleigh said...

While I do think we'll eventually see an end to the era of floating exchange rates, and a return to beggar-thy-neighbour devaluations, I don't think we're there yet. Currency manipulations won't manage to spark inflation though, due to the truly staggering amount of credit destruction we are facing. Simply put, credit implosion is a deflationary juggernaut following the inflationary credit boom we have just lived through. For the time being, credit inflation is our past and credit deflation is our future.

I think the dollar is in the early stages of a significant rally, with a concommittant fall in the euro. Anti-dollar sentiment has reached historic extremes, which is a set-up asking for a spike fueled by short-covering. A strongly held consensus is a good contrarian indicator.

Stoneleigh said...

We are starting to see an emerging mainstream consensus that the worst of the credit crunch is over. This is a good contrarian signal that the rally is probably over (or at least nearly so).

The next phase of the decline should begin soon, if it hasn't begun already.