Debt Rattle, June 5 2008: Come Pounding

Ben Shahn Zinc, Ark. October 1935
"Among the few remaining inhabitants of Zinc, Arkansas, deserted mining town."

Ilargi: If Lehman can only be saved by being bought, I predict a process far uglier than anything we’ve seen, or arguably even imagined, so far. It would have to be for literally pennies on the dollar.

The Fed cabal has the market power to schlepp its share price into the gutter. The shareholders will be left holding putrid empty bags, and either JPMorgan, or even Goldman Sachs, will pick up the juicy parts for next to nothing.

However it turns out, it will be known as a watershed moment: the next troubled Wall Street firm will have entirely different prospects from there on in. No more Bear Stearns style niceties, it’ll be Mad Max on the tip of Manhattan.

Not 2 dollars a share, but 2 pennies.

But I have to say: I care far less about that than I do about American and European investors (yes, you and your pension plan) buying up the rights to water for the planet's poorest people. That makes me feel like me too, I have no more ethics than amoeba. You think I'm just afraid to admit it? Maybe I'll feel better if, like you and your investment made men, I stop caring.


Options slimmer for Fed in Lehman's case

The Federal Reserve has already dug so deep into its policy toolbox during the credit crisis that any future bank rescue like that of Bear Stearns might be more difficult to engineer.

Fears of another Wall Street flare-up simmered this week after the Wall Street Journal reported Lehman Brothers Holdings Inc would have to raise as much as $4 billion or more to cover possible losses, and Standard & Poor's cut the company's bond rating.

Bankers say a sale like that of Bear Stearns earlier this year to JP Morgan, or any sale at all, is unlikely for Lehman in the near term because the bank is on much stronger footing than its fallen counterpart. Moreover, its potential acquirers have their own problems.

"It's a very different situation from Bear Stearns," said one senior investment banker. Without extra help, analysts say the ongoing crisis makes Lehman unattractive to any potential buyer, despite a drop of more than 50 percent in the U.S.-based investment bank's share price so far this year.

Luckily for the Fed, many investors believe Bear Stearns was a one-time debacle that will not likely be repeated. Less favorably, the chances of mimicking the Bear bailout plan, which involved providing $30 billion for JP Morgan to buy it, are much slimmer this time around.

"Is Lehman going to have problems? I wouldn't be shocked," said William Fleckstein, president of Fleckstein Capital in Seattle, Washington. "If it gets to that point, I don't know what the Fed is going to do."

One big problem is a lack of probable candidates. Many of the deep-pocketed U.S. commercial banks have problems of their own. Two of the biggest, JP Morgan and Bank of America, are already making hefty acquisitions, with BofA set to take over Countrywide.

This leaves European banks as potential bargain-hunters. Among candidates to acquire Lehman, the name of British bank Barclays Capital often comes up, as do those of HSBC and Swiss banks Credit Suisse and UBS.

However, these banks, too, have recently come under strain. Credit Suisse warned in March it could report its first quarterly loss in five years. UBS, meanwhile, has fired thousands of staff and taken several write-downs over its exposure to the credit crunch.

HSBC has also faced losses from its exposure to the U.S. mortgage market and is coming under increasing pressure to break itself up. Wachovia, meanwhile, jettisoned its chief executive earlier this week, prompting speculation that loan losses linked to the purchase of a big mortgage lender could widen.

"There is just no likely buyer out there at the moment," said the same banker. "Until earlier this week Wachovia would have been a possible but that's no longer the case. The two Swiss have their own problems, as do HSBC." Broader investor skittishness is also an obstacle to large M&A transactions, barring situations like Bear Stearns, where the asset was cheap enough to minimize the buyer's risk.

Still, there was a sense of inevitability in the markets that suggested somehow, some way, Lehman would eventually be up for grabs. "The very likely outcome for Lehman is that it's going to be bought," said Chip Hanlon, president of Delta Global Advisors in Huntington Beach, Calif.

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US banks fear new $5000 billion balance burden

Accounting changes could force US banks to take thousands of billions of dollars back on to their balance sheets in the coming months in a move that is likely to curb further their lending and could push them into new capital raisings, analysts have warned.

Analysts at Citigroup said a planned tightening of the rules regarding off-balance sheet vehicles would force banks to reconsider arrangements and could result in up to $5,000bn of assets coming back on to the books. The off-balance sheet vehicles have been used by financial institutions to keep some assets off their balance sheets, thereby avoiding the need to hold regulatory capital against them.

Birgit Specht, head of securitisation analysis at Citigroup, said: "We think it is very likely that these vehicles will come back on balance sheet. "This will not affect liquidity because [they] are funded, but it will affect debt-to-equity ratios [at banks] and so significantly impact banks' ability to lend."

Ms Specht told a seminar at a conference on asset-backed securities in Cannes that the uncertainty about what might change was making banks uneasy about their investments. "Banks are not investing [in assets] right now because of funding issues and regulatory uncertainty."

The comments come as regulators and central bankers are intensifying behind-the-scenes discussions about the shape of the financial architecture in response to the credit turmoil. A key component of these global talks – which are likely to come to a head in the next couple of months – will be the accounting regime for off-balance sheet vehicles, with some senior regulators pressing for a global initiative to bring these vehicles back on to the balance sheet, not just in the US but in Europe as well.

Both international and US accounting bodies are working on rule changes; the US standard-setter, the Financial Accounting Standards Board, is to decide on Wednesday. US rulemakers have come under domestic pressure from regulators and policymakers who felt the rules allowed banks to hide too much of their exposure to subprime assets.

Although many leading banks have strengthened their capital, these steps have been focused on repairing the damage wreaked by credit losses – rather than offsetting any impact of new assets rolling back on balance sheets.

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S&P rating cuts could cost banks billions

Three of Wall Street’s biggest banks face handing billion of dollars in collateral to their trading partners after their credit ratings were downgraded a notch on Monday, an unwelcome capital squeeze as they scramble to raise more funds.

Credit rating agency Standard & Poor’s downgraded Merrill Lynch, Lehman Brothers and Morgan Stanley – three of the credit crunch’s most prominent casualties – to A, A and A+ respectively, saying their profit outlooks were weakening and more writedowns were possible.

Because the downgrades make the banks less creditworthy, their trading partners in over-the-counter deals (such as credit default swaps or interest rate swaps) can ask them to post extra collateral as security. Merrill estimated in its last quarterly filing it would have to increase collateral payments by $3.2bn if its credit rating was downgraded a notch. Morgan Stanley estimated its hit as $973m, while Lehman said it would pay about $200m.

“It is another capital squeeze on the banks, and a lot of money, considering how leveraged they remain,” said Mehernosh Engineer, credit strategist at BNP Paribas. Analysts said the downgrades looked like sabre-rattling from S&P, which is fed up that banks have been raising fresh funds through hybrid securities like preferred shares, which save them from issuing normal shares.

Ratings agencies usually want companies to have less than 25-30 per cent of their total capital in hybrid securities, because they can weaken the long-term health of banks’ balance sheets. But some banks are now above that limit. “Like many others they want these institutions to raise more straight equity capital,” said credit strategist Jim Reid at Deutsche Bank.

S&P said the outlook for all three banks, along with a host of other Wall Street institutions, was negative. Another downgrade for Morgan Stanley would require it to post almost the same amount of collateral again, while for Lehman the figure would surge to $5.2bn, by its own estimates. Merrill would face paying an extra $700m.

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Ilargi: There’s a smart idea: let’s all invest in water rights at the other end of the world. We’ll get every last penny out of the local population, and if that’s not enough anymore, and they can’t pay our "global market prices" any longer, well, Darwin gave us the perfect excuse: survival of the fittest.

Yes, there’s a lot of profit in misery. There are many who claim that private ownership of resources is the only way to deter The Tragedy of the Commons. But are we sure?

Can we all see what is so deadly wrong with this? Or will someone have to come and buy up the rights to your water before you get the drift? If so, don’t worry, because it’s going to happen, you know!!

Water crisis to be biggest world risk

A catastrophic water shortage could prove an even bigger threat to mankind this century than soaring food prices and the relentless exhaustion of energy reserves, according to a panel of global experts at the Goldman Sachs "Top Five Risks" conference.
 
Nicholas (Lord) Stern, author of the Government's Stern Review on the economics of climate change, warned that underground aquifers could run dry at the same time as melting glaciers play havoc with fresh supplies of usable water.

"The glaciers on the Himalayas are retreating, and they are the sponge that holds the water back in the rainy season. We're facing the risk of extreme run-off, with water running straight into the Bay of Bengal and taking a lot of topsoil with it," he said.

"A few hundred square miles of the Himalayas are the source for all the major rivers of Asia - the Ganges, the Yellow River, the Yangtze - where 3bn people live. That's almost half the world's population," he said.

Lord Stern, the World Bank's former chief economist, said governments had been slow to accept the awful truth that usable water is running out. Fresh rainfall is not enough to refill the underground water tables. "Water is not a renewable resource. People have been mining it without restraint because it has not been priced properly," he said.
 
Farming makes up 70pc of global water demand. Fresh water for irrigation is never returned to underground basins. Most is lost through leaks and evaporation. A Goldman Sachs report said water was the "petroleum for the next century", offering huge rewards for investors who know how to play the infrastructure boom. The US alone needs up to $1,000bn (£500bn) in new piping and waste water plants by 2020.

"Demand for water continues to escalate at unsustainable rates. At the risk of being alarmist, we see parallels with Malthusian economics. Globally, water consumption is doubling every 20 years. By 2025, it is estimated that about one third of the global population will not have access to adequate drinking water," it said.

China faces an acute challenge. It makes up 21pc of humanity but controls just 7pc of the water supply. The water basin in parts of northern China is falling by one meter a year due to overpumping. In Heibei province the aquifer fell three meters last year. An increasing number of rivers are running dry.

Disputes over cross-border water basins have already prompted Egypt to threaten military action against any country that draws water off the Nile without agreement. The shift to an animal protein diet across Asia has added to the strain. It takes 15 cubic metres of water on average to produce 1kg of beef, compared to six for poultry, and 1.5 for corn.
 
Goldman Sachs advises investors to focus on the high-tech end of the world's $425bn water industry. But beware the consumer "backlash" against bottled water, now viewed as an eco-hostile waste of fuel. It is eyeing companies that produce or service filtration equipment (which can now extract anything from caffeine to animal growth hormones by using nanotechnologies), ultraviolet disinfection, desalination technology using membranes, automated water meters and specialist niches in water reuse.

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Ilargi: And if taking their water away doesn't quite do it for you, how about you price them out of food? Hey, you're just an investor in a free global market, right? If you don't do it, someone else will.

Taking water and food away from people, for whatever reason, including this deluded market investment delirium tremens, is nothing more or less than a declaration of war. You have very little time left to ask yourself: Are you sure you're ready for that? If you can justify to yourself making money off other people's hunger, down the line someone will come along and make you hungry, and your children too. The mechanism has no reverse, no steering wheel, and no brakes. And you ain't in control. Think about that, and do it carefully.

Potash North shares rocket 670% on market debut

What's a potash permit worth? About $38-million, judging by the stunning share price increase posted by Potash North Resource Corp. Wednesday.

The junior miner, which was previously a shell company called Timer Explorations Inc., saw its stock climb 670 per cent on the TSX Venture Exchange in its debut as a potash play after disclosing it had won an exploration permit from the Saskatchewan Mines Branch.

The new resource play, whose backers include the high-profile mining entrepreneur Robert Friedland as well as Lukas Lundin, the successful scion of the Lundin family mining empire, is just the latest example of the frenzied interest in all things potash related.

"People are going be paying big money for these situations," said Craig Angus, a gold industry veteran who has been named president and chief executive officer of the new venture. Potash North doesn't have reserves or even a resource estimate for how much of the mineral used to make fertilizer might be contained in the permitted 91,000-acre land package.

The site is east of Regina near the Manitoba border and just 20 kilometres from a pair of potash mines operated by Mosaic Group Inc. Its few drill holes are historical, mostly from oil and gas explorers. Still, by the end of trading yesterday, the new potash play could boast a market value of about $41-million.

Saskatchewan hasn't seen a new potash mine for nearly 40 years, in part because of a decades-long slump in prices and the fact that deep potash mines are particularly expensive to build. Industry experts estimate it will take a minimum of five years for a new mine to be built at a cost of at least $2.5-billion.

Yet soaring prices, which have reached more than $600 (U.S.) a tonne from around $100 four years ago, have helped create a junior potash sector seemingly overnight. It is a phenomenon not dissimilar to the scores of uranium exploration companies that sprouted in 2006 and 2007 amid a rapid rise in the radioactive commodity's price.

"It's the start of an emerging trend you're going to see. It's much like the oil sands industry was 10 or 15 years ago. The potash industry was a sleepy little industry for a number of decades until the dramatic price increases," said Mr. Angus.

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Ilargi: As I said before, to know what the Fed is thinking and planning, listening to Bernanke is now useless. Instead, in a carefully planned order, the lackeys are trotted out to each divulge part of what is being discussed in the ivory towers. Invariably, these minions reveal views of the economy that are very markedly more pessimistic than what Bernanke makes believe. It’s all staged.

Lacker Says Fed Loans to Wall Street Risk More Crises

Richmond Federal Reserve Bank President Jeffrey Lacker said the lending to securities firms that the central bank introduced in March may lay the seeds of further financial crises.

"The danger is that the effect of the recent credit extension on the incentives of financial-market participants might induce greater risk taking," Lacker said in a speech to the European Economics and Financial Centre in London. That "in turn could give rise to more frequent crises," he said.

Lacker urged that the central bank now "clearly" set boundaries for its help to financial markets. In an interview yesterday on the themes of his speech, Lacker said even those new boundaries may not be believed by investors unless a financial firm fails "in a costly way."

The remarks are the strongest warning by an official about the consequences of the Fed's aid to securities dealers, the first lending to nonbanks since the Great Depression. While other regulators have focused on tightening investment-bank oversight in exchange for the lending, Lacker said there's a case for "scaling back" the new programs.

Philadelphia Fed President Charles Plosser separately today urged specifying conditions "under which the central bank will lend" to firms. Thomas Hoenig of Kansas City said last month the Fed's actions were "likely to weaken market discipline," while Minneapolis's Gary Stern in April worried about "adequate incentives to contain" an expansion in the Fed's safety net.

"The real challenge isn't in laying out this concept but in pulling it off," said Brian Sack, senior economist at Macroeconomic Advisers LLC in Washington, who used to work at the Fed. Officials should "put in place a set of polices that will keep us from getting to that situation again or give the regulators means" to deal with a firm facing collapse, he said.

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Ilargi: Isn't that just hilarious? All those silly programs coming out of Washington to keep people in their homes by adapting the terms of their loans? No can do. In many cases, nobody knows who owns the loan.

'Sliced, Diced' Mortgages More Likely to Default

Most of the 5.85 million subprime mortgages in the U.S. are in danger of defaulting in the next 12 months because of restrictions on changing terms of the loans, according to Offit Capital Advisors.

About 80 percent of the loans are in bonds that "slice and dice" rights to a mortgage's interest or principal in multiyear segments, said Todd Petzel, chief investment officer for the New York-based firm, which manages $5 billion. Lifting restrictions on loan modifications spelled out in the securities requires the agreement of everyone who has invested in them, Petzel said.

"If you could get all the investors in the same room, there's no limit to the modifications that could be made to a loan, but that's not likely to happen," Petzel said. "Once you cut up a pig into pork chops and loins and hams it's nearly impossible to put the pieces back together."

Anti-foreclosure legislation in the U.S. House and Senate asks lenders to voluntarily reduce mortgage principal and banking regulators are urging lenders to modify loan terms to stem the worst surge of foreclosures in seven decades. About half of the subprime adjustable mortgages in securities had payments delinquent for more than 60 days or was in foreclosure, according to a report on the Federal Reserve's Web site.

The collapse of the subprime market that began last year caused at least $380 billion of asset writedowns and credit losses and damaged the economy. Measured annually, U.S. economic growth probably will reach a seven-year low of 0.9 percent in 2008, Fannie Mae, the world's largest mortgage buyer said in a May 8 forecast.

"We're suffering from a hangover that comes from having the credit markets all jammed up," said Steve Van Order, a debt strategist at Calvert Asset Management in Bethesda, Maryland, which oversees $10 billion in bonds. "We're a credit-dependent economy, and that mechanism hasn't been working right."

There were 5.85 million subprime mortgages in the fourth quarter, according to the Mortgage Bankers Association in Washington. Of those, 104,215 were modified by permanently altering the terms of the contract, according to Hope Now Alliance in Washington, a voluntary coalition of mortgage companies created by U.S. Treasury Secretary Henry Paulson.

The terms of most mortgage-backed securities prohibit reducing a loan's principal by more than 5 percent, Offit Capital's Petzel said. That's not enough, in most cases, to avoid a foreclosure, he said. "New layers of wealth will be eroded from both consumers and from the balance sheets of still fragile financial institutions" if foreclosures continue to rise, he said today in a note to clients.

The technology exists to reconstitute whole loans from the various instruments that own pieces of them and repackage them as new bonds, said Van Order. The main obstacle is the lack of agreement on how the mortgages will perform, he said.

"People were in agreement, when they invested in these securities, on how these loans would likely behave, and of course it turned out they all were wrong," Van Order said. "We don't yet have enough of a consensus on the surviving loans to reverse- engineer the securities."

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Dollar Stumbles After Trichet

The dollar lost its gains against the euro Thursday morning as European Central Bank President Jean-Claude Trichet stayed hawkish about inflation pressures.

In remarks following the ECB's decision to keep interest rates steady again at 4.0%, Mr. Trichet said that the upside risks to price stability have increased in the euro zone. As a result, he said a rate increase is possible, though not certain. Mr. Trichet said the ECB is in a state of heightened alertness.

"This is significantly more hawkish than any expected," said Marc Chandler, global head of foreign exchange strategy at Brown Brothers Harriman in New York. His comments reversed the dollar's upward course against the euro since Tuesday, when Federal Reserve Chairman Ben Bernanke expressed concern about inflation in the U.S. and the role a weaker dollar plays in increasing inflationary pressures.

The euro rose to an intraday high of $1.5503. Higher interest rates in the euro zone would expand the rate differential between the dollar and euro. The differential has already favored the single currency since the Fed aggressively began cutting rates in September, in the wake of the U.S. credit credit crunch.

Earlier, a stronger-than-expected weekly jobless claims report in the U.S. had supported the dollar. The number of U.S. workers filing new claims for unemployment benefits posted a surprising drop last week to a six-week low, signaling some improvement in labor-market conditions ahead of Friday's employment report for May.

These data are significant in that the all-important U.S. nonfarm payrolls report will be released Friday. However, analysts say the weekly survey was conducted in a different period than the monthly nonfarm jobs report, and may not reflect the upcoming data.

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MBIA, Ambac May Quit Aaa Battle on Moody's Likely Cut

MBIA Inc. and Ambac Financial Group Inc. may give up attempts to retain the Aaa credit ratings of their bond insurance units after Moody's Investors Service put them under review for a second time this year.

The world's largest bond insurers, which have raised $4.1 billion combined in the past six months, said they won't seek more capital after New York-based Moody's yesterday said the most likely result of its examination would be a downgrade of the companies' top insurance financial strength rankings.

"You can't go to somebody to raise capital if you don't know what the rules for capital raising would be," MBIA Chief Executive Officer Jay Brown told reporters yesterday. "Goal posts move, targets change." Brown and Ambac interim CEO Michael Callen were hired this year largely to fulfill one key mission: save the bond insurers' Aaa credit ratings.

More than $1 trillion of municipal bonds and corporate securities the companies guaranteed depend on those top ratings, as does the capacity for New York-based Ambac and Armonk, New York-based MBIA to generate enough new business.
"The ability of MBIA and Ambac to continue as viable ongoing companies is highly in doubt," according to a note from Rob Haines and Craig Guttenplan, analysts at debt research firm CreditSights Inc. in New York.

"How can a triple A be justified for a company that cannot sell its product, is facing mounting losses and has no access to the capital markets?" Moody's put Ambac and MBIA under review in January, only to affirm MBIA a month later and Ambac in March. The credit rating company cited "meaningful uncertainty" about Ambac's ability to regain market share since the first reviews, and "diminished new business prospects" for MBIA in yesterday's announcement.

MBIA, Ambac and the rest of the industry stumbled after expanding beyond municipal insurance to guarantees on collateralized debt obligations that have since tumbled in value. Downgrades of the companies may trigger forced sales and losses for states, municipalities, investment banks and mutual funds.

Ambac reported a first-quarter net loss of $1.66 billion, compared with $213.3 million in net income a year earlier. MBIA posted a net loss of $2.4 billion. It had a profit of $198.6 million a year earlier.

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Ilargi: There are highly divergent numbers being reported on Lehman’s leverage. The company itself said a few days ago that it lowered it from 37:1 to 25:1. There was also a claim yesterday that it was down to 12:1.

But David Einhorn says it’s a whopping whooping 40:1. I know, he’s invested in shorting Lehman. Still, these are differences large enough to decide whether the company will live or die. It’s also important to see which assets Lehman is selling off to de-leverage, and what the haircuts are on them.

Betting against Lehman at record levels

Many investors are continuing to bet heavily against Lehman Brothers, lifting the percentage of the bank’s shares sold short to a record level. The value of the bank has nearly halved in the past year amid concern about its finances.

It is expected this month to announce a significant loss, including $500m-$700m on the failure of some of its hedging positions.
The level of short interest in Lehman has been rising since late last year and spiked sharply in the past two months to 13 per cent, indicating that many other short sellers have piled in. The level of shares held short in Lehman is the highest of the Wall Street investment banks.

David Einhorn, the high-profile principal of Greenlight Capital, the hedge fund manager, said Lehman was his biggest short position. He has mounted a highly public campaign against Lehman. He began selling short last July on the belief that it was undercapitalised and had not fully marked down the value of its assets, he said.

Mr Einhorn, who stressed that his fund was not primarily a short-seller, said: “The problem is the overall leverage and loan portfolio . . . they are 40 times levered on tangible equity, and they own things that don’t strike me as being the kinds of things that should be levered at all.”

Mr Einhorn’s leverage figure is higher than that calculated by Lehman and other Wall Street analysts. Tim Schuler, an investment strategist at Permal, the $40bn fund of hedge funds, said that Permal’s managers were generally short financial services stocks, in expectation that there would be more damage to come before a recovery. “The noise about Lehman doesn’t bode well for what we’re seeing in financials,” he said. Permal is not invested in Greenlight.

Mr Schuler said one of the question marks over financial services firms was where their core earnings would come from in future. The comments came as Lehman shares stabilised after three days of relentless selling. The shares closed up 2.58 per cent at $31.40 after Guy Moszkowski, a Merrill Lynch analyst, upgraded Lehman to a buy, saying the expectation of a significant second quarter loss was “more than priced in” to the stock.

He added that fears that Lehman could suffer the same fate as Bear Stearns were “unfounded” and said the bank has “ample liquidity” as well as direct access to Federal Reserve borrowing. Investors also appeared to embrace reports that if Lehman decides to raise more capital it is likely do so by selling a stake to a strategic partner such as a US asset management group or a bank in China or South Korea.

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Lehman Is Also Open to Big U.S. Investors

Lehman Brothers Holdings Inc., which has been reaching out to foreign investors in an effort to raise new capital, is also willing to open its books to U.S. institutional investors, according to a person familiar with the situation.

Lehman indicated to at least one U.S. pension fund that it would provide the fund with nonpublic information so that the fund could consider making a direct investment in the firm. Lehman didn't reply to requests for comment.

It has been an eventful few days for Lehman, as worries about the securities firm's coming report on its quarterly results and possible need for fresh capital continue to weigh down its stock price. Lehman shares rose 2.6%, or 79 cents, to $31.40 in New York Stock Exchange composite trading at 4 p.m. Wednesday, but they are down 15% so far this week.

The New York firm was buoyed Wednesday by an upgrade from Merrill Lynch & Co. analyst Guy Moszkowski, who said the selloff in Lehman shares this week has been overdone. "Lehman has more to do in remixing the business away from securitization markets but still has very strong global franchises in investment banking, asset management and equities," Mr. Moszkowski concluded.

Sovereign-wealth funds from Singapore, South Korea and Kuwait are among those that recently have bought preferred shares or other direct offerings from Merrill, Citigroup Inc., Morgan Stanley and UBS AG. Lehman has had talks with a major South Korean investor but made no announcement about a potential stake.

U.S. institutional investors haven't been nearly as active as such government-run investment funds in making direct investments in U.S. financial companies trying to shore up their balance sheets as the credit crunch drags on.

So far, the only large U.S. institutional investor to jump in is the New Jersey Division of Investment, which manages the state's $80 billion of pension funds. In January, New Jersey invested $400 million in a Citigroup preferred-share offering and an additional $300 million in a preferred offering by Merrill Lynch.

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Without Bear, Lehman is vulnerable

Until March, Lehman Brothers Holdings Inc. was protected, in part, by its smaller, weaker competitor Bear Stearns Cos. Now, with Bear Stearns a division of J.P. Morgan Chase & Co., Lehman is the smallest of the bulge-bracket investment banks left.

Being the weakest link on Wall Street, as Bear showed, means that should panic in the market set in, Lehman would be first in line for a run of hedge fund investors pulling their credit. It's that crushing scenario that has Dick Fuld, Lehman's long-time chief executive considering raising up to an additional $4 billion in capital through a stock offering. What could set off the panic? For one, Lehman is poised to report a loss for the first time since the firm went public.

As David Trone, brokerage analyst at Fox-Pitt Kelton wrote Tuesday "Any Forthcoming Raise Would Be Purely For Optics, In Our View. A lesson learned from Bear Stearns, in the extreme, perceptions can matter more than reality."
Lehman, fairly or not, is perceived as overburdened with commercial and residential real estate debt - a reputation it once shared with Bear.

The Federal Reserve is backing all of Wall Street's trading positions by providing capital through its discount window. But what if that doesn't pacify jittery counterparties? Jamie Dimon at J.P. Morgan is unlikely to buy another investment bank even if he can get it for less than $2 a share.

Lehman also has a vocal nemesis that Bear didn't have. David Einhorn, the head of Greenlight Capital, has been attacking the soundness of the firm's financials and publicly rebuking Erin Callan, Lehman's chief financial officer. Fierce competitors, Bear Stearns always served Fuld and Lehman better in the marketplace than they may have considered. For all of Lehman's diversification and advantages over the smaller Bear, having someone to bully keeps the bullies from picking on you.

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Bank of England holds interest rates at 5% in blow to householders and businesses

The Bank of England today spurned pleas for a new cut in interest rates to shore up the faltering economy and slumping housing market and held them at 5 per cent. The harsh noon verdict from the Bank’s rate-setting Monetary Policy Committee (MPC) dealt a fresh blow to hard-pressed households and businesses, fearful of rapidly worsening economic prospects and struggling with mounting financial strains.

Its decision came as a further blow to homeowners after Halifax this morning reported that house prices fell by 2.4 per cent or £4,000 in May to £184,111. It was the second biggest monthly fall on record, after prices slipped by 2.5 per cent in March. Analysts said the new figures were alarming. House prices have fallen by 6.6 per cent in the first five months of this year, more than the total decline in prices during the whole of 1992.

The housing market has been hit hard by a lack of mortgages vailable to new buyers. Recent figures from the Bank of England show that loans approved for house purchases has slumped to a record low. The Bank’s tough decision to keep rates pegged for a second month in a row came as it stuck to its recent hard line that it must prioritise its battle to tame rising inflation, stoked by soaring food and fuel prices.

The MPC had been widely expected by the City to rebuff the growing clamour for a fresh cut in official base rates after it forecast last month that headline consumer price inflation will rise over the summer to almost 4 per cent, as food and energy costs continue their upward charge. The Bank gave warning that inflation would take two years to fall back to its 2 per cent target, even if base rates were pegged at present levels.

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Ilargi: Since the 1990’s? Make that 1930’s.

Britain faces deepest slump since 1990s

The economy faces one of the sharpest slowdowns in the world, the Organisation for Economic Co-operation and Development (OECD) found. In an unusually explicit rebuke, the report blamed the Government – and by implication Gordon Brown – for borrowing and spending too much in recent years.

This “excessively loose fiscal policy” left little, if any, room to cut taxes and save the economy from a deep decline, it stated. The assessment, in the OECD’s six-monthly report on the world economy, will be seen as an attack on the Prime Minister as he faces the worst popularity ratings since polling began during the Second World War.

In its gloomiest assessment yet of Britain’s prospects, the Paris-based institution warned that: Britain is highly vulnerable to the credit crisis, and house prices will continue to fall, possibly by 10 per cent;

• Some 200,000 more people will lose their jobs over the next 18 months as unemployment rises to 5.8 per cent — the highest level in a decade;
  
• The economic growth rate will slump to 1.4 per cent next year, the lowest since 1992, and far below the Treasury’s 2.5 per cent forecast.

To combat the decline, the OECD said the Bank of England needed to cut interest rates three times, bringing them down to 4.25 per cent — the lowest in more than four years. However, it advised the Bank’s Monetary Policy Committee (MPC), which takes its latest interest rate decision today, to wait until next year before a reduction, or risk losing control of inflation.

The OECD has warned repeatedly that by spending and borrowing so freely since the turn of the millennium the Government would leave Britain ill-equipped to deal with an economic slump. It said yesterday that this had come to pass.

Forecasting that unless the Government raises taxes or cuts spending it will break its borrowing rule, it said: “Much tighter fiscal policy [higher taxes or lower public spending] will be required in the future if the rule is still to be respected. “While ongoing economic weakness in 2009 would argue against fiscal restraint, the Government’s options have been limited by excessively loose fiscal policy in past years when economic growth was strong.”

The comments are embarrassing for Mr Brown, whose stewardship of the economy both as Chancellor and Prime Minister has come under fire as the housing market has turned and the broader economy has slowed.
In the latest sign of the slowdown, statistics showed yesterday that the services sector – which includes everything from banks to hairdressers and accounts for three quarters of the economy – had started to shrink for the first time in five years.

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Ilargi: Let’s see: the average UK home price is around $350.000, while in the US it’s about $200.000 and falling fast.

Uh-oh. Wait a minute. I think I can see clearly where this is going.

New evidence shows scale of UK house price falls

House prices have fallen by nearly 4 per cent during the past year, their fastest rate of decline since 1993, figures showed today. Britain's biggest mortgage lender, Halifax, said the cost of a home slipped by a further 2.4 per cent during May to stand at an average of £184,111.

On an annual basis house prices have now fallen by 3.8 per cent since May last year, the biggest year-on-year drop since April 1993. The latest figures are in line with those reported by Nationwide Building Society last week, which showed house prices fell by a record 2.5 per cent during May, prompting warnings that the market could be heading for a deep and prolonged correction.

The average home now costs 6.8 per cent less than it did at the beginning of the year, with prices falling in four of the past five months, while property values are 9.4 per cent lower than at their peak in August last year.

Martin Ellis, Halifax chief economist, said: "The decline in prices is caused by the difficulties created for potential house purchasers by the rapid rise in house prices in the last few years, a squeeze on spending power and the reduction in credit availability. These factors have curbed housing demand."

But the group stressed that the price falls needed to be seen in the context of the strong house price gains experienced in recent years, with the cost of a home soaring by 79 per cent during the five years to August 2007 - an average rise of £88,000. Halifax added that it continued to expect high employment levels, low interest rates and a shortage of new homes being built to support housing valuations.

The number of new mortgages approved for house purchase also fell by 49 per cent during April compared with a year earlier, according to the Bank of England, while the Royal Institution of Chartered Surveyors said the number of new buyers in the market dropped for the 17th month in a row in April to a record low.

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Ilargi: This should make for some very happy shareholders:
"The seven largest housebuilders[..] were worth £18.5bn 12 months ago, but are now valued at less than £5bn after yesterday's sell-off." And then to top it off, they get a cash call. Nice....

UK builders facing cash calls as sales slump

Many of Britain's biggest housebuilders could be forced into deeply discounted emergency rights issues before the end of the year, City analysts are warning, amid unprecedented gloom about the prospects for the sector.

More than £300m was wiped off the value of the country's six largest housebuilders yesterday, with investors panicked into a sell-off by a doom-laden report on the sector from investors at UBS. The investment bank said there was little prospect of any imminent recovery from leading housebuilders while mortgage lending remained depressed.

Mark Stockdale, UBS's lead housing analyst, said he was therefore slashing his price targets for Barratt Developments, Persimmon and Taylor Wimpey. He also made large reductions to the dividends he is forecasting from Barratt, Redrow and Taylor Wimpey.

Mr Stockdale said housebuilders, analysts and investors had been taken by surprise by the pace at which the housing market had deteriorated in the last two months and that he saw no prospect of improvement until 2010. "The speed of the collapse in April and May has been astonishing," he said. "This is as bad as 1991 – without a doubt. And the big difference is that I have never seen a housing market fall as fast as in the last eight weeks."

With all six leading housebuilders warning of serious slowdowns in sales this year, Mr Stockdale said "there has to be a reality" that some companies would be forced into rights issues to protect already fragile balance sheets.

ABN Amro analyst John Messenger warned that Barratt Development was the housebuilder most likely to make a cash call on shareholders, though he said Taylor Woodrow, Redrow and Persimmon could all follow suit.

"I personally think [Barratt] needs to do something to support the balance sheet," Mr Messenger said. "It would have to raise about £900m through a rights issue to move the business forward and put it back into a sustainable business model." Alternatively, he warned, the company might have to find a "white knight or an underwriter of last resort".

Barratt, which declined to comment yesterday, issued an interim management statement last month in which it said it continued to operate within its £2.6bn of committed facilities and its banking covenants. Analysts are concerned that not only are house prices falling sharply, hitting consumer confidence, potential buyers were finding it increasingly difficult to find a mortgage as home loan lenders continued to be constrained by the credit crunch.

The seven largest housebuilders – now six following the merger of Taylor Woodrow and George Wimpey – were worth £18.5bn 12 months ago, but are now valued at less than £5bn after yesterday's sell-off.

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FSA insider trading probe into Bradford & Bingley slide

The Financial Services Authority is investigating potential insider trading in Bradford & Bingley stock in the days leading up to the buy-to-let lender's shock profits warning. B&B shares fell 8.5pc in late trading on Thursday, before rallying a little, and 7.5pc again at the end of play on Friday.

At the time, the board was holding emergency talks to bail out the bank with private equity firm Texas Pacific Group. Bankers said the collapse ahead of Monday's announcement suggested possible insider trading. The FSA confirmed it was looking into the issue, saying: "As you'd expect, the FSA does monitor sharp movements in the share prices."

B&B shares slumped 24pc to 67p on Monday after its profits warning, TPG's £179m cash injection for a 23pc stake, and the overhaul of its original 82p-a-share rights issue. The regulator is keeping a close eye on unusual movements in bank shares after short-sellers planted false rumours about HBOS earlier this year, causing an 18pc collapse in the stock and sparking fears for financial stability.

The FSA is believed to be examining alleged attempts by investment banks to undermine rights issues, potentially destabilising financial markets. Some sales traders are said to be advising clients on how to cause a rights issue to fail and make a fortune by shorting it. Short-sellers borrow stock to sell it in the expectation that they will be able to buy it back at a lower price and profit on the difference.

Royal Bank of Scotland has been a particular target, with 400m shares borrowed since Thursday last week, according to Data Explorers, the research company. The volume of RBS stock on loan, which amounts to almost £1bn, was "a significant increase on normal levels", Data Explorers added.

RBS appears to have seen off the short-sellers, though, as the shares have recovered 10pc to 249?p in the past two days ahead of the completion of its £12bn rights issue at 200p this Friday. TCI, the activist investor, is believed to have taken a small stake in RBS, though it is said to be involved for valuation reasons and not to orchestrate a break-up, as it did with Dutch bank ABN Amro last year.

Fears for financial stability are also thought to have led to high-level involvement in B&B's emergency restructuring. Sir Callum McCarthy, chairman of the FSA, and John Kingman from the Treasury played a leading role in orchestrating the deal. Prime Minister Gordon Brown was briefed personally before a final decision was taken. The overriding aim was to avoid a repeat of Northern Rock and another run on a bank.

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Ilargi: It was never supposed to be anything other than this. The US military have acquired their own private source of oil; a truly brilliant move from a strategic point of view. The US invasion of Iraq has been a smashing success all along, and 90% of pundits have completely missed out on that all along. Here’s hoping they’ll start waking up.

Revealed: Secret plan to keep Iraq under US control

Bush wants 50 military bases, control of Iraqi airspace and legal immunity for all American soldiers and contractors

A secret deal being negotiated in Baghdad would perpetuate the American military occupation of Iraq indefinitely, regardless of the outcome of the US presidential election in November.

The terms of the impending deal, details of which have been leaked to The Independent, are likely to have an explosive political effect in Iraq. Iraqi officials fear that the accord, under which US troops would occupy permanent bases, conduct military operations, arrest Iraqis and enjoy immunity from Iraqi law, will destabilise Iraq's position in the Middle East and lay the basis for unending conflict in their country.

But the accord also threatens to provoke a political crisis in the US. President Bush wants to push it through by the end of next month so he can declare a military victory and claim his 2003 invasion has been vindicated. But by perpetuating the US presence in Iraq, the long-term settlement would undercut pledges by the Democratic presidential nominee, Barack Obama, to withdraw US troops if he is elected president in November.

The timing of the agreement would also boost the Republican candidate, John McCain, who has claimed the United States is on the verge of victory in Iraq – a victory that he says Mr Obama would throw away by a premature military withdrawal.

America currently has 151,000 troops in Iraq and, even after projected withdrawals next month, troop levels will stand at more than 142,000 – 10 000 more than when the military "surge" began in January 2007. Under the terms of the new treaty, the Americans would retain the long-term use of more than 50 bases in Iraq. American negotiators are also demanding immunity from Iraqi law for US troops and contractors, and a free hand to carry out arrests and conduct military activities in Iraq without consulting the Baghdad government.

The precise nature of the American demands has been kept secret until now. The leaks are certain to generate an angry backlash in Iraq. "It is a terrible breach of our sovereignty," said one Iraqi politician, adding that if the security deal was signed it would delegitimise the government in Baghdad which will be seen as an American pawn.

The US has repeatedly denied it wants permanent bases in Iraq but one Iraqi source said: "This is just a tactical subterfuge." Washington also wants control of Iraqi airspace below 29,000ft and the right to pursue its "war on terror" in Iraq, giving it the authority to arrest anybody it wants and to launch military campaigns without consultation.

Mr Bush is determined to force the Iraqi government to sign the so-called "strategic alliance" without modifications, by the end of next month. But it is already being condemned by the Iranians and many Arabs as a continuing American attempt to dominate the region. Ali Akbar Hashemi Rafsanjani, the powerful and usually moderate Iranian leader, said yesterday that such a deal would create "a permanent occupation". He added: "The essence of this agreement is to turn the Iraqis into slaves of the Americans."

Iraq's Prime Minister, Nouri al-Maliki, is believed to be personally opposed to the terms of the new pact but feels his coalition government cannot stay in power without US backing.

The deal also risks exacerbating the proxy war being fought between Iran and the United States over who should be more influential in Iraq.

Although Iraqi ministers have said they will reject any agreement limiting Iraqi sovereignty, political observers in Baghdad suspect they will sign in the end and simply want to establish their credentials as defenders of Iraqi independence by a show of defiance now. The one Iraqi with the authority to stop deal is the majority Shia spiritual leader, Grand Ayatollah Ali al-Sistani. In 2003, he forced the US to agree to a referendum on the new Iraqi constitution and the election of a parliament. But he is said to believe that loss of US support would drastically weaken the Iraqi Shia, who won a majority in parliament in elections in 2005.

The US is adamantly against the new security agreement being put to a referendum in Iraq, suspecting that it would be voted down. The influential Shia cleric Muqtada al-Sadr has called on his followers to demonstrate every Friday against the impending agreement on the grounds that it compromises Iraqi independence.

The Iraqi government wants to delay the actual signing of the agreement but the office of Vice-President Dick Cheney has been trying to force it through. The US ambassador in Baghdad, Ryan Crocker, has spent weeks trying to secure the accord.

The signature of a security agreement, and a parallel deal providing a legal basis for keeping US troops in Iraq, is unlikely to be accepted by most Iraqis. But the Kurds, who make up a fifth of the population, will probably favour a continuing American presence, as will Sunni Arab political leaders who want US forces to dilute the power of the Shia. The Sunni Arab community, which has broadly supported a guerrilla war against US occupation, is likely to be split.

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