Thursday, September 4, 2008

Debt Rattle, September 4 2008: Slaughterhouse Stats


UPDATED 5.00 PM EDT: Wall Street, DJIA, Sep 4 2008, Closing Numbers


Ilargi: I thought I’d open today with a look at the New York Stock Exchange. This is the portrait of little people losing big money.

When it comes to economic reality nowadays, and especially media coverage of it, 99% of the population seems to be made up of two kinds of people: Those who don’t know, and those who don’t want to know.

They are the ones still buying cars and houses -or at least trying to-, and they are the ones investing in the stock market. These days, that means they are being fattened to get plucked of all their feathers, and then slaughtered, like so many chickens.

Bill Gross is not one of them.

Bill Gross has a pretty good idea of what is good for Bill Gross. But "opening up the balance sheet of the U.S. Treasury", as he insists is needed, is not so good for those of us who are not Bill Gross.

His warnings are right on the money, very much so; his solutions are self-serving.

He even wants to set up a -new- way to subsidize home loans, pretending it would be good for buyers. First off, that would require putting Fannie and Freddie’s $9 trillion in debt on the Treasury’s books, though. Those books are backed by taxpayers. A new home-loan scheme would then add more of the same, i.e. losses.

Well, been there done that. That is exactly what Fannie and Freddie have done. And look at the result. And now he wants more of the same under a different name? There would be no US housing industry left to speak of if these two wouldn’t have bought 80% of all mortgages in the past two years.

So did it help? It only helped putting US taxpayers deeper into the gutter. Homes are hugely overpriced, and it’s crazy to want to keep that scam going. The last ones that is good for are the very homebuyers that all these schemes are supposed to benefit.

Basically, what he says is that US taxpayers should now buy up all the assets -not just mortgage related ones- that nobody else wants to touch anymore. And that is really the way Bulgaria used to run its economy. Perhaps still is. The difference is that Bulgaria’s finances were in much better shape that the US today.

Bill Gross extends a sort of open invitation to move from Bulgaria to Weimar. And I’m sure he’s figured out a way to do well even there. Well, Bill, it’s not going to happen. We’re too far gone.


U.S. Government Must Buy Assets to Prevent 'Financial Tsunami,' Gross Says
The U.S. government needs to start using more of its money to support markets to stem a burgeoning "financial tsunami," according to Bill Gross, manager of the world's biggest bond fund.

Banks, securities firms and hedge funds are dumping assets, driving down prices of bonds, real estate, stocks and commodities, Gross, co-chief investment officer of Pacific Investment Management Co., said in commentary posted on the firm's Web site today. Since financial markets seized up a year ago as the subprime-mortgage market collapsed, the Standard & Poor's 500 Index has fallen 13 percent and home prices are down more than 15 percent.

"Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami," Gross said. "If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury."

The government needs to replace private investors who either don't have the money to buy new assets or have been burned by losses, Gross said. Pimco, sovereign wealth funds and central banks are growing reluctant to fund financial firms after losses on investments they made to support the companies, Gross said.

The world's biggest banks and brokers are retreating after more than $500 billion in writedowns and credit losses since the start of 2007 and have raised $364.4 billion in new capital. Yields on investment-grade corporate bonds, debt backed by commercial mortgages as well as credit cards reached record highs last month relative to benchmark rates.

Treasury should support not only mortgage finance providers Fannie Mae and Freddie Mac, but also "Mom and Pop on Main Street U.S.A.," by subsidizing rates on home loans guaranteed by the Federal Housing Administration and other government institutions, Gross said. A new version of the Resolution Trust Corp., which bought assets from failing institutions during the savings-and-loan crisis of the 1980s, may also work, he said.

U.S. Treasury Secretary Henry Paulson arranged a rescue package for Washington-based Fannie and Freddie of McLean, Virginia as concern escalated the government-chartered companies didn't have capital to withstand the housing slump. Treasury pledged to pump unlimited debt or equity into the companies should they need it.

As Fannie and Freddie, banks, securities firms and hedge funds shrink, yields on all debt assets will rise compared with benchmark rates and volatility will increase, Gross said. The declines will end once sellers have depleted their assets and sufficient capital has been raised, Gross said. Unless "new balance sheets" emerge, prices of almost all assets will drop, even those of "impeccable" quality, he said.

"There is an increasing reluctance on the part of the private market to risk any more of its own capital," Gross said. "Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning."

The extra yield demanded on Ginnie Mae's 30-year, current- coupon mortgage-backed securities over 10-year Treasuries has climbed to 1.75 percentage points, from 0.87 percentage points at the start of last year, according to data compiled by Bloomberg. Bonds guaranteed by the U.S. agency are backed by the U.S. government. Spreads on 2-year AAA rated bonds composed of federally backed student loans have climbed to 0.95 percentage points over benchmark rates, from 0.01 percentage points below, Deutsche Bank AG data show.

Pimco, a unit of Munich-based Allianz SE, is seeking to take advantage of declines in home-loan bonds. The firm is raising as much as $5 billion to buy mortgage-backed debt that has plunged in value, according to two investors with knowledge of the matter. The Distressed Senior Credit Opportunities Fund will invest in securities backed by commercial and residential mortgages, said the people, who asked not to be identified because the fund is private.

The decline in home prices hasn't been seen since the Great Depression, Gross said. That drop translates to an even bigger decline in overall wealth as the effects ripple through markets, Gross said. Home prices in 20 of the largest U.S. metropolitan areas fell 15.9 percent in June from a year earlier, according to an S&P/Case-Shiller index.

Fannie and Freddie 30-year fixed-rate mortgage bond yields, which influence the rates on most new home loans, have probably risen 75 basis points because of the waning demand, Gross said. A basis point is 0.01 percentage point. About 61 percent of the holdings of Gross's Pimco Total Return Fund were mortgage-backed securities as of June 30, mostly debt guaranteed by Fannie, Freddie or Ginnie Mae, according to data on Pimco's Web site.

The fund returned 9.8 percent in the past 12 months, beating 97 percent of its peers in the government and corporate bond fund category as of Sept. 3, according to Bloomberg data. The returns are 5.76 percent annually over five years. Pimco has about $830 billion of assets under management. "In a global financial marketplace in the process of delevering, assets that go up in price are rare diamonds as opposed to grains of sand," Gross said.




U.S. Initial Jobless Claims Rise Fastest in Five Years
First-time claims for unemployment insurance climbed more than forecast, and benefit rolls reached a five-year high, underscoring a deteriorating job market that threatens to erode consumer spending.

Initial jobless claims rose to 444,000 in the week ended Aug. 30, while the number of Americans continuing to collect benefits increased to 3.435 million in the prior week, the Labor Department said today in Washington. A private report indicated separately that U.S. companies cut 33,000 jobs in August.

The figures reinforce projections for tomorrow's August employment report from the Labor Department to show an eighth straight month of payroll declines. Households may cut spending as employment prospects dim, property values decline and credit becomes harder to get.

"We're continuing to get sort of a grinding slackening in the labor markets," said Michael Gregory, a senior economist at BMO Capital Markets in Toronto. "Businesses are becoming more cautious about hiring and layoffs continue. At some point this begins to weigh increasingly heavily on the consumer."

ADP Employer Services said the 33,000 decline in private payrolls followed a revised gain of 1,000 for the prior month that was lower than previously estimated. Treasuries rose, sending benchmark 10-year note yields to 3.68 percent at 9:37 a.m. in New York, from 3.70 percent late yesterday. The Standard & Poor's 500 Stock Index dropped 0.6 percent to 1,266.81.

Economists had forecast initial claims would fall to 420,000 from a previously reported 425,000 in the prior week, according to the median of 40 projections in a Bloomberg News survey. Estimates ranged from 405,000 to 435,000. "We're still in an uncomfortable situation with respect to job growth," Richard DeKaser, chief economist at National City Corp. in Cleveland, said in a Bloomberg Television interview. "The underlying trend here is not a good one for August."

Economists forecast the Labor Department will report tomorrow that nonfarm payrolls fell by 75,000 in August, following a drop of 51,000 the prior month, bringing the total decline this year to 538,000. The jobless rate stayed at 5.7 percent, the survey indicates. The four-week moving average of initial claims, a less volatile measure than the weekly figure, fell to 438,000 from 441,250, today's report showed.

So far this year, weekly claims have averaged 378,000, compared with 321,000 for all of 2007, when the economy generated 91,000 new jobs each month on average. Monthly job losses have averaged 66,000 in 2008, according to Labor data. Monthly payrolls tend to fall as claims rise.

The surge in claims that began in the middle of July can be at least partly attributed to the government's extension of jobless benefits under legislation signed by President George W. Bush in June. The government hasn't been able to quantify the program's impact on initial claims.

"The claims data has been clouded over the past month by the extension of unemployment benefits," said Ellen Zentner, U.S. macroeconomist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. The unemployment rate among people eligible for benefits, which tends to track the jobless rate, was unchanged at 2.6 percent. Thirty states and territories reported an increase in claims, while 23 had a decrease. These data are reported with a one-week lag.




Bank of England holds interest rate at 5%
The Bank of England kept interest rates on hold at 5 per cent today, despite widespread expectations that the country is set to enter a recession in the second half of the year.

It is likely that while a rate cut was discussed among the Bank's Monetary Policy Committee (MPC) members, their hand was stayed by rising inflation, which hit a 16-year high of 4.4 per cent last month and is set to increase further. Today's decision will come as a blow to homeowners, struggling with high mortgage costs, who have seen more than £25,000 wiped off the value of their homes in the past year.

The price of the average home plunged by 12.7 per cent to £174,178 in the year to August, down from nearly £200,000 in August last year, according to new figures from Halifax, the mortgage lender. The average mortgage rate for a borrower with a 10 per cent deposit. or 10 per cent equity in their home. is around 6.5 per cent, much higher than the base rate of 5 per cent.

David Blanchflower, the arch-dove on the MPC, has already hinted that he would vote for aggressive cuts this month to boost the economy, but analysts said that other committee members would rather wait until there is evidence that inflation is starting to fall before moving for a reduction.

The Bank has forecast that inflation will peak at 5 per cent by the end of the year before falling sharply, opening the way for future cuts in the interest rate. However, there is increasing pressure for the Bank to take more urgent action over the stagnant economy.

Earlier this week, the Organisation for Economic Co-operation and Development (OECD), an influential think-tank, said that the British economy would shrink in the final two quarters of the year, pushing the country into a technical recession. In a further embarrassment for Gordon Brown, the UK will be the only country of the leading G7 nations to be in recession at the end of the year, according to the OECD.

Howard Archer, chief UK and European economist at Global Insight, said: "Despite the very real danger of recession, it was always likely to prove premature for the Bank of England to cut interest rates, given well above target and rising inflation, still significant medium-term inflation risks and the weakness of the pound.

"Nevertheless, the minutes of the MPC meeting should make very interesting reading when they are released in two weeks time to see if the committee has shifted further towards cutting interest rates." Alun Powell, senior economist at HSBC, said hopes of an imminent rate cut were rising. "We certainly expect the MPC to cut rates over the next month or so, which would provide welcome relief to many homeowners."




Average UK home loses $45.000 in value in one year, as prices fall at fastest rate on record
UK homeowners have seen £25,000 wiped off the value of their property in the last year, according to Halifax, as house prices fall at the fastest rate on record.
 
House prices have tumbled almost 13pc since last August, Britain's biggest mortgage lender said in its latest monthly report. Weak demand from house buyers continued to push average house prices down 1.8pc in August - dragging the annual rate of decline down to 12.7pc.

Halifax's chief economist Martin Ellis said: "The pressure on householders' income, together with the reduction in the availability of mortgage finance due to the global financial markets crisis, is resulting in both lower property prices and activity levels."

Halifax warned homeowners that market conditions will remain challenging, as it revealed that the annual decline is the steepest it has ever recorded - since it began compiling data in 1983. George Johns, UK economist at Barclays Capital, expects house prices to face further declines. He said: "Today's figures are no surprise - they are reflecting the sharp downturn in the level of mortgage approvals.

"From their peak in the fourth quarter of 2007, we expect house prices to fall 18pc by the time the market bottoms out in the second quarter next year." Halifax said that the average UK property is now worth £174,178 - just below the Government's new, temporary stamp duty threshold of £175,000.

Halifax added that the Government's surprise move would help a "significant number" of homebuyers, adding that almost a quarter of a million homebuyers in England and Wales would have escaped stamp duty over the past year if the threshold had been raised to £175,000 previously.

However, Halifax pointed out that the measure would do little to help those in the South East - only 12pc of total sales during August were below £175,000 in London, compared to 75pc in the North. Mr Ellis said: "The pressure on householders' income, together with the reduction in the availability of mortgage finance due to the global financial markets crisis, is resulting in both lower property prices and activity levels."

The news compounds Nationwide's report last week that house prices are now falling at their fastest rate for nearly 20 years. According to the Nationwide House Price Index, average property values have dropped by 10.5pc in the last year, the first time that the percentage fall has reached double figures since 1990.

Howard Archer, chief UK economist at Global Insight said: "It seems odds-on that house prices will continue to head rapidly south given that the Bank of England reported record low mortgage approvals for house purchases in July, while latest surveys generally show that house sales are depressed, buyer interest remains weak, it is taking longer to sell a house, and sellers are achieving a falling percentage of their asking price."




ECB Leaves Rate at Seven-Year High 4.25%
The European Central Bank kept interest rates at a seven-year high to fight inflation even as the euro-region economy teeters on the brink of a recession.

ECB policy makers meeting in Frankfurt today left the benchmark lending rate at 4.25 percent, as predicted by all but one of 53 economists in a Bloomberg News survey. The bank will wait until at least March next year to lower borrowing costs, another survey shows.

The ECB wants to prevent a wage-price spiral as workers demand compensation for higher food and energy costs. It raised rates in July and council members Axel Weber and Lucas Papademos said last week another increase may be necessary if inflation risks increase. At the same time, the economy contracted in the second quarter and inflation slowed after oil prices retreated from a record.

"Inflation might remain at a higher level for longer than many people think," Thorsten Polleit, chief German economist at Barclays Capital in Frankfurt, said in an interview with Bloomberg Television. Still, "the phase of economic weakness will probably push the balance in the ECB Governing Council toward a rate cut in 2009."

President Jean-Claude Trichet holds a press conference at 2:30 p.m. to explain today's decision. In addition to commenting on monetary policy, Trichet may announce changes to the ECB's collateral requirements for lending to banks. Separately, the Bank of England kept its key rate at 5 percent.

While crude oil prices have retreated 26 percent from a record $147.27 a barrel on July 11, they're still up 46 percent over the past year. Euro-region inflation slowed to 3.8 percent in August from a 16-year high of 4 percent in July. The ECB aims to keep the rate below 2 percent.

Some labor unions are already pushing through bigger wage increases to compensate workers for the higher cost of living. Deutsche Lufthansa AG, Europe's second-largest airline, last month agreed to a 5.1 percent raise for some ground staff and cabin crew after a strike forced the cancellation of hundreds of flights.

In Italy, hourly wages rose 4.3 percent in July from a year earlier, the biggest increase in a decade. IG Metall, Germany's biggest union, starts wage negotiations this month for 3.2 million metal, electronics and car workers. The union has said it will demand a bigger pay increase than the 6.5 percent it asked for last year.

"IG Metall usually sets a benchmark for wage demands in other industries," said Andreas Rees, chief German economist at UniCredit Markets & Investment Banking in Munich. "It's too early to give the all clear on inflation." ECB Vice President Papademos on Aug. 27 said the emergence of a wage-price spiral would "require a stronger degree of monetary tightening."

While the ECB will raise its inflation estimates when it publishes new economic projections today, it will lower its outlook for growth, said Laurent Bilke, an economist at Lehman Brothers in London who used to work as a forecaster at the central bank. He predicts the ECB will be forced to cut rates in January.

In June, the bank forecast growth of about 1.8 percent this year and 1.5 percent in 2009. It projected inflation would average 3.4 percent this year and 2.4 percent next year. Since then, Europeans' confidence in the economic outlook plunged to a five-year low and the manufacturing and service industries contracted for a third consecutive month, indicating the economy may have entered a recession.

German factory orders slumped 1.7 percent in July from June, the Economy Ministry in Berlin said today, extending their longest ever losing streak to eight consecutive months. "The possibility of a rate hike by the end of the year has vanished," said Bilke. "The situation has already deteriorated enough for a single rate cut to be insufficient."

Investors are less certain and have scaled back bets on lower ECB rates, Eonia forward contracts show. The yield on the May contract was at 4.18 percent today, up from 4.03 percent before Papademos and Weber spoke. In an interview published Aug. 27, Bundesbank President Weber said "the discussion about declining rates in Europe is premature." The ECB may have to raise rates further "if the economic outlook brightens," he said.

The euro's 9 percent decline from its peak of $1.60 on July 15 may help to bolster European exports, while lower oil prices should eventually leave consumers with more money to spend.

The ECB "is not yet persuaded that growth will be weak enough over the next 18 months to more than outweigh second-round effects stemming from prior increases in commodity prices," David Mackie, chief European economist at JPMorgan in London, wrote in a research note to clients. "It will take a while for the central bank to come around to the idea of easing."




ECB Will Tighten Lending Rules to Stop Bank Abuse
European Central Bank President Jean- Claude Trichet said the ECB will tighten its lending rules to stop them being exploited by financial institutions stung by the year- long credit crisis.

Trichet said today the bank will increase the gap between the face value of most asset-backed bonds and how much can be borrowed against them. The ECB will apply an additional 5 percent discount for securities that have only theoretical pricing. Unsecured bank bonds will have a 5 percent discount. The new rules will take effect on Feb. 1.

The ECB is concerned its money-market rules are being abused by banks trying to unload securities damaged by the credit rout in return for central bank funds. Europe's financial institutions stepped up their borrowing from the ECB, whose lending rules are looser than the Bank of England's, after the U.S. subprime mortgage collapse derailed financial markets a year ago.

"We don't think it would hamper the way the system is functioning," Trichet said at a press conference in Frankfurt today. "It's a small fraction in the present total amount of collateral. I prefer to use the term refining."

The cost of protecting European bank bonds from default soared to the highest in five months after Trichet announced the changes to the so-called haircuts, or risk premia, it applies to collateral. Credit-default swaps on the Markit iTraxx Financial index of subordinated debt of 25 European banks and insurers climbed 9 basis points to 174, the highest since April 1, according to JPMorgan Chase & Co. prices at 3:02 p.m. in London.

ECB council member Yves Mersch foreshadowed today's announcement when he said in an interview in Jackson Hole, Wyoming last month that the central bank is concerned that some financial institutions are "gaming the system."

Trichet made today's announcement after the ECB left its benchmark interest rate at 4.25 percent. He said the central bank remains focused on fighting inflation even after cutting its economic growth forecasts for this year and next. Trichet said the ECB will apply a "uniform" risk premium of 12 percent on asset-backed securities. This haircut is meant to protect the ECB against a decline in the value of the assets.

Until now, the "valuation haircuts" on asset-backed securities ranged from 2 percent to 18 percent. The value of the underlying asset is calculated as the market price less the haircut. An increase in the haircut therefore reduces the amount that can be borrowed, making banks more dependent on investors who are demanding higher returns before committing funds.




Ilargi: This is the fun side of finance. With a full platoon of its bankers under criminal investigation for billing $100’s of billions in unjustified fees, JPMorgan exits the muni swaps business (make that "racket"), arguing that "The risk/return profile of this business is such that the returns no longer justify the level of resources we have allocated to it". No kidding. Mr. Gotti.

JPMorgan, Facing Federal Probe, Exits Municipal Swaps
JPMorgan Chase & Co. will stop selling interest-rate swaps to government borrowers in the $2.6 trillion U.S. municipal bond market roiled by an antitrust probe and the near-bankruptcy of Alabama's most-populous county.

At least seven former JPMorgan bankers are under scrutiny in a Justice Department criminal investigation of whether banks conspired to overcharge local governments on swaps and other derivatives. JPMorgan also led a group of banks that charged $120 million in fees for such deals in Jefferson County, Alabama. That was as much as $100 million too high, the county's former adviser said.

Wall Street marketed unregulated derivatives as a way for municipalities to save money. The financing, which local officials across the country have said they didn't understand, backfired this year as fallout from the global credit crisis caused borrowing costs to soar. Now, Jefferson County can't afford its monthly payments and JPMorgan may be left holding defaulted debt.

"The risk/return profile of this business is such that the returns no longer justify the level of resources we have allocated to it," Matt Zames, JPMorgan's head of rates, foreign exchange and municipal bonds, said yesterday in a memo to employees, a copy of which was obtained by Bloomberg News.

By stopping sales of derivatives in public finance, JPMorgan also may be trying to protect its reputation, said Christopher "Kit" Taylor, who ran the Municipal Securities Rulemaking Board from 1978 to 2007. "It cuts down on all the bad publicity," he said.

JPMorgan was sued last week by the Erie, Pennsylvania, school district over undisclosed fees on swaps, and is among those named in civil antitrust suits pending in U.S. courts. The New York-based bank also has disclosed that the Securities and Exchange Commission may sue the bank in connection with an investigation of derivatives.

JPMorgan said in the memo it would stop selling interest- rate derivatives to local governments, while continuing to market the products to non-profit customers such as hospitals. Derivatives are contracts whose value is derived from assets including stocks, bonds, currencies and commodities, or from events such as the weather or changes in interest rates.

Sales of derivatives to cities, towns and school districts provided banks with fees as earnings from arranging sales of tax-exempt bonds used to build schools, roads and other public works declined. Underwriting fees on municipal bonds sold through banks chosen ahead of time, which make up about 80 percent of the market, declined to $5.40 per $1,000 of bonds last year, from $7.23 in 1998, according to Thomson Reuters data.

Interest-rate swaps, contracts in which two parties agree to exchange interest payments based on an underlying bond, are also usually awarded without competitive bidding. Fees -- which the banks make by adjusting the interest rates up and down -- are frequently not disclosed to the buyer.

"All financial products as they go through the maturation cycle become less profitable and muni swaps have gone through a maturation cycle," said Peter Shapiro, managing director of Swap Financial Group, a South Orange, New Jersey-based financial adviser to state and local governments. "That's happened at the same time as the fed criminal investigation has moved ahead and a series of civil suits have multiplied."

Jefferson County paid more than $100 million in fees for interest-rate swaps it purchased from JPMorgan and other banks, paying about $50 million above prevailing prices for 11 of the contracts it bought between 2002 and 2004, according to an August 2005 Bloomberg Markets article. None of the fees was disclosed to officials, records show.

Porter, White & Co., the Birmingham-based financial advisory firm later hired by the county to analyze all 17 of its swap agreements, said the banks raked in as much as $100 million in excessive fees on the deals. School districts in Pennsylvania were also unaware of the fees they were charged on derivative deals, according to a February article by Bloomberg Markets, and the advisers they hired never told them.

The derivatives were typically paired with debt, such as auction-rate securities, whose interest rates fluctuate weekly or monthly. Under the swap, the borrower would pay a fixed rate and received a rate that varied, which was supposed to match the floating rate on its bonds.

The strategy worked as long as top-rated insurers agreed to guarantee the bonds against default and banks acted as buyers of last resort for investors who wanted to sell when rates were reset. When guarantors' credit ratings came under pressure this year because of losses on subprime-mortgage-linked securities, investors dumped insured debt, while dealers of auction-rate bonds suddenly stopped buying unwanted securities.

Borrowers faced interest costs of more than 20 percent, and, to refinance into fixed-rate debt, they paid fees to banks to break their swap contracts. Nowhere is that suffering more acute than Jefferson County, which includes Birmingham, Alabama's largest city. Officials there relied on the advice of JPMorgan in 2002 and 2003 while refinancing almost all the $3.2 billion of fixed-rate debt that built sewers into variable-rate bonds coupled with interest-rate swaps.

When the insurers guaranteeing the bonds lost their top credit ratings and the auction-rate market seized up in February, the yield on the bonds jumped as high as 10 percent, from about 3 percent in January. At the same time, the swaps tied to the debt, instead of protecting against higher rates, backfired. That pushed the sewer system's annual debt costs to $460 million, more than twice the $190 million it collects in revenue.

JPMorgan is now leading the negotiations to prevent the county from filing the biggest municipal bankruptcy since Orange County, California's in 1994. It is among the banks that are holding Jefferson County bonds under an agreement to act as buyers of last resort, and may suffer losses in the event of default. JPMorgan under Chief Executive Officer Jamie Dimon has weathered the credit crisis better than many of its rivals, taking $14.3 billion in writedowns, losses and credit provisions since the beginning of 2007.

The company fell 9 percent in New York trading this year, compared with a 33 percent decline for New York-based Citigroup Inc., which reported $55.1 billion in credit losses, and a 46 percent drop for Zurich-based UBS AG, which had $44.2 billion in costs. JPMorgan has raised $9.5 billion in capital to offset the losses, according to data compiled by Bloomberg. The bank was indicated today at the equivalent of $39.61 in German trading of only 35 shares.

JPMorgan's derivatives sales also have come under scrutiny in Pennsylvania. The Erie City School District on Aug. 29 sued JPMorgan and a Pennsylvania financial adviser in federal court alleging they colluded to reap more than $1 million in excessive fees on a 2003 derivative deal. The suit alleges JPMorgan conspired with the adviser, Pottstown, Pennsylvania-based Investment Management Advisory Group, to convince the district to sell the bank a derivative known as a swaption, or an option on an interest-rate swap.

JPMorgan made $1.23 million on the deal, almost 10 times a fair fee, based on market conditions at the time, the suit alleges. A separate school district, in Butler, Pennsylvania, also asked the SEC to investigate its derivative deal with JPMorgan.

JPMorgan's exit from municipal interest-rate swaps may harm the firm's investment-banking business because cities and states that solicit bond underwriters want banks with strong derivatives capabilities, said Swap Financial's Shapiro. "Historically, derivatives have been one of JPMorgan's strongest calling cards in the municipal arena," Shapiro said.

Charles LeCroy, the JPMorgan banker who masterminded Jefferson County's swaps, pleaded guilty in January 2005 in a federal corruption investigation in Philadelphia into whether city bond business was steered to political supporters of former Mayor John F. Street.

LeCroy and fellow banker Anthony Snell pleaded guilty to charges that they defrauded JPMorgan by arranging a $50,000 payment to bond lawyer and fundraiser Ronald A. White for legal work on a Mobile, Alabama, school district transaction that White didn't perform. According to an interview with Snell by an outside attorney for JPMorgan made public in the case, the bank also sought to get White work on swap transactions because they were more lucrative than typical bond deals.

"Swap deals were more numerous and higher fees available," Snell said in the interview. "In addition, swap transactions have much more flexibility for payment because there is no requirement, as there is in new money transactions, that the fees be disclosed." Taylor, the former municipal bond regulator, said JPMorgan's exit may be intended to help it deal with charges that may soon emerge from the almost two-year long investigation by the Justice Department and the SEC.

Investigators are looking at whether bidding practices for a type of financial agreement, known as a guaranteed investment contract, were rigged. The Internal Revenue Service requires that the contracts, where governments place money raised from bond sales until it is needed for projects, be awarded by competitive bidding from at least three banks.

Federal prosecutors are trying to determine if advisers hired by municipalities to handle the bidding conspired with banks and insurance companies to rig auctions. Authorities are also looking into how banks arranged derivatives for local governments. "I wonder if they are trying to get ahead of the Justice Department's decision," Taylor said. "They want, when that comes out, to say we're out of that business."




Merrill May Fail to Sell Bad Loans to Korea Asset
Merrill Lynch & Co.'s talks to sell a "significant" amount of bad loans to Korea Asset Management Corp. are faltering because of a dispute over price, the Korean firm's chief executive officer said. "We have yet to reach an agreement because of differences in assessing the value of assets," Lee Chol Hwi said yesterday in an interview in Seoul. "We have been seeking to buy a significant amount, but a deal may be difficult at this rate."

Failure to strike a deal may indicate Merrill, the third- largest U.S. securities firm, and Lehman Brothers Holdings Inc. might have to cut prices for assets they're trying to sell as mortgage-related losses widen. Lee, 55, said state-run Korea Asset can afford to be patient because the U.S. financial crisis will probably push prices lower.

Merrill CEO John Thain, who took over in December, has sold assets and subprime-linked investments as the third-largest U.S. securities firm was battered by more than $50 billion of credit market losses.

"The U.S. companies including Merrill need whatever capital they can get, even at the cost of making deals that may be less favorable to them," said Yun Chang Hyun, professor of business administration at University of Seoul. "Those with money definitely have the upper hand right now."

Korea Asset, created in 1962 to help clean up delinquent loans, set up a 1 trillion won ($871 million) fund with local partners to buy bad debts in the U.S., Lee said. The firm made its first overseas investment in December last year, leading a group of South Korean companies in buying 133.4 billion won worth of bad debts in China.

Lee also said Korea Asset may buy non-performing loans from Lehman and other companies. Yi Kyung Ju, a spokesman for the fund, subsequently said there have been no formal talks with Lehman. Merrill spokesman Rob Stewart declined to comment, as did Lehman spokesman Matthew Russell.

Korea Development Bank said Sept. 2 it's in talks about buying a stake in Lehman, as the country's companies seize on a collapse in stock prices to purchase U.S. assets on the cheap. Korea Investment Corp., the nation's sovereign fund, put $2 billion into Merrill this year. Lee declined to give the size of the potential transaction, which would be Korea Asset's first U.S. deal. It will be within the 1 trillion won fund, he said.

Merrill sold $30.6 billion of collateralized debt obligations, the mortgage-linked securities that caused the bulk of its losses, at a fifth of their face value in July to Lone Star Funds, a Dallas-based investment manager. Thain, 53, at the time said the sale was necessary to reduce Merrill's risk.

The credit crunch has produced more than $500 billion of credit losses and writedowns at the world's biggest banks and securities firms. Merrill, with $51.8 billion, ranks second after Citigroup Inc.'s $55.1 billion, data compiled by Bloomberg show.

The calamity has created opportunities for Asian firms with deep pockets. Temasek Holdings Pte, Singapore's $130 billion sovereign wealth fund, plans to boost its stake in Merrill to between 13 percent and 14 percent from 9.4 percent. Citigroup and Morgan Stanley are among other U.S. firms that have gotten cash infusions from Asian companies and sovereign funds. "The U.S. market desperately needs capital," Lee said. "It's practically a buyer's market there."

Lee said he's also considering investing in Japan. He worked at the Finance Ministry before joining Korea Asset in January. His key posts at the ministry included a position at the South Korean embassy in Japan between 1997 and 2001. The return on the investment in China "has been much higher than expected," Lee said, declining to elaborate.

Korea Asset played a key role in liquidating distressed assets in South Korea in the aftermath of the 1997-98 Asian financial crisis, when the government sought $57 billion in loans from the International Monetary Fund to help businesses repay overseas debts.

The agency has so far recouped 42.8 trillion won by selling stakes in assets bailed out since the crisis, more than the 39.3 trillion won it paid for those holdings. Korea Asset expects to earn at least 3 trillion won more by 2012 by selling stakes in companies like Daewoo International Corp.

Preparations for selling Daewoo International, a Seoul-based trading company, may begin as early as this year, Lee said. Daewoo International was created from a former trading arm of Daewoo Group, which collapsed under swelling debt after the 1997- 98 crisis. "We will watch the market conditions to sell Daewoo International soon," Lee said. Korea Asset owns 35.5 percent of the company.




Ilargi: Perhaps it’s a law of nature that the higher a company’s debt, the more nonsense comes from its executives.

The US auto makers, just like Fannie and Freddie, need to be liquidated, or they’ll become far too heavy a millstone around the necks of the population.

As for signs of economic improvement and reaching a bottom, I can only hope people are awake enough by now to know how false such statements are.

Auto Sales Tumble, But Industry Sees Signs of Hope

Auto makers reported another big drop in U.S. vehicle sales for August, but an easing in gasoline prices and emerging signs of improvement in the economy have boosted the industry's hopes that it is near the bottom of its downturn.

Sales of cars and light trucks fell 15.5% to 1.25 million last month, down from 1.48 million a year earlier, according to Autodata Corp. The closely watched seasonally adjusted annualized selling rate was 13.7 million vehicles, up from 12.55 million in July, but down from 16.3 million in August 2007, Autodata said.

"There are early indications of somewhat improving conditions," said Ford Motor Co. economist Ellen Hughes-Cromwick, in a conference call with analysts and reporters. She pointed to a decline of about 40 cents a gallon in the price of gasoline, improvement in a key measure of consumer confidence and an upward revision in the federal government's estimate of second-quarter economic growth.

In a separate conference call, General Motors Corp. executives said they are seeing signs that the industry is "at or near the bottom." The consumer "is feeling better," said Michael DiGiovanni, GM's top sales analyst. Despite the industry's hopes the market won't get much worse, auto executives warned it may still take months, or even a few quarters, before signs of a recovery emerge.

Ms. Hughes-Cromwick said it would be likely to take "several more months" for the housing and credit markets to improve, and Mr. DiGiovanni cautioned that "it's really too early to declare victory on the economy turning the corner."

Some forecasters have predicted 2009 vehicle sales will be even with 2008 or perhaps slightly lower. Almost all auto makers posted sizable sales declines for August. GM's sales fell 20.3% to 307,285 cars and light trucks, though August was its best month of the year in terms of market share, Mr. DiGiovanni said.

GM's performance was helped by a sales campaign offering consumers "employee discounts" on its vehicles. The company said it would extend the offer through the end of September. GM also plans to increase the number of 2009 models carrying the discounts, said GM spokesman John McDonald.

Ford's sales fell 26.5% to 155,117 vehicles. Both Toyota Motor Corp. and Honda Motor Co., whose sales have been holding up better than those of Detroit's Big Three, also saw significant declines. Toyota sales dropped 9.4% to 211,533 vehicles, and Honda's fell 7.3% to 146,855 vehicles.

Chrysler LLC turned in the worst showing, with its vehicle sales falling 34.5% to 110,235. The decline puts Chrysler, once the nation's No. 3 auto maker, in danger of slipping to No. 6, behind Nissan Motor Co. Thanks to strong sales of a new vehicle called the Rogue, Nissan's sale rose 13.6% to 108,493 vehicles.

The drop in Chrysler's sales came despite discounts of up as much as 40% on its Dodge Ram pickup trucks. That suggests rebates and other sales incentives, Detroit's favorite tool for boosting sales, are losing their effectiveness.

Incentive programs "are becoming sort of worn out," said Tom Libby, senior director of industry analysis for J.D. Power & Associates. "It's being perceived as the same old stuff from the same companies. The domestics are being hurt by repeatedly using these programs because the perception by consumers is that they need to do them to get rid of their cars."

Auto makers in recent years have tried to limit their use of incentives, which tend to erode resale values, tarnish brands and condition consumers to hold out for the next big deal. Discounts also carry a risk of pulling consumers into the market before they would naturally buy a vehicle, depressing future demand. But the companies have been forced to return to incentives because of the steep decline in sales in recent months, most notably of pickup trucks and sport-utility vehicles.

The fact that incentives aren't working this time around heightens concerns about the ability of auto makers, particularly the Detroit companies, to clear unwanted inventory and carry out restructuring plans that emphasize building and selling smaller, fuel-efficient cars. Contributing to Detroit's woes are the inability of increasing numbers of Americans to get auto loans and some discount fatigue as consumers sort through a variety of competing deals.

"The biggest issue is credit," Chrysler President Jim Press said in an interview. "It isn't the gas mileage of the vehicles turning people off, it's getting credit and financing."




Boston Fed president makes a gloomy forecast
The US economy is facing negative headwinds stronger than those it experienced during the recession of the early 1990s, according to one of the country's leading central bankers. Eric Rosengren, president of the Boston Federal Reserve, believes that those headwinds - a result of the continuing sub-prime crisis - have not subsided as had been hoped.

Mr Rosengren, who sits on the Fed's powerful interest rate setting committee, painted a grim picture of the state of the US economy, saying that the liquidity crunch has now morphed into a full-blown credit crunch, with the woes of the financial sector spreading through other parts of the system.

As a result, the central banker believes the economy will soften in the second-half of 2008, and that the US jobless rate could rise above 6pc, from its current level of 5.7pc. In contrast to recent speeches from Fed officials, Mr Rosengren also said that the lowering of the central bank's base interest to 2pc from as high as 5.5pc in September 2007 had provided less stimulus than it should have done because of the credit crunch.

His comments appear to be at odds with those from Dallas and Richmond Fed presidents Richard Fisher and Jeff Lacker, who have argued that the Fed funds rate is at its most stimulative since the Second World War.
Mr Rosengren, who made the comments during a lunch at the Greater Manchester Chamber of Commerce in New Hampshire, did note, however, that the Fed's rate cuts have off-set some of the contraction in lending.

Some of his comments were echoed in the publication last night of the Fed's Beige Book, a region-by-region assessment of the state of the US economy. The Beige Book said that economic conditions continue to be "slow" as consumers choose not to spend too lavishly, instead focusing on essentials.

"Reports from the 12 Federal Reserve Districts indicate that the pace of economic activity has been slow in most Districts," the Fed said. The Beige Book's assessment is in line with general thinking on the health of the US economy, with consumers pulling back from spending on larger items such as cars and entertainment items, focusing on necessary household spending.




Economy 'Slow' in Most of U.S., Fed's Beige Book Says
Business across most of the U.S. was "slow" last month, while almost all Federal Reserve districts reported pressure to raise prices because of higher commodity costs, the central bank said in its regional economic survey.

Consumer spending was "slow" in most of the 12 Fed districts as housing "weakened or remained soft," the Fed said in its Beige Book report, published two weeks before officials meet to set interest rates. A "general pullback in hiring" helped keep wage increases "moderate," the Fed said today.

With the economy weakening under the impact of the yearlong financial crisis and housing recession, and consumer prices rising, most investors anticipate the Fed will keep interest rates unchanged through December. Policy makers have lowered the rate 3.25 percentage points over the past year.

The picture of the economy "is a troubling one," John Ryding, a former Fed economist who now runs RDQ Economics LLC in New York, said in an interview with Bloomberg Television. "We could see the economy languishing or move further south and at the same time see inflation pressures remain elevated -- and that's stagflation."

While prices of energy and other commodities have declined recently, the Fed said companies in the San Francisco district, the largest region, reported that "upward price pressure remained significant," while "price levels remained high" in three other districts. Philadelphia-area retailers saw "rising wholesale costs," the Fed said.

"The pace of economic activity has been slow in most districts," the report said. "Wage pressures were characterized as moderate by most districts amid a general pullback in hiring." Today's report was prepared by the Philadelphia Fed, based on information collected on or before Aug. 25. The survey comes amid a debate among policy makers about the magnitude of the threats posed by inflation and the credit crisis.

In a speech today, Boston Fed President Eric Rosengren said the U.S. credit crunch has blunted the impact of the Fed's rate cuts, signaling he opposes raising borrowing costs. By contrast, the Fed said yesterday that directors of three other district banks asked to raise the charge on loans to commercial banks at the Aug. 5 policy meeting.

The previous Beige Book, released July 23, reported "elevated or increasing" price pressures amid slower economic growth. Five districts indicated "a weakening or softening" in their economies, and consumer spending was "sluggish or slowing" in every region.

At the last meeting, Fed policy makers agreed that their next change in rates would be an increase, with some officials concerned about inflation favoring an increase earlier than traders expect, according to minutes of their meeting. Today's report said labor markets were "unchanged or somewhat softer" across most of the country, compared with the last Beige Book. Several districts said the energy industry had worker shortages, the Fed reported.

About 463,000 Americans have lost jobs since January as the worst housing recession in a quarter century has curtailed spending and bank lending. Economists expect annualized rates of growth of 1 percent in the third quarter and 0.4 percent in the fourth quarter, according to the median estimate in a Bloomberg Survey in early August. Manufacturing "declined" in most regions, and demand slowed for home mortgages and consumer loans, the Fed said today.

Fed Chairman Ben S. Bernanke in an Aug. 22 speech that inflation should ease later this year and in 2009, while warning that policy makers will act if price increases don't slow over the "medium term." He said financial turmoil has "not yet subsided" and is contributing to weaker economic growth and higher unemployment.

The consumer price index rose 5.6 percent for the 12 months ending in July. The Fed's preferred benchmark, the personal consumption expenditures price index, minus food and energy, has been at 2 percent or higher since April 2004. "All districts reported continuing upward price pressure from elevated input costs, although several noted recent retreats in some commodity and energy prices," the Fed said today.

The Beige Book's regional anecdotes are gathered through hundreds of telephone calls, news clippings and personal contact by the staff of the 12 Fed banks, whose districts cover all 50 U.S. states. The anecdotes are designed to supplement quantitative forecasts of the Board of Governors staff.




Oil-Supply Data Probed for Manipulation
Commodity-market regulators are investigating whether energy-market players are injecting false data into the marketplace to influence perceptions about crude-oil supply and demand, people familiar with the probe say.

Among other things, regulators are concerned that companies may be reporting inventory levels that benefit their own trading positions but that may not be accurate, people familiar with the regulators' thinking say.

Unexpected drops in oil inventories reported each Wednesday by the U.S. Energy Information Administration can spark price spikes on the main oil futures benchmark on the New York Mercantile Exchange. A company could theoretically underreport barrels in its tanks, for example, at a key hub to suggest oil is scarcer than it really is, and then sell its physical oil at a premium when oil prices jump on misleading news.

Another concern is whether companies conduct some physical oil sales and purchases solely to influence short-term pricing on oil futures markets. It isn't clear whether the regulators, at the Commodity Futures Trading Commission, have certain energy firms in their sights. But people familiar with the agency's operations say its concerns stem from tips from sources in the oil-trading world about big market moves that occurred unexpectedly.

The CFTC is taking depositions, or testimony, about some of those periods, lawyers say. The agency has become more active in soliciting and acting on leads from traders and experts in physical energy handling, according to people familiar with the CFTC's operations.

Among the periods the agency is examining, these people say, is a rapid shift in the structure of oil markets in July 2007. Price relationships flipped in a way that was extremely profitable for traders who may have had close knowledge of continuing and rapid drain-off in oil inventories.

Oil for near-term delivery had been selling at a discount to oil to be delivered months and years into the future. Suddenly, oil for immediate delivery became much more expensive when a glut of oil at a key hub at Cushing, Okla. rapidly drained.

An agency spokeswoman said, "The CFTC has already announced one enforcement action [in July 2008] in the crude oil markets that resulted from the agency's nationwide crude oil investigation, and these investigative efforts are ongoing. Ensuring the integrity of the futures markets is critical, particularly in the energy sector given the impact energy prices have on all consumers."

It is illegal to report false data to the EIA. One issue is how much the EIA vets the information it receives; the CFTC is interested in doing more thorough examinations of inventory data that it suspects may be inaccurate. Jonathan Cogan, spokesman for EIA, says while the EIA doesn't do physical inventory checks to audit the accuracy of the reported numbers, the agency looks at other data on supply and demand to determine if the inventory data appears on target.

The CFTC's probe about data integrity is part of a longer-term oil markets investigation as well as a broader effort by the CFTC to improve its information about and its understanding of the workings of the energy markets it regulates.
Pressure on the CFTC to exert more aggressive oversight has mounted lately as Congress has debated whether to require the agency to take new steps to curb abuses or study the impact of speculation on the market. Several lawmakers have criticized the agency for lax regulation.

The CFTC recently hired outside consultants to help it dive into the ins and outs of physical oil shipping and terminals. They are hosting intensive boot camps for its enforcement attorneys to give them a road map of who owns key infrastructure and how they use it. The idea is to better grasp where, if a trader wanted to manipulate prices, the markets might be vulnerable.

The latest requests for information in the oil-market probe could help the enforcement staff build an encyclopedic database of who's who in the oil-trading world. It is loading emails and trading data onto a digitized platform, according to people familiar with its demands.

The CFTC sent out a new wave of broad information requests a few weeks ago to large oil traders, including Wall Street firms, energy companies and physical-oil merchants, after sending an earlier set of inquiries this spring, people involved in the cases say.

It is seeking the names of the firms' biggest traders and their email and instant-message correspondence about the oil markets dating back to early 2007, or in some cases back to 2005. It has also asked about storage holdings, among other physical assets the traders may own or control.

Some people who have seen the requests characterize them as overly broad. Among other queries, the CFTC asked some recipients to disclose any unfair, improper, unethical and unlawful practices, they say. The requests follow more-targeted subpoenas issued last fall about trading in refined oil products and other subpoenas in December, inquiring about transactions on a widely used energy price-reporting system run by Platts, a unit of McGraw-Hill Cos.

"Platts has full confidence in the integrity of our price assessment processes, which are designed to bring transparency and efficiency to the marketplace." says a company spokeswoman.

The agency previously settled civil charges against a unit of Marathon Oil Corp. alleging that company attempted to manipulate the cash price of crude oil through bidding activity on Platts. The Marathon unit didn't admit or deny wrongdoing. The CFTC is continuing to aggressively pursue any misleading reporting to Platts, people involved in the matters say.

The lines of inquiry in the CFTC oil probe have clear parallels to a series of successful cases it has prosecuted over the past several years against natural-gas traders who reported false data to industry trade publications and price-reporting services including Platts. Those cases have resulted in several civil settlements, and recently criminal sentences for some defendants.

The CFTC is seeking to obtain data from the EIA about what various companies report and that the EIA uses to compile its widely watched weekly energy inventory estimates. Traders the world over watch the data as an important barometer of energy supply, since the data the U.S. publish are far more robust than in many other nations.

The EIA says while it has shared data with the CTFC in the past, it doesn't provide an entire data feed for an open-ended time frame. Mr. Cogan, spokesman for EIA, says, "The reason why this data is protected at the individual level is ... that in order to get truthful, accurate, timely reporting of data -- which is data that competitors would find useful -- we try to ensure that that data is not available at the company level. That way companies will feel they can accurately report to us. It will benefit the whole market with better information."

Enforcement attorneys also have been pursuing a theory that some traders have leased oil tankers as floating storage to make oil inventories on the ground appear less-well supplied than they really are, say attorneys familiar with its inquiries.

Skeptics of the theory argue that the largest crude-oil tankers are small in context of hundreds of millions of barrels of total U.S. oil inventories. They are extremely expensive to lease and holding that much oil in storage is also capital-intensive, so any scheme to hold oil off the market would be risky.




Toronto Stock Exchange losses mount
A new leak sprung in the S&P/TSX Thursday morning as the industrial sector led the index to another triple-digit loss.

Already down 4.6 per cent since the start of the week, the index declined another 1.5 per cent, or 185 points, by 11 a.m. (ET) to trade at 12,929.64. Breaking below 13,000 is seen as a significant moment for technical analysts who follow the index, because it marks a 15 per cent drop from the market's all-time high set in June.

“Now that we've broken through 13,000, 12,500 becomes a must-hold,” said Joe Ismail, an analyst at Maison Placement Canada Inc. “If it stays below that, that indicates we have further downside to go and there will be an even nastier correction phase from the top-to-bottom.”

The rout had been led by miners and energy companies, trading sharply lower as the price of oil slipped below $110 (U.S.) a barrel. But on Thursday, Bombardier Inc. led the way down after it reported quarterly results that seemed to disappoint investors.

The company's shares were down 7 per cent in morning trade, to $7.80 (Canadian), even though the company said it returned to profitability. Profit was $246 million (U.S.), up from a $71-million loss a year ago. Revenue was up 22 per cent.
Miners and energy producers were still under pressure, with each sub-index trading about 2 per cent lower.

Oil has been largely responsible for the continued selloff, with the price-per-barrel slipping almost $7 in the past week to around $109. The selloff was triggered after Hurricane Gustav failed to wreak havoc in the Gulf of Mexico last weekend, leaving refineries and oil rigs largely intact. Prices stabilized Thursday, with a barrel trading for $109.14, down 21 cents.

“Energy prices are finally moderating their price movements, as market participants breathe a bit of relief and find some respite from the pre- and post-Gustav violence,” wrote Dennis Gartman, editor of the Gartman Letter. But with two new storms forming in the Gulf, he said oil prices could once again fluctuate wildly as traders speculate on the effect each hurricane could have on global supplies.

“Computer tracks have both ‘Ike' and ‘Josephine' heading into the Gulf, but not until next week some time,” he wrote. “Take respite while one may; it may be only a short while that it is available.”




Ilargi: I don’t want a political forum here, but this portrait of Gordon Brown is interesting because it paints the picture of perhaps the first government that will be toppled by the financial crisis. Many will follow. Likely to be succeeded by much more right wing parties. That’s the sign of the times.

Gordon Brown: Living on borrowed time?
The last time Gordon Brown turned his mind to Ealing, life was sunnier in every sense. A dazzling triumph in last summer's by-election, in which the vote for the party billed as "David Cameron's Conservatives" barely featured, seemed to foretell a smooth ride for the new man in charge at No 10.
 
However, when the Prime Minister recently arrived in the west London suburb he was greeted by miserable, squally autumn showers. And the economic weather was even worse. The pound had plunged to an all-time low against the euro, on the back of Chancellor Alistair Darling's careless talk about Britain facing the worst conditions for 60 years, and the forecasters at the Organisation for Economic Co-Operation and Development (OECD) were about to announce that Britain's economy was tipping into recession.

Mr Brown had faced a stormy summer, too, as the fiscal gloom gathered and infighting within his party intensified. He had spent weeks thrashing out plans for an economic rescue package designed to jump-start the housing market by reducing stamp duty, thereby helping first-time buyers and those having their homes repossessed.

But Mr Darling's indiscreet talk had already blown the plan off course – and left the Chancellor's head firmly on the chopping block. Talking down the economy was not part of the plan. Alongside the raising of the stamp duty threshold from £125,000 to £175,000, the Government is also planning to promote shared equity schemes. In Ealing, Mr Brown visited home-owner Dominic Bradley, who had benefited from such a scheme.

But the rain-soaked members of the press tagging along behind were still puzzled as to why this particular area had been chosen: according to the Halifax, the average property price in Ealing is £329,039. Indeed, in much of London and the South East, you would be hard-pressed to find a home worth anywhere near the new stamp duty starting rate. Will these proposals, drafted in an atmosphere of political crisis, actually work?

Admittedly, the stamp duty holiday will help inject a little more vigour into the market, if only because it brings to an end the chaos caused by the Government's original leaking – then denying – of the proposals. For the past month, those on the verge of buying a property have, quite reasonably, been putting off their purchase, sending prices and sales volume even further south. The number of homes being sold in the coming 12 months will almost certainly increase from the recent record lows.

However, given the rate of decline in house prices, all a buyer has to do to save even more than the stamp duty discount is to sit on his hands that little bit longer before buying. Based on the experiences of the early 1990s – when the Tories tried something similar – there is every chance that the measures will serve only to delay, rather than prevent, the eventual slump, especially given that the suspension of stamp duty is only a year.

There is bound to be another crunch in 12 months' time, at which point prices are still likely to be falling – and an election will be fast approaching. Neither is there much in the rest of the package to excite existing homeowners – unless they are close to being evicted from their property. It includes relief for around 6,000 families struggling to keep up with interest payments, the extension of a shared-ownership scheme to get 10,000 first-time buyers on to the housing ladder, and funding for 5,500 more council houses in the next 18 months.

But the Government's promise to prevent lenders from using repossession as anything other than a last resort could hardly be more disingenuous. Foreclosure is always a last resort for lenders, mainly since it is an expensive process. And figures show that, for all the Government's bon mots, lenders are even quicker to repossess than they ever have been before.

Then there is a broader question: why on earth is the Government still trying to push more Britons into racking up debts and getting a foothold on the increasingly rickety housing ladder? Is it credible that the Government can distinguish between feckless and responsible borrowers? If ever there were a sure-fire way to encourage another boom and bust in five years' time this is surely it.

"They seem to be encouraging first-time buyers into a market that most people assume will have much further to fall," said Robert Chote, of the Institute for Fiscal Studies. "The danger is that you will be encouraging large numbers of people to buy houses whose prices are more likely to fall than rise."

It would have been useful to have put all of these questions to the Prime Minister – and many more. But after his visit to Mr Bradley, he sped off in his Jaguar before the press pack could offer a penny for his thoughts – a sum that, given the state of the public finances, might have been quite welcome.

He knew, given his experience at the Treasury, that the measures announced yesterday were insignificant on a national scale. They will do nothing to encourage banks to lend more to prospective buyers, nor do anything for the millions whose mortgage bills have suddenly shot up, nor for those who are being squeezed harder than ever before between higher living costs and anaemic wage rises.

In other words, the scale and ambition of this package – or rather the lack of it – makes it blindingly obvious that the Government is immensely stretched. Only a few years ago, the OECD warned Mr Brown that he was borrowing and spending too much.

Carry on this way, they told him, and you won't have anything left to rescue you when the going gets tough. Mr Brown insisted that Britain was uniquely well-placed to weather the coming storm – but yesterday's forecasts from the OECD claimed that Britain was actually the only G7 country in which growth was going into reverse.

The Prime Minister has next to no cash to help prevent the slump. Most of the money for these measures has been brought forward from the next two years' Budgets. The stamp duty holiday will cost an estimated £600?million. That this will take the Chancellor to within a whisker of his borrowing rule – that total government debt must not exceed 40 per cent of GDP – is almost irrelevant.

In the market's eyes, the rule is already broken. The Government will have to borrow a record amount next year as the economy slows. This is why the pound has fallen so sharply over the past few months. The full, ugly reality has finally dawned on investors, and they are pulling their money out of the country as fast as they possibly can.

Meanwhile, the crisis has blown out of the water not just the Government's finances, but its procedures. When Mr Brown was at the Treasury, tax policy was sacrosanct, confined to the spring Budget and autumn Pre-Budget Report. Yet now the discipline of the Brown years has been cast aside.

The stamp duty plan makes this the second time the Budget has been reopened since the original version was delivered in March. In May, it was to head off the 10p tax rate row with a £22 billion tax cut that was funded by borrowing. Treasury officials, who have been programmed to work to the strict regime of two big public policy statements a year, are said to be frustrated and exhausted beyond measure. The relationship between old friends Brown and Darling is now being stretched beyond the point of endurance.

Even the management of the announcement was a shambles. Following the initial leak, the stamp duty plan was yesterday out by the Communities Secretary on the radio, blowing the Prime Minister's Ealing surprise. The Tories have cause to think Labour is making it up as it goes along. One senior opposition MP said: "It's simple, this is an unfunded tax cut. That is what they used to scream at us whenever we proposed anything, but now they are so desperate that they are heaping everything on to borrowing and damning the consequences."

They, and other critics of the Government, point to the fact that the package has nothing – not even a hint of a solution – to deal with the real problem at the heart of the housing market and the wider economy. This is no longer just a housing market collapse.

Yes, house prices are falling at more than 10 per cent a year – the fastest rate since the early 1990s – but this has metamorphosed into a broader economic slump. The entire UK economy ground to a standstill last quarter, according to the Government's own numbers, and is now shrinking.

Businesses are struggling to borrow to finance their investments; they are already starting to lay off staff, with respected City forecaster Capital Economics, and other experts, now predicting that a million people could lose their jobs in the next 18 months.

Labour's hope is that in such difficult times, voters want grizzled veterans in charge rather than upstart, wet-behind-the ears Tories. One loyal MP even points out that in 1981, Mrs Thatcher was despised by the country, but still went on to be someone people voted for. In the current climate, such comments seem laughable – if not delusional.

Judging by the economic data, and the response to the new housing plans, what seems most likely is that Gordon Brown looks like ending his tenure at No 10 in the fine tradition of Labour governments: with a sinking economy, a ballooning unemployment problem and a full-blown sterling crisis. If, that is, he and his colleagues do not knife each other first.


28 comments:

FB said...

Hello,

Am back from trips to NL and Italy, now trying to catch up on the reading.

Saw that El_Pollo was making the shift to the Finanzagentur. Once the money is there, you have a number of options, particularly concerning what happens when your Bundesobligationen come to term. There is also the new (as of 1 July) Tagesanleihe where, as the name implies, the money is available for withdrawal daily. The current rate (92.5% of Eonia) is just under 4%, not bad for very safe money that you can pull in a flash. Let me know if you need more info.

About Schadenfreude (2 Sept.), I am unsure what Illargi means. Do you mean that we will be happy because Britain is doing so much worse that we are?

About all the people signing Anonymous (someone made a comment a while back), I would also ask that they use an alias. It really helps to follow the discussions.

About smugness, I read it more as occasionally overbearing confidence. Given the track record of I&S, I would probably be very confident too. Add to that their helpfulness and you have an extraordinary blog. I just wish more people would read it.

So much for now. Must continue to catch up on the reading.

Ciao,
François

OuttaControl said...

Just running through some numbers today on my company's pension plan. BTW, the plan was almost back to solvency last Dec 31 thanks to the stock market gains of the last few years. However, although it's difficult to calculate accurately because one doesn't know exactly which Canadian, US and European equities it is invested in, I can approximate that its financial position has deteriorated by ~$250million or about 8% this year. Annual revenues of the company are about $1.2 billion. I suspect the government bond component of the plan increased a little but was probably offset (and then some) by the corporate bond component. Let's call that a wash for now. Then there's the 5% in real estate. One can only presume that that is, or will be, a bad investment.

Then let's factor in a direct dependence on airline travel for company revenue, terrible company demographics, and a few hundred million dollars of ABCP that will be marked to market in due time.

Oh, and long term interest rates that have fallen significantly from their already low values at the end of last year.

It's never been a better time to cash out of this particular defined benefit pension plan before it's too late.

OuttaControl said...

Note: $95M of the $250M has occurred just this month, just in the equity portion.

Sorry! Another Shadenfreudian slip on my part.

(Wait a second, this is MY potential misfortune that I'm am gleefully acknowledging. That's ok, right?)

rachel said...

For many of ‘those who don't know’, it is too late to cash out. Trying to convince them better now (even with loses) than later, turns them into 'those who do not want to know.'
I wish I had a simple phrase, a sound bite, that would get my family and friends’ attention and action. Suggestions?
(sigh)...so many good people who worked so hard for their money will see it disappear.

el_pollo said...

Hi Francois,

I am trying to transfer my bonds but am having some trouble with the tracking numbers in the application. Perhaps you could contact me at hpaulfuchs (nospam) at gmail dot com. Thanks.

el_pollo said...

@ Rachael

"I wish I had a simple phrase, a sound bite, that would get my family and friends’ attention and action. Suggestions?"

I thinks it's in the drinking water. Cut them off from the municipal supply. Distill your own :-)

Anonymous said...

@ rachel

My family is still clueless. They don't take the time to read the few MSM articles that I send them...They have other priorities, and trust their professional financial planner.
Anonymous Reader

rachel said...

el pollo:
The AquaRain filter must not be doing it.
Seriously though, when a wonderful couple I know was talking about buying a new house, I asked them to image if they both lost their jobs and could not find decent work, would they be able to support the monthly payments. They look at me like I am crazy, like it can't happen here.
I want to scream!

rachel said...

AS for Trusting financial Planners.
So many Americans, especially baby boomers TRUST, they trust doctors to do what’s best for the patient (not the HMO profits), they trust the food supply to be healthy, they trust that the government will be there to rescue them in a storm...TRUST has been the ultimate manipulator used by government and financial sector.
Disgusting!
For those of us that know better, how do we convince the kindly 68 y/o woman that her retirement account is about to go south, or the 75y/o man that his deposits in his savings account my not be there.
Powerful, Greedy people are destroying decent hard working people and I just don’t know how to wake people up.

scandia said...

Rachael, I had given up on warning people until to-day. I did suggest stashing cash to a friend planning to go south for the winter. She called me " an alarmist". Yes, exactly the point- sounding the alarm. She choses to believe that the market will settle down, return to normal, after the elction.No problemo.

Webjazz said...

I've also tried to warn a number of people, but none have listened. And I haven't even been all doom and gloom, just suggesting that they move money from being long to being flat in cash in their 401Ks.
Only my wife has taken heed and done so. In another year or so I think she'll be very pleased that here money has not gone down the drain.

dark_matter said...

rachael,

Show them the crash course from

http://www.chrismartenson.com/crashcourse

It is interesting and understandable. If that don't do it, nothin' will.

Anonymous said...

Mostly, I think, people don't take time to research for facts. They hear a 5-second sound-bite on TV, such as...we need oil, we gotta drill NOW. Ugh, they don't research to understand that it takes years to get any new oil, and besides, there's not going to be much oil there anyway.

And my family is book-smart too: they all have college degrees. What they really need is a degree in common sense and critical thinking skills.
Anonymous Reader

Anonymous said...

Its unnerving to see the stock market drop as much as it did today after watching the Playbook, from yesterdays DR. It didnt look like there was any sign today of a healthy pump in the "pump and dump" scheming of the plunge protection team. Lets see tomorrow and Monday if the pumping will continue or not.

dg

OuttaControl said...

ilargi wrote :...perhaps the first government that will be toppled by the financial crisis. Many will follow. Likely to be succeeded by much more right wing parties. That’s the sign of the times (bold is mine)

Right wingedness largely got the US into their portion of the global mess and, frankly, I think the populace might be catching on to how much corporate welfare there has been and will continue to be prior to the next election.

I think the incumbent governments of whatever stripe will be shown the door. Ergo Steve's imminent election call in Canada. There's no reason to have an election now; the polls haven't changed much. EXCEPT: if the theo-cons thought that maybe, just maybe, the electorate will be extremely unhappy in 6 months time because half of them are insolvent and/or unemployed. If there were no election, the Liberals would continue to vote with or abstain from confidence bills (knowing that they can't get a majority and wouldn't want to govern with a minority in a downward spiral). So the PC's are taking a chance: try for a majority so they can take 5 years to ride out the storm that they feel is imminent. OR pi$$ off enough voters for calling an unneeded election that the Liberals get a minority. Then the PC's can put the blame for economic disarray on the Liberal incumbents, and cruise to a majority after they topple the government in, say, 12-18 months.

Having a majority, especially PC, around 2010 would be a very scary thing. For a fascinating taste of what the King (L) and Bennett (Tory) governments did in the 30's in Canada, I highly recommend Pierre Berton's The Great Depression.

Any recommendations for a similar book for the US Depression?

Michael said...

@Rachel,

I understand your frustration, but the reality is that there isn't anything you can tell them that would have them change their mind.

Essentially the world as we know it is crumbling down around us. It must be a bit how it must have felt on the other side of the iron curtain 20 odd years ago. The difference being that they wanted it to happen and thought a brighter future lay ahead.

I am close to my mid 30s and looking back the signs where there even back then, but the reality is that most people didn't look closely enough back then and now they try their darnest to not look at all.

My recommendation: Look out for yourself. There is a handful of people who "see the light". One of them only recently REALLY saw it and is now in a really really lousy mental state as the reality is starting to dawn on him.

Credit (and our way of life for the most part) was like a drug, and we are all addicted to one degree or the other. Until everybody wants to see what is going to happen they won't, and for many it will be too late..... And nothing anybody can really do.

el_pollo said...

Well, I spread the word to two of my close friends who actually have investments, and both have acted decisively to protect themselves. One has even started to read the DR every day. My only sibling sent me a tin foil hat, but her daughter, a corporate lawyer, is following it very closely now. Sometimes I feel like a cross between Jeremiah and Noah, but some people are open and listen. In the end it's their karma. If they chose not to listen, there is a lesson that must be learned.

OTOH

"No one ever went broke underestimating the intelligence of the American public." -
-- Henry Mencken

Anonymous said...

I have had few listen to me.Some long term friends who I had advised to buy gold,who were advised by their financial adviser not too.....when gold was 200.

It is refreshing to have these friends ask my advice now...

[For the record I sent them here.{Hi,Dr.P!}]

That Bill Gross thinks the US treasury should be used to bail out private investor types makes me slightly ill.[The sound of pigs on the way the the killing room]

Nah,I think there is a lot of people who need to find out about Mr.Market.,and what a true bastard he can be...They are so quick to demand a "market solution"to the ills of our society,Why not now?

Why not their friend and neighbor getting screwed by the "Ideological asses" we have running the system now...anyway they are not worth enough to cause this administration to look out after their collective asses....You need to BE a sovereign wealth fund to play in their game or get their attention..

As they will soon find out...

snuffy

Greenpa said...

Rachel: "TRUST has been the ultimate manipulator used by government and financial sector. Disgusting! For those of us that know better, how do we convince the kindly 68 y/o woman that her retirement account is about to go south, "

It's almost a waste of your time, alas. Trust is indeed deeply embedded in our herd behavior- follow the leader. And for sure, the top manipulators know it and count on it.

One possible tactic that could help- try to sell them on "don't put all your eggs in one basket". If you can get them to listen at all- maybe you can get them to put SOME of their assets elsewhere, "just in case". Foot in the door kind of thing. Shoot for just a little.

brimstone said...

One of the most frustrating aspects of becoming aware of all of this, is seeing your loved ones and family continue to walk through life blindly and politely brushing you off when you try to explain some of this to them.

The question i have struggled with is how do you prepare in a manner that will allow you to help you family ( brothers sister and their spouses) as much as possible?

Greenpa said...

dg: "It didnt look like there was any sign today of a healthy pump in the "pump and dump" scheming of the plunge protection team. Lets see tomorrow and Monday if the pumping will continue or not. "

The urge to predict is irresistible; even though foolish, and of course one can't know. My guess- this time, they'll let the Dow drop to 1060, plus or minus- then shoot for a temporary "support" level around 1100. I don't think they're ready for the big drop just yet.

Guessing is such fun- since I don't have a penny in it.

rachel said...

@ Brimstone
I struggle with this too;
how do I prepare in a manner that will allow me to help my family and loved ones, especially when they roll their eyes when I bring up the topic.
My only solace is that at a minimum they might be prepared somewhat mentally as they have heard me say it so many times.
I just do not have enough money to buy food supplies for everyone…and going forward what will we do when we have all lost our jobs, retirement accounts, etc…..
I am not all doom and gloom...we will get creative and somehow make it work. The thing that bothers me most is how it does not have to be like this, but the dark forces of greed and corruption have had their way and will contiune to try to get more in the name of 'bailouts' and 'national security'

EBrown said...

Greenpa,
I little while ago I predicted the large drop in the markets would come in early October (1000 points off the Dow in a week or less), immediately on the heels of another big bank failure. Aside from the obvious societal disruption that will follow over the ensuing years I have no skin left in that game so I can make totally asinine predictions like this and laugh about it. Of course, many of my family members still stand to lose should such prognostications come anywhere near the truth. Some have listened to me. Like @Rachel I think we're going to be forced to muddle through in very different circumstances than most people currently expect...

Anonymous said...

Sounds like many of us are struggling with how to deal with what's coming even though I and S have correctly predicted it. One would think that early warning that the ship is sinking would give one the advantage but in the end it might mean one freezes in the water or starves in a lifeboat rather than being trapped below deck.

el_pollo said...

" One would think that early warning that the ship is sinking would give one the advantage but in the end it might mean one freezes in the water or starves in a lifeboat rather than being trapped below deck."

Well, IMO part of coming into this world is the agreement to play out our hands to the best of our abilities. So starving in the boat is better than being trapped below decks.

Looks like the PPT took Thursday off, but they are back with a vengeance today. Could there really be enough innocent, stupid people out there to still jump on the plunging elevator? Bogles the mind if there are.

brimstone said...

Raechel

The thing that bothers me most is how it does not have to be like this, but the dark forces of greed and corruption have had their way and will contiune to try to get more in the name of 'bailouts' and 'national security'

and this is what really gets me. With the talents and resources available within my immediate family, we could be very well prepared. as well prepared as is possible besides owning a private island.
Alas, the majority of said resources will be lost.

Anonymous said...

Raechel,
As this is late,I hope it reaches you
The best way to prepare for food shortages on a limited/non-existent budget,is to purchase garden seed.Stored correctly,that alone can make the difference.The amount of seed one can store might make the real difference in the long term

a few pounds of cabbage seed,ect will feed a LOT of people...

snuffy

freddie freeloader said...

Rachel, in addition to purchasing garden seed, I would look into volunteer work on an organic farm (http://www.wwoof.org/). Assuming we still have two nickels to rub together by next growing season...). You may learn a lot and build valuable relationships for the future.