Friday, February 29, 2008

Debt Rattle, Happy Bissextile Leap Day 2008

On the East Coast it is now February 29. It is formally called Bissextile Day. There are 97 of them every 400 years.

Have fun in your bissextileness.

Credit turmoil losses set to top $600-billion
Losses from the global credit market crisis will likely top $600-billion (U.S.), with banks and brokers responsible for more than half of that, UBS said in a note published on Friday. “Our global banks team estimates total industry losses in this financial crisis should reach north of $600-billion, of which listed banks and brokers should account for ‘only' $350-billion,” said Geraud Charpin, a credit strategist at UBS in a note entitled: “Wide Spreads — Here To Stay.”

Some $160-billion of that $350-billion has already been written off, the note said. American International Group Inc. on Thursday posted the biggest quarterly loss in its 89-year history — $5.29-billion — and missed Wall Street forecasts after being hurt by a writedown of securities exposed to bad mortgage investments. “AIG's $15-billion writedown is the clearest indication banks are not the only ones to suffer potential losses,” Mr. Charpin said.

Fears of writedowns have battered equity and credit markets, with rumours of fresh problems emerging almost daily.
As a result, financial credit spreads have sharply underperformed corporate peers and are now at levels where they are pricing in widespread defaults, according to Deutsche Bank.

U.S. Federal Reserve Chairman Ben Bernanke on Thursday warned some small U.S. banks might go under during the current stress, which has been prompted by housing market problems, but that the country's banking system remained solid.

Ilargi: After downgrading Citigroup last year, Meredith Whitney started to receive death threats. She cost the boys from Brazil billions in market value. What do you think will happen if she continues to talk loud and clear?

Outlook for U.S. banks just got gloomier

The U.S. banking sector is headed for a credit downturn that will be "the worst in generations," featuring widespread defaults on a range of debts and a national house price slide not seen since the Great Depression, says one of the most influential analysts on Wall Street. The banks face massive loan losses -- "far more dramatic" than most bank executives and ratings agencies have forecast -- as the next chapter in financial sector turmoil unfolds, said Meredith Whitney, an analyst with Oppenheimer & Co. Inc.

"We believe loss rates will exceed the highest levels since 1990 by a significant margin," she said in a note Monday. "Bank losses will be the highest in the past 20 plus years as a result of greater numbers of individual defaulting on mortgages and/or other loans and from [loan balances that] are far higher than they were in the last housing cycle."

Ms. Whitney -- who is also a panellist for Fox News and the number two ranked analyst on a Forbes list of top stock pickers for 2007 -- shot to global infamy last year after her gloomy, but accurate, predictions about the scale of subprime problems facing Citigroup Inc. led to a worldwide sell-off of banking stocks.

In Monday's note, the Oppenheimer analyst slashed her already-depressed forecasts of what large U.S. banks will earn in 2008 by 29% and by 13% for 2009, citing concerns about mortgages, credit card balances and other loans. In contrast to Ms. Whitney's pessimistic view, there was some good news Monday for big U.S. banks reeling from US$92-billion in collective writedowns tied to investments in the subprime mortgage market.

The U.S. financial sector was buoyed Monday by an announcement from rating agency Standard & Poor's that it is unlikely to downgrade bond insurer MBIA Inc. any time soon. S&P and other ratings agencies have been reviewing MBIA and its peers after U.S. monolines posted record losses on collateralized debt obligations they guaranteed (CDOs). Banks stood to lose as much as US$70-billion if the CDOs they owned no longer carried an automatic AAA rating because of the insurance.

Ilargi: "City Limits" is about to acquire a whole new meaning....

Vallejo to unveil deal to avoid bankruptcy

This onetime shipyard city turned Bay Area commuter village appears to have averted a move that is rare in California and across the nation -- declaring bankruptcy. A somber City Council had prepared to vote Thursday evening after putting the bankruptcy issue on the table earlier in the week during an emotional hearing that drew hundreds of concerned residents. But Mayor Osby Davis told a standing-room-only audience that the city had reached an agreement in closed session with labor leaders that would be announced today.

"We've got a tentative agreement, which is good," said Jon Riley, vice president of the International Assn. of Firefighters, Local 1186. "Nobody wanted bankruptcy." City Manager Joseph Tanner had recommended that the council file for Chapter 9 bankruptcy, which would allow the city to renegotiate its debt, but also substantially reduce services for years to come. For residents, the prospects are grim: Potholes left unfixed. Trees not trimmed. Longer waits for police to respond to calls.

"It's a black eye," said Ray Prather, manager of a downtown Army-Navy store. "We worry that people won't want to come to Vallejo when they read about this," Prather said. Civic leaders blame the city's current money woes -- a looming $9.2-million shortfall -- on a downturn in the housing market, flagging efforts to remake its waterfront and the high cost of providing public safety.

Police and firefighters account for 80% of Vallejo's budget, city officials say, due to soaring overtime bills and lucrative union contracts that have boosted base salaries, benefits and retirement plans. In most California cities, the average is about half the budget. Vallejo's dance with insolvency is a historic exception among California cities, experts say.

Canada's current account in deficit
Canada's current account, the broadest measure of international trade, registered a small deficit in the fourth quarter of 2007, a deeper drop than expected and the first deficit since 1999. Statistics Canada said Friday that in the fourth-quarter the difference between what Canada buys and what it sells to the rest of the world deteriorated by $1.8-billion from the previous three-month period to mark a $513-million deficit, on a seasonally adjusted basis.

Lower exports, hurt by the strong dollar, and a record travel deficit led to the fourth-quarter showing, the first deficit since the second quarter of 1999, the agency said. The current account balance measures goods, services and investment income. For all of 2007, the surplus narrowed sharply to $14.2-billion, compared to $23.6-billion in 2006.

“This narrowing surplus occurred against the backdrop of a Canadian dollar that made strong gains against major foreign currencies in 2007, particularly the American dollar and the British pound,” Statistics Canada said. “This generally made Canada's exports more expensive and its imports cheaper, with consequence for the current account balance.” The goods surplus in the fourth quarter narrowed to $9.3-billion, falling below the $10-billion mark for the first time this decade, as exports dropped more than imports, the statistics gathering agency said. As well, it noted, the deficit on the services side was another record, $5.8-billion.

Canada's capital account, meanwhile, which measures investment, saw the second largest quarterly inflow of foreign direct investment, at $47-billion, second only to the surge at the end of the tech bubble, noted BMO Capital Markets deputy chief economist Douglas Porter. Mr. Porter pointed out that for all of last year, foreign direct investment inflows hit a record $115-billion, representing 7.5 per cent of gross domestic product, and more than double the outflow by Canadian companies investing outside the country.

The net number shows a massive inflow of $62-billion in 2007, he said, the largest on record in dollar amounts but also the highest as a share of GDP.

The Worst-Case Scenario for Housing
Forecasters say a 40 percent drop in home prices from their peak is possible, though quite unlikely

A year ago, most economists talked in worried tones about the possibility that American home prices could slip after almost doubling during the prior decade. At worst, fretted Wall Street's more bearish forecasters, prices could drop as much as 20 percent from their peak in a more dire version of the last housing downturn during the early 1990s, when new-home sales dipped but existing homes held their value.

Fast-forward to today, and the scope of those concerns looks almost quaint. Home prices are already falling fast (with builders offering huge rebates on new homes), and the only question now is: Just how low can they go?  Forecasts by Moody's now use a 20 percent drop in median existing-home prices from their 2005 peak as a baseline, with prices weakening through at least mid-2009. The forecast assumes the United States is already in a mild recession.

And that is the good news. "Our weaker a 25 percent decline in prices," says Celia Chen, Moody's director of housing economics. "That would be in the case of a housing and credit crash and still a moderate recession." There are new worst-case whispers as well. "You want the darkest? Forty percent," she says. "There's your apocalypse."

That's right. In Moody's most pessimistic (and most unlikely) scenario, existing-home prices plummet by 40 percent from their peak. A drop like that would certainly plunge the economy into a deep recession, push unemployment to around 9 percent, and hamstring economic growth in a way that could take years to undo. The shock of falling home prices and tight credit markets would spill into everything from consumer spending to business investment.

Ouch. Mix in the huge glut of unsold houses on the market, and such a catastrophe would be a recipe for a huge devaluation of not just homes but other assets, like automobiles. Tight credit would exacerbate the pain, forcing interest rates on bank loans to climb. It would also coincide with a generation of retiring baby boomers who watched home prices soar and pared back their personal savings accordingly, notes Merrill Lynch.

Ilargi: Look, we live in a democracy. That means you are free to listen to the retarted clown who doubles as the talking hand for the Fed, and believe his every word. You are also free to believe that the Fed is trying to save the US economy.

But not without me telling you that this freak show is liquidating that same economy, and all your assets with it. Let’s hook up here a year from now, and you can tell me who was right; it'll all be done within that year, it'll be too late in February 2009.

In the meantime, just watch how all the wealth they can get their greasy fingers on is being shifted to the banking system, while all the debt moves the opposite direction: the public sector. YOU ARE THE PUBLIC!! You are being saddled with all the debt the gamblers incurred, while they take away all you have left.

Bernanke says US slowdown will eclipse dotcom bust
Federal Reserve chairman Ben Bernanke said that the impact of the current housing-led slowdown in America has the potential to be far deeper than the collapse of the dotcom boom at the start of the decade. The latest news and analysis of the UK and world economy

Mr Bernanke predicted that a combination of fiscal and monetary policy should lead to stronger growth in the second half of 2008. In his second day of semi-annual assessment of the economy on Capitol Hill, Mr Bernanke explained that the decline in home prices is causing a broader set of problems than the end of the technology bubble. Comparing the 2001 slowdown to the economy's current woes, he said: "In fact the effects of the stock market declines were primarily on investments. In this case, consumers are taking the brunt of the effects."

Mr Bernanke also believes the Fed is in a more difficult position to respond now that it was in 2001. However, he does not anticipate a period of stagflation - where stagnant economic growth and inflation coincide - saying that economy's current problems are "nowhere near" the set of issues that led to the stagflatory environment of the 1970's.

Speaking after the US Commerce Department confirmed that the US economy grew by 0.6pc in the last three months of 2007, Mr Bernanke predicted that a combination of fiscal and monetary policy should lead to stronger growth in the second half of the year.

The Dollar Selloff Continues
The euro extended its advance against the dollar yesterday to another record high after disappointing U.S. jobs data and a repeat performance by Federal Reserve Chairman Ben Bernanke on Capitol Hill. The Fed chief's testimony before the Senate Banking Committee was largely the same as a day earlier before members of the House. He did little to offer relief from recession fears and supported market expectations for a 50-basis-point cut to the benchmark U.S. rate at the next meeting of the policy-setting Federal Open Markets Committee.

The path for U.S. rates has diverged from the euro zone, where the European Central Bank is expected to keep its key rates on hold. Against this backdrop, investors continued to sell the greenback, driving the euro intraday to a fresh high of $1.5231. The dollar also dropped to a new low against the Swiss franc at 1.0485 francs, and got closer to a nearly three-year low against the yen, falling as far as 105.07 yen. Against the emerging-market currencies, the dollar isn't finding much relief as investors seek to profit by using cheap U.S. lending rates to fund bets in riskier assets.

The buck fell to its lowest level against the Colombian peso since 1999 and against the Chilean peso since 1998. The Brazilian real also strengthened for the ninth consecutive session yesterday, rising to a fresh nine-year high against the dollar. "This is follow-through from the move seen all week," said Dan Katzive, foreign-exchange strategist at Credit Suisse Group in New York. "The dollar is undermined by the fact that U.S. yields are continuing to fall relative to other industrial countries."

US economy risks a 'lost decade' like Japan
The US could be facing a "lost decade" like that suffered by Japan in the 1990s as the markets fail to respond to interest rate cuts and the US Federal Reserve runs out of options, the head of one of the leading private equity firms said today.Tim Collins of Ripplewood Holdings, said the Fed was "running out of policy alternatives" as it attempted to prevent a long recession in the US.

Mr Collins, whose firm has significant expertise in Japan after leading the buyout and turnaround of Japan Telecom, said he believed a "sharp repricing of assets" was the most likely outcome. But he said: "My fear is that we will prolong it and suffer a death of a thousand cuts after we have exhausted all the options."

"Even without a recession and with all of the policy tools available we still have hundreds of billions of dollars of losses." Japan has only recently emerged from a period of zero interest rates. He said the future would not be clear until a recession had laid bare the true state of the financial system. "You have to wait for the tide to go out to see who is wearing a bathing suit," he said.

But the chairman of Ripplewood, which last year completed the $2bn buyout of Readers Digest, rejected the argument, put forward by some at this year's SuperReturn private equity conference in Munich, that Sovereign Wealth Funds would replace struggling banks to provide debt to private equity companies.

"The financial markets operate on the basis of the multiplier effect in the banking system and you cannot replicate that with what is effectively equity, not debt, from sovereign wealth funds."

Ilargi: In Medieval Europe, there were efficient methods to deal with pathological liars making fortunes off the public good.

Treasury's Paulson Says He Favors a 'Strong Dollar'
Treasury Secretary Henry Paulson said he favors a strong U.S. dollar that over the long term reflects the competitiveness of the world's largest economy. "In my heart and soul, I just know and believe that a strong dollar is in our nation's interest,"Paulson said in response to questions from the audience after a speech in Chicago. "Our economy, like any other, is going to have its ups and downs, but I believe our economy is going to continue to grow this year and that our long-term competitiveness is going to be reflected in the value of the dollar."

The U.S. currency today fell to a record low of $1.5229 versus the euro, as a slowing American economy encouraged bets the Federal Reserve will cut interest rates again. The dollar also reached a 2 1/2-year low of 104.58 yen. The language Paulson used in the dollar's latest slide recalls the phrases he used in November, when the currency was in a three-month decline against the euro and also weakening against the yen.

"They're crossing their fingers on the dollar that it won't go down all that much more,"said David Gilmore, partner at Foreign Exchange Analytics in Essex, Connecticut. "They've got enough other problems to worry about." As the dollar sank to new lows against the euro, President George W. Bush said it should reflect the country's economic fundamentals. The currency has declined in five of the past six years, based on the Federal Reserve's broad dollar index, which compares it with currencies of U.S. trading partners.

"I believe that our economy has got the fundamentals in place for us to grow and continue growing more robustly, hopefully, than we're growing now,"Bush said during a White House press conference. "The value of the dollar will be reflected in the ability for our economy to grow economically. And so we're still for a strong dollar."

Dollar Falls to Three-Year Low Versus Yen on Fed 'Indifference'
The dollar fell to the lowest level in three years versus the yen on signs the Federal Reserve sees a weakening dollar as helping the U.S. economy. The U.S. currency dropped below 104 yen, to its lowest level since March 2005, after Fed Chairman Ben S. Bernanke said the weaker currency helps cut the trade deficit, and as a report showed Chicago-area business contracted this month. The U.S. Dollar Index, which tracks the currency against six major counterparts, sank to the lowest since its start in 1973.

``It's broad dollar weakness because of concerns about the U.S. economy, U.S. yields, expectations of rate cuts and financial markets,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup Inc. in New York. ``They don't care about the weak dollar. I absolutely believe the market is disappointed'' by Bernanke's comment.

Ilargi: I suggest you just read the next few excerpts as I put them before you. Personally, I simply fail to grasp the reasoning behind F&F’s record losses morphing into them taking on $100’s of billions more in risk. It looks absurd to me beyond the extent of Kafka . But please, make up your own mind. I can give you a few pointers: those record losses are now, more than ever, guaranteed to grow at record pace. And the government backing means that your tax dollar will now pay for the losses of the private banks that had these mortgages on their sheets before. It’s simply shifting the private banks’ ugly bottomless deep doodoo debt to the public sector. And in case you forgot: you are the public. You’re being robbed.

Fannie and Freddie smile through crisis
Even as the private sector flees the mortgage market, the two money-losing government-backed lenders will take on more risky debt.

The housing bust is handing Fannie Mae and Freddie Mac a fresh chance to rebuild their battered images. But the hefty losses the firms reported this week, and worries about the health of the economy, show it won't be easy. The Office of Federal Housing Enterprise Oversight, which regulates Fannie and Freddie, said Wednesday it would lift portfolio-growth restrictions that have fettered the companies for the past two years.

Lifting the portfolio caps could free Fannie and Freddie to substantially expand their holdings of mortgages and related securities, beyond the $746 billion which each firm is presently allowed to hold. OFHEO said the move rewards the companies for tightening up the lax management policies that led to multibillion-dollar financial restatements and executive shakeups earlier this decade.

But the decision - welcomed by both Fannie and Freddie - also hands policymakers another weapon as they seek to ease the pain of the housing bust, which has left many homeowners in distress. After all, many private investors are fleeing the mortgage market, suggesting that Fannie and Freddie may be stepping into treacherous territory.

Another lender delivered a reminder Thursday of just how sour the mortgage markets have turned. Thornburg Mortgage, which specializes in jumbo loans - mortgages bigger than the ones Fannie and Freddie invest in - said values in the mortgage securities market have dropped so sharply this month that the company might have to sell assets to meet margin calls, even though it doesn't expect to recognize losses on the bonds themselves.

The decision to lift the portfolio caps is a natural one, says Jeffrey Miller, CEO at investment adviser NewArc Investments in Naperville, Ill., because it gives officials an easy way to offer a bit of support to housing prices and ease worries about the health of the economy. "Any solution will have to go through the GSEs," says Miller, referring to Fannie and Freddie as governmet-sponsored enterprises. He notes that the move to expand the mortgage caps shows how policymakers naturally "look to structures that already exist to deal with problems."

Fannie Mae May Have Financial Rating Cut by Moody's
Fannie Mae, the largest source of money for U.S. home loans, may have its bank financial strength rating cut by Moody's Investors Service because of a record $3.55 billion fourth-quarter loss. The loss "represents a significant deterioration of surplus regulatory capital"from $3.9 billion in December, Moody's said in a statement today. Fannie Mae is likely to have "sizable losses"in the first half of 2008 and may have a net loss for the year.

Fannie Mae, which accounts for at least one in five home loans, is facing the toughest housing slump in a generation, Chief Executive Officer Daniel Mudd said yesterday, forecasting the market won't bottom until 2009. Regulators removed limits on the combined $1.5 trillion mortgage portfolios of Fannie Mae and Freddie Mac yesterday, enabling the companies to increase financing for the housing market.

While Moody's affirmed the Washington-based lender's top Aaa senior-debt rating with a stable outlook, it's reviewing the financial strength rating, which measures the odds of the company needing assistance from shareholders, the government or other external parties. That rating is at B+, the third highest grade.

"A downgrade would raise Fannie's borrowing costs, which would be negative for its shareholders, but would be unlikely to send another shock wave through credit markets,"said Tim Condon, Singapore-based head of research at ING Groep NV.
Fannie Mae lost more than half its market value in the past year as the housing slump deepened. Analysts at Goldman Sachs Group Inc. and Merrill Lynch & Co. cut recommendations to "sell"in the past week on concern that falling home prices will hurt earnings.

Freddie Falls Further
First it was Fannie Mae and now it's Freddie Mac. Though Freddie's numbers were awful, some help from Washington had investors clamoring for Freddie Mac on Thursday, but the excitement wouldn't last long. The McLean, Va.-based lender said its losses grew to $2.5 billion in the fourth quarter of 2007 as more home loans buckled and expected future woes forced the company to set aside money for looming dark days.

Freddie Mac lost $600 million in the first three quarters of 2007. The worse-than-expected forth-quarter $2.5 billion loss looks massive next to Freddie Mac's $401 million loss in the last three months of 2006. Wall Street analysts had expected a $1.5 billion loss for the quarter. Despite this, investors rallied to the lender during trading on Thursday, but it wasn't enought to keep them interested.The stock closed down 2.4%, or 60 cents at $24.49. Fannie Mae enjoyed a similar spike without the later drop, closing up 2.3%, or 63 cents, at $27.90.

Freddic Mac, the second largest buyer and backer of home mortgages in the U.S., said Thursday that it posted $3.1 billion in losses in 2007, or $5.37 a share, versus earnings of $2.3 billion, or $3 a share, in 2006. Freddie says its 2007 losses are equal to $3.97 per share versus a loss of 73 cents per share in the previous year. This is 70.0% more than analysts' prediction of $2.34 in losses.

"There’s not much positive to cheer the bulls," said Morgan Stanley analyst Kenneth Posner. "Housing data looks poor, prime credit is rapidly deteriorating, and earnings for both government sponsored enterprises are expected to be weak for the foreseeable future."

Freddie Mac Loss Swells as Mortgage Crisis Deepens
Freddie Mac, the second-biggest provider of U.S. residential mortgage funding, on Thursday said its fourth-quarter loss widened to a record $2.5 billion as the housing crisis worsened.

Freddie Mac, as well as rival Fannie Mae, suffered from soaring defaults on mortgages guaranteed by the two companies as nationwide home prices declined in 2007 for the first time since the Great Depression. The company also warned it expected to lose billions of dollars more in upcoming quarters as the housing market slump deepens and more borrowers fall behind on payments.

Regulators have loosened restrictions on the two government-sponsored enterprises (GSEs) in the hope they will be able to prop up real estate by holding financing costs down for a bigger pool of home buyers. The GSEs hold charters from Congress to boost homeownership. However, the companies' staggering losses and desire to protect capital in a crumbling credit market has curbed their power to stabilize the housing market. Fannie and Freddie have had to raise fees to lenders, which analysts said may extend the credit crunch the GSEs are being asked by Congress to undo.

The mortgage finance companies' capital is strained as they must write down the values of mortgage securities they own and their contracts to guarantee mortgages backing bonds they issue. At the same time, capital is needed to back new investments and rapid growth in their mortgage guarantee businesses. Losses led the companies to raise $13.8 billion through the sale of preferred stock last quarter. "Freddie Mac's ability to maneuver in 2008 is severely limited after fourth-quarter results ate through almost one half the preferred capital raised during the period," Jim Vogel, a strategist at FTN Financial in Memphis, Tennessee, said in a note to clients.

Fannie Proposes Ban on Lenders' In-House Appraisers
Fannie Mae, the biggest source of financing for U.S. home loans, told lenders it will probably ban their use of appraisals by in-house employees or those arranged by brokers. Fannie Mae distributed the proposal, a response to New York Attorney General Andrew Cuomo's yearlong mortgage probe, to lenders in a "talking points" memo this week, according to a person familiar with the document. The memo was published on American Banker's Web site yesterday.

"It would be a monumental change because it would require a shift in the way that the lending industry does business," said Jonathan Miller, chief executive officer of Manhattan-based appraisal company Miller Samuel Inc. and a longtime proponent of creating a firewall between residential appraisers and mortgage originators. "I think it would be tremendous."
Rising foreclosures on U.S. home loans spurred Cuomo's investigation. He initially subpoenaed appraisers to ask whether mortgage brokers or lenders pressured them to inflate home valuations, which in turn would artificially boost the value of collateral supporting mortgage-backed securities.

"Fannie Mae wishes to cooperate with the New York AG's investigation and, as part of a cooperation agreement, will likely agree to a number of items," according to the memo. The proposed changes include banning Fannie Mae's partners from using appraisers employed by their wholly owned subsidiaries. Mortgage lenders that own appraisal companies include Countrywide Financial Corp., the nation's largest home- loan originator. The restrictions would apply to loans acquired after Sept. 1, according to the memo. Fannie also told lenders that an independent appraisal clearinghouse likely would be established.

About three quarters of residential mortgage appraisals are arranged through brokers who only get paid if a loan closes, Miller said today in a phone interview. He called the practice "laughable" because it creates a financial incentive for mortgage brokers to push appraisers toward higher valuations. Higher appraisals also mean more homeowners qualify to refinance their homes and take cash out, he said.

No more ABCP writedowns, National Bank vows
National Bank of Canada won't take any more writedowns on its asset-backed commercial paper portfolio, its executives vowed Thursday, unless the restructuring of the ABCP market descends into chaos or the United States plunges into a deep recession.

The bank, which cut the carrying value of its ABCP portfolio by 25 per cent in November and took a $365-million charge, won't be doing that again “unless there is a severe U.S. recession, or a disorderly liquidation of the [market],” chief executive officer Louis Vachon told analysts on a conference call after the release of first quarter results.

The restructuring of the third-party ABCP market is moving forward under the a committee of lenders headed by Toronto lawyer Purdy Crawford, and “we're very confident the process will reach a successful conclusion, said Ricardo Pascoe, co-CEO of the National's investing banking arm. He offered reassurance that a standstill agreement and trading freeze are still in force, despite their official expiration on Feb. 22.

National has more exposure to the troubled ABCP market than any other bank, and now values those holdings, after the writedown, at $1.7-billion While the bank did not take another charge in the quarter, the ABCP crisis continues to make a dent its profits. The bank took a $14-million hit to its bottom line from ABCP financing costs and professional fees in the three months ended Jan. 31

Bank of Montreal may abandon debt rescue
Facing new writedowns of more than $500-million, BMO is considering quitting group that is restructuring frozen ABCP market

Bank of Montreal has signalled it may pull out of an effort to restructure $33-billion in stranded asset-backed commercial paper, as mounting woes in the global credit market leave the bank facing margin calls of more than $500-million on two of its own ABCP trusts. According to sources, bank officials recently advised the group of ABCP investors seeking a fix for the market, known as the Crawford Committee, that BMO may no longer be able to honour its commitment to contribute to a $14-billion line of credit.

That credit line is the centrepiece of a plan to swap the frozen notes into new long-term bonds. Bank of Montreal's specific commitment to the so-called liquidity line has never been disclosed, but it is one of four Canadian banks that agreed in December to provide as much as $2-billion in total. The remaining $12-billion is backed by a group of international banks.

Global credit markets have sold off so much more since December that financial institutions are facing the renewed prospect of additional losses on such structured products as ABCP. Yet, if banks balk at helping the Crawford Committee, they raise the prospect of a fire sale of assets that would further drive down credit markets and exacerbate losses in other areas of their businesses.

What bad banking news means to you
Bad news about the banking industry may have you wondering about the safety of your hard earned cash at your own bank. In the past year there have been four bank failures. And the chairman of the Federal Deposit Insurance Corp and banking industry experts foresee many bank failures down the road.

"Regulators are bracing for 100-200 bank failures over the next 12-24 months," says Jaret Seiberg, an analyst with the financial services firm, the Stanford Group. Expected loan losses, the deteriorating housing market and the credit squeeze are blamed for the drop in bank profits. The problem areas will be concentrated in the Rust Belt, in places like Ohio and Michigan and other states like California, Florida and Georgia.

The number of institutions categorized as "problem" institutions by the FDIC has also grown from 50 at the end of 2006 to 76 at the end of last year. But to put that in perspective -- by the end of 1992 -- at the tail end of the banking crisis -- there were 1,063 banks on that "trouble" list says David Barr of the FDIC.

Banking experts say there is one thing that will save your money if your bank goes under. That's FDIC insurance. "It's the gold standard," says banking consultant Bert Ely. "The FDIC has ample resources. It's never been an issue," he says. The FDIC insures deposits in banks and thrift institutions. The federal agency was created during the Great Depression in response to thousands of bank failures. The FDIC maintains that not one depositor has lost a single cent of insured funds since 1934 as a result of a bank failure

Alt-A Mortgage Securities Tumble, Signaling Losses
Securities backed by Alt-A mortgages and other home loans to borrowers with better-than-subprime credit tumbled this month, causing investment funds to unwind or meet margin calls and signaling larger losses for Wall Street.

London-based Peloton Partners LLP, which owns debt tied to home loans considered safer as well as bets against subprime, is liquidating a $1.8 billion hedge fund. UBS AG and Merrill Lynch & Co., which reported some of the largest of the more than $160 billion of mortgage losses at the world's biggest banks, also hold the securities, according to company statements.

Valuations for AAA rated securities backed by Alt-A loans, deemed between prime and subprime in terms of expected defaults, slumped 10 percent to 15 percent this month, partly because it's so difficult to trade or find prices for them, Thornburg Mortgage Inc., the Santa Fe, New Mexico-based lender and investor, said in a securities filing today.
"There really hasn't been an orderly two-sided market in 2008," Arthur Frank, a mortgage-bond analyst in New York at Deutsche Bank AG, said today in a telephone interview.

Alt-A securities began tumbling on Feb. 14, when UBS disclosed its holdings and speculation began spreading that the Zurich-based company would sell a large amount, Thornburg President Larry Goldstone said in a Bloomberg Radio interview today. Mortgage debt would generally sell for less today than in August, when Thornburg sold $20.5 billion of mostly AAA bonds backed by prime "jumbo" adjustable-rate mortgages at a loss of about $930 million to meet margin calls, he said.

Sub-prime lands AIG with $11bn write-down
American International Group, the world's largest insurer by assets, has produced its biggest-ever quarterly loss as a public company after taking an $11.12bn (£5.63bn) write-down on investments linked to US sub-prime mortgages.

AIG, best known in the UK as the shirt sponsor of Manchester United, reported a net loss of $5.29bn in the fourth quarter compared to a $3.44bn profit in the same period last year as it wrote down guarantees sold to protect fixed-income investors. The losses came as the insurer wrote down the value of credit-default swaps as a result of the US sub-prime mortgage collapse. AIG shares fell 3.5pc to $48.40. British-born chairman and chief executive Martin Sullivan called the results "clearly unsatisfactory".

The news comes just weeks after AIG said in a regulatory filing that it thought it would have to take a $4.88bn write-down for October and November, after PricewaterhouseCoopers found a "material weakness" in its financial reporting. The filing warned: "AIG is still accumulating market data in order to update its valuation of the portfolio."

Wachovia, Deutsche Bank Employees Targeted in Probe
A senior Deutsche Bank AG banker and employees at two other firms were notified by the U.S. Justice Department that they are targets in a municipal bid-rigging probe. Patrick Marsh, head of municipal structuring at Deutsche Bank, Germany's biggest bank, disclosed in employment records filed with U.S. regulators that he is a target of the criminal antitrust investigation. Wachovia Corp. and Piper Jaffray Cos. also disclosed in regulatory filings today that they had employees targeted in the investigation.

Justice Department prosecutors and the Securities and Exchange Commission subpoenaed more than a dozen banks and insurers in November 2006 in a search for evidence of bid rigging for investment contracts governments buy using bond sale proceeds and derivatives such as interest-rate swaps. Wachovia in its filing said it received subpoenas from the Justice Department and the SEC.

"This is the beginning of the end of this investigation," said Christopher "Kit" Taylor, executive director from 1978 to 2007 of the Municipal Securities Rulemaking Board, a panel that issues rules on municipal bond deals. "I'm afraid that this is going to add a further taint to a market that otherwise was considered to be very safe, very stable, maybe, even boring."

Another Rogue Trader Strikes
On Wednesday morning, a U.S.-based MF Global broker blew through the authorized trading limit in his personal account and lost $141 million in wheat futures in a matter of hours. Bermuda-headquartered MF Global, one of the biggest futures brokers with a strong reputation in risk management, blamed the incident on a failure of its retail order computer systems that let the broker take on large positions that exceeded the cash on hand in the account.

The price of failure? MF has to cover the loss, amounting to 6% of its capital. The firm said Thursday it had fired the trader.

Is this starting to sound all too familiar? Last month, Société Générale, the second largest French bank, also admired for its risk management and skill in derivatives trading, reported a $7 billion loss. It says a rogue index futures trader named Jerome Kerviel bypassed internal compliance systems over several months to place an unauthorized $80 billion bet on the direction of European markets

Other firms have been sunk by traders going too far out on the limb. In 2006, Amaranth Advisors, a $9 billion hedge fund, collapsed after its head natural gas trader, Brian Hunter, lost $6.5 billion in a week on bad bets on the direction of gas futures. But at least he had the nod from headquarters. In 1995, the 230-year-old Barings Bank imploded in just three days after the discovery that trader Nick Leeson lost $1.6 billion in unauthorized trading in Nikkei futures over three years.

Can't Anyone Here Deal with Derivatives?
Merrill Lynch overstated cash flows received from derivatives-financing transactions.

Can anyone figure out how to account for derivatives? Apparently not one of the biggest investment banks in the world. In a Monday regulatory filing, Merrill Lynch disclosed that it would restate previously issued cash-flow statements going back to 2005 to correct errors stemming from an adjustment that "incorrectly reflected cash flows received from certain customer transactions."

That adjustment spawned an overstatement of cash flows received from derivatives-financing transactions and was offset by a corresponding overstatement in cash flows used for trading liabilities, according to the investment banker. The restatement reduces cash provided by financing activities by $22.9 billion in the first nine months of this year. It also cut cash provided by financing activities by $15.7 billion for 2006 and by $4.6 billion for $2005.

The company reported that the error did not affect earnings statements, balance sheets, or other reports. Further, the company’s compliance with any financial covenants under its borrowing facilities was not affected, Merrill stated.

India's Budget Offering Forgiveness On Farm Debt
With an eye on upcoming elections, India’s Finance Minister Palaniappan Chidambaram waived farm debts and cut personal taxes, in an attempt to boost consumption amid slowing economic growth. In his fifth annual budget presentation, the minister increased exemption limits for personal taxes to 150,000 rupees ($3,755.16), from 110,000 ($2,753.79) rupees, in a nation where only a third of the population pays taxes. He left corporate tax rates and surcharges unchanged.

He also cut excise duties on pharmaceutical goods--exempting AIDS drugs entirely--and small and hybrid cars and abolished duties on wireless data cards. Jewelry exports, which suffered last year as the rupee appreciated against the dollar, also got duty relief on select gems.

Indian automakers were expecting some budget relief after their sales suffered last year because of tightening interest rates. Loans finance a preponderance of the passenger vehicles purchased in India. "The budget was about populist measures, but the finance minister has shown some commitment to financial reforms," said D. K. Joshi, chief economist at Crisil, the Indian arm of ratings agency Standard and Poor's. "He’s given a fillip to growth by reducing excise duties on key sectors like autos, and has put more money to spend into the hands of consumers."

Chidambaram forecast that the fiscal deficit will be 2.5% of GDP for the fiscal year 2009, down from an estimated 3.3% this year. Economic growth for the quarter ended Dec. 31 stood at 8.4%, compared to 8.9% in the previous quarter, the government said Friday. Last fiscal year, GDP growth was 9.6%. Agriculture has "struck a disappointing note," Chidambaram said in Parliament. Growth rates in the primary sector are expected to be about 2.8% for the year ending March 31. Agriculture accounts for the livelihoods of about two-thirds of India’s population, and consequentially has a powerful voting base.

Ilargi: Oh man, I'm going to have to post this picture. It has no link to anything I do here, but it's simply priceless all by itself:

Thursday, February 28, 2008

Debt Rattle, February 28 2008

NOTE: today’s earlier post can be found here: 1 down, 10.000 to go

Ilargi: B-52 Ben is starting to choke on his web of crap. It’s hard to pick out the most blatant lie, there’s too many by now. But alright, how about this one: ”U.S. bank balance sheets are in strong shape.".

When he said that, someone in that Senate Committee should have interrupted him and asked for proof, for the sheets and the numbers in them. But they just play the same game, and even if they’d be tempted to, Ben is not under oath, so there’d just be more nonsense.

Just days after the FDIC announces that they expect over 100 bank failures in the near future, Bozo the Clown has the gutzpah to sit in front of your chosen representatives and say that the balance sheets of those same banks are in strong shape. You can call it what you want, a comedy, a tragedy, it makes no difference, but don’t ever again believe one single syllable of this play.

And by the way, the only thing that would lend any strength to those balance sheets is the money that you deposited with these banks. But don’t be too sure there’s much of that left either.

Bernanke: Stagflation Not Expected
Federal Reserve Chairman Ben Bernanke said Thursday that the current mix of slow growth and rising inflation is nowhere near the conditions of the 1970s, commonly referred to as "stagflation." "I don't anticipate stagflation," Mr. Bernanke said in response to questions from the Senate Banking Committee, where he delivered the second leg of his semiannual economic testimony to Congress.

He said the U.S. should return to strong growth and low inflation in coming years, and that the mix of fiscal and monetary stimulus should boost growth in the second half of this year. He also said that while oil prices remain a wild card, even if they stabilize at current high levels, that should reduce price pressures this year. Mr. Bernanke also said that there are some distinct differences between the current economic downturn and the previous one in 2001 that make it tougher for policymakers to respond to today's events. "Every period of economic stress has unique" circumstances, Mr. Bernanke said.

The housing correction that the U.S. now faces creates "a broader set of issues" than the bursting of the technology bubble at the start of this decade. The U.S. also has a "less advantageous" fiscal situation than a few years ago when the government ran a surplus, Mr. Bernanke said, and the dollar has weakened. Though there are more inflationary pressures than during the previous downturn, Mr. Bernanke said inflation expectations remain "pretty stable."

Mr. Bernanke also said U.S. bank balance sheets are in strong shape, and he doesn't anticipate major problems in the banking sector. Still, banks should continue raising capital, Mr. Bernanke said, adding he is worried banks might pull back from new lending.

Ilargi: In our ongoing course in “Expand your daily vocabulary”, we have an important new term. After subprime, counterparty risk, auction rate securities and credit default swaps, we proudly present: Margin Call. Soon coming to a town near you. If you have a mortgage, it may well come even closer than that.

Margin Calls Prick Thornburg
Thornburg Mortgage shares were plunging Thursday on news that the mortgage originator may be forced to sell assets in order to meet collateral requirements by its lenders.

The Santa Fe, N.M.-based company said that it has so far met $300 million in so-called margin calls since Feb. 14, and may be required to post more cash as its portfolio of Alt-A loans has fallen some 10% to 15% in value over the past few months. Alt-A mortgages are unconventional, nonprime mortgages that are provided to borrowers with insufficient documentation to prove their income.

Thornburg maintains a portfolio of some $2.9 billion in Alt-A mortgages. The lender described the drop in the value of those loans in a regulatory filing with the Securities and Exchange Commission as a "sudden adverse change in mortgage market conditions in general" that began on Feb. 14. Shares of the company were down as much as 22% in Thursday trading action, after seeing values plunge as much as 28% in premarket trading. More recently, shares were off 18.3% to $9.43.

Thornburg faced similar calls for additional capital to meet lender requirements during the summer when the mortgage crisis began to upend Wall Street firms and traditional mortgage lenders. Back in August, the mortgage originator sold $21.9 billion of assets to appease lenders and raised $500 million a month later to shore up its balance sheet. The West Coast mortgage lender specializes primarily in providing adjustable-rate mortgages known as jumbo loans, which are typically $417,000 or more.

Wachovia employees targeted in muni bond probe
The U.S. Department of Justice is investigating two Wachovia Corp. employees for improper conduct as part of the agency's investigation into competitive-bid practices in the municipal bond market.

In its annual report, Wachovia (NYSE: WB) disclosed it has received subpoenas from the DOJ and the U.S. Securities and Exchange Commission seeking documents and information from its municipal derivatives group. The two agencies told Wachovia they believe the employees engaged in improper conduct in the bond market.

In November, the DOJ notified the two employees, whom the bank did not identify, that they were targets of the investigation. Both employees are on administrative leave. The bank said it is cooperating fully with government investigators.

The investigation has involved other financial institutions, including Bank of America Corp. The bank (NYSE: BAC) recently disclosed the receipt of a Wells notice from the SEC on Feb. 4. The notice means SEC investigators may suggest the agency take legal action against employees. BofA agreed to cooperate with the DOJ, and in exchange the department will not seek criminal antitrust prosecution against the bank for matters it voluntarily reported to federal investigators.

Ilargi: As the OFHEO miraculously and irresponsibly allows Fan and Fred to get deeper into debt, it may not matter much: both are being downgraded. That’s a far more suitable prize for record losses.

Freddie Mac Posts Record Loss, Remains 'Cautious'
Freddie Mac, the second-largest source of money for U.S. home loans, posted a record $2.45 billion loss for the fourth quarter as rising mortgage defaults sent credit costs soaring. The net loss, which amounted to $3.97 a share, widened from $401 million, or 73 cents, a year earlier, the McLean, Virginia- based company said in a statement today. The loss compared with a $2.06 average estimate of 12 analysts in a Bloomberg survey.

Government-chartered Freddie Mac and the larger Fannie Mae, which account for 45 percent of the $11.5 trillion home loan market, are posting their biggest-ever losses as foreclosures and tumbling housing prices increase costs on the mortgages they buy and guarantee. Freddie Mac Chief Executive Officer Richard Syron said today the company remains 'extremely cautious' for 2008.

Credit losses 'are costing Freddie Mac valuable capital,' said Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York. 'Losses won't bottom out until next year.' The fourth-quarter results included writedowns and other non-interest expenses of $2.1 billion primarily related to derivatives contracts, and $912 million of credit expenses. Credit losses will rise to $2.2 billion in 2008 and $2.9 billion in 2009, Freddie Mac said.

The company's regulator tried to provide a boost yesterday, removing limits on the combined $1.5 trillion mortgage portfolios of Fannie Mae and Freddie Mac, enabling the companies to increase financing for the slumping housing market. The Office of Federal Housing Enterprise Oversight lifted the constraints after the companies met a demand to resume timely reporting this month. 'Today's economy represents one of the most severe housing downturns in American history and our results reflect that difficult environment,' Syron, 64, said in the statement.

Fannie Mae yesterday posted a record net loss of $3.55 billion for the fourth quarter and increased its forecast for credit losses. Moody's Investors Service said it may cut Fannie Mae's financial strength rating because the losses are eroding the company's capital. Moody's is also reviewing Freddie Mac. Freddie Mac lost about 60 percent of its market value in the past year.

Door Could Open To Class Actions
A federal appeals court is nearing a decision on a battle between Chevy Chase Bank and a Wisconsin couple that could for the first time enable homeowners across the country to band together in class-action lawsuits against mortgage firms and get their loans canceled. The case is alarming Wall Street's biggest banks, which could bear the hefty cost of reimbursing all mortgage interest, closing costs and broker fees to groups of homeowners who uncover even minor mistakes in their loan documents.

After a federal judge in Milwaukee ruled last year that the Wisconsin couple had been deceived and other borrowers could join their suit, Chevy Chase Bank appealed to the circuit court in Chicago. Kevin Demet, the lawyer for the plaintiffs, said a decision by the appeals court is imminent, though others involved in the case said it could be a matter of weeks.

"It's one of the most important cases for the mortgage industry right now," said Louis Pizante, chief executive of Mavent, which provides consumer protection law services to major lenders. "The case was somewhat interesting a couple years ago when it started, but its ramifications and impact have completely changed given the current environment."

In recent years, home lending has boomed. But standards loosened at many mortgage firms and led to a rise of abuses, in particular predatory practices. Now, record numbers of people are finding themselves with loans that are more than they can afford and many want out.

Estimates vary widely on the number of homeowners who could benefit from the case. Those who have refinanced or hold a home equity loan are already eligible for a refund, while others can get monetary damages. The court's ruling won't change this. But by allowing plaintiffs to file class-action suits, the ruling would make it much easier and more affordable for groups of homeowners to get that relief, several lawyers and mortgage analysts said.

Dozens of class-action homeowner lawsuits have been filed in California and elsewhere against the nation's largest banks. The success of these claims could turn on the decision in the Chevy Chase case.

Americans Plan to Save, Not Spend, Tax-Rebate Checks, Poll Says
The stimulus plan Congress approved this month may provide less of a jolt to the U.S. economy than intended, as most Americans plan to save rather than spend their tax rebates, a Bloomberg/Los Angeles Times survey shows. Only 18 percent of respondents said they will spend their rebate on purchases, while slightly more than three in 10 said they prefer to use the money to pay off debt, and a third said they'll pocket it.

"People in Washington assume that about 40 percent of the money will be spent," said Douglas Elmendorf, a senior fellow at the Brookings Institution, a Washington-based research organization. "Much less would be disappointing." Respondents are increasingly gloomy about the economy's course. A majority said the U.S. is already in a recession and that President George W. Bush hasn't done enough to tackle the home-mortgage crisis.

"It's time to circle the wagons and pay down debt," said Chris Danvers, 50, of Sacramento. He said he's noticed that business is slowing in the upscale steak house where he works as a waiter, so he will pay off the debt he recently incurred buying a refrigerator and a couch.

Bush and congressional leaders agreed on a $168 billion stimulus plan that has as its centerpiece tax rebates for most households. Taxpayers are expected to start receiving checks in May, ranging from $300 to more than $1,200 for some families.

Did the Rating Agencies Push the Monolines Into the Structured Finance Business?
A dirty little secret of the bond insurer mess is that the rating agencies not only aided and abetted their ill-fated entry into the structured finance business but apparently prodded them in that direction. Although I had been given this tidbit before, I hadn't gotten independent verification, but it now comes via a report in Bond Buyer of a speech by New York insurance superintendent Eric Dinallo.

First, the initial reports, February 3:
RK said...
There was an interesting interview today on CNBC with one of the principals of Egan Jones, the private ratings firm. Gasparino was on as well and made an interesting point. He said that S & P and Moodys were telling the municipal insurers for the last several years that they NEEDED to get into the structured finance business, to MAINTAIN their AAA rating, and that a prospective entrant into the business was told that to GET a AAA they would need to participate. While this is so far only heresay, Gasparino has done some good reporting in the past based on apparently good connections.

realty-based lawyer said...
Not hearsay - it happened in Oct/Nov 2005 or thereabouts. The prospective entrant was a financial guarantor being established by DEPFA, an Irish bank with German links that was recently acquired by Hypo Real Estate. CEO was Michael Freed.

Now for the independent sighting in Bond Buyer in its article, "New Regs for NY Insurers":
Insurance regulators did not stop hte financial guarantors from expanding their busineses out of the muni market, a dynamic that one of the moderators suggested could nevertheless play out in future business cycles. In response, Dinallo said his understanding of the current crisis was the the bond insurers were encouraged to expand into the structured finance by the rating agencies, who asked them to expand their books of business.

"From what I have learned so far, the bond insurers were encouraged by the rating agencies to improve their returns on equity and seek diversification through doing this structured business," Dinallo said.

The article notes that the Standard & Poor's has denied suggesting that the monolines increase their structured finance business; Moody's and Fitch so far are silent. It also begs the question of what sort of management would take strategic advice from experts in credit.

But again, one cynically has to wonder. Given how important and profitable the structured finance business was to the rating agencies at the time, they clearly (and naively) thought it was great business. And having the monolines involved no doubt facilitated getting deals done. Of course, this doesn't excuse either the companies themselves or the regulators. Nevertheless, given (as we have seen) that the threat of the loss of their AAA rating is a sword of Damocles over the monolines' heads, they'd have to think hard about ignoring a rating agency's recommendation.

Banks to report billions more in write-downs
Banks are likely to report more write-downs worth billions of dollars from exposure to leveraged loans and commercial-mortgage securities when they report first-quarter results, analysts at Citigroup said Wednesday. Bank of America Corp. could unveil $2.15 billion of write-downs, while JPMorgan Chase & Co.may report a $1.44 billion hit. Wachovia Corp. could see a $590 million impact, the Citi analysts estimated.

The mortgage-fueled credit crisis has hit banks and brokerage firms hard. As the real-estate boom ended, these companies were left holding mortgage-backed securities and more complex but related securities known as collateralized debt obligations, or CDOs. With delinquencies and foreclosures surging, the market value of these exposures slumped. That's already forcing banks and brokerage firms to take more than $100 billion of write-downs.

Fourth-quarter write-downs were mostly driven by a slump in the estimated market value of CDOs partly backed by residential-mortgage securities. This time around, leveraged loans and securities backed by commercial mortgages will likely be the main culprits, Citi analysts said. The credit crunch also torpedoed the corporate-buyout boom, leaving the same banks and brokers holding leveraged loans that were arranged to finance big acquisitions by private-equity firms.

New York Faces Double Whammy as Swaps Compound Failed Auctions
Local government officials from New York to Houston who followed the advice of their bankers and issued auction-rate bonds in combination with interest-rate swaps are now getting squeezed by both. States, cities and hospitals across the country expected yields on the debt to move in tandem with benchmark rates when they bought swaps to protect against rising interest costs.

Instead, the bonds' rates are up an average 3.1 percentage points since September, while the one-month London interbank offered rate -- what banks charge each other for funds -- has dropped 2.7 points. 'It's a universal problem,' said Debra Sloan, director of capital markets at Boston-based Partners Healthcare System Inc., which has interest-rate swaps on $450 million of its $600 million in auction securities. 'We try to structure them so that over time there is a match.'

The failure of the financial instruments compounds the pain for borrowers stuck paying record-high interest on auction-rate debt billed as a cheap alternative to traditional bonds. Investors got skittish last year, retreating from auctions that determine new rates every seven to 35 days. Now UBS AG, Goldman Sachs Group Inc., and other brokers are refusing to be bidders of last resort, and the $330 billion market is frozen. Municipalities and their taxpayers are paying for swap agreements that haven't worked for months.

The contracts typically require buyers to pay fixed rates in exchange for variable payments from the banks arranging them. These variable rates, based on Libor, roughly matched the cost of auction bonds for more than five years, making the fixed rates -- still far lower than what borrowers would have paid on traditional bonds -- well worth it. Then, when a crisis in the subprime mortgage market began to shake investor confidence in September, they started to diverge.

The annualized rate on $63 million of auction bonds the city of Buffalo, New York, sold in 2005 jumped 7.7 percentage points when a Feb. 14 auction failed, triggering the penalty rate of 11 percent proscribed in the terms of the deal. That's almost 9 percentage points more than the floating rate it got from a swap with New York-based Citigroup Inc. Adding in the fixed rate of 3.17 percent, the city paid more than 12 percent that week.
'It hasn't always been like that,' said Anthony Farina, executive assistant comptroller in Buffalo.

Pennsylvania Student Loans Halted on Auction Failures
The Pennsylvania Higher Education Assistance Agency, the second-largest seller of auction-rate debt for the past seven years, will stop making student loans next month after paying $24 million in extra interest. The agency services and buys existing obligations and makes about $500 million in new loans annually, chief financial officer Tim Guenther said. Officials, who made 140,000 student loans in the 12 months through June 30, said they will halt making new ones on March 7.

'The decision was taken because with the auction rates resetting where they are, bringing on new loans is a guaranteed loss at this time,' Guenther said. 'Basically, since Feb. 13 every auction has failed.' The agency is telling its client schools to deal with banks with which it normally deals to arrange new loans for students. Those banks will charge the same amount for interest and fees as the agency. The effect of the disruption on students for now is 'probably nothing,' Guenther said.

The agency sold $8.4 billion of auction-rate bonds from 2000 to 2007 and was the second-largest issuer during the period, according to Thomson Financial. Problems may occur if the agency can't buy the loans that Pennsylvania banks make. If the institutions must retain those obligations, they may exit the market, Guenther said. 'We don't think that danger is imminent, but we don't know when that happens,' Guenther said. The failures are occurring as investor confidence wanes in the creditworthiness of insurers backing auction-rate debt of the type Pennsylvania authorities issued.

The failures have cost the agency about $24 million in additional interest costs over the last three weeks, Guenther said. Their auctions are conducted by banks including New York- based Citigroup Inc. and Morgan Stanley, Minneapolis-based RBC Dain Rauscher Inc. and Zurich-based UBS AG. The agency hasn't sought a refund of fees paid to the banks that ran the failed auctions. 'We haven't been going after them on getting out of contracts so much as trying to figure out a way to fix the problem,' Guenther said.

Ilargi: We’re getting used to this stuff, right? Another day, another downgrade. Note, though, that this is not a subprime story: much of it is much higher rated.

Fitch Places $97B of SF CDOs on Watch Negative on Worsening Mortgage Performance
Following continued deterioration in the subprime and Alt-A RMBS markets, Fitch Ratings initiated a global review of 430 structured finance collateralized debt obligations (SF CDOs) with exposure to residential mortgage-backed securities (RMBS). Fitch has placed $97 billion of rated notes, comprised of 902 tranches, across 197 transactions on Rating Watch Negative.

This action reflects the continued credit deterioration in U.S. subprime mortgage as recently revealed in heightened loss expectations and resultant rating actions. The combination of declining home prices and high risk mortgages are principal drivers of increased loss expectations for subprime RMBS. In light of this on-going deterioration, Fitch's RMBS group announced increased loss expectations of 21% and 26% of initial securitized balances for subprime RMBS from the 2006 and 2007 vintage, respectively. Accordingly, Fitch placed $139 billion of 2006 and 2007 subprime RMBS on Rating Watch Negative.

As of Feb. 25, 2008, Fitch completed rating actions on approximately 80% of these tranches with 1,913 RMBS bonds being downgraded an average of 8.6 notches, 366 RMBS bonds affirmed and 91 RMBS bonds remained on Rating Watch Negative. A detailed list of the RMBS rating action summary is available on the Fitch Ratings web site at

In placing SF CDO transactions on Rating Watch Negative, Fitch primarily considered exposure to subprime RMBS and other SF CDOs with underlying exposure to subprime RMBS. Fitch notes that credit deterioration of the underlying subprime RMBS securities may be amplified at the SF CDO-level due to the use of leverage as well as structural features, such as overcollateralization (OC) haircuts and OC-based event of default (EOD), which may adversely impact certain rated notes and CDOs containing these notes.

Further, Fitch's higher loss forecasts are expected to result in widespread and significant downgrades among the subprime RMBS bonds still on Rating Watch Negative, and may affect all levels of the subprime RMBS capital structure. This was taken into consideration in identifying Rating Watch Negative candidates, especially with respect to high grade SF CDOs (i.e. underlying collateral originally rated 'AAA', 'AA' or 'A'), which tend to be thinly capitalized.

Other factors considered in the Rating Watch Negative process included the worse-than-expected and still rising level of negative credit migration of Alternative-A (Alt-A) mortgage loans. In fact, a significant number of Alt-A transaction has been downgraded, placed on Rating Watch Negative or 'Under Analysis' by either Fitch or the other rating agencies.

Saudi real estate giant calls on UAE to drop dollar peg
The UAE should drop its dirham currency's peg to the dollar to help fight soaring inflation, the chief executive of a Saudi Arabian real estate firm said. Abdulraman Al-Tassan, chief executive of Rakaa Properties, is the latest business leader to call on the second-largest Arab economy to sever its link to the dollar as it tackles inflation which hit a 19-year peak of 9.3% in 2006.

"The long-awaited decision on whether to de-peg the GCC currencies from the dollar is one possible effective solution" to combat inflation, Al-Tassan said in a statement issued on Wednesday on the impact of a regional real estate boom on inflation. Rakaa Properties, the real estate arm of Riyadh-based conglomerate Rakaa Holding, is developing a $272 million project on Abu Dhabi's Reem Island.

UAE business leaders - including Khalaf Al-Habtoor, chairman of conglomerate Al-Habtoor Group, and Dubai Properties Chief Executive Mohammed Binbrek - made calls for an end to the dollar peg in December in a report in the daily Emirates Business 24/7. Surging inflation in the Gulf has fuelled speculation that some countries may either revalue their currencies or drop their pegs to the dollar, which hit a record low against the euro on Wednesday.

UAE inflation probably accelerated to 10.9% last year on surging rents, National Bank of Abu Dhabi (NBAD) said this week. "Al-Tassan agreed with the call to de-peg the dirham from the dollar," the Rakaa statement said.

Bets on revaluation grow on Greenspan remarks
UAE dirham forwards widened on Wednesday after former US Federal Reserve chairman Alan Greenspan commented in favour of currency reform, renewing bets on Gulf Arab currency revaluations.

Speaking at conferences in Saudi Arabia and the UAE on Monday, Greenspan said near-record Gulf Arab inflation would fall "significantly" were the oil producers to drop their dollar pegs and float their currencies freely. "When Alan Greenspan talks, people listen to him," said Jason Goff, head of group treasury and market sales at Emirates Bank International.

"A good part of speculation on Gulf currencies is outside of the Gulf. What Greenspan says carries weight in the market," he said. Dollar pegs restrict the Gulf's ability to fight inflation by forcing them to shadow US monetary policy at a time when the Fed is cutting rates to ward off recession. The dollar slumped to a record low against the euro on Wednesday

UAE being held back by dollar peg
The UAE's booming economy is being held back by its currency peg to the weak US dollar, the Asia editor of The Economist magazine told on Monday. Speaking on the sidelines of a conference in Abu Dhabi, Pam Woodall said it was no longer economically viable for the UAE and other Gulf states to continue with their dollar peg as the US economy was spiralling into recession.

“All countries pegged to the dollar are suffering rising inflation. Abu Dhabi is growing at an amazing rate, it does not make economic sense for booming economies to peg their currencies to a country that is about to go into recession,” Woodall said. Woodall predicted the issue of the dollar peg would continue to dog Gulf states over the next year as further rate cuts by the US Federal Reserve fuelled inflationary pressure.

[Inflation in the UAE probably hit 10.9% in 2007, the National Bank of Abu Dhabi (NBAD) said, revising up its forecast for price rises by almost three percentage points on rising rents.

Inflation is rising rapidly across the world's top oil-exporting region, where economies are surging on a near five-fold rise in oil prices since 2002. UAE inflation hit a 19-year peak of 9.3% in 2006, according to official data. "Indicators continue to point to unabated inflation," NBAD said in a note on Sunday in which it raised its inflation forecast from 8.1% because of faster than anticipated rent increases]

Paulson Says No Go on Housing Bailouts
Treasury Secretary Hank Paulson has thrown a bucket of cold water on a number of proposals being floated in Washington to rescue troubled borrowers via the explicit use of public funds, such as the idea of reviving the 1933 Home Owner's Loan Corporation to buy underwater mortgages and renegotiate them.

In some respects, Paulson's tough stance is welcome, because many of these proposals would do more for banks and investors than borrowers. Many homeowners, including ones who are capable of servicing their mortages, are walking away because they deem them an unattractive investment. There is now a large class of nominal homeowners who in fact are more akin to renters with a home ownership option that is now deeply out of the money. And they can often rent more cheaply too.

But unfortunately, what is driving Paulson isn't a pragmatic assessment of what measures might be cost effective and not involve undue moral hazard. Instead, he is guided primarily by the ideological imperatives of this Adminsitration, which is to favor so-called private sector solutions. But that construct is dishonest and limiting. For instance, the Journal reports that Paulson maintains that "market-based approach will be enough to keep the situation under control."

If Paulson considers the worst housing market since the Depression to be under control, I shudder to think what an unmanaged situation would look like.

However, a grey area in "private sector solutions" is a willingness to rack up government contingent liabilities. The portfolio ceilings on Fannie Mae and Freddie Mac were lifted Wednesday, and OFHEO's James Lockhart had said earlier this month that the two GSEs could add $100 billion in mortgages in the next six months without running into capital limits. The plan now in place is to keep Fannie and Freddie in remediation mode, setting aside reserves 30% higher than the usual minimum. However, if the GSEs come under increasing pressure to take on weaker mortgages to salvage the housing market, even those higher reserves may prove insufficient.

Similarly, the Treasury has not nixed some proposals to increase the role of the FHA. The FHA is the historical source of mortgages to middle and lower income borrowers, so an increased role for the FHA could well make sense. But again, it may be subject to pressures to relax its standards and become a warehouse for mortgages on the brink.

CIBC tables a $1.4-billion loss
Canadian Imperial Bank of Commerce reported a first-quarter loss of $1.456-billion on Thursday, compared to a profit of $770-million a year earlier, as the bank took a slew of charges related to its subprime mortgage exposure.

The writedowns and paper losses included a $2.28-billion (pre-tax) charge because of the bank's exposure to troubled bond insurer ACA Financial Guaranty Corp.; a $626-million charge on exposure to other financial guarantors; $473-million of paper losses on securities tied to the U.S. mortgage market; and a $108-million loss on the sale of some of the bank's U.S. business to Oppenheimer Holdings Inc. as well as management changes and the restructuring of some other businesses.

Those items, amounting to $3.49-billion, were partially offset by two much smaller gains; $56-million on tax-related items, and $171-million on the changing value of credit derivatives on corporate loans.

“Our losses related to the U.S. residential mortgage market are a significant disappointment and are not aligned with our strategic imperative of consistent and sustainable performance,” stated CEO Gerry McCaughey. The bank cautioned that “market and economic conditions relating to the financial guarantors may change in the future, which could result in significant future losses.”

BMO-sponsored ABCP trusts downgraded by DBRS
Bank of Montreal is one step closer to a writedown of as much as $495-million after failing to reach an accord to head off the potential collapse of two asset-backed commercial paper trusts that the lender sponsors.

Credit rating agency DBRS downgraded the notes of Apex Trust and Sitka Trust on Thursday after BMO failed to negotiate a restructuring proposal with a party owed collateral by a deadline of last night, and after Apex failed to roll over all its notes that came due that day. A spokesman for Bank of Montreal had no immediate comment.

“Several levered super-senior transactions entered into by the trusts with several swap counterparties face outstanding calls for additional collateral,” DBRS said. “The total amount of collateral that is due is significant.”DBRS declined to comment on what it meant by “significant.” The result of the failure to roll and meet collateral calls would likely be a wind-up of the two trusts after a short grace period of two days in which BMO will have a chance to scramble for a solution.

If one isn't found, BMO warned last week that it could end up writing off its $495-million net exposure to the trusts. That would be in addition to $210-million in losses the bank has already booked resulting from the trusts. Normally, the plan for an ABCP trust facing a collateral call is to sell more notes to raise money, but with the market not buying ABCP from Apex that is going to be difficult.

Toronto-based BMO could fund the collateral calls on its own, and it said last week that it could offer further support. However, doing so would mean doubling down on a bet that credit markets will recover in a meaningful way, which they show few signs of doing.

Speculative Onslaught. Crisis of the World Financial System: The Financial Predators had a Ball
When CDO holders around the world last summer suddenly and urgently needed liquidity to face the market sell-off, they found the market value of their CDOs was far below book value. So, instead of generating liquidity by selling CDOs, they sold high-quality liquid blue chip stocks, government bonds, precious metals.

That simply meant the CDO crisis led to a loss of value in both CDOs and stocks. The drop in price of equities triggered contagion to hedge funds. That dramatic price collapse wasn’t predicted by the theoretical models built into quantitative hedge funds and led to large losses in that part of the market, led by Bear Stearns’ two in-house hedge funds. Major losses by leading hedge funds further fed increasing uncertainty and amplified the crisis.

That was the beginning of colossal collateral damage. The models all broke down.

Lack of transparency was at the root of the crisis that had finally and inevitably erupted in mid-2007. That lack of transparency was due to the fact that instead of spreading risk in a transparent way as foreseen by accepted economic theory, market operators chose ways to "securitize" risky assets by promoting high-yielding, high-risk assets, without clearly marking their risk. Additionally, credit-rating agencies turned a blind eye to the inherent risks of the products. The fact that they were rarely traded meant even the approximate value of these structured financial products was not known.[...]

Risk and its pricing did not behave like a bell-shaped curve, not in financial markets any more than in oilfield exploitation. In 1900 an obscure French mathematician and financial speculator, Louis Bachelier, argued that price changes in bonds or stocks followed the bell-shaped curve that the German mathematician, Carl Friedrich Gauss, devised as a model to map statistical probabilities for various events. Bell curves assumed a mild form of randomness in price fluctuations, just as the standard I.Q. test by design defines 100 as "average," the center of the bell. It was a kind of useful alchemy, but still alchemy.

That assumption that financial price variations behaved fundamentally like the bell curve allowed Wall Street Rocket Scientists to roll out an unending stream of new financial products each more arcane and complex than the previous. The theories were modified. The "Law of Large Numbers" was added to say that when the number of events becomes sufficiently large, like flips of a coin or rolls of die, the value converges on a stable value over the long term. The Law of Large Numbers, which in reality was no scientific law at all, allowed banks like Citigroup or Chase to issue hundreds of millions of Visa cards without so much as a credit check, based on data showing that in "normal" times defaults on credit cards were so rare as not to be worth considering.

The problems with models based on bell curve distributions or laws of large numbers arose when times were not normal, such as a steep economic recession of the sort the United States economy today is beginning to experience, a recession comparable perhaps only to that of 1931-1939.

Zogby Poll: 67% View Traditional Journalism as "Out of Touch"
Internet is the top source of news for nearly half of Americans; Survey finds two-thirds dissatisfied with the quality of journalism

Two thirds of Americans - 67% - believe traditional journalism is out of touch with what Americans want from their news, a new We Media/Zogby Interactive poll shows. The survey also found that while most Americans (70%) think journalism is important to the quality of life in their communities, two thirds (64%) are dissatisfied with the quality of journalism in their communities.

Meanwhile, the online survey documented the shift away from traditional sources of news, such as newspapers and TV, to the Internet - most dramatically among so-called digital natives - people under 30 years old.

Nearly half of respondents (48%) said their primary source of news and information is the Internet, an increase from 40% who said the same a year ago. Younger adults were most likely to name the Internet as their top source - 55% of those age 18 to 29 say they get most of their news and information online, compared to 35% of those age 65 and older. These oldest adults are the only age group to favor a primary news source other than the Internet, with 38% of these seniors who said they get most of their news from television.

Overall, 29% said television is their main source of news, while fewer said they turn to radio (11%) and newspapers (10%) for most of their news and information. Just 7% of those age 18 to 29 said they get most of their news from newspapers, while more than twice as many (17%) of those age 65 and older list newspapers as their top source of news and information.

Web sites are regarded as a more important source of news and information than traditional media outlets - 86% of Americans said Web sites were an important source of news, with more than half (56%) who view these sites as very important. Most also view television (77%), radio (74%), and newspapers (70%) as important sources of news, although fewer than say the same about blogs (38%).

”This is the new face of hunger”
Huge budget deficit means millions more face starvation

The United Nations warned yesterday that it no longer has enough money to keep global malnutrition at bay this year in the face of a dramatic upward surge in world commodity prices, which have created a "new face of hunger". "We will have a problem in coming months," said Josette Sheeran, the head of the UN's World Food Programme (WFP). "We will have a significant gap if commodity prices remain this high, and we will need an extra half billion dollars just to meet existing assessed needs."

With voluntary contributions from the world's wealthy nations, the WFP feeds 73 million people in 78 countries, less than a 10th of the total number of the world's undernourished. Its agreed budget for 2008 was $2.9bn (£1.5bn). But with annual food price increases around the world of up to 40% and dramatic hikes in fuel costs, that budget is no longer enough even to maintain current food deliveries.

The shortfall is all the more worrying as it comes at a time when populations, many in urban areas, who had thought themselves secure in their food supply are now unable to afford basic foodstuffs. Afghanistan has recently added an extra 2.5 million people to the number it says are at risk of malnutrition.

"This is the new face of hunger," Sheeran said. "There is food on shelves but people are priced out of the market. There is vulnerability in urban areas we have not seen before. There are food riots in countries where we have not seen them before."

1 down, 10.000 to go

Ilargi: This sort of news article will become very familiar soon. What's good to note is that towns, unlike companies, don't close the gates and cease to exist when they declare bankruptcy. Probably creditors will be the biggest victims here, along with those working for the town. It will be allowed to continue as some sort of 'minimal facility', providing only urgent and 'necessary' services. Road maintenance won't be among them.

California City Moves Closer to Bankruptcy Filing
Vallejo, a city of 135,000 outside of San Francisco, moved closer to bankruptcy after negotiations with its labor unions collapsed. Bondholders will likely be asked to sacrifice some of their investment if the city seeks bankruptcy protection, an attorney for the municipality said last night. Vallejo faces ballooning labor costs and declining housing-related sales-tax revenue, leaving budget officials projecting that money will run out within weeks.

The city council is scheduled to consider a resolution tomorrow to file for Chapter 9 bankruptcy protection, after negotiations with labor unions to win salary concessions broke down Monday. If approved, Vallejo would become the biggest city and second-largest local government in the state after Orange County to file for bankruptcy.

Municipalities throughout California are grappling with billions of dollars in labor and pension cost increases incurred during the late 1990s. The crisis comes as the worst housing slump in the U.S. in 26 years saps tax revenue. The state's own $16 billion deficit led Governor Arnold Schwarzenegger last month to declare a fiscal emergency.

Bondholders are "creditors who would have to come to the table and it may be possible to adjust how much you are paying them and on what time period, which would, in effect, free up money that could be used as part of the plan to resolve the city's problems on a longer-term basis." John Knox, a public finance attorney with the law firm Orrick, Herrington & Sutcliffe, told the city council last night.

'Last Resort'

Vallejo faces a $6 million shortfall and won't have money left to pay salaries as of March 31, according to the city manager's office. The deficit is expected to grow to $13 million during the coming fiscal year, beginning July 1, according to budget documents.

Police and firefighting salaries, pension and overtime consumes $63.1 million, or about 74 percent of the city's $85 million general fund budget. The city has slashed $13 million in spending since December 2006, firing 47 workers.

"Bankruptcy is a last resort," said councilwoman Joanne Schivley. "But guess what folks, that's where we are now at."

Standard & Poor's on Feb. 21 changed its outlook to negative from stable on $59 million of city bonds. That debt, backed by water-system revenue, motor vehicle license fees and special district property assessments, is rated A and A-, the sixth- and seventh-highest investment grades.

Big Impact

Clark Stamper, who oversees $600 million of municipal bonds at Stamper Capital & Investments, including Vallejo debt, said a bankruptcy filing could encourage other California communities to consider the step should the city persuade a judge to reopen labor agreements. "What happens in Vallejo is going to be the model for what happens across the state," Stamper said yesterday. "It will have a big impact."

Chapter 9 of the federal bankruptcy code deals specifically with municipal governments such as cities, counties and school districts, allowing them to reorganize their debts and come up with a way to pay them off. If the city seeks bankruptcy protection, basic government services such as police and firefighting, would continue. The filing would freeze all creditor claims while city officials devise a plan to solve the financial troubles. That plan would need approval by the court, which could dissolve the labor contracts that aren't set to expire until 2010.

Compounded Woes

Vallejo was home to the West Coast's first naval shipyard, which was shuttered in 1996. The area has been one of the hardest hit in Northern California by the housing market slump.

Home prices in Solano County dropped 19 percent in January from the year before, according to DataQuick Information Systems, a firm that tracks real-estate in the state. Compounding the city's woes is lost tax revenue when above- normal rains damped attendance at a local Six Flags Inc. marine world amusement park, one of the 10 largest employers in the county.

Orange County in Southern California filed the biggest municipal bankruptcy in U.S. history in December 1994 after former Treasurer Robert Citron's wrong-way bet on interest-rate derivatives sold by Merrill Lynch & Co. lost $1.6 billion. The county of 3 million people is the third-most populous in California after Los Angeles and San Diego.

Bankruptcy Stigma

Desert Hot Springs, a town of 20,000 people north of Palm Springs, filed for bankruptcy in 2001, when it couldn't afford a legal judgment of almost $6 million. Both Orange County and Desert Hot Springs sold municipal bonds to pay creditors and emerge from bankruptcy.

Three years ago, the threat of bankruptcy loomed in San Diego as three mayoral candidates said a filing was one option for dealing with the city's soaring pension indebtedness to police and other employees. Jerry Sanders, who won the election, never pursued that step. Half Moon Bay, a small town south of San Francisco, has also considered bankruptcy because of a legal judgment handed down in November in a dispute with a real estate developer.

"Bankruptcy is a bad idea," Vallejo resident Andy Russo told the council during a standing-room-only informational hearing last night in city hall. "The stigma of bankruptcy will stick to us for a long, long time."