Miss Florence Skadding and H.J. McMullan. Opening of pool at Columbia Country Club, Chevy Chase, Maryland
Ilargi: I'm sure you saw that the Shanghai Composite Index dropped a major league 6.7% last night, right? Well, it did, sort of, as in yes and no. You see, Shanghai nights -and days- have their limits. berg says:
At least 150 stocks on the 898-member index dropped by the daily 10 percent limit
The Shanghai Index dropped 23% from August 4. Hmmm. Looks like it might have dropped that much just in one day if it were not tied to its chair. Depends on who the biggest funds are, and if any of them are among the 150. If I were a betting man, I’d go for positive. Who needs bans on shorts in that scheme?
I see all sorts of charts comparing Shanghai to Manhattan, but I don’t think that one really holds. Then again, a bubble's a bubble's a bubble, ain't they? On Wall Street, there's a different limit. They halt trading altogether if it gets too bad. And individual stocks can be taken out, true, but not -solely- because of a 10% drop.
By now, since everything's going according to plan, there are tons of folks out there in the full growth green mood, who just cannot wait for a good non-farm payroll reading by their oracle of choice in a few days, to find confirmation of their hopes and blessings and delve into that market like never before and like there’s no tomorrow. Their reasoning, if I read it well, is that the recent 5-month rise in the markets happened against a background of gruesome numbers, so once we only lose 200,000 jobs a month, them stocks a-must be a-bound for heaven and beyond.
Me, though, I think not. I like the theory that in very light summer trading, covering shorts has been the driving force with the leaden foot on the pedal. In essence, speculators are becoming afraid of betting against the government and the Federal Reserve. But who today's going to buy the government supported entities Fannie, Freddie, Citi et al that were leading the rally?
According to today's numbers, next to no-one. They were today's main Manhattan losers, with traffic in Citi outmuscling all the rest by a mile. Barron's told its readers to sell Citi, that may have been a factor. Is that their prerogative, though, I was wondering? The main winners were the skeleton holdings firms of Lehman's and Wamu, much to my amusement. You think there's anyone thinking those firms'll rise up gloriously, or that maybe there's something else going on?
Nah, Shanghai is not very likely to keep on falling today (or is it tomorrow?). That's not a likely scenario. And Manhattan isn't going to slip slide into the Hudson on September 1 either. Them things don’t drop in straight lines. But drop they do.
And for all you green shooters on September 1, I have but one or two questions. How many among you called the March bottom, and are now so gloriously rich as a result they have no need to follow the markets any longer? That 50% rise looks good now, and it makes you feel great, but ask yourselves, who made the real money from that surge? Was it you, or are you next? AIG rose 264% almost overnight. Did you? I don't think so. But you still feel that good July/August employment numbers are the sign to invest? It’s always right around the corner, isn't it?
My take is that those who got their profits in that 50% surge are not going to bet on more of the same. And neither are the shorts who lost their shirts (AIG 264% equals shorts buying), though they are prime candidates for double-or-nothings. I have a few other "takes" as well. Along with the back-to-business rising Manhattan trading volumes we’ll see rising foreclosures (a dead-sure given) and job losses (who fires anyone in August, after all?), a rising US dollar (no other safety available), a second stimulus package (though it won’t go by that name) and a world of pain for far more people than I am even remotely comfortable considering. A pain that others will be betting on to get richer.
There is nothing that points upwards but government spending, we're looking at an economy kept barely alive by transferring money from its left to its right pocket, making itself believe the right pocket is the only one that contains real value.
Dolphins don't have pockets to worry about.
I I will be king
And you You will be queen
Though nothing will Drive them away
We can beat them Just for one day
We can be Heroes Just for one day
And you You can be mean And I I'll drink all the time
'Cause we're lovers And that is a fact
Yes we're lovers And that is that
Though nothing Will keep us together
We could steal time Just for one day
We can be Heroes For ever and ever
What d'you say
I I wish you could swim
Like the dolphins Like dolphins can swim
Though nothing Will keep us together
We can beat them For ever and ever
Oh we can be Heroes Just for one day
I I will be king
And you You will be queen
Though nothing Will drive them away
We can be Heroes Just for one day
We can be us Just for one day
I I can remember
Standing By the wall
And the guns Shot above our heads
And we kissed As though nothing could fall
And the shame Was on the other side
Oh we can beat them For ever and ever
Then we can be Heroes Just for one day
We can be Heroes Just for one day
We can be Heroes
We're nothing And nothing will help us
Maybe we're lying Then you better not stay
But we could be safer Just for one day
Commercial Real Estate Lurks as Next Potential Mortgage Crisis
Federal Reserve and Treasury officials are scrambling to prevent the commercial-real-estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat. Their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds. Similar mortgage-backed securities created out of home loans played a big role in undoing that sector and triggering the global economic recession. Now the $700 billion of commercial-mortgage-backed securities outstanding are being tested for the first time by a massive downturn, and the outcome so far hasn't been pretty.
The CMBS sector is suffering two kinds of pain, which, according to credit rater Realpoint LLC, sent its delinquency rate to 3.14% in July, more than six times the level a year earlier. One is simply the result of bad underwriting. In the era of looser credit, Wall Street's CMBS machine lent owners money on the assumption that occupancy and rents of their office buildings, hotels, stores or other commercial property would keep rising. In fact, the opposite has happened. The result is that a growing number of properties aren't generating enough cash to make principal and interest payments.
The other kind of hurt is coming from the inability of property owners to refinance loans bundled into CMBS when these loans mature. By the end of 2012, some $153 billion in loans that make up CMBS are coming due, and close to $100 billion of that will face difficulty getting refinanced, according to Deutsche Bank. Even though the cash flows of these properties are enough to pay interest and principal on the debt, their values have fallen so far that borrowers won't be able to extend existing mortgages or replace them with new debt. That means losses not only to the property owners but also to those who bought CMBS -- including hedge funds, pension funds, mutual funds and other financial institutions -- thus exacerbating the economic downturn.
A typical CMBS is stuffed with mortgages on a diverse group of properties, often fewer than 100, with loans ranging from a couple of million dollars to more than $100 million. A CMBS servicer, usually a big financial institution like Wachovia and Wells Fargo, collects monthly payments from the borrowers and passes the money on to the institutional investors that buy the securities. CMBS, of course, aren't the only kind of commercial-real-estate debt suffering higher defaults. Banks hold $1.7 trillion of commercial mortgages and construction loans, and delinquencies on this debt already have played a role in the increase in bank failures this year.
But banks' losses from commercial mortgages have the potential to mount sharply, and the high foreclosure rate in the CMBS market could play a role in this. Until now, banks have been able to keep a lid on commercial-real-estate losses by extending debt when it has matured as long as the underlying properties are generating enough cash to pay debt service. Banks have had a strong incentive to refinance because relaxed accounting standards have enabled them to avoid marking the value of the loans down.
"There is no incentive for banks to realize losses" on their commercial-real-estate loans, says Jack Foster, head of real estate at Franklin Templeton Real Estate Advisors. CMBS are held by scores of investors, and the servicers of CMBS loans have limited flexibility to extend or restructure troubled loans like banks do. Earlier this month, it was no coincidence that CMBS mortgages accounted for the debt on six of the seven Southern California office buildings that Maguire Properties Inc. said it was giving up. "During most of the evolution [of CMBS] no one ever thought all these loans would go into default," says Nelson Rising, Maguire's chief executive.
Indeed, many property developers and investors complain there is no way to identify the investors that hold their debt and that it is difficult to negotiate with CMBS servicers. In light of the complaints, the Treasury is considering guidance that would allow servicers to start talking about ways to avoid defaults and foreclosures sooner, according to people familiar with the matter. But investors in CMBS bonds argue that the servicers are ultimately bound contractually to the bondholders.
So Maguire will soon have a lot of company. In a study for The Wall Street Journal, Realpoint found that 281 CMBS loans valued at $6.3 billion weren't able to refinance when they matured in the past three month, even though 173 such loans worth $5.1 billion were throwing off more than enough cash to service their debt. Mounting foreclosures in the CMBS sector would likely depress values even further as property is dumped on the market. And this would put pressure on banks to write down loans. "What's going on in the CMBS world is a precursor for what might be seen in banks' books," predicts Frank Innaurato, managing director at Realpoint.
The commercial-real-estate market could yet be salvaged by an improving economy and bailout programs coming out of Washington. In addition, capital markets are starting to ease for publicly traded real-estate investment trusts. Since March, more than two dozen REITs have managed to raise more than $13 billion by selling shares. Still, most of the $6.7 trillion in commercial real estate is privately owned. Also, it is unlikely commercial real estate will benefit much from an early stage of an economic recovery. What landlords need is occupancy and rents to rise, and that means employers have to start hiring and consumers need to shop more. So far, there are few signs this is happening.
China’s Stocks Slump Most Since June 2008, Cap Monthly Loss
China’s stocks plunged, with the Shanghai Composite Index falling the most since June 2008 and entering a bear market, on concern a slowdown in lending growth may derail a recovery in the world’s third-largest economy. The benchmark index tumbled 6.7 percent to 2,667.75, capping its biggest monthly loss since October. The gauge has slumped 23 percent from its 15-month high on Aug. 4 and is the worst performer this month among 89 benchmark indexes tracked by Bloomberg globally.
"The local market bears are convinced that tightening is already underway," said Howard Wang, head of the Greater China team at JF Asset Management, which oversees $50 billion. Only "a very strong set of macro numbers in August" or "stronger statements from central authorities" would change this trend, Wang said. At least 150 stocks on the 898-member index dropped by the daily 10 percent limit. Industrial Bank Co. and Aluminum Corp. of China Ltd. tumbled by the permitted cap after Caijing magazine reported new loan growth this month may be almost half that of July. Lower profits dragged Baoshan Iron & Steel Co., the nation’s biggest steelmaker, and China Southern Airlines Co. down at least 7 percent.
China Petroleum & Chemical Corp., Asia’s largest refiner, slid 10 percent on concern the government will keep fuel prices unchanged to support the economy as crude climbs, squeezing refining margins. The Shanghai gauge slumped 22 percent this month as banks reined in lending to avert asset bubbles and policy makers advised industries such as steel and cement to curb overcapacity. The decline stopped a rally that had sent the measure up 103 percent from a November low on prospects the government’s 4 trillion yuan ($586 billion) stimulus program and a record amount of new loans will ensure the economy grows at least 8 percent this year.
The benchmark index lost 192.94 to 2,667.75, a three-month low. Today’s slump was the most since June 10, 2008, when the index tumbled 7.7 percent after the central bank ordered lenders to set aside record reserves to curb credit growth and inflation. The CSI 300 Index dropped 7.1 percent to 2,830.27. "The plunge reflects investor pessimism over short-term liquidity rather than any changes in the fundamentals of the economy," said Leo Gao, who helps oversee about $600 million at APS Asset Management Ltd. in Shanghai. "It’s panic selling."
China may have 200 billion yuan of new loans in August, the Beijing-based Caijing magazine reported today on its Web site. That compares with 7.4 trillion yuan for the first half of 2009 and 355.9 billion yuan in July alone. The government plans to tighten capital requirements for financial institutions, three people familiar with the matter said this month. Industrial Bank, which reported a first-half profit decline this month, fell to 27.88 yuan, the lowest since May 26. Aluminum Corp. of China, the nation’s No. 1 maker of the metal, slid to 12.74 yuan. Jiangxi Copper Co., the biggest copper producer, tumbled to 33.27 yuan after more than tripling this year. All declined by the 10 percent limit.
Ba Shusong, deputy director of the State Council’s Development Research Center said Aug. 28 the nation’s economic growth may start to slow in the second quarter of next year as the impact of government stimulus policies diminishes. Brokerages retreated on concern stock market declines and lower loan growth will curb equity trading. Citic Securities Co., the nation’s biggest by market value, dropped 6 percent to 24.88 yuan. Northeast Securities Co. tumbled 10 percent to 31.50 yuan.
An estimated 1.16 trillion yuan of loans were invested in stocks in the first five months of this year, China Business News reported June 29, citing Wei Jianing, a deputy director at the Development and Research Center under the State Council. Baoshan Iron fell 7 percent to 6.42 yuan, capping a 33 percent loss this month. First-half profit plunged 93 percent to 669 million yuan as the economic slowdown curbed demand from automakers and shipbuilders. The company said the "global economy hasn’t recovered substantially and the foundations for a domestic recovery aren’t solid."
China Southern, the nation’s biggest carrier, fell 7.9 percent to 5.26 yuan. First-half net income at the Guangzhou- based carrier tumbled 97 percent to 25 million yuan, as it failed to repeat year-earlier foreign-exchange gains. The Shanghai Composite’s gain since its 2008 low on Nov. 4 made it the best performer among world equity benchmarks and more than tripled its valuation to 39 times reported earnings, according to Bloomberg data. It now trades for 29 times profit, while the MSCI Emerging Markets Index, a 22-country benchmark, valued at 19 times earnings.
"The market was priced for perfection," said Lee King Fuei, a Singapore-based portfolio manager at Schroders Plc, which oversees about $186.5 billion globally as of June. "At these levels, you need much stronger earnings to get investors excited." China Petroleum, or Sinopec, slumped 10 percent to 11.13 yuan, the most since June 2007. PetroChina, the world’s most valuable company, retreated 6.7 percent to 12.80 yuan.
The government will reduce the number of times it adjusts fuel prices at this "critical juncture" for the economy, the state-run Shanghai Securities News reported Aug. 29. The National Development and Reform Commission, the country’s top economic planner, said the report was untrue. Crude oil has gained about 35 percent since the government introduced a new mechanism for adjusting fuel prices that promises a "normal" profit for refiners.
Bond Market, Eyeing 10% Jobless Rate, Rejects Recovery
The bond market isn’t buying all the optimism over the end of the global recession. While the International Monetary Fund said last week the economic recovery will be faster than it forecast in July, investors pushed yields on government debt to the lowest level since April, according to the Merrill Lynch & Co. Global Sovereign Broad Market Plus Index. The gauge, which tracks $15.4 trillion of bonds worldwide, gained 0.73 percent this month, the most since 1.02 percent in March.
Debt investors can’t see a recovery strong enough to spur central bank interest rates anytime soon, especially with the Obama administration forecasting that unemployment in the U.S. - - the world’s largest economy -- will rise above 10 percent in the first quarter. After stripping out the effects of the U.S. government’s "cash for clunkers" program to buy new cars, consumer spending was unchanged in July, according to Commerce Department data released on Aug. 28. "The bond market does not believe we will see rapid robust rates of growth," said Jeffrey Caughron, an associate partner in Oklahoma City at The Baker Group Ltd., which advises community banks investing $20 billion. "The deleveraging of the consumer will act as a drag on growth, which will keep inflation to a minimum and interest rates relatively low."
Bond yields are lower now than when Federal Reserve Chairman Ben S. Bernanke said in an Aug. 21 speech at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming, that "prospects for a return to growth in the near term appear good." European Central Bank President Jean-Claude Trichet said that while the economy is no longer in "freefall," it faces "a very bumpy road ahead." Two-year Treasury note yields fell 7 basis points, or 0.07 percentage point, last week to 1.02 percent, and are down from this month’s high of 1.36 percent on Aug. 7, according to BGCantor Market Data. The 1 percent security maturing on August 2011, sold by the government Aug. 25, ended the week at 99 31/32.
The picture is the same in Europe. U.K. two-year gilt yields dropped to a record low of 0.828 percent on Aug. 25 before ending the week at 0.84 percent. German bund yields of similar maturity declined 12 basis points to 1.25 percent last week and fell from 1.61 percent on Aug. 10 even as government reports showed the economy exited the recession in the three months ended June 30. Yields on government bonds of all maturities average 2.27 percent, compared with this year’s peak of 2.62 percent on June 8, according to the Merrill Lynch index. The drop helped return fixed-income investors to profit, earning 2.14 percent since the start of June after losing 1.54 percent in the first five months of the year.
Fixed-income strategists at London-based HSBC Holdings Plc said the drop in yields reflects a growing perception that central banks are unlikely to raise borrowing costs as soon as forecast just a month ago. "Interest rates are likely to remain at record lows for quite a while," said Andre de Silva, the deputy global head of fixed-income strategy at HSBC, Europe’s largest bank. Traders are pricing in less than a 50 percent chance of a U.S. rate increase before March, federal funds futures show. As recently as June, they saw 70 percent odds of a boost in the Fed’s target rate for overnight loans between banks to at least 0.5 percent in November from the current target range of zero to 0.25 percent.
In Europe, traders are paring bets the ECB will raise its main refinancing rate from 1 percent this year. The implied rate on the Euribor futures contract expiring in December was 0.85 percent on Aug. 28, down from 1.22 percent at the start of June. Bond investors are more pessimistic than stock investors, who have pushed the MSCI’s World Stock Index to the highest level since October. The index rallied 4.7 percent this month after the Washington-based IMF, which rescued countries from Iceland to Pakistan during the global crisis, said in July the world economy will expand 2.5 percent in 2010 following a 1.4 percent contraction this year. Since then, Japan, France and Germany returned to growth.
"We do believe the recovery is in sight and is going to be perhaps a little better than we had at one time thought, but we expect a rather muted recovery," Caroline Atkinson, the IMF’s external relations director, said to reporters in Washington on Aug. 27. Reports last week in the U.S. and Europe showed home sales, durable goods orders and business sentiment rose more than forecast. The median estimate of 55 economists surveyed by Bloomberg is for growth in the U.S. of 2.3 percent next year.
"It’s too pessimistic a view to look at all these factors and still think we won’t have a reasonable recovery," said Michiel de Bruin, who helps manage $27 billion as head of European government debt in Amsterdam at F&C Asset Management Plc’s Dutch unit. "Our view is that if unemployment rises at a slower pace than expected, that’s already good news. Against this backdrop, government bonds will find it very hard to sustain a rally going forward."
Two-year Treasury yields are forecast to end the year at 1.32 percent, while 10-year yields may rise to 3.87 percent from 3.45 percent last week, according to the median estimate of more than 45 economists and strategists surveyed by Bloomberg. An increase to those levels would still leave 10-year yields below their average of 5.63 percent during the past 20 years. Treasuries gained last week even as reports showed the housing market may have bottomed. Although the National Association of Realtors in Washington said Aug. 21 that sales of existing U.S. home jumped 7.2 percent in July to the highest level in two years, prices fell 15 percent from a year earlier.
"Evidence has been accumulating that housing has begun to put in a bottom," said Jay Mueller, a senior money manager who oversees about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. "Still, the news isn’t that earth shaking. Going forward we are going to need to see a lot more fundamental justification on the economy getter better, and not just less bad information, if the move to riskier assets is to be sustainable."
Mutual funds, pensions and endowments sold $1.79 billion more shares of companies that rely on consumer spending this month than they’ve bought, the fastest pace in at least 14 years, based on data compiled by Boston-based State Street Corp., the custodian of $16.4 billion of assets. The world’s biggest financial institutions, which have taken $1.6 trillion in writedowns and losses since the start of 2007, are scooping up bonds at an accelerating pace.
Bank holdings of government securities and debt of mortgage companies Fannie Mae in Washington and McLean, Virginia-based Freddie Mac increased to a record $1.37 trillion in the week ended Aug. 12, from $1.31 trillion on July 29, Fed data show. The 4.8 percent jump was the biggest for any two-week period since the start of the year. The surge comes as the U.S. savings rate reached 6.9 percent in May, the highest level since 1993. It was as low as zero as recently as April 2008. The bond market is signaling that the measures by policy makers may not be enough because unemployment is forecast to climb, capping consumer demand, which accounts for about 70 percent of U.S. economic activity.
"It’s not at all clear that the economy is out of the woods yet," said Mihir Worah, who invests the $14 billion Real Return Fund for Newport Beach, California Pacific Investment Management Co. "We still have to see convincing signs that the consumer can survive once the government stimulus is taken away, and we are not convinced of that." The last time the U.S. unemployment rate was above 10 percent was in 1983, following the recession of 1981 and 1982. Cuts in the Fed’s target rate from 20 percent at the start of that contraction to 8.5 percent, combined with deficit spending by the Reagan administration helped push the jobless rate down to 7 percent by the end of 1985.
At the start of this recession in December 2007, the Fed’s target rate for overnight loans between banks was 5.25 percent, driving policy makers to alternative measures such as purchases of bonds after it cut borrowing costs to almost zero in December. Wages and salaries fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960, Commerce Department figures show. Purchases will probably climb at an average 1.6 percent quarterly rate through June 2010, compared with 2.8 percent during the six-year expansion that ended in December 2007, according to a Bloomberg survey of economists this month.
Threadneedle Asset Management Ltd. in London, was bearish on Treasuries until May. "There’s much optimism about the state of the economy in general," said Dave Chappell, a money manager at the company, which oversees $90 billion. "But when the stimulus programs, such as a credit tax break for first-time home buyers, run off, can the momentum continue? It probably can’t. Treasuries, particularly long-dated ones, are unlikely to buckle with this improving view on the economy."
Why China Can't Save The World
While the Chinese economy is growing rapidly and becoming enormous, here's a reminder that China still can't lead the global economy into growth.As seen below, China's expenditures remain too small relative to those of the US, Europe, and to a lesser extent Japan.
(Charts via Societe General, "Global Market Outlook" Presentation, 21 August 2009)
China Stocks 'In Deep Bubble,' May Drop Another 25%
China’s economy isn’t "sustainable" and the benchmark Shanghai Composite Index may fall another 25 percent, former Morgan Stanley Asian economist Andy Xie said in an interview. "The market is in deep bubble territory," Xie, who correctly predicted in April 2007 that China’s equities would tumble, told Bloomberg Television. The Shanghai index plunged 6.7 percent to 2,667.75 today, the most since June 2008 and entering a bear market, on concern a slowdown in lending growth may derail a recovery in the world’s third-largest economy. Xie said the index "should be 2000 or less."
The Shanghai gauge slumped 22 percent this month, the worst performer among 89 benchmark indexes tracked by Bloomberg, as banks reined in lending to avert asset bubbles and policy makers advised industries such as steel and cement to curb overcapacity. The decline stopped a rally that had sent the measure up 103 percent from a November low on prospects the government’s 4 trillion yuan ($586 billion) stimulus program and a record amount of new credit would ensure the economy grows at least 8 percent this year.
"The local market bears are convinced that tightening is already underway," said Howard Wang, head of the Greater China team at JF Asset Management, which oversees $50 billion. Only "a very strong set of macro numbers in August" or "stronger statements from central authorities" would change this trend, Wang said. The tumble in China stocks send the MSCI World Index of 23 developed nations down 1 percent at 10:17 a.m. New York time. The Bank of New York Mellon China ADR Index, tracking American depositary receipts, lost 2.6 percent, led by commodity producers.
At least 150 stocks on the 898-member Shanghai index dropped by the daily 10 percent limit. Industrial Bank Co. and Aluminum Corp. of China Ltd. tumbled by the permitted cap after Caijing magazine reported new loan growth this month may be almost half that of July. Lower profits dragged Baoshan Iron & Steel Co., the nation’s biggest steelmaker, and China Southern Airlines Co. down at least 7 percent. Chinese stocks are trading at the steepest discount in the world compared with analysts’ price targets after this month’s slump in the benchmark index.
Equities in China remain "a bright spot" among global stocks because of the nation’s strong growth potential, Goldman Sachs Group Inc. said today. "We think the market concerns about a near-term ‘exit strategy’ appear premature as the government remains pro- growth," Thomas Deng and Kinger Lau, analysts at Goldman Sachs, wrote in a research note. China may have 200 billion yuan of new loans in August, the Beijing-based Caijing reported today on its Web site.
That compares with 7.4 trillion yuan for the first half of 2009 and 355.9 billion yuan in July alone. The government plans to tighten capital requirements for financial institutions, three people familiar with the matter said this month. An estimated 1.16 trillion yuan of loans were invested in stocks in the first five months of this year, China Business News reported June 29, citing Wei Jianing, a deputy director at the Development and Research Center under the State Council.
Bailout Profits? Don’t Make Me Laugh!
The government has taken profits of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and $414 million on American Express. The five other banks that repaid the government — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — each brought in $100 million to $334 million in profit.”
-New York Times>
My definition of an investment profit is simple: You take the money you have invested, and if adds up to more that what you began with, well, then, you have a profit.
Let’s say on the other hand, you own 20+30 positions; 5 of them are higher than where you purchased them, and all the rest deeply in the red. Net net, your portfolio is down immensely. Most rational investors would hardly call that investment a “profit.”
Looking just at early TARP repayments means that we are ignoring a) the rest of the TARP; and b) the majority of other expenses, guarantees, loans capital injections, and outright spending that has taken place.
Perhaps the rookies are manning the terminals, with the senior people away on vacation. That would explain the inexplicably clueless headline over at the NYT this morning: As Big Banks Repay Bailout Money, U.S. Sees a Profit.
Excerpt:
“Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.
The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.”
Now, by any traditional measure of profits, you include all of the costs incurred against the total revenue, to determine if there is a net gain (or loss). This simple mathematical analysis of what a profit is — Are we up or down? — seems to have eluded the headline writers.
At least the author makes mention of how tenuous the usage of that word is the article’s body:
“These early returns are by no means a full accounting of the huge financial rescue undertaken by the federal government last year to stabilize teetering banks and other companies.
The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.”
What this is more appropriately described as is a return of capital; to call this a profit is to ignore trillions of dollars in taxpayer monies that have been spent, lent, guaranteed, drawn against and otherwise consumed in what will likely be the greatest transfer of wealth in the planet’s history.
Raft of Deals for Failed Banks Puts U.S. on Hook for Billions
The biggest spur to deal-making among banks isn't private-equity cash or foreign investors. It is the federal government. To encourage banks to pick through the wreckage of their collapsed competitors, the Federal Deposit Insurance Corp. has agreed to assume most of the risk on $80 billion in loans and other assets. The agency expects it will eventually have to cover $14 billion in future losses on deals cut so far. The initiative amounts to a subsidy for dozens of hand-picked banks.
Through more than 50 deals known as "loss shares," the FDIC has agreed to absorb losses on the detritus of the financial crisis -- from loans on two log cabins in the woods of northwestern Illinois to hundreds of millions of dollars in busted condominium loans in Florida. The agency's total exposure is about six times the amount remaining in its fund that guarantees consumers' deposits, exposing taxpayers to a big, new risk. As financial markets heal and the economy appears to be pulling out of recession, the federal government is shifting from crisis to cleanup mode. But as the loss-share deals show, its potential financial burden isn't receding. So far, the FDIC has paid out $300 million to a handful of banks under the loss-share agreements.
The practice is largely a response to the number of bank failures of the past 18 months, which has stretched the FDIC's financial and logistical resources. The FDIC had just $10.4 billion in its deposit-insurance fund at the end of June, down from more than $50 billion last year. The agency said Thursday it had 416 banks on its "problem" list at the end of the second quarter, which means the list of banks at a higher risk of insolvency has been growing.
Many of the government programs aimed at attacking the financial crisis have carried high price tags, including the Treasury Department's $700 billion Troubled Asset Relief Program, which includes major government investments in American International Group Inc., Citigroup Inc., Bank of America Corp., and the U.S. auto industry. But federal money isn't just going one way. Some of the emergency programs put in place last year, including TARP, have brought in billions of dollars for the government.
On a range of rescue programs run by the Federal Reserve, such as loans to investment banks and purchases of mortgage-backed securities, the Fed earned $16.4 billion through the first six months of 2009. The FDIC said earlier this year that it earned more than $7 billion on the fees it charged through a program that guaranteed debt issued by banks.
On Aug. 14, Alabama's Colonial Bank collapsed, felled by bad commercial-real-estate lending. The FDIC, assuming its traditional role, brokered a sale of the bank's deposits to BB&T Corp., ensuring that customers wouldn't see any interruption. It also agreed to help BB&T buy a $15 billion portfolio of Colonial's loans and other assets by agreeing to absorb more than 80% of future losses. Under the deal, the most BB&T can lose is $500 million, the bank says, and that is only in the unlikely event that the entire portfolio becomes worthless. The FDIC is on the hook to cover the rest.
In June, Wilshire State Bank, a division of Wilshire Bancorp Inc. in Los Angeles, agreed to buy $362 million in deposits and $449 million of assets from failed Mirae Bank, also of Los Angeles. The FDIC agreed to assume most future losses on roughly $341 million of those assets, largely commercial real estate and construction loans in Southern California. "After we understood how [the loss-share] works, we were literally overjoyed," says Joanne Kim, chief executive of Wilshire State Bank.
Loss-share agreements made a brief appearance in the early 1990s during the savings-and-loan crisis, but haven't been used this extensively before. The FDIC sees the deals as a way to keep bank loans and other assets in the private sector. More importantly, it believes such deals mitigate the cost of cleaning up the industry. The FDIC contends it would cost the agency considerably more to simply liquidate the assets of failed banks, especially with the current crop of troubled institutions and their portfolios of loans on misbegotten real estate.
The FDIC's premise is that banks that take on the troubled assets will work to improve their value over time. The agency estimates the loss-share deals cut will cost it $11 billion less than if the agency seized the assets and sold them at fair-market value. "This is an issue the FDIC is grappling with because the loss rates they are estimating on these failed banks are pretty amazing," says Frederick Cannon, chief equity strategist at Keefe, Bruyette & Woods Inc. By potentially mitigating losses -- or at least stretching them out over time -- the deals provide some protection for the agency's insurance fund. "It's a great opportunity for banks," says James Wigand, deputy director of the FDIC's division of resolutions and receiverships. "It's a great opportunity for us."
The federal government is on the hook for billions of dollars in bank losses if the economy doesn't recover. It will carry that burden for a long time. Many of the loss-share deals will be in place for up to 10 years. Some industry officials worry that bankers might tire of the partnerships with the FDIC and put little effort into reworking the soured loans because the bulk of losses will fall to the government. FDIC officials maintain that because banks still have a "material" exposure, they will be reluctant to do this.
"There is certainly an incentive for the banks to play fair and do right, but there is never a limit on the ability of the private sector to shift cost to the government," says John Douglas, a former FDIC general counsel who now advises banks as a partner at the law firm Davis, Polk & Wardell LLP. The FDIC's inspector general has said he is examining the controls designed to ensure that banks play by the rules. Since Jan. 1, 2008, 109 banks in 29 states have failed, ranging from one of the smallest banks in the country, Dwelling House Savings and Loan in Pittsburgh, a one-branch bank with $13.4 million of assets, to Washington Mutual, which had $307 billion of assets and was the largest bank failure in U.S. history.
Those collapses have cost the FDIC $40 billion, putting a huge dent in its reserves. The FDIC was created during the Depression to maintain consumer confidence in banks by guaranteeing deposits. If its deposit-insurance fund runs out, the FDIC would likely have to borrow money from the Treasury Department or slap higher fees on the banks whose contributions keep the fund afloat. During the savings-and-loan crisis in the 1980s and early 1990s, more than 1,000 banks failed. The government set up the Resolution Trust Corp. to take over assets from failed banks and sell them. Such a structure doesn't exist now, which means that the FDIC has to take on those assets or somehow persuade healthy banks to do so.
Last year, the agency struck only a handful of loss-share deals with healthy banks. That left the government with lots of troubled loans from failed banks to sell. "The hardest part today in the acquisition game is valuing assets or determining real equity, and with a loss share you can do that," says Len Williams, chief executive of Home Federal Bank in Idaho, which picked up $197 million in assets from the failed Community First Bank in Oregon on Aug. 7, most of it covered by a loss-share agreement.
Over the past 12 months, no bank has been a buyer of more failed banks than Stearns Bank of St. Cloud, Minn., which began as an agricultural bank. It bought the deposits and most of the assets of Horizon Bank in Pine City, Minn., on June 26; of Community National Bank of Sarasota County and First State Bank, both of Sarasota, Fla., on Aug. 7; and of ebank in Atlanta on Aug. 21. It brokered loss-share arrangements on all the deals, covering $619 million in assets. The acquisitions expanded the bank's assets by 60%, with limited risk of future losses.
By comparison, when Stearns agreed to buy the deposits of failed Alpha Bank & Trust in Alpharetta, Ga., last year, loss-share deals hadn't yet become common. Stearns purchased just $39 million of Alpha's $354 million in assets, leaving the rest for the FDIC to sort out. Stearns has entered into more loss-share deals than any other bank. "We have had to bid on [each of the banks], so everybody has had the same opportunity," says Chief Executive Norman Skalicky. In most cases, the FDIC agrees to cover 80% of future losses on a big portion of the assets, and 95% on the rest. The FDIC says it doesn't anticipate facing the 95% loss-coverage scenario on any deal.
Typical assets include loans on commercial real-estate developments, condominiums and single-family homes. Banks are required to report at least every quarter on estimated loan losses, and to have a team in place working full time to maximize the value of the assets. Banks must get permission from the FDIC to sell any loans. Big banks also have used the deals to grow with minimal risk. On Aug. 21, BBVA Compass, a unit of the giant Spanish company Banco Bilbao Vizcaya Argentaria, bought $12 billion in loans and other assets from the failed Guaranty Bank in Austin, Texas. As part of the deal, the FDIC said it would cover most losses on a $9.7 billion portion of that pool.
The Office of Thrift Supervision said last week that more than half of Guaranty's loans were "higher risk," including commercial, construction and land loans. BBVA Compass said the deal would have the FDIC "bear 80% of the first $2.3 billion of losses and 95% of the losses above that threshold." Its chairman, José Maria Garcia Meyer-Dohner, described it as a "low-risk transaction." The arrangement made BBVA Compass the 15th largest bank in the U.S. Veteran banker Joseph Evans saw the loss-share deals as a major opportunity.
He approached State Bank and Trust Co., a tiny bank in Pinehurst, Ga. with just $35 million in assets, with a proposition: He would take charge of the bank, find investors to pump $300 million of capital into it, then buy up the assets of failing banks in Georgia. Mr. Evans, who has spent years selling distressed assets, recruited investors, and on July 24 he put his plan in motion. The FDIC shut down six affiliated Georgia banks and agreed to sell $2.4 billion of deposits and $2.4 billion of assets to Mr. Evans's team. The FDIC agreed to absorb most losses on $1.7 billion of those assets. Overnight, the small bank became one of the largest in the state.
"From a turnaround guy's perspective, I've never had this kind of downside protection," Mr. Evans says. "I don't believe we would have either been interested or found interested investors to enter the banking industry at this moment in time, absent the FDIC assistance." He says there's a good chance his team will make a strong profit. He estimates it will take roughly four years to work through the bad assets in the portfolio. The FDIC wouldn't have to resort to such deals if it could easily sell the assets of failed banks. But last year, most healthy banks refused to bite.
In 20 of 2008's 25 failures, banks acquired less than 30% of the assets of the failed banks. When ANB Financial failed in Bentonville, Ark. on May 9, 2008, for example, Pulaski Bank and Trust Co. of Little Rock agreed to buy only $236 million of the $2.1 billion of the failed bank's assets. Last month, Galena State Bank in Galena, Ill., bought most of the assets of failed Elizabeth State Bank in Elizabeth, Ill., under a loss-share agreement.
As a result, Galena's portfolio now includes delinquent loans on two log cabins in the area. Andrew Townsend, Galena's chief executive, say his people have yet to visit the properties, which were often rented out to tourists. "There's a lot of work to getting your arms around everything and working through credit issues and conversion issues and valuation," he says. "Relatively speaking, that shouldn't take forever, and at the end of the day, we should have a nice pool of earning assets and clientele."
St. Louis Fed Charts – Banks Not Looking that Healthy at ALLL…
by Nathan Martin
When a banks’ loans begin to non-perform, they begin to eat into their capital reserves. Each banks’ Board of Directors is responsible to assess their reserves and make certain that they comply with legal and accounting requirements and, of course, they are certainly free to maintain standards that are higher than minimums.
The Fed tracks the banks’ Allowance for Loan and Lease Losses (ALLL) and produces charts showing ALLL versus NONPERFORMING loans. A ratio of 100 would mean that all the banks in that size have ALLLs that exceed their nonperforming loans – a condition of health. The lower the ratio number, the less healthy the banks are for that size stratum. The banks are complaining about arbitrary rules regarding ALLL, to learn more here is an article from July of this year; Banks' loan loss reserves are lagging behind delinquent loans… (site will only let you view article once w/o login).
The Fed groups banks into those with ASSETS less than $300 million, those with assets $300M to $1B, those $1B to $20B, and those $20B and Higher. Of course, you and I don’t know how those “assets” are valued or by who. That’s where Enron accounting mark-to-model accounting standards come in – thus the charts below are likely indicating a false sense of health, if you can call them healthy at all. Also keep in mind that there are now millions of home owners underwater on their loans, and many commercial real estate loans are facing the same fate. As asset deflation drives prices lower, any hiccup in income drives those loans into the nonperforming category. Let’s examine the small to medium size ($300M to $1B) and the large banks above $20B…
BANKS $300M to $1B:
Nonperforming loans:
ALLL Ratio:
BANKS over $20B:
Nonperforming loans:
ALLL Ratio:
Here’s the chart of TOTAL nonperforming loans:
So, the big banks would appear to have fewer nonperforming loans, but their ALLL ratio is running around 12 while the smaller banks are up around 30. Again, I’m betting that the REAL ALLL is much, much lower due to mark-to-model, but what you’re seeing here regardless is NOT a picture of health, that’s for sure.
For more on bank capital requirements, you may want to start your research with a visit to Wikipedia - Capital Requirements.
Note that the total loans and leases at all commercial banks are now negative:
And that net commercial loan charge offs are continuing to skyrocket:
And I think the chart of the week is the chart showing net capital inflows. Is that what a loss of confidence looks like?
[..] I still think these charts have deflation written all over them.
Ilargi: TRIN is NYSE Short Term Trading Index
Why is TRIN (Arms Index) So Low?
by Brett Steenbarger
A few readers have asked this question, noting recent low TRIN values. (TRIN is also known as the ARMS Index). Of course, what this means is that a high proportion of daily trading volume has been concentrated in rising stocks. But is TRIN low?
To address this, I looked at the median 20-day TRIN values going back to 2000. I used the median because the TRIN ratio is constructed in such a way that you can get much larger readings above 1.0 than below. With the median, I wanted to capture whether the average day was showing greater concentration of volume to the winning or losing stocks.
Guess what? The current 20-day median TRIN is the lowest value we've seen since 2000 at around .75. I'm not exactly sure what to make of that. What I can tell you with certainty is that two of the past historical occasions in which we've had 20-day price highs and ultra low median 20-day TRIN readings have been March, 2000 and late May/early June, 2007. Both corresponded more or less to bull market peaks.
The ultra low TRIN seemed to capture frothiness in those markets: lots of volume going into a few speculative, rising issues. Might we be seeing the same thing with the recent pops in such low priced stocks as AIG, C, FNM, FRE, CIT, and BAC? I note that about 2 billion of NYSE volume was concentrated in C, FNM, and FRE alone. Seems like lots of money chasing low-priced volatile financial stocks. Just like lots of money chasing volatile tech stocks or emerging market stocks. Not something you'd see at market bottoms. A bit of a sentiment caveat for this market shrink.
Recent Concentration of Volume in Financial Stocks: Coordinated Capital Infusion?
by Brett Steenbarger
I just wanted to add some color to my recent post regarding why the NYSE TRIN indicator might be broken
Reader Brian adds a very interesting perspective, indicating that he’s watched TRIN and C side by side and has seen a very strong correlation. When C flips from up to down (or vice versa), there is a corresponding huge move in TRIN. This could only be the case if a stock like C comprised a large share of total NYSE volume, which indeed seems to be the case, as noted by The Big Picture blog.
Above I took C, FNM, and FRE and expressed their *composite* volumes (e.g., the volumes transacted across all exchanges) as a fraction of NYSE volume. What we see is that, early in 2007, those three stocks accounted for only 1-3% of NYSE volume. During the financial crisis of late 2008 and again as the market was bottoming in early 2009, that ratio skyrocked to well over 50%.
Recently, however, the volume in these three stocks has hit astronomical levels relative to total NYSE trading, as all three have made phenomenal percentage gains during August. Indeed, the composite volume of these three stocks alone has recently doubled total NYSE volume. If we look at just the NYSE trading of these firms, they are accounting for about 40% of NYSE volume. It is not surprising that Brian would notice TRIN flipping up and down as these stocks change direction.
Again, the question is what all this means. There is no way that mom and pop trader and investor are involved in any meaningful way in generating these kind of daily trading volumes. Nor are proprietary trading shops capable of generating volumes that exceed those of the entire New York Stock Exchange. While I have no doubt that the algorithmic trade close to the market is participating in this movement, the directionality of the involvement suggests that large financial institutions are systematically buying the beaten-up shares of the poster children for TARP: C, FNM, FRE, AIG, and the like.
It is worth noting in this regard that other major (healthy) financial firms, such as GS and JPM, have seen no such surge in their volume or their trading prices.
My best guess? We’re seeing a massive infusion of capital into very troubled financial institutions, no doubt aided by short covering and the participation of program traders and proprietary daytrading firms. Where is the capital coming from? Why has it poured in so suddenly (the really large infusions began in early August)? Why is it coming in at such a pace that it is dominating NYSE volume? Zero Hedge rightly wonders why this hasn’t triggered alarms at the exchange. And why is it happening with only the weakest financial institutions?
If you were the government and you saw that these institutions were on the verge of a major fail, with billions of taxpayer dollars at risk, I’m not sure you’d announce that to the world. Nor, at this point politically, could you ask for yet another bailout package. But you would only pour money into those stocks at a frantic pace (capable of detection) if you perceived a dire need for the capital.
I’m not inclined toward conspiracy theories, but it’s difficult to imagine a scenario in which this is not a (frighteningly necessary) coordinated capital infusion, with taxpayer dollars ultimately at work in financial markets.
FDIC Insured Institutions have $13.3 Trillion in Assets
The banking system has taken the country to the financial edge of the greatest recession since the depression. The enormous number of bad loans floating out in the economy only complicates the unemployment situation. When we look into the latest banking data, we realize that over 1,000 of current banks will fail or merge with a too big too fail bank. In fact, the total number will be over 1,000 simply because the “not too big” to fail banks heavily bet on commercial real estate loans that amount to $3 trillion.Recent data shows that approximately 25% of all the banks insured by the FDIC are unprofitable. That number tells us that some 2,000 banks cannot turn a profit. Let us first look at the current data:
This is probably one of the more telling charts. We have 8,195 institutions. 3,010 of those have less than $100 million in assets. 4,487 have between $100 million to $1 billion. 582 fall between $1 billion and $10 billion. Those over $10 billion? 116. This is incredibly disturbing and shows the monopoly that a few big banks have. 116 banks make up 77 percent of all total banking assets in the United States! So you can have the lower 8,079 banks fail and you wouldn’t even lose 25 percent of the total assets of the banking system.
To show you the heavy weight of commercial real estate loans in the lower rung of banks, take a look at this data:
For commercial and industrial loans the banks with the lowest assets seem to have the highest non performing loans. This is bad news since there are $3 trillion in commercial loans floating out in the market and the U.S. Treasury has already mentioned plans to bail these loans out. Bad news of course for the taxpayer but more money thrown to the bigger banks. It would seem that politically we are letting smaller banks fail to placate the public with bread and circuses while the big banks get the real money. You’ll also notice that the banks with smaller assets are also facing higher credit card non-current loans. Given that many of these banks are small enough to fail by our government standards, you can expect that many will fail in the upcoming months. The government seems to be following one path right now. That path includes protecting those 116 banks.
$13 trillion is a large number of total assets. It equates to approximately one year of our national GDP. The number is even more daunting when you realize much of the assets are secured by real estate. In addition, the 8,195 institutions employ over 2 million people. More bank failures mean more layoffs that will add to the already 26 million unemployed and underemployed Americans. But let us look at that balance sheet:
$1 trillion in non-farm residential loans
$535 billion in construction and development loans
$672 billion in home equity lines
$1.3 trillion in commercial and industrial loans
$398 billion in credit cards
Do you think these loans will do well in the current recession? But a more curious data point, in 2004 there were 8,976 FDIC insured institutions. Now it is down to 8,195. What has happened? The big banks keep swallowing up the smaller banks. Since 2004 we have 781 fewer FDIC insured banks. Not all these are failures. What is happening is that the banking sector is consolidating with the too big to fail. Did we not learn any lessons with the gigantic trusts in the early part of the 1900s? Monopolies are not good but it would appear that is our current philosophy. Let the small fail or be eaten up while the big banks are protected at all taxpayer costs. Recently, the FDIC started charging big and smaller banks, even those that were prudent higher fees because they need more money. More money to help the bigger banks not fail while closing the door on smaller banks. This is selective crony capitalism here. Lehman Brothers collapses yet Goldman Sachs remains. Now tell me, who has more political connections?
The number of problem institutions is steadily growing:
The FDIC has 416 institutions listed as “problem” banks. Keep in mind some of the biggest failures like IndyMac did not appear on this list. It is becoming clear that we may have over 1,000 bank failures since it has little consequence in the total asset size of the banking system of the country and our government seems set on protecting the big banks only.
So far, the non-current loans are growing at a steady pace. This chart does not look like a green shoot:
Over $300 billion in loans are currently non-current. The trend is still heading higher. So the obvious conclusion is more money is going to be launched at banks. Until we start seeing stability in this area we can expect more and more banks to fail. The banking sector posted its second quarterly loss in the last 18 years:
I find the Q1 data incredible. The only way banks turned a profit here was because of the trillions in taxpayer bailouts. This is where your mega banks started stating they turned profits even though they had taxpayer handouts and suspended mark to market accounting.
The charts above tell us that we are going to see a large number of bank failures. Many of those commercial real estate loans come up for refinancing in the next few years:
Source: Zero Hedge
Now you tell me who is going to refinance an empty strip mall in Arizona? Some of these are going to have massive losses. Many banks are carrying these toxic mortgages at close to face value. As the months go along, we are going to become very accustomed to bank failure Fridays. Get used to it
Citi investors should take profits: Barron's
Investors that bought Citigroup Inc shares should take profits after the U.S. bank's shares climbed almost 100 percent in the last month, Barron's said in its August 31 edition. Further gains in Citi's shares are likely to be limited, the newspaper -- which was bullish on the bank a month ago -- said, adding that other U.S. bank stocks look more attractive. Citi shares closed on Friday at $5.23.
Shares in Citigroup fell as low as $1 earlier this year after it received $45 billion in bank bailout money from the U.S. Treasury's Troubled Asset Relief Program and the government now owns a 34 percent stake in the company. The second-largest U.S. bank, JPMorgan Chase & Co, and former investment bank Morgan Stanley are both in better shape than beleaguered Citi, the newspaper said, noting that both have returned U.S. government bank bailout funds.
Commercial Real Estate Lurks as Next Potential Mortgage Crisis
Federal Reserve and Treasury officials are scrambling to prevent the commercial-real-estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat. Their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds. Similar mortgage-backed securities created out of home loans played a big role in undoing that sector and triggering the global economic recession. Now the $700 billion of commercial-mortgage-backed securities outstanding are being tested for the first time by a massive downturn, and the outcome so far hasn't been pretty.
The CMBS sector is suffering two kinds of pain, which, according to credit rater Realpoint LLC, sent its delinquency rate to 3.14% in July, more than six times the level a year earlier. One is simply the result of bad underwriting. In the era of looser credit, Wall Street's CMBS machine lent owners money on the assumption that occupancy and rents of their office buildings, hotels, stores or other commercial property would keep rising. In fact, the opposite has happened. The result is that a growing number of properties aren't generating enough cash to make principal and interest payments.
The other kind of hurt is coming from the inability of property owners to refinance loans bundled into CMBS when these loans mature. By the end of 2012, some $153 billion in loans that make up CMBS are coming due, and close to $100 billion of that will face difficulty getting refinanced, according to Deutsche Bank. Even though the cash flows of these properties are enough to pay interest and principal on the debt, their values have fallen so far that borrowers won't be able to extend existing mortgages or replace them with new debt. That means losses not only to the property owners but also to those who bought CMBS -- including hedge funds, pension funds, mutual funds and other financial institutions -- thus exacerbating the economic downturn.
A typical CMBS is stuffed with mortgages on a diverse group of properties, often fewer than 100, with loans ranging from a couple of million dollars to more than $100 million. A CMBS servicer, usually a big financial institution like Wachovia and Wells Fargo, collects monthly payments from the borrowers and passes the money on to the institutional investors that buy the securities. CMBS, of course, aren't the only kind of commercial-real-estate debt suffering higher defaults. Banks hold $1.7 trillion of commercial mortgages and construction loans, and delinquencies on this debt already have played a role in the increase in bank failures this year.
But banks' losses from commercial mortgages have the potential to mount sharply, and the high foreclosure rate in the CMBS market could play a role in this. Until now, banks have been able to keep a lid on commercial-real-estate losses by extending debt when it has matured as long as the underlying properties are generating enough cash to pay debt service. Banks have had a strong incentive to refinance because relaxed accounting standards have enabled them to avoid marking the value of the loans down.
"There is no incentive for banks to realize losses" on their commercial-real-estate loans, says Jack Foster, head of real estate at Franklin Templeton Real Estate Advisors. CMBS are held by scores of investors, and the servicers of CMBS loans have limited flexibility to extend or restructure troubled loans like banks do. Earlier this month, it was no coincidence that CMBS mortgages accounted for the debt on six of the seven Southern California office buildings that Maguire Properties Inc. said it was giving up. "During most of the evolution [of CMBS] no one ever thought all these loans would go into default," says Nelson Rising, Maguire's chief executive.
Indeed, many property developers and investors complain there is no way to identify the investors that hold their debt and that it is difficult to negotiate with CMBS servicers. In light of the complaints, the Treasury is considering guidance that would allow servicers to start talking about ways to avoid defaults and foreclosures sooner, according to people familiar with the matter. But investors in CMBS bonds argue that the servicers are ultimately bound contractually to the bondholders.
So Maguire will soon have a lot of company. In a study for The Wall Street Journal, Realpoint found that 281 CMBS loans valued at $6.3 billion weren't able to refinance when they matured in the past three month, even though 173 such loans worth $5.1 billion were throwing off more than enough cash to service their debt. Mounting foreclosures in the CMBS sector would likely depress values even further as property is dumped on the market. And this would put pressure on banks to write down loans. "What's going on in the CMBS world is a precursor for what might be seen in banks' books," predicts Frank Innaurato, managing director at Realpoint.
The commercial-real-estate market could yet be salvaged by an improving economy and bailout programs coming out of Washington. In addition, capital markets are starting to ease for publicly traded real-estate investment trusts. Since March, more than two dozen REITs have managed to raise more than $13 billion by selling shares. Still, most of the $6.7 trillion in commercial real estate is privately owned. Also, it is unlikely commercial real estate will benefit much from an early stage of an economic recovery. What landlords need is occupancy and rents to rise, and that means employers have to start hiring and consumers need to shop more. So far, there are few signs this is happening.
Sen. Corker Wants $15,000 Credit for Home Buyers
The housing market looks for hope today and it may mean a new tax break for you. There's already a tax credit for first-time home buyers. Now, Tennessee Senator Bob Corker says he will fight for an existing home-owner's credit on a new house. Corker says housing will lead the country out of the recession, even as Chattanooga real estate agents are seeing foreclosures. "We have quite a few foreclosures and we're expecting to get more according to what Washington tells us," says Chattanooga Association of Realtors President Nickie Schwartzkopf.
But a bit of good news came from Corker Tuesday, who delievered welcome news to the Realtors. "Things feel like they're beginning to turn around as it relates to real estate no question," says Corker. Everyone agrees that is in large part to the $8,000 first-time tax credit. It has allowed new home buyers to move in and existing homeowners to move up. But time is quickly running out on the opportunity. "Because it has to be bought and closed on by November 30th, so it takes a little over thirty days to get a loan through so we're getting down to the wire," Schwartzkopf says.
Corker hopes the tax credit will be extended. In fact he wants a $15,000 dollar tax credit for any home buyer. All though he's not a huge fan of the 'cash for clunkers' program, he says it proved it you give buyers a break, they will buy. "Even though the 'cash for clunkers' program was one that didn't work particularly well from a logistics standpoint, I think it showed that incentives do drive people."
And a purchased home means paid property taxes and money spent at stores for everything from furniture to paint. "If you can buy, now would be a great time to do that and to own a home," says Schwartzkopf. Corker also talked briefly about the health care debate, saying he agrees some sort of reform is needed -- but he doesn't agree it should be rushed through Congress.
Lehman faces up to $100 billion in claims
Lehman Brothers’ European businesses plan to lodge claims for as much as $100bn against their former holding company in the coming weeks, as the winding up of the collapsed US bank gathers pace.
The filing of the demands, which are being prepared by PwC, represents the opening of another front in the battle to recoup billions of dollars from Lehman Brothers, following its bankruptcy almost a year ago. Tony Lomas, a partner with PwC – which is acting as administrator of the defunct investment bank’s main European operations – described the range of claims as "exceptionally complex". Many relate to past guarantees that the former parent company issued to its global subsidiaries, Mr Lomas said.
More than 100 former Lehman companies across Europe are demanding repayment for work completed as part of the filing, according to Mr Lomas, and claims must be filed by September 22 to comply with a deadline set by the US bankruptcy court. "We’re dealing with a large number of entities and therefore the claims could be as much as $100bn?.?.?.?we anticipate a large amount of further work in dealing with these claims." Since Lehman Brothers’ bankruptcy last September, administrators have been working to quantify the bank’s position and verify claims of creditors, including clients. The sheer range of activities carried out by Lehman and the fact that its businesses are being handled by different administrators have complicated the process.
Information on claims and assets is being shared by rival companies, in a bid to speed up proceedings and avoid law suits. Lehman Brothers declared bankruptcy with debts of more than $613bn. Lehman Brothers International (Europe) held more than $30bn of client assets at the time of its collapse. Clients of Lehman Brothers’ European operations will face delays in recovering up to $9bn of assets after a judge in England decided this month that he could not approve a scheme that would have helped customers with assets trapped in the defunct bank receive compensation more quickly.
PwC had proposed a scheme that would have divided more than 1,000 clients into three classes and allowed the administrators to deal with claims by class rather than individually. Mr Justice Blackburne decided that the English courts did not have the jurisdiction to modify Lehman Brothers International (Europe) clients’ claims.
Euro Zone August Inflation Negative
Euro zone consumer prices fell for the third month running year-on-year in August and the data, coupled with falling inflation expectations, looks set to keep ECB rates steady despite a nascent economic recovery. Prices in the 16-country area fell 0.2 percent this month, European Union statistics office Eurostat estimated on Monday, after a 0.7 percent drop in July and a 0.1 percent easing in June.
Forecasts from economists polled by Reuters had centred on a 0.3 percent fall in August, but some had forecast a 0.2 percent dip after stronger-than-expected German inflation data last week. "Despite the emerging strong growth in the second half of 2009, the ECB will not hike rates in the current year," said Christoph Weil, economist at Commerzbank. With survey and hard data pointing to the euro zone emerging from recession in the third quarter, markets are speculating about when the European Central Bank might start tightening policy again after cutting borrowing costs to 1 percent earlier this year.
"With the inflation rate set to remain dampened for the foreseeable future and the credit downturn in full swing, we see a strong case for a steady refi rate throughout 2010," said Tullia Bucco, economist at Unicredit. The ECB wants inflation to be just below 2 percent but Commerzbank's Weil expects the rate of consumer price growth could rebound to 1 percent at the end of the year. The bank meets on interest rates on Thursday, when the market expects no change to its main refinancing rate. A detailed breakdown of the estimate and month-on-month data will be available on September 16. The fall in prices is likely to be mainly due to cheaper oil, the cost of which has roughly halved since August 2008.
A monthly consumer survey by the European Commission showed that inflation expectations among households set a new record low in negative territory in August for the fifth month in a row. "With the current outlook and the stabilising economy, the euro zone will not slip into a Japan-like, full-fledged, deflation," said Carsten Brzeski, economists at ING bank. "At the same time, huge excess capacities, a further widening output gap in 2010, very weak credit growth and private sector inflation expectations at record lows send a clear signal that monetary policy tightening will not be on the ECB's agenda any time soon," he said.
Swiss "Black" Accounts – A Trillion Dollar Problem
by Bruce Krasting
The case against UBS is over. The Justice Department appears to have won this one. A total of 4,450 out of a total of 52,000 names will be divulged to either DOJ or IRS. Based on what has been presented it would appear that the other 48,000 names that were not disclosed either had the money sent back to a bank in the Sates (equivalent of full disclosure) or they had hired a lawyer and confessed their sins to the IRS.
According to the DOJ the 52,000 names had a total of $15 billion in their black accounts. A sizable amount of money. The question that has been hanging in the air is how much money is still in Swiss black accounts that has not been flushed out at this point? How many other Americans have accounts that were not with UBS? How many accounts are there from non-US names? What is an estimate as to the size of this problem?
The August edition of Swiss Review provides some insight. While Swiss Review is not the end all source of information on this topic their writing is not independent of the Swiss Government who provides a portion of the operating budget. With that in mind I was shocked to find the following in the August edition of SR:
“Switzerland has become a paradise for foreign capital on which tax is not paid. The uproar from foreign governments is understandable.” These are not the words of a critic of the banks, but of private banker Konrad Hummler. He says that around 30%, or CHF 1,000 billion, of the CHF 2,800 billion or so of foreign assets in Swiss banks is untaxed “black money”.
Mr. Hummler probably knows as much about the topic of black accounts in Switzerland as anyone. His Bio:
Konrad Hummler is managing partner of Wegelin & Co., private bankers, and has acted for many years as personal advisor to the chairman of the board of directors of the Union Bank of Switzerland (UBS). He serves as a colonel in the general staff of the Swiss Army.
Mr. Hummler has put a number of nearly 1 Trillion dollars on the problem. This is much higher than any estimate that I have seen before. I thought it could be as high as $500b. It appears that I was understating things by a factor of 2. Some perspective based on the comments by Mr. Hummler:
-The $15 billion owned by the 52,000 American names represents 1.5% of the total.
-The average US account balance at UBS was $300,000. ($15b/52k). Extrapolating from that number one gets an estimate on the total number of black accounts at 3.3 million. Based on this calculation a range of estimates on the total number would be between 2 and 4 million.
Mr. Hummler’s comments are unlikely to go unnoticed by the global taxing authorities. The idea that there is this much money waiting to be claimed by the host countries makes it certain that the attacks against Swiss banks will continue far into the future. Everyone will want their share of $1 Trillion.
I believe that the trees are shaking and the leaves falling on this issue as I write. I recently reviewed a letter from a large Swiss private bank (not Wegelin & Co) that was sent to a US client it reads, in part, as follows:
“To ensure transparency toward the IRS, we would ask you to sign the enclosed form W-9 and return it to us by 30 September 2009. We will then forward form W-9 to our US depository, which will in turn disclose your holdings to the IRS.”
While this letter may not represent the thinking and action of other Swiss banks it is likely that they will be forced to follow suit in the not too distant future. Mr. Rolf Ribi the author of the story in Swiss Review states in his lead in, Banking confidentiality is facing, “the beginning of the end”. I would disagree with Mr. Ribi. We are far from the beginning of this process. The end will come much sooner than is expected. Black accounts in Switzerland are a thing of the past.
A Hat Tip to Mr. Hummler for providing this insight.
Ilargi: Two articles on the same survey, wildly different in focus.
Inflation Will Accelerate This Decade, Business Economists Say
The Federal Reserve will be unable to prevent the trillions of dollars in government stimulus pumped into the U.S. economy from stoking inflation later this decade, a survey of business economists showed.
The price gauge tracked by the central bank will rise 3 percent a year on average from 2014 through 2018, according to the median estimate in a poll taken by the National Association for Business Economics. The rate exceeds the 2 percent pace that the respondents said was the Fed’s unofficial target.
The report is in line with surveys of consumers and indicates the central bank may have to work harder to damp inflation expectations after pouring more than $1 trillion into credit markets in a strategy known as quantitative easing. Economists in the survey also said the Obama administration’s $787 billion stimulus program would push consumer prices higher. "An excessively stimulative fiscal policy and a complicated exit from its quantitative easing policies over the medium term will result in the Fed tolerating a higher level of inflation than it desires," according to a statement issued by the Washington-based group today.
The price measure that tracks consumer spending and excludes food and fuel costs, the Fed’s favorite, rose 1.4 percent in July from the same month last year, the smallest gain since 2003, a Commerce Department report showed last week. The last time it exceeded 3 percent was in 1992. The main reasons cited for concern over the inflation outlook included "lagged effects of policies now in effect," "monetization of the debt" and an "ineffective exit strategy" by the central bank, the report said. Only a "small percentage" thought a loss of Fed independence will cause prices to accelerate.
American consumers projected this month that inflation will rise 2.8 percent per year over the next five years, according to the Reuters/University of Michigan sentiment survey issued last week. Fifty-six percent of the economists in the NABE survey said the Fed will keep the benchmark interest rate target near zero for at least the next six months, while 44 percent projected it would rise. Half of those surveyed thought the government’s fiscal measures were excessive, up from 33 percent in the group’s March survey. Almost eight out of every 10 economists surveyed said a second stimulus bill wasn’t needed.
Three-quarters said they would like to see the government cut spending over the next two years, while only 28 percent projected the reductions would actually take place. The economists also favored increased regulation of financial markets, including greater oversight of derivatives, requirements on financial institutions to put more of their own funds at stake when securitizing mortgages and reform of the credit-rating companies. This was the most surprising finding for Chris Varvares, the president of NABE and of Macroeconomic Advisers LLC in St. Louis. "This tends to be a fairly conservative group, and you can see it except when it comes to regulation," Varvares said in an interview. "They definitely are into more regulation in financial services."
No need for second U.S. fiscal stimulus package: survey
The U.S. economy does not need a second fiscal stimulus package, instead the government should cut spending over the next two years, according to a survey of business economists released on Monday. Most economists in the National Association for Business Economics (NABE) semi-annual poll were concerned about the outlook for the U.S. government budget. Also, they doubted health-care reforms proposed by the Obama administration would lower costs while increasing access and maintaining quality.
"This is one of the fastest-moving and most controversial economic policy environments we have experienced in a generation," said NABE president Chris Varvares. "The more vexing policy challenges about which there is less agreement are federal health-care ... budget policies." The government early this year stepped in with a $787 billion package of spending and tax cuts to break the worst recession since the Great Depression of the 1930s. Separately, it bailed out banks to prevent the financial system from collapsing.
Those actions left the economy saddled with a $1.58 trillion budget deficit in fiscal 2009, and a shortfall of about $9 trillion between 2010 and 2019. The ballooning budget deficit is causing alarm and feeding into opposition to President Barack Obama's central policy priority of overhauling the U.S. health-care system, whose price tag is $1 trillion. While economists in the NABE survey acknowledged that the stimulus package had helped to brake the pace of the economy's decline in the second quarter, only 35 percent viewed fiscal policy as being "about right".
Half of the respondents saw fiscal policy as too stimulative. About 266 members took part in the poll which was conducted between August 3-18. The U.S. economy contracted at a 1.0 percent annual rate in the second quarter after collapsing 6.4 percent in the first three months of the year. "Fully 76 percent do not believe a second stimulus package is needed. Three-quarters responded that they would like to see fiscal policy become more restrictive over the next two years, but only 28 percent expect that it will be," the NABE said. "In fact, the largest share, nearly 42 percent, expects fiscal policy to become even more stimulative than it is now."
Just over half believed that fiscal stimulus would add between 0.5 and 1.5 percentage points to gross domestic product growth in the second half of 2009, while over a third saw it as adding less than half a percentage point. About 58 percent felt the stimulus would add between half and 1.5 percentage points to growth from the fourth quarter of 2009 to the fourth quarter of 2010, the survey showed. Nearly 70 percent of economists believed that monetary policy was "about right". About 56 percent of respondents expected the Federal Reserve to keep interest rates unchanged over the next six months, while 44 percent saw an increase.
The Fed has cut interest rates almost to zero and pumped around $1 trillion into financial markets via a range of credit easing measures to prevent lending from freezing up, amid a global credit crisis sparked by the collapse of the U.S. housing market. "Half of the economists do not believe quantitative easing actions of the Fed will be inflationary over the next couple of years, while 41 percent think they will," the NABE said.
AIG Chief Benmosche Says Cuomo 'Unbelievably Wrong'
American International Group Inc. Chief Executive Officer Robert Benmosche told employees that New York Attorney General Andrew Cuomo was "unbelievably wrong" for drawing attention to staff who got retention bonuses. Benmosche criticized Cuomo and lawmakers during a town-hall style meeting this month for life insurance workers in Houston. Cuomo subpoenaed AIG in March during a national furor about $165 million in retention bonuses sent after the firm’s bailout and said those who returned the cash wouldn’t have their names published. That month, some employees received death threats and protesters visited the Connecticut homes of two AIG executives.
"What he did is so unbelievably wrong," Benmosche said during the Aug. 11 remarks, according to a record obtained by Bloomberg. "He doesn’t deserve to be in government, and he surely shouldn’t be the attorney general of the state of New York. What he did is criminal. You don’t create lynch mobs to go out to people’s homes and do the things he did." After being approached by Bloomberg today about the remarks, AIG said that Benmosche "regrets his comments regarding Mr. Cuomo and the tone of those comments" and said that Cuomo resisted pressure to release names.
Benmosche has blamed regulators for the company’s near collapse in remarks he’s made to employees since being appointed CEO this month. While comments in an earlier address focused on unnamed officials at the Federal Reserve and Treasury, Benmosche in Houston singled out Cuomo, the chief prosecutor of New York, where some of the world’s largest financial firms are based. "The worst thing that will ever happen to him is when he and I meet in the room and I close the door," Benmosche, 65, said of Cuomo during the meeting. "I ain’t going to meet with him with anybody else in the room. I won’t tell you what I’ll say to him, but I will tell you, there won’t be a nice word."
Cuomo said in March that staff of AIG’s financial products unit, blamed for the insurer’s near-collapse and subsequent U.S. bailouts, returned at least $50 million of the $165 million in awards. He said that "if a person returns the money, I don’t believe there’s a public interest in releasing their name." "Mr. Benmosche now recognizes that the New York Attorney General resisted public pressure to disclose the names of AIG employees during the controversy in March regarding compensation, and with emotions running high, he noted the importance of all parties to proceed with care and sober judgment," AIG spokeswoman Christina Pretto said today in a statement. Cuomo said in a March 19 statement that his office was "aware of the security concerns of AIG employees." Richard Bamberger, a spokesman for Cuomo, declined to comment.
"Since joining AIG earlier this month, Mr. Benmosche has held several employee meetings around the country in which employees have repeatedly voiced concerns about the threats and harassment they have experienced," the statement said. "Mr. Benmosche vowed to do everything he can so that innocent families are not put at risk again." Benmosche’s predecessor Edward Liddy, who took over after AIG’s September rescue, was grilled during congressional hearings in March and May over his handling of the bonuses, which were designed to prevent valued workers from leaving.
"I would never, ever let them talk to me the way they talked to him," Benmosche told employees. "I would have told them what to do with this job, and I would have said it on TV: ‘You can stick it where the sun don’t shine.’" Benmosche said that AIG Chairman Harvey Golub, the former CEO of American Express Co., would work with lawmakers while he focused on operations and decides which units will be kept. Golub "is going to run interference for me in Washington, because I’ve got to tell you, I can’t be running the business here and dealing with all those crazies down in Washington," Benmosche said, adding "actually, they’re not. They’re very nice, sophisticated people. Vote for them. Please. And give them your money."
Also in the meeting, after suggesting that employees challenge their managers over a salary freeze, Benmosche said, "I create so much trouble, don’t I? That’s my job." Benmosche told staff in an Aug. 4 meeting that he plans on rebuilding businesses and won’t be pressured by regulators into selling assets at unfavorable prices. "I’m appalled at how much pressure has been put on all of you to just sell it no matter what, because the Fed wants out, or the Treasury wants out," Benmosche said. "If they want out in a hurry, they shouldn’t have come in in the first place."
Benmosche, who was CEO of MetLife Inc. for eight years, transformed that company into the largest publicly traded U.S. life insurer from a mutual owned by customers. AIG’s $182.5 billion federal bailout includes a $60 billion credit line, a Treasury Department investment of as much as $70 billion and $52.5 billion to buy mortgage linked assets owned or backed by the company.
Cuomo’s predecessor as attorney general, Eliot Spitzer, sued AIG in 2005 for allegedly misleading investors about the company’s financial health. AIG agreed to a $1.64 billion settlement of state and federal probes into improper transactions to inflate reserves and hide underwriting losses. The company later restated earnings lower by $3.4 billion. Cuomo, 51, may run for governor of New York, according to speculation by pollsters. Cuomo has a 4 to 1 lead over New York Governor David Paterson in a 2010 Democratic primary, according to a Quinnipiac University poll.
BofA Is Facing a World of Hurdles
In his first weeks as Bank of America Corp.'s corporate and investment banking chief, Tom Montag already faces what may prove to be one of his biggest tests: steadying the turmoil-ridden overseas operations BofA acquired in the Merrill Lynch deal.
Top bankers have streamed out of the former Merrill overseas operation, dealing a blow to BofA's hopes of substantially expanding the bank outside of the U.S. for the first time. Under Brian Moynihan, Mr. Montag's predecessor, some top bankers feared that BofA wasn't committed to the things they care about: from aggressively chasing every deal to paying top dollar for star bankers. Mr. Montag is moving quickly to repair the damage. Addressing managing directors in his group by phone two weeks ago, he said he expects the U.S. giant to make about 50% of its big corporate loans abroad in the coming years, a tall order for a bank that historically confined itself to U.S. shores and currently makes roughly 15% of such loans abroad.
Mr. Montag will soon make one of his most sensitive decisions as he sets out to transform BofA into a global bank, naming a management team as early as next week. A delicate -- and telling -- matter will be the fate of Andrea Orcel, the firm's top rainmaker in London. BofA agreed to buy Merrill at the height of the financial crisis, when Merrill was in danger of collapse. The deal brought with it a desirable international investment-banking platform that BofA could use to transform itself into a more geographically diverse outfit with access to faster-growing markets around the world.
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BofA, run by Chief Executive Ken Lewis, got less than 10% of its net revenue from abroad last year, compared with more than a third for Merrill historically, and roughly one-quarter for J.P. Morgan Chase & Co., viewed by many as the most successful big U.S. bank. If Mr. Montag succeeds, he could provide a shot in the arm to a bank whose growth prospects in the U.S. have diminished. Even before the economic slowdown, the bank, which also has a large retail presence, had already expanded into most of the desirable markets in the U.S., and it has crossed a government limit on the level of deposits it can hold there.
"Ken and I both know there are greater growth opportunities outside the U.S.," Mr. Montag said in an interview last week, his first since being appointed in early August to run the combined bank's corporate and investment banking units, in addition to capital markets. "We're actively engaged in hiring people to take advantage of our resources." BofA has a long way to go to be a powerhouse internationally. In Dealogic's rankings of top arrangers of syndicated loans in Europe this year, BofA ranked 21st, with just $2.9 billion of loans to its credit. In the U.S., it was No. 1, at $73.9 billion. In mergers and acquisitions, BofA in Europe was No. 9, lagging behind both its ranking in the U.S. and Merrill's traditional European ranking.
Boosting its lending should open the door for the bank to provide more such services in Europe. But the effort got off to a rocky start, leading to key departures and other problems. "Combining two organizations is a pretty difficult thing to do, especially with the backdrop of a very difficult environment," says Jonathan Moulds, BofA's president for Europe, the Middle East and Africa. "I think a number of people who left will look back and say that leaving probably wasn't the right decision."
Early on, Merrill's international hub in London was marred by a clash of the two banks' cultures. Legacy Merrill bankers describe BofA as more process-oriented. To their surprise, they found human-resources officials in their staff meetings. Where Merrill bankers had been encouraged to aggressively chase every opportunity, BofA is happy to let some go. When the deal was struck, bankers in London thought they would be spared the usual merger carnage because there was little overlap here. But in the months after the deal closed, at least half of the members of Merrill's investment banking executive committee in London departed. Few if any of them have been replaced with outside hires.
Some complained that the firm refused to back their clients with loans. Mr. Moynihan, Mr. Montag's predecessor, said at a dinner in London in February that BofA had no need for "star bankers," a former Merrill banker who was present says. Through a spokesman, Mr. Moynihan says his comment was: "We want stars like Magic Johnson and Larry Bird, who could be part of a team and make everyone better. There are other great stars who never won because they couldn't work on a team."
In a management shake-up at BofA in early August, Mr. Moynihan was shifted to a job overseeing the firm's huge consumer bank and credit-card businesses. Mr. Moynihan's comments -- and the $45 billion in U.S. aid BofA received during the crisis -- led to fears that the lavish pay Merrill bankers were used to wouldn't be maintained. Mr. Montag has been assuring bankers "we'll pay for greatness" and insists that he and Mr. Moynihan agree on strategy.
Curtailing the Merrill culture may mean passing on opportunities. Bank of America Merrill Lynch recently dropped Dragon Oil PLC as a client because of the oil producer's ties to Iran. Even though advising the company isn't technically against U.S. rules, and Washington didn't pressure it to do so, BofA decided to relinquish the assignment, a person familiar with the matter said. Dragon is the subject of a takeover offer, which could yield millions in fees for HSBC Holdings PLC, the U.K. bank that took over the assignment. Still, the appointment of Mr. Montag was seen by many in London as a sign that BofA brass wanted to make amends. BofA staffers say the firm has picked up momentum recently. They point to assignments won in recent weeks on deals for clients including Swedbank AB and Aegon NV.
What's North Dakota Doing Right?
At Minervas Restaurant & Bar in Bismarck, N.D., the only patrons bartender Trent Mock hears complain about unemployment are out-of-state visitors staying at the adjacent hotel. "People from Bismarck are pretty relaxed," Mock says. "They're not worried, not at all." There's a reason: At 3.6%, Bismarck's unemployment rate is the lowest in the nation, according to the Bureau of Labor Statistics. Blessed with a diversified economy, the city of some 60,000 residents on the east bank of the Missouri River has remained largely unmarred by the global financial crisis, which has wrecked the U.S. housing industry, felled hundreds of banks of all sizes, and sent the national unemployment rate to nearly10%.
Right now, Bismarck residents have scant reason to worry. "Our employment situation is such that if one sector took a hit, another one could compensate for it," says Russell Staiger, director of the Bismarck-Mandan Development Assn., a private, not-for-profit economic development corporation that supports Bismarck and its smaller sister city across the river, Mandan. As the state capital, Bismarck employs more than 12,600 government workers, up from 11,700 a year ago, according to June, 2009, figures from the Bureau of Labor Statistics.
The city has four colleges—Bismarck State College, Mary University, United Tribes Technical College, and a small section of the University of North Dakota Medical School—and two major medical facilities. The city had a combined total of education and health-service employees of 11,100 as of June 2009, up from 10,800 in June 2009 and 8,000 a decade earlier. Most people think the local health-care industry in particular is pegged for growth. "North Dakota has an issue of small towns dying off, so for health care, people are coming to Bismarck," says Tom Gerhardt, a 33-year resident and news director at KXMB-TV, the local CBS affiliate.
Of course, none of this optimism is to suggest that negative economic indicators don't lurk. There are rumors that Bobcat, North Dakota's largest manufacturing employer, might relocate its Bismarck plant to consolidate its work with that of other factories. The plant, which makes small excavators and frame loaders for construction and landscaping, employs 620 residents. "It's on people's minds, but I wouldn't say they're panicky," says Phil Davis, customer-service area manager for Job Service of North Dakota, which helps people find jobs. Bobcat spokeswoman Laura Ness Owens said on Aug. 28 that the West Fargo (N.D.) company has not disclosed any plans to close or relocate the Bismarck plant.
Staiger worries that entrepreneurs and corporate entities from other states will view the low unemployment rate as a reason to decide against opening up shop in Bismarck. "Unemployment rates of 3% or 4% or 5% give new businesses pause," says David Flynn, director of the Bureau of Business & Economic Research at the University of North Dakota in Grand Forks. "They don't think they'll be able to find enough employees." Roger Johnson, who served as North Dakota's Agricultural Commissioner from 1996 to 2009 and is now president of the National Farmers Union in Washington, D.C., believes revenue from the agricultural sector may contract a bit in the coming years because of an easing of the inflation that caused prices of farm products to rise. "If tomorrow commodity prices moved somehow, it could create problems," says Flynn, "and of course crops are always at risk until they get out of the field."
But it's energy—vast, if hard-to-reach, oil and near-optimum conditions for wind-generated power—that holds the greatest promise for new job opportunities in Bismarck, Staiger says. "We're one of the best wind-turbine areas in the nation," he notes. "We have strong prevailing winds, and they're consistent." On 30,000 acres of land south of Minot, a city 110 miles north of Bismarck, construction began on Aug. 17 on the $250 million, 77-turbine PrairieWinds ND1 wind-farm project. The wind farm's developer, Basin Electric Power Cooperative, says it will be the largest such cooperatively owned project in the nation.
Another energy source, crude oil, is also a potential source of employment. The Bakken Formation, a geological phenomenon covering parts of North Dakota, Montana, and Saskatchewan, has an estimated 3 billion to 4 billion barrels of recoverable oil, only a tiny percentage of which has been tapped. The oil sits in subterranean rock formations that are particularly elusive given current technology. The oil industry already employs some Bismarck residents and could create thousands more jobs if scientists devise new technologies to reach Bakken's oil reserves.
Although there's little farmland in Bismarck proper, the city benefits greatly from having agricultural equipment dealers, livestock sales, and facilities to process dairy products. North Dakota is the country's largest producer of flax, sunflower seeds, and durum wheat, the principal component of pasta. Farmland covers 90% of the state, making North Dakota the most rural of all U.S. states.
North Dakota has been spared the financial indignities that have plagued much of the country. The state finished its fiscal two-year cycle on June 30, 2009, with a $1 billion budget surplus; at least some of that windfall is likely to go toward creating more state-government jobs. And homeowners are enjoying lowered property taxes rather than foreclosures. "No low-documentation loans—'liar loans'—were given out in North Dakota," says Flynn at the University of North Dakota. "No metro community in North Dakota ever saw any more than 3% to 4% subprime loans." According to the real estate information site Zillow.com, the median list price for houses in Bismarck is $159,900, in contrast with the national $219,000.
Brian Peterson, proprietor of Knowles Jewelry, a 100-year-old retailer in downtown Bismarck, blames his store's flattening of sales on media reports about the national recession. "We've seen people tightening their belts," Peterson says. "I ask my customers: 'Have you lost your job? Has your interest rate gone up?' The answer is no. But consumer confidence is still hurt. I haven't laid anyone off, but I've put expansion plans on hold."
Study Says World's Stocks Controlled by Select Few
A recent analysis of the 2007 financial markets of 48 countries has revealed that the world's finances are in the hands of just a few mutual funds, banks, and corporations. This is the first clear picture of the global concentration of financial power, and point out the worldwide financial system's vulnerability as it stood on the brink of the current economic crisis.
A pair of physicists at the Swiss Federal Institute of Technology in Zurich did a physics-based analysis of the world economy as it looked in early 2007. Stefano Battiston and James Glattfelder extracted the information from the tangled yarn that links 24,877 stocks and 106,141 shareholding entities in 48 countries, revealing what they called the "backbone" of each country's financial market. These backbones represented the owners of 80 percent of a country's market capital, yet consisted of remarkably few shareholders.
"You start off with these huge national networks that are really big, quite dense," Glattfelder said. "From that you're able to ... unveil the important structure in this original big network. You then realize most of the network isn't at all important." The most pared-down backbones exist in Anglo-Saxon countries, including the U.S., Australia, and the U.K. Paradoxically; these same countries are considered by economists to have the most widely-held stocks in the world, with ownership of companies tending to be spread out among many investors.
But while each American company may link to many owners, Glattfelder and Battiston's analysis found that the owners varied little from stock to stock, meaning that comparatively few hands are holding the reins of the entire market. "If you would look at this locally, it's always distributed," Glattfelder said. "If you then look at who is at the end of these links, you find that it's the same guys, [which] is not something you'd expect from the local view."
Matthew Jackson, an economist from Stanford University in Calif. who studies social and economic networks, said that Glattfelder and Battiston's approach could be used to answer more pointed questions about corporate control and how companies interact. "It's clear, looking at financial contagion and recent crises, that understanding interrelations between companies and holdings is very important in the future," he said. "Certainly people have some understanding of how large some of these financial institutions in the world are, there's some feeling of how intertwined they are, but there's a big difference between having an impression and actually having ... more explicit numbers to put behind it."
Based on their analysis, Glattfelder and Battiston identified the ten investment entities who are "big fish" in the most countries. The biggest fish was the Capital Group Companies, with major stakes in 36 of the 48 countries studied. In identifying these major players, the physicists accounted for secondary ownership -- owning stock in companies who then owned stock in another company -- in an attempt to quantify the potential control a given agent might have in a market.
The results raise questions of where and when a company could choose to exert this influence, but Glattfelder and Battiston are reluctant to speculate. "In this kind of science, complex systems, you're not aiming at making predictions [like] ... where the tennis ball will be at given place in given time," Battiston said. "What you're trying to estimate is … the potential influence that [an investor] has."
Glattfelder added that the internationalism of these powerful companies makes it difficult to gauge their economic influence. "[With] new company structures which are so big and spanning the globe, it's hard to see what they're up to and what they're doing," he said. Large, sparse networks dominated by a few major companies could also be more vulnerable, he said. "In network speak, if those nodes fail, that has a big effect on the network." The results will be published in an upcoming issue of the journal Physical Review E.
Brazilian president aims to eradicate poverty with oil billions
Brazilian president Luiz Inacio Lula da Silva today vowed to pump billions of petrodollars into the war on poverty in the wake of one of the world's biggest oil discoveries this decade. Speaking on his weekly radio show, president Lula said: "Monday, 31 August, represents a new independence day for Brazil. "We are talking about a discovery of oil that is almost 6,000m [under the sea], huge reserves that place Brazil among the biggest oil producers in the world."
He claimed that new legislation he is planning would allow profits to be used to "take care of" education and poverty once and for all. Brazil has been celebrating an unexpected oil boom since November 2007, when state-controlled energy company Petrobras discovered the Tupi oilfield off Brazil's southeast coast. Tupi, estimated to contain around 8bn barrels of oil, was the biggest discovery in the Americas in more than 30 years. Following the discovery president Lula declared: "God is Brazilian".
His regional rival, Venezuelan president Hugo Chavez, joked the Brazilian president should be renamed "Sheikh Lula". The Tupi field is part of the so-called "pre-salt" band, an 800km strip containing a series of vast deep-water oil reservoirs which could hold as much as 150bn barrels of oil. The discovery of the region led Brazil to suspend the auctioning of all offshore oil blocks pending new legislation, intended to give the government a larger slice of profits. Lula is expected to create a "social fund", designed to channel oil profits into poverty-reduction initiatives, and should hand greater control of "strategic" oilfields to the government.
The changes, which have been heavily criticised by opposition politicians, still require approval from Brazil's congress. Foreign oil companies have reacted nervously to speculation over the legislation, concerned that they will be handed a smaller role in future exploration of the region. While the global financial slump has seen many oil companies cutting back, Petrobras recently announced a five year plan to invest $174bn (£108bn). Petrobras director Jose Sergio Gabrielli said the pre-salt fields represented a "new era" for Brazil.
Texas loses more than 32,000 oil and gas jobs
The Texas oil and gas industry is continuing to trim jobs at a rapid pace, according to the latest Texas Petro Index (TPI), which measures employment levels in the oil and gas industry. So far this year, the state’s oil and gas sector has shed more than 32,000 jobs through July 2009. And thousands of more jobs are expected to be lost before the year is up.
Volatile commodity prices for crude oil and natural gas are blamed for the job losses. Texas crude oil prices are currently averaging $60.91 per barrel. This is down from an average price of $130.91 a barrel back in July 2008. Natural gas prices in Texas are currently averaging $3.62 per thousand cubic. This is down from $12.33 per thousand cubic feet in July 2008.
Because commodity prices have been volatile, oil and gas producers have curtailed drilling activity. As of July 2009, there were 342 drilling rig in production, according to the Baker Hughes count of active rigs. This was down from a peak of 958 rigs at the end of August 2008.
"Producers and oil-field service contractors are shedding jobs to shrink the industry’s workforce to the level required to operate 300 to 350 rigs in Texas," says petroleum economist Karr Ingham, who created the TPI for the Texas Alliance of Energy Producers. "That adjustment is not complete, so it appears that thousands more Texans will be sent packing before this cycle hits bottom." Ingham estimates that one of every 10 Texans employed by the oil and gas industry have already lost their jobs as of July. The Texas Alliance of Energy Producers is the largest state association of independent oil and gas producers in America.
Ilargi: Quite long, very good. Do read.
Wall Street Stealth Lobby Defends $35 Billion Derivatives Haul
Wall Street is suiting up for a battle to protect one of its richest fiefdoms, the $592 trillion over-the-counter derivatives market that is facing the biggest overhaul since its creation 30 years ago. Five U.S. commercial banks, including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Bank of America Corp., are on track to earn more than $35 billion this year trading unregulated derivatives contracts. At stake is how much of that business they and other dealers will be able to keep.
"Business models of the larger dealers have such a paucity of opportunities for profit that they have to defend the last great frontier for double-digit, even triple-digit returns," said Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics, which analyzes banks for investors. The Washington fight, conducted mostly behind closed doors, has been overshadowed by the noisy debate over health care. That’s fine with investment bankers, who for years quietly wielded their financial and lobbying clout on Capitol Hill to kill efforts to regulate derivatives. This time could be different. The reason: widespread public and Congressional anger over the role derivatives such as credit-default swaps played in the worst financial crisis since the Great Depression.
"Public sentiment isn’t very much in their favor," said Richard Lindsey, a former director of market regulation at the U.S. Securities and Exchange Commission who worked at Bear Stearns Cos. from 1999 to 2006, referring to Wall Street firms. "In some places, they’re not going to have anybody who wants to listen to them." In a bad omen for the industry, the Obama administration kept the details and timing of its plan to regulate the derivatives markets under wraps before making it public earlier this month.
Robert Pickel, head of the International Swaps and Derivatives Association, and Scott DeFife, chief lobbyist for the Securities Industry and Financial Markets Association, were meeting with Deputy Treasury Secretary Neal Wolin on Aug. 11, when Wolin mentioned that the proposals would be sent to Congress in 60 minutes, according to a person familiar with the meeting. The sudden notice was not what they were used to. "The administration is desirous of maintaining control and the initiative on this," said Craig Pirrong, a finance professor at the University of Houston who has testified before Congress about derivatives trading. "They wanted to make sure they could get their vision out there pure and uninfluenced by the industry."
The Obama proposal made public that day is an effort to gain oversight and control of the market for derivatives traded over the counter. The so-called OTC market consists of privately negotiated contracts that enable companies or investors to hedge against or bet on swings in the value of bonds, interest rates, currencies, commodities or stocks. Unlike exchanges, the business is unregulated and prices aren’t public.
The five biggest derivatives dealers in the U.S. -- JPMorgan, Goldman Sachs, Bank of America, Morgan Stanley and Citigroup Inc. -- held 95 percent of the $291 trillion in notional derivatives value of the country’s 25 largest bank holding companies at the end of the first quarter, according to a report by the Office of the Comptroller of the Currency. More than 90 percent of those derivatives were traded over the counter, the OCC data show.
In the first six months of 2009, those five banks made $35 billion from trading in both derivatives, including interest- rate and credit-default swaps, and cash instruments such as Treasuries and corporate bonds, according to company reports collected by the Federal Reserve. About half of JPMorgan’s $31.2 billion in trading revenue from 2006 to 2008 probably came from derivatives, based on a breakdown the firm provided in a presentation in February and revenue figures in regulatory filings those years, according to Alexander Yavorsky, a senior analyst at Moody’s Investors Service in New York. The proportion of trading revenue that comes from derivatives is similar at other top firms, according to people familiar with the banks’ income sources.
The Obama plan would require that the most common, or standardized, OTC derivatives be processed through clearinghouses, whose members would make good on trades in the event any of them default. The $182.5 billion federal rescue of American International Group Inc. underlined the problem of so-called counterparty risk, or the danger that one of the parties to a contract won’t be able to meet its obligations. For years New York-based AIG had run a lucrative business collecting fees by selling banks and other investors credit-default swaps, a form of insurance that would pay out if their pools of mortgage securities defaulted. When the housing market collapsed, AIG found itself unable to meet its promises and the government stepped in with taxpayer money to honor the contracts.
Wall Street expected that the administration would try to mandate clearinghouses. It didn’t anticipate the proposals would go further by requiring standardized trades be listed on exchanges or regulated platforms that entail reporting of trades, according to people familiar with how the legislation developed and who asked not to be named. That could cost Wall Street a lot of money. Under the current system, the banks profit from the so- called bid-ask spread, which is the gap between what they charge customers and what they pay to hedge their trades.
When a company or investor wants to enter into a swap, the bank checks internal pricing sources to determine the cost of making the opposite trade with another bank, which would enable it to eliminate any exposure on the trade. Armed with that information, it then offers a higher swap price to the client, allowing the bank to pocket a profit. The prices are measured in basis points, each of which is 0.01 percentage point.
Banks earn one to three basis points on average, each year, by creating an interest-rate swap for a customer, according to a former Deutsche Bank AG trader who asked not to be identified. For example, a bank that charges three basis points for a 10- year swap with the notional value of $100 million will earn about 23 basis points, or $230,000, over the lifetime of the trade when accounting for the present value of money, the former trader said. Banks do thousands of such deals a year.
"Part of the pull and tug is that the banks are trying to prevent more and more of the product from being commoditized in the sense of being exchange-traded," said Charles Peabody, an analyst at Portales Partners LLC in New York, which provides institutional equity research. "Like anything that starts to get commoditized -- we’ve seen that with Trace on the bond side -- it’s obviously going to pressure margins."
Trace, shorthand for the Trade Reporting and Compliance Engine, was created in 2002 to post prices on all registered corporate bonds 15 minutes after trades occur. The public disclosure meant bond dealers no longer had better price data than clients, and profit margins in the business shrank by more than 50 percent, according to a Bloomberg News review of trades and a study published by the Rochester, New York-based Journal of Financial Economics. Sanford C. Bernstein & Co. analyst Brad Hintz estimates that Wall Street revenue from trading fixed-income, commodities and currency swaps in the over-the-counter market may be reduced by 15 percent just by a move to clearinghouses. Forcing trades onto exchanges would cut revenue further.
Obama’s plan deals another blow to banks. It aims to discourage them and their customers from using non-standard, or customized, derivatives that can’t be processed by a clearinghouse or traded on an exchange by requiring that parties to such trades hold more capital to protect themselves against losses. The plan would also require they put up more money, known as margin, to insure they make good on the trades. Both changes would impose added costs on banks and some customers.
Regulators would get to see all of the trades in the market and the positions held by each of the participants, while the public would get data on trading volumes and open positions for the market as a whole, helping to reduce secrecy. The plan also seeks to limit sales of derivatives to individuals and small municipalities to make sure unsophisticated investors don’t get talked into contracts they don’t understand. While the proposed Obama legislation goes further than some banks expected, it was derived from a broader plan released in June that the industry had already helped influence, said Lauren Teigland-Hunt, managing partner of Teigland-Hunt LLP, a New York law firm that represents hedge funds and institutional investors in the derivatives market.
"They did their homework, they didn’t want to roll out something stupid," Teigland-Hunt said of the administration. "Once they did that, they said, ‘We’re going to do this legislation. We’re not going to have it written for us.’" The new, more detailed proposals are "a starting point," she said. "The industry will have an opportunity to weigh in here, and will weigh in here." The Obama proposals don’t go as far as some people have urged.
Hedge fund billionaire George Soros and Berkshire Hathaway Inc. Vice Chairman Charles Munger are among investors who have called for limits on the use of credit-default swaps. Soros wrote in a March 24 Wall Street Journal column that regulators should ban so-called naked swaps, in which the buyer isn’t protecting an existing investment. Two days later Treasury Secretary Timothy Geithner dismissed such an idea before the House Financial Services Committee, telling members that "my own sense is that banning naked swaps is not necessary and wouldn’t help fundamentally."
Janet Tavakoli, founder and president of Tavakoli Structured Finance Inc. in Chicago, said in an interview that derivatives have allowed banks to camouflage risk. "There has been massive widespread abuse of over-the- counter derivatives, which have contributed to transactions that people knew or should have known were overrated and overpriced at the time they came to market," said Tavakoli, who traded, structured and sold derivatives over more than two decades in the financial industry. Wall Street is accustomed to getting its way with derivatives legislation. The last major congressional action, in 2000, was designed to exempt over-the-counter derivatives from government oversight.
Lawyers for Wall Street’s largest banks initiated and shepherded the 2000 Commodity Futures Modernization Act through Congress because they were concerned the business was in jeopardy from reforms proposed by Brooksley Born, then chairman of the Commodity Futures Trading Commission, according to two lawyers involved in the process who asked not to be identified.
The market has swelled more than sixfold since then, according to industry data. "The Street does make money on this, so it tends to be pretty important to them," said Lindsey, the former Bear Stearns executive who now works as an adviser to hedge funds and institutional investors at New York-based Callcott Group LLC.
Analysts can only estimate how much revenue the big banks make from over-the-counter derivatives because the banks provide little disclosure in their quarterly 10-Q and 10-K filings, said Portales Partners’ Peabody. "I’ve been in the business for 30 years, and I read these 10-Qs and 10-Ks, and I still walk away not understanding how they’re conducting their business, how profitable it is," Peabody said.
In recent months, Wall Street firms have embarked on a lobbying campaign to influence the media and legislators. Goldman Sachs held an off-the-record seminar for reporters in April to explain how credit-default swaps work. Deutsche Bank has offered to put clients in touch with media to discuss concerns about increased capital and margin requirements. JPMorgan has mobilized some corporate clients, advising them that the proposed changes could hurt their ability to hedge against losses, according to a person familiar with the matter.
The banks "are saying everyone thinks we’re biased, so you have to go out there and talk about it," said Paul Zubulake, a senior analyst at Boston-based research and consulting firm Aite Group LLC. While banks say the need for customized contracts stems from customer demand, it’s often the case that Wall Street pushes the products on their clients, said Lindsey, the former Bear Stearns executive. "Some customers want bespoke derivatives, but often these products are sold, not bought," he said.
On Aug. 24, while lawmakers were on recess, the U.S. Chamber of Commerce organized a briefing for congressional staffers aimed at explaining how companies use derivatives to manage risk. The session, called "Derivatives 101," featured speakers from Cargill Inc. and Devon Energy Corp., so-called end-users that don’t represent banks, said Jason Matthews, who leads the group’s lobbying efforts on financial-services issues.
The organization called the briefing because "some proposals would make it very difficult for many companies, including manufacturers, energy companies and commercial real estate owners and developers to use over-the-counter derivatives to manage the risks of their day-to-day business," Matthews said in his e-mail invitation to the staffers. Wall Street firms and trade associations have held a series of meetings with staff members of the House Financial Services Committee to discuss derivatives trading, said Cory Strupp, who ran government relations for JPMorgan before joining SIFMA, the securities-industry group, last year.
"There’s been a big learning curve, and members and staff have gone a long way along that curve," said Strupp, a key lobbyist on derivatives. Strupp was on the team at JPMorgan a decade ago when the industry persuaded Congress to repeal the depression-era Glass-Steagall law that separated deposit-taking companies from investment banks. While the Obama proposals will have "a lot of influence," they won’t necessarily serve as a "base text" for legislation, Strupp said. Wall Street firms stand to benefit from staving off efforts for reform. One senior executive at a top-five derivatives firm, who declined to comment publicly, said that while he expects Congress will adopt some form of legislation, he thinks it will be a long time coming and that the degree of reform is in doubt.
One key issue is how the government and regulators define the word "standardized," which will determine what contracts need to be handled by clearinghouses and can be traded on exchanges. "The legislation would say that all standardized contracts need to be cleared, which begs the question what is standardized?" said Geoffrey Goldman, a partner who focuses on derivatives and structured products at law firm Shearman & Sterling in New York. "The bill doesn’t answer that question."
That question, which will determine how much change there is in the way the contracts are traded, may fall to regulators, including SEC chairman Mary Schapiro and Gary Gensler, chairman of the Commodity Futures Trading Commission, Goldman said. In interviews last week, both Schapiro and Gensler said there was a need to make the OTC derivatives market more transparent and less risky by moving more trading onto exchanges and clearinghouses.
"I feel passionately that we must bring the over-the- counter derivatives marketplace under regulation," said Gensler, a former Goldman Sachs banker who opposed giving the CFTC oversight of over-the-counter derivatives when he worked at the Treasury Department from 1997 to 2001. "Looking back, there’s no doubt that I think all of us should have done more to protect the American public knowing what we know now." Another debate is over which clearing platforms or exchanges should be used. JPMorgan, Goldman Sachs, Bank of America, Citigroup, Morgan Stanley and other banks will begin sharing profits next year from the credit-default swap clearinghouse ICE US Trust LLC.
While the banks have an interest in supporting that initiative, they’re expected to lobby to remove any requirements that the contracts be executed on exchanges because that would cut them out of making a profit on the trades, according to lawyers working for the banks. "The broker-dealers are happy to clear as much as they can because they do have a vested interest in the clearing companies that they’re clearing these products through," said Aite Group’s Zubulake. Chicago-based CME Group Inc., the world’s largest futures exchange, would be a logical place to clear interest-rate swaps because it already clears Eurodollar futures, which are often used as a hedge for rate swaps, Zubulake said. He doubts that will happen though. "They don’t want to clear an interest-rate swap through the CME because they don’t own the CME," Zubulake said.
Paul Gulberg, a colleague of Peabody’s at Portales Partners, said the most likely outcome is legislation requiring that trades be reported and, in some cases, cleared. He said it’s "not very likely" the law will force derivatives onto an exchange or an electronic facility. Health-care reform may make it unlikely any derivatives legislation will be enacted in the near future, Peabody said. For Wall Street, the longer it takes to get legislation passed the better. As stock market values and the economy improve, anger at banks is likely to subside.
"If we don’t pass it by early 2010, we get into the congressional election period where this is just too controversial an issue," Peabody said. "You’ve got too many different financial interests with opposing views that Congress just isn’t going to go out on a limb and pass it and put their re-election in jeopardy. We don’t think we’re going to see legislation until 2011."
91 comments:
Remind me how the 1,000,000 jobs a month lost call panned out again?
I have been out of the market since middle of 2008 thank you very much. I asked again have we lost 1,000,000 jobs in any month? No? lol. Now we are about to see a jobs report where to decline is down to 200K. By the middle of next year that number will be zero trending positive.
Anonymous said...
Remind me how the 1,000,000 jobs a month lost call panned out again?
Remind me again how prescient your observations have been regarding the market and the timing thereof.
Losers . . . thy name is "Anonymous"
So many losers,
So little time.
David you must be on something. Asked and answered. No need for me to respond to the same question again.
The Great Recession Q4 2007 - Q2 2010
RIP
Anonymous said...
Now we are about to see a jobs report where to decline is down to 200K. By the middle of next year that number will be zero trending positive.
Really?
Well, we will just have to check back again with you on your prescient forecasting, in a couple weeks then, won't we?
You really should have the bollocks to start your own blog and stick by your forecasts instead of hiding behind your pussy Anonymous facade.
Recent Concentration of Volume in Financial Stocks: Coordinated Capital Infusion? points to TAE
and
Bailout Profits and Ritholtz html is backwards
@ Anonymous 11:48 PM
I'm here to learn. Please sketch out the mechanism by which you think the economy will have largely healed itself by the 2nd quarter of 2010? I'll freely admit to being surprised that the unemployment numbers have improved as much as they have. Nevertheless, the fundamental dynamic of deflation coupled with debt contraction seems to be unaltered. Rather than throwing a jab and then leaving, it would be much more useful to have a discussion of the rationale that underlies your prediction.
Ed jobs and income man. Both are leveling off. Once they start trending back up, the recession is finished.
Re.: Study Says World's Stocks Controlled by Select Few
Rephrasing
These are some of the lead cows leading the herd.
jal
"Bigelow said...
Recent Concentration of Volume in Financial Stocks: Coordinated Capital Infusion? points to TAE and Bailout Profits and Ritholtz html is backwards"
Prove it.
@ Anonymous 12:33 AM
Anonymous said:
"Ed jobs and income man. Both are leveling off. Once they start trending back up, the recession is finished."
My reply:
Who will supply the credit to create jobs and increase incomes?
On this question, Ilargi's summary appears to provide the answer. The current decrease in the rate of job loss stems from the government shifting money from its left pocket (future taxation) to its right pocket (current spending). How can the government afford to continue this activity for the years that would be required to reverse the job and income losses? Wouldn't that level of borrowing precipitate a bond market dislocation? Even if the government could borrow enough to reverse the job losses, wouldn't the tax increases and/or spending cuts to pay for all the borrowing simply tip the system right back into a crisis?
Help me to see what you see.
"It’s not at all clear that the economy is out of the woods yet," said Mihir Worah, who invests the $14 billion Real Return Fund for Newport Beach, California Pacific Investment Management Co. "We still have to see convincing signs that the consumer can survive once the government stimulus is taken away, and we are not convinced of that."
In other words, minus the fly and the ointment, things are almost looking better than dire.
It’s quite amazing to read the projections of an upward economic sprit while the patient is still attached to a life support machine. And a very expensive one at that.
Aesthete
I'm the anonymous poster from yesterday who pointed out that zero and one hundred percent are the realm of zealots and extremists.
That being said I do not think the global economy is out of the woods or that the future looks rosy. The economic system of the world is increasingly based on fixes and patches to prolong the status quo and we are beginning to experience resouce limits and serious side effects due to use of fossil fuels.
My criticism is that taking extreme views when predicting the future and being 100 percent sure of all of them means the ones where I&S are mostly right are lost in the noise where they are (100% :-) ) wrong.
The other issue I see with I&S' predictions is time scale. You may be right on the trend and completely wrong on the timing. Calling the housing crash in 2005, for example, would still be considered a lucky guess by many. Prechter has been calling for deflation since the late 1990's IIRC. He may eventually be right but he sounds like the proverbial stopped clock that is right twice a day but wrong the other 1438 minutes.
Anon 11:48 must belong to the Bernanke school who thinks that debt does not matter.
From previous articles, I thought the Alt-A and Prime mortgages were next in line as the next potential mortgage crisis, with Commercial Real Estate looming.
So what happened?
@ Anon 1:31 AM
Anon said:
"My criticism is that taking extreme views when predicting the future.....The other issue I see with I&S' predictions is time scale. You may be right on the trend and completely wrong on the timing."
----------------------
My reply:
Without question, the future that I&S predict sounds pretty harsh relative to what one reads elsewhere in the blogosphere and certainly the MSM. Nevertheless, both I&S have clearly articulated the facts upon which their extrapolations are based. You haven't identified any data that supports your vision for a future in which we muddle along for years.
Does negligent or mercenary add anything to the mix?
MMN, scandia, and Stoneleigh
I appreciate all of your comments and you are very close to the mark that I am aiming for. The word that I want to use, and now bear with me, is conspiracy in the sense used here: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” -Adam Smith
Or in the legal sense. From Wikipedia Conspiracy to commit a crime:
In the criminal law, a conspiracy is an agreement between two or more persons to break the law at some time in the future.
The problem with that word is that our society has an allergy to it in the Adam Smith/Legal sense and any mention of the word is assumed to refer to some highly improbable and convoluted malevolent secret society. Again, from Wikipedia conspiracy theory:
Conspiracy theory is a term that originally was a neutral descriptor for any conspiracy claim. However, it has come to almost exclusively refer to any theory which explains a historical or current event as the result of a secret plot by usually powerful conspirators, such as a "secret team" or "shadow government", rather than broad social forces and large structures of human collectivities.
Since the word that most accurately describes the circumstances I would like to convey for a theory of broad social forces is already taken and as damaging to one's credibility to use as wearing a tinfoil hat to a seminar what word or phrase should I use to replace it?
For those of you that missed it, here is the context I need to use that word in:
I had an idea and I wanted some feedback on it. I finally started graduate school for economics and I was musing about Adam Smith's invisible hand, not the hand every already knows about, the other hand.
So here is my theory of the invisible black hand: Businesses and politicians pursuing their own political self interests unintentionally create a global bad* almost as if they were guided by an invisible hand.
*bad, stupidity, cunning, conspiracy, or other?
The problem with word selection is that I need a word that meets these criteria: Intelligent (for the individuals involved), deliberately or willfully foolish or unwise (for the society), and while including the possibility of greed avoids any hint of malice (as that would imply conspiracy, which would imply tinfoil hats)
"You haven't identified any data that supports your vision for a future in which we muddle along for years."
Didn't make a prediction. Merely commented on the process.
Lerntariydyaidjit.
Sorry Ruben,
I suspect your comment was for me, and I deleted and reposted to change a few things.
What I would really like is a word that encompasses both negligent & mercenary. Something that on the level of say one banking lobbyist and one senator and is roughly equivalent to a conflict of interest or ethics violation. But when aggregating the effect from all banking lobbyists and all senators creates a boondoggle on the scale of cartoon super villainy.
Is there a word or phrase that would apply to both of these situations? Where one negligent senator and one lobbyist with mercenary sensibilities propose a single legislative change, and the compounding of multiple negligent senators and multiple lobbyists with mercenary sensibilities produce an endless string of boondoggles sufficient to create the second great depression. That would then fit back into this sentence.
Businesses and politicians pursuing their own political self interests unintentionally create a X almost as if they were guided by an invisible hand.
Ed Gorey:
The main data point that supports the vision of a future in which we muddle along for years is nothing less than the last eleven months, i.e. the bailout regime. The US government, indeed the governments of the world, are behind the financial system come hell or high water. They've been able to prop it up. Of course we know that these are "zombie" banks, but really what difference does it make to us, to regular people?
You point out the prospect of a bond market dislocation, and such an event is inevitable. The thing is though that if a bond market dislocation is the great fear, then one should prepare for inflation, not deflation.
I've learned a lot from I&S, but I'm starting to get a little wobbly on, for example, the question of whether to take out a mortgage to buy a house. Their analysis seems to have underestimated the lengths to which the Fed & Treasury would go to prop up their masters, and the sheer stupidity of the world population that allows them to do so.
Don't get me wrong: I really don't think I&S's vision of the future is unduly bleak. But on timing and the inflation/deflation question, I'm up in the air.
"Remind me how the 1,000,000 jobs a month lost call panned out again?"
Take the 500-700K job loses per month for most of the year. Add some of the positive job growth (birth/death) numbers that are plucked out of thin air, the reduced hours/pay of those who have kept their jobs, the delay (not the prevention) of job losses by taking on massive public debt, and so on, and 1 million per month is probably a reasonable estimate.
Or you could just believe BLS numbers and not bother thinking... you have plenty of company.
"I really don't think I&S's vision of the future is unduly bleak"
AND
"I've learned a lot from I&S, but I'm starting to get a little wobbly on, for example, the question of whether to take out a mortgage to buy a house."
:)
The optimists are out in full force today it seems. Wonderful :-) I encourage you all to buy stocks,houses,condos in Miami and get into debt for that great business idea you have. Go on, buy that Lexus,I know you want it! In the meantime the executives of the world's biggest companies are selling their stock at a ratio of 30.6 to 1. Please carry on being the debt slaves that you are and buy,buy,buy!
One funny aspect of the TARP profits is that TARP is actually just a trading account owned by the Treasury and there is no plan to put it into the general fund. I a hearing last month a very smooth talking Treasury flack explained some of it. Wish I could find a link.
First he said that only about half of the 700 billion was out there saving us. The rest was standing at the ready for whatever. A couple of congress critters shyly asked if they could have the money back, or at least the money paid back and the 'profits'. To spend on paying for other things. One actually asked if giving the money back was how the Treasury thought was written. What they should do or could do. This is the law congress wrote, nominally anyway, and voted for but they had to ask the Treasury flack what their law meant.
No said the Treasury flack. We are keeping it in the nice TARP account. End of story.
edit
One actually asked if giving the money back was how the Treasury thought THE LAW was written.
@Brendan
"I've learned a lot from I&S, but I'm starting to get a little wobbly on, for example, the question of whether to take out a mortgage to buy a house. Their analysis seems to have underestimated the lengths to which the Fed & Treasury would go to prop up their masters, and the sheer stupidity of the world population that allows them to do so."
From someone who just placed a major gamble last week shorting the S&P500, that is great news. Stoneleigh said that just before the cliff, almost everyone would be doubting her sanity. We are getting close.
The insider corporate officers are selling their own stock over buying at a 30:1 ratio. Maybe they know something the krill don't know.
Also, the bond dislocation will be deflationary IMO. If the USA is to stay in the world market, like buy some oil for example, it will then have to balance the budget. Raise taxes, steal the IRA's and pension funds, eliminate Medicare, Medicaid, and SS should go a long way to balancing the budget. Of course, beefing up NORTHCOM to chasten the krill would be a smaller increased expense, as well as all the dog kibble at the detention centers.
As the old bird said"30 to 1".That says it all.
The ones who KNOW are selling as fast as they can..
off to work
snuffy
"You point out the prospect of a bond market dislocation, and such an event is inevitable. The thing is though that if a bond market dislocation is the great fear, then one should prepare for inflation, not deflation."
Sorry bubba you get an F and were going to have to hold you back a year and maybe you should have paid atention in summer school.
NEW YORK, Sept 1 (Reuters) - Redbook Research on Tuesday released the following seasonally adjusted weekly data on U.S. chain store sales: Year-over-year: Week (w/e 8/29/09 vs year ago) -4.1 pct Year-over-year:Month (August 2009 vs August 2008) -4.3 pct Month-over-month: (August 2009 vs July 2009) -0.6 pct
http://tinyurl.com/nmf4xr
From Rick Ackerman's blog post today:
Treasury Default Not So Unthinkable
Although we can be certain Americans and their government owe far more than they will ever be able to repay, the question of how this debt eventually will be discharged is the economic conundrum of the day. Some think hyperinflation is the only way out, since it would allowing debtors to repay all that they owe with worthless bank notes that would be in copious supply. However, this is hardly a solution, since those on the receiving end - i.e. the lenders — would be ruined, as would the bond markets, banks and all other institutional conduits and agents of saving.
We’ve argued here that deflation will prevail, visiting pain on borrowers more or less in proportion to their sins. Lenders would wind up with the collateral, mainly in the form of residential real estate, but the advantage in this would probably be far less than what has been imagined by those who see bankers as conniving thieves out to steal the whole world’s tangible assets. In fact, the bankers would have to rent the homes back to those who had defaulted, saddling themselves with the politically unseemly problem of squeezing blood from a stone. Would they risk stirring up the mob, or would they instead settle up on relatively easy terms? We don’t think they’ll have much choice.
Read the rest at:
http://tinyurl.com/kmz8tq
If today's ISM comes in hot that will set the tempo for much of the rest of 09. ISM was a leading indicator on the way down, and it's been below 50 for quite some time now. An above 50 print and get out the way, we're going higher, perhaps much higher, and that will be sustained IMHO till the next ISM print.
ps, I still think the economy (financial/political systems) is/are toast in the long run, but the long run has a time frame of perhaps years.
ISM @ 52.9 BOOM!
Perusing the number--it looks like cash for klunkers pushed it over 50. A one time item. Not so bullish after all.
OUR Government was NOT set up to juice the economy, run car companies or create jobs. Our Government WAS set up to secure our borders, maintain a sound currency and give us the chance to enjoy life, liberty and pursue our happiness as we see fit not as some bureaucrat thinks we should. Our government has failed to provide us those basics for which it was established.. Tis a sad day, a sad day indeed. John
Thanks for posting the article on the Swiss banks kicking out their customers, Ilargi. It gave me more information about something that's happening in my own life.
We set up a Swiss account (not with UBS) several years ago to move our perfectly legal and taxes-paid-upon U.S. dollars to. (Easier to convert them OUT of U.S. dollars that way, amongst other things.) Even in 2004, I had lost faith in the future of the U.S. banking system.
A few months ago, we got a call from our gnome in Zurich informing us that we were going to get the bum's rush, unless we declared ourselves to be Australians. We did, which proved to be a useful dodge. Bought us some time.
It prevented the bank from liquidating all our positions when stocks and our European currencies were down, and the U.S. dollar was up. The proceeds from selling our assets low and buying dollars high would have been dumped in our lap with a cheque that would be like the proverbial white elephant. Our banker, who we kinda like, told us that many of his long-time American clients are angry at him because the bank screwed them like that.
I've been following the UBS story, so I knew the genesis of this. I could never figure out why our bank would be running scared, because it wasn't involved. Our gnome would only tell us that management had decided to go on a "witch hunt" (his term) and that sooner or later, ALL foreign clients might be given the heave-ho.
I understand it better now. It's like Stoneleigh points out how the centre will try to grab from the fringes. Citizens who stash their cash in a far-away country is pretty fringe. (Although our banker said exceptions were being made for U.S. citizens with more than $1 million in their accounts, and I notice that none of this disclosure applies to corporations. Rich people and businesses get a break, as usual.)
What is the world coming to when Swiss banks are saying "We don't want your money"? What are the Swiss going to do to get by -- base a country on skis and cheese? (Not that I really care -- f@ck those skeevers if they think they're too good to play with my cash.)
In a way they're doing us a favour, because this gives me more impetus to literally cash out, doing our one-family run on the bank. I have more faith in the bank of the mattress, the false wall, the carefully covered hole in the dirt, than I do even in Switzerland. Crazy as those latter options may be, they might be more secure than for-real banks.
@Anon 9:57.
Yeah, right. Look, even if somehow jobs magically started appearing such that we started putting 500,000 people back to work each month, where are the wages coming from?
Perhaps more credit is going to finance things? The banks are in no mood to lend, and with all of the foreclosures, there's going to be a lot of messed up credit scores for the next seven years. Credit is a limited option.
Offshoring is growing, and they are still bringing in tons of guest workers. The goal is to bring wages down. There's no movement anywhere to increase wages except in the finance industry.
But I don't see real unemployment coming down. When the tent cities start disappearing, then I'll believe it.
I think you've gotten a whiff of the Wall Street air. That's not healthy.
NEW YORK (Reuters) - U.S. consumers satisfaction with credit cards plummeted in 2009, driven by anger due to fees and higher interest rates, according to a J.D. Power and Associates poll released on Tuesday.
The poll showed around 20 percent of customers reported an increase in their interest rates since 2008, with the largest decline in satisfaction among revolvers, those card holders who carry a balance from month to month.
In addition, 18 percent of customers complained about various fees, up from 10 percent a year earlier.
http://tinyurl.com/lzwprw
snuffy said...
"As the old bird said"30 to 1".That says it all.
The ones who KNOW are selling as fast as they can.."
You beat me to it! I was getting ready to make the exact same comment.
The markets need confidence? And those who can ACTUALLY see the real books have NONE?
Gosh, what do you suppose that means? Particularly when all other statistics are visibly being cooked.
30 to 1 is utterly damning - and, please note, it's a REAL number from today and last week- not a projection into next year based on a one week quirk in some highly suspect measurement.
Ignore the trolls. Feeding them keeps them alive.
No Greg, I don't think these are trolls. There are plenty people who genuinely think what they say they do.
It's just that their views on ISM numbers are not shared by the markets, which are taking a beating so far. There's a complete sell-off going on in what I wrote above, the government owned firms, Fan, Fred, AIG etc. All down over 15% right now, as are yesterday's stars Lehman and Wamu. Citi loses 5%.
I see little confirmation of impending glory days from larger players. Insider selling is a serious affair, hedge funds bet against recovery, if you add those things up, it ain't pretty.
The ISM data are far too dependent on taxpayer money for my taste. That makes me nervous, certainly when taxpayers obviously have nothing left to donate but potential future revenues.
Another thing I noticed today is that existing home sales are up, but construction spending is down. What sort of message is that? Who buys an existing home without modifying it at least a little bit?
That last bit should read pending home sales, not existing.
El G said:
"Stoneleigh said that just before the cliff, almost everyone would be doubting her sanity. We are getting close."
My older son (who knows better) doubts my sanity. It ain't easy ...
I think most people will be in denial until they are shocked by losing their job and/or their money in the bank. Wasn't Noah mocked until the flood came?
Ilargi, et al....
Today's must read is Lee Adler's fantastic rant in the Wall Street Examiner. His analysis is almost exactly in line with that which Ilargi has laid out over the past months. Nice graphs included too. Here's one of my favorite parts,
"The fact is that the economy is not getting better. It is not healing. Nothing goes down in a straight line, especially when a government throws a couple trillion in debt at it. But those trillions are not endless. The kindness of strangers, namely foreign central banks who buy that debt, is not without limit. The time will come when the government will not be able to float more debt to pay off the existing debt, when the burden of paying back these wildly reckless bets will fall directly on the back of the US taxpayer.
We are facing a crisis much greater than any we have faced so far. The Fed will not continue to pump cash into the pockets of the Primary Dealers indefinitely as they have been doing since March. When that cash gusher stops, or even slows, the stock market will again collapse. It simply cannot be sustained at these levels without that subsidy."
I'm the ISM guy. Fade me. Sheesh! --I did say the number wasn't as bullish as it first appeared, however.
Still have GDP, earnings Q3, and NFP on deck. A moving target, them indices, still.
@ El G
I hope you give it good to golem sacks! Real, real good. Ride it all the way down.
@ Board
Sept. 1 (Bloomberg) -- Paul Tudor Jones, the billionaire hedge-fund manager who outperformed peers last year, is wagering that Goldman Sachs Group Inc. and Morgan Stanley got it wrong in declaring the start of an economic recovery.
Jones’s Tudor Investment Corp., Clarium Capital Management LLC and Horseman Capital Management Ltd. are taking a bearish stand as U.S. stock and bond prices rise, saying that record government spending may be forestalling another slowdown and market selloff. The firms oversee a combined $15 billion in so- called macro funds, which seek to profit from economic trends by trading stocks, bonds, currencies and commodities.
“If we have a recovery at all, it isn’t sustainable,” Kevin Harrington, managing director at Clarium, said in an interview at the firm’s New York offices. “This is more likely a ski-jump recession, with short-term stimulus creating a bump that will ultimately lead to a more precipitous decline later.”
Paul Tudor Jones is the legendary trader featured in the rare PBS docu-movie Trader.
Ahimsa - The real shock will come will credit cards are not allowed to buy any more stuff.
Bukko_in_Australia said...
A few months ago, we got a call from our gnome in Zurich informing us that we were going to get the bum's rush, unless we declared ourselves to be Australians. ...
As i understand it, this is all sequels from our friend Heinrich Kieber who defected from the Liechtenstein bank with a few CD's under his arm in 2002.
Mellow
Bluebird,
True, true. Thank you. I guess I was subconsciously thinking of my son who is not in debt.
9/1/09 @ 1:13 PM:
DJI: -192.33 (2.03%)
Yup, looks like wine & roses to me.
Look for the PPT to start pumping the market with narco-money from the Caymans around 2 PM or so. I'm guessing today's goal is limiting the DJI drop to < -100 and keeping the S&P 500 above 1000.
If you have a Chase credit card like I did and you realize by using it you were supporting JPMorgan-Chase, you should close the account and go find yourself a nice credit union card.
Bloomberg news - bulk shipping rates to drop 50%
http://internationalshippingnews.blogspot.com/
"Aug. 31 (Bloomberg) -- Just as global trade starts to recover, the shipping market is crashing for the second time in a year as China reduces raw-material imports and record numbers of new vessels set sail."
Anchors Aweigh
"If you have a Chase credit card like I did and you realize by using it you were supporting JPMorgan-Chase, you should close the account and go find yourself a nice credit union card.
September 1, 2009 1:21 PM "
When I log on to my credit union CC website I see a Bank of America logo.
(also, apparently I can't use my card in cuba and a few other places?)
"I hope you give IT good to golem sacks!"
I thought we were giving it to them? Oh, sorry, I was thinking of a different IT.
VK
I sort of see myself as Slim Pickens, riding that H-Bomb down, whoopping, and waving my 10 gallon hat as in the final scene of Dr. Strangelove.
3rd Coast
What I wrote yesterday is meant only to reflect on the USVI and not the West Indies Caribbean culture in general.
I have had a non-borrowing account at Scotia for about 8 years. I went to put in a change of address today. My new address is my son's in NYC. He will open everything, and the urgent stuff he will scan and send to me as jpg attachments. They wouldn't let me change my address unless I could prove it was valid. I said I couldn't because I hadn't moved there yet and that it is my son's address. So they said I could get a notarized letter from my son. I said that I wasn't getting no steeenking notarized letter from my son. But I had signed my son up to the account a couple of months ago, so I told them to just send the statements to the secondary party, i.e. my son. That worked.
I told the Scotia rep that I just opened a brand new checking account and SDB with Chase in Ft. Lauderdale and I didn't need no steenking proof of address, just my passport and drivers license, and how happy I was was to be leaving the American Paradise. She said things have gotten bad since 9-11. I said I didn't blow up no buildings - why make my life hard. Then I told her that Ben Franklin said that he who choses security over freedom will wind up with neither. I said Ben Franklin was a great American, as can be told by the fact that he has his pictures on all the hundred dollar bills that the drug traffickers launder their money with. She look at me like I was speaking Kurdish.
@3rd Coast
"Look for the PPT to start pumping the market with narco-money from the Caymans around 2 PM or so. I'm guessing today's goal is limiting the DJI drop to < -100 and keeping the S&P 500 above 1000."
That can't be true. Isn't the PPT part of the govmint. Then how could they have narco dollars? Next thing you know you will be talking about the CIA flying in crack from Central America to Hot Springs Arkansas and flying back automatic weapons. Jeez. No telling what some people might believe.
Mexican Health Care
http://www.usatoday.com/news/world/2009-08-31-mexico-health-care_N.htm
OK. I'll leave the door open and the light on.
@ el gall:
I'm the sort of person who believes that the most important outcome of Iran-Contra was tightened maintenance schedules and more experienced techs at Air America.
;)
There is a secret song
at the centre of the Fed,
and its sound is like an echo
in the bottomless pit.
Who is the One who is Money?
OK, I'll bite; isn't North Dakota the only state with a state owned bank. I don't know her name, but she blogged about the benefits.
Pops, too lazy
A few important indicators the government didn't make up...
“Misery loves company, eh? Online dating service Match.com notices a pattern in its site activity during tough times. The fourth quarter of 2008 was its busiest in seven years (the site has been around since 1995). Match had a similar surge in late 2001, right after 9/11.
The company believes people are looking for someone with whom they can forget about money troubles—or share the pain. When the Dow Jones industrial average dropped to a five-year low last November, Match.com had its second-busiest weekend of the year.”
10 Quirky Economic Indicators
“On Bloomberg’s Nov. 25 “In Focus,” Bloomberg News correspondent Su Keenan showed that cocoa commodities tend to do better in tough economic times
“If you’ve been craving chocolate lately, you may not be alone,” Su Keenan said. “Analysts say worries about jobs and the recession have people desiring a little something sweet – like a Hershey’s kiss. And that can boost sales of candy bars and the cocoa that goes into making them.”
And according to Keenan, the shifts in the unemployment rate are tied to shifts in the price of cocoa commodities. “Over the past decade, cocoa prices and the unemployment rate have gone hand and hand,” she said.”
Bloomberg: Chocolate's the Cure for Economic Woes
““DURING a recession, laxatives go up, because people are under tremendous stress, and holding themselves back,” said Mr. Shapiro, now chief executive of SAGE, a Chicago-based consulting firm. “During a boom, deodorant sales go up, because people are out dancing around. When people have less money, they buy more of the things that have less water in them, things that are not so perishable. Instead of lettuce and steak and fruit, it’s rice and beans and grain and pasta. Except this time the price of pasta’s so high that it’s beans and rice.””
A Hemline Index, Updated
“But the men's underwear index -- or, conveniently, MUI -- may also have a silver lining. Mintel predicts that next year, men's underwear sales will fall by 0.5 percent, and as with many economic indicators, a slowing of a decline can be welcomed as a step in the right direction. Retailers are reporting encouraging signs in the men's underwear department. Sears spokeswoman Amy Dimond said stores are beginning to see more sales. At Target, spokeswoman Jana O'Leary said sales of men's underwear have been stronger over the past two months and multi-pair packs are moving.”
More Indicators to Keep an Eye On
“The indicator I prefer is the Hot Waitress Index: The hotter the waitresses, the weaker the economy. In flush times, there is a robust market for hotness. Selling everything from condos to premium vodka is enhanced by proximity to pretty young people (of both sexes) who get paid for providing this service. That leaves more-punishing work, like waiting tables, to those with less striking genetic gifts. But not anymore.”
Hot Waitress Economic Index
“Motion Detectors: So this is pretty predictable on one level. More and more businesses are installing motion detectors to cut energy costs – rooms darken when no one is around. But this can have unintended consequences. Was talking to a friend at a leading business magazine who was visiting the CEO of a major US corporation. Apparently the executive suite was pretty empty when he visited with lots of vacant cubicles. As he was talking with the CEO, who was insisting that business was picking up, the floor outside his office kept going dark.”
Fringe Economic Indicators (Part II)
El G.
"OK. I'll leave the door open and the light on."
Just what I thought when reading that. But then I wondered: What light?
Frank A - Thanks for the interesting Adler rant link.
I think the pebble of people in the know about this criminal system are growing into a rock, and then a millstone. In the end it will be hung around their neck!
Unemployment stats can be very tricky. I'm sure most of the people here are familiar with the work of John Williams of shadow stats. Below is an article in which he discusses that according to one very reasonable measure, unemployment is at 20.6%.
http://www.usnews.com/articles/business/economy/2009/08/27/is-unemployment-the-worst-since-the-great-depression.html?ref=patrick.net
Here’s another interesting statistic:
The average human has one breast and one testicle. ~Des McHale
Stoneleigh --
I know you've written about the long-term potential danger in Treasuries. I was wonder what your thoughts are on the following article:
http://www.econlib.org/library/Columns/y2009/Hummeltbills.html#
Coy Ote from yesterday
Thanks for the Chris Martenson "Crash Course" link. Much less depth than TAE, but it's a powerful introduction that may be more readily digested by many newcomers.
I recommend it as a "jump start" to anyone beginning to suspect that "something is amiss!"
Here 'tis again: http://tinyurl.com/5gg38r
Well, if finally happened to me. Today Chase called to say they were lowering my credit limit because they thought my outstanding balances on 2 of their cards and 1 other were too high... which is a load of crap. I use my cards mainly on projects and have for years. They just want to lower the limit - no biggie. But what really got me were the questions about my recent purchases, like what were they for, including some at another bank! After railing on him, he said I didn't have to answer the questions (which I don't recall him saying in the beginning). To which I said I wasn't answering any more. He ended by saying something about a free credit report... which I almost laughed at because I have great credit. Poor fella, hired by da' man to do his bid'ness.
This is it people. The ugly head of the beast is getting ready to strike... call it what you will - shock & awe, whatever - there are millions who will roll over and do as they are told. Not me... I started my disconnect by closing accounts (like Citi, Wells Fargo) and will continue with Chase. I lived a good third of my life without credit or accounts... looking forward to the last third being like the first!
BEN BERNANKE - MILTON FRIEDMAN
http://www.reason.com/news/show/135804.html
There is a 12 part professional documentary about the collapse of Argentina on YouTube. If you have the time and interest, it is worth a view.
Shades of our future?
http://www.youtube.com/watch?v=whVSw5X2pVU&NR=1
@Bukko 10:08 AM
Had the same experience with a Cantonal Bank where we established an acct in 2006. In December they quit communication and said the acct would be closed by June 30 unless we traveled there in person and signed a declaration the acct was not for purposes of tax evasion (we had already declared it to the Treasury Dept.)
Our interest was to place some assets outside the shakey US system and also the benefits of easy currency conversion.
I would think business practices will probably become somewhat more user-friendly, but who knows.
We don't like lumpy matresses if there are alternatives.
Bukko, Anon 8:35,
I would expect a lot of effort being put into the hunt for funds deposited abroad, by just about any western country. It's one of the few sources of real money (as opposed to credit) left to go after, rumored, as I posted this week, to add up to as much as $1 trillion.
The Nikkei slide is on! 3% so far.
Stoneleigh and Ilagari,
Do you have an "About" page? I ask because I've been reading for many months now, and I'm curious who the two of you are and your relationship to one another and what you do for a living. It took awhile to figure out that one of you is a "he" and Stoneleigh is the "she" and that you are definitely not right wingers (ironically, I am and somehow agree with most everything you write). But that's about all I know about ya'll. Do you care to expound or do you prefer to keep an anonymous internet persona?
Thanks,
Country Mouse
The Anon losers don't want to be called out, like I have from time to time... :)
At least, when I'm wrong, I can truly say that I was shocked to be, and saw no reason that what I said would be...
I think it's just a case of them trying to keep the "old normal" afloat long enough to steal whatever they can out of it before everything goes poof.
(Sounds like an anime company I used to be a fan of that decided to shuffle it's debts on the backs of a "divorced" financial lifeline they didn't care for...)
Anon 2355: Let me fix your post for you:
I have been out of the market since middle of 2008 thank you very much. I asked again have we lost 1,000,000 jobs in any month? No? lol. Now we are about to see a fictional jobs report where to decline is down to 200K. By the middle of next year that fictional number will be zero trending positive.
Fixed. If they don't keep lying their asses off, the riots will start around the Christmas shopping season when too many people have no hope of getting what they want for Christmas with any degree of legitimacy.
Anon shill: The only way the jobs number and income can stabilize is a shrinking denominator -- and that means population, idiot...
Ilargi is a probably a dutch giant from Amsterdam, given that dutch men are so tall. He also happens to be a blue eyed blonde with a history in finance and energy. He seems to be a real bookworm given that he took a month of from work to read Jay Hanson's site! He plays football/exercises (soccer) regularly and thinks Ronaldo is overpaid. Also enjoys the odd wine glass with 70's and 80's music. He's probably a doctorate in something.
Stoneleigh is probably a brunette from Coventry, England, 3 kids, has two degrees in Law and Biology(?) from Warwick University, but she happens to know a lot about everything including constitutional law, renewables (her work field), psychology, herding, grids, farming and exercise. She happens to have a 6 pack and is as fit as an elite SAS soldier. She also went to school with another famous bear - Eric Sprott and some Ice Hockey captain.
But that's what they tell us, I'd like to think that they are from a nearby galaxy and are guiding us humans from above. How else does one explain Stoneleigh's spock like abilities and Ilargi's constant energy - he can recharge himself like Superman, via the Sun! That is all we know of them...
C'est la vie!
:-)
Rural rodent,
"Do you care to expound or do you prefer to keep an anonymous internet persona?"
We're good this way for now.
Ed_Gorey: There's only one way this Anonymous shill can be correct: Infinite balance sheet, with no real repayment _ever_.
What you are seeing now is a transfer of all this debt malarkey from the derivatives market to the bond market. Once a bond dislocation hits...
I mean, the amount of reduction in tax revenues _now_ indicates that we might already be past the point (today -- and not with the promised outlays, as some like to do) for the servicing of the national debt.
I&S do not reveal themselves because they have no credentials. They are bloggers. Two out of a million.
If their message is being shared as a public service, it does no good here in this dark corner of the internet universe where this small choir gets preached to on a daily basis.
I say go public and get this information out there in the press.
Media outlets do not publish people with make believe names. They assume that their message is also make believe.
Just my $.02.
team10tim:
How about 'apparent conspiracy'? Still uses the dreaded word, but hedges it. As in:
Individual businesses and politicians pursuing their own political self interests unintentionally create an apparent conspiracy, almost as if they were guided by an invisible hand.
I added individual for clarity, I would also be inclined to include the word ignorant (or ignorance) in there somehow too, to show that it isn't malicious in intent, but I can't think of how to phrase it.
All,
Someone was asking for a compilation of Stoneleigh's comments the other day. I have two collections that are publicly available on a SkyDrive account at the following location:
http://cid-c26388ef19e98530.skydrive.live.com/browse.aspx/.Public
I did not compile these comments. I am just making them available. CA and South Florida can be thanked for compiling the comments.
I did edit and cleanup one of the documents, but the other is basically in the format that was provided to me by El G. When I get some time, I may be able to get it into a format consistent with the other document.
Regards,
Robb
Thanks a million Robb for the link.
Somehow, the files download as ".doc_" . I changed the file name to regular ".doc" and they opened up just fine.
Re: Swiss banks holding "real" money vs. "credit money". I hadn't thought about it that way, but what we, and no doubt most other people doing buisness in Switzerland have, is hard money, not some illusory fractional creation.
In our case, it represents profits from selling a house at the peak of the bubble, (saw that ending, thanks to "The Economist" magazine), retirement accounts that were cashed out in lump sums (OUCH! to the pre-payment penalties and maximum tax rates on that), inheritances and other "real" money that was actually on deposit. (As opposed to future promises to pay, which is all that retirement funds are.)
So whatever we put in a Swiss vault was real enough that it could be leveraged up 10:1 under a conservative FRB system, or more likely, used to cover 10X that much in bad bets. But only if it's snatched back to the U.S. We didn't have all that much (and no, I don't want to invest it in your sure-fire scheme, thank you very much) but I can now see why it would be desireable to U.S. bankmaggots.
FWIW, for anyone thinking how great it would be to have a Swiss bank account, it's not immensely superior. Whilst our banker is a cultured, well-traveled, multi-lingual fellow, (as are the other bank staff we've dealt with) he's not a flaming financial genius. His job is to sell investment vehicles offered by the bank. It's what bank employees do, after all.
He doesn't share the "Oh my God, the system could collapse!" view my wife and I have. Guys like him can't, by the very nature of their job. If they didn't philosophically believe in the virtues of the banking system, they'd be bad candidates to work there, eh?
Our guy finds us mildly amusing with our desire to buy a little more gold from time to time. (Banksters dislike gold buyers, because any money we stick into metals is money the bank cannot play around with in their investment vehicles. It becomes "mattress money.")
The Swiss, at least the ones who deal with punters at our level, have no magic formula for spinning small piles of cash into huge ones. They've got good information, because their fingers are in so many pies, and they offer more flexibility than U.S. banks. You want to buy some yen, or get into a fund that dabbles in the Indian market? They can do that easier than a U.S. bank, and with less risk that they're going to rip you off.
But I have not found them to be an all-wise pot of gold. And the current freeze-out only reinforces my opinion. So if you've never had a Swiss bank account, don't kick yourself over it.
Went ahead and uploaded both documents on Scribd for easy(er) web access (though downloading them isn't a bad idea). Thanks again to El G, South Florida, and Robb.
Link #1- Jan. 2008 to Nov. 2008
Link #2- Oct. 2008 to Jun. 2009
New post up.
In my college Econ classes they would refer to a criminal conspiracy among bidnesspeople as "formal collusive oligopoly." How long would it take for the new term FCO to become tainted with tinfoil by the demagogues?
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