Thanksgiving turkey for President Warren G. Harding arrives at the White House.
Ilargi: Everybody thinks the dollar will fall. Everybody thinks gold will rise. Everybody thinks China is the next major world power. Everybody thinks the markets will climb well into the new year.
Every bank seems to need more money. Both in the US and in Europe, the banking systems need tens of billions of dollars in additional capital. And soon. China is reining in its banks, which will also need to raise billions more after spending 2009 in a wild government ordered lending spree. Japanese banks have lived in the twilight zone longest of all. The IMF estimates there's at least another $1 trillion in losses to be absorbed. Standard and Poor's simply says most large banks are unsafe. Too much risk.
But risk happens to be how everybody's trying to make up for their previously incurred losses. Which made banks and funds invest in the likes of Dubai, now fast turning into a downside risk of $100-150 billion. Credit Suisse estimates a $40 billion Dubai exposure for European banks, but I'm guessing most Dubai bonds may well reside with for instance pension funds.
Every government seems to need money too. More than they can print and live to tell about. It's not just the US. Société Générale's Glenn Maguire predicts China's trade surplus will turn into a deficit perhaps as early as next year. That would sure shift the rules of the game a notch, wouldn't it? It would rob the US of its sugar daddy and give China some real solid ground to boost the US dollar. Just got to find a way to explain it to the billion or so servants back home who will be thrown back a few decades and forced to return to lands now so polluted they won’t return to their former state for decades, if ever.
The Case-Shiller index says US home prices fell 9.4% (some say 8.9%, same difference) in the past 12 months. Doesn't even seem that bad at first glance, does it? Not even 10%. Well, how about you realize that just about anybody in the US has been able to purchase a home with an mortgage, 3.5% down, $8000 tax credit towards that down payment, all courtesy of the government, and prices still came down 9.4%? Doesn't make it look any better, does it? Makes one wonder where they would have been in a free market system. Then again, that's something Bulgarians never asked themselves either back in the day.
What would make home prices stabilize, or even rise? Employment is and will remain the number one factor. The connection between jobs and foreclosures has been well documented, and jobless people don't buy many homes either, not even when the administration serves them on a silver platter. There may be stats and graphs of falling inventory, but they are worthless until we see a full and open report across the country of both foreclosures in the pipeline and already foreclosed homes that don't show up in any stats. There are an estimated 7 million of those. 10.7 million more households are underwater.
One party or another will have to be the first to get out of this housing racket, and it won't be the banks. It’ll be either the US government, represented by Fannie Mae, Freddie Mac, the FHA and Ginnie Mae, or it will be the Federal Reserve, which has bought up $1 trillion plus in mortgage backed securities (hard to keep score) just in the past year, and has lost either $100 billion on that investment if you just follow home prices, or much more than that if you look at, among others, mortgage resets and default percentages. Like the 8% of loans modified in 2009, or the 38.8% of those modified one year ago, that have already re-defaulted. The Fed holds lots of securities based on those loans.
The racket has to stop. It will when the losses become overwhelming. Judging from what's being lost right now, that moment shouldn't be far off. Obama needs to reserve money for employment programs. He doesn't have that money. He plans to establish a bipartisan panel to squash the deficit. But squash it with what? Higher taxes? Not very likely, at least not on the federal level; state- and local taxes may have to rise more than enough. Spending cuts then? Cut what where? Obama will need to spend much more, not less, on jobs. Moving out of the mortgage field may be the best -or even only- choice left. Still, it has a huge drawback: it would mean bankruptcy for thousands of banks and millions of home-owners, and potential all-out economic mayhem.
No matter how you look at it, when it comes to either spending more or cutting more, there doesn't seem to be a way out with odds that any bookie would favor. Or is there? Maybe we will see a first glimpse of a third option in Obama's address to the nation December 1 from West Point Academy. The President will announce next Tuesday that he’ll send -probably- between 30,000 to 40,000 extra troops to Afghanistan, at $1 million per soldier. What he should also elaborate on, and what was told the media in preparation for the speech, is that the White House has now pushed the decision to be out of Afghanistan to 2017. In other words, beyond "Obama time", even if he were to seek and get a second term.
Maybe that's the line of thinking on the economy as well, to leave the hard decisions for the next guy. It would fit the pattern Obama has set until now. He hasn't stood up to anyone really so far. He's watched from the sidelines on his own watch as the rich got richer and the poor got more destitute. He's chosen the easy way out. When it comes to Wall Street and the economy, I find it hard to name even one single thing that Obama has done that Bush 43 wouldn't have done exactly the same. And that is a disconcerting realization, even after a whole year of same old same old.
Moreover, if that's the idea, to avoid the hard decisions, it wouldn't work anyway. The US will be called to -financial- order even long before Obama's first term is done. But then there's of course always the possibility lingering in the background that it's not a matter of not making the hard decisions now. Maybe those decisions were made long ago, by the people who paid to get Obama where he is today. I have no doubt we’ll know by Thanksgiving next year.
FDR recognized how much certain special interests hated him, and famously proclaimed he welcomed their antagonism. Obama is no FDR.
Happy turkey.
Are Dollar Bears Too Bullish?
by Randall W. Forsyth
It would be so simple to follow the playbook of the inflationary 1970s. Today's deflationary threat is more dangerous, however.
Gold set another record Monday while the Dow Jones Industrial Average gained 1% to a 13-month high, supposedly based on the cheery thought that the U.S. dollar would inevitably collapse to zero. Investors faced a barrage of bearish articles about America's fiscal plight, from the front page of the New York Times warning about "Wave of Debt Payments Facing U.S. Government" to the Economist's cover story, "Dealing with America's Fiscal Hole" to the Financial Times posing the question, "Is Sovereign Debt the New Subprime?"
No wonder they wanted to flee the dollar. As Dennis Gartman observed in his Monday morning missive: "It is almost as if one can hear capital saying aloud, 'Let me outta here; get me some gold; or get me some euros, at least get me some blue-chip stocks. Get me anything, but get me out.'" With the U.S. Dollar Index falling another 0.7%, to 75.10, gold continued its seemingly unstoppable advance to another peak. The active December futures contract on the Comex settled up $17.90, at $1,164.70 an ounce after trading at almost $1,175. And as if to underscore the public's interest in the latest gold rush, the five most-read stories on Marketwatch.com were all about gold.
There's no disputing that America's budget mess poses a long-term threat to the dollar, more so than the Federal Reserve's low-interest-rate policies. That was pointed out here just last week . So far, however, there seems no shortage of buyers for the U.S. government's debt, including Monday's record auction of $44 billion of two-year notes, which will be followed $42 billion of five-year notes Wednesday and $32 billion of seven-year notes.
That would contradict the notion of an imminent rerun of That ''Seventies Show, featuring soaring interest rates and inflation. That is, after all, what sent gold to its then-record of $850 in January 1980, the final year of that benighted decade. (And by the way, notwithstanding all the recently published assessments of this decade, it doesn't end until Dec. 31, 2010.) Would that we could have that rerun? We'd all have the playbook on how to deal with those travails. Don't buy any Pintos, avoid polyester and burn disco records. Just buy gold, dump bonds, borrow and borrow and buy the biggest house you can afford. Maybe the last one didn't turn out so well.
Indeed, Albert Edwards, Societe Generale's global strategist, sees the risks running quite the opposite of the consensus, which has a global recovery on track with a steadily falling dollar. Instead, he looks for a double-dip back into recession leading to a surging greenback, with a collapse of "the China economic bubble" resulting in a double whammy for commodity prices. Writing in his latest Global Strategy Letter, Edwards points to signs of doubts about the U.S. economic recovery, from the labor market remaining "very sick" with the uptick in unemployment rate over 10% plus the Conference Board's consumer finding showing jobs getting still harder to get. Meanwhile, the ECRI Leading Indicator, which trumpeted recovery earlier in the year, has fallen for five straight weeks.
But what's way out of the consensus is the call for China's massive trade surplus to turn to deficit by Societe Generale's Asian economist, Glenn Maguire, who Edwards writes has been "very right on China this year." "This is a mega-call and will have major implications for the global financial markets," Edwards declares. China no longer will be accumulating currency reserves at nearly the same pace, leaving less to recycle into U.S. Treasuries. The reduced capital inflow would also slow China's domestic monetary growth and real output, which track each other. Meanwhile, capital outflows from Japan, another source of global liquidity, could be hampered were there a sharp rise in its government bond yields.
A synchronized end to the Chinese and U.S. economic recoveries could play out in increased protectionist pressures, including competitive devaluations, Edwards continues. That could lead to a spike in the dollar as speculative carry trades are unwound, as happened to the yen in 2008. A rise in the dollar would pull up the renminbi, which "may be all too much for a beleaguered Chinese economy." Then, Edwards says, the U.S. goal of delinking of the RMB from the dollar would be accomplished -- with China devaluing rather than revaluing its currency higher. Edwards adds, "I am reassured that my views are not totally bananas when two of the deepest thinkers are also concerned about a Chinese economic crash."
Those include Edward Chancellor, who has written extensively about bubbles, including "The Devil Take the Hindmost: A History of Financial Speculation," and recently observed the Chinese economy shows symptoms of weakness similar to those after the Greenspan Fed reflated following the bursting of the tech bubble. Meanwhile, Jim Chanos, the famed short seller of Kynikos Associates, thinks he spies manipulated data about China's economy. Chanos, it should be remembered, sniffed out the phony accounting at Enron.
Indeed, there were hints the bubble in China was about to burst, or at least deflated, in the 3.5% plunge in the Shanghai Composite Tuesday. That came after on rumors that China's banks were ordered to raise more capital. Charles Dumas of Lombard Street Research writes in a note to clients this wasn't just a matter of an increased supply of shares, but a move almost certainly on orders of the government for banks to bolster their balance sheets following their lending spree earlier this year. Tightening of monetary policy is likely to follow as the boom produced by massive fiscal stimulus -- equal to 25% of gross domestic product--is generating inflation pressures.
The sort of deflationary crisis, resulting in competitive devaluations, protectionism and contracting world trade, recalls what happened in the 1930s, Edwards concludes. Despite politicians' solemn vows not repeat those blunders, "all I see are more and more protectionist measures being implemented, belying the soothing rhetoric." The 1930s were indeed very different from the 1970s. In the latter decade, you could just buy gold (though that was more difficult before today's exchange-traded funds) and let your cash earn double-digit yields. The falling dollar battered stocks and especially bonds back then. Now, cash yields absolute zero but stocks benefit from every drop in the dollar while global investors continue to buy Treasuries, seemingly undeterred by the greenback's steady slide.
But recall a year ago; the dollar soared like the yen with the unwinding of carry trades (which involve the borrowing in those low-yielding currencies) as stocks and other risk assets fell sharply. Such a rerun seems to be the one potential risk that seems ignored as gold gets bid giddily higher -- a significantly more painful deflationary squeeze than the inflationary surge they see. At the minimum, China's likely moves to cool its boom could portend outcomes quite different from the what the consensus expects. As Lombard Street's Dumas concludes, "With China's recovery as the leading force in the world recovery, this would mark the end of the stock market, and general risk asset, rebound from last winter's lows."
Dubai Starts to Untangle Dubai World Fallout
Dubai on Thursday started to untangle the $60 billion financial mess of its once prized Dubai World conglomerate by ring-fencing its profitable ports unit. DP World will be excluded from the debt standstill and restructuring of Dubai World and its subsidiaries, the ports operator said in a statement posted on the Nasdaq Dubai Web site. The company, the world's fourth-largest ports operator, is 77% owned by Dubai World, with the rest of its shares listed on Nasdaq Dubai. Its assets include Jebel Ali port, the Middle East's largest container terminal.
Government-owned Dubai World -- a conglomerate spanning real estate, ports and leisure interests -- appears in deep trouble as it struggles to deal with its debts and almost $60 billion of liabilities. Investors are concerned the company may default, sending the cost of insuring Dubai's sovereign debt skyrocketing. It now costs $570,000 to insure $10 million of Dubai sovereign debt against default for five-years, up from $440,000 at Wednesday's New York close, according to data provider CMA.
The impact of Dubai World's restructuring spilled into Asian markets Thursday. Spreads on Asian sukuk, or Islamic bonds, widened, eclipsing the broader market amid concern that Dubai World's real-estate unit Nakheel could default on a $3.52 billion bond due December. Fear of a default by Dubai helped push the dollar higher in Europe. The British pound was down at $1.6552 from $1.6722, on concern about the exposure of U.K. banks to Dubai World.
Moody's Investors Service and Standard & Poor's downgraded the debt of various Dubai government-related entities including DP World following the announcement of Dubai World's restructuring. Moody's downgraded the companies affected to junk. A spokesman for the Dubai Financial Support Fund, set up in response to the global economic downturn, declined to comment as did spokespeople for Dubai World and DP World. Dubai has already turned to neighboring Abu Dhabi to help plug a hole in its finances. The Abu Dhabi-based Central Bank of the United Arab Emirates bought $10 billion of its emergency bonds in February. Majority Abu Dhabi-owned National Bank of Abu Dhabi and Al Hilal Bank bought another $5 bilion of Dubai's debt earlier Wednesday.
DP World is considered the best asset within the Dubai World stable and the government may be seeking to protect it from creditors. The company made a $188 million profit in the first half and can fall back on a global network that extends across Africa, Asia and Europe. Dubai government pulled back from a plan to sell off part of DP World earlier this year possibly to regional private-equity fund Abraaj Capital to raise cash. Dubai World's biggest concerns are its troubled real-estate unit Nakheel and it's investment company Istithmar World. Nakheel, which borrowed heavily to build vast property projects including Palm shaped residential islands in the Persian Gulf, has suffered badly from a 50% fall in Dubai real-estate prices since last year.
Istithmar said in September it had laid off staff and was in talks about restructuring its debt. It has halted investments this year after struggling to eke out a return on deals such as the $942 million purchase of U.S. department store Barneys. Separating good assets from the less creditworthy within Dubai World could be complicated by outstanding debt with its subsidiaries. Nakheel loaned its parent Dubai World almost $3 billion last year before the full extent of its financial problems emerged, according to its earnings statement for 2008. The document shows that Nakheel had approximately $2.5 billion identified as "loans to a related party" still outstanding at the end of the year.
"It's too early to say if it is being broken up," said Marina Akopian, partner, HEXAM Capital, which manages about $440 million in emerging markets. "If this happens the sovereign support for the borrowers in the entire region will be in doubt. Also should they effectively default, it can become one of the biggest sovereign defaults since the Argentinean crisis." In June, Dubai World hired AlixPartners, the turnaround experts advising on the General Motors bankruptcy, to help it with an aggressive restructuring intended to save $800 million over the next three years.
Record Gold Cools Wedding Season Demand in India
Gold imports by India, the biggest buyer, slumped for the seventh month as jewelers and housewives shunned bullion because of record prices, a traders’ group said. Purchases so far this month totaled about 18 tons compared with 34 tons a year ago, said Suresh Hundia, president of the Bombay Bullion Association Ltd., citing preliminary data. Gold prices reached a record for a third time this week as a weaker dollar increased the metal’s appeal as an alternative investment and central banks from India and Sri Lanka purchased bullion as a hedge against the U.S. currency. There may be 1.2 million marriages in India between now and Dec. 12, Hundia said. “Demand in India is nil when it should have been at its peak because of marriages,” he said by phone.
December-delivery futures on the Multi Commodity Exchange of India climbed to a record 17,868 rupees ($386) per 10 grams today and traded at 17,783 rupees at 6:40 p.m. local time. The price must drop to 16,000 rupees to lure buyers, Hundia said. Global gold consumption was 34 percent lower in the third quarter compared with a year ago, when investors bought bullion as a haven from the economic crisis, the World Gold Council said Nov. 19. It was 10 percent higher at 800.3 tons in the July-to- September period as Chinese demand reached 120.2 tons. Demand in India advanced 26 percent to 137.6 tons in the quarter ended September compared with the previous three months, while jewelry consumption climbed 27 percent to 111.6 tons from the second quarter, the council said.
Sales in the wedding season, which runs from September to January, may stay weak as buyers are “yet to digest” the 50 percent jump in prices in the past six months, Harmesh Arora, director of NIBR Bullion Ltd. and vice president of the bullion association, said in a phone interview. Bullion has gained 34 percent this year as investors seek a hedge against inflation and a weakening U.S. dollar. The price may drop to $1,120 an ounce and a breach of that support level may see gold heading to $1,088, he said. “A correction is round the corner and may start as early as next week,” Hundia said.
Gold for immediate delivery fell 0.7 percent to $1,183.15 an ounce at 6:41 p.m. Mumbai time. The metal, which moves inversely to the dollar, climbed as high as $1,195.13 after the dollar fell to a 15-month low. India’s central bank may add to its purchases of gold, the Financial Chronicle reported yesterday. The bank bought 200 tons for $6.7 billion from the International Monetary Fund.
US Durable Goods Orders Fall Off a Cliff
Durable goods orders declined 0.6% in October. The consensus expected orders to have risen 0.5%. To make matters worse, excluding transportation, orders declined 1.3%. The market may try to flip the data by stating that it was a purely statistical decline. Orders in September were heavily revised upward as orders rose a full percentage point more (2.0%) than originally expected. However, if the recovery is going to be sustainable, orders need to increase at a steady pace over the next several months.
Businesses had stated in their earnings reports that increased demand expectations were driving them to purchase new investment equipment. Immediately following the announcement, orders for nondefense capital goods excluding aircraft, a proxy for business investment in equipment and software, surged 2.6% in September. All of the gains in business investment were wiped out in October as orders for nondefense capital excluding aircraft fell 2.9%. The drop in business investment orders included an 8.0% decline in machinery orders and a 2.1% decline in computer and electronic products.
Motor vehicles, a sector that many economists had believed would lead the U.S. out of the recovery, continues to falter. After rebounding 1.5% in September, new orders reversed direction and declined 0.1% in October. The drop correlates well with the abrupt stoppage in the industrial production and assemblies data but goes against the strong increase in October sales. To further complicate matters, total manufacturing shipments declined 0.2% in October after rising 1.6% in September. Shipments of goods are accounted in the GDP report, not the orders data. Excluding transportation, shipments rose a steady 1.2%.
Most of the increase in shipments was in manufacturing inputs, including primary metals (3.6%) and fabricated metal products (0.5%). The increase in manufacturing inputs could mean that manufacturers are beginning to stockpile supplies and are readying themselves for an increase in production in the near term. However, the increase in production may still be weeks or even months away if durable good orders do not pick up significantly. Manufacturing inventories held steady with no growth after declining 1.2% in August. Unfilled orders fell 0.4% for the month.
2010 Will Be A Year Of Horrible Market Declines
Chart guru Robert Prechter was on Fast Money Monday, reiterating his comments about extreme declines. He states that bullishness has gone from 2% to 90% (though we're not sure where that comes from), and that volume and breadth are down. Interestingly, when he was asked about gold, he demurred and said he was "very, very bullish" on the dollar.
Initial Jobless Claims Drop 35,000 Seasonally Adjusted, Rise 68,080 Unadjusted
Seasonally-adjusted initital jobless claims fell 35,000 from last week to 466,000. Yet they rose 68,080 on an unadjusted basis. This basically means they rose less than normal for this time of year.
At 466,000 on a seasonally adjusted basis, the jobless claims are now below 500,000 for the first time since January, when they were 488,000. They are also at the lowest level since the week of September 13th, 2008 when they hit 459,000.
October new home sales gain on rise in South
U.S. new home sales rose 6.2% in October on strong results in the South, the Commerce Department estimated Wednesday. The rise in new-home sales to a seasonally adjusted annual rate of 430,000 was well above the 390,000 pace expected by economists surveyed by MarketWatch.
Sales rose 23.2% in the South. Sales fell 20% in the Midwest, and 5.1% in both the Northeast and the West. The pace of new-home sales in September was revised slightly higher to a level of 405,000. New-home sales are up 5.1% compared with a year ago. The supply of homes on the market fell to 239,000 in October, representing a 6.7-month supply. The median sales price in October hit $212,200, compared with $213,200 in the prior year.
Case-Shiller: Home Price Recovery Stumbles, Results Worse Than Expected
Home prices fell 9.4% in September, according to the widely-respected S&P/Case-Shiller housing index. Analysts had been looking for a 9.1% decline, so this is a bit worse than expected.
On a sequential basis, home prices rose .3%, again, a bit worse than the .8% analysts had been looking for. The market is now back to where it was in Fall 2003.
The housing market is creeping back, but at a pace disappointing to the bulls.
Speaking on CNBC S&P's David Blitzer said the report showed clear signs that the strong momentum seen over the summer is starting to crack.
Housing Bottom? "Not Even Close," Barry Ritholtz Says
A fifth-straight monthly gain for the Case-Shiller Index Tuesday and Monday's stronger-than-expected existing home sales report is giving renewed hope to the housing bulls. "Disregard them," says Barry Ritholtz, CEO of Fusion IQ, who notes the existing home sales number was juiced by sales of cheap condos and various government programs. Meanwhile, the Case-Shiller results were below expectations. We are "not even close" to a bottom in housing, says Ritholtz, who estimates national house prices remain 15-20% overvalued, based on the traditional metrics of: median income-to-median sales price, the cost of owning vs. renting, and housing stock as a percent of GDP.
"Until we start seeing a healthy housing market that can stand on its own, without government props, without distressed properties selling 60% off peak levels - that's how you know the bottom is in," says the blogger and Bailout Nation author. The likely best-case-scenario for housing is several years of sideways action for prices, wherein population growth and a firmer economy combine to sop up the still huge inventory of homes on the market.
"And that's if we're lucky," Ritholtz says, citing the lackluster environment for jobs and wages, as well as CoreLogic's analysis that 23% of all U.S. mortgage holders are under water, as reported in The WSJ. With so many Americans owing more money than their homes are worth, the recent rise in foreclosures and so-called jingle mail is "not nearly done," he warns. In sum, expect more homes for sale at distressed prices and more downward pressure on prices overall -- unless the "real" economy shows dramatic improvement, which Ritholtz doesn't see anytime soon, as discussed here.
Homebuyer Tax Credits Threaten the FHA
A few weeks ago, President Barack Obama signed legislation extending an $8,000 tax credit for first-time home buyers. The refundable tax credit, available even if a family has no taxable income, will enable many more buyers to close on a home. But it also could bankrupt the Federal Housing Administration (FHA) and, by doing so, damage an already weak housing market. The tax credit was put in place as part of the stimulus package signed into law earlier this year. Initially, it was available only to first-time buyers with a combined income of $150,000 or less ($75,000 for individuals). Approximately 40% of all first-time buyers used the credit in 2009, so extending it was strongly supported by real estate brokers, home builders and their congressional allies.
The extension the president signed makes the credit available to first-time buyers, but also to people who have owned a home for at least five years. In addition, it raises the maximum income for a qualified buyer to $225,000 a year for couples and makes the credit available until mid-2010. (It had been set to expire at the end of this month.) The problem is that the FHA insures mortgages of homes below certain price levels with such a low down payment that it can be funded solely by the refundable tax credit. And, as we've seen in the recent housing crisis, buyers with no skin in the game are more likely than others to default on their mortgages when the value of their home falls below their mortgage balance.
Here's how the credit allows buyers to avoid putting their own money at risk. Suppose a couple making $60,000 annually buys a home worth $200,000. They can get an FHA-insured loan if they put down 3.5% of the purchase price, about $7,000. The couple will also need to come up with another $1,000 in closing costs, for a total of $8,000. The couple can either dip into savings or borrow that money from relatives or somewhere else on a temporary basis.
After closing, the couple can quickly obtain the $8,000 refundable tax credit to pay off their temporary loan (or replenish their savings). In effect, they will have bought a home without putting any of their own money at risk. Owners who don't sink their own money into a house are much more likely to default on the mortgage. The FHA already is facing a rising number of serious problems on its insured mortgages. Last week the agency reported that its cash reserves dropped to 0.53% of the $685 billion of total loans it insurers. This is well below the 2% federal law requires the FHA to have in reserves.
Beyond these reserves, the FHA has roughly $28 billion in a capital surplus fund, established by Congress to absorb losses on insured mortgages over the next 30 years. With the reserves and capital in hand, agency officials believe they have enough cushion to avoid needing a federal bailout. But a recent government audit concluded that the FHA would run out of money in 2011 and need a federal bailout if we have a protracted recession. The deteriorating quality of the FHA's mortgage portfolio is a critical challenge to the housing market and the federal budget. By the end of next year, the FHA's portfolio is projected to rise to $1 trillion. Currently, over 20% of all new home mortgages are insured by the FHA.
Meanwhile, the tax credit for first-time home buyers is expected to cost the Treasury approximately $15 billion in 2009—more than twice the projected cost when Congress approved the stimulus package. Some of the cost overrun is due to fraud. At least 19,000 filers who claimed $139 million in tax refunds under this credit did not actually buy a home, according to Treasury officials. In addition, 74,000 filers claiming a total of $500 million in refunds seem to already have owned a home.
We all want to help first-time buyers acquire homes and support the depressed U.S. housing market. Without real down payments, however, new homeowners are likely to default on their mortgages, and the FHA will probably need a taxpayer bailout. The Obama administration should increase the requirements to qualify for an FHA-insured mortgage. In addition to the 3.5% down payment, the administration should also require that buyers put down at least half of the tax credit they will receive for buying the home.
One in Four Borrowers Is Underwater
The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery. Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif. These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn't expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.
Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home's value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American. Most U.S. homeowners still have some equity, and nearly 24 million owner-occupied homes don't have any mortgage, according to the Census Bureau. But negative equity "is an outstanding risk hanging over the mortgage market," said Mark Fleming, chief economist of First American Core Logic. "It lowers homeowners' mobility because they can't sell, even if they want to move to get a new job." Borrowers who owe more than 120% of their home's value, he said, were more likely to default.
Mortgage troubles are not limited to the unemployed. About 588,000 borrowers defaulted on mortgages last year even though they could afford to pay -- more than double the number in 2007, according to a study by Experian and consulting firm Oliver Wyman. "The American consumer has had a long-held taboo against walking away from the home, and this crisis seems to be eroding that," the study said. Just months after showing signs of leveling off, the housing market has thrown off conflicting signals in recent weeks. Jittery home builders and bad weather led to a 10.6% drop in new home starts in October, and applications for home-purchase mortgages have dropped sharply in recent weeks.
These same falling prices have boosted home sales from the depressed levels of last year. The National Association of Realtors reported Monday that sales of previously occupied homes in October jumped 10.1% from September to a seasonally adjusted annual rate of 6.1 million, the highest since February 2007. The bump in sales was ahead of forecasts, spurred by falling prices, low mortgage rates and a federal tax credits for buyers. Congress recently expanded and extended the tax credits.
The latest First American data aren't comparable to previous estimates because the company revised its methodology. First American now accounts for payments made by homeowners that reduce principal, and it no longer assumes that home-equity lines of credit have been completely drawn down. The changes reduced the total number of borrowers under water -- although both old and new methodology show increases from the previous quarter. Using the old methodology, the portion of underwater borrowers would have increased to 33.8% in the third quarter.
Homeowners in Nevada, Arizona, Florida and California are more likely to be deeply under water, according to the analysis. In Nevada, for example, nearly 30% of borrowers owe 50% or more on their mortgage than their home is worth, said First American. More than 40% of borrowers who took out a mortgage in 2006 -- when home prices peaked -- are under water. Prices have dropped so much in some parts of the U.S. that some borrowers who took out loans more than five years ago owe more than their home's value. Even recent bargain hunters have been hit: 11% of borrowers who took out mortgages in 2009 already owe more than their home's value.
Andrew Lunsford put 20% down when he bought his home in Las Vegas for $530,000 in 2004. Now, he said, his home was worth less than $300,000. "I'm to the point where I feel I will never get my head above water," said Mr. Lunsford, a retired state trooper who works for an insurance company. He said his bank won't modify his loan because he can afford his payments, and he's unwilling to walk away, he said: "We're too honest." Borrowers with negative equity are more likely to default if they live in a state where the bank can't pursue their assets in court, according to a study by the Federal Reserve Bank of Richmond.
But borrowers who are less than 20% under water are likely to maintain their mortgage if their loan is modified and the payments reduced, said Sanjiv Das, head of Citigroup's mortgage unit. "Beyond 120%, the most effective modification is a complete loan restructuring, including a principal reduction." Mortgage companies have been reluctant to reduce mortgage principal over worries about "moral contagion, with people not paying their mortgage or redefaulting because they believed the bank would reduce their principal," Mr. Das said.
Many borrowers are so deeply under water that they can't take advantage of lower rates and refinance their mortgage. "We're declining hundreds of loans each month," said Steve Walsh, a mortgage broker in Scottsdale, Ariz. "The only way we will make headway is if we allow for a streamlined refinance where the appraisal is irrelevant." Realtors reported that home sales in October were up 24% from a year earlier. The number of homes listed for sale nationwide was 3.57 million at the end of October, down 3.7% from a month earlier, the trade group said. But that inventory could rebound next year as banks acquire more homes through foreclosure.
About 7.5 million households were 30 days or more behind on their mortgage payments or in foreclosure at the end of September, according to the Mortgage Bankers Association. Many of those homes will be lost to foreclosure, adding to the supply of homes for sale. A recovery could pay off for the roughly 30% of underwater borrowers who owe 110% or less of their home's value and are able to endure the slump. "Most people prefer to stay in their home" even if the value of their property has declined, said John Burns, a real-estate consultant based in Irvine, Calif.
Citi Mortgage Reveals What Treasury Won't
Citigroup released its eighth quarterly mortgage data report today, touting the fact that it had helped "approximately 130,000 distressed homeowners with loans it owns or services remain in their homes and avoid foreclosure on mortgages valued at more than $20 billion." Other banks, like Bank of America issue similar monthly reports, but what makes Citi's unique is that it is not being shy about disclosing re-default rates. Take a look:
I've been asking Treasury Department officials to disclose redefault rates on modifications in the Home Affordable Modification Program, or at least to release the number of trial modifications that have been converted to permanent mods. The trial period is three months, so if a borrower misses a payment (redefault) they are supposed to be immediately dropped from the program. The program really kicked into gear in June, so by now, at the very least, we should know how many borrowers have missed a payment.
I was told we'd get the conversion rate in November; now I'm being told it will be in December, in the November HAMP status report. Treasury is also saying that true "redefault rates" will not be available until the end of the first quarter of 2010. I'm not going to argue semantics. I know many lenders have given borrowers extensions on the three month trial in order to get all the paperwork correct, but that has nothing to do with who has and who has not missed a payment. Look, maybe very few people have missed a payment, or fewer than we think, and the program is a huge success. We'd just like to know.
I realize I may seem like I'm being a pain in this particular government agency's backside, but the only way we can gauge housing's recovery is to gauge the foreclosure crisis, and the only way we can gauge the foreclosure crisis is to know if the government's 75 billion dollar bailout is working as hoped.
Getting back to the Citi report, redefault rates are still running high, even in the second quarter, which would have been when at least some of the bank's modifications fell under the HAMP program. In any case, in the first part of this year, banks supposedly got away from offering just repayment plans, which can often raise a monthly payment, to real modifications that either reduce principal or reduce mortgage interest rates. Redefaults now are likely less to do with a poor modification and more to do with unemployment and loss of home equity. Kudos to Citi for releasing the data.
Banks Scramble as Debt Comes Due
Banks have spent the past year dealing with a mountain of bad assets. Now attention is turning to trillions of dollars of debt they have maturing over the next few years. Banks unable to maneuver around the challenge could be forced to refinance their debt at sharply higher costs. The situation was caused by banks engaging in cheap borrowing during the credit-market boom that began in the middle of the decade and lasted through 2007. As financial markets hit crisis mode, banks were propped up by government guarantees that enabled them to keep selling debt -- but with much shorter maturities.
About $10 trillion of debt comes due by the end of 2015, including $7 trillion by 2012, according to Moody's Investors Service, which highlighted growing concerns about the banks' looming liabilities in a report this month. The life span of bank debt has shrunk to historically low levels, forcing banks to deal with the problem sooner rather than later. Globally, the average maturity of new debt rated by Moody's fell from 7.2 years to 4.7 years in the past five years. "We thought that we should send a signal" of warning, said Jean-Francois Tremblay, a Moody's analyst and one of the report's authors.
The problem is especially acute for U.S. and U.K. banks, which have been among the hardest hit by the financial crisis. In the U.S., banks have seen maturities drop to 3.2 years from 7.8 years in the past five years. In the U.K., the average maturity for new debt fell to 4.3 years from 8.2 years, Moody's said. The report didn't include data on specific banks. Large banks such as Citigroup Inc. and Bank of America Corp. said they expect no problem refinancing at affordable rates and that they have historically high levels of cash to cover maturing debt. Their funding needs are likely to be lower anyway because of sluggish lending and sales of assets or business that require debt funding.
Citigroup has about $30 billion in 2010 of debt coming due next year, with an additional $39.5 billion in 2011 and $59.3 billion in 2012. Bank of America must deal with debts totaling about $55.4 billion in 2010, $35.3 billion in 2011 and $58.4 billion in 2012. J.P. Morgan Chase & Co. faces about $130 billion maturing through 2012. In a recent meeting with Oppenheimer Equity Research analysts, a senior executive at J.P. Morgan indicated that the company "has the flexibility to issue debt only when terms are favorable," according to a Nov. 13 report. Last month, Eric Aboaf, Citigroup's treasurer, told investors the bank expects to sell less than $15 billion of bonds in 2010 and doesn't plan to refinance all the debt that comes due next year, mainly due to less demand for loans from bank customers.
Concern remains about how banks will deal with souring assets, such as loans they made to borrowers to fund purchases of homes, offices and land. But attention turning to the other side of the bank balance sheet is significant. A key government lifeline, the Temporary Liquidity Guarantee Program, which provides federal banking for bank bonds, expired last month. Debt issued under that program, which guaranteed the debt, had relatively short maturities. Banks will have to pay back debt back before 2012, putting their refinancing on a collision course with five-year debt that was sold in 2007, as markets were soaring.
It doesn't help that buyers of that government-backed debt tended to be investors attracted to safe government debt, Barclays Capital analysts said. Those investors may not be willing buyers when the banks need to refinance without government backing. The government debt also was sold at markedly cheaper costs. A Baa-rated bank that sold government-backed three-year debt would have paid a coupon of about 1.3%. That same bank would have to pay 7.75% to sell 10-year debt, according to Moody's. That is important because banks are being pressured to sell longer-term debt.
Roger Freeman, an analyst at Barclays Capital, said that a big gamble for bank treasurers is deciding whether borrowing costs will be more expensive now or in six to 12 months' time. While base interest rates could increase, more investor confidence in bank debt could help decrease borrowing costs. The cost to raise long-term debt—between five and 10 years—has improved markedly from last October. But borrowing costs in the bond market remain above 2005 levels.
Citigroup, for example, sold $2 billion in five-year bonds in September at a cost of 3.25 percentage points above Treasury securities, or a yield of 5.5%. While that was cheaper than a mid-August sale at a spread of 3.8 percentage points, it is far more expensive than the 0.73 percentage points Citigroup paid back in 2004. Rising borrowing costs for banks could spill into the broader economy at a time when consumer and corporate borrowers already are under stress. Banks could pass on the costs in the form of higher interest rates.
Fear pushes US rates into negative
Negative interest rates are back. Yields on short-term US government debt have fallen into negative territory as banks and investors park their cash in havens before the end of the year. Strong demand for US Treasury bills, US government debt with durations of one year or less, suggests that dislocation and fear still pervades the financial system as institutions and investors show they are willing to forgo interest income completely or even take a small loss to own securities considered safe.
In the bond market, analysts say the heightened demand for short-term government debt also extends to the two-year note, reflecting a quest by banks and institutional investors for pristine year-end balance sheets, in what is commonly called window dressing on Wall Street. William O’Donnell, strategist at RBS Securities, says: “One of the primary catalysts keeping yields at the front end low is the amount of liquidity in the system that needs to find a spot over the calendar flip.”Since late last week, yields on some Treasury bills maturing in January have traded and been quoted below zero per cent. Meanwhile, three-month bills have approached zero per cent, while the yield for six-month bills recently fell to a record low of 13 basis points. On Tuesday, yields edged higher but remain near these lows. This comes as the amount of outstanding Treasury bills has dropped by $209bn to $1,859bn since the end of August when one and three-month bills were both yielding above 10bp and six-month paper was at 22bp.
Talk by some members of the Federal Reserve that the economy faces uncertain prospects next year has led many investors to conclude that official interest rates will remain on hold well into 2010. In some quarters, there are fears of a double-dip recession amid worries about commercial real estate and the potential exposure among small and regional US banks. Andrew Lo, at the MIT Sloan School of Management, says: “Year-end is typically not a great time and the flight to safety into bills is motivated in part by general concerns about the economy and whether another shoe, such as commercial real estate, will drop.”
Normally, the window dressing scramble starts in mid-December but this year a number of factors has sparked an earlier flight into Treasury bills. This is the first year that all leading US banks, many sitting on big trading profits thanks to the rebound in risky assets since March, will close their books at the same time. In past years, investment banks such as Goldman Sachs and Morgan Stanley reported annual results in November and could thus add liquidity, by selling Treasury bills, during December as other banks and institutions rushed to window dress.
Another factor is the low level of overnight interest rates set by the Federal Reserve. Since last December, the federal funds rate has been placed in a range of zero to 0.25 per cent which, say traders, means that the traditional year-end demand for bills can draw rates into negative territory. David Ader, strategist at CRT Capital, says: “Negative bill rates are one of the unintended consequences of having a low funds rate. It doesn’t take much to push bills below zero when there is such a large demand.” Mr Ader also says that many holders of bills, such as central banks, are loath to lend them out into the market, and this has contributed to a squeeze, pressuring rates lower.
Treasury bills briefly traded negative ahead of the third quarter ending in September and a lack of liquidity has plagued trading at crucial times in recent years. Ted Wieseman, economist at Morgan Stanley, says: “There has been a regular pattern during this crisis of bills being badly squeezed around quarter ends, but it’s happening a lot earlier than normal this time around. “Even last year when the financial crisis was near its peak we didn’t see the pressures intensifying so far ahead of the actual calendar turn.”
Last December, one-month Treasury bills traded as low as minus 9bp, and traders are not ruling out a similar move as the calendar enters December and liquidity becomes scarcer. Some say that other short-term market rates could also approach zero and possibly turn negative. Gerald Lucas, senior investment adviser at Deutsche Bank, says: “Overnight rates in the money market may well be negative at year end as banks, looking to reduce the assets on their balance sheet, will be reluctant to take overnight funds from investors.” Already, financing rates for Treasury collateral in the repurchase market are tight for the year end. Joseph Abate, strategist at Barclays Capital, says: “Treasury collateral is trading around 3bp for the turn, which would be comparable with the June and September quarter ends.”
Mr Wieseman says: “Our financing desk thinks it is likely on New Year’s eve that we will see a repeat of the previously unprecedented negative overnight rates first seen at the end of September.” But once the new year gets under way, the general view is just like that of last January; yields will rebound back into positive territory. Mr Ader says: “We expect to see an ongoing bid and negative rates will be commonplace into 2010, righting quickly in January. “While counterintuitive, negative rates simply reflect balance sheet window dressing demand and the premium for having very short-term liquid assets.”
Lending Declines as Bank Jitters Persist
U.S. lenders saw loans fall by the largest amount since the government began tracking such data, suggesting that nervousness among banks continues to hamper economic recovery. Total loan balances fell by $210.4 billion, or 3%, in the third quarter, the biggest decline since data collection began in 1984, according to a report released Tuesday by the Federal Deposit Insurance Corp. The FDIC also said its fund to backstop deposits fell into negative territory for just the second time in its history, pushed down by a wave of bank failures.
The decline in total loans showed how banks remain reluctant to lend, despite the hundreds of billions of dollars the government has spent to prop up ailing banks and jump-start lending. The issue has taken on greater urgency with the U.S. unemployment rate hitting 10.2% in October, even as the economy appears to be stabilizing. "There is no question that credit availability is an important issue for the economic recovery," FDIC Chairman Sheila Bair told reporters Tuesday. "We need to see banks making more loans to their business customers." She said large banks -- which account for 56% of industry assets and received a large share of the government's bailout funds -- accounted for 75% of the decline.
James Chessen, chief economist at the American Bankers Association, an industry trade group, said, "It's a very risky time for any lender because the probability of loss is greater, and they are being prudent in their approach to lending. Their regulators are demanding it." The FDIC's quarterly banking profile, which analyzed data from 8,099 federally insured banks, reported that 552 financial institutions, with combined assets of $345.9 billion, were on the government's problem list at the end of September, up from 416 with $299.8 billion of assets at the end of June. That means roughly 7% of all U.S. banks are on the list and face a higher probability of failure. FDIC officials don't disclose the names of banks on the list, in part because it could lead to bank runs.
Many banks on the problem list are expected to return to health, but the FDIC is seeing a jump in the number of failures. Fifty banks failed in the third quarter, the most in a single quarter since the fourth quarter of 1992. Three new banks were chartered in the third quarter, the lowest quarterly number since World War II. The FDIC said its deposit-insurance fund, which backstops trillions of dollars in deposit accounts, fell to a negative $8.2 billion at the end of September, an $18.6 billion drop from the end of June. The FDIC said one reason for the decrease was that the agency shifted $21.7 billion from the fund into reserves for bank failures over the next 12 months.
Even though the FDIC's fund balance was negative, it still had reserves of cash. The FDIC said it had $23.3 billion in cash at the end of September to help resolve future bank failures. FDIC officials recently agreed to require banks to prepay three years' worth of government insurance fees, which is expected to bring in an additional $45 billion by the end of the year. The decrease in loan balances reported Tuesday likely reflects a decline in demand for loans among economically anxious businesses and consumers, as well as a reduced willingness by banks to lend. The total of commercial and industrial loans, a category that includes business loans, fell to $1.28 trillion at the end of September, from $1.36 trillion at the end of June. The outstanding total of construction loans, credit cards and mortgages also fell.
Government officials have stepped up pressure on banks to make more loans in recent weeks. The banking industry recorded a net profit of $2.8 billion for the third quarter, compared with a $4.3 billion loss in the second quarter, according to the FDIC report. Banks wrote off $50.8 billion in bad loans in the third quarter, $22.6 billion more than they did in the third quarter of 2008. Ms. Bair said the industry wasn't likely to be profitable in the fourth quarter, in part because banks are expected to write off more bad loans before year-end.
White House Weighs New Panel to Tackle Deficit
The White House is considering a bipartisan commission to tackle the nation's swelling deficit, as it seeks to show resolve on a problem that threatens its broader agenda. Top White House officials, including budget director Peter Orszag, met Tuesday with Senate Budget Committee Chairman Sen. Kent Conrad to discuss establishing such a commission, which has been pushed by Mr. Conrad, a North Dakota Democrat, and his Republican counterpart on the committee, Sen. Judd Gregg of New Hampshire.
Senior congressional officials said the idea was gaining traction. Two officials said the White House was likely to make its own proposal for a panel, which could have less power than the proposed Conrad-Gregg commission. White House aides said no final decision had been made. The idea is to bring Republicans and Democrats together to make tough decisions about how to cut costs or raise revenue in areas including Social Security, Medicare and taxes. For the White House, establishing a commission would show that the Obama administration is serious about tackling the deficit while postponing any real moves until after the 2010 elections.
The federal budget deficit swelled to a post-World War II record of $1.4 trillion in fiscal 2009 and isn't expected to shrink much this year. The White House budget office has already asked each cabinet department, except for defense and veterans affairs, to submit two budgets for fiscal 2011 -- one freezing spending at current levels, the other cutting spending by 5%. The magnitude of the deficit is starting to constrain Democrats' room for maneuver. Top House Democrats are pressing for a new tax to pay for any troop increases in Afghanistan. Meanwhile, an effort by congressional Democrats to pass job-creation measures, such as a tax credit for hiring new workers, faces skepticism from a White House unsure that such ideas are worth the cost.
In addition, the administration is being pressed by Messrs. Conrad, Gregg and 12 other senators -- Democratic, Republican and independent -- who demand action on a federal debt commission before they will approve any increase in the national debt ceiling. If the debt ceiling isn't raised above its current $12.1 trillion level, the government will exceed its borrowing limits and could be forced to default on its debt. Treasury officials say the limit could be reached by mid-December. "There are rare moments in this institution when you can implement fundamental change," Sen. Evan Bayh (D., Ind.) said during a budget hearing this month. "This is one of them."
Chuck Marr, a budget aide to the Democrats' former Senate Majority Leader Tom Daschle, said some kind of commission or budget summit could be the only way to bring Republicans into the decision making in the hopes of generating support for cutting cherished programs or raising taxes. Sen. Conrad said the need for such a special process now is "inescapable" because of the depth of the country's fiscal problems and the difficulty in reaching consensus in Congress.
"If one looks at the history of how these major agreements have been reached, it's almost always been through some sort of special process," he said in an interview this week, citing a 1983 commission on Social Security and a 1990 summit between then-President George H.W. Bush and congressional leaders on the deficit. But House Speaker Nancy Pelosi (D, Calif.) and senior Democrats such as House Appropriations Committee Chairman David Obey of Wisconsin have vociferously opposed delegating tough decisions to outside panels or commissions.
Taking concrete steps to cut spending and raise taxes, always politically difficult, has become even harder given the U.S. economy's weakened condition. With projected deficits averaging more than 5% of gross domestic product over the next decade, the enormity of the task makes it more daunting. So does the looming 2010 election, when Democrats face the possibility of big losses. Reducing the deficit to 3% of GDP in coming years -- a number recently cited by Mr. Orszag as the administration's goal -- would require substantial changes. For 2013, for example, the government likely would have to eliminate about $250 billion from the projected $775 billion deficit. But higher economic growth would also help.
Sen. Gregg, who is concerned that a White House commission would lack teeth, said Tuesday he believes the Obama administration has little interest in real deficit reduction. "You've got to look at their actions, not their words, and their actions are to massively expand the government," he said. Senior congressional budget aides and some lawmakers are also skeptical that Congress would act anytime soon on an administration-backed commission's plans. Failure to enact meaningful deficit reduction could leave the U.S. with unsustainable deficit projections far into the future. That raises the risk that investors might lose confidence in the country's currently AAA-rated debt, driving up the government's borrowing costs.
Falling Chicago Fed index bodes ill for U.S. recovery
The Federal Reserve Bank of Chicago said on Monday its gauge of the national economy fell further into negative territory in October, in a report that suggested the economic recovery could be in trouble. The Chicago Fed said its National Activity Index slid to -1.08 from a revised -1.01 in September. September's reading was originally reported at -0.81. The index's three-month moving average, CFNAI-MA3, decreased to -0.91 in October from -0.67 in September, declining for the first time in 2009, the Chicago Fed said.
"October's CFNAI-MA3 suggests that growth in national economic activity remained below its historical trend," the report said. The Chicago Fed said that a move below -0.70 in the index's three-month moving average following a period of economic expansion indicates an increasing likelihood that a recession has begun. The report appears to highlight the fragile state of the economy, which only started growing again in the third quarter this year following the worst slump in decades.
The Chicago Fed's report also said the amount of economic slack reflected in the three-month moving average "indicates low inflationary pressure from economic activity over the coming year." The 85 economic indicators that comprise the Chicago Fed's index are drawn from four categories: production and income; employment, unemployment and hours; personal consumption and housing; and sales, orders and inventories.
Thirty-two of the 85 individual indicators made positive contributions to the index in October, and 53 made negative contributions. Forty-three indicators improved from September to October, while 42 indicators deteriorated. Values of zero in the National Activity Index indicate a national economy expanding at historical trends, negative values indicate below-trend growth and positive values signal growth above trend, the Chicago Fed said. Financial markets showed little reaction to the report.
Just In Time for the Holidays: More Gloom and Doom with David Rosenberg
Just in time for the holidays: More gloom and doom from a well-known economist., who used to be Merrill Lynch's chief economist and now works for Gluskin Sheff of Canada, told CNBC Tuesday that the US economy is mired in an economic crisis that shows only scant signs of abating. "We're in a form of Depression," Rosenberg said in a live interview. "Depressions...typically happen after a prolonged period of credit excess morphs into a collapse and you get asset deflation. We had asset deflation and we had a contraction in private-sector credit."
Rosenberg is just the latest well-known expert—including New York University's Nouriel Roubini and Pimco bond fund's Mohamed El-Erian—to warn that the economy remains mired in either no growth or slow growth that will last several years. Last week, banking analyst Meredith Whitney told CNBC that the US economy is likely to fall back into a recession next year and that stocks are overvalued. "I haven't been this bearish in a year," she said in a live interview.
Despite all the dire predictions, there are plenty of experts who say the economy and stocks are recovering nicely and will continue to do so. The government reported Tuesday the economy grew at a revised 2.8 percent rate in the third quarter. And on Monday, a survey by the National Association for Business Economists showed they expect unemployment to bottom soon. The big disparity of forecasts has proven challenging for investors.
"There's a tremendous amount of angst about where the economy is going to be next year and whether or not this is a good opportunity to take some profits," says David Twibell, president of wealth management for Colorado Capital Bank in Denver. "There's more confusion among investors than I've probably ever seen." Rosenberg, meanwhile, urged investors to be careful. The Standard & Poor's 500 is probably overvalued from its current levels, he said. The broad market index has gained about 60 percent from its March lows and has recently broken some key resistance levels.
Yet Rosenberg said an S&P at about 875 is more reflective of fair value considering earnings this year and the prospects of the road ahead. That would represent about a 20 percent drop. Valuing the current market is tricky considering the amount of trouble left in the economy, Rosenberg said. "This is a different animal than the garden-variety of recession that we're used to forecasting in the post-World War II era," he said. "The Fed started reducing rates in 2007 and here we are debating when did the recession end."
Rosenberg said Canada-based Gluskin Sheff has been using corporate bonds and commodities, particularly gold, to capture gains while staying away from heavy stock bets. The stock market has gained, he said, only because of optimism from government stimulus, which he said is undependable. "We are basically in a post-bubble credit collapse," Rosenberg said. "Is the recession technically over? You know what? All the expert seem to agree on that. That's what has me a little nervous."
Most global banks are still unsafe, warns S&P
Standard & Poor's has given warning that nearly all of the world's big banks lack sufficient capital to cover trading and investment exposure, risking further downgrades over the next 18 months unless they move swiftly to beef up their defences. Every single bank in Japan, the US, Germany, Spain, and Italy included in S&P's list of 45 global lenders fails the 8pc safety level under the agency's risk-adjusted capital (RAC) ratio. Most fall woefully short.
The most vulnerable are Mizuho Financial (2.0), Citigroup (2.1), UBS (2.2), Sumitomo Mitsui (3.5), Mitsubishi (4.9), Allied Irish (5.0), DZ Deutsche Zentral (5.3), Danske Bank (5.4), BBVA (5.4), Bank of Ireland (6.2), Bank of America (5.8), Deutsche Bank (6.1), Caja de Ahorros Barcelona (6.2), and UniCredit (6.3).
While some banks may look healthy under normal Tier 1 and leverage targets, critics claim these measures can be highly misleading since they fail to discriminate between high-risk and low-risk uses of leverage. The system failed to pick up the danger signals before the financial crisis. The supposedly moderate leverage of US banks in 2007 proved to be a spectacularly useless indicator. S&P has shifted to a tougher code. It is less tolerant of hybrid capital – a liability rather than an asset, and no defence in a crunch – and insists that banks must quadruple capital put aside to cover trading desks. Private equity exposure will be treated more harshly.
The Bank for International Settlements unveiled its own version in September. The regulatory framework worldwide is clearly shifting in this direction, a move that will hit some banks harder than others. "We expect banks to continue strengthening capital ratios over the next 18 months to meet more stringent requirements. Failure to achieve this could put renewed pressure on ratings," said Bernard de Longevialle, S&P's credit strategist. Tougher rules at this juncture may prove "pro-cyclical", if banks respond by cutting loans. This may perpetuate the credit crunch for smaller borrowers unable to tap the bond markets. "There is a risk that the increase in regulatory capital requirements could weigh on banks' ability to finance recovery," said Mr de Longevialle.
The "safest" global bank is HSBC (9.2), followed by Dexia (9.0), ING (8.9) and Nordea (8.8). UK banks fare relatively well: Standard Chartered (8.1) is in the top quintile; Barclays (6.9) is in the middle. The study left out RBS and Lloyds because their status is unclear. Chinese banks – the world's largest – were excluded. Many banks on the sick list are already cleaning up their books, mostly by disposing of assets or converting hybrids into common stock. Citigroup exchanged $64bn (£38.5bn) of hybrid equity in the third quarter. UBS has cut reliance on hybrids, still 80pc of its capital earlier this year.
Japanese banks score worst because they rely on hybrids and are major players on the stock exchange, buying equities at 12 times leverage. Equity portfolios make up more than 50pc of their capital. This could prove troublesome given Tokyo's bourse has fallen this year, missing out on the global rally. German banks do poorly because they have large holdings of asset-backed securities (ABS), often toxic. US banks look healthy in terms of leverage, but look less pretty when this is adjusted for risk. S&P said past focus on leverage alone had been a recipe for trouble. It encouraged banks to opt for dodgy products – treated as if equal to top-notch sovereign debt – and could be circumvented "off-books" in any case. Rules created the illusion of safety
Half of banks' losses still unknown: IMF chief
Half of the losses suffered by banks could still be hidden in their balance sheets, more so in Europe than in the United States, the International Monetary Fund's chief, Dominique Strauss-Kahn, was quoted as saying on Tuesday. In an interview with French newspaper Le Figaro, Strauss-Kahn also said the IMF thought the euro currency was probably a bit too strong.
"There are still some important losses that have not been unveiled," Strauss-Kahn was quoted as saying in response to a question on banks, according to excerpts of the interview that were sent to media ahead of publication on Wednesday. "It's possible that 50 percent (of bank losses) are still hidden in their balance sheets. The proportion is greater in Europe than in the United States," he said. Asked about currencies, Strauss-Kahn noted that Europeans were the ones who have been complaining the most about the strength of their currency.
"The IMF also thinks that the euro is probably a bit too strong, but it's very difficult to determine in a way that is unquestionable the level at which currencies would be balanced," he said. "Europeans must, however, better affirm their economic strategy if they do not want to let the Sino-American couple dominate the global debate for the next 20 years," he said. Strauss-Kahn said the two crucial factors to achieve the status of major economic power today are a big population and technological advances.
"The enlarged Europe has a big population, with 500 million inhabitants, but on the technological front things have not moved on sufficiently since the Lisbon strategy was launched in 2002," he said, referring to the 27-member European Union. The Lisbon strategy was an EU roadmap that was supposed to cut red tape, promote growth and make the bloc the world's most innovative region. "I note that the technological debate, which today is focused particularly on energy, is much more vigorous in the United States than in Europe," Strauss-Kahn said.
US economic growth revised downward
The economy grew more slowly than first thought this summer, according to a revision of third quarter data on gross domestic product released Tuesday, suggesting that the recovery started with less of a bang than originally reported. GDP, a broad measure of economic output, rose at a 2.8 percent annual rate in the July to September period, the Commerce Department said, compared to the 3.5 percent growth rate first reported. The agency re-calculates the data as more complete information becomes available.
The revised data are still consistent with the widespread view among economists that the recession ended over the summer, as the nation began producing more goods and services. But it also indicates that the burst of activity wasn't as great as first thought, which helps explain why the job market has been so painfully slow to turn around.
Economists believe the economy has continued growing in the fourth quarter, though still at a measured pace--an annual rate in the 3 percent range. However, the unemployment rate rose to 10.2 percent in October and is widely forecast to continue rising. Employment frequently lags overall output at the end of a recession, as skittish employers ramp up production using existing workers rather than hiring new ones, unsure if rising demand will last.
Personal consumption expenditures rose at a 2.9 percent rate in the third quarter, the department said, not the 3.4 percent growth originally reported, with a particularly steep reduction in the growth in purchases of durable goods, such as automobiles. Consumer spending accounts for about two thirds of total GDP, making its sustained recovery a key to continued expansion. There was a 15.1 percent rate of decline in investment in commercial buildings, worse than the 9 percent drop first reported. And housing investment rose less than first thought, climbing at a 19.5 percent rate instead of 23.4 percent. Government contributed more growth than first thought, rising at a 3.1 percent annual rate, not 2.5 percent.
Reclaiming what belongs to taxpayers
Chinese banks and regulation
Liu Mingkang is a regulator’s regulator: stern, patrician, and quick to slap down dissent. On Monday wires reported that China’s Banking Regulatory Commission, where he is chairman, was urging big banks to boost capital ratios to 13 per cent of risk-weighted assets next year, from 10-11 per cent now. Rubbish, retorted Mr Liu. Lenders simply need to formulate “medium-to-long-term plans” on replenishing capital; more thinly-capitalised banks may face quotas on new lending.
The swift rebuke is understandable. The global debate on bank capital has been characterised by rumour and misdirection. But swatting the question aside won’t suppress the chatter. China’s banks enjoy many distinctions, but capital strength is not among them. Of 245 listed banks around the world tracked by Bloomberg, the highest-ranked Chinese lender (excluding Hong Kong-domiciled banks) is the smallest – $5bn Bank of Nanjing, at 80th place, with 11.63 per cent tier one.
This year’s record loan growth is knocking down capital ratios – especially as the lending mix shifts from short-term bills to longer-term loans with higher risk weightings. At the end of last year, the six largest lenders had average core capital fractionally over 10 per cent. By the third quarter this year, that had dropped to 8.88 per cent – a record rate of decline, according to Credit Suisse. Mid-sized lenders are already jockeying for capital. China Minsheng, the ninth largest listed bank by assets, raised $3.8bn selling shares in Hong Kong last week. Industrial Bank and China Merchants, number eight and five respectively, have announced plans to raise $5.8bn between them.
And late on Tuesday came reports – unconfirmed by the regulator – that ICBC, CCB, Bank of China and Bank of Communications, the top four, had submitted capital plans. By then, CCB and BoC had become the day’s biggest fallers on the Hang Seng. Investors are positioning for dilution – whatever Mr Liu says.
China derivatives hit banks
When, at the beginning of 2008, Antoine Castel took control of the fixed-income unit in Beijing of Calyon , the investment banking arm of Crédit Agricole, the world’s biggest banks were making fat profits in China’s nascent derivatives markets. But just weeks into his new job at the French bank, Mr Castel watched in horror as Chinese companies began to lose billions of dollars on the bespoke trades they had struck with western dealers. It was the start of a chain reaction that this summer unleashed a fierce backlash from regulators and local banks.
In stark contrast to the slow pace of reform in derivatives markets in the US and Europe, China’s regulators have in recent months shut down the main route by which foreign banks sold derivatives from offshore operations and have banished speculative deals – moves that have important implications not only for Chinese companies and foreign banks, but also for the evolution of China’s capital markets and the internationalisation of the renminbi.
As a result of the sweeping regulatory overhaul, trading volumes have plunged and foreign banks are scrambling to adapt to doing business in the new environment. “If you compare the business we are doing today with the business we were doing two years ago, it’s completely different,” says Mr Castel. “You have to forget about [the old] market. It’s gone.” Previously, dozens of western banks such as Goldman Sachs and Morgan Stanley were striking huge deals with mainland companies that wanted to manage their exposure to swings in commodity prices, interest rates and currencies.
In two cases where trades went spectacularly wrong, Citic Pacific, the Hong Kong-listed arm of China’s largest investment conglomerate, lost $1.9bn last year on bets against the Australian dollar, while Air China, the country’s flag carrier, lost $1.1bn on oil derivatives. They were just two of hundreds of companies that entered trades that were wildly mismatched with their hedging requirements, market participants say. Chinese regulators suspect that in some instances companies used derivatives as a way to speculate, rather than hedge, while banks frequently sold overly complex products – the most profitable – without fully explaining the potential downside.
Products with names such as “snowballs” and “snowblades” proliferated, many with so-called “zero cost” structures that failed to live up to their name. Dealers say billions of dollars of trades are being renegotiated in private, some under pressure from Sasac, the shareholder and regulator of hundreds of state companies. Total trade volumes have more than halved since a year ago, say market participants. Complex trades have vanished from the market. “We are selling plain vanilla business in China, that is it,” says Mr Castel.
Deals that banks were once able to complete in five minutes over the phone now take an hour as the risks are explained in detail, says Mark Wightman of Super Derivatives, a data provider. The biggest shock to the established order came this summer when the China Banking Regulatory Commission banned most of the trades that can be originated offshore.
Until recently, almost all derivatives deals between foreign banks and China’s industrial and commercial companies were struck overseas, typically in Hong Kong. To surmount obstacles including foreign exchange controls that made it difficult to trade with Chinese companies directly, overseas groups would typically get mainland banks to stand in the middle of each deal for a fee. These “intermediary trades” also allowed those overseas groups to minimise their credit risks by dealing with a small number of big banks rather than dozens of more risky companies.
For the Chinese banks, however, acting as middlemen proved less advantageous. When the crisis struck in 2008, they were forced to provide their foreign trading partners with vast amounts of collateral, but were unable to recover nearly as much money from the local companies on the other side of each trade. Regulators are said to be furious that local banks got into such a vulnerable position and enabled offshore groups to use “suitcase salesmen” to do business on mainland soil.
As well as banning the practice of intermediary trades, the CBRC now requires that banks ensure clients only buy derivatives that are appropriate for their hedging needs. The rules make it “virtually impossible to do some of the hairier trades and will really chill the market for anything but vanilla trades in future”, says Fred Chang, an industry veteran who now works for the law firm Lovells in Beijing. In spite of grumbling among some bankers, most market participants believe that the regulations, while a stumbling block for the time being, are necessary foundations for the growth of a market that traders expect to be enormous within a decade.
David Liao, head of global markets at HSBC China, says the rules would be “a short-term sting in terms of revenue” but would be helpful over the longer term.
But regulation is only the start of the problems for many western groups. The Chinese banks that dominate onshore trading have grown more assertive and are demanding that foreign banks play by their rules. The big four state-owned commercial banks are refusing to deal with the local operations of foreign banks unless they provide contractual guarantees on the trades from their global headquarters. Foreign banks are reluctant to provide these guarantees or other concessions being demanded because it would lead to higher capital charges, and they fear it would trigger a cascade of similar demands from banks across the world.
As a result of the stalemate, a two-tier system has emerged, with foreign banks trading almost exclusively among themselves, while local banks do the same. Most market participants expect a solution to the deadlock to emerge in time, most likely with foreign banks backing down on their positions. More?over, at some point the trading books of the Chinese banks will reach bursting point and they will need to offload their risks to their western peers. What is clear is that foreign banks, while bruised, are unwilling to let either regulatory clampdown or local competition drive them out of the market. As one western banker in China says: “You have to be in this market. You can’t afford to stay out of it.”
China's banks need to raise at least $43 billion in additional capital
China’s banks are preparing to raise tens of billions of dollars in additional capital to meet regulatory requirements following an unprecedented expansion of new loans this year, according to people familiar with the matter. China’s 11 largest listed banks will have to raise at least Rmb300bn ($43bn) to meet more stringent capital adequacy requirements and maintain loan growth and business expansion, according to estimates from BNP Paribas.
China’s banking regulator has warned it would refuse approvals for expansion and limit banking operations if lenders did not meet new capital adequacy requirements, a move that has prompted the country’s largest state-owned banks to prepare capital-raising plans for next year and beyond. Expectations of giant cash calls from the listed Chinese banks spooked investors on Tuesday, helping to send the benchmark Shanghai Composite Index down 3.45 per cent on a day of record turnover on the Shanghai and Shenzhen markets.
China’s banking regulator “is definitely aware of potential asset quality issues and is pushing for higher capital adequacy requirements to offset deterioration in asset quality”, according to Dorris Chen, an analyst with BNP Paribas. Following government orders to prop up the domestic economy in the face of the global crisis, Chinese banks extended a record Rmb8,920bn in loans in the first 10 months of the year, up by Rmb5,260bn from the same period a year earlier.
This unprecedented loan expansion resulted in a record fall in their core capital adequacy rates from just over 10 per cent at the end of last year to 8.89 per cent by the end of September, a drop that worries regulators.
Bank of China has been the most aggressive lender this year, adding more than Rmb1,000bn in new loans in the first half of the year alone. The bank told the Financial Times on Tuesday that it was “actively considering various options to replenish capital to achieve its sustainable development”. BNP Paribas estimates BoC would have to raise Rmb137bn to maintain its capital adequacy rates into next year and beyond.
Credit Suisse estimates that Bank of Communications, the country’s fifth-largest lender by assets, in which HSBC holds close to 20 per cent, will have to raise about Rmb27bn over the next year. China Minsheng Bank raised $3.8bn in an initial public offering in Hong Kong last week while Industrial Bank and China Merchants Bank plan to raise Rmb18bn and Rmb22bn respectively through rights issues to boost their capital.
The banking regulator said the vast majority of Chinese commercial banks met current capital adequacy requirements but lenders were expected to conduct reviews of their asset quality and ensure they continued to meet regulatory requirements. In the aftermath of last year’s financial crisis, the banking regulator has introduced so-called dynamic provisioning and capital adequacy requirements that are tailored for each bank and take into account the quality of a bank’s assets and capital as well as the quantity.
The banks will be able to raise money through a variety of methods, including capital injections from existing shareholders such as state holding companies, selling new shares to the public or by issuing bonds. The capital-raising is unlikely to dilute the state’s ownership in the banks. On Monday, the regulator ordered banks to maintain a “stable and sustained” rate of new lending, without any major jumps or falls, until the end of the year.
Chinese credit tightening chills Asian markets
China has stepped up efforts to halt the explosive growth in credit, ordering the country's five top banks to raise capital over coming weeks or face lending sanctions. The move amounts to monetary tightening in China's state-run banking system. The news triggered a sell-off on Asian stock markets and raised broader concerns about the strength of the global rally. The Shenzen index fell by 4.5pc on Wednesday. "For practical purposes, the recovery in risk assets since last winter is now over," said Charles Dumas, of Lombard Street Research.
The China Banking Regulatory Commission reminded banks that they must set aside money to meet a capital adequacy ratio of 10pc and to cover 150pc of bad loans. New loans rose $1.3 trillion (£785m) in the first nine months of this year as Beijing mobilised banks as the main instrument of emergency stimulus. While credit has driven a powerful rebound, much of the money has leaked into speculation on property and stock markets. A chorus of officials have now begun warning that asset markets are spiralling out of control, risking a dangerous bubble. Both ICBC – the world's biggest bank – and the Bank of China said they were examining a range options to rebuild their capital base. The largest banks may need about $50bn in fresh capital.
Concerns about Japanese banks are also growing louder. Fitch Ratings said bad loans at the three "mega" banks – Mizuho, Sumitomo, and Mitsubishi –rose 9pc in the first half of the fiscal year. The trio continue to rely on hybrid capital that offers little defence in a crisis. Japanese banks are heavily leveraged to the Tokyo stock market through equity portfolios. They have a thin safety margin to cope with any further falls in the Nikkei index. Japan's new Democrat government is worried that deepening deflation will slowly erode the foundations of the nation's financial system. It has blamed the central bank for failing to respond with enough monetary stimulus. "The situation is serious," said banking minister Shikuza Kamei. "The Bank of Japan is asleep at the wheel as usual."
EU solidarity wil be tested
Here we go again. The stability of the eurozone is once again in question as punters bet heavily in the credit default swaps market on an Italian sovereign default, while the yields on government debt in peripheral countries such as Greece move out further against the German benchmark. Is this a blip or a reflection of deteriorating fundamentals? Note, first, that this worry was supposed to have been looked after by the German U-turn on bail-outs back in February. Then, you will recall, German policymakers declared that widening eurozone government bond spreads should not be a worry because fiscally distressed eurozone members would be granted financial support on the basis of solidarity within the European Union.
Since then estimates of the deficits of EU countries have tripled from 2.3 per cent in 2008 to 6.9 per cent this year, while the estimate for 2010 is for 7.5 per cent. The forecast for Greece, where the deficit was 7.7 per cent in 2008, has rocketed to nearly 13 per cent this year, far in excess of earlier estimates. At the same time there is growing concern about how financial imbalances in the EU will be unwound. For while there is a noisy debate about global imbalances, a more muted one is taking place over a regional imbalance in Europe, with Germany and other northern Europeans running large current account surpluses with deficit countries mainly in the south. While monetary union has protected weak eurozone countries from currency crises, such deficits have become much harder to finance since the credit crunch.
Germany is Europe’s biggest creditor country. And its U-turn on bail-outs almost certainly reflected a recognition that the Germans faced a potentially stark choice. If current account deficits and public sector debt in southern Europe were becoming unsustainable, German banks that financed the deficits might have to be rescued. Alternatively, to prevent debtor countries defaulting, they could try to sort out the fiscal mess using a Maastricht clause that permits financial support for eurozone countries in severe distress from factors outside their control. Conditionality is thus making a comeback in the policymakers’ vocabulary.
Such intervention may be coming closer as the Greek government shows little appetite for putting its fiscal house in order. And there are serious questions about how deficit countries can restore their competitiveness to help unwind the imbalances. It is quite a task. Goldman Sachs has estimated, for example, that in Italy, Spain and Greece, the real effective exchange rate would need to decline by more than 30 per cent to secure a return to balance. Since devaluation is not an option the adjustment has to take place through inflexible labour markets. The unpalatable question is the level of unemployment at which competitiveness is restored.
While some adjustment is now taking place, the German consumer will have to do more to support the deficit countries. That cannot be taken for granted. What, then, is the risk of a regional version of the break-up of the Bretton Woods semi-fixed exchange rate system in the early 1970s? Suggestions that Italy or Greece might choose to leave the club seem implausible, because the prospect of devaluation would cause money to drain from the banking system, while the value of debt and the cost of debt service would soar. Much easier for politicians to subcontract fiscal policy to the European Commission and tell the electorate that the resulting pain was all the fault of the nasty Germans.
Surplus countries have a bigger incentive to leave if weak countries drag down the value of the euro. Yet history suggests that it is always dangerous to underestimate the political commitment to monetary union. That said, how much and for how long will German (and other) taxpayers be prepared to stump up for profligate Southern Comfort countries? The unwinding of Europe’s imbalances will be slow and the adjustment will entail dismal eurozone growth unless northern European consumers ease the process. Would they kindly spend, spend, spend, in their own interest.
Geithner's Disgrace
by Eliot Spitzer
The issue has been festering for months: Why were AIG's counterparties—including Goldman Sachs, JPMorgan Chase, and UBS—paid 100 cents on the dollar when the feds rescued the insurance giant, helping raise the cost of the bailout to nearly $200 billion? A new report issued by Special Inspector General Neil Barofsky now reveals that government officials, notably then-New York Fed President and current Treasury Secretary Timothy Geithner, grievously damaged the nation and capitulated to the very banks they should have been supervising.
Barofsky's report reads like a case study in failed negotiation. The New York Fed didn't have the backbone to stand up to Wall Street, didn't understand its capacity to protect taxpayers, and didn't appreciate that its responsibility was to taxpayers. Geithner and the Fed have proffered a series of spurious reasons for their willingness to pay AIG's counterparties—the leading Wall Street banks—in full while demanding concessions from every other entity with whom the Treasury or the Fed dealt. Geithner suggested he could not use the threat of AIG's default in the absence of a federal bailout to get concessions from AIG's creditors. Why not?
That is exactly what the government did with the auto industry, and rightly so. The entity providing financing to a near-bankrupt institution must always seek contributions from everyone else at risk. The fact that the Fed had a strong predisposition against letting AIG go into bankruptcy didn't mean the Fed shouldn't have used every opportunity to wrangle concessions from the other parties. For Geithner to say it would have been "unethical" to negotiate for concessions is sheer silliness. It is akin to saying that having decided that you are willing to pay up to $250,000 for a house, it is unethical to negotiate to buy it for $225,000.
Geithner also claims that using the possibility of AIG's default as a negotiating opportunity would have cast doubt on the government's commitment to financial stability. What? Seeking to get other parties to share the burden demonstrates a lack of commitment to restoring financial stability and market-based realities? Pressuring Goldman and the other counterparties to offer concessions would have forced them to absorb the consequences of making suspect deals with an insurance company that was essentially a Ponzi scheme. Forcing them to give concessions would have been one small step toward ending the moral hazard the Fed had allowed to flourish for years.
Geithner also claims that refusal to pay 100 cents on the dollar might have been misinterpreted by the rating agencies and so cast a shadow on AIG's credit rating. Huh? AIG was flat-lining. The only way to restore its credit rating was for the government to bail it out—and to negotiate the best possible deal while doing so.
Perhaps most remarkable is that Geithner claims the "sanctity of contract" prevented renegotiating with the counterparties. But the government wasn't a party to these contracts! The government was stepping in with taxpayer money to save a broken company on terms to be set by the government. The counterparties had the contractual right to refuse the terms, throw AIG into bankruptcy, and suffer the consequences. In a workout context, the entity with cash—here, the government—can set the terms, and the other parties can either accept those terms or walk over to bankruptcy court. The government had absolutely no contractual obligation to do anything.
Also amazing is Geithner's assertion that he and the Fed were acting on behalf of AIG. Perhaps nothing is more fundamental than knowing whom you represent. Geithner and the Fed were supposed to be acting on behalf of taxpayers and citizens, not AIG. Their effort was supposed to get the best result for taxpayers: preserving the structure of the economy and stopping a free fall. That—not preserving AIG's market value—was the rationale for intervention. Once tax dollars were at stake, Geithner should have been asking how to achieve the best economic result while minimizing taxpayers' exposure.
Geithner has tried to deflect some of this criticism by suggesting that it is "untainted by experience." I would suggest that it is Geithner who displays lack of experience in his dealing with the financial community. He doesn't know how to negotiate, doesn't understand what cards he holds, and doesn't understand the need for fundamental reform.
Why panicky Dems are bailing on Tim Geithner
One residual from Timothy Geithner’s rough confirmation back in January — “Turbo Tax Tim” and all that — is that his political position is probably a bit more precarious than that of the typical newbie treasury secretary. Not only has Geithner been a frequent target of late-night comedy shows, he’s the public face of the unpopular bank and automaker bailouts. High unemployment rate isn’t helping either.
No surprisingly, a new Rasmussen poll finds that 42 percent of Americans think Geithner has done a “poor” job handling the economy versus 20 percent who rate him “good or excellent.” And the furor over his handling of the AIG bailout has yanked the competence issue back to the forefront.
So there is little political risk from calling for his resignation, as Representative Peter DeFazio, an Oregon Democrat, and several Republicans have done. But, my sources say, there seems to be little White House appetite at this moment for ousting Geithner, who certainly has no plans of his own for a fast exit. Expect him to stick around until at least November 2010. And why would Obama cut him loose when doing so would be tantamount to a vote of disapproval in his own economic policies? No one has charged Geithner with going rogue, after all. So blame the model, not the man, if you must. Not to mention a quick hook would stink of panic.
Top cabinet secretaries of first-term presidents rarely leave before the midterm elections. Nor does Geithner have much to fear from a whisper campaign to put JPMorgan CEO Jamie Dimon in the job, according to insiders. Despite the rumors, Dimon doesn’t want the gig. What banker would, given the current populist political climate? It seems unlikely that radioactive Wall Street will be supplying Geithner’s eventual successor. More likely candidates: Rahm Emanuel (he of the frequent phone calls to Geithner), White House chief of staff; Janet Yellen, president of the San Francisco Federal Reserve; Lawrence Summers, director of the National Economic Council; and Roger Ferguson, CEO of TIAA-CREF and former Fed vice chairman.
But the calls for Geithner’s resignation, as well as stunts like the Congressional Black Caucus blocking a key House committee vote on financial reform, indicate a degree of desperation among congressional Democrats. They see high unemployment and dissatisfaction with Obama’s scattered focus on the issue as driving the anti-incumbent mood. Unlike in sports, in government it’s the players, not the coach, who gets fired. And that’s why some Dems think one way to save their jobs in 2010 is by suggesting that Geithner lose his today.
Secretary Dimon?
Media speculation that JPMorgan Chase chief executive Jamie Dimon is in the running to succeed embattled US Treasury Secretary Timothy Geithner may not be as far-fetched as sceptics suggest. Having already committed himself to reappointing Fed chief Ben Bernanke, Mr Geithner may be a convenient candidate for Barack Obama to throw under the bus as unemployment surges. Though Mr Geithner is only two weeks younger than the President and five younger than Mr Dimon, he lacks both mens’ gravitas. But tapping a prominent Wall Street executive at a time when the public is baying for bankers’ blood might be tough.
He would not be the first poacher turned gamekeeper though. And perhaps Dimon’s best credential for the job is that his firm has navigated Wall Street’s meltdown fairly well, in stark contrast to rival mega-banks. That makes it somewhat ironic that, were it not for a falling out with Sandy Weill, Dimon would likely have taken over the helm at shakier Citigroup. Would it be a wise career move? Conventional wisdom holds that Mr Dimon would be giving up an even greater fortune and legacy by leaving Wall Street now. But perhaps he would be getting out while the getting is good.
With JPMorgan shares back above their pre-Lehman level, Dimon could exercise options and unload shares at a relatively attractive price. And moving to a government job would unlock a loophole intended to lure businessmen into senior government roles, allowing him to defer taxes on much of the gain. If banker compensation remains under pressure, his opportunity cost is not terribly high. Perhaps a better question to ask is not whether the timing of Dimon’s departure from Wall Street would be wise but, with only a flimsy recovery underway, whether the Treasury post is a poisoned chalice.
Bank of England tells of secret £62bn loan to save RBS and HBOS
The Bank of England secretly lent £61.6bn to Royal Bank of Scotland and HBOS at the height of the financial crisis to prevent their immediate implosion, it said on Tuesday. In a shock announcement, the Bank disclosed that it had been forced to use its lender of last resort facility last October to "buy time" for RBS and HBOS, which were "effectively... bust". It managed to keep the loans - the equivalent of almost £3,000 for every household in the UK - a complete secret to all but a handful in the City for well over a year.
The loans, which began on 1 October 2008 for HBOS and seven days later for RBS and lasted until January this year, show that even after being effectively semi-nationalised, fellow financial institutions were still refusing to lend the banks money. Like Northern Rock the previous year, they were forced to call on the Bank's assistance, although unlike Northern Rock they did not disclose the support. Paul Tucker, the Bank's deputy Governor for financial stability, told the Treasury Select Committee: "If we hadn't done it, the cycle would have been a lot worse than it would have been otherwise. This was a classic lender of last resort operation. Within months the Government had massive equity stakes. What that's effectively saying is that these institutions were bust... This was a dire emergency."
In exchange for the near £61.6bn support, the Bank demanded £100bn of collateral, underlining the concern it had about the value of both institutions' assets. It also demanded a fee, the scale of which it has not disclosed. Most remarkable, however, was the fact that the Bank managed to lend such a sum without it being detected by market participants or by the media - although rumours did abound at the time. The Bank used recent changes in the law to limit the detail it published on the support. Economists said yesterday that whereas the Northern Rock support had been difficult to disguise because of the relative calm in markets, at the time of the RBS and HBOS support the Bank had been swelling its balance sheet with currency swap facilities with the Federal Reserve and European Central Bank.
The loan facilities, of £36.6bn for RBS and £25.4bn for HBOS, were in addition to the hundreds of billions provided to the banking system in the form of guarantees, liquidity support and recapitalisation funds. Through them, the Bank was also quietly injecting cash into the economy some six months before it started quantitative easing. Economist Tim Congdon said: "It is staggering, but it was the right thing to do. If you're in a system that is prone to panics, the last thing you want is to advertise that an institution is in trouble." Shadow Chancellor George Osborne said: "The scale of these loans raises the question of how Labour's tripartite regulatory structure allowed these banks to come so close to collapse in the first place, and underlines the need for fundamental reform to put the Bank of England back in charge."
German Business Sentiment Returns to Pre-Crisis Levels
German business sentiment improved more than expected in November to reach its best level since the financial crisis struck in 2008, data on Tuesday showed. The figures, together with news of stronger growth in the third quarter, confirm that Europe's largest economy is recovering -- even if unemployment is still expected to rise. German business sentiment improved surprisingly sharply in November to reach the same level as before the outbreak of the global financial crisis in late summer 2008, figures released on Tuesday showed.
The monthly business climate index compiled by the Ifo economic research institute rose by a bigger-than-expected 1.9 points to 93.9, the eighth consecutive increase. Business managers were also more upbeat about the outlook for the coming six months than they had been in October, according to a corporate survey on which the index, one of of Germany's most important economic indicators, is based. "The German economy is continuing to work its way out of the crisis," Ifo President Hans-Werner Sinn said in a statement. Sentiment has continued improving in the manufacturing sector as well as in the wholesale and retail sectors, while the construction industry has grown more pessimistic about its outlook, Ifo said.
Companies said their outlook for exports has also improved slightly, despite the strength of the euro which makes German products more expensive to buy in countries outside the euro zone. Other key figures on Tuesday supported the assessment that Europe's biggest economy is recovering from its worst downturn since the 1930s. Gross domestic product grew 0.7 percent in the third quarter from the previous quarter, marking the strongest growth since early 2008. That marked a continuation of the trend in the second quarter, when the economy grew 0.4 percent. "The German economy is continuing to recover from the strong downturn of last winter," the Federal Statistics Office said in a statement. Growth was boosted by investment in construction and machinery as well as by goods exports which increased by 4.9 percent quarter-on-quarter. Private consumer spending fell by 0.9 percent, however.
Ralph Solveen, an economist at Commerzbank, attributed that decline to the expiry of the government's scrapping bonus in early September which had boosted sales of small cars. "Consumer spending will remain weak because of rising unemployment but it won't collapse," Solveen said. "Consumption won't help drive growth in 2010. The impetus will instead come from exports but also from investments." Economists at Commerzbank and Citibank now expect growth to accelerate slightly to around 0.8 percent in the final quarter of 2009. Despite the improvement, unemployment is expected to rise next year as companies hit by the crisis restructure and lay off workers. "If the economy grows just 1.5 percent as predicted, companies won't be able to avoid redundancies," said Sebastian Wanke, an economist at Dekabank.
Chancellor Angela Merkel had warned in her government statement to parliament on Nov. 10 that the full force of the recession would hit Germany in 2010. So far, short-time working programs have enabled firms to largely put off redundancies, but those programs are temporary. A comparison with the year-earlier quarter illustrates the extent of the downturn -- GDP in the third quarter was down 4.7 percent from the same period in 2008. In the second quarter, the drop had been as high as 7.0 percent.
Dubai World asks for debt ‘standstill’
Dubai World, the conglomerate owned by the government of the Gulf emirate, on Wednesday asked creditors for a six-month “standstill” on its obligations. The group includes Nakheel, a state-owned property developer that is responsible for some of Dubai’s most ambitious land reclamation projects – including the Palm Jumeirah and the World Islands – and has $4bn in outstanding Islamic debt falling due next month. The conglomerate also includes the high-profile DP World, the owner of the former P&O ports operator.
Bankers and analysts in the Gulf reacted with dismay to the announcement. One senior local banker at a bank with exposure to Dubai World said he believed it could technically obtain a standstill only with the agreement of creditors, but said he had received no information from Dubai World. The banker described the idea of a standstill as a “disaster” for confidence. The announcement came hours before the start of the Aid al-Adha holiday and the UAE national day celebrations, which will see the region shut down for more than a week.
The cost of protection against a Dubai debt default widened by more than 100 basis points to stand at more than 400 basis points in intraday trading, according to Bloomberg data. Ratings agencies estimate that Dubai and companies it owns have $80bn in outstanding debt. The emirate, one of seven which together form the UAE, is struggling with a deep property slump. The standstill plea came as two wholly-owned Abu Dhabi banks subscribed a further $5bn in financing for debt-laden Dubai, the emirate’s department of finance said in a statement.
National Bank of Abu Dhabi and Al Hilal Bank, an Islamic institution founded only last year, each subscribed $2.5bn in bonds issued by Dubai, the statement said. “The $5bn bond announced earlier today by the Dubai Department of Finance... is not linked to the restructuring of Dubai World,” the department said on Wednesday. The bond subscription comes 10 months after the Central Bank of the United Arab Emirates, which is based in Abu Dhabi, bought $10bn of government paper issued by Dubai, the first tranche of a proposed $20bn programme.
Over the preceding weeks, senior Dubai figures had insisted that all was well and that a landmark $4bn sukuk or Islamic bond due in December by Nakheel, which has preoccupied the markets since the start of the year, would be repaid in full and on time. Financiers had assumed that Abu Dhabi, the wealthy capital of the UAE, would stand behind Dubai if necessary. Sheikh Muhammed bin Rashid al Maktoum, Dubai’s ruler, ealier this month told those who question the strength of the relationship between his emirate and Abu Dhabi to “shut up”.
But Omar bin Sulaiman, the young head of the Dubai International Financial Centre, the emirate’s offshore flagship, was abruptly fired last weekend and three other senior lieutenants were removed from the board of a leading conglomerate. Analysts sensed a putsch by more conservative elements representing leading merchant families within the ruler’s majlis, or court. There was speculation on Wednesday about Abu Dhabi’s role. Some observers questioned why the two Abu Dhabi banks had subscribed to only $5bn of the Dubai debt issue and not $10bn, which would have completed the $20bn programme put forward in February.
One observer said it would have been better if the Nakheel sukuk had been paid on time, “but this [the standstill] will give them another six months to come up with other sources of funding”. He said Dubai did not want to be seen to be being bailed out by Abu Dhabi, as it would indicate that Dubai “is in a difficult situation”. “But if market players step in, then yes they are able to tap the market. It depends how people are reading it.”
Goldman's secret moral pathology
by Paul B. Farrell, MarketWatch
In "The Battle for the Soul of Capitalism" Jack Bogle no longer sees Adam Smith's "invisible hand" driving "capitalism in a healthy, positive direction." Today, his "Happy Conspiracy" of Wall Street plus co-conspirators in Washington and Corporate America are spreading a contagious "pathological mutation of capitalism" driven by the new "invisible hands" of this new "mutant capitalism," serving their selfish agenda in a war to totally control America's democracy and capitalism.
The "Goldman Conspiracy" is the perfect B-school case study of Wall Street's secret contagious pathology, with insiders like Lloyd Blankfein, Henry Paulson and others pocketing billions more of the firm's profits than shareholders, evidence the new "mutant capitalism" has replaced Adam Smith's 1776 version which historically endowed the soul of American democracy as well as our capitalistic system. Sadly for America Goldman's disease is rapidly becoming a pandemic spreading beyond Wall Street's too-greedy-to-fail banks, infecting our economy, markets and government as it metastasizes globally.
What are the symptoms of this growing "soul sickness," this "pathological mutation of capitalism" Bogle fears? Recently we reviewed the consequences of this "soul sickness." Today we'll paraphrase news reports about 15 symptoms spreading "soul sickness" beyond the boundaries of this Goldman case study: These are the 15 signs of a moral pathology undermining not just banking but American democracy and capitalism.
1. Gross denial of any moral damage caused by their rampant greed
Seeking Alpha: "Goldman is America's most hated corporation." We cheer as Rolling Stone's Matt Taibbi calls Goldman "a giant vampire squid wrapped around the face of humanity." Banks triggered a global crisis. Main Street suffers. Greedy bank CEOs raid the Treasury then stuff $30 billion in their bonus pockets, up 60% from last year. They are our 21st century General Motors, convinced "What's good for Goldman is good for America." We saw how that arrogance ended. Wall Street has similar suicidal symptoms.
2. Narcissistic egomaniacs with secret 'God complexes'
London Times' John Arlidge interviewed Goldman CEO Blankfein: "He paid himself $68 million in 2007, now worth more than $500 million, yet insists he's a blue-collar guy. He says banking has a 'social purpose,' just a banker 'doing God's work.'" When I was at Morgan Stanley in the 1970s the firm ran an ad: "If God Wanted To Do a Financing, He Would Call Morgan Stanley."
Today, all of Wall Street is dual diagnosed: They're morally blind money addicts who believe they're "God's chosen." AA would say: They haven't "bottomed," won't recover from their disease till a disaster hits, with another market meltdown and the "Great Depression 2." Then maybe they'll "quit playing God."
3. Paranoid obsessives about secrecy, guilt and non-disclosure
Bloomberg: "New York Fed's Secret Deal: Taxpayers paid $13 billion more than necessary when government officials, acting in secret, made deals with banks on AIG, buying $62 billion of credit-default swaps from AIG." The government would eventually cover about $180 billion in AIG swaps backing toxic CDOs when Paulson and Ben Bernanke double-teamed to bailout Goldman, saving them from bankruptcy.
4. Power-hungry need to control government using Trojan Horses
Wall Street Journal: "For a year Goldman said it wouldn't have suffered damage if AIG collapsed. But a new report kills that claim. TARP inspector general found that then New York Fed Chair Tim Geithner gave away the farm. If AIG had collapsed, Goldman would have had to cover the losses itself. They couldn't collect on the protection of AIG swaps." Yes, Goldman was bankrupt. But friends in high places always save them.
5. Borderline personalities who regularly ignore conflicts of interest
New York Times: "Before becoming Treasury secretary in 2006, Hank Paulson agreed to hold himself to a higher ethical standard than his predecessors. He specifically said he'd avoid his old buddies at Goldman where he was CEO. Later Congress saw many conflicts of interest, not just meetings but favorable treatment for his buddies at Goldman."
6. Pathological liars incapable of honesty even with own investors
McClatchy News: "Goldman secretly bet on the U.S. housing crash after peddling more than $40 billion of securities backed by 200,000 risky home mortgages. But they never told their investors they were also secretly betting that a drop in housing prices could wipe out the value of those securities." Paulson knew, stayed silent. "Only later did their investors discover Goldman's triple-A investments were junk. Did Goldman's failure to disclose its bets on an imminent housing crash violate securities laws?" Boston University Prof. Laurence Kotlikoff says: "This is fraud, should be prosecuted." But it won't be in the new "mutant capitalism." Members of AA say you know when an alcoholic is lying: Their lips are moving. Same with Wall Street: Think liar's poker. It's in their DNA. They're compulsive liars trapped in a culture of secrecy. They lie, the lies cascade, memory slips, more lies are necessary, they cannot stop lying. Goldman sure can't ... look, their lips are moving again.
7. Sole fiduciary duty to insiders, not investors, never the public
New York Examiner: "Goldman was at the heart of the subprime market, selling subprime junk as no-risk AAA bonds, then gambling, hedging, shorting their investors. Goldman traded like Enron. That set up the meltdown. The Fed and Goldman's ex-CEO at Treasury saved Goldman. Taxpayers got stuck with the bill. Bailout overseer Elizabeth Warren called this reckless gambling. Trend forecaster Gerald Celente calls it mafia-style looting.
8. Moral issues are PR glitches, violations of 'don't get caught' rule
USA Today says "Goldman Sachs should be celebrating. Yet, the mood at the investment bank seems to be one of crisis about the public backlash over employees' bonuses." So Goldman's on a PR blitz in a bid to undo the damage. They canceled their Christmas party. Also launched a $500 million program for small businesses. Get it? They can't see their moral failings, only a PR problem, so they hire PR agents and crisis managers first.
9. Charitable donations are tax and PR opportunities, not moral issues
New York Times: Examined Goldman charitable foundation's tax filing: Thick as a phone book with more than 200 pages of trades. "Never seen anything like it," said Verne Sedlacek, president of Commonfund, a $25 billion fund for universities and nonprofits. The money to Goldman's foundation is dwarfed by insiders' bonuses. The foundation got $400 million, gave away $22 million. Bonuses were 20 times more. Even the New York Post said "Goldman's Born Again Image is Laughable." They're sleaze-ball cheapskates.
10. When exposed in a massive fraud, feign humility, fake an apology
CBS MoneyWatch: "Blankfein now says he's 'sorry for the role Goldman played in the housing crisis: We participated in things that were clearly wrong.'" Wrong? Sounds more like he's admitting to something "clearly criminal." Reread: Isn't he admitting guilt to a fraud; cheating millions of homeowners, shareholders, taxpayers? Then laughs at us with phony "restitution," a fund of $100 million annually for five years to small-business owners. Financial Times says "$100 million is the profits from one good trading day. In 3Q '09 they had 36 days better than that." Unfortunately, these crooks will get away with it.
11. When bankruptcy threatens, bribe friends in 'Happy Conspiracy'
Barron's: While Geithner was "showcasing what a great investment Washington made in Goldman, the 23% return on the $5 billion of the taxpayers money, Warren Buffett's deal made him a fabulous 120% return. Goldman's stock ran up to $180 from $115, a gain of $2.8 billion. Add 8% discount on warrants, another $3.2 billion to him."
12. Engage co-conspirators to cover up, distract, do your dirty work
Reuters: "Former Merrill Lynch CEO John Thain was fired after a scandal over the billions in Merrill bonuses. He says big insider bonuses don't cause excessive risk-taking nor the financial crisis." He blames "poor risk management, excessive leverage and too much liquidity for too long. But even if they tie bonuses to long-term performance, that won't prevent the next collapse." Why? They'll find new ways to break the moral code.
13. As money-hungry vultures they will prey on vulnerable Americans
McClatchy News: "An obscure Goldman subsidiary spent years buying hundreds of thousands of subprime mortgages, many from the more unsavory lenders. They repackaged them as high-yield bonds. The bottom fell out. Now, after years of refusing to disclose they owned the mortgages, the secret is out and Goldman has become one of America's biggest, greediest foreclosers." Yes, the vampire squid wants pounds of flesh.
14. Treat everyone not in the 'Happy Conspiracy' with tough love
HuffPost's Leo Leopold warns: "Each day reveals how we've traded away our sense of decency and the common good in exchange for pure greed. Unemployment means hunger. The Agriculture Department reports 49 million Americans don't have enough food, up 13 million over the last year, highest number ever." Wall Street treats anyone not in the "Happy Conspiracy" as morally defective capitalists in need of "tough love."
15. Addicts consumed by money: 'Jesus would throw them out ...'
New York Times' Maureen Dowd: "Goldman's trickle-down catechism isn't working. We have two economies. In the past decade Wall Street's shared little with society. Their culture is totally money-obsessed. There's always room for a bigger house, bigger boat. If not, you're falling behind. It's an addiction. And Washington's done little to quell it. Geithner coddles wanton bankers. Obama's absent. 'Saturday Night Live' was tougher. And as far as doing God's work: The bankers who took taxpayer money, pocketing obscene bonuses: They're the same greedy types Jesus threw out of the temple."
Warning: Washington, Main Street, none of us has "clean hands." We're all in bed with the "Happy Conspiracy," touched by greed, turning a blind eye to Wall Street's rapidly metastasizing moral and spiritual pathology: So ask yourself, do you believe America's widespread "lack of a moral compass" will eventually trigger another, bigger market and economic meltdown, pushing America into the next "Great Depression II?"
15 Signs American Society Is Coming Apart at the Seams
Editor's note: The following is an edited excerpt from the Amped Status report, "The Critical Unraveling of U.S. Society."The economic elite have launched an attack on the U.S. public and society is unraveling at an increased rate. You may have missed it in the mainstream news media, but statistical societal indicators are reading red across the board. Let’s look at the top 15 statistics that prove we are under attack.
1) The inequality of wealth in the United States is soaring to an unprecedented level. The U.S. already had the highest inequality of wealth in the industrialized world prior to the financial crisis. Since the crisis, which has hit the middle class and poor much harder than the top 1 percent, the gap between the top 1 percent and the remaining 99 percent of the U.S. population has grown to a record high.
2) As the stock market went over the 10,000 mark and just surged to a 13-month high, the three big banks that took taxpayer money and benefited the most from the government bailout have just set a new global economic record by issuing $30 billion in annual bonuses this year, “up 60 percent from last year.” Bloomberg reported: “Goldman Sachs, the most profitable securities firm in Wall Street history, had a record profit in the first nine months of this year and set aside $16.7 billion for compensation expenses.” Goldman Sachs is on pace for the best year in the firm’s history, and it is also benefiting by only paying 1 percent in taxes.
3) The profits of the economic elite are “now underwritten by taxpayers with $23.7 trillion worth of national wealth."
As the looting is occurring at the top, the U.S. middle class is just beginning to collapse.
4) Workers between the ages of 55 to 60, who have worked for 20 to 29 years, have lost an average of 25 percent off their 401k. During the same time period, the wealth of the 400 richest Americans went up by $30 billion, bringing their total combined wealth to $1.57 trillion.
5) Home foreclosure filings "hit a record high in the third quarter (of 2009)… They were the worst three months of all time… 937,840 homes received a foreclosure letter" in this three-month period; “3.4 million homes are expected to enter foreclosure by year’s end, with some experts estimating that next year will be even worse.”
President Obama has enacted a $75 billion taxpayer funded program that has been a spectacular failure in stemming the foreclosure crisis and has proven to be another massive waste of billions of taxpayer dollars.
6) 25 million people are unemployed or underemployed.
This means we have 25 million people who urgently need to increase their income, and they’re quickly running out of options. The unemployment rate is expected to rise further and remain high for several years. “The president’s chief economic adviser warned that the nation’s unemployment rate could stay ‘unacceptably high’ for years to come."
The New York Times reports: "Americans now confront a job market that is bleaker than ever in the current recession, and employment prospects are still getting worse. Job seekers now outnumber openings six to one, the worst ratio since the government began tracking….” As this ratio continues to grow, it will lead to a further reduction in wages -- average worker wages have seen a sharp decline over the past year.
Economist Nouriel Roubini, a man who accurately predicted our current crisis, just reported on unemployment stating: “Think the worst is over? Wrong. Conditions in the U.S. labor markets are awful and worsening…. So we can expect that job losses will continue until the end of 2010 at the earliest. In other words, if you are unemployed and looking for work and just waiting for the economy to turn the corner, you had better hunker down. All the economic numbers suggest this will take a while. The jobs just are not coming back.”
7) As the few elite banks thrive, there have been 123 U.S. bank failures thus far this year. Recently, three banks that the government declared “healthy” and gave taxpayer money, have folded. The Wall Street Journal reports: “U.S. regulators have seized or threatened at least 27 banks that got capital infusions from the Troubled Asset Relief Program, including some lenders government officials knew were troubled when they awarded the money. The troubles put taxpayers at risk of losing as much as $5.1 billion invested in the banks since TARP was launched in October 2008.”
8) As bankruptcies surge across the board, 10 U.S. states are on the verge of bankruptcy, with several ready to declare a financial state of emergency. California, Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin are all “barreling toward economic disaster, raising the likelihood of higher taxes, more government layoffs and deep cuts in services."
9) This is occurring at a time when the “federal budget deficit for the fiscal year that just ended was $1.4 trillion, nearly a trillion dollars greater than the year before." In total, "U.S. public debt topped $12 trillion for the first time in history… The public debt topped $10 trillion in September 2008. The debt is quickly approaching the statutory limit of $12.104 trillion, meaning Congress would have to raise the ceiling to prevent a shutdown of government operations."
Economist Dean Baker explains the risk of running such a large deficit: "The debt limit must be increased at regular intervals in order to allow the government to function normally because the government is currently operating at a deficit. If the debt limit is not passed, then at some point the government will not be able to pay workers and contractors. It won’t be able to send out Social Security checks or make payments for Medicaid and unemployment insurance to state governments. And, it will not be able to make interest payments on government bonds, effectively defaulting on the national debt."
Needless to say, all of this will make life drastically more difficult for American citizens. As the middle class continues on the path of economic decline, the number of citizens living in poverty has already hit an all-time high.
10) Although the government’s official figure tries to low-ball the number, 47.4 million U.S. citizens live in poverty, and the U.S. poverty rate is the highest in the industrialized world.
Predictably, homelessness is rising at an increased rate as well. "The U.S. government does not tally the numbers but interested organizations say that more than 3 million people were homeless at some point over the past year…. The fastest growing segment of the homeless population is families with children.”
Children have been hit especially hard by the economic crisis:
11) * 50 percent of U.S. children, one out of every two children, will need to use food stamps to eat.
One out of every two children in the United States of America will need to use a food stamp… to EAT!
If you didn’t think starvation was a serious threat in the U.S., just read this new Washington Post report: “The nation’s economic crisis has catapulted the number of Americans who lack enough food to the highest level since the government has been keeping track, according to a new federal report, which shows that nearly 50 million people — including almost one child in four — struggled last year to get enough to eat… Several independent advocates and policy experts on hunger said that they had been bracing for the latest report to show deepening shortages, but that they were nevertheless astonished by how much the problem has worsened. 'This is unthinkable. It’s like we are living in a Third World country,' said Vicki Escarra, president of Feeding America."
The United States Department of Agriculture released these findings in a study that was completed in December 2008, which means these numbers don’t take into account the millions more unemployed throughout 2009. The numbers of people living in poverty and struggling to eat has seen a significant increase since then.
This a national tragedy. But it gets much worse.
12) In 2008, according to the Census Bureau, the number of U.S. citizens without health care grew to a record 46.3 million. “The new figures, however, understate the severity of the economic downturn because a large portion of the nation’s job losses and unemployment rate increases occurred after the Census survey data was collected in March as part of the annual Current Population Survey."
13) Lack of health insurance has caused 45,000 preventable U.S. citizen deaths in the past year. The American Journal of Medicine recently released a study that stated, “Nearly two out of three bankruptcies stem from medical bills, and even people with health insurance face financial disaster if they experience a serious illness.”
A Johns Hopkins Children’s Center study reported that 17,000 children have died due to lack of health care. You can also add in a recent report that revealed that 2,266 U.S. veterans have died in 2008 due to lack of insurance.
The 50 million now uninsured and the 45,000 preventable deaths per year statistics are expected to drastically rise over the next few years. As the Senate continues to strip meaningful amendments from a health care bill that wouldn’t even take effect until 2013, it has become clear that, despite the media hype, the health care bill is going to fall far short of meaningful reform and continue to rig the game in favor of large insurance company profits at the expense of the U.S. population. With the highest cost healthcare in the world, current trends will continue and much needed change is not on the horizon.
Never before has the United States had so many citizens with so little means, little to no income and heavy debt. Debt and costs of living have now shackled U.S. citizens just as they have shackled people throughout the world. The economic hit men have now hit the United States as well and millions of American citizens are now effectively sentenced to a slow death.
Economic Imperial blowback has hit the mainland.
And the clock is ticking louder by the day…
And here’s two more facts for you:
14) The gun and ammunition manufacturing industry in the United States has over 200 companies producing billions of dollars in annual revenues. This huge manufacturing base cannot fulfill demand quickly enough. The demand for guns and ammunition has hit a record high and the gun industry cannot produce enough bullets to keep up with orders.
Americans are arming themselves to the teeth!
15) In the past year, 100 new armed militia groups have been formed, as militia members have doubled in numbers. Federal authorities are gravely concerned about the “uptick in militia activities." One federal authority recently said, “All it’s lacking is a spark. I think it’s only a matter of time before you see threats and violence."
So let’s break down these numbers.
You have a population of 50 million people who are in desperate need of money, they most likely have no health insurance and can’t afford to get health care or help of any kind. Part of this population probably also has loved ones who can’t get life sustaining medical treatments, or loved ones who have already died due to lack of costly medical treatment. The clock is ticking loud for these people and they are running out of options fast, and time delayed is time closer to death.
While the richest 1 percent have never had it so good, a significant percentage of the U.S. population now has firsthand experience in this. Millions upon millions of Americans are poor, broke, struggling, starving, desperate… and armed.
We are sitting on a powder keg!
We are now witnessing the critical unraveling of U.S. society.
You can read the rest of the report here.
The Emperor’s New Clothes: Those Foreclosures Are Not Real Folks, Get it?
The Emperor is still strutting around as though he was fully clothed in the best silk, color and design. Wall Street is still the darling of government and a whole lot of other people, even if it was a little bad these past few years. We’ve been through the part where the swindler’s came to town, where the government officials ashamed of their apparent blindness and ignorance raved about the new derivative innovations, and the parade of foreclosures based upon invisible clothes. But we have not arrived at the part in the story where the little child yells out that the old fool has no clothes on. And we still don’t hear everyone laughing at wall Street and sending them home to lick their own wounds instead of inflicting it on everyone else.
The swindlers are still in town selling invisible clothes to everyone gullible enough to buy nothing and call it something. We are running on vapor since 1983 when derivatives were zero. Now we have credit derivatives with a nominal value of somewhere over $500 Trillion — that is ten times the total money in circulation from government origins. That’s “nominal value” because they don’t exist and they have no value. There is no substance to them to the extent that they are based on secured debt and possibly all other debt. There is no mortgage, there is no note, although there might be an obligation. But if there is an obligation it probably has been extinguished by either set off for predatory “lending” (actually illegal sale of unregistered securities fraudulently masquerading as loan products) or extinguished by payment directly or indirectly from Uncle Sam, more investors or others. In this fairy tale (national nightmare), the swindler’s take over the government instead of sneaking out of town with their hoard of ill-gotten gains.Think about it. If virtually ALL of the securitized residential mortgages that were originated for the last 10 years are in some sort of trouble, how much brain power does it take to conclude that there was something wrong with them to begin with?
If virtually ALL of the mortgage backed securities that were created and sold in the last 10 years went into default, how much brain power does it take to conclude that there was something wrong with them to begin with?So if virtually all the transactions originating the source money and all the transactions that were funded from the source money went bad, how much brain power does it take to conclude that there was no substance to the transaction and that the whole thing was a fantasy from Wall Street, who are now strutting around with their pockets bulging with the all the money everyone else (investors and “borrowers”) lost?
I’ve been as gentle as I could, giving everyone a chance to catch up but we are now on the precipice of a cliff far deeper than anything we have seen before including one year ago. And nobody on the side lines is really getting it. We continue our march toward the edge of the cliff, push the ones in front off, in the hope or belief that we won’t ever get there. So here it is, my opinion to be sure, but anyone who has been following my writings since April, 2007 knows that I called the stock market crash, the credit freeze and the collapse of the world economies and why. So it’s not like I don’t have a track record. I wasn’t the only one and people with far more credibility than me spotted the same things and continue to scream bloody murder, “the emperor has no clothes!” See comments by Roubini, Krugman, Volcker et al.
- Geithner and Summers have to go. They are the emperor’s closest confidants who don’t want to look stupid even if it destroys the entire country. The current emperor is still on a learning curve so we have to cut him some slack. The prior ones, well….read on.
- The recession is real but most of it could be reversed by simply admitting the obvious: those derivatives have no value, the mortgages are mostly invalid, the notes are mostly invalid, and the obligations are mostly extinguished by the swindlers’ own chicanery with Federal bailouts and Credit Default Swaps, which were the cloth of the Emperor’s invisible clothes.
- The need for the AIG bailout can be argued. But nobody can argue that the people who benefited from it are the same people who got us into this mess. They took a system that was working and turned it into a system that couldn’t work. They turned mortgage lending on its head: mortgages that were likely to perform were valuable only as cover for most of the illegal activities underneath. The real incentive was to create mortgage pools that would fail and where they could collect on credit default swaps worth as much as 30 times the original nominal value. Vapor on Vapor.
- That means they have every motivation to make certain you go into default and no motivation whatsoever to modify, settle, allow short-sale or do anything for the benefit of a homeowner who wants to settle the matter honorably. You can’t do that when you are dealing with dishonorable people with motives that amount to acts of domestic terrorism. There is no talking to them because if they can get you to default on that $300,000 loan they probably are going to get paid $9,000,000 just on your default. How do you like them apples? Check it out. It is true.
- Any obligation — whether it is a loan for refinancing a house, buying a house, student loan, auto loan etc. that have the attributes discussed in this blog — does NOT have any security or note that can be enforced and all of them can be extinguished in bankruptcy — probably even including the nondischargeable student loans. (More on that another time).
- Therefore, much of the recession, all of the foreclosures and much of the lost wealth that is “missing” is legally, morally and ethically and in actuality and reality, a fantasy. Some 20 million homeowners or more with these residential mortgages securitized through a money laundering scheme are sitting on wealth they have been convinced they don’t have. But they do. Those houses are free and clear — legally, morally and ethically.
- All the homes in the MERS database are probably free from any encumbrance legally, ethically and morally. Trillions of dollars of wealth that is claimed as “lost” is still possessed by people who don’t know they have it and the game is on to make sure that if they ever figure it out it will be too late.
- Imagine the purchasing power in our consumer economy if the mortgage obligations and other obligations simply vanished. What would happen to the recession? What would happen to unemployment? What would happen to tax revenues without ever raising the rate of taxation? It would all self correct. And speaking of taxes, how about all those trillions of dollars in “fees” and “profits” that were sequestered off shore, never reported and thus never taxed? what would happen to the national and state deficits?
- All this is happening because the wrong people are controlling the conversation and most people are listening because the “experts” because they are so smart “must know better.” Consider me the child who yelled “But the Emperor has no clothes.” A million experts with long resumes, PhD’s and persuasive catch words can’t change the fact that the money laundering scheme of the last 10 years was clothed in “Apparent” legality but in substance was simply fraud perpetrated by people who were not any smarter or better than the common swindler. They did, however, have one ace in the hole — the Emperors were in on it. Maybe we have a chance with the current administration, maybe not.
- Unless we do something about this, we will suffer the indignity of decline into third world status as the wealthy few squeeze the life out of the rest of the country. Is this too extreme for you? Go to the International Money Fund website or the World Bank website or any other website or book that addresses basic economics. You won’t find anything different there. Just words, like these, with a little more polish and a little more academic tone, with the same message.
Hacked climate emails called a "smear campaign"
Three leading scientists who on Tuesday released a report documenting the accelerating pace of climate change said the scandal that erupted last week over hacked emails from climate scientists is nothing more than a "smear campaign" aimed at sabotaging December climate talks in Copenhagen. "We're facing an effort by special interests who are trying to confuse the public," said Richard Somerville, Distinguished Professor Emeritus at Scripps Institution of Oceanography and a lead author of the UN IPCC Fourth Assessment Report.
Dissenters see action to slow global warming as "a threat," he said.
The comments were made in a conference call for reporters. The scientists—Somerville, Michael Mann of Penn State and Eric Steig of University of Washington—were supposed to be discussing their new report, the Copenhagen Diagnosis, a dismal update of the UN IPCC's 2007 climate data by 26 scientists from eight nations. Instead they spent much of the time diffusing the hacker controversy, known in the media as "Climate Gate."
The scandal began on November 20, when an unknown hacker stole at least 169 megabytes of emails from computers at the prominent Climate Research Unit (CRU) of the University of East Anglia and put them online for the world to see. CRU is considered one of the world's leading institutions concerned with human-caused global warming. The leaked emails contain private correspondence on climate science dating back to 1996. Skeptics of global warming say these messages are filled with evidence of manipulated data from lead authors of the UN's highly influential IPCC reports.
U.S. Sen. James Inhofe (R-Oklahoma, pictured here), a climate skeptic, said he would launch an inquiry into UN climate change research in response. In an interview with the Washington Times radio show, Inhofe explained the investigation would look into "the way cooked the science to make this thing look as if the science was settled, when all the time of course we knew it was not."
CRU Vice-Chancellor of Research Trevor Davies responded in an official statement: "There is nothing in the stolen material which indicates that peer-reviewed publications by CRU, and others, on the nature of global warming and related climate change are not of the highest-quality of scientific investigation and interpretation." Michael Mann, co-author of the Copenhagen Diagnosis and lead author of the UN IPCC Third Assessment Report, blamed skeptics for taking the personal emails out of context.
"What they've done is search through stolen personal emails—confidential between colleagues who often speak in a language they understand and is often foreign to the outside world. Suddenly, all these are subject to cherry picking," he said. They've turned "something innocent into something nefarious," Mann added. The vital point being left out, he said, is that "regardless of how cherry-picked," there is "absolutely nothing in any of the emails that calls into the question the deep level of consensus of climate change." This is a "smear campaign to distract the public," said Mann. "Those opposed to climate action, simply don't have the science on their side," he added.
Professor Davies called the stolen data "the latest example of a sustained and, in some instances, a vexatious campaign" designed "to distract from reasoned debate" about urgent action governments must take to reverse climate change. According to Somerville, the comments in the emails "have nothing to do with the scientific case" for climate change. It is "desperate" to launch this right before Copenhagen, Eric Steig, co-author of the Copenhagen Diagnosis, said on the call.
Sen. Inhofe, meanwhile, lauded the timing of the incident. "The interesting part of this is it's happening right before Copenhagen. And, so, the timing couldn't be better. Whoever is on the ball in Great Britain, their timing was good," he said. The fallout from the scandal is putting some of the world's leading climate scientists on the defensive and underlining the influence of skeptics, even as the case for human-caused warming gets stronger.
According to the Copenhagen Diagnosis report, climate change has rapidly accelerated beyond all previous predictions and humans are to blame. The findings are a synthesis of 200 peer-reviewed papers that continued to pour in from all over the world after the UN IPCC issued its 2007 analysis. Somerville described the report as an "authoritative assessment" of the newest climate change data. The results reveal that global warming emissions in 2008 were nearly 40 percent higher than those in 1990. Further, sea level rise is 80 percent above past IPCC predictions.
If 2 degree Celsius warming is to be avoided—the point at which catastrophic damage is predicted to occur—fossil fuel emissions must peak between 2015 and 2020, "and then decline rapidly," the authors warn. "There's an urgency to this that is not politically or ideological driven," said Somerville. This is "objective scientific reality," he added, and we're "running out of time," to stop the problem.
In a statement released on Tuesday, three of the UK's leading science organizations—the Met Office, the Natural Environment Research Council and the Royal Society—issued an unusually strong statement in advance of Copenhagen. They wrote: The scientific evidence which underpins calls for action at Copenhagen is very strong. Without co-ordinated international action on greenhouse gas emissions, the impacts on climate and civilization could be severe.
Climate change quickens, seas feared up 2 metres
Global warming is happening faster than expected and at worst could raise sea levels by up to 2 metres (6-1/2 ft) by 2100, a group of scientists said on Tuesday in a warning to next month's U.N. climate summit in Copenhagen. In what they called a "Copenhagen Diagnosis", updating findings in a broader 2007 U.N. climate report, 26 experts urged action to cap rising world greenhouse gas emissions by 2015 or 2020 to avoid the worst impacts of climate change.
"Climate change is accelerating beyond expectations," a joint statement said, pointing to factors including a retreat of Arctic sea ice in summer and melting of ice sheets on Greenland and Antarctica. "Accounting for ice-sheets and glaciers, global sea-level rise may exceed 1 metre by 2100, with a rise of up to 2 metres considered an upper limit," it said. Ocean levels would keep on rising after 2100 and "several metres of sea level rise must be expected over the next few centuries."
Many of the authors were on the U.N.'s Intergovernmental Panel on Climate Change, which in 2007 foresaw a sea level rise of 18-59 cms (7-24 inches) by 2100 but did not take account of a possible accelerating melt of Greenland and Antarctica. Coastal cities from Buenos Aires to New York, island states such as Tuvalu in the Pacific or coasts of Bangladesh or China would be highly vulnerable to rising seas. "This is a final scientific call for the climate negotiators from 192 countries who must embark on the climate protection train in Copenhagen," Hans Joachim Schellnhuber, Director of the Potsdam Institute for Climate Impact Research, said in a statement.
Copenhagen will host a Dec. 7-18 meeting meant to come up with a new U.N. plan to succeed the Kyoto Protocol beyond 2012. But a full legal treaty seems out of reach and talks are likely to be extended into 2010. "Delay in action risks irreversible damage," the researchers wrote in the 64-page report, pointing to a feared runaway thaw of ice sheets or possible abrupt disruptions to the Amazon rainforest or the West African Monsoon. The researchers said global carbon dioxide emissions from fossil fuels were almost 40 percent higher in 2008 than in 1990.
"Carbon dioxide emissions cannot be allowed to continue to rise if humanity intends to limit the risk of unacceptable climate change," said Richard Somerville of the Scripps Institution of Oceanography at the University of California. In a respite, the International Energy Agency has said emissions will fall by up to 3 percent in 2009 due to recession. The report said world temperatures had been rising by an average of 0.19 Celsius a decade over the past 25 years and that the warming trend was intact, even though the hottest year since records began in the mid-19th century was 1998. "There have been no significant changes in the underlying warming trend," it said. A strong, natural El Nino weather event in the Pacific pushed up temperatures in 1998.
