Thursday, January 31, 2008

Debt Rattle, January 31 2008


Ilargi: The markets may be cheering the rhetoric from MBIA's conference call, raising the stock 10%, but Standard & Poor's doesn't like the drinks served at the party:

[Late Thursday, Standard & Poor's Ratings Services placed MBIA ratings on a watch list "with negative implications," which means there is a 50 percent chance the agency will drop the rating at least a notch within the next 90 days.]

FGIC loses "AAA" rating from S&P, MBIA may be cut
Standard & Poor's on Thursday cut its "AAA" ratings on FGIC Corp's bond insurance arm, and placed its top ratings on the bond insurance arm of MBIA Inc on review for downgrade. The rating agency also said it may cut the "AAA" rating of XL Capital Assurance Inc, the bond insurance arm of Security Capital Assurance.

The move comes as bond insurers are scrambling to raise capital required to hold their top ratings. Bond insurers are at risk of losing the ratings because of expected losses from risky residential mortgage securities in their insurance portfolios. S&P cut Financial Guaranty Insurance Co's "AAA" insurer financial strength rating by two notches to "AA." It also cut parent company FGIC Corp's long-term rating by three notches to "A," the sixth-highest investment grade, from "AA."

Forbes, Feb 1:

Bond Insurers Need Help--Fast
The New York Department of Insurance has been meeting with investment banks, which are exposed as counterparties to the bond insurers, to try to arrange a bailout of the industry, the demise of which could put thousands of municipal issuers at risk of being unable to raise money. But that bailout is slow in coming and some say not likely to happen. Three banks have 45% of the counterparty exposure, Citigroup, UBS and Merrill Lynch, making the chances of a banking industrywide rescue remote, even bank executives acknowledge. But banks are on the hook for billions of write-downs, up to $70 billion worth by Oppenheimer analyst Meredith Whitney's calculations. The industry needs solutions, fast.

Thursday, top MBIA executives tried to calm investor anxiety about the fate of the firm, saying the stock's plunge in the last year was an over-reaction to problems facing the industry and the result of "fear-mongering" and "distortions" by self-interested investors.
It was a clear shot at Pershing Square Capital, the New York hedge fund run by William Ackman, who released a letter to regulators Wednesday, along with a lode of data, to support his claim the bond insurers are headed for a swift demise.

Gary Dunton, MBIA's chief executive, said on a conference call Thursday that [MBIA has $16 billion socked away to pay claims.

So what's likely to happen at this point? In the absence of a bailout, the banks could get together and form a reinsurance company to relieve the bond insurers of some of their exposure. This is something New York insurance regulator Eric Dinallo has encouraged. Berkshire Hathaway jumped in the market in December and is seeking licenses to insure bond issues in all 50 states, and a spokesman for the insurance regulator said earlier this month that they were talking to other interested companies.

Another option: an injection of capital from an outside investor, and rumors have floated for several days that private equity firms would step in, as Warburg Pincus has already stepped in for MBIA. On Thursday, investor Wilbur Ross said there would be fallout in the industry but it was important to make sure troubles at the bond insurers don't disrupt municipal bond issuance, a $2.6 trillion market. Ross has been coy about whether he will step in and invest in Ambac or other bond insurers.

"If you throw municipal bonds into disorder, you're going to have a real world-class problem," Ross was quoted as saying at a luncheon in New York.

Ilargi: Bill Ackman read 140.000 pages on MBIA, and ran very sophisticated computer models. But he cannot ask questions in their conference call today. Instead that call is used to throw terms at him such as "speculation", "fear mongering, "distortion", "nothing further from truth". Sounds like them's fighting words, except that MBIA doesn't have the courage to show up for the fight, and instead throws cheap punches at an adversary who can't defend himself..

As for the computer model: MBIA's CFO says that the analytical work was done by "an anonymous global bank", and that is simply not true. The analysis was done by a bank's highly developed software, which was this morning placed on the internet in Open Source format. We should hear findings of other parties running it with their numbers, parameters and expectations, soon. In the meantime, MBIA has gained a few more days in which they need not be transparent.

MBIA Says Capital Is Adequate, Rejects Speculation
MBIA Inc. Chief Executive Officer Gary Dunton said the world's largest bond insurer has more than enough capital to keep its AAA credit rating and dismissed speculation the company may go bankrupt.

Dunton, speaking on a conference call after Armonk, New York-based MBIA reported a $2.3 billion fourth-quarter loss, blamed "fear mongering" and "distortion" for driving the company's stock down more than 80 percent in the past year.
"It's very difficult to see the reputation of a company you love coming under fire," Dunton said. "The ground has literally opened up below us in the industry," he said.

MBIA is in the best position among its peers to survive the losses and downgrades on securities the industry guaranteed, Dunton said. MBIA's capital raising efforts will exceed the requirements necessary to keep its top credit ranking at Moody's Investors Service, he said, adding that speculation about MBIA's holding company liquidity risk is "nothing further from truth."

MBIA only allowed questions on the conference call today to be submitted in advance through e-mail. This was MBIA's way of ``taking the microphone away'' from people who had ``abused the privilege and ranted'' in the past, Greg Diamond, head of investor relations said on the call. These people had become adversaries, Diamond said, without naming anyone specific.

MBIA Chief Financial Officer Chuck Chaplin dismissed findings by Ackman yesterday that the company's CDO losses would reach $11.6 billion. The loss estimate was calculated using a model supplied by an unnamed investment bank, and the findings were sent in a letter to the Securities and Exchange Commission and New York Insurance Superintendent Eric Dinallo.

"It's important to point out that it is a letter demanding transparency where all the analytical work was done by an anonymous global bank that doesn't wish to be identified," Chaplin said in response to a question on the conference call today. He said there were flaws in the way the results were presented and said the model itself was a "black box."

Ilargi: Bill Ackman’s letter on the bond insurers yesterday afternoon, as we reported, threw an icy cold shower on the hoped-for market revival in the wake of the Fed’s 0.5% rate cut. While the overall implications of Ackman’s well-timed action have yet to be assessed, there’s a chilling and deepening sense of fear in the US economy this morning.

MBIA can presumably be written off. The $15 billion rescue package initiated by New York Insurance Superintendent Eric Dinallo is laughably inadequate in view of recent events, since the company insures over half a trillion dollar 'worth' of paper that may not have been properly graded. There could be attempts by the Fed to act, but it's hard to see anything remotely enough to restore confidence. I've said before that the ratings agencies have their own problems with clients' trust in their work, and they will be reluctant to dig themselves into an ever deeper hole. And even if they'd wanted to, Bill Ackman's recent revelations leave them no choice.

“It is hard to fill a bucket with a hole at the bottom.”
William Ackman, the activist shorter of the monolines, has stepped up his one-man campaign to bring the beleaguered insurers down.He claims he has obtained the most detailed yet data on Ambac and MBIA’s exposure to CDOs, and has bunged it all onto an “open source” website for others to add to.

In an accompanying letter, which you can view here, sent to Eric Dinallo, the SEC and cc-ed (as you do) to Ben Bernanke and the US Senate, Ackman said the data - obtained from an anonymous bank - would mark “a departure from relying on the opaque, faith-based pronouncements that the bond insurance industry has promulgated to the marketplace.”

The hedge fund manager, who took short positions on the monolines back in 2002, says people should feel free to use the data to make their own loss estimates. His own sums leave MBIA and Ambac facing around $11.6 billion of losses apiece on their RMBS and ABS CDO net exposure

Ilargi: In his letter yesterday, Ackman questioned the format of the MBIA conference call, which prohibited shareholders, and of course him, to ask questions directly.

Ackman posts MBIA questions ahead of call
Pershing Square Capital Management, a hedge fund, wrote an open letter to MBIA Inc on Thursday ahead of the bond insurer's conference call.

The conference call, which was to begin at 11 a.m., has an unusual format: Investors and analysts were asked to submit their questions in advance, or to submit their questions electronically. That means conference call participants may not be able to hear or see every question that is asked.

Pershing Square, founded by Bill Ackman, asked questions regarding possible uses for the company's cash, and collateral posting requirements at subsidiaries. The letter was likely intended to make Pershing Square's questions public even if MBIA chooses not to answer them on the call.

Ackman Devoured 140,000 Pages to Prove 'MBIA Was Never AAA'
It was the $109,000 photocopying bill that hedge fund manager William Ackman says made him realize how much he'd read and underlined before betting against bond insurer MBIA Inc. in 2002.

His law firm charged him for copying 725,000 pages of financial statements and other documents, 140,000 of them about MBIA, to comply with a subpoena. Following New York and U.S. probes of his trading and reports, Ackman persisted in challenging MBIA's AAA credit rating for more than five years, based on his own research.

Ackman may soon be proved right. MBIA, the largest provider of insurance against defaults in the global credit market, today reported a fourth-quarter net loss of $2.3 billion because of a slump in the value of mortgage-related securities it guaranteed. The independent research firm CreditSights Inc. this week said MBIA's credit rating may be downgraded. Ackman had warned that MBIA was magnifying its risks by backing instruments such as those based on loans to the least creditworthy homebuyers.

"It's in the nature of a shareholder activist to be persistent,"says Ackman, now 41. "I've been persistent because it's an important issue. People are obsessive about stupid things. They are persistent about important things.''

In the MBIA documents, Ackman says he saw that the insurer was guaranteeing untested asset-backed securities. He also found a reinsurance transaction that allowed the company to downplay a loss. MBIA agreed in January 2007 to pay $75 million to settle U.S. regulators' inquiries into that deal.

Ilargi: The following from the Financial Times’ Alphaville is a bit long, but that’s because it ties the picture together very well. Highly recommended read.

MBIA: Another morning, another monoline crisis…
Rate cuts or no rate cuts, the news just keeps getting worse for the big bond insurers, or monolines. On Thursday morning, or rather, just after midnight US eastern time, MBIA, the world’s largest bond insurer, posted its biggest-ever quarterly loss and said it is considering new ways to raise capital after a slump in the value of subprime-mortgage securities the company guaranteed.

At the same time, reports the Wall Street Journal, MBIA said it closed on its $500m stock sale to private equity investor Warburg Pincus, part of a deal announced earlier this month that will have Warburg invest up to $1bn in the troubled bond insurer. As part of the deal, two Warburg managing directors took seats on MBIA’s board of directors, replacing two current directors. In its press release, MBIA chief executive Gary Dunton said the capital-raising initiatives would offset the credit impairments the company expected to take, reports the Journal.

We can definitely believe Dunton’s statement that: “We are disappointed in our operating results for the year”. According to the Journal, MBIA’s Q4 derivatives write-down is more than 10 times as large as the $352.4m write-down it reported in the third quarter, an indication of the rapidly worsening US housing market and its effect on securities backed by loans made to credit-challenged customers. News of MBIA’s loss came a day after FGIC’s insurance unit became the third company to be stripped of its Aaa credit rating and downgraded to Aa.It also came just after shares in MBIA and Ambac, the second-biggest bond insurer, tanked in New York on Wednesday, sliding 15.9 per cent and 12.6 per cent, respectively, on fears of imminent downgrades.

Adding to the cheer, John Thain, Merrill Lynch’s new chief executive, told the FT on Wednesday that while individual credit insurers would most likely receive capital infusions from investors, it would be difficult to craft an “industry-wide” bailout for the beleaguered guarantors. In other words, the $15bn that New York State insurance superintendent Eric Dinallo is trying to persuade Wall Street banks to cough up for a sweeping monoline rescue plan is unlikely to appear.

And in a separate report, the FT has an update on the serious impact MBIA and Ambac’s troubles are having on the “normally sedate” world of municipal bond investing. Municipal bond yields have spiked sharply higher versus US Treasuries, “a sign that long-term investors are selling munis because of a perceived increase in risk” - and about half the $2,600bn municipal bond market is guaranteed by bond insurers led by MBIA and Ambac.

It is also a sign, according to the FT, of forced selling from a little-known but important group of short-term municipal bond investment vehicles - known as “tender option bonds” - that have run into acute stress in recent weeks, based on suspicions about the quality of bond insurers’ guarantees on the paper that they issue. TOBs have been popular with money market funds - which are required to invest in short-term and highly-rated paper and to maintain the value of every dollar invested. TOB programmes issue securities backed by long-term municipal bond assets, in a market worth about $400bn, according to FT estimates. Now, amid the growing likelihood that the bond insurers will lose their crucial Aaa ratings, money market investors are selling TOB paper to protect themselves from the risk of downgrades.

At the same time, MBIA is “reeling from an expansion out of municipal securities into guaranteeing CDOs”, notes Bloomberg, “and as the value of some CDOs plummet, ratings companies are pressing the insurers to add more capital”. Without the Aaa stamp, notes the FT, MBIA would be unable to lend a top rating to new securities, crippling its business and throwing ratings on $652bn of debt into doubt

S&P Lowers or May Cut $534 Billion of Subprime Debt
Standard & Poor's said it cut or may reduce ratings of $534 billion of subprime-mortgage securities and collateralized debt obligations, as home loan defaults rise. The downgrades may extend losses at the world's banks to more than $265 billion and have a "ripple impact" on the broader financial markets, S&P said.

The securities represent $270.1 billion, or 47 percent, of subprime mortgage bonds rated between January 2006 and June 2007, S&P said today in a statement. The New York-based ratings company also said it may cut 572 CDOs valued at $263.9 billion. The downgrades may increase losses at European, Asian and U.S. regional banks, credit unions and the 12 Federal Home Loan Banks, S&P said. Many of those institutions haven't written down their subprime holdings to reflect their market values and these downgrades may force their hands, S&P said.

"It is difficult to predict the magnitude of any such effect, but we believe it will have implications for trading revenues, general business activity, and liquidity for the banks," S&P said. The ratings company will start reviewing its rankings for some banks, especially those that "are thinly capitalized." S&P downgraded $50.1 billion of subprime-mortgage securities, none rated higher than A+. More than 69 percent of the AAA rated subprime securities from 2006 and 46 percent from the first half of 2007 were placed on review.

"This one, I didn't see coming," said Mark Adelson a consultant at Adelson & Jacob Consulting LLC in New York, and a former asset-backed bond analyst at Nomura Securities. Some of the largest global banks have already taken "significant" losses and they aren't likely to have more writedowns, S&P said.
Ilargi: This last line below is one hell of a scary statement, especially when you realize this is not confined to the US, it's a global phenomenon. Thousands of small banks and large ánd small funds sit on trillions 'worth' of waste paper. When MBIA rattles its last breath, Jericho's dominoes will start tumbling..
Under accounting rules, many smaller banks haven't been required to write down their holdings until the credit ratings fell, enabling them to avoid the losses that have crippled Citigroup Inc., Merrill Lynch & Co. and UBS AG.

Ilargi: We touched on the following topic yesterday. After the revelation that the ECB is secretly keeping Spain’s banks afloat for now, at the cost of taxpayers all over Europe (and they may be doing the same in other countries -Ireland?-), the UK wants to engrave “clandestine” help in its laws. At the cost of? Drumroll......., crescendo........Yes, indeed, see the highlighted line.

UK: Secret bank rescues to be allowed
Chancellor Alistair Darling is to give new powers to the Bank of England to mount secret rescue operations for banks requiring emergency funds. The plan will be unveiled today as part of sweeping regulatory reforms designed to prevent a repeat of the Northern Rock debacle, the BBC has learned.

He will also make the Bank of England's loans to a troubled bank rank first in the queue of creditors.

There will be a 12 week consultation period on the new legislation."It's unclear whether the devastating run on the Rock could have been prevented by the kind of clandestine help which the Bank may in future be able to provide," said the BBC's business editor Robert Peston. "Such secrecy would only apply where such emergency lending is temporary and limited in nature. "So the Treasury believes that the Rock probably needed too much money for too long for the Bank of England to be able to keep the rescue operation out of the public domain."

The tripartite system under which the FSA, the chancellor and the Bank of England work together to deal with emergencies has been criticised for failing to prevent the first run on a UK bank for more than a century. But that system is expected to remain in place under the new proposals.

The consultation is also expected to discuss what amount of bank deposits should be protected. Currently, savers have the first £35,000 in each account guaranteed, but the chancellor is likely to suggest extending that.
He may also propose that the protection scheme for depositors should be funded by the banks up-front.

Merrill Plans to Cut Back on CDOs, Structured Finance
Merrill Lynch & Co., the world's largest brokerage, will cut back on packaging home loans and consumer debts into securities after the collapse of the subprime mortgage market eroded demand for the products.

"Opportunities in many areas"of structured finance and so-called collateralized debt obligations "will be minimal for the foreseeable future and our activities will be reduced accordingly,"New York-based Merrill said in an e-mailed statement. The firm will continue packaging corporate loans and derivatives into securities.

Merrill issued the statement after Chief Executive Officer John Thain told investors at a conference in New York earlier today that the firm planned to exit its CDO and structured credit businesses. Jessica Oppenheim, a spokeswoman for the company, said the statement was released to clarify Thain's remarks. She declined to elaborate on the statement.
"We are not going to be in the CDO and structured-credit types of businesses,"which generated 15 percent of the firm's fixed-income revenue, Thain said at the conference.

Merrill posted its largest-ever loss last year after writing down the value of its CDOs and other assets related to subprime mortgages by more than $24 billion. The New York-based bank was the biggest underwriter of CDOs from 2004 through 2006, and got stuck with some of the products as investor demand declined.

Credit default swaps: how to spot the riskiest banks
The whole point about the 'credit crunch' - is that it means banks won’t or can’t lend as easily or as cheaply as they once did. The reason for this is that they are under-capitalised, either because losses have eroded their capital base or because they have had to take off-balance sheet loans back onto their books (in reality, much the same thing) This is a glorified way of saying that some banks are (at least technically) bankrupt.

Now, the system doesn’t like to admit such things - for obvious reasons - so we can expect the banks along with the central banks, such as the Bank of England and the regulators such as the FSA to lie about it. As such, it is highly unlikely that any bank will be allowed to fail (witness Northern Rock, which isn’t even a real bank) but that doesn’t stop the markets having a view as to who they are least comfortable lending to and which banks therefore need to pay more to get their hands on the cash they need to keep operating.

We can get a view on this by looking at the interest rates the banks off to us on their savings accounts - the higher the rate clearly the more desperate they are for cash. However another way to gauge the risk of your bank account it is too look at the credit default swap market. Credit default swap (CDS) spreads measure the premium to the risk-free interest rate that a bank can expect to pay in the market for 5-year loans. The higher the CDS for any given bank, the riskier the market thinks that particular bank’s debt is.

GATA's advertisement in The Wall Street Journal
This advertisement, sponsored by GATA and costing $264,426.26, is scheduled to appear in The Wall Street Journal on Thursday, January 31, 2008.

New UBS Writedown Dents Credibility
The $4 billion writedown announced by UBS on Jan. 30 doesn't come as a huge surprise. As far as is known, UBS has the largest exposure among European banks to U.S. subprime mortgages and collateralized debt obligations (CDOs), and the value of these securities is continuing to deteriorate—hence the need to acknowledge further losses. Other banks also are expected to take further hits.

"European banks involved in U.S. subprime will be making further writedowns," says Simon Adamson, an analyst at debt specialists CreditSights in London. Other European banks with potential for additional subprime losses include Royal Bank of Scotland, Deutsche Bank, Crédit Agricole, Credit Suisse, and Barclays, Adamson says.

UBS's foray into the U.S. mortgage markets has turned into an absolute nightmare. The bank, which had been considered one of Europe's best-managed financial institutions, has now written off a staggering $18 billion in exposure to subprime and other risky securities—comparable to the $16.7 billion in losses taken by Merrill Lynch and the $18 billion hit taken by Citigroup. With UBS's overall exposure to potentially toxic debt estimated by Adamson at $29 billion, this may well not be the last such announcement from the bank's stone-fronted Zurich (Switzerland) headquarters. UBS now acknowledges that on Feb. 14 it will report a loss of about $4 billion for 2007.

The terse announcement from UBS did not make clear exactly how the new losses came about. Unanswered questions, according to Adamson, include whether the new losses occurred because of concerns over the viability of bond insurers and whether credit problems are spreading into mortgages not classed as subprime. If the bank is writing down higher grades of mortgage debt, that would be a worrying development.

The Real Recession Problem: Consumers Are at the End of Their Ropes
Perhaps the silliest part of an already silly stimulus bill is a provision giving corporations big tax deductions this year on the costs of new machinery, instead of spreading those deductions over several years, as is normally the case. The idea is to get businesses to invest in more machinery, which will stimulate the economy. But accelerated depreciation, as it’s called, doesn’t work. Almost the same tax break was enacted in 2002 and studies show just about no increase in business investment as a result. Why? Because companies won’t invest in more machines when demand is dropping for the stuff the machines make. And right now, demand is dropping for just about everything.

This tax break exemplifies the illogic of what’s called supply-side economics. If you reduce the cost of investing, so the thinking goes, you’ll get more investment. What’s left out is the demand side of the equation. Without consumers who want to buy a product, there’s no point in making it, regardless of how many tax breaks go into it.

Which gets us to the real problem. Most consumers are at the end of their ropes and can’t buy more. Real incomes are no higher than they were in 2000, while food and energy and health care costs are all rising faster than inflation. And home values are dropping, which means an end to home equity loans and refinancing.

Most of what’s being earned in America is going to the richest 5 percent, but the rich devote a smaller percent of their earnings to buying things than the rest of us because, after all, they’re rich -- which means they already have most of what they want. Instead of buying, the rich invest most of their earnings wherever around the world they can get the highest return. Add all this together and there’s just not enough consumer demand out there to keep the American economy going. We’re finally reaping the whirlwind of widening inequality and ever more concentrated wealth. Supply-siders who want to cut taxes on corporations and the rich just don’t get it. Neither does most of official Washington.

Robert Reich is the nation's 22nd Secretary of Labor

2008 Outlook: Thrill Ride, Part III

See the megaphone formation?  It is called a wolf wave.  We are at a fairly good level of profits now, but it projects a nuclear winter in corporate profits dead ahead (see chart below).  From Record highs never seen in fifty years, to record lows also not seen in the same period, below the lows of 2001-2002.  This chart is a testament to how fiat money and credit creation has made steady growth and economic stewardship become more and more unmanageable over a long period of time. 

It is clear that monetary policy is also following this wolf wave pattern, either too hot or too cold.  Politicians (and their “something for nothing” constituents) in the western world see these enormous profits and are set to attack the creators and holders of this wealth.  They want the money and they will put in place new taxes and entitlement mandates to claw back this gusher of wealth, thereby accelerating the downside of this wave.  We all want business cycles that cleanse past excesses, but the up and downs are now out of control.  There is no consistency, no orderly form to the business and economic cycles, everything now is either booming or busting. 

As this pattern approaches what it is prophesizing we can look at 4th quarter 2007 profits -- which are now projected to have clocked in at a year over year LOSS of approximately (-19%) extending its slide from the 3rd quarters NEGATIVE (- 9%).  This Wolf Wave is afoot throughout the G7, it is not limited to the US and it is set to EAT these economies and asset markets for lunch.  As this earnings collapse unfolds so do incomes and tax receipts in Washington, Brussels, Paris, Berlin, Rome, etc., as well as statehouses, municipalities and the incomes of individuals. 

Wednesday, January 30, 2008

Debt Rattle, January 30 2008

Ilargi: This here puts a big smile on my face. We ran Bill Ackman's letter to the ratings agencies, about how they need to come clean on their bond insurers' assessments, a few days ago. Now Ackman takes it one step further, and writes to teh SEC and to Dinallo, who's trying hard to save the insurers. Ackman's one man crusade will make him very unpopular in lots of places, but now that he's made Bloomberg with his letter, who can ignore him? He's my hero for the day. Cutting Ben at his own game, so to speak.

MBIA, Ambac May Each Lose $11.6 Billion, Ackman Says

MBIA Inc. and Ambac Financial Group Inc., the two largest bond insurers, may each lose $11.6 billion on guarantees of residential mortgage securities and some collateralized debt obligations, according to hedge fund manager William Ackman.

Ackman calculated the losses using a model supplied by an unnamed investment bank and sent the findings in a letter to the Securities and Exchange Commission and New York Insurance Superintendent Eric Dinallo. Ackman is a managing partner of Pershing Square Capital Management LP, which is trying to profit from declines in the stocks and bonds of MBIA and Ambac.

Ackman, 41, stepped up his attack by posting on the Internet a list of asset-backed CDOs and other securities guaranteed by Armonk, New York-based MBIA and New York-based Ambac that allows others to craft their own loss predictions. Ackman didn't say how he got details on the securities, many of which haven't been disclosed by the companies.

"Up until this point in time, the market and the regulators have had to rely on the bond insurers and the rating agencies to calculate their own losses in what we deem a self-graded exam," Ackman said in a statement preceding release of the letter. "Now the market will have the opportunity to do its own analysis."

Ilargi: And there’s more in the “fun for the whole family” game of Downgrade Your Insurer (kudo for both to webjazz):

FGIC Loses AAA Rating at Fitch After Missing Deadline
Financial Guaranty Insurance Co., the world's fourth-largest bond insurer, lost its AAA credit rating at Fitch Ratings after missing a deadline to raise capital. Financial Guaranty, a unit of New York-based FGIC Corp., was cut two levels to AA, New York-based Fitch said today in a statement. The company had been AAA since at least 1991. Moody's Investors Service and Standard & Poor's are also reevaluating their ratings.

The loss of the AAA stamp jeopardizes ratings on bonds Financial Guaranty insured and limits the company's ability to generate new business. FGIC, along with MBIA Inc. and Ambac Financial Group Inc., are paying a price for expanding beyond their traditional business of backing municipal bonds to guaranteeing debt linked to riskier subprime mortgages and home- equity loans, as well as collateralized debt obligations.

"This announcement is based on FGIC's not yet raising new capital, or having executed other risk mitigation measures, to meet Fitch's AAA capital guidelines within a timeframe consistent with Fitch's expectations," the ratings company said today.
FGIC is controlled by Walnut Creek, California-based PMI Group Inc., Blackstone Group LP, and Cypress Group. PMI dropped 27 cents, or 2.9 percent, to $9.16 in New York Stock Exchange composite trading. Blackstone fell 43 cents to $18.56.
The insurance unit's top rating was placed under review by Fitch, Moody's and S&P in December after downgrades of securities backed by subprime mortgages. Fitch gave the company until this week to boost capital by $1 billion.[..]

About 71 percent of FGIC's guarantees are on municipal bonds, 23 percent are structured finance and 6 percent are international transactions, according to the company's Web site. FGIC guaranteed $21 billion of home-equity securities, $8.8 billion of subprime mortgage debt, and $10.3 billion of CDOs backed by subprime mortgages and other loans...

Ilargi: I don’t find this cut so interesting, not least of all since it was signaled loud and clear. What I’m much more curious about is where they go from here. How much time will this one buy them? What if markets fall again quickly? Today, Dallas Fed President Richard Fisher dissented, and next time he will probably not be alone anymore. This is a very risky game with the value of the US dollar. There are plenty countries wondering about their currencies being pegged to the dollar, and many more who are worried about their holdings in dollar-denominated paper.

Fed Lowers Rate to 3% as U.S. Expansion Falters
The Federal Reserve lowered its benchmark interest rate by half a percentage point to 3 percent, the second cut in as many weeks, to prevent the U.S. economy from sinking into a recession.

"Today's policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity," the Federal Open Market Committee said in a statement after meeting today in Washington. "However, downside risks to growth remain."

The move, coupled with the Jan. 22 emergency cut of three- quarters of a point, is the fastest easing of monetary policy since 1990. Hours before the decision was announced, the Commerce Department reported that gross domestic product grew 0.6 percent in the fourth quarter, half the pace forecast by economists.

Stocks rallied, while the dollar fell and Treasury notes weakened.

"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," the Fed said today. "Recent information indicates a deepening of the housing contraction as well as some softening in labor markets."

In America, land of the bubbles, the next pop will be the biggest
Three cheers! Wall Street's got a new rally song: "I'm dreaming dreams, I'm scheming schemes, I'm building castles high." Actually it's the 1919 tune that launched the roaring run-up to the '29 crash and the Great Depression. Remember the lyrics: "I'm forever blowing bubbles. Pretty bubbles in the air. They fly so high, nearly reach the sky. Then like my dreams they fade and die."

And it still fits today! Listen to venture capitalist Eric Janszen's scary new paradigm in "The Next Bubble," a Harper's Magazine report: "That the Internet and the housing hyperinflations transpired within a period of 10 years, each creating trillions of fake wealth, is, I believe, only the beginning."

Translation: The next bubble is already expanding. Now listen very closely as Janszen makes the single most dangerous prediction of 2008: "There will and must be many more such booms, for without them the United States can no longer function. The bubble cycle has replaced the business cycle." After the collapse of the 1990s dot-com bubble we laughed at all the hype they had spewed: "This time it's different." "New paradigm." "New economy that only went up."

Well, stop laughing: The new, new came true, says Janszen. Seriously, the economy and the stock market can no longer function without an ever increasing series of bubbles, one after another, rapidly expanding then bursting, with all the manic trading, risk, uncertainty, hypervolatility and distortions that come with it.

Janszen traces bubbles through history: From the 1720's South Sea Bubble to the housing-subprime bubble. Bubbles are accelerating, becoming more frequent, a frenzy feeding on itself: "Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble fully deflated, a new mania began to take place."

What's so scary is not that the subprime bubble was happening so fast on the heels of the dot-com bubble, not that the pundits, the public and the policy makers all appeared to be ignoring it. What's really scary is that our best and brightest leaders in Washington, Wall Street and Corporate America wanted to create a bubble! They even threw jet fuel on this raging fire with cheap money, favorable taxes and minimal oversight.

Biggs's Tips for Rich: Expect War, Study Blitz, Mind Markets
Barton Biggs has some offbeat advice for the rich: Insure yourself against war and disaster by buying a remote farm or ranch and stocking it with "seed, fertilizer, canned food, wine, medicine, clothes, etc." The "etc." must mean guns. "A few rounds over the approaching brigands' heads would probably be a compelling persuader that there are easier farms to pillage," he writes in his new book, “Wealth, War and Wisdom."

Biggs is no paranoid survivalist. He was chief global strategist at Morgan Stanley before leaving in 2003 to form hedge fund Traxis Partners. He doesn't lock and load until the last page of this smart look at how World War II warped share prices, gutted wealth and remains a warning to investors. His message: Listen to markets, learn from history and prepare for the worst.

"Wealth, War and Wisdom" fills a void. Library shelves are packed with volumes on World War II. The history of stock markets also has been ably recorded, notably in Robert Sobel's "The Big Board." Yet how many books track the intersection of the two? The "wisdom" in the alliterative title refers to the spooky way markets can foreshadow the future. Biggs became fascinated with this phenomenon after discovering by chance that equity markets sensed major turning points in the war.[..]

Mankind endures "an episode of great wealth destruction" at least once every century, Biggs reminds us. So the wealthy should prepare to ride out a disaster, be it a tsunami, a market meltdown or Islamic terrorists with a dirty bomb.

The rich get complacent, assuming they will have time "to extricate themselves and their wealth" when trouble comes, Biggs says. The rich are mistaken, as the Holocaust proves. "Events move much faster than anyone expects," he says, "and the barbarians are on top of you before you can escape."

Ilargi: Yesterday we reported that the European Central Bank has been propping up Spain’s financial institutions in secret, and we’ve yet to find out how long that has been going on. Now the British want to write laws that allow secret actions by the Bank of England. That way they'd have official secrets. I would seriously question these practices. Either you have free markets, or you do not. If central banks are free to undermine the freedom of the market, in secret, who knows what they will do with those powers? The possibilities for market manipulation are endless.

UK seeks new laws to stop another Northern Rock
Britain could provide emergency loans in secret to ailing banks under a proposed law that would give the authorities more power to intervene to prevent another Northern Rock-style crisis.
The government on Wednesday launched a 12-week consultation on improving the framework to preserve financial stability and protect depositors should a bank fail.

The proposals include allowing a bank to keep emergency loans secret for a short period, in contrast to Northern Rock, whose announcement that it had needed emergency funding prompted the first run on the deposits of a UK bank for over 140 years as savers panicked.

"ELA (emergency liquidity assistance) may be a very short-term solution for a solvent bank and immediate disclosure could, by leading to a loss of consumer confidence, exacerbate any liquidity problems," the consultation document said. "In these circumstances, there may be strong arguments for delaying disclosure until the temporary problems have passed."

Ilargi: Look, Spain built more homes two years in a row, 2005-6, than Britain, France and Germany combined. It's one huge bubble. Now the ECB buys securities based on nothing but bubbles. There's nothing secure about them. The bubble needs to pop. Simple as that. For what will the ECB do when Ireland, Greece, Portugal et al start stumbling? These secret bail-outs are nothing else than a huge grab into taxpayers' pockets, with the loot thrown down a deep dark hole.

The secret bail-out of Spain's banks
Spanish banks issued a record £39bn of mortgage bonds and other asset-backed securities in the fourth quarter, according to ratings agency Moody's. Now, as you'll no doubt recall, the market for these securities seized up back in July and hasn't really opened up since. (Incidentally, that's one of the reasons why mortgage rates in the UK aren't really coming down, despite the fall in the interbank lending rate and the base rate. The banks and building societies still can't sell on the loans they make.)

So who is buying all these Spanish mortgages? Well, it seems they are being used as collateral for loans from the European Central Bank. The ECB accepts AAA-rated securities as collateral, apparently unaware that the label AAA carries a lot less weight than it used to.

This has helped Spanish banks avoid the fate of Northern Rock. The Rock, you'll no doubt remember, was brought down when it was unable to sell on its mortgages, which meant it was unable to pay back the money it had borrowed to write them in the first place. It seems that Spain's banks, rather than get a very public loan from the ECB, have instead been quietly dumping their mortgage books onto it.

Of course, no one's overtly admitting to this. And at the moment, the consequences of all this aren't entirely clear. But if the ECB is holding a lot of mortgages as collateral against loans to Spanish banks, and the Spanish property market crashes as badly as say, the US, you do have to wonder just how much of that money the ECB is going to get back. How will German taxpayers feel about bailing out the Spanish? I don't know. But I can't wait to find out.

Ilargi: The title of the following article is just another way of saying: here come the pink slips and mass unemployment.

Corporate America braced for recession
Leading US companies are shifting into recession mode and preparing to cut costs, freeze hiring and reduce capital spending as they brace for an economic slowdown, senior executives and industry experts said. Their concerns are likely to be reinforced by the International Monetary Fund, which slashed its forecast for US growth and warned that no country would be completely immune from what it termed a “global slowdown”.

Separately, a US study due out today shows that chief financial officers’ views of the economy are the most pessimistic in nearly four years.

Business leaders say rising oil prices, sagging consumer confidence and the on-going credit crunch are prompting them to put in place contingency plans to protect against the expected economic downturn. “We have a number of levers we can pull in terms of capital and costs,” said Andrew Liveris, chief executive of Dow Chemical, which reported a halving in fourth-quarter earnings. “We have been buttoned down since July with a total clampdown on costs and capital expenditure.”

Jim Owens, chief executive of Caterpillar, the world’s largest maker of construction equipment and a company regarded as a gauge of national economic health, last week warned of “anaemic growth in the US”. Multinationals are counting on growth in overseas demand and the weak dollar to offset domestic weakness.
A leading US management consultant said that over the past few months, his firm had been “deluged” with calls from smaller, domestically-focused companies asking for advice on how to deal with a recession.

“They all want to know what to cut and what to hold back if the economy hits the buffers,” he said.

Ilargi: I have repeatedly talked about the role of the 1999 Glass-Steagall repeal in creating the market mess we are in. Once commercial banks could also be investment banks, and much more, they became both the house and the player at the crap table. It took them less than 10 years to drain the entire world economy into oblivion. Reinstating Glass-Steagall should be high on the political agenda, if we are ever to have a functioning economy again.

The Great Credit Unwind of 2008
The US' current account deficit (nearly $800 billion) has been recycling into US Treasuries and securities from foreign investors. Up to this point, American markets were an attractive place to put one's savings. The dollar was strong, and the stock market had a proven record of profitability and transparency. But since President Bill Clinton repealed Glass-Steagall in 1999, the markets have been reconfigured according to an entirely new model, "structured finance".

Glass-Steagall was the last of the Depression-era bulwarks against the merging of commercial and investment banks. As a result banking has changed from a culture of "protection" (of deposits) to "risk taking", which is the securities business. Through "financial innovation" the investment banks created myriad structured debt instruments which they sold through their Enron-like "off balance" sheets operations (SIVs and Conduits).

Now, trillions of dollars of these subprime and mortgage-backed bonds---many of which were rated triple A---are held by foreign banks, retirement funds, insurance companies, and hedge funds. They are steadily losing value with every rating's downgrade.

Ilargi: Mish has a good one for those of you who haven’t yet clued in to the non-recourse loan issue. Yes, people walk away, and no, they do not go bankrupt because of it. It shatters their credit rating, but that may not be their prime concern.

By the way, Mish also had a story yesterday on banks’ non-borrowed reserves. We had that last week, we trumped him there, and Minyanville. No gloating here, though. Humility is our middle name.

You Walk
There is an interesting new business that just started up January 1, 2008. The business is called You Walk Away.

Is Foreclosure Right For You?
• Are you stressed out about your mortgage payments?
• Do you have little or no equity in your home?
• Have you had trouble trying to sell your house?
• Is your home sinking under the waves of the real estate crash?
• What if you could live payment free for up to 8 months or more and walk away without owing a penny?

Unshackle yourself today from a losing investment and use our proven method to Walk Away.

I spoke with John Maddux a "senior advocate" with You Walk Away (YWA) about the business. As one might expect it is booming. For $995 one receives a half hour of legal counsel where individual strategies are mapped out and all the laws pertaining to recourse vs. non-recourse loans as well as judicial procedures are explained to the customer. YWA also files the necessary legal papers to stop mortgage companies from calling and informs you immediately of how many days you will be able to stay in the house for free. Should the lender take longer to process the documents, YWA will keep you informed of any extra time.

With the amount of money at stake, the fee seems reasonable for the services provided.

Maddux informed me that YWA is currently operating in the state of California only, but Nevada and Florida will soon be coming online. Eventually they expect to be nationwide.

FBI probes 14 firms for possible subprime fraud
The investigation, in cooperation with the SEC, looks at companies from mortgage lenders to financial firms that bundle home loans into securities sold to investors.

The Federal Bureau of Investigation on Tuesday said it is investigating 14 companies for possible fraud or insider trading violations in connection with loans made to risky borrowers - and investments spun off of those loans. Agency officials did not identify the companies under investigation but said the wide-ranging probe, which began in spring 2007, involves companies across the industry - from mortgage lenders to financial firms that bundle home loans into securities sold to investors.

The FBI is working in conjunction with the Securities and Exchange Commission, Neil Power, chief of the FBI's economic crimes unit in Washington, said during a briefing with reporters. The development comes as authorities in New York and Connecticut investigate whether Wall Street banks hid crucial information about high-risk loans bundled into securities that were sold to investors.[..]

Morgan Stanley, Goldman Sachs Group and Bear Stearns all disclosed in regulatory filings Tuesday that they are cooperating with requests for information from various, but unspecified, regulatory and government agencies. Officials at the companies either declined to comment or could not immediately be reached

Goldman Sachs hit with fresh legal action relating to sub-prime fallout
The legal fallout from the sub-prime crisis in the United States continued yesterday as Goldman Sachs conceded for the first time that it was the target of legal action and the FBI opened an investigation into 14 companies involved in America’s mortgage bond industry.
Morgan Stanley revealed yesterday that it, too, was the subject of new lawsuits, relating to the bank’s role in underwriting secondary share offerings for New Century Financial and Countrywide, the US mortgage lenders.

Goldman Sachs reported in its annual report, published yesterday, that it had received requests from regulators for information relating to high-risk sub-prime mortgages and related investment products that it had helped to package, such as collateralised debt obligations, which are pools of bonds and other asset-backed securities.

One case involving Goldman is being led by Andrew Cuomo, the New York attorney-general, who has issued subpoenas to the main Wall Street firms as he seeks to determine whether they knew more about the risks of sub-prime mortgage bonds than they let on.

Fed lends $30-billion to cash-strapped banks
The Federal Reserve, working to combat effects of a serious credit crisis, said Tuesday it had auctioned $30-billion (U.S.) in funds to commercial banks at an interest rate of 3.123 per cent. It marked the fourth in a series of innovative auctions the Fed began last month in an effort to provide cash-strapped banks with extra reserves. The Fed's hope is that the increased resources will keep banks lending and prevent a severe credit squeeze from pushing the country into a recession.

The latest auction results indicated that the Fed's program is having success. The 3.123 per cent interest rate for the $30-billion in short-term loans marked the lowest rate of any of the four actions. The previous auction resulted in a rate of 3.95 per cent and the first two saw rates at 4.65 per cent and 4.67 per cent. Bids for the current auction were received on Monday. The sharp drop in rates had been expected. Analysts said it reflected the fact that the central bank cut a key interest rate last week by three-fourths of a percentage point, the biggest reduction in more than two decades.

Mr. Bernanke has said that the current auction process will continue for as long as needed to make sure that banks have sufficient reserves. He said the auctions might become a permanent addition to the Fed's “tool box” of strategies it can employ when credit markets have seized up. But he said before that occurs, the Fed would seek comments from the public on how the auctions should be designed so that they can be best used by financial institutions.

For Fed, It's Not Clear-Cut
Ben S. Bernanke and his colleagues at the Federal Reserve will decide today whether to cut interest rates for the second time in a week -- and find themselves in the difficult position of having either to risk cutting rates too much or risk disappointing financial markets and spurring more panic.

Futures markets are placing a 77 percent chance on a rate cut of half a percentage point or more. If the Fed follows through and gives financial markets what they expect, it would help stimulate a slowing U.S. economy with the steepest cutting of interest rates in a single month in the modern history of the Federal Reserve. But it also would leave the Fed with less flexibility to cut rates further if the economy gets worse. There have been some tentative signs lately that the economy is not slowing too seriously, including a report yesterday of strong sales of durable goods.

If, on the other hand, the Fed cuts rates by only a quarter percentage point or not at all, it could spook financial markets and prompt renewed worry that the central bank is not responding to the risk of a recession aggressively enough. "The Fed is in a tough spot," said Ethan S. Harris, chief U.S. economist of Lehman Brothers. "They want to look aggressive, but it's hard to keep up with the markets, which keep pricing in even more aggressive rate cuts."

Fed quiet on bond insurers rescue
In autumn 1998 when hedge fund Long-Term Capital Management was imploding, William McDonough, then president of the New York Federal Reserve, pulled the heads of Wall Street banks into an oak-panelled Fed meeting room – and bullied them into organising a collective bail-out.

The meeting is renowned since it quelled the LTCM storm. With Wall Street now facing the threat of a new financial calamity – this time from the embattled bond insurers – some bankers are wondering if the Fed could repeat its trick.

In public, at least, it would seem not. In recent days, it has been Eric Dinallo, New York Superintendent of Insurance, who has spearheaded efforts to cut a deal, by approaching 13 large investment banks and issuing public statements on the matter.

By contrast, the New York Fed, and its president, Tim Geithner, have been notably silent, avoiding comment on the issue altogether. This stance is partly because official responsibility for overseeing the bond insurers rests with the state insurance regulators, not the Fed. Thus the insurance regulator from Wisconsin, which regulates Ambac, one of the two biggest bond insurers, also took part in the meeting with banks.

Bankers believe the Fed also wants to avoid derailing private sector efforts to resolve the crisis, either by stepping in too early or forcefully. “LTCM means everyone is now looking to the Fed but the Fed does not want to give the impression that it will just sort things out,” says one former US official, who points out that the “impetus must come from the private sector”

Banks seek value in monoline rescue plan
With the New York insurance regulator pushing for a deal to bail out the bond insurers, or monolines, the banks approached to stump up the cash will be working hard to see where value lies for them.
It is understood that Eric Dinallo, the New York insurance superintendent, is pushing for $10bn-$15bn to prop up the troubled sector.

Some analysts and bankers believe that figure is too high. Compared with Merrill Lynch’s $3.1bn write-offs linked to monoline hedges, $15bn from all banks may look fairly small, but Merrilll’s contracts were mostly with ACA Capital, the bond insurer closest to insolvency.

Writedowns from ratings downgrades to other monolines would not be half as painful, bankers insist. Geraud Charpin, analyst at UBS, believes an industry-wide downgrade from AAA to AA would lead to $10bn in total writedowns at the most for banks on monoline-guaranteed structured bonds such as mortgage-backed debt.
Standard & Poor’s said this month it expected total after-tax losses for the monoline industry from mortgage-backed bonds and the more complex collateralised debt obligations to be $13.6bn.

S&P’s assessment could worsen, particularly since its estimates of losses had grown by 20 per cent, or almost $2.5bn, since its previous examination in mid-December. S&P said this growth was not significant in terms of individual companies’ capital strengthening plans. A number of monolines have talked about raising $1bn-$2bn of new capital, which across the eight or nine most important groups leads to the proposed $10bn-$15bn.

Some see this figure as inadequate. Independent Strategy, a London-based research house, believes closer to $140bn is needed

Bond Insurer Default May Roil Default Swap Market
A default by a bond insurer such as ACA Capital Holdings Inc. may trigger a "settlement disaster" for credit-default swaps because of uncertainty over how to make good on overlapping contracts, according to Bank of America Corp. analysts.

Some investors including Merrill Lynch & Co. bought credit- default swaps from financial guarantors to guard against losses on mortgage-linked securities, and then later bought protection for the possibility those guarantees may be worthless. The structure of such contracts means some may not be able to redeem their hedges in the event of default, the analysts wrote. "We see huge potential problems for settling CDS contracts," the analysts, led by Glen Taksler in New York, wrote in a Jan. 25 report. "Even a credit event for a relatively small monoline, such as ACA, could have significant implications."

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt or to hedge against losses. The buyer gets face value in exchange for the underlying securities or the cash equivalent should a borrower default. A 2005 supplement to industry documents made it possible for investors to use credit-default swaps to hedge against both losses on the debt sold by bond insurers and losses on securities that the insurers guaranteed, Taksler said.

Merrill Lynch bought $19.9 billion in credit-default swap protection from financial guarantors to protect against losses on mortgage-linked securities known as collateralized debt obligations, the New York-based firm disclosed in a statement last month. The bonds and loans underlying the securities have been defaulting at a record pace. The possibility that the bond insurers themselves fail prompted Merrill to buy an additional $2 billion of protection as of Dec. 28 that would pay it if an insurer defaulted, according to the company's disclosure.

An actual default could cause problems for Wall Street in determining who can collect on such hedges and how much, the Bank of America analysts wrote in their report titled "Monolines: A Potential CDS Settlement Disaster?"

Societe Generale Board Faces Mounting Pressure to Drop Bouton
French President Nicolas Sarkozy said this week that senior executives at Societe Generale should face "consequences," and Jean Arthuis, a former finance minister and head of the French Senate commission on finance, said Bouton has "no choice but to resign." Sarkozy is a president "associated with money and finance, so this story will have a terrible impact on his popularity," said Jean-Marc Lech, co-chairman of Paris-based polling firm Ipsos SA. "Bouton is out."

The trading shortfall, more than four times the $1.4 billion of losses by Nick Leeson that brought down Barings Plc in 1995, forced Bouton to turn to shareholders to raise 5.5 billion euros in a stock offering and triggered speculation the 144-year-old bank will be taken over. The loss, announced on Jan. 24, overshadowed the 2.05 billion euros in subprime-related writedowns the French bank also disclosed that day.

BNP Paribas SA, the largest French bank, is holding preliminary internal discussions about a possible bid, the Wall Street Journal reported yesterday, citing a person familiar with the talks. A spokesman at Paris-based BNP Paribas, which tried and failed to buy Societe Generale in 1999, declined to comment.

Prime Minister Francois Fillon told Parliament yesterday that the government will ensure that Societe Generale remains in French hands. "Societe Generale is a great French bank and Societe Generale will remain a great French bank," Fillon said.

UBS Reports Record Loss After $14 Billion Writedown
UBS AG, Europe's largest bank by assets, had a record loss after raising fourth-quarter writedowns on assets infected by U.S. subprime mortgages to $14 billion. The Zurich-based bank announced today a net loss of 12.5 billion Swiss francs ($11.4 billion) for the fourth quarter, almost double the median estimate of analysts surveyed by Bloomberg. The annual shortfall was about 4.4 billion francs, the first since UBS was created through a merger a decade ago.

UBS fell as much as 4.1 percent in Swiss trading as its loss exceeded those reported earlier this month by Citigroup Inc. and Merrill Lynch & Co. The collapse of the U.S. subprime mortgage market has led to more than $130 billion of losses and markdowns at securities firms and banks since June.

"The damage is enormous," said Dominique Biedermann, director of Ethos Foundation in Geneva that holds UBS shares worth about 80 million francs and has called for an independent audit of the bank's controls. "It wipes out profit and shows that an inquiry is needed to make sure it doesn't happen again, and eventually whose responsibility this is."

The bank increased markdowns directly linked to the subprime market to about $12 billion from the $10 billion it forecast in December and said an additional $2 billion of writedowns are for other U.S. residential mortgage securities. "Weak" debt-trading revenue and the sale of securities at a loss to cut risky assets contributed to the results, UBS said.

"Value declines have extended beyond just subprime-related exposures, to new areas, for which we do not yet have disclosure on exposure size," Jeremy Sigee, an analyst at Citigroup, said in a note to clients. "The recently bolstered capital base remains vulnerable to further erosion.”

Crisis inflicts fresh wounds, UBS cut deepest
Fresh writeoffs at big European and Japanese banks on Wednesday threw the investor spotlight firmly back onto the credit crunch after days gazing at Societe Generale's stunning losses, which it blames on a junior trader.

With the Federal Reserve expected to cut interest rates for the second week running, Swiss bank UBS illuminated the depth of the crisis -- unveiling $4 billion in new writedowns tied to the U.S. subprime mortgage meltdown, dragging it deep into the red for the year.

UBS has now written off a total of $18.4 billion on the back of a credit crisis that has caused over $100 billion in losses worldwide and forced UBS and others, such as Citigroup bank posted a 12.5 billion Swiss franc ($11.45 billion) loss for the last three months of 2007 and a full-year loss of 4.4 billion francs.

Newspaper reports said subprime losses at Japan's Mizuho Financial Group Inc may have ballooned to as much as $2.8 billion, potentially forcing the bank to cut its full-year forecast for a second time. Japan's 2nd-largest bank, which reports results on Thursday, may have to inject 200 billion yen ($1.9 billion) or more into its faltering brokerage unit, the Nikkei business daily said

Private investors take the money and run
Private investors withdrew the highest-ever amounts from investment funds last month and switched into cash and low-risk savings. The figures have left the investment industry braced for more dismal news when the figures for this month are totted up.

The combination of tumbling markets, fears about recession and the Northern Rock affair saw net outflows from retail funds reach £377.4m in December, turning the last quarter of 2007 into the investment industry’s worst on record, according to the In-vestment Management Association.

The December outflows follow £332m in net redemptions from funds in November, breaking a 15-year history of net inflows into UK investment funds from individual savers.

Central bankers are fiddling as Rome burns
David Blanchflower, the leading dove on Britain's Monetary Policy Committee, has broken ranks in a rare outburst of dissent, rebuking colleagues for waiting too long to cut rates as the economy slows abruptly.

"Worrying about inflation at this time seems like fiddling while Rome burns," he said, resorting to language rarely heard in the bland world of central banks. "The evidence from the housing market, and especially the commercial property market, is worrying. Consumer confidence is low in the UK. Interest rates are restrictive at their current levels and that is why I have been voting for cuts," he said.

The comments came as the International Monetary Fund tore up its growth forecast for 2008 and abandons a quarter-century doctrine of fiscal orthodoxy. It warned that damage from the credit turmoil has reached the point where governments may need to ignore the rule book and resort to radical measures. "What is clear is there will be a serious slowdown," said Dominique Strauss-Kahn, the IMF's managing director. "I don't think we would get rid of the crisis with just monetary tools. A new fiscal policy is probably an accurate answer to the crisis."

Britain has far less scope for fiscal stimulus than the US or most of Western Europe. The UK budget deficit is already above the EU's legal limit of 3pc of GDP. The current account deficit has reached 5.6pc of GDP on a quarterly basis, by far the w orst of the big G7 economies. Any move to rescue the economy will have to come chiefly from lower interest rates

Royal Bank set for further writedown related to bond insurer, CFO says
Royal Bank of Canada (TSX:RY) says it will write down the full amount of its exposure to a U.S. bond insurer this quarter, a liability valued at $104 million months ago. The chief financial officer of Canada's biggest bank told a U.S. banking industry conference Tuesday that the Royal will write off in the current quarter the exposure to the unnamed insurer, believed to be troubled ACA Capital Holdings Inc.

The blue-chip bank's exposure to the bond insurer was disclosed in its last quarterly report on Nov. 30. At that time, the bank took a writedown of $357 million pre-tax, or $160 million after tax and employee bonus reductions. Since then, the bond insurer has run into further trouble which forced Royal Bank to write down the rest of its insurance value, CFO Janice Fukakusa told the Citi Financial Services conference in New York.

Canada won't escape U.S. woes, TD chief says
Toronto-Dominion Bank chief executive Ed Clark says a significant slowdown is coming, and the Canadian economy will not decouple from the United States. Speaking to a financial services conference in New York, Mr. Clark spoke positively of the domestic banking environment.

“I always say to people if you don't buy me, buy one of the Canadian banks,” he told the room of investors. “It's been a terrific story in Canada.” But he added Canada's economy will not likely escape troubles south of the border.
“Our outlook is that Canada will not decouple itself from the United States,” he said, adding there will be an impact on the bank's business.

“We're sitting here, the guns of August, waiting for the war to begin and anticipating it,” he said. “... Over a year ago, I announced it was coming, and all I did was end up cutting expenses probably a year in advance. But I do think this time it really is coming, and we are going to have a significant slowdown.”

Canada: Firms' concern over economy grows, ratchet down investment plans
Business confidence in the Canadian economy has sunk to a nine-year low and many firms have cut back on investment plans, a survey by the Conference Board of Canada suggests. Surprisingly, the group's winter index of business confidence is largely unchanged in the fourth quarter of 2007 as an all-time-high percentage of 1,000 firms polled in December reported operating at a high capacity during the period.

But the outlook turned decidedly gloomy when the subject came to prospects for the next six months, when many are predicting the Canadian economy will slump as the U.S. heads to, or close to, recession. Expressing concerns over the high Canadian dollar and weak demand in the U.S., only 8.3 per cent said they believe overall conditions will improve, compared with 33 per cent who thought it would worsen. The 8.3 per cent is the second-worst result since 1990, when the Canadian economy was in recession.

As well, the share of firms who expected their profitability to improve over the next six months fell 17.2 percentage points - a historically large number for the Conference Board survey.

Tuesday, January 29, 2008

Debt Rattle, January 29 2008

Ilargi: Spain is blowing up, and has been doing so under the radar for quite a while. This will reveal the Achilles' heel in the Euro zone: the weakest link in the chain and all that. Europe starts to unravel, and there's what, 27?, countries aligned like so many domino stones.

Also, read the whole CNN/Fortune story on CountryDied, and observe the snide remarks. They would have been impossible until very recently. A THIRD of its subprime loans are delinquent. And then the share price goes up, after BoA says again that the takeover is on. Yes, second half of 2008. HA!!!! That deal was stillborn, it's a PR trick.

ECB aid to Spanish banks matches Rock rescue

Spanish banks are issuing mortgage securities and asset-backed bonds on a massive scale to park at the European Central Bank, using them as collateral to raise money at favourable rates from the official credit window in Frankfurt.

The rating agency Moody's said lenders had issued a record €53bn (£39bn) in the fourth quarter, yet almost none of the securities have actually been placed on the open market. Most have been sent directly to the ECB for use in "repo" operations. "The market has shut down," said Sandie Arlene Fernandez, the author of the report.

"Few, if any, of the transactions in the RBMS market (mortgage securities) have been placed since September. Some of the banks are hoping that the market will open up again but most are just preparing these deals to use as repos, which they can do since the ECB accepts AAA-rated securities," she said. The total volume of securities issued since the credit crunch began to bite in July has reached €63bn.

Reliance on the ECB window appears to have kept the mortgage sector afloat despite the sharp slowdown in the Spanish property market and the de facto closure of the capital markets for this type of business, allowing Spain to avoid the sort of mishap suffered by Northern Rock in Britain and Countrywide in the US.

Countrywide: From bad to worse
Countrywide on Tuesday reported a loss of $422 million in the fourth quarter and revealed that an astounding one-third of its investment portfolio's sub-prime mortgage loans are delinquent.

The loss threw cold water on Countrywide chief operating officer Steve Sambol's confident assurances to investors in October that, "We view the third quarter of 2007 as an earnings trough, and anticipate that the company will be profitable in the fourth quarter and in 2008." Seen in this light, Countrywide's fourth-quarter loss, compared to a $621 million profit a year ago, is what the numerous class action attorneys circling Countrywide will surely call "an unfavorable fact." Countywide finished 2007 with a loss of $704 million.

The numbers didn't appear to faze Bank of America CEO Ken Lewis's determination to acquire Countrywide, however. In a conference Tuesday, Bloomberg quoted him as telling investors. "Everything is a 'go' to complete this transaction." Just over two weeks ago, BoA agreed to buy Calabasas, Calif.-based Countrywide in a $4 billion deal. If and when the deal goes through, the combined company will control just over 25 percent of the U.S. real estate loan origination market.

The market took the highly scripted BoA support as crucial and sent Countrywide stock up 20 cents to $6.15. At the fulcrum of the mortgage credit crisis, Countrywide's earnings are seen as a bellwether for the once vibrant - and now largely collapsed - United States mortgage industry. The primary culprit remains a combination of old-fashioned credit deterioration plus an alarming new development: Borrowers simply are walking away from their homes as their equity value falls ever further below their loan amount.

Ilargi: Bloomberg has further developments in the SocGen case (thanks, webjazz). Ummm, this is starting to smell like some French cheeses. If you're on the board of a bank in France, and you ditch $200+ million in shares right before a revelation like this, you’re French toast. Which, of course, goes well with the cheese. The last article in this post states that Citigroup "cut its [SocGen] target price from €130 per share to €65, reducing its market price tag from €72.9 billion to €36.4 billion." So Mr. Day saved himself $100 million, but the Elysée will look at what this cost the French.

Societe Generale Board Member Sold Shares on Jan. 18
Societe Generale SA board member Robert Day and his foundations sold shares of the bank worth 45 million euros ($67 million) on Jan. 18, the day it said management discovered trading frauds costing 4.9 billion euros. Day's sales totaled 40.5 million euros for himself and 4.5 million euros for the Robert A. Day Foundation, France's market regulator, the Autorite des Marches Financiers, said in two statements on its Web site.

These sales bring to 140 million euros the amount of shares in Societe Generale that Day or his foundations have sold since the start of the month. "The AMF has opened an investigation into Societe Generale," Christine Anglade, a spokeswoman for the regulator, said today. She declined to say what the AMF was looking into at the bank.

Ilargi: The new revelations about what really happened with Countrywide and Bank of America are a perfect starting point to send out a warning, and an explanation.

Countrywide contacted BoA after issues arose over the 'Advances' (borrowings) it obtained from the Federal Home Loan Banks (FHLB) system. CFC was theatening to break through the ceiling of what it could borrow from the Atlanta FHLB. At a certain point it had over $51 billion in advances.

The warning here is in this, from TickerForum :
Legislation provides the Federal Home Loan Banks with a "SUPER LIEN" on any bank assets if a member bank fails. This means the FDIC may not have enough funds to pay depositors after the FHLB Advances have been paid.

The FHLB is a GSE, a government sponsored entity, like Fannie Mae and Freddie Mac, private but 'covered'. The FHLB has never lost a penny on defaulting loans. When a bank goes tummy-up, its Super Lien gives it first rights to whatever of value is left.

The FDIC itself says this:
Through her research, she advised, she was fascinated to learn about the FHLBs' "super lien" against the assets of banks to which they make advances. These rights, she added, including prepayment fees, are provided by statute and are superior to the rights of depositors and even to the FDIC after an institution fails.

In general, people expect the FDIC to guarantee the first $100.000 in deposits for every account. But the FDIC insures the banks, not the depositors. In other words, depositors will have to hope something will be left after the FHLB have taken back their loans. In case of a large numbers of defaulting banks, we are looking at hundreds of billions. And it's questionable if the FDIC will have enough left to pay to depositors. Knowledgable TickerForum poster Karen 'Nothing':
The depositors will have to get in line behind the FHLB to negotiate with the bank to get their "insured" deposits back.
This does not necessarily mean that no-one will get back a penny if their bank fails, for one thing nothing like a large scale bank failure has happened in a long time, but it does make clear that the situation is much more complicated than most people think.

Countrywide Deal Driven by Crackdown Fear
The fear of potential regulatory crackdowns helped drive Countrywide Financial Corp. into the arms of acquirer Bank of America Corp., people familiar with the situation say.

Though the big home-mortgage lender faced large and unpredictable losses on defaults, the more immediate danger was pressure from regulators, politicians and rating firms, these people say. That realization helped spur Countrywide co-founder and Chief Executive Angelo Mozilo to call Bank of America in December and start talks that led to the Charlotte, N.C., bank's $4 billion deal to acquire Countrywide, which was announced Jan. 11.

Countrywide, due to report fourth-quarter results today, faced "a cascading series of regulatory issues" as it pondered whether to try to stay independent, says one person briefed on the situation. A Countrywide spokeswoman declined to comment.

After falling home prices and mounting mortgage defaults rattled investors in mid-2007, Countrywide could no longer raise money through short-term borrowings in the capital markets or sales of mortgages other than those that could be guaranteed by government-sponsored investors Fannie Mae and Freddie Mac. That forced Countrywide to rely much more heavily on two other sources of funding: deposits at its savings-bank unit and borrowings -- so-called advances -- from the Federal Home Loan Banks system. But the sustainability of those funding sources was increasingly in doubt by late last year.

In late November, Sen. Charles Schumer, a New York Democrat, wrote to regulators of the 12 regional Federal Home Loan Banks, cooperatives that lend money to banks and other financial institutions. Mr. Schumer argued that a surge in Countrywide's home-loan bank borrowings to $51.1 billion as of Sept. 30 from $28.8 billion three months earlier might "pose a risk to the safety and soundness of the FHLB system as a whole."

Countrywide already was near a cap on the amount of FHLB borrowings it could obtain under rules that limit those to 50% of assets held by the borrower. Ordinarily, FHLB borrowings equal no more than about 15% to 25% of a bank's assets, a former bank regulator says, and much higher levels would tend to make regulators jittery. Sen. Schumer says Countrywide now has reduced its FHLB borrowings by about $4 billion. The next quarterly disclosures on those borrowings are due in late March.

A spokesman for Countrywide says the FHLB borrowings declined "primarily because of growth in customer deposits, which reduced our need" for funding from the home-loan banks. "This decline was not driven by any action taken by the FHLB of Atlanta," the spokesman says.

Derivatives boom raises risk of bankruptcy
A boom in the use of derivatives is giving creditors strong incentives to push troubled companies into bankruptcy rather than help rescue them, according to new research and industry experts.

A study by academics Henry Hu and Bernard Black concludes that, thanks to explosive growth in credit derivatives, debt-holders such as banks and hedge funds have often more to gain if companies fail than if they survive. The study suggests this development could endanger the stability of the financial system.

The findings highlight a crucial problem in corporate restructuring when more and more companies are facing financial difficulties as a result of the credit crunch and US economic slowdown. According to the research and industry practitioners, creditors have a strong interest in voting against a restructuring plan if they have bought credit or loan default swaps, which trigger payments when a company fails.

“Investors now accumulate positions in a company by targeting layers of debt or multiple layers of debt,” said Michael Reilly of the financing restructuring practice at Bingham McCutchen.

“Where their interests lie are less predictable, especially if they also hold credit default swaps. Their financial interests may be best served by forcing a default if they are on the right side of a CDS position.” The problem is compounded by creditors not having to disclose derivatives positions, making it very difficult for companies and regulators to find out their real intentions.

IMF head in shock fiscal warning
The intensifying credit crunch is so severe that lower interest rates alone will not be enough “to get out of the turmoil we are in”, Dominique Strauss-Kahn, the managing director of the International Monetary Fund, warned at the weekend.

In a dramatic volte face for an international body that as recently as the autumn called for “continued fiscal consolidation” in the US, Dominique Strauss-Kahn, the new IMF head, gave a green light for the proposed US fiscal stimulus package and called for other countries to follow suit. “I don’t think we would get rid of the crisis with just monetary tools,” he said, adding “a new fiscal policy is probably today an accurate way to answer the crisis”.

Mr Strauss-Kahn’s words rip apart a long-standing global consensus that fiscal retrenchment in the US and Japan is needed to help reduce huge trade imbalances. It comes as the IMF is due to release new economic forecasts this week which, he said, would show a “serious slowdown and it needs a serious response”.

Expect the eurozone to show some resistance
Within minutes of last week’s rate cut by the Federal Reserve , market analysts predicted that the European Central Bank would have to do the same. When the US sneezes – you know the rest.

It is not going to happen. The ECB may cut interest rates at some point, though I would not bet any hard currency on this. One of the most important reasons historically for monetary union in Europe was to become less dependent on the US. Today, monetary policy in Europe is geared towards domestic targets. If the ECB cuts, it will happen because of firm evidence of a fall in domestic inflationary pressures.

Some central bankers have even advocated a rate increase. If there is concrete evidence that the most recent spike in headline inflation rates is translating into higher wages, that may still happen. Most probably it will not. But the prospect of a rate cut is just as remote.

US foreclosures rise in December; reach 2.2 million in 2007, up 75 pct from 2006
The number of foreclosures filed by US homeowners increased sharply in December and left calendar-year 2007 foreclosures higher by nearly 1 mln compared with 2006, according to a private sector report released today.

The number of foreclosure filings for December was 215,749, up 6.8 pct from November, according to California-based RealtyTrac.

December foreclosure filings are 97 pct higher than the number of foreclosures seen in December 2006.

This rise led to a total of 2.2 mln foreclosures in 2007, up 75 pct from the roughly 1.26 mln the company reported in 2006. RealtyTrac said 1 pct of all US households was in 'some stage of foreclosure' in 2007, up from 0.58 pct in 2006.

Ilargi: You may have noticed that we have so far ignored the SocGen rogue trader story. That's because we never felt till now that the real story was out in the open. Now, however, we're getting somewhere: French magistrates have refused to keep Jerôme Kerviel in custody, and haven't even charged him with anything (contrary to what many news sources claim). The government is chiming in as well, and the directors have hot feet. SocGen is in deep trouble.

Prosecutors let SocGen fraud rap drop: source
French prosecutors will not appeal against a decision to throw out the accusation of fraud leveled against a trader blamed for huge losses at Societe Generale, a senior judicial source said on Tuesday.

If confirmed, the move would represent a blow for SocGen managers, who last week branded trader Jerome Kerviel a "fraudster" and said the bank had been the victim of "massive fraud". The judicial source said it was also "inevitable" that many staff within SocGen would be questioned over the affair.

Investigating judges reviewing the case decided on Monday to place Kerviel under formal investigation for lesser allegations concerning breach of trust, computer abuse and falsification, which carry a maximum three-year prison term. Being placed under investigation can lead to trial, but falls short of filing formal charges.

Prosecutors had asked the magistrates also to consider charges of fraud and "aggravated breach of trust", which carries a maximum seven-year prison term. Judges Renaud Van Ruymbeke and Francoise Desset decided there was not enough evidence to back this up. They also rejected a request by prosecutors that Kerviel remain in custody as investigations continue.

SocGen director offloaded €100m worth of shares
Société Générale is facing legal action from shareholders claiming the bank is involved in insider dealing as today it emerged that a non-executive director at the French bank sold off nearly €100 million worth of SocGen shares eight days before the discovery of "irregular trades" made by "rogue trader" Jérôme Kerviel.

Documents released by the AMF, the French market regulator, show that Robert A. Day, an non-executive director at Société Générale, sold off €85.7 million in shares on January 10. Also, two trusts connected to Mr Day, offloaded large chucks of shares on the same day - the Robert A. Day Foundation sold €8.6 million in stock and the Kelly Day Foundation sold €959,066. Details of the share sales emerged as Mr Kerviel was charged with attempted fraud by the French financial police.

Paris prosecutor Jean-Claude Marin said that Mr Kerviel has admitted hacking into computers and faking e-mails to hide trades since 2005.

Mr Kerviel also disclosed that Eurex, the derivatives exchange controlled by the German stock exchange, contacted Société Générale in November 2007 to flag up Mr Kerviel's trades with France's second largest bank - two months before the irregular trades were fully investigated and announced to the market. Mr Marin said: “Questioned by the bank, [Mr Kerviel] produced a fake document to justify the risk cover."

A group of around 100 Société Générale investors have brought a suit against the bank. Mr Day, 65, is the founder of TCW, a Los Angeles investment company which is a subsidiary of Société Générale's asset management group. TCW, based in Los Angeles, has a portfolio of $66 billion in collateralised debt obligations (CDOs) of which $52 billion are under management for Société Générale Asset Management.

CDOs are complex financial instruments which are often backed by sub-prime mortgage debt. Société Générale revealed last week it has €4.9 billion in CDOs backed by US sub-prime mortgage debt.

Today Citigroup cut the bank's possible target price by 50 per cent, saying the French bank is suffering "damaged credibility" and is unlikely to be taken over. Citigroup, which downgraded the scandal-hit French bank’s shares from a "buy" to a "sell" also cut its target price from €130 per share to €65, reducing its market price tag from €72.9 billion to €36.4 billion.