Tuesday, February 26, 2008

Debt Rattle, February 26 2008

Updated 3.30 pm

Ilargi: Let me try and find the proper diplomatic terms here. Earlier today, we've had an article that questions the safety of money in US bank accounts, and I have said that an increase in frozen credit instruments will inevitably lead to private bank accounts coming under pressure. Now the FDIC, which is alleged to insure bank accounts (but in reality insures banks), turns out to be preparing for at least 100 bank failures in the next 12-24 months.

On top of all this, we have seen, in the past few weeks, serious doubts about what the FDIC can do and is willing to do for your money. As the WSJ states, it has a $52.4 billion fund. Do the math, that would insure 520.400 $100.000 accounts, and there are 300 million Americans. Moreover, you don't have first dibs at that fund. The Federal Home Loan Banks have a superlien, meaning they get their loans back before you even come into the picture. You can find more info on this by searching The Automatic Earth, or at Karl Denninger's excellent Ticker Forum

Note that none of us have the gift of seeing into the future, and for many of you we seem to come out of very far left field, but we can at least ask you to follow the information we provide, and to please be careful.

FDIC to Add Staff as Bank Failures Loom
The Federal Deposit Insurance Corp. is taking steps to brace for an increase in failed financial institutions as the nation's housing and credit markets continue to worsen. The FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

FDIC spokesman Andrew Gray said the agency was looking to bulk up "for preparedness purposes." The division now has 223 employees, mostly based in Dallas. The agency, which insures accounts at more than 8,000 financial institutions, is also seeking to hire an outside firm that would help manage mortgages and other assets at insolvent banks, according to a newspaper advertisement.

In public, policy makers are debating what role the government should play in trying to stabilize the housing market and minimize foreclosures. Meanwhile, regulators have worked discreetly behind the scenes to closely monitor the growing number of troubled banks and thrifts considered at risk. "Regulators are bracing for well over 100 bank failures in the next 12 to 24 months, with concentrations in Rust Belt states like Michigan and Ohio, and the states that are suffering severe housing-market problems like California, Florida, and Georgia," said Jaret Seiberg, Washington policy analyst for financial-services firm Stanford Group.

In job postings on its Web site, the FDIC said it is looking for people with "skill in performing duties associated with a financial-institution closing, such as receivership management, resolutions and/or asset disposition; knowledge of the resolutions process as it relates to complex financial institutions." Such positions would require "very frequent overnight travel," the posting said, and would pay up to $180,770. "The notion of bringing back some people who have been through it before is very smart," said William Isaac, who was FDIC chairman from 1981 until 1985. All told, the FDIC has roughly 4,600 employees, far fewer than the about 15,000 it had as recently as 1992.

On Sunday, the FDIC ran a newspaper ad seeking companies that could service commercial loans, mortgages and student loans in the event of a bank failure. It didn't say how much a company could earn in this area.
The FDIC rated 65 banks and thrifts as "problem" institutions at the end of the third quarter of 2007, up from 47 institutions a year earlier. Both figures are low by historical standards. At the end of 1993, there were 572 "problem" banks and thrifts. The FDIC is expected to update its data on "problem" institutions today.

Before the housing market soured, the banking industry was enjoying one of its most profitable stretches in U.S. history. There wasn't a single bank failure from July 2005 through January 2007, an unprecedented span.
There have only been four bank failures in the past 12 months, a rate the FDIC has easily been able to handle.

In many parts of the country, the housing-market decline has hamstrung banks, and regulators have reported weakening performance of commercial real estate, small business and credit-card loans. Exacerbating the situation is a cash-flow crunch, which makes it harder for banks to obtain funding to originate new loans.

FDIC Chairman Sheila Bair, Comptroller of the Currency John Dugan and Office of Thrift Supervision Director John Reich have warned of a pickup in bank failures. Last week, Mr. Reich reported that the thrift industry lost a record $5.2 billion in the fourth quarter.

The FDIC was created by Congress in the 1930s after a series of bank runs during the Great Depression. At the end of 2007, it had $52.4 billion in its fund that backstops the nation's insured deposits.

Ilargi: US housing starts scraping the bottom of the gutter, while the ratings of the insurers of bonds and securities based on that same US housing are once again injected with still more borrowed life-support credit. But it's not easy to force-feed a carcass.

Sovereign Wealth Funds are ‘under scrutiny’, and we just need to take a closer look at Liechtenstein and the fall-out of the European -make that global- tax evasion scandal.

S&P/Case-Shiller Home Prices Fell 9.1% in December
Home prices in 20 U.S. metropolitan areas fell in December by the most on record, reflecting the deepening housing recession, a private survey showed today. The S&P/Case-Shiller home-price index dropped 9.1 percent from December 2006, after a 7.7 percent decrease in November. Nationwide, home prices fell 8.9 percent in the fourth quarter from a year earlier, the biggest decline in 20 years of record keeping.

Prices may fall further as would-be buyers hold out for bargains and foreclosures add to the glut of unsold properties, extending the worst housing slump in a quarter century. Shrinking home values and credit restrictions threaten to reduce consumer spending and push the economy into a recession.

"It's inevitable that prices will decline a lot more in 2008 because inventory is so high," said Patrick Newport, an economist at Global Insight Inc. in Lexington, Massachusetts. "It'll put a pinch on consumer spending." December's drop was the 12th monthly decline in a row and the biggest since the group began keeping year-over-year records on the 20-cities index in 2001.

U.S. Home Foreclosures Jump 90% as Mortgages Reset
Bank seizures of U.S. homes almost doubled in January as property owners failed to make higher payments on adjustable-rate mortgages. Repossessions rose 90 percent to 45,327 last month from the same period a year ago, RealtyTrac Inc. said today in a statement. Total foreclosure filings, which include default and auction notices as well as bank seizures, increased 57 percent.

"The most troubling thing is that we are seeing more and more of these properties actually going all the way through the process and going back to the banks," Rick Sharga, executive vice president of Irvine, California-based RealtyTrac, said in an interview.

Defaults among subprime borrowers and those unable to meet rising payments on adjustable-rate loans drove foreclosure filings to the highest since August and the second-highest since RealtyTrac started keeping records. About $460 billion of adjustable mortgages are scheduled to reset this year, raising minimum payments for borrowers, according to New York-based analysts at Citigroup Inc.

More than 233,000 properties were in some stage of default last month. Total filings increased 8 percent in January from December, said RealtyTrac, a seller of foreclosure statistics that has a database of more than 1 million properties. Nevada, California and Florida recorded the highest foreclosure rates among the 50 states, RealtyTrac said.

California: Foreclosures exceed sales
For what one expert thought was the first time, the number of monthly foreclosures exceeded the number of monthly home sales in California in January, according to data compiled by two research companies. The data is a grim reflection of the worsening housing market, as the number of homeowners who can't or won't make their payments rises and the number of home buyers dwindles.

ForeclosureRadar, a Discovery Bay real estate research firm, said 19,821 California homes went into foreclosure in January, representing about $8 billion in home loans. Meanwhile, DataQuick reported 19,145 home and condo sales in January. In December, there were 12,783 foreclosures, according to ForeclosureRadar, and 25,585 home and condo sales, according to DataQuick.

Sean O'Toole of ForeclosureRadar said he doubts there has ever been another time when the number of foreclosures exceeded the number of sales in a month. DataQuick's numbers are for closed transactions that occurred in January. ForeclosureRadar uses its own proprietary method of gathering foreclosure data.

"There's no way a market that slow can clear these kinds of foreclosures," said Christopher Thornberg of Beacon Economics, a Bay Area research and consulting firm. "What that number says to me is you have more homes getting dumped on the market in terms of foreclosures than there is demand for homes."

Wicked Witch of the West: I’m Melting
A Ponzi economy melts, because the shortfall in income necessary to support fictitious capital becomes more and more evident, and glaringly obvious. And when incomes fall short, defaults occur, and fictitious assets prices collapse. Oh sure the Ministry of Truth can proclaim (lie) otherwise as they did in classic fashion yesterday when “reaffirming AAA” for MBIA and Ambac, but that does not change or redirect the truth of the situation.

By the way, Standard and Poors new corporate logo about says it all, announced in conjunction with their latest rating farce.

The event to look for soon would be a complete failure and collapse of a monoline credit insurer, AAA rating and all. The word “ironic” will be the understatement of all time to describe this. That in turn will melt one of the Wicked Witches (rating agencies) right down to a pool of steaming goo along side the monoline outfit. For those who follow all this drama, that will be that special moment when the Fat Lady truly sings.

I have been reporting that about a fourth to a third of California sales are foreclosures. That’s a level that drives prices, and explains the big ass price drops. Now we have news that there are more foreclosures than sales in California. Still when I looked over the latest loan performance from Countrywide Financial’s servicing portfolio, I was surprised about the surge in delinquencies relative the actual foreclosures.

On $1.48 trillion the difference between 7.47% and 1.48% or about 5% is around $75 billion in fresh foreclosure prospects going into a market that has already collapsed. This suggest that there is much, much more to come out of the pipeline, and that perhaps lenders are dragging their feet about the process?

So all one really needs to do, is focus hard on Ponzi markets and ignore the Lies. Ponzi fuel melts when underlying collateral does, and the evidence illustrates that collateral is in free fall right now.

And yes Dr. Holmes, that does not bode well for AAA ratings, or even A ratings. Nor does it bode well for cheap mortgage rates. If it wasn’t for foreign central bank blank check writing for agency paper, no telling how high mortgage rates would be at this juncture

MBIA, Ambac Step-Up Efforts to Keep Credit Ratings
MBIA Inc. and Ambac Financial Group Inc., the world's two largest bond insurers, increased efforts to stave off credit rating downgrades that would cripple their ability to guarantee new debt. MBIA yesterday suspended its asset-backed securities guarantee business for six months, said it would separate that unit from its municipal guarantees and eliminate the quarterly dividend. New York-based Ambac is working with banks to find $3 billion as the companies try to satisfy Moody's Investors Service and Standard & Poor's that they deserve AAA ratings.

S&P signaled the bond insurers may be successful. The ratings company yesterday said it was no longer reviewing MBIA and affirmed Ambac's AAA rating pending its ability to raise new capital. A downgrade would stymie their ability to guarantee debt and strip the AAA stamp from $1.2 trillion of insured bonds. Banks stand to lose as much as $70 billion on insured debt they own if the ratings are reduced, according to Oppenheimer & Co. analysts in New York.

"This dose of optimism for a narrowly averted wave of monoline downgrades could go a long way to restoring capital market confidence in the near term," Lehman Brothers Holdings Inc. analysts led by Jack Malvey in New York said yesterday in a report to clients. S&P said MBIA remains on negative outlook, meaning that any ratings move may be lower, though not any time soon. Ambac, which ranks second to MBIA among bond insurers, is being given more time to avoid a downgrade, S&P said.

"Everything we are working towards right now is centered on regaining stability," Chief Executive Officer Jay Brown said in a letter to shareholders. "We can expect a bumpy ride over the coming months and possibly longer." Brown also said he has "questions" about the company's 2007 preliminary results released last month and hasn't yet signed off on the statements, according to the letter. Losses will continue next quarter, Brown said.

Ambac and banks that bought its insurance are scrambling to pull together a rescue package that would avert a downgrade. The company may announce plans to raise as much as $3 billion in capital, according to a person familiar with the matter. "We're getting much closer to having something in place," Sean Dilweg, Wisconsin's insurance commissioner, which has jurisdiction over Ambac, said yesterday. "As the controlling regulator we've been working the whole while on a variety of options. Ambac is unique because it's looking at a large equity position.""No one is locked down on a specific option at this point," Dilweg said of Ambac in a telephone interview. "We're looking to make sure all the policy holders are protected."

U.S. Pushes Sovereign Funds To Open to Outside Scrutiny
Seeking to head off a political backlash against huge investments in Western companies by Asian and Middle Eastern government-run investment funds, the U.S. is prodding two of the biggest funds to embrace a set of promises that they won't use their wealth for political advantage.

Executives from the world's largest sovereign-wealth fund -- the Abu Dhabi Investment Authority -- and from the Government Investment Corp. of Singapore met Thursday with a U.S. Treasury delegation led by the assistant secretary for international affairs, Clay Lowery. The talks are part of delicate global negotiations to draft rules to oversee the behavior of such funds, without discouraging them from investing in the U.S., Canada and Europe at a time of global financial turmoil.

Abu Dhabi's fund has assets of about $900 billion; Singapore's is estimated to have $300 billion. "The two funds are some of the most mature, well-known and credible sovereign-wealth funds," said Treasury Undersecretary David McCormick in an interview yesterday. "We are actively trying to have many conversations" with different funds. A representative of the Singapore fund declined to discuss the matter; officials at the Abu Dhabi fund weren't available for comment.

Sovereign-wealth funds are huge pools of government-controlled investment cash. They have an estimated $3 trillion in assets and are growing rapidly. Recently, they have helped rescue U.S. and European financial institutions, including Citigroup Inc., Merrill Lynch & Co. and UBS AG, by purchasing minority stakes.
Those investments have raised concerns in Washington and in European capitals that the funds may be gaining political clout. The European Commission plans to release its views on the subject tomorrow. That's likely to ratchet up pressure on the funds to adopt what amounts to a voluntary code of conduct.

The Sham of Sovereign Wealth Fund Negotiations
The Wall Street Journal reports today in "U.S. Pushes Sovereign Funds To Open to Outside Scrutiny," that the US Treasury Department talking to two large sovereign wealth funds, Singapore's Temasek and the Abu Dhabi Investment Authority, as the first steps in a process to ""draft rules to oversee the behavior of such funds, without discouraging them from investing."

Let's see if I get this straight. The US is running a chronic current account deficit, which means we are dependent on the kindness of foreigners to maintain our lifestyle. In other words, we have to run a capital account surplus, which is tantamount to having other countries buy our real or financial assets. And while the fall in the dollar has reduced our current account deficit somewhat, it's still at a high level. Ergo, we need our money fix.

Brad Setser, who monitors the international capital data closely, has been reporting for some time that the private demand overseas for US assets has fallen considerably. The key buyers now are foreign governments. And those governments, who used to be content to buy low-returning Treasury bonds, are now looking to diversify their holdings and earn higher returns. Enter the sovereign wealth funds.

What is comical about this whole idea is the idea that we have any say in this matter. Of course, the US can nix individual deals, as we did to Dubai Port World's purchase of UK P&O Ports. Dubai Ports had to divest five US port operations; the UK imposed no such requirement. Similarly, the US blocked Chinese oil company CNOOC's bid for Unocal blocked, which ruffled quite a few feathers.

But we've already let foreign banks make substantial investments into our troubled financial sector, which one can argue gives them strategic leverage. Yes, these are minority stakes, the investors don't hold any board seats. Nevertheless, as eminence grise Felix Rohatyn pointed out, “You don’t need to appoint two directors to a board to have influence when you own 10 percent of the company.”

Indeed, when Citi's board was ready to oust Chuck Prince, Sandy Weill paid a visit to the bank's biggest shareholder, Prince Alwaleed, to make sure he was on board. Alwaleed owns a mere 3.6%, smaller than some of the stakes recently acquired.

Qatar fund favoring European banks over ones in U.S.
Qatar's prime minister, who heads the country's sovereign wealth fund, says he favors investing in European over U.S. lenders because U.S. bank stocks are likely to fall further on write-downs of subprime mortgages.

Qatar, which bought less than 2 percent of Credit Suisse, is looking to spend $10 billion to $15 billion over the next two years on bank stakes to diversify the country's economy from oil and natural gas, the prime minister, Sheik Hamad bin Jassim al-Thani, said during an interview here.

"In the United States, we need to wait a little," Hamad, who also heads the Qatar Investment Authority, said Saturday. "We think there are still problems with the banks."

In contrast, the state-run Kuwait Investment Authority, which has at least $225 billion of assets, said last month it would invest $3 billion in Citigroup and $2 billion in Merrill Lynch as those two U.S. banks scrambled for capital after billions of dollars in write-downs. Prince Alwaleed bin Talal of Saudi Arabia is also investing in the two, banks but has not said how much.

Shares in Royal Bank of Scotland jumped 5 percent Monday after a British newspaper, The Sunday Telegraph, reported that the Qatar Investment Authority, whose assets Standard Chartered puts at $60 billion, is considering making an investment in the bank. It cited people with knowledge of the authority's plans. A spokeswoman for the Royal Bank of Scotland declined to comment Monday on the newspaper report.

In January, The Sunday Telegraph was the first to report Qatar's interest in Credit Suisse, saying the investment fund was looking to build a 5 percent stake in the Swiss lender. "Up to now, I think it is under 2 percent, but, of course, when we reach the legal point where we have to declare, we will do so," Hamad said of his Credit Suisse shares. The threshold for public disclosure is 3 percent.

Ex-Treasury official: State pension funds a bigger worry than sovereign wealth funds
The economic and national security threats posed by sovereign wealth fund are vastly overrated, and U.S.-based pension funds are a greater threat to the nation’s economy, according to former Treasury undersecretary Randal Quarles. “Sovereign wealth funds would not make my list of 100 largest concerns,” said Mr. Quarles today at a forum sponsored by the libertarian-leaning American Enterprise Institute. He noted that foreign government-owned funds, which are now estimated to manage nearly $3 trillion, are a “moderate force” in the world economy in terms of size and influence.

Indeed, he’s more skittish about state-run pension funds than about sovereign wealth funds. “I think that there are a variety of reasons to be less concerned about foreign government investment in the United States frankly than about our own government investment in the U.S.,” said Mr. Quarles. He noted that sovereign wealth fund investments are less likely to be controlling investments. He also pointed out that there is less incentive for political pressure because those funds are not in control of regulators in the United States.

Pension funds still dwarf sovereign wealth funds worldwide, with $53 trillion in assets. Alaska has its own sovereign wealth fund, which has invested in other foreign companies, such as those in Norway.

Still, a plethora of recent investments in Wall Street firms by sovereign wealth funds set off the current policy debate, primarily over the funds run by Russia and China, and have drawn congressional scrutiny. The Senate Banking Committee will hold a number of hearings on sovereign wealth funds in the coming months, according to a recent letter from committee chairman Christopher Dodd (D-Conn.). Sen. Evan Bayh (D-Ind.) said he may introduce legislation to shore up loopholes in existing regulations.

The Collection Agency - Weekly Report
Last week I mentioned 3 market makers who had stopped supporting ARB with their own capital to support prices. That list has grown, in addition to Citi, Goldman Sachs and Lehman Bros you can now add UBS, Morgan Stanley and Merrill Lynch. Without wanting to labour the point that's 6 of the biggest Investment Brokers / Banks that are effectively saying either the Muni bond market is toxic or they do not have the capital to support the Muni market. I firmly believe it is the latter. I want to show you one chart that supports my assertion. It's from the Fed:

Clearly the situation has deteriorated at a rapid pace and is much more serious than the credit scare last August. US banks have no reserves; they are for all intents and purposes, broke. In fact they are beyond broke and as I suggested last year banks are now sub-prime. 150% of the reserves at depository institutions are borrowed. That can only mean one thing, the banks have "lost" 1.5 times their original non borrowed reserves. Not only have they lost what they had, they went on and lost half as much again. If you or I did that, we would be bankrupted and probably arrested for attempting to defraud the lender.

Notice the amount of total reserves (yellow line) is roughly equal and appears cyclical to the Federal Reserve TAF lending programme. The Fed is no longer the "lender of last resort" it has become the de-facto Bank of the USA.

I am amazed that so little attention has been paid to this state of affairs. The Northern Rock debacle, one overstretched bank in the UK, has had all the headlines, yet with the WHOLE banking industry in the US insolvent you hardly see it mentioned.

Now, I am not going to give you advice on what to do about your cash on deposit and I don't want you to think I am being overly bearish but…….I have called this whole fiat credit collapse correctly from the beginning. No, I don't want a pat on the back. I just want to read the next line carefully.

If I had money in a US bank today, I would be worried. So worried I would withdraw the cash before new regulations are passed restricting account activity. I know it sounds alarmist but then the first warnings always do.

Ilargi: As yet another instrument freezes up, it’s hard not to ponder when banks will put a freeze on the last one: your bank accounts.

Variable-Rate Note Market Now Freezing-Sources
Major banks, including UBS AG and Citigroup, are making it harder for clients to sell what was considered one of the safest alternatives to cash -- so-called variable-rate demand notes -- sources familiar with industry practices say. "I heard everybody's doing it," one of the sources said on Monday.

Previously, investors who wanted to sell these floating- rate notes just had to contact the banks, which would either resell the debt or salt it away in their inventory. But now, because banks are afraid of taking on any more risk, they are taking advantage of the slower and more cumbersome procedures spelled out in the debt's legal papers, which oblige would-be sellers to go through the tender agents.

As a result, this $400 billion market is starting to freeze up -- much like the market for auction-rate paper -- as the banks put their need to save cash ahead of the investors' desire for them to buy their debt to keep the market liquid.

One of the main culprits causing the market for variable-rate demand notes to seize up is the troubled bond insurers that guarantee them. This is the same factor that has caused the $330 billion auction-rate note market to get hit with billions of dollars of failed auctions every day since late January.

Goldman, Lehman May Not Have Dodged Credit Crisis
Even Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. may find they haven't dodged the credit crisis. The new source of potential losses: so-called variable interest entities that allow financial firms to keep assets such as subprime-mortgage securities off their balance sheets. VIEs may contribute to another $88 billion in losses for banks roiled by the collapse of the housing market, according to bond research firm CreditSights Inc. Goldman, which hasn't had any of the industry's $163 billion in writedowns, said last month it may incur as much as $11.1 billion of losses from the instruments.

The potential for a fire-sale of the assets that would bring another round of charges has "always been our greatest fear," said Gregory Peters, head of credit strategy at New York-based Morgan Stanley, the second-biggest securities firm behind Goldman in terms of market value. VIEs, known as special purpose vehicles before Enron Corp.'s collapse in 2001, finance themselves by selling short-term debt backed by securities, some of which are insured against default.

Now that Ambac Financial Group Inc. and other guarantors have started to lose their AAA financial-strength ratings, Wall Street firms may be forced to return those assets to their books, recording the declining value as losses. MBIA Inc., the biggest insurer, said yesterday it plans to separate its municipal and asset-backed businesses, a move Peters said would likely result in a lower credit rating for the types of assets owned by VIEs.

Wall Street's writedowns stem from a surge in mortgage delinquencies among homeowners with the riskiest subprime-credit histories. The industry's VIEs, also known as conduits, had $784 billion in commercial paper outstanding as of last week, according to Moody's Investors Service and the Federal Reserve."There's a big number at work here and it will have significant consequences," said J. Paul Forrester, the Chicago- based head of the CDO practice at law firm Mayer Brown.

"The great fear is that a combination of subprime CDOs, SIVs and conduits result in a flood of assets into an already-stressed market and there's a price collapse."

Auction-rate woes seeping into corporate sector
While public-sector borrowers continue to get hammered by the blackout in the auction-rate securities market, U.S. corporates are beginning to feel the pain as well. Late last week, two companies reported in Securities & Exchange Commission filings that they had money stuck in illiquid securities, which will force them either to take write-downs or scrap plans for expansion.

Aventine Renewable Energy Holdings, a $1.6 billion in sales ethanol maker, reported that it may have to delay the construction of two new plants due to excess cash trapped in failed auction-rate securities. “Should we not be able to liquidate a substantial portion of the remaining portfolio of these ARS securities on a timely basis and on acceptable terms, we will have to either attempt to raise additional funds or slow down the construction of our new facilities, or both,” said CFO Ajay Sabherwal on a conference call.

As of Dec. 31, 2007, Aventine said that it had $211.5 million in taxable auction-rate securities. Since the beginning of this year, the company had successfully liquidated $84.3 million of those securities, taking a pretax loss of $1.5 million in the process. The company indicated the remaining $127.2 million was stuck in illiquid auction-rate securities, which are backed by student loans and continue to be rated triple-A.

SBA Communications, with $408 million in revenue, reported that it had to take a $15.6 million impairment charge because it held nearly $30 million in failed auction-rate securities. The charge contributed to the $77.9 million loss the company posted for the year.

Aventine and SBA join companies like Bristol-Myers Squibb, US Airways, 3M and Ciena, which have all reported problems stemming from failed auction-rate securities. Such securities are long-term bonds turned into short-term securities that adjust every seven to 49 days at auction. But recently, many auctions have failed as auction runners—investment banks—have refused to use their own capital to backstop the facilities.

Liechtenstein tax scandal spreads to U.S., elsewhere
The tax-evasion probe linked to Liechtenstein bank accounts widened to 10 countries as German authorities said they’ve investigated several hundred people on suspicion of concealing money in the principality. The U.S., Sweden, Germany, the U.K., France, Italy, Spain, Canada, Australia and New Zealand all have information on citizens who’ve potentially used Liechtenstein bank accounts to avoid taxes, Mats Sjoestrand, the Swedish Tax Agency’s director general, said today.

German tax investigators have directly searched the homes and offices of about 120 people since the beginning of the raids 12 days ago, Eduard Gueroff, a spokesman for the Bochum prosecutor’s office, said in a telephone interview. “Quite a few” people confessed to tax evasion, Mr. Gueroff said. Prosecutors in Bochum will later today provide additional details on the scope of the nationwide probe, which led to the resignation of Deutsche Post CEO Klaus Zumwinkel on Feb. 15. The U.K. has also ordered a crackdown on people channeling money to the European principality and the U.S. Senate is investigating accounts in Liechtenstein.

Bavaria and Lower Saxony, two of the five German states with confirmed raids, said today that 68 people in those two states have amended their tax returns on their own since the probe began and offered to pay more money. Under German law, citizens who confess to filing an incorrect tax statement prior to being uncovered by authorities are free from prosecution.

Liechtenstein: where the missing billions go
The atmosphere is almost palpable on the sleepy streets of Vaduz, which is on the banks of the river Rhine. Overlooked by its medieval mountain-top castle, glistening bank facades jostle for space with investment firms and dubious "letter-box" holding companies of which the country boasts an estimated 73,700. Liechtenstein does not need a mainline railway station because few of its paying clients make a habit of travelling by train.

Instead, Mercedes and BMW limousines, usually with German number plates, briefly grace the streets of Vaduz, usually shortly before lunchtime, before they disappear out of sight of tax police or possibly even intelligence agents into the underground garages of the banks. Among the occupants of the cars are the tax evaders who have helped to put Liechtenstein on an OECD blacklist of only three countries in the world classed as "unco-operative tax havens". The others are Andorra and Monaco.

"Excessive bank secrecy rules and a failure to exchange information on foreign tax evaders are relics of a different time and have no role to play in relations between democratic societies," Angel Gurria, the OECD's secretary general, said last week.

Liechtenstein has remained an exception. Banks and "discreet" financial services are the core of its economy. They account for 14.3 per cent of the workforce and contribute to 30 per cent of a gross domestic product of €2.7bn (£2bn). The Liechtenstein royal family happens to own the country's largest bank and also wields more power than any other monarchy in Europe. The country has more registered companies than its 35,000 citizens and a maximum tax rate of 18 percent. The Liechtenstein system works as follows: the principality has 15 banks and more than 300 trustees, usually lawyers, who manage thousands of stiftungen, or "foundations".

The Liechtenstein banks' foreign customers favour stiftungen above most other investments because they are hardly obliged to pay any tax if they put money into them. The rules governing anonymity are also highly favourable. If a customer wants to remain anonymous, he or she, simply appoints one of the principality's trustees to run his investments on their behalf.

Being tax-free, the investment grows far more quickly than in a normal account and, as the account holder remains anonymous, the tax authorities, in his or her country of residence, remain unaware that sums are being filched away illegally from under their noses. Apart from a few hiccups involving secret Liechtenstein bank accounts held by the German Flick family of Nazi-era industrialists, and members of Germany's conservative Christian Democratic Party who were exposed during the early 1990s, the system of trustees and foundations has worked famously for the principality, its clients and royal family.

Switzerland pleads not guilty as tax scandal widens
Switzerland and Luxembourg are trying to distance themselves from Germany's crackdown on tax dodgers in Liechtenstein as a scandal over secretive bank accounts spreads. Police have raided homes and offices in cities across Germany, targeting about 1000 people in a huge tax evasion probe after the government paid an informant millions of euros for a CD containing Liechtenstein bank data.

German Finance Minister Peer Steinbrueck has vowed to widen the hunt for hidden cash beyond Liechtenstein to include countries with banking secrecy rules, such as Switzerland, Luxembourg and Austria, which all border Germany. But Swiss Finance Minister Hans-Rudolf Merz shrugged off any links to Switzerland, in a move that underscores the size of the stake in the war of nerves between Germany and its neighbours. Switzerland is home to trillions of dollars in offshore savings.

"I fail to see how problems for Switzerland could arise," he said. "This is about Liechtenstein." A spokesman for Mr Mrez said on Monday that Switzerland had complied with international standards to prevent tax dodging. "Switzerland is not a tax haven according to OECD (Organisation for Economic Cooperation and Development) criteria. There is a black list and Switzerland is not on it," he said.

Swiss National Bank chairman Jean-Pierre Roth said he was surprised by Mr Steinbrueck's comments. "We agreed on taxes on interest," Mr Roth told reporters at the sidelines of an event in Vienna. "This was agreed years ago with the EU and third countries." Luxembourg, home to a huge asset management industry and a slew of private banks, also distanced itself from the affair. "We do not consider ourselves a tax haven," a government spokesman said.

Both Luxembourg and Swiss laws prohibit revealing bank information to the outside world except in criminal matters. Tax evasion or the failure to report earned income is not considered a crime in either country, although tax fraud - falsifying documents to avoid taxes - is. Both countries impose a withholding tax on interest earned on undeclared accounts held by Europeans as a way to discourage tax dodgers.

Ilargi: When German magazine Der Spiegel publishes English language articles, they are often very good. This one is no exception.

Tax Whistleblower Sold Data to the US
Spanish investigators were after Kieber for a 1996 fraudulent real estate deal in Barcelona, which had earned Kieber 600,000 Swiss francs ($553,000). He apparently fled to Argentina before returning to Liechtenstein, where he began working for LGT Bank in April 2001. No one at LGT was familiar with his past history in Barcelona.

Kieber was considered an excellent computer specialist and, as his attorney Robert Müller says, a highly intelligent, "inconspicuous and sensitive man who speaks Spanish well." His job at LGT was to digitize all of the paper documents at a subsidiary of the bank, LGT Treuhand. This explains why the stolen data collection contains so much information, including contracts, meeting minutes, handwritten notes -- essentially the bank's entire inventory of information. Kieber had been given exceptional access to the archives of LGT Treuhand.

Kieber knew that he had been convicted of fraud in Spain and was wanted by the police there. The pressure was probably what prompted him to make a copy of the LGT data. In January 2003, after resigning and going into hiding, he used the stolen data in an attempt to blackmail Liechtenstein authorities. According to Liechtenstein state prosecutor Robert Wallner, in return for being assured of free passage and given two forged passports, Kieber agreed that he would not turn over the stolen client data to "foreign media and authorities."

But the Liechtenstein authorities turned down the offer. Nevertheless, Kieber turned himself in -- and got off lightly. For the Spanish fraud charges, his attorney Müller negotiated a penalty of one year in prison, reduced to three years' probation, which would not be entered into his police record in Liechtenstein. He was not convicted of data theft and, on Jan. 7, 2004, Liechtenstein authorities closed the Kieber case. The bank and the judges were convinced that Kieber had learned his lesson and, out of remorse, would return all of the client data unused.

How wrong they were.

Kieber must have begun his final mission shortly after the court issued its decision. He negotiated with the Americans first, then with the British. He obviously came to some agreement with the Americans, because US tax investigators have apparently hit pay dirt in 50 cases since the summer of 2007.

British, Dutch put squeeze on Liechtenstein tax dodgers
Britain and the Netherlands joined a European effort to crack down on tax evasion on Monday, allying themselves with Germany in seeking information on those with secret bank accounts in Liechtenstein. Britain's tax agency said it had followed Germany's lead and paid a whistleblower to get hold of secret data on British citizens with accounts in the landlocked tax haven. The Dutch finance ministry urged citizens who evade tax by putting their money in Liechtenstein bank accounts to turn themselves in or risk paying large fines.

Germany has led efforts to stymie Liechtenstein-based tax evasion, targeting 1,000 wealthy people suspected of parking money in the principality's banks. Liechtenstein has accused Germany of illegally acquiring the secret data. Britain's tax agency, Her Majesty's Revenue and Customs (HMRC), confirmed it had paid for data on bank accounts held by Britons in Liechtenstein and that it was seeking to recover at least 100 million pounds ($196 million) in unpaid taxes. "It should now be clear to everyone that that there is no safe hiding place for the proceeds of tax evasion," HMRC's acting Chairman Dave Hartnett said in a statement, urging people with hidden income to tell the tax agency about it quickly.

He called for Organisation for Economic Cooperation and Development's (OECD) standards on transparency and exchange of information on tax matters to be fully implemented. Liechtenstein is one of three countries on the OECD's tax-haven blacklist, alongside Andorra and Monaco. Media reports said Britain paid the whistleblower 100,000 pounds for details on the accounts of 100 wealthy Britons. For its part, the Netherlands said it was expecting Germany to furnish it with information on any Dutch citizens listed in the records purchased from the Liechtenstein informant.

German probe puts heat on Australian tax dodgers
Australian tax authorities Tuesday refused comment on reports that they had received a list of rich locals who had salted away millions of dollars in secret bank accounts in the tax haven of Liechtenstein, a tiny European principality. But the Australian Tax Office (ATO) pointed to its record of pursuing high-profile individuals suspected of using overseas jurisdictions to evade taxes. News reports abroad said that the German government had passed details to the ATO of suspected tax dodgers who were clients of the Liechtensteinische Landesbank (LLD).

The list was bought by the German government from a former LLD employee and convicted swindler named in newspaper reports as 42- year-old Heinrich Kieber, a Liechtenstein citizen. There are reports that under a witness-protection programme, Kieber has been given a new identity and is living in Australia. The German government is trying to recover unpaid taxes from LLD clients identified by Kieber, who after being convicted of fraud and theft in Liechtenstein sold his list to the German authorities.

Britain has reportedly paid German authorities for the names of its citizens who appear on Kieber's list. Though the ATO does not have a policy of paying for information leading to the apprehension of tax cheats, it has proven itself assiduous in catching citizens who try to evade tax through offshore bank accounts and trust funds.

The ATO is currently working through a list of local clients that it found on a laptop seized in Melbourne from international tax guru Philip Egglishaw, who is based in the Channel Islands jurisdiction of Jersey. Crocodile Dundee film star Paul Hogan was on that list, along with prominent people from the fields of sports and entertainment. Hogan, who last year left Australia to live in the United States, said he had settled outstanding tax bills.

Gold prices fall on possible IMF bullion sales
Gold fell in Asia, extending yesterday's loss after the US said it would back "limited" sales of bullion reserves by the International Monetary Fund, the third-largest holder of the precious metal.

Some of the IMF's $US98 billion ($106 billion) in reserves should be sold to cover a revenue shortfall, said David McCormick, the Treasury's undersecretary for international affairs. The US is the IMF's largest shareholder. Gold has more than tripled in the past seven years, gaining 12% this year and reaching a record high of $US953.91 an ounce on Feb. 21.

The US news "stirred fears that such sales will take a toll on sentiment and weigh heavily on bullion," Darren Heathcote, head of trading at Investec Bank, said in a report today.

The Next Slum?
Strange days are upon the residents of many a suburban cul-de-sac. Once-tidy yards have become overgrown, as the houses they front have gone vacant. Signs of physical and social disorder are spreading.

At Windy Ridge, a recently built starter-home development seven miles northwest of Charlotte, North Carolina, 81 of the community’s 132 small, vinyl-sided houses were in foreclosure as of late last year. Vandals have kicked in doors and stripped the copper wire from vacant houses; drug users and homeless people have furtively moved in. In December, after a stray bullet blasted through her son’s bedroom and into her own, Laurie Talbot, who’d moved to Windy Ridge from New York in 2005, told The Charlotte Observer, “I thought I’d bought a home in Pleasantville. I never imagined in my wildest dreams that stuff like this would happen.”

In the Franklin Reserve neighborhood of Elk Grove, California, south of Sacramento, the houses are nicer than those at Windy Ridge—many once sold for well over $500,000—but the phenomenon is the same. At the height of the boom, 10,000 new homes were built there in just four years. Now many are empty; renters of dubious character occupy others. Graffiti, broken windows, and other markers of decay have multiplied. Susan McDonald, president of the local residents’ association and an executive at a local bank, told the Associated Press, “There’s been gang activity. Things have really been changing, the last few years.”

In the first half of last year, residential burglaries rose by 35 percent and robberies by 58 percent in suburban Lee County, Florida, where one in four houses stands empty. Charlotte’s crime rates have stayed flat overall in recent years—but from 2003 to 2006, in the 10 suburbs of the city that have experienced the highest foreclosure rates, crime rose 33 percent. Civic organizations in some suburbs have begun to mow the lawns around empty houses to keep up the appearance of stability. Police departments are mapping foreclosures in an effort to identify emerging criminal hot spots.

The decline of places like Windy Ridge and Franklin Reserve is usually attributed to the subprime-mortgage crisis, with its wave of foreclosures. And the crisis has indeed catalyzed or intensified social problems in many communities. But the story of vacant suburban homes and declining suburban neighborhoods did not begin with the crisis, and will not end with it. A structural change is under way in the housing market—a major shift in the way many Americans want to live and work. It has shaped the current downturn, steering some of the worst problems away from the cities and toward the suburban fringes. And its effects will be felt more strongly, and more broadly, as the years pass. Its ultimate impact on the suburbs, and the cities, will be profound.

The Irony Of It All
Toxic credit crunch contagion continues to spread, silently kicking the stuffing out of the economy faster than people think. Whether you want to talk about credit cards, corporations, or commercial real estate - the credit crunch is spreading, and beginning to look nastier all the time.

You should know that when banks begin to fail in the States, and they will, things could spiral out of control to the extent controls will to need be placed on both digital and physical movement. Transfers between banks will cease up completely, debts will be called in (so pay them off now), systems from food distribution to medical care will break down, and Martial Law will be the result as the population retaliates. Life will change as you know it.

And if that's not enough, you should know things in the East might not be as rosy as some people think either, and that they are ready to join in the credit crunch contagion. Of course Japan has never really escaped the credit crunch that gripped their economy back in the 90's after bubblizing the real estate market. That's the tell-tale-sign a bubble economy is on its last legs you know - when master planners need resort to bubblizing the real estate market.

Generally it's all down hill after that on a secular (long-term) basis because this is a reflection of not just a turn in the larger credit cycle; but more, and the driver of credit growth in the end, this is the signal demographic constraints have turned negative. Harry Dent is not wrong in this regard. It's a simple numbers game, where an aging population is less prone to take on debt.

So, wouldn't it be ironic if the West went into a Japanese style asset deflation starting about now then? Wouldn't that surprise a lot of people, not the least of which being Wall Street barkers / economists that keep telling us this is not possible. Wouldn't that be ironic after all the attention that's been paid to making sure nothing like this ever happens again, with the placement of Helicopter Ben at the Fed's helm to ensure such an outcome is avoided. Wouldn't all of this be ironic to the dispassionate observer looking down on the situation?

Past this however, and perhaps the real irony of the situation, is if we are supposed to know so much these days, more than those back in the 20's and 30's that managed the US into a Depression, and more recently in Japan, then why was Greenspan and company allowed to bubblize the global economy for the benefit of so few - why? This to me is the irony in the larger situation.

Socionomics of Time
Conventional wisdom says there is always something to buy in a bear market, and always something to sell in a bull market. But what about a secular bear market that stems from a massive overvaluation of all financial assets due to a long-term financial-asset mania? If the long-term deflationary thesis is correct, the point of recognition will result in the simultaneous decline of all financial assets. This is a difficult concept to grasp, especially given the length and magnitude of the secular bull market that brought us to this point.

Bear markets exist to “re-adjust” and re-price inflated assets. The conventional wisdom that there is always something to buy in a bear market, sell in a bull market, is indeed grounded in a nugget of truth: manias typically conclude with one asset extremely overvalued at the expense of another asset that is extremely undervalued. But this mania has created the overvaluation of all financial assets.  So what is left that is undervalued?  Intangible assets; relationships, time, quietude, reflection - all those things that are difficult to define and whose value deflated in the mania for goods and financial assets.

Since 2000 a number of books have been written from the standpoint that life is about more than work and production. Over the past decade we have seen a compression of time - we do more with less - a consequence of the relentless pursuit of financial assets. But now social mood is shifting. As a consequence of that shift, certain intangible assets will be re-priced. Perhaps the most important of these intangibles will be time. It is arguably our most precious commodity, and how we spend it may dramatically change as the structural bear market reasserts itself.

Spending habits: Americans at all income levels tighten their belts
Until recently Shannon Palmer, like many Americans, spent money freely. She assembled a nice wardrobe, took four vacations a year, and ate out often. But now, as she listens to economists discuss the likelihood of a recession, she recognizes the need to get her own finances in order.

"I'm young and I feel mostly secure in my job, but I have a good deal of debt on my back," says Ms. Palmer, a publicist in Andover, Mass. As a step toward fiscal responsibility, she has begun a "very aggressive" plan to pay off student loans, a car loan, and credit-card bills. She has also started to save. "This is a time for action when it comes to people taking responsibility for their personal finances," she says. "This is just the motivation I needed. It's forced me to look at things differently."

Looking at things differently is a theme running through conversations of Americans at all income levels these days as they review their spending habits. Nearly 2 out of 3 consumers intend to reduce indulgent spending in 2008, according to a new survey by HSBC Bank USA. Four out of 5 want to increase the amount they save."Even at the top layers of luxury, there has been some softening in spending," says Milton Pedraza, CEO of The Luxury Institute in New York. That includes yachts, jets, cars, and additional homes.

Among those who do not dwell in that economic stratosphere, the new prudence is often a necessity, stemming from uncertainty about jobs, high fuel costs, heating bills, and the price of healthcare. For others, like Palmer, it is voluntary and represents, at least in part, a shifting of values. They regard an economic downturn as an opportunity to reassess their priorities.

Sarkozy pressures SocGen chief to quit
French President Nicolas Sarkozy stepped up pressure on the head of Societe Generale to quit over the bank's recent trading scandal Tuesday, but France's top business lobby warned him not to interfere. “I just don't understand the Societe Generale situation. When the chairman of a company experiences a disaster of this magnitude and he does not assume the consequences of this, that is not normal,” Mr. Sarkozy said in a newspaper interview.

It was his bluntest criticism of SocGen Executive Chairman Daniel Bouton since the bank revealed a record €4.9-billion, or $7.3billion U.S., of rogue trading losses on Jan. 24 that has turned the French bank into a possible bid target.“For someone to make €7-million a year does not shock me. But on one condition, that he assumes his responsibilities. That's what the problem is with Daniel Bouton,” Mr. Sarkozy told Le Parisien newspaper.

“I've got nothing against him. But you can't say ‘I'm going to be paid €7-million a year' and then, when there's a problem, say ‘It's not me'. That, I cannot accept.”

IMF slashes Canada's growth outlook on US slowdown
The International Monetary Fund on Monday slashed a half point from its 2008 Canadian economic growth forecast, to 1.8 percent, mainly due to a weakening US economy. Despite a sharp slowdown in the final quarter of 2007, the Canadian economy expanded by around 2.5 percent for the full year, buoyed by nearly four percent growth in domestic demand, particularly private consumption and residential investment, the IMF said in a report on Canada.

In its prior forecast in October, the IMF had seen Canada's economy slowing slightly to a 2.3 percent pace in 2008. However, rapidly deteriorating conditions in its neighbor to the south, where a severe housing slump and a related credit squeeze have nearly stalled the US economy, have affected Canada, the IMF said.

"Growth slowed toward the end of the (2007) year, and is expected to decelerate further to 1.8 percent in 2008 reflecting a sharp downturn in the United States, past currency appreciation, and a tightening of financial market conditions," the IMF said in a report on Canada.

HSBC Bank Canada takes commercial paper hit
HSBC Bank Canada reported a 13.3 per cent drop in fourth-quarter profits Tuesday and shed light on the tough operating environment that ensnared banks late last year, as investors wait for this country's larger banks to begin reporting earnings Thursday. Results from Canada's seventh-largest bank were hurt by a provision for losses in its holdings of third-party asset-backed commercial paper, as well as by a generally more difficult banking environment. “The outlook for 2008 is mixed,” HSBC Bank Canada chief executive Lindsay Gordon stated.

While the Canadian economy remains resilient, and growth in western Canada is strong, “both personal and commercial segments of the bank's business remain very competitive with ongoing pressure on margins, particularly in the personal segment,” he said. Bank margins were squeezed late last year as the credit crunch drove up the banks' cost of funds. HSBC Bank Canada said its cost of funds increased by almost 20 basis points.

The bank earned $111-million after preferred share dividends in the three months ended Dec. 31, a drop of $17-million from the same period a year earlier, after taking a hit in the second half of 2007 because of its holdings of third-party asset-backed commercial paper. It took a $47-million pre-tax charge because of the holdings, which were $230-million, after provisions, at the end of the year. The bank had bought some paper back from clients after the market for third-party ABCP crumbled late last summer.

Oil patch split over partial moratorium
A business-led lobbying effort to create a partial moratorium on oil sands development in order to free up conservation land has divided Canada's major energy companies, while a government decision on the issue will likely be delayed until after next Monday's provincial election. Major oil producers – led by Petro-Canada Corp., Suncor Inc., Husky Energy Ltd., Shell Canada and Imperial Oil – have for the first time called on Alberta to slow development in the Athabasca region.

The group, which also includes Devon Canada and ConocoPhillips Canada, signed a private letter last month calling for the province to suspend land lease sales until at least 2011 in three areas around Fort McMurray, saying any additional sales “would continue to reduce the available options for the establishment of new conservation areas.”

The letter was also signed by Environment Canada and the Pembina Institute, a Calgary-based environmental group, and presented on behalf of the Cumulative Environmental Management Association, a group of 46 industry, government and aboriginal members working in the Regional Municipality of Wood Buffalo.

“Further granting of new surface and sub-surface rights would continue to reduce the available options for the establishment of new conservation areas that would serve to accomplish a balanced suite of regional outcomes,” states the letter to the Alberta departments of Energy, Environment and Sustainable Resources Development. The request for a development freeze in some areas has been rejected by at least four major companies belonging to the group and operating in the oil sands.


jewishfarmer said...

Nice reporting, as usual. The link for the California Foreclosures however takes me direct to Google, not the article, just FYI.


Edgy said...

If I had money in a US bank today, I would be worried. So worried I would withdraw the cash before new regulations are passed restricting account activity. I know it sounds alarmist but then the first warnings always do.

Umm, was anyone else disturbed by this? Do investment companies qualify for this warning? In other words, would an account holder potentially be prevented from selling (cashing in) and then cashing out?

Ilargi said...

Nice reporting, as usual.
Well, hello and thank you, Mrs. Astyk.

The link for the California Foreclosures however takes me direct to Google
I tried it, and it takes me where I wanted it:
Foreclosures exceed sales
See if that one does the same..

goritsas said...


Yes. That is the answer. Several hedge funds have closed to redemptions. If you had funds in those, you'd be out of luck. If your investment company went broke and had none of the funds it said it had, you'd be out of luck. If you're at all concerned, sell now, whatever the price. Having cash is not going to be a bad thing. Sure, the timing might be off but in 5 years, with a fat wadge of moolah in your hip pocket, you'll be the king in your circle. The rest will be begging, after me of course. I'll be begging way before then.

goritsas said...

This is becoming like having Tom Hanks at the Oscars, inevitable. And the award for biggest fraud goes to Goldman. And the award for biggest balance sheet cover up goes to Citi. The award for the best foreign fuck up goes to UBS. In a special award for ten years of great service to its constituency, every banker in Europe, the ECB receives a special nomination for secrecy above and beyond the call of duty. No ceremony would be complete without thanking the UK government for reappointing Merv, without whom the blame would be laid square at the door of Brown; thanks Merv, every loser Prime Minister needs twats like you and Darling to keep those spotlights shinning somewhere else. Of course, tonights biggest prize of all goes to the the biggest holder of worthless collateral in the history of finance, Ben and his singing claptrap, the Federal Reserve!

Ilargi said...


See my comment introducing the article after the one you quote:
"As yet another instrument freezes up, it’s hard not to ponder when banks will put a freeze on the last one: your bank accounts."

No-one except for the specialists had ever heard of variable rate notes, or of auction rate securities up to 2 weeks ago. Now we have, and it's because ever more financial instruments are dying off, taking the banks' ability to fund operations with them. At a certain point, private accounts will have their turn.

Anonymous said...


Ran across this and posting link for your amusement a view about:

Ackman and MBIA Inc.
by an Eric J Fox

Hmmm, gee and I thought this was the alternative channel! Maybe my computer has come with a spin cycle?

Anonymous said...

Bank of America tells this guy he can't spend over a $5,000 limit, though his account has $10,000.

People encountering disasters often say it's like being in a movie--they can't believe it's happening. It can't happen in their town, their street, their bank.

Anonymous said...

Illargi, Stoneleigh,
I followed you on TOD. Congratulations on your new site.

If cash is king, and if banks will fail and private accounts could be restricted, where do you hold your cash... buried in a hole?

Ilargi said...


Mr. J. Fox (hi, Mikey!!) states 6 claims by Ackman, and comments only on the first one. I take it that means he considers the other five correct.

As far as claim 1, the -upcoming- insolvency of the holding company, is concerned, Fox claims to have spotted all sorts of inaccuracies (incorrectnesses).

Ackman has simply stated that the holding company will be insolvent in 2nd quarter 2008. That ends July 1.

Fox uses Ackman's document, d.d. Nov 20, 2007, and says that the claim of insolvency within 2.2-4.9 quarters for MBIA itself is incorrect because the holding company had money on Dec. 31 2007?! Look:

"Ackman uses a cash balance as of 9/30/07 (slide 125) of $464 million and states that MBIA will be insolvent in somewhere between 2.2 and 4.9 quarters. This has already been proven incorrect as the company ended the year with a balance of $434 million at the holding company level (MBIA conf call 1/31/2008)"

What can I possible say to that logic?

Do I need to explain to Mikey's little brother that 4.9 quarters from Nov 20 2007 takes him to about January 2009?

I think Ackman may well be very correct in everything he's said.

Note that external capital infusions could not have been predicted, and may of course shift dates somewhat, though they won't solve anything.

Note also that Ackman is not short MBIA, but the holding company. He says MBIA will soon be unable to pay dividend to the latter, which will then and because of that become insolvent. But as noted: 2nd quarter 2008.

Note also that Channel Re, the reinsurer set up and owned by MBIA, to reinsure its own insurances (!!), was downgraded last week.

Ilargi said...


Welcome. The best place for your cash may be in valuable goods that will allow you to produce more valuable goods. But do keep some in one or more holes, and be smart about it.

Anonymous said...

Thanks Ilargi,

Yes I saw the dates and noted like you that one point argument. Nice to see I wasn't wrong in my rather unqualified evaluation of the piece.

"One red herring does not a market make:)" anon

Anonymous said...

Texas Instruments has got stuck with circa $575m of auction-rate securities after failed auctions to sell them. Seemingly the securities are backed by pools of student loans.

Anonymous said...

I agree with your position on cash.
I have questions regarding gold.
Yesterday you mentioned that the central banks may keep the price of gold higher by not selling so much until the time that the IMF sells its gold. However, when the stock market falls further, will gold not be considered as a safe haven during downturns? Will people who have exited the stock market before the bottom not move to gold? Will it be only cash? In the last depression, the price of gold was fixed and it is not the case now.
Or is it in this upcoming deflation/depression all assets and commodities will get knocked back?

Anonymous said...

I want to thank you for posting info about bank stability. I'm conservator for my mother who has alzheimers. Every financial move I make on her behalf needs the approval of the court. So, I compile notes from pertinent articles and pass them on to my attorneys, who then use them to help inform the independent counsel and court. Your site and explanations are an immense help.

Ilargi said...


"Yesterday you mentioned that the central banks may keep the price of gold higher by not selling"

I did not say that. Central banks have a schedule according to which they dump gold. That keeps the price down rather than up. Why they do it is a bit of a question. The Bank of England famously a few years ago sold a lot of its gold at the exact lowest point in the market.

My point with gold is that it's the easiest manipulable commodity out there. To wit: even a rumor of the IMF selling 10% of its stock sends prices down. If these guys get together at tee-off, and make a deal to first short the gold markets, and after sell a sufficient amount to hammer the prices, they make an absolute killing. That would be hard to resist, especially since they can't lose: they can buy back the same gold the day after, at a much lower price.

There are parties that have huge amounts of gold in vaults, which can be sold on a day's notice. This is where it differs from oil, to give an example. KSA can't sell its oil on that short a notice, since it can't pump that fast. Gold is a far more "stored" commodity. Some of it has been in vaults for centuries. Not so with oil, which is largely unrefined etc.

I think gold is a very good place to store value, but not necessarily right now. If you can wait and sit on it 5-10 years, different story. But who can oversee that time frame today? You might conclude that farmland and means to protect it would have been better.

. said...

Ilargi - thanks for all the hard work on this.

Any word on how much of the FDIC's $52B is actually mark to make believe crapola? And how much of it is in bonds backed by failing monolines?

The infection has metastasized, and the only thing left that is real to me is the bag of pre 1965 quarters in the glove box of my car I keep handy for emergencies.

Stoneleigh said...


I agree with ilargi that gold will hold its value over the long term (an ounce of gold would have bought you a good toga in Rome and would buy you a good suit now), but may not be an ideal investment now. If you have too much cash to hang on to in liquid form, you might want to consider purchasing hedges against disruption of our just-in-time economy - in other words things that give you a measure of control over the essentials of your own existence.

Asset prices fall across the board in a deflation as people sell not what they'd want to, but what they have to in order to pay debts, meet margin calls and cover living expenses in the absence of credit. In other words, they're forced to sell their good assets to meet the margin calls on their bad ones. Most things should therefore be cheaper later, but some things may not be available at all, so buying some hard goods now could make sense. (Any important thing that you need the internet and a credit card to purchase would be a good example.)

For instance, within the last couple of years the Gaza strip began exporting gold, despite not producing any gold at all. Desperate people were selling whatever they possibly could in order to survive in what is virtually a prison camp. When many are desperate and sell at once into a buyers market, prices fall substantially.

If you preserve cash now, you could be one of the buyers in a buyers market, although you shouldn't wait too long IMO as access to gold could become difficult down the road. Private ownership of gold was illegal during the Great Depression, and gold was confiscated without compensation from safety deposit boxes. Owning gold is therefore not without its risks however well it may hold its value.

FWIW, I'm expecting gold and silver prices to reverse quite soon.

The Collection Agency said...

Thanks for the link and the C&P you used in your well collated article.

Not many (well, I say that, my blog seems to taking off) have heard of me, I like it that way.

I am the nemesis of the banking / investment world and it serves them right.

Visit the blog and read the archives, you will soon see that I have been chasing them down, in my own small way.

A visit to www.livewire.co.uk will also show you the kicking I have recently given to Virgin and Bloomberg, amongst others.

Thanks for visiting and I shall be earmarking this site, a great find.

"Do not allow the collectors or their agencies to take away your wealth!" An almost quote from an ex-pres of the USA

Anonymous said...

I would like to pose a question for myself which would be asked by many others here as well. If we should take precautions with holding/moving to cash, what to do about 401k plans, where the bulk of most of one's savings are after one is middle aged??? For many of us, these are electronic positions in some brokerage account. Sell, take the penalty, pay the taxes and start digging??? Or take electronic treasuries positions? Or what? Thanks.

madhatter said...


I am curious about how two of your statements fit together. On the surface it would seem that "although you shouldn't wait too long IMO as access to gold could become difficult down the road." would contradict "FWIW, I'm expecting gold and silver prices to reverse quite soon." If this is a supply and demand thing, shouldn't restricted access to gold increase its price rather than reverse the present upward trend?

What other forces to you see coming into play? (I can understand colluding parties shorting, dumping and then buying back, but as far as I can see, something like that might broaden rather than limit access?)

Stoneleigh said...


If I had a 401K (which I don't) I would be inclined to think that a bird in the hand is worth two in the bush, so to speak. Retirement savings in the usual forms are IMO unlikely to be still there when most people would want to retire.

The main difference between inflation and credit expansion (what we're seeing now) is that inflation is comparable to cutting the real wealth pie into smaller and smaller pieces, whereas credit expansion creates multiple and mutually exclusive claims to the same pieces of real wealth pie.

When a credit expansion deflates, as this one is about to do IMO, a fight ensues between competing claimants to the small amount of real wealth underpinning all the IOUs. Unfortunately this all too often results in real wealth being destroyed, mislaid, paid out to lawyers or lost to unscrupulous third parties in the confusion. As the parties to the disputes are all likely to be far higher up the financial food chain than you are, their actions will determine the fate of your nest egg without your knowledge or consent. Trying to extract your money after this feeding frenzy has begun in earnest will probably be difficult at best, and quite likely impossible IMO.

Keeping what you have under your own control is generally the safest option IMO, although there are risks associated with all choices. Withdrawing money from a 401K would be a difficult choice for many people because of the obvious upfront cost of doing so, and the fact that your family, friends, neighbours, colleagues and financial advisers will probably think you're crazy.

I would suggest thinking long and hard about what you personally believe will happen - based on as much information as possible - and try to protect yourself from the risks you think are the most significant. We have our own views as to what those risks are, which we're happy to share with readers, along with the information that informs those views, but risk/benefit calculation for your own particular circumstances has to be yours.

Stoneleigh said...


To me, gold prices are highly speculative at the moment, as are other commodities, and stocks to a lesser extent (optimism is still strong in stocks, but has been shaken recently). In other words investors don't care what they pay for them because they're sure they can sell them to someone else later for even more. Once the psychology shifts (or the biggest sucker has been fleeced, to put it another way), prices should fall across the board, probably quite sharply. IMO a sharp reversal is not too far off for many speculative investments, precious metals among them.

Waiting to buy until the market bottoms, however, could present problems. The best deals are rarely available to the little guy. By the time the market bottoms (which I would expect to be quite a while), it may no longer be possible. If you want precious metals, you might want to wait until much of the speculative premium has been dissipated, but not wait too long.

Personally though, there are an awful lot of things I'd do with money before buying gold. If you still have something left after hedging against disruption and saving liquidity, then you may well want to consider gold as it will hold its value over the long term. You would need to be fairly sure you could afford to leave it untouched for many years though in order to make the most of it as an investment, as it's a much better hedge against the currency inflation that will probably follow credit deflation than it is a hedge against the deflation itself.

Anonymous said...

Hello, Ilargi.

Anonymous said...

regarding 401k.

how about this:
change 401k to a self-directed IRA. buy a farm or a piece of farm land with the IRA?

according to the rule, you cannot use the farm or land yourself until you are ready to cash out. but how about this:

buy a piece of farm land from a farmer and rent it back to the farmer then you rent another piece of land from the farmer? or find an indirect relative or a friend to do the same and rent to each other?