Tuesday, February 5, 2008

Debt Rattle, February 5 2008

Update 5.30 pm

Ilargi: The bond industry, all by itself, is looking at $41 billion in write-downs. No wonder Fitch questions whether the $1.5 billion MBIA capital infusion will be sufficient. As we reported, Sean Egan at Egan-Jones Ratings claims that the bond insurers need $30 billion in added capital - EACH.

MBIA's AAA Rating Placed Back Under Review by Fitch

MBIA Inc.'s AAA bond insurance ranking was put back under review for a downgrade by Fitch Ratings less than a month after affirming the grade with a stable outlook. Fitch is updating its assumptions for higher losses on U.S. subprime-mortgage securities, the New York-based ratings company said today in a statement. The results may show MBIA doesn't have enough capital to support its guarantees on such debt even with the $1.5 billion of new capital that MBIA has raised, Fitch said.

"Fitch believes that a sharp increase in expected losses would be especially problematic for the ratings of financial guarantors -- even more problematic than the previously discussed increases in AAA capital guidelines, which has been the primary focus of recent analysis of the industry," Fitch said.

The bond insurance industry guarantees $2.4 trillion of debt, much of which would be thrown into doubt if it isn't insured by a AAA rated company. The industry may be faced with $41 billion of writedowns from subprime-mortgage related losses, according to JPMorgan Chase & Co. analysts. Downgrades may also force banks to write down $70 billion, Oppenheimer & Co. analyst Meredith Whitney said yesterday in a report.

Fitch said that a material increase in expected claims payments could be inconsistent with an AAA credit rating, regardless of how much capital the bond insurers raise. Fitch also placed CIFG Financial Guaranty back under review after affirming the company's rating last year when it raised $1.5 billion in capital.

Ilargi: Alright, time to stop sweating the small stuff. Subprime schmubprime, Option Schmoption ARM's. That's just minor scratches. Let's dive into the field of deep and crippling wounds: derivatives. It's a theatre of madness and pain that is hard to understand and oversee, and the main players would like to keep it that way. The biggest of those main players is the Fed. And you, yes you, are the one they will send the bill to.

The Trillion Dollar Secret
For the past year or so, the investment world has been wrapped up in their version of a steroid scandal - the sub-prime mortgage mess. Banks are taking write-offs in the tens of billions and estimates are that write-offs will reach as high as $100 billion before long. CEO’s are losing their jobs and having to settle for multi-million dollar pensions. (Don’t you feel bad for them?)

Who to blame for this mess will be the subject of a myriad of Congressional hearings in the future. After spending millions investigating the whole sub-prime disaster, they will come to this simple conclusion: lenders got too aggressive and borrowers got in over their heads. In other words, risky loans ended up being risky. What a surprise!

But there is a secret right in front of everybody that the Fed, Wall Street and the banking industry wants to make sure investors don’t notice. It is the incredible growth in derivatives. If you think the sub-prime problem is big, you ain’t seen nothing yet. According to the Comptroller of the Currency, total Derivatives in the top 25 banks in the US amount to about 180 Trillion dollars. Not billion, trillion. 1000 times a billion.

The scariest part of derivatives is their leverage. Like exchange traded options, derivative contracts can control assets for only a fraction of the contract value. The banks take the leverage to an extreme and have very little in assets backing up their derivative portfolios. According to the Comptroller, the top 25 banks have assets that only amount to about 6% of the Notional Value of their derivatives. JP Morgan, the biggest player in derivatives, has assets backing up its portfolio of only 1.60%.

What happens if the value of the portfolio were to change by 2%, what happens to the banks' assets? And with all of the recent scandals in Real Estate and other "creative strategies" the banks have been employing recently, how do we even know if their asset numbers are correct? Is it possible that the $1.40 Trillion in assets JP Morgan claims is somewhat less, thanks to writeoffs and bad real estate?[..]

Derivatives have barely any regulation on them. For years, Congress tried and Greenspan stood in the way. Banks barely mention them in the annual reports except for a footnote. Thanks to the lack of regulation, derivatives have grown dramatically. There has been a 473% increase in the Notional Value of derivatives at the top 25 banks since 1999. And why not? They can produce billions in almost free revenues to the banks. Free revenues? Yes.

Why do Banks use Derivatives?
Here’s how they work. According to some sophisticated formulas and theories, if you make opposite bets with 2 different trading partners, you can capture the difference in the middle and get virtually risk free profits. If your 2 bets cancel each other out, then whatever is left over in the middle is profit, with zero risk.

Let’s say I bet with bank A that interest rates are going to go up. And I bet with bank B that they are going to go down. Both cancel each other out. But thanks to various strike prices and durations, we can get a small amount of difference in what I sell one contract for and what I buy the first one for. That difference is the whole game. The pennies I make in the middle are free. So I can keep them and make lots of money if I do it big enough.

According to the Comptroller, about 85% of all banks derivatives are this type. Which leaves 15% not. 15%, is not a lot, right. Not until you figure 15% of the 179 Trillion is $26.85 Trillion, still more than double the US economy! And more than double the amount of all the banks’ assets put together.[..]

Who is the Fed working for? Who is the Fed most concerned about? Who is the Fed likely to consider before making any moves. Given the choice between a Dollar crash or a major bank failure and closure, which do you think the Fed fears most? If you think the Fed doesn’t take the bank’s derivatives holdings into consideration, you have not been paying attention. It seems everything the Fed has been proposing since the summer is designed to throw the Dollar under the bus and let inflation run. All to protect the banks.

The sub-prime disaster is a drop in the bucket compared to the massive derivative monster in the banks. Don’t think the Fed doesn’t know this.

Derivatives is an industry tainted by its side effects
At times like these, spare a thought for derivatives salesmen. It has been clear for a while that their wares can prove toxic. But it must be dispiriting for the poor devils that almost every time a fresh chasm opens in the financial landscape, derivatives are at the bottom of it. Most obviously, the harm inflicted on the investment banks has been derivative-based, as last week’s further losses from UBS reminded us. So too, of course, was the Société Générale affair. In the US, the FBI is now investigating the subprime disaster, including the part played by Wall Street derivatives merchants.

That aside, the deepening crisis of the monoline insurers results from them insuring credit derivatives instead of the humdrum municipal bonds they were set up to handle. And as a final insult, an academic study now argues that credit default swaps have the effect of pushing more firms into bankruptcy. More on that last point shortly. But first, observe that several of those cases involve the imputation of fraud – the “bezzle”, as JK Galbraith called it. As he remarked, the bezzle rises and falls with the cycle. “In good times, people are relaxed, trusting, and money is plentiful. But there are always many people who want more.”

For such people complexity is a magnet, since it offers more scope for escaping detection. And there are few things in finance more complex than structured derivatives; witness the fact that the trading desks of the big banks are largely staffed by maths and physics PhDs. The UK’s Financial Services Authority warned last week that there was probably more fraud on the way, either because of misdeeds surfacing from more lax times or because individuals were now pressed into wrongdoing by falling markets.

Place your bets on how many cases will involve derivatives.

Did Greenspan push risky home loans?
The former Federal Reserve chairman denies he encouraged adjustable-rate mortgages. Here's what he said; you decide.

Having just written a book on Alan Greenspan, I assumed I wouldn't have much more to say on the subject for quite some time. But a week and a half ago, the former Federal Reserve chief made a claim so outrageous I felt it needed to be discussed. On a recent trip to Canada, I happened to read a story in The Globe and Mail, "Greenspan on the defensive," about a question-and-answer session he'd just done with Sherry Cooper, the chief economist at BMO Nesbitt Burns, before a Vancouver business audience.

Weapons of mass denial
Reporter Wendy Stueck described the chairman's version of a now infamous speech as follows: "Mr. Greenspan also denied being a booster for risky mortgage products, saying that while he noted advantages in some new mortgage products in an oft-referenced 2004 speech, he spoke in favor of conventional mortgages in an address a week later that has been ignored."

Being quite familiar with that 2004 speech -- in which the chairman had been rather emphatic -- I was shocked to read this claim. I decided to investigate, first by seeing what exactly Greenspan had said in the Q&A with Cooper.
MR. GREENSPAN: In 2004 I went before a Credit Union . . . and I discussed the pros and cons of various types of consumer finance.[..] What I was commenting on and I said wasn't described properly in my earlier remarks was that there are certain occasions when it pays to take the adjustable rate mortgage. If, for example, you are a corporate executive who is going to be in certain cities for two years, it probably makes no sense whatever to take a fixed rate mortgage. Probably be far better to take an adjustable rate mortgage, to take the risk. So I strongly clarified my remarks saying that it's true one of the great inventions was the 30-year fixed rate mortgage in the United States.That never got picked up. Indeed the issue stayed that way until very recently when all of a sudden the original one comes up . . . not the one a week later. So I plead not guilty.

Greenspan gave 22 speeches in 2004. If he had truly been worried about people misconstruing what he was saying, he could easily have given a speech to clarify the issue. He did not. Here's what he originally said in that Feb. 23, 2004, speech.

"Calculations by market analysts of the 'option adjusted spread' on mortgages suggest that the cost of these benefits conferred by fixed-rate mortgages can range from 0.5% to 1.2%, raising homeowners' annual after-tax mortgage payments by several thousand dollars.

Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward.

"American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest-rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."

Not guilty? You decide.

Stimulus plan a scam to benefit the rich
Higher loan limits will lead to Fannie Mae, Freddie Mac bailout

Congress is about to sell us the biggest fraud in American history. It's been highly touted as an economic stimulus bill that will help millions of Americans - and has the backing of both President Bush and House Speaker Nancy Pelosi. In the coming year, individuals would receive rebates of up to $600 and families up to $1,200. There are other goodies, too, including tax write-offs for small businesses and an expansion of the child tax credit.

But, as the old adage goes, nothing comes for free. As part of the bill, Congress is set to rush through an increase in the mortgage loan limits for Fannie Mae and Freddie Mac (and Federal Housing Administration insurance, too) - from $417,000 to $729,750 - the first step toward a massive financial disaster in which taxpayers will end up paying through the nose.

Here's how we got to this point. Domestic and international investors hold hundreds of billions of dollars in bad debt, because U.S. investment houses sold them junk securities based on often fraudulent mortgages. Many of these mortgages were sold to unqualified buyers under terms that made widespread foreclosures a certainty once the housing market began to fall.

Investment banks and bond rating agencies sat down and tried to figure out how to describe Americans with insufficient incomes and little for a down payment as great credit risks on loans too big for their incomes. The new rules focused on credit scores, because it was a good excuse to avoid looking at income and down payment, factors that would have restricted this moneymaking fiasco.

Now, thanks to Congress, junk bond investors will be able to pawn off their bad debt to Fannie and Freddie, instead of suing the big investment houses for ripping them off. This shift will certainly doom Fannie Mae and Freddie Mac, so don't be surprised if we, the taxpayers, have to bail out poor Fannie and Freddie - to the tune of more than $1 trillion.

Why more than $1 trillion? If Goldman Sachs is correct in its recent projections that home prices in California are going to drop 35 to 40 percent, the state's losses alone would top $2 trillion, because California has a disproportionate number of jumbo loans. The irony here is that the collapse in housing prices could make Fannie insolvent even without raising the loan limit. Increasing Fannie's limit is like going on a spending spree with your credit cards because you know you are going to file for bankruptcy in a few months. Only here the taxpayer is left holding the bag. Our children will pay interest on this debt in perpetuity. It is our debt. It is inescapable.

In the coming months, Fannie and Freddie will buy up mortgages based on old, fraudulent appraisals and on loans with bogus inflated incomes. Unfortunately, many of these loans will still default. But that's just the start. Brace yourself for another wave of faxes, phone calls and junk mail urging you to refinance at only 1 percent. With zero new regulation, the same bad actors that caused this crisis can once again inflate property appraisals and begin a new cycle of fraud.

Contrary to popular myth, Fannie holds a lot of subprime debt, option ARM debt and other dodgy securities. Fannie and Freddie owned or guaranteed almost 45 percent of all mortgages in America last year. BusinessWeek noted in 2007 that Fannie and Freddie have "moved more prominently into low-documentation loans, which require little or no proof of the borrower's income." Expansion of Fannie and Freddie's reckless lending is exactly what Congress wants because it's plausibly deniable. Teary-eyed lawmakers can take to the airwaves a year from now and declare: "We had no idea Fannie could go under, but we can't cut and run now. We have to bail out Fannie and Freddie for the good of America! It's going to be a tough slog, but you're getting used to those, no?"

It's too late to overcome housing bubble burst
As the economy shifts into reverse and Congress and the president work out the details of a proposed fiscal stimulus, some are asking whether it will be enough to keep the economy out of a recession. The answer is very likely no. The timing, length and depth of a recession depends on many variables and is therefore difficult to predict. But there are certain things that we already know.

First, we are witnessing the bursting of an unprecedented bubble in house prices. Nationally, a loss of wealth of about $8 trillion would be necessary just to bring these prices back to their normal long-term trend.
Even conservative estimates of the effect of such a drop imply a decline in consumer spending of $400 billion, or about 3 percent of the gross domestic product. Some economists think it would be much more than that, because of the expansion in recent years of consumers borrowing against the previously rising value of their homes.

We also have the first official GDP growth numbers for the last quarter, which shows the economy at a near standstill with just 0.6 percent annualized growth. Consumer spending, which accounts for about 70 percent of the economy, has been holding up; but this cannot last as the price of homes that people have been borrowing against continues to fall.

The size of the proposed stimulus, which is about $150 billion, is just not large enough to compensate for the kind of spending declines that we can expect. Near the peak of the housing bubble in 2005, homeowners were cashing out about $780 billion in home equity at an annual rate. A lot of it was used for consumption, but this ATM machine has run out of cash.

Sallie Mae Credit Rating Cut by S&P, May Be Lowered More
SLM Corp.'s credit rating was lowered two levels to BBB- from BBB+ by Standard & Poor's Ratings Services, and the student lender may be cut further.
The student-loan company, known as Sallie Mae, will remain on "credit watch negative," New York-based S&P said in a report today. The decision follows commitments by a group of banks to provide Sallie Mae with $31 billion in financing. It reflects concern SLM won't receive the money because "it is subject to various conditions." Once Sallie Mae gets financing, S&P said it expects to revise the outlook to "stable."

Sallie Mae, based in Reston, Virginia, said on Jan. 28 that it got commitments from the banks as it dropped a lawsuit over a failed $25.3 billion takeover offer. Sallie Mae had short-term debt of $35.9 billion at the end of 2007, and long-term borrowings of $111.1 billion, according to a regulatory filing.
"We believe 2008 will be a difficult year for Sallie Mae, as higher funding costs, reduced profitability and potential asset quality deterioration will keep pressure on," S&P analyst Ernest Napier said in a report. The ratings company lowered SLM's short term credit rating to A-3 from A-2.

Sallie Mae fell $1.54, or 6.7 percent, to $21.46 at 4:32 p.m. in New York Stock Exchange composite trading, and declined to as low as $21 in after-hours trading. The company has fallen 54 percent in 12 months and trades at about two-thirds less than the $60 a share originally offered in April by private equity firm J.C. Flowers & Co. in New York

Sir Richard Branson emerges as likely victor as Olivant pulls out of Rock bid
Sir Richard Branson emerged as the likely winner of the takeover battle for Northern Rock last night after Olivant, a rival consortium, pulled out less than 15 minutes before the Treasury's deadline for bids for the troubled bank.

However, Northern Rock's largest shareholders continued to snub the Virgin consortium's offer, vowing last night to support a proposal by the bank's management to retain its independence. Shares in the Newcastle-based bank plunged 8 per cent to close at 88p on news of the Olivant consortium's withdrawal.
Treasury sources said that they were shocked by the dramatic withdrawal of the consortium led by Luqman Arnold, the former Abbey chief executive. The Treasury was last night talking to Olivant about its decision to drop out.

Sources with knowledge of the Olivant bid blamed conditions set by the Treasury for its withdrawal. The Treasury told bidders on Friday that they must repay £25 billion worth of government-guaranteed bonds within three years in order to satisfy European rules on state aid

Ilargi: I got the one below through a UK source that asked: Is this some kind of parallel universe?

Two trillion pounds of wealth tied up in homes
Homeowners have almost two trillion pounds of wealth tied up in their properties -- providing a huge buffer against a house price downturn. Britons have property equity worth 1.95 trillion pounds, once outstanding mortgage debt is taken into account, according to GE Money Home Lending. Just over a quarter of British homes are owned outright -- delivering 1.37 trillion pounds of property wealth -- while people with mortgaged properties have build up 582 billion pounds-worth of equity in their homes.

The average homeowner has 127,455 pounds of mortgage-free wealth tied up in the home, giving a considerable buffer against short-term house price falls. House price growth has slowed considerably and two of Britain's largest mortgage lenders, Halifax and Nationwide, expect prices to be flat for 2008 as a whole. Others are expecting falls, particularly in some areas where prices have overshot the wider market.

"Whatever happens to the property market in the short term, we have had a prolonged period of rising prices which have -- importantly -- helped many homeowners to build equity and a reassuring cushion against any downturn," said Gerry Bell, head of mortgage marketing at GE Money Home Lending. "However, whilst consumers should take some reassurance from the equity that they currently hold in their homes, they also need to ensure that they are not complacent and continue to make prudent financial decisions -- particularly in an environment of economic slowdown which could potentially see house prices falling.

Retailers bracing for worst January report on record
Forget about gift-card use that pushed holiday sales into January or retailers' appetizing clearance sales. With consumers worried about their wallets, retailers may be about to report the industry's worst January sales numbers on record. U.S. chain-store sales in January are expected to be flat and even decline from a year earlier, according to the International Council of Shopping Centers.

By either measure, that would be the worst reading, unadjusted for inflation, since 1969 when ICSC began to compile the data, according to ICSC's chief economist, Michael Niemira said. ICSC already lowered the January forecast twice from an original estimate of a 1.5% gain during the month, Niemira said.

"It's an economic blizzard that seemed to be weakening demand," Niemira said. "The story of recession seemed to be in every daily newspaper. It just starts to increase the worry level. As the uncertainty got worse, the consumers' unwillingness to spend seemed to get worse."

It's Not Just the Business Cycle
Robert Reich is the nation's 22nd Secretary of Labor

A better stimulus package? More bailouts of Wall Street? Another Fed rate cut? None of these fixes will help much because they do not deal with the underlying problem now facing American consumers, and the underlying anxiety now gripping American voters. The problem lies deeper than the current slowdown and transcends the business cycle.

The fact is, middle-class families have exhausted the coping mechanisms they have used for more than three decades to get by on median wages that are barely higher than they were in 1970, adjusted for inflation. Male wages today are in fact lower than they were then: the income of a young man in his 30s is now 12 per cent below that of a man his age three decades ago. Yet for years now, America’s middle class has lived beyond its pay cheque. Middle-class lifestyles have flourished even though median wages have barely budged. That is now ending. Americans are beginning to feel the consequences.

The first coping mechanism was moving more women into paid work. The percentage of American working mothers with school-age children has almost doubled since 1970 – from 38 per cent to close to 70 per cent. Some parents are now even doing 24-hour shifts, one on child duty while the other works. These families are known as Dins: double income, no sex. But we reached the limit to how many mothers could maintain paying jobs. What to do? We turned to a second coping mechanism. When families could not paddle any harder, they started paddling longer. The typical American now works two weeks more each year than 30 years ago. Compared with any other advanced nation we are veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.

But there is also a limit to how long we can work. As the tide of economic necessity continued to rise, we turned to the third coping mechanism. We began to borrow, big time. With housing prices rising briskly through the 1990s and even faster between 2002 and 2006, we turned our homes into piggy banks through home equity loans. Americans got nearly $250bn worth of home equity every quarter in second mortgages and refinancings. That is nearly 10 per cent of disposable income. With credit cards raining down like manna, we bought plasma tele?vision sets, new appliances, vacations. With dollars artificially high because foreigners continued to hold them even as the nation sank deeper into debt, we summoned inexpensive goods and services from the rest of the world.

But this final coping mechanism can no longer keep us going, either. The era of easy money is over. With the bursting of the housing bubble, home equity is drying up. As Moody’s reported recently, defaults on home equity loans have surged to the highest level this decade. Car and credit card debt is next. Personal bankruptcies rose 48 per cent in first half of 2007, probably even more in the second half, which means a wave of defaults on consumer loans. Meanwhile, as foreigners begin shifting out of dollars, we will no longer have access to cheap foreign goods and services.

How the Fed just made this crisis a whole lot worse
Bond, equity and currency markets have reacted sharply to the Federal Reserve’s aggressive decision to cut US base rates, intra-meeting, by 0.75% points and by a further 0.5% points at its scheduled 30th January Open Markets Committee meeting. The pace of this reduction is unparalleled and takes the US Fed Funds rate down to 3.0%, representing a whole 2.5% point easing from the point at which the US central bank began cutting the key rate on 18th September. Views polarise as to whether the Fed has acted in time, too late, too aggressively or not aggressively enough.

Although our base case is built on the view that the US economy slid into recession in December 2007 (and thus aggregated data for Q4 shows the economy moving ahead, albeit at a much slower pace than that recorded over Q3), sufficient doubt as to whether the US is actually in recession causes us to consider the possibility that we might be wrong…and what the most significant implication of that might be. We start with what we know. We know that in the recent past the West has enjoyed an unprecedented (post WW2) period of unbroken prosperity and that the economic (monetary) policy of the past decade has been characterised by the creation of a series of asset price bubbles, particularly in the financial sector and in real estate, the evolution of massive external deficits and the re-ignition of inflationary pressures…followed by a collapse!

Whether the latest moves in equity and bond markets reflect nothing more than another mid-cycle correction or the atypical end of the cycle remains to be seen but what we suspect is that if we’re wrong and the financial market experience of the past two months turns out to be nothing more than another, very large, mid-cycle correction the Fed will be roundly criticised for misreading the tea leaves and panicking into overly aggressive policy action by fretful markets.

In fact we have been here before and not all that long ago. This year marks the tenth anniversary of the Asian crisis, a period with uncanny similarities and yet also profound differences to today’s conditions. Back then the trigger for the Asian crisis proved to be the innate fragility of the emerging Asian economies’ primitive financial systems. The recent experience reveals, if anything, the vulnerabilities of an oversophisticated Western financial system. Back then, the response from the Greenspan Fed was to create a period of aggressive disinflation which looked, for a period, as if it might morph into an all-out debt deflationary spiral (Armageddon for financial markets). If recent experience is anything to go by it appears that the Bernanke Fed has opted for the same old medicine in its attempts to stave off the atypical downturn.

One factor that was emerging as an issue ten years ago and has become an issue of profound consequence now is the extent of the debt mountain. Whilst we accept that monetary policy is a blunt instrument when attempting to re-calibrate the economic barometer we do admit to concerns regarding the effectiveness of monetary policy in making any difference when financial sector, non-financial sector and household debt levels have risen, in the USA, to around 90% of GDP. The only domestic US sector with anywhere near sufficient capacity to add to existing levels of debt is the government and if the recent bipartisan agreement between president Bush and the democrats is anything to go by that looks like being another popular route towards the desired economic salvation.

The inference is pretty clear to us. We have reached the point at which the mountain of debt has become unmanageable, indigestion has set in and the authorities are pushing on a string. In this context the crisis in the credit market, whilst clearly needing a near-term solution, is ultimately part of the long-term solution.

Services data add to US economic gloom
Activity in the US services industry contracted in January for the first time in five years, according to a closely-watched survey, adding to gloominess about the economic outlook as businesses suffered from a combination of weak demand and rising costs. The Institute for Supply Management’s non-manufacturing business activity index, which records the temperature across vast swathes of the US economy, fell from a seasonally adjusted level of 54.4 per cent in December, signalling an expansion, to 41.9 per cent in January, indicating a contraction.

Most economists had predicted that activity in the services industry would slow, but the ISM index would fall only slightly to 53 per cent. The sharp contraction in services businesses - from financial services to healthcare and lodging – is likely to raise the odds of a US recession in 2008. It also makes it more likely that the Federal Reserve will continue to cut interest rates at its next meeting in March.

“If the move does stand up on revision, then it suggests a significant and sudden broadening out of the weakness in the US economy,” wrote analysts at Goldman Sachs. “In its short history (since 1997) this survey has rarely produced readings below 50 outside recession”.

U.S. Stocks Drop on Bank Downgrades; American Express Declines
U.S. stocks declined for the first time in three days after analysts told investors to sell American Express Co., Wells Fargo & Co. and Wachovia Corp. on concern a recession will worsen defaults among consumers. American Express, the third-biggest credit-card company, slumped after UBS AG said U.S. unemployment will rise, reducing profits. Wells Fargo and Wachovia, the fourth- and fifth-largest U.S. banks, dropped the most in seven years after Merrill Lynch & Co. said loan losses may increase. Concern spending will slow also dragged down retailers such as Tiffany & Co. Almost seven stocks declined for every four that advanced on the New York Stock Exchange.

"We probably have not seen the end of the bad news," said Craig Hester, who oversees $1.5 billion as chief executive officer of Hester Capital Management in Austin, Texas. "The first wave has come through the residential mortgage market, and now we're beginning to see credit card delinquencies on the increase."
American Express decreased $1.94 to $47.66. UBS analysts led by New York-based Eric E. Wasserstrom advised selling the shares because the recession "will result in higher levels of unemployment in 2008-09, the primary driver of credit losses." "American Express is tied to small businesses and consumers in terms of spending," said Tim Smalls, head of U.S. trading at Execution LLC in Greenwich, Connecticut. "That's an ongoing issue. This market is going to be choppy."

Shares of other credit card companies decreased. Discover Financial Services slid $1.62 to $16.34. Capital One Financial Corp. dropped $4.32 to $52.65. Wells Fargo fell $2.26 to $31.39 and Wachovia dropped $3.23 to $35.53. Merrill Lynch lowered its recommendations on the stocks to "sell" from "neutral," citing the latest Case- Shiller data, which showed "rapidly declining California real- estate values." They said the valuations of the companies did not fully discount earnings and recession risk in 2008.

"If economic growth is slowing, there may not be that much demand for borrowed money," said John Carey, who oversees about $13 billion at Pioneer Investment Management in Boston. "The financial stocks make up a significant part of the market and facilitate a lot of other business transactions."

Ambac Financial Group Inc. plunged $1.81, or 14 percent, to $11.39, the steepest decline in the S&P 500. MBIA Inc. dropped 97 cents, or 5.9 percent, to $15.39. The bond insurance industry may lose $34 billion on securities they guaranteed, causing them to be stripped of their AAA credit ratings, Citigroup Global Markets said in a Feb. 1 report.

All Downhill From Here, Baby!
I like the way Ben Jones characterizes the progression of this crash. It looks the same everywhere, no matter all the fools who delude themselves with: "It won't happen here." It will happen here. It is happening here. Every location that sowed the wind of the real estate bubble, will reap the whirlwind.

It looks like this...

First, the multiple bids end.
Second, sales slow and inventory builds.
Third, builders offer incentives.
Fourth, the resale market also start offering incentives, burying St. Joseph and probably praying to St. Jude, or bargaining with their gods to get them out of this mess and they will never fool with real estate again.

Price cuts and more price cuts. Rinse and repeat.

Prices eventually stall when seller wishing prices drop to what they owe, and no fool has rushed in to bail them out. Foreclosures spike.

All downhill from there, baby.

French Banks Face Money Laundering Trial
More than 135 people and four French banks _ including already embattled Societe Generale _ went on trial in Paris on Monday on charges they abetted a money laundering operation between France and Israel. The case reached court as Societe Generale is reeling from billions of dollars in trading losses announced last month. Those losses are the subject of a separate, unrelated investigation.

In the money laundering trial, the defendants include 142 people or entities including Societe Generale, the French unit of Barclays PLC, the National Bank of Pakistan and Societe Marseillaise de Credit. Societe Generale CEO and Chairman Daniel Bouton and other senior bank executives are among the defendants.

The case centers on five networks, four made up of shopkeepers and companies and the fifth various Israeli associations. Prosecutors say the banks failed to properly monitor checks drawn on French accounts that were subsequently cashed in Israel. The cash was then returned to France. Suspicious transactions reportedly rarely exceeded 2,250 euros (currently worth $3,335). While charges vary, individuals, if convicted, could face up to 10 years in prison and heavy fines. The banks risk heavy fines.

Societe Generale is accused of having laundered some 32 million euros, Barclays France close to 24 million euros, National Bank of Pakistan and Societe Marseillaise de Credit about 2.6 million euros.

Ilargi: Parts of China are becoming too expensive to produce in: the answer, what else, is outsourcing.

Last call for Guangdong shoemakers
Guangdong's thousands of shoemakers, many of whom saw the start of the province's transformation into China's engine of modernization, are packing their lasts and moving elsewhere as the Pearl Delta Region undergoes another economic metamorphosis.

The once-dynamic shoemaking industry has become a remnant of its old self, with more than 1,000 footwear and accessory producers going out of business amid an increasingly unfriendly environment for their operations. They are part of a mass-migration of manufacturing industry from the delta, as factories shut up shop in increasingly expensive Guangdong and open up either in the country's more backward hinterland or overseas, frequently in other Asian countries such as Vietnam.

As many as 10,000 factories, many invested from Hong Kong, are expected to close around the Lunar New Year holiday on February 7. Millions of migrant workers heading home to inland provinces with New Year bonuses in their pockets are unlikely to have work to draw them back.

Driving the closures, as factory owners face rising costs for land and wages, are government policies aimed at forcing out from the area production of low-value-added goods and at pulling in businesses that pollute less, employ higher-skilled workers and help move the region up the value scale. Guangdong will push ahead with developing innovative and service industries while combating pollution, provincial governor Huang Huahua said when he delivered a report at the Guangdong 11th People's Congress on January 17.

Measures such as the increased protection of intellectual property rights (IPR) will be introduced to develop a service-and-technology-oriented and environmentally friendly economy. A multi-tier capital and corporate bond market are envisaged to help catapult the capital Guangzhou and Hong Kong's neighboring city of Shenzhen into a financial hub status to attract multinational firms. Such changes may help white-collar workers from expat bank executives to insurance salespeople in Guangdong and across the border in Hong Kong breath easier if it helps to reduce the delta region's notorious air pollution, which has been cited by companies as justification for moving offices to Singapore to the south.

Less happy will be blue-collar workers who lose their jobs and their families in the poorer inland provinces that depend on their remittances. Some, such as 34-year-old Xiao Hanjun, from Hubei province in central China, heading home for the new year, hoped to find work in Suzhou, Jiangsu province, after being laid off a month ago, ending 10 years of working in a factory in Guangdong's Foshan.

Others will be less lucky, as many factories are moving sticks out of the country. Hong Kong businessman Leung Ka-yiu, boss of a shoe factory in the Guangdong city of Dongguan, broke off an interview earlier this month for a phone discussion on transferring the plant to Vietnam. After hanging up the phone, Leung said: "No one wants to leave, but we just couldn’t go on doing business."

Ilargi: Australia? Major finance crisis? Yes, as I will keep on repeating till it’s understood: this credit crunch will hit you from multiple directions, all mutually reinforcing. Positive debt feedback.

Australia: Moody's May Cut A$83 Billion of Mortgage-Backed Bonds
Moody's Investors Service may cut the ratings on A$83 billion ($75 billion) of Australian mortgage- backed bonds linked to PMI Group Inc. on concern the U.S. home- loan insurer will find it harder to pay claims. Moody's is reviewing the ratings on bonds tied to loans insured by the local unit of PMI, it said today in a statement. They account for about 45 percent of the A$180 billion mortgage- backed bonds issued in Australia, making for the biggest review Moody's has done in the nation, said Henry Charpentier, structured finance analyst at the ratings company in Sydney.

Any downgrades will stifle sales of Australian mortgage- backed bonds, which fell 87 percent in the six months to Dec. 31. Australian lenders will find it more costly to raise capital to fund mortgages if Moody's cuts the ratings. "There is still a big question mark as to how non-bank originators fund themselves," said David Goode, a credit analyst at Challenger Financial Services Group Ltd. in Melbourne. "The banks are certainly affected as well; this makes illiquidity worse."

Australia's five largest banks increased mortgage interest rates last month to recoup higher borrowing costs, marking the first time in more than a decade that the nation's biggest lenders made a change in home loan rates that didn't follow the Reserve Bank of Australia. Yield margins on Australian mortgage-backed debt have surged as much as fourfold amid the global credit squeeze and no public mortgage-backed bond has been sold this year.

Australia raises interest rates
A strong property market has contributed to rising inflation

Australia has raised interest rates to an 11-year high of 7%, as part of efforts to control rising inflation. The rise comes as other major central banks are cutting interest rates to ease an economic downturn. Australia's resource-rich economy has continued to expand due to a sustained rally in commodity prices.

Chinese demand for raw materials has allowed Australia to lessen its reliance on the United States, which is on the brink of a recession. The Reserve Bank of Australia has raised the cost of borrowing 11 times since 2002. "Having both the international and domestic information available, the board concluded that a tighter monetary policy stance was needed now," said Glenn Stevens, the bank's governor.

Coal prices surge to record high
Coal prices have soared to a record after serious disruptions at some the world's most important coal producers. The benchmark price in Asia jumped 25% to $116 a tonne. Last month, China, the world's biggest coal producer, said it would halt exports in February and March due to the worst snow in decades. Power shortages in South Africa have disrupted mining there and in Australia heavy flooding has caused serious problems for several mining companies.

According to one trader, "supply is so tight at the moment that users just have to pay whatever producers are asking, and if they sit around and wait, they will either have to fork out even higher prices or be told there is no more tonnage available".

Indonesia, the world's biggest coal exporter, says most of its output for 2008 is already sold. Stocks at South Korean utilities have fallen to less than two weeks worth of supplies, according to reports. The Philippines state electricity company is struggling to source coal due to high prices.

Ilargi: I’ll admit that I’m tempted to call Richard Branson the world’s biggest rubbish dump, but here’s another candidate. Why does this belong in the Debt Rattle? It may well be the biggest debt we have.

The world's rubbish dump: a garbage tip that stretches from Hawaii to Japan
A "plastic soup" of waste floating in the Pacific Ocean is growing at an alarming rate and now covers an area twice the size of the continental United States, scientists have said.

The vast expanse of debris – in effect the world's largest rubbish dump – is held in place by swirling underwater currents. This drifting "soup" stretches from about 500 nautical miles off the Californian coast, across the northern Pacific, past Hawaii and almost as far as Japan.

Charles Moore, an American oceanographer who discovered the "Great Pacific Garbage Patch" or "trash vortex", believes that about 100 million tons of flotsam are circulating in the region. Marcus Eriksen, a research director of the US-based Algalita Marine Research Foundation, which Mr Moore founded, said yesterday: "The original idea that people had was that it was an island of plastic garbage that you could almost walk on. It is not quite like that. It is almost like a plastic soup. It is endless for an area that is maybe twice the size as continental United States."

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Curtis Ebbesmeyer, an oceanographer and leading authority on flotsam, has tracked the build-up of plastics in the seas for more than 15 years and compares the trash vortex to a living entity: "It moves around like a big animal without a leash." When that animal comes close to land, as it does at the Hawaiian archipelago, the results are dramatic. "The garbage patch barfs, and you get a beach covered with this confetti of plastic," he added.
The "soup" is actually two linked areas, either side of the islands of Hawaii, known as the Western and Eastern Pacific Garbage Patches. About one-fifth of the junk – which includes everything from footballs and kayaks to Lego blocks and carrier bags – is thrown off ships or oil platforms. The rest comes from land.[..]

According to the UN Environment Programme, plastic debris causes the deaths of more than a million seabirds every year, as well as more than 100,000 marine mammals. Syringes, cigarette lighters and toothbrushes have been found inside the stomachs of dead seabirds, which mistake them for food. Plastic is believed to constitute 90 per cent of all rubbish floating in the oceans. The UN Environment Programme estimated in 2006 that every square mile of ocean contains 46,000 pieces of floating plastic

Ice Melt Accelerates Around the World

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The most dramatic loss of ice in recent years has been the decline of summer sea ice in the Arctic Ocean. Between 1953 and 2006, the area covered by sea ice in September shrunk by 7.8 percent per decade, more than three times as fast as the average rate simulated by climate models. Researchers were further stunned in the summer of 2007 when Arctic sea ice extent plummeted to the lowest level ever measured, more than 20 percent below the 2005 record. This decline is rapidly changing the geopolitics of the Arctic region, opening the Northwest Passage for the first time in recorded history and triggering a scramble among governments to claim large swaths of the potentially resource-rich Arctic sea floor.

An important factor behind the sudden drop in ice cover in 2007 was that the sea ice at the start of the spring melt-season was thinner and less extensive than usual. The fact that the ice was unable to fully recover over winter has led researchers to suggest that a tipping point has already been reached: many now believe the summer Arctic Ocean could be ice-free by 2030, decades earlier than previously thought possible. Arctic sea ice both reflects sunlight and acts as an insulating layer between the relatively warm ocean and the colder atmosphere. As it melts away, these cooling effects disappear, warming the region still further. Sea-ice decline may therefore be part of the reason why average Arctic temperatures have risen at almost twice the global rate in the last 100 years.

Warmer temperatures are also accelerating ice melt on the nearby Greenland ice sheet, which contains enough ice to raise sea level by seven meters (23 feet). Mass loss in Greenland more than doubled between 1996 and 2005, with loss in the southeast accelerating even further since 2004. The summer of 2007 saw a record area of ice melt on Greenland, 10 percent more than the previous maximum in 2005.

In 2006, scientists reported that “glacial earthquakes” caused by large masses of ice moving rapidly over bedrock had doubled in frequency in Greenland over the last five years. These earthquakes are associated with meltwater from the glacier surface, which flows to the base of the ice sheet and lubricates it, causing rapid glacial movement. Positive feedback mechanisms such as this meltwater lubrication accelerate the speed with which glaciers react to warmer temperatures; ice sheets once thought to change only over millennia are now seen to be responding to warmer temperatures in just decades.

At the other end of the earth, the West Antarctic Ice Sheet (WAIS) is also showing disturbing early signs of disintegration. These include the thinning and acceleration of glaciers near the coast, the retreat of grounding lines (the point at which glaciers leave the land and become floating ice shelves), and the increased calving of large icebergs. A recent study estimates that West Antarctica is losing approximately 132 billion tons of ice per year, 59 percent faster than only a decade ago. In 2007, researchers reported satellite data showing large lakes and rivers of meltwater flowing beneath the ice sheet, suggesting that the positive-feedback mechanisms recently found to be accelerating ice loss in Greenland are also at work in Antarctica.

The WAIS is thought to be particularly vulnerable to warming because its base rests largely below sea level; higher sea level or a warmer ocean could lead to an unstable retreat of the grounding line toward the interior, producing a sudden and rapid disintegration of the ice sheet.


Anonymous said...

Jim Sinclair
has been warning on derivatives a long while:
“A Review Of World Economies
Author: Jim Sinclair
Dear Friends,
Let us review the key principles as of late:
• Lower interest rates have no capacity to fix the derivative problem now or in the future.
• Fiscal stimulation as now suggested would provide $100 billion to the public, of which 1/3 to 1/2 MAY make it to consumer goods. This will benefit China as almost nothing is manufactured in the USA any more other than derivatives.
• The assumption that the US economy will fall less enthusiastically than others is a reach as the USA is the home of OTC derivatives, the foundation of the problem.
• Those that professed interest rates as the sole determinant of currency value have now shifted with Greenspan’s and Bernanke’s help to comparative economic disasters as the determinant of a currency’s value.
• Interest rates will drop to zero if the equity market disintegrates.
• President Bush, Chairman Greenspan and the Secretary of the Treasury have taken their best shot. If the equity market does not steady FAST, as in IMMEDIATELY the bust will be record breaking because all possible economic ammunition has been used.
• Oil prices may speak of less inflation when it declines but increasing food prices say more.
• No bats, no bees, no food! Both bats and bees are disappearing for what are yet unknown reasons.
• Monetary inflation ALWAYS causes PRICE inflation.
• Today all geopolitical risk has been thrown from focus.
• Default derivative bond guarantee firms will have their bond ratings reduced, putting $1 trillion in bonds at considerable risk.
• The derivative problem internationally is only beginning and therefore so is the dollar decline.
There is much more but this is enough to come to a conclusion. That conclusion is gold is headed to $1650 and the dollar to .5200 after the BS runs out and all the weak gold shorts have been fried.
Now please observe the horror of margin in anything gold and avoid it like the plague.”

Thanks for mentioning the plastics-ocean dead zones.

Polymers Are Forever

Plastic bags are killing us

Plastic Ocean


Anonymous said...

i'm a mid-aged resident of california and remember the recession during the first half of reagan's initial term and one more starting at the end of his second term and lasting most of bush sr's administration.

the first one was described as the worse since the depression and the next downturn was quite severe here in calif.

both came to an end and life continued on.

why are so many predicting extreme doom and gloom from the current downturn?

Anonymous said...

I think the current downturn is viewed as more serious than those that you site because those recessions took place within an environment that was more sound to begin with.
What we are seeing today is a massive debt bubble bursting upon a financial environment that is not able to withstand it.
Were it not for the extreme steps that the central banks and governments have been taking around the world, an unprecedented financial meltdown would undoubtably have occurred already.
So now the open question is, will a meltdown be averted or not? In my opinion, the ice seems to be closing in around the ship and starting to crush the spars.

Anonymous said...

I am also middle-aged. Why is it worse this time?

There is about half a Quadrillion dollars of unregulated marked-to-model derivatives underpinning the credit bubble we are all in. There have been credit contractions before, but credit growth has never ever been this big before. Decades of policies discouraging savings means there are few savings and even less cash money.


Ilargi said...


Sinclair is one of many who have expressed them selves on the derivatives issue. The Financial Times' Gillian Tett published some good easy-to access-stuff. For instance, why these instruments are so complicated. Turns out, that's on purpose, because they cannot be patented. Good detail.

Another detail that often gets overlooked: we need to focus mainly on the nominal value of that market. From what I understand, it looks acceptable to assume that it is at least 10%. That in turn means that if this market really goes tummy up, $70 trillion in real money/credit/debt will have to be put on the table.

The whole thing is very secretive, and the best estimate numbers probably are from the BIS late last year, which put total derivatives trade at over $700 trillion, with a growth rate in 2007 of 24%. If that rate holds in 2008, we'll be looking at $875 trillion by Christmas.

It may seem strange to think it would keep on growing while all else shrinks, but as I said earlier, that 24% rate looks to me to be the equivalent of the Vegas crap table where double or nothing paradoxically is the game of choice, since many players feel they have no choice. This year, this could grow into some kind of hyperinflation. Don't forget, regulation in the field is non-existent, there's no SEC, no government, nothing.

Unknown said...

Why is it different?

In the Reagan days we had Volcker who operated on sound principles and created a even playing field.

Investors and business, small and large, made good profits based on sound decisions and everyone got rich.

With Greenspan and Bernanke we have a private club that operates outside legal principle strictly to protect their own while plundering the wealth of the American people.

And now they get to install their evil queen by decree.

Time to get the hell out of Dodge, not so easy to get out of Zimbabwe.

Greyzone said...

Stoneleigh and Ilargi,

I assume you've seen Mish's latest?


If that's not contraction/deflation then I don't know what is. That's massive, and messy.

Anonymous said...

Also remember Buffett bought Gen Re and thought he could unwind it's derivatives positions; at least four years later they were still trying.


Anonymous said...

I see that Bill Gross has posted his February commentary. He's calling for another DEpression, a return to the 30's.
Thanks for your work ilargi and stonleigh.

Anonymous said...

Can someone explain what the TickerForum discussion really means. If the Fed will take so many types of dubious assets as collateral, this seems like it would be inflationary - hyper-inflationary eventually. You know, like the pushing on the string might actually work if they can keep things together for long enough to dispel the panic. Does this lead to a dollar collapse? And then what?