Monday, March 31, 2008

On the brink of disaster

Wall Street 1930

Please don't miss today's Debt Rattle, March 31 2008

Ilargi: Like many people who work in the world of finance, Allan Sloan at Fortune magazine has a pretty good overview of the situation. But like most of his “peers”, his conclusions are warped by the fact that he can’t imagine himself as a victim. They all think the system will be repaired and survive. They are all wrong in that. Moreover, they all think they can outsmart "the others". Most of them are wrong in that too.

Still, when the senior editor at large for Fortune writes a lengthy article with a title like "On the brink of disaster", I think it's good to draw attention to it. It might make people sit up and listen who otherwise would remain ignorant and oblivious. After all, this sort of material is a thousand miles away from the cheerleading that was the signature for publications such as Fortune until very recently. That is a momentous turnaround. Now, there's a fear, but they can't tell what it is. They know, but they don't want to know.

Chaos on Wall Street
The big banks' fear of big losses is threatening to bring down the entire system, with dire consequences for all of us. Here's what's going on, and what we can do about it.

What in the world is going on here? Why is Washington spending billions to bail out Wall Street titans while leaving struggling homeowners to fend for themselves? Why are the Federal Reserve and the Treasury acting as if they're afraid the world may come to an end, while the stock market seems much less concerned? And finally, what does all this mean to those of us who aren't financial professionals?

Okay, take a few breaths, pour yourself a beverage of your choice, and I'll tell you what's happening - and what I think is going to happen. Although I expect these problems will resolve themselves without a catastrophic meltdown, I'll also tell you why I'm more nervous about the world financial system now than I've ever been in my 40 years of covering business and markets.

Finally, I'll tell you why I fear that the Wall Street enablers of the biggest financial mess of my lifetime will escape with relatively light damage, leaving the rest of us - and our children and grandchildren - to pay for their misdeeds. We're suffering the aftereffects of the collapse of a Tinker Bell financial market, one that depended heavily on borrowed money that has now vanished like pixie dust. Like Tink, the famous fairy from Peter Pan, this market could exist only as long as everyone agreed to believe in it.

So because it was convenient - and oh, so profitable! - players embraced fantasies like U.S. house prices never falling and cheap short-term money always being available. They created, bought, and sold, for huge profits, securities that almost no one understood. And they goosed their returns by borrowing vast amounts of money.

The first shoe

The fantasies began to fade last June when Bear Stearns let two of its hedge funds collapse because of mortgage-backed-securities problems. Debt market - both here and abroad - went sour big-time. That, in turn, became a huge drag on the U.S. economy, bringing on the current economic slowdown.

And before you ask: It's irrelevant whether or not we're in a recession, which National Bureau of Economic Research experts define as "a significant decline in economic activity spread across the economy, lasting more than a few months." What matters is that we're in a dangerous and messy situation that has produced an economic slowdown unlike those we're used to seeing.

How is this slowdown different from other slowdowns? Normally the economy goes bad first, creating financial problems. In this slowdown the markets are dragging down the economy - a crucial distinction, because markets are harder to fix than the economy.

A leading political economist, Allan Meltzer of Carnegie Mellon, calls it "an unusual situation, but not unprecedented." When was the last time it happened in the U.S.? "In 1929," he says. And it touched off the Great Depression.

No, Meltzer isn't saying that a Great Depression - 25% unemployment, social unrest, mass hunger, millions of people's savings wiped out in bank collapses - is upon us. Nor, for that matter, am I. But the precedent is unsettling, to say the least. You can only imagine how unsettling it is to Federal Reserve chairman Ben Bernanke, a former economics professor who made his academic bones writing about the Great Depression.

Academics now feel that the 1929 slowdown morphed into a Great Depression in large part because the Fed tightened credit rather than loosening it. With that precedent in mind, you can see why Bernanke's Fed is cutting rates rapidly and throwing everything but the kitchen sink at today's problems. (Bernanke will probably throw that in too, if the Fed's plumbers can unbolt it.) None of this Alan Greenspan (remember him?) quarter-point-at-a-time stuff for him.

Fear is the culprit

So why hasn't the cure worked? The problem is that vital markets that most people never see - the constant borrowing and lending and trading among huge institutions - have been paralyzed by losses, fear, and uncertainty. And you can't get rid of losses, fear, and uncertainty by cutting rates.

Giant institutions are, to use the technical term, scared to death. They've had to come back time after time and report additional losses on their securities holdings after telling the market that they had cleaned everything up. It's whack-a-mole finance - the problems keep appearing in unexpected places. Since the Tink market began tanking, so many shoes have dropped that it looks like Imelda Marcos's closet.

We've had problems with mortgage-backed securities, collateralized debt obligations, collateralized loan obligations, financial insurers, structured investment vehicles, asset-backed commercial paper, auction rate securities, liquidity puts. By the time you read this, something else - my bet's on credit default swaps - may have become the disaster du jour. To paraphrase what a top Fednik told me in a moment of candor last fall: You realize that you don't know what's in your own portfolio, so how can you know what's in the portfolio of people who want to borrow from you?

Combine that with the fact that big firms are short of capital because of their losses (some of which have to do with accounting rules I won't inflict on you today) and that they're afraid of not being able to borrow enough short-term money to fund their obligations, and you can see why credit has dried up.

The fear - a justifiable one - is that if one big financial firm fails, it will lead to cascading failures throughout the world. Big firms are so interlinked with one another and with other market players that the failure of one large counterparty, as they're called, can drag down counterparties all over the globe. And if the counterparties fail, it could drag down the counterparties' counterparties, and so on. Meltdown City.

The long-term view

In 1998 the Fed orchestrated a bailout of the Long-Term Capital Management hedge fund because it had $1.25 trillion in transactions with other institutions. These days that's almost small beer, because Wall Street has created a parallel banking system in which hedge funds, investment banks, and other essentially unregulated entities took over much of what regulated commercial banks used to do.

But there's a vital difference. Conventional banks have reason to take something of a long-term view: Mess up and you have no reputation, no bank, no job, no one talking to you at the country club. In the parallel system a different ethos prevails. If you take big, even reckless, bets and win, you have a great year and you get a great bonus - or in the case of hedge funds, 20% of the profits.

If you lose money the following year, you lose your investors' money rather than your own - and you don't have to give back last year's bonus. Heads, you win; tails, you lose someone else's money. Bernanke and his point man on Wall Street, New York Fed president Tim Geithner, know everything I've said, of course. As does Treasury Secretary Hank Paulson, former head of Goldman Sachs.

They know a lot more too - such as which specific institutions are running out of the ability to borrow and have huge obligations they need to refinance day in and day out. Walk by Fed facilities in New York City or Washington, and you can feel the fear emanating from the building.

Because these aren't normal times, the Fed has tried to reassure the markets by inventing three new ways to inundate the financial system with staggering amounts of short-term money. This is in addition to the Fed's existing mechanisms, which are vast.

The three newbies - the term auction lending facility, the primary-dealer credit facility, and the term securities lending facility - total more than half-a-trillion dollars, with more if needed. Much of this money is available not only to commercial banks but also to investment banks, which normally aren't allowed to borrow from the Fed.

How can the Fed afford this largesse? Easy. Unlike a normal lender, the Fed can't run out of money - at least, I don't think it can. It can manage monetary policy while in effect creating banking reserves out of thin air and lending them out at interest. That's how the Fed reported a $34 billion profit in 2006, the last available year, of which $29 billion was sent to the Treasury. The Fed can even add to its $800 billion stash of Treasury securities by borrowing more of them from other big players.

Then there's the Treasury. In March the Treasury - which failed this past winter to get private firms to establish a $100 billion "superfund" (please, no giggles from people who equate the term with Love Canal) to keep things called "structured investment vehicles" from having to sell their holdings in a bad market - unleashed Fannie Mae and Freddie Mac and the Federal Home Loan Banks to buy hundreds of billions of dollars of mortgage-backed securities.

That market was seeing prices drop sharply because of large forced sales from the collapse of Carlyle Capital and from hedge funds desperate to pay off some of their borrowings. That decline, in turn, could have forced more write-downs at big firms. Bringing Fannie and Freddie back in the game eases those market problems. Letting Fannie and Freddie bulk up could create trouble down the road, the firms' pledges to raise more capital notwithstanding. But on balance, it was a smart thing to do.

How you'll pay

Still with me? Good. Now let me show you how we taxpayers are picking up the tab for much of this rescue mission to the markets - even though Uncle Sam isn't sending checks to Wall Street. Here's the math. Say the Fed extends $500 billion of emergency loans to firms in need of short-term money. They're paying around 2.5% interest to Uncle Ben (or Uncle Sam, if you prefer). That rate is way below what they'd pay to borrow in the open market, if they could borrow. The difference between the open-market price and 2.5% is a gift from us, the taxpayers.

I think that's better than letting the world financial system collapse - but it's a serious subsidy to outfits that made a lot of money on the way up and that are now whining about losses. You gotta love it - private profits, socialized losses.

Now to the infamous Bear Stearns deal. Bear shareholders are set to get $10 a share - about $1.2 billion - from J.P. Morgan Chase. That's $1.2 billion more than they were likely to realize in a bankruptcy had the Fed and the Treasury dared let Bear go broke. More important, Bear's creditors - who were asleep at the switch and ought to be forced to pay for it - got out whole because J.P. Morgan agreed to take over Bear's obligations.

The only reason Morgan did that is its deal with the Fed. The Fed is fronting $29 billion to Bear, which in turn will offload $30 billion of its financial toxic waste into a fund run on the Fed's behalf. J.P. Morgan eats the first $1 billion of losses - a concession it made to the Fed, which was embarrassed and enraged when Morgan raised the price it was paying for Bear to $10 a share from the $2 originally agreed to.

The securities that Bear is shedding aren't worth $29 billion in today's markets -if they were, Morgan wouldn't need the Fed's dough. The Fed - which is to say the taxpayers - is eating the difference between $29 billion and what that stuff is worth. It wouldn't surprise me to see the Fed end up with a $4 billion haircut - but we'll probably never know. (Once you take that haircut into account, you see why Bear shareholders should stop complaining about getting "only" $10, and why Bear debtholders should erect a statue to Bernanke.)

Fedniks tell their friends - yes, many Fed folks have both social consciences and friends - that they're furious about the Wall Street enablers of the mortgage mess and other financial excesses being able to escape the full cost of their folly, with the public picking up the cost.

The lesser evil

But as one of the players said to me, "Is it better to let Bear Stearns fail and risk setting off a market collapse that costs a million jobs?" The answer, of course, is no. Bear had about $13 trillion of derivatives deals with counterparties, according to its most recent financial filings. If Bear had croaked, large parts of the world could have croaked. And the economic damage could have been catastrophic.

Okay. Is there good news here? Indeed, there is. Sooner or later, all this money being thrown at the debt markets will stabilize things. But the costs will be steep. Those of us who have been prudent, lived within our means, and didn't overborrow are paying a huge price for this. Income on our Treasury bills, money market funds, and CDs has dropped sharply, thanks to the Fed's rate cuts, and our wealth has eroded relative to foreign currencies and commodities.

As an indirect result of the Fed cutting short-term rates, we've already seen a loss of faith in the dollar by our foreign creditors. That's helped run up the price of commodities that are priced in dollars, and may well be stirring up inflation even as the Fed lowers retirees' incomes.

It's going to get harder and harder to finance our country's trade and federal budget deficits, with our seemingly ever-falling dollar carrying such low interest rates. The dollar has been the world's preeminent reserve currency - but I think those days are drawing to a close. Don't be surprised if in the not distant future the U.S. is forced by its lenders to borrow in currencies other than its own. It could get really ugly.

Our financial institutions will emerge from this episode weakened, compared with those in the rest of the world. It's going to take years to work out our country's excess borrowings, with lenders and borrowers - and quite likely American taxpayers all bearing the cost.

So, after all this, we end up with the same old story. Whenever you see a financially driven boom and people tell you, "This time it's different," don't listen. It's never different. Sooner or later, the bubble pops, as it has now. And you and I end up paying for it.

Allan Sloan is senior editor at large at Fortune Magazine

Debt Rattle, March 31 2008

Ilargi: If you don’t mind, I’ll shift the inane “Paulson Plan” left of center stage for now. As soon as I saw the Wall Street Journal write that the US has a “lame duck President”, the last few doubts about the plan vanished: it’s just a balding man trying to strike a convincing pose.

Still, don’t forget that Paulson headed Goldman Sachs for a long time: if and when the Fed takes over the US, Goldman will be sitting pretty. The bald man has laid an egg. And when the crisis truly explodes later this year, the blueprint is ready when the nation starts begging for a strongman to stand up. We are about where Berlin was 80 years ago.

For now, I have a sliver of hope left that someone will wake up to the fact that it’s insanity in its purest incarnation to give the reigns over your economy to an organization that everybody takes great pains to paint as independent from the democratically elected government. There should be alarm bells ringing somewhere, I’d say, but perhaps that’s just the romantic part of me that can’t stop hoping either that Snow White never knew the dwarfs in a biblical sense.

First though, we’ll see rallies in the market, simply because there’s still suckers out there that can and need be cleaned out. Not that I see a significant rally this year, not even a bear one, the model is already too broken.

Updated 12.45 pm EDT

Ilargi: The Fed has “shouldered most of the burden of saving the global economy”? The ECB has loaned out at least as much as the Fed, so I would doubt that. Plus, the Fed is not trying to save the global economy, just the US. And the ECB does so for Europe. Presumably.

"The ECB and Bank of England have so far failed to restore order to money markets.". Well, so has the Fed, right? Am I missing something?

Here's a crucial detail that few recognize: “Bernanke has committed as much as 60 percent of the $700 billion in Treasury securities on his balance sheet..” Hey, 40% to go, let’s party. When that is gone, the Fed will get dictatorial powers over Wall Street anyway, so why worry?

Trichet, King May Support Fed as Ammunition Runs Low
Federal Reserve Chairman Ben S. Bernanke has so far shouldered most of the burden of saving the global economy and financial markets. He may be about to get more help. With the credit crisis entering its ninth month, Bank of England Governor Mervyn King and European Central Bank President Jean-Claude Trichet are on the verge of new steps to spur lending and increase liquidity, say economists at Lloyds TSB Group Plc and Royal Bank of Scotland Group Plc. Interest-rate cuts may be next if the crisis persists.

"We're inching closer to the great global monetary easing," says Joachim Fels, co-chief economist at Morgan Stanley in London. Lloyds predicts King's next step will be to accept more types of collateral for loans. Trichet will pump more money into banks, RBS forecasts. Such measures would take Europe's two biggest central banks further down the path laid out by Bernanke this month.

The Fed chairman needs all the help he can get. In addition to lowering interest rates at the fastest pace in two decades, Bernanke has committed as much as 60 percent of the $700 billion in Treasury securities on his balance sheet to expand lending. The Fed has also offered a $29 billion loan against illiquid securities to assist the buyout of failing securities firm Bear Stearns Cos.

"There is a barrier in terms of the size of the Fed's balance sheet as to how much it can do" short of printing more dollars, says Neil Mackinnon, chief economist at London-based hedge-fund ECU Group Plc, which manages about $1.5 billion. "If the European central banks were to adopt more Fed-style measures, it would go a long way to helping the Fed tackle the crisis. This is not only a problem for the U.S. to resolve."

The ECB and Bank of England have so far failed to restore order to money markets. The cost of borrowing in euros and pounds last week rose to highs for the year. The three-month London interbank offered rate for euros climbed 5 basis points to 4.73 percent, the highest level since Dec. 27. It fell today for the first time since March 3, according to the European Banking Federation.

Bear market rallies only delay day of reckoning
Every slump is punctuated by exuberant bursts of optimism, known to traders as "bear market rallies". Japan had four false dawns during its long slide into the abyss. Each lifted Tokyo's Nikkei index by an average of 53pc. Such bounces can be intoxicating.

Teun Draaisma, Morgan Stanley's stock guru, expects the current rally to boost Europe's MSCI 600 index by 21pc from its trough in late January, with similar moves on the S&P 500. The battered shares do best: builders and banks this time. There have been nine bear rallies since 1970. The average length is four months. The surge misleads investors into believing that sunlit uplands lie ahead. Then the sucker punch hits.

"The Federal Reserve's actions have averted financial Armageddon, but they cannot avert an earnings recession. We don't expect a new bull market until early 2009," he said. Morgan Stanley says earnings will fall 16pc this year as debt leverage kicks into reverse. Investor psychology is "asymmetric". The market discounts trouble in advance. Share prices start falling a year before earnings peak. In a downturn investors keep selling until earnings hit bottom.

"Bear markets are terrible for the human psyche. You get one profit warning after another. People see their hopes dashed so many times that they stop believing," said Mr Draaisma. "You have got to be very disciplined and not buy shares too early just because they look cheap. Things can go down further than you ever dare believe," he said. He is not predicting a bloodbath along the lines of 1929-1933 (-88pc) or 2001-2003 (-49pc): just a long slog, with failed rallies.

For now, the markets are flashing a tactical buy signal. Mr Draaisma's "capitulation indicator" has crashed to the lowest level since the 1998 LTCM crisis: the share "valuation indicator" is near an all-time low. UBS is also gearing for a big rebound, convinced that the Fed's move to shoulder $30bn of Bear Stearns liabilities has changed the game. In its latest report -"Ready for a Rally" - it said financial shares rose 448pc in the 12 months after the Swedish rescue in 1992, 88pc after Japan's Revitalisation Law in 1998; and 82pc after Roosevelt's Emergency Banking Act in 1933.

The pessimists at Société Générale remain sceptical, even though the Fed has gone nuclear. "We expect global equity prices to fall by up to 75pc from their peaks as a deep global economic downturn unfolds over the next few years," said Albert Edwards, their global strategist. He fears a 50pc collapse in earnings, compounded by an "Ice Age derating of equities".

Whatever happens, there will always be tactical rallies. Mr Edwards cites four Wall Street bounces above 25pc in the 2001-2003 bust. The buying cue is when investor gloom nears black despair. The put/call ratio on options is now at a bearish extreme of 0.90. "That would historically suggest that a joyous 25pc spring rally is close at hand," he said. Yet Mr Edwards remains wary as long as analysts cling to their belief that earnings will rise 11pc in 2008. This is not the sort of "washout" level of gloom required to clear the air.

Still, the oldest adage on Wall Street is "never fight the Fed". In short order, Ben Bernanke has slashed interest rates by 300 basis points to 2.25pc, and invoked the emergency clauses of Article 13 (3) of the Federal Reserve Act for the first time since the Great Depression to take on direct credit risk.

The Bush administration has told the housing agencies Fannie Mae and Freddie Mac to absorb $200bn of extra mortgage debt. It has implicitly nationalised them in the process. The network of Federal Home Loan Banks has mopped up $900bn of mortgage securities. Congress has rushed through a $170bn fiscal blitz.

This is not to be sniffed at. It is worth a good spring rally, until the inexorable logic of a 25pc house price crash prevails once again. Bernard Connolly at Banque AIG, who foresaw this crisis with uncanny accuracy, believes central banks will resort to full-throttle reflation, setting off a fresh boom in shares and gold. But this will occur only after the economic slump has spread to Europe and beyond.

Brace for $1 Trillion Writedown of 'Yertle the Turtle' Debt
Be it ever so devalued, $1 trillion is a lot of dough. That's roughly on a par with the Russian economy. More than double the market value of Exxon Mobil Corp. About nine times the combined wealth of Warren Buffett and Bill Gates.

Yet $1 trillion is the amount of defaults and writedowns Americans will likely witness before they emerge at the far side of the bursting credit bubble, estimates Charles R. Morris in his shrewd primer, "The Trillion Dollar Meltdown." That calculation assumes an orderly unwinding, which he doesn't expect.

"The sad truth," he writes, "is that subprime is just the first big boulder in an avalanche of asset writedowns that will rattle on through much of 2008." Expect the landslide to cascade through high-yield bonds, commercial mortgages, leveraged loans, credit cards and -- the big unknown -- credit-default swaps, Morris says. The notional value for those swaps, which are meant to insure bondholders against default, covered about $45 trillion in portfolios as of mid-2007, up from some $1 trillion in 2001, he writes.

Morris can't be dismissed as a crank. A lawyer, former banker and author of 10 other books, he knows a thing or two about the complex instruments that have spread toxic debt throughout the credit system. He once ran a company that made software for creating and analyzing securitized asset pools. Yet he writes with tight clarity and blistering pace. The financial innovations of the past 25 years have done some good, Morris notes. Collateralized mortgage obligations, invented in 1983, saved homeowners $17 billion a year by the mid-1990s, according to one study.

CMOs transformed the business by slicing pools of mortgages into different bonds for different risk appetites. Top-tier bonds had the first claim on all cash flows and paid commensurately low yields. The bottom tier was the first to absorb all the losses; it paid yields resembling those on junk bonds. What began as a good thing, though, soon spawned a bewildering array of new asset classes that spread throughout the financial system, marbling balance sheets with what Morris calls inflated valuations, hidden debt and "phony triple-A ratings."

The more the quants fine-tuned the upper tranches of CMOs and other collateralized debt obligations, the more dangerous the bottom slices grew. Bankers began calling it "toxic waste." Guess where the toxins wound up? That's right: Credit hedge funds are now the weakest link in the chain, Morris says. Their equity stands at some $750 billion and is so massively leveraged that "most funds could not survive even a 1 percent to 2 percent payoff demand on their default swap guarantees," he writes.

Global Assets Deflating
About $2.4 trillion has been lost in US housing values and stocks are down too

Few things in life are more satisfying than shooting teenagers…watching them yelp in pain and fall down in a heap…defeating youthful energy with age and treachery. More about that below…but first, the financial situation: The weekend gave people time to think. Too bad. Thoughts lead to action which leads to trouble. What the commentators, pundits, and policymakers are thinking about is how to ‘fix’ problems in the capital markets. Most of them couldn’t fix a flat tyre, of course. But that doesn’t stop them. They imagine that they can find the hole in the world’s money system…and patch it. .

“US readies overhaul of financial regulation,” is today’s big headline in European version of the Wall Street Journal. The article goes on to tell us that a whole group of changes are coming our way. As near as we can tell, these changes mean nothing – they are simply rearranging the bureaucrats’ desks. This is the plan put forward by Hank Paulson, former Goldman chief executive and now head man at the Treasury.

Critics charge that it doesn’t go far enough…that it is really an extension of the deregulation trend that got us into trouble in the first place. A whole chorus of whiners is now calling for re-regulation of the financial institutions – with heavy emphasis on mortgage lending. The real problem in today’s capital markets is not that the machinery of capitalism is broken, but that it’s working. And that is what the reformers aim to stop. They want to ‘fix’ the markets… like you would ‘fix’ a stray cat – so it couldn’t have kittens. What they really want is to neuter the market…spay it, so it is a cuddly pet, but one that doesn’t give you any trouble.

So far, US homeowners have lost probably about 12% of the wealth they thought they had in their houses. The total capital value of the residential housing market is about $20 trillion. So, a 12% loss is equal to about $2.4 trillion. A few foreign housing markets have been hit harder – Ireland, Spain and Iceland, for example. The equity markets have been hit by similar losses. Equity funds alone have seen $100 billion of cash pulled out by nervous investors. But here – something curious – “In an ugly global crisis, US markets not so bad,” another WSJ headline.

In 2008, the Dow is down 7.9%. But foreign markets are down more. France has lost twice that amount. Germany has dropped even more – 18.7%. But the biggest losses are in the go-go markets of the East. Indian stocks have lost nearly 20% of their value. The Shanghai stock market has fallen 32%. Overall, non-US and Canadian markets are down about 15% - meaning, that the world’s equities have taken a loss of about $4.5 trillion in local currency terms…or about $3 trillion when measured in dollars. (The dollar has gone down so that dollar-based investors have lost less on foreign markets than local investors.)

We have been pointing out that these huge reductions in the implied wealth of the world’s investors weigh heavily on the deflation side of the scales. The money people thought they had is disappearing. To a hedge fund investor, the vanished money may mean nothing more than a missing digit on his portfolio report. But to a marginal homeowner, the losses force him to change his standard of living – cutting back on expenses so as to balance his family budget. For not only does he have less money, his costs keep going up. Every three months the American Farm Bureau buys a typical bag of groceries. This quarter, the price was up 8.9% over a year ago. And gasoline? It’s up 64 cents a gallon over the last 12 months.

A good part of the world economy seems to be drifting into a slump – despite the efforts of the feds to keep the money flowing.
“Capital shortage lingers despite Fed’s latest steps,” reports the WSJ. The banks are rebuilding their balance sheets; they’re not taking on more risky credits. Analysts will take aid and comfort from the performance of the US market so far this year; they will see it as a sign of strength that American equities have sunk less than others. But it is really a sign of weakness.

While foreign markets soared over the last 10 years, US stocks went nowhere. Having not gone up, now they’re not going down. And while they are not going anywhere the value of the dollar continues to fall – wiping out stockholders’ real wealth. In terms of what they can buy on world markets, US stock market investors have lost 25% to 30% of their purchasing power over the last decade. They’ll probably lose another 30% over the decade ahead.

Proposed Rules Bring Cheers, Fears
With a trader's eye toward risk and reward, Wall Street saw upside in the possibility of lighter, more streamlined regulation, but worried that rules designed to make the financial system safer could cut into profits.
Treasury Secretary Henry Paulson is proposing a sweeping overhaul of the system that regulates banks, brokerages, exchanges and insurance companies that is designed to streamline the structure.

The proposal also would shift power from states to the federal government and eliminate some regulatory agencies, giving more power to the Federal Reserve. The plan is unlikely to gain approval soon, with a lame-duck president and an increasingly partisan Congress unlikely to make major moves in an election year.

Wall Street gained some comfort that the plan, spearheaded by Mr. Paulson -- former chief executive of Goldman Sachs Group Inc. -- began as an effort to simplify financial regulation. Many were worried, however, that because the rules are coming just two weeks after the Fed helped avert the collapse of Bear Stearns Cos., political finger-pointing will create a more-onerous regulatory system.

The Fed's decision to lend money to Wall Street firms on the same terms it does to Main Street banks opened the door for regulators to demand more information from them. It also could require investment banks like Lehman Brothers Holdings Inc. and Goldman Sachs to keep more capital on hand than currently required. "I think that is a realistic quid pro quo for access to the Fed's borrowing facilities," said Thomas Russo, chief legal officer and vice chairman at Lehman.

That would be offset by a more efficient regulatory system. "This is a major step forward in the modernization of the U.S. financial services markets," Mr. Russo said. Last year, the number of U.S. regulators overseeing and inspecting securities firms fell to just two from three with the merger of the National Association of Securities Dealers and the enforcement arm of the New York Stock Exchange, which resulted in the creation of the Financial Industry Regulatory Authority, or Finra. The proposed plan could dilute the oversight of the other regulator, the Securities and Exchange Commission, while the Fed would take on a bigger role.

Critics argue that the goal should be far tougher regulation on Wall Street, in particular to protect small investors from being duped into buying risky securities they don't understand. They point to the current mess involving so-called auction-rate securities, which were pitched to investors as the equivalent of cash, but now can't be sold and are losing value.

The auction-rate securities situation follows problems in the municipal-bond market, the structured-finance business, derivatives including collateralized debt obligations, and only just a few years ago, the technology-stock bubble, where Wall Street firms happily peddled profitless dot-com companies that ultimately went bust.

Paulson Plan Endorses Fed's Enhanced Market Authority
Treasury Secretary Henry Paulson's plan to overhaul U.S. market regulation would officially endow the Federal Reserve with the broader authority that it has already accrued in the past two weeks. The Fed, which engineered JPMorgan Chase & Co.'s purchase of Bear Stearns Cos. and became lender of last resort to the biggest bond dealers, will oversee "market stability," under proposals that Paulson will unveil today.

The Securities and Exchange Commission, traditionally the main regulator of Wall Street firms, will be merged with the Commodity Futures Trading Commission, according to a draft of the report. "It would be Congress and the president essentially giving a blank check to a regulator over which they have very little power," said Michael Greenberger, a professor at the University of Maryland in Baltimore and a former CFTC official. Paulson's proposal will "allow Wall Street to do whatever they want until a crisis occurs, at which point the Fed would intervene."

The central bank's response to the credit freeze and the near bankruptcy of Bear Stearns shows how the role of regulators is being redefined by events, regardless of Paulson's review, which began nine months ago. SEC Chairman Christopher Cox isn't protesting the proposed merger of his agency -- formed during the Great Depression -- with the CFTC, saying that regulation would be better served by fewer organizations.

"Just as systemic risk cannot be neatly parceled along outdated regulatory lines, the overarching objective of investor protection can't be fully achieved if it fails to encompass derivatives, insurance, and new instruments that straddle today's regulatory divides," Cox said in a statement on March 29.

The Treasury will recommend that the Fed share authority over banks, securities firms and insurers in monitoring corporate disclosures, writing rules and stepping in to prevent economic crisis, according to the draft, which was distributed to officials last week and obtained by Bloomberg News.

Why the Paulson Plan is DOA
Let’s see. In the middle of perhaps the greatest financial upheaval since the Great Depression, Treasury Secretary Hank Paulson is proposing a change in financial regulations which basically amounts to a big wink to Wall Street.

His plan will go nowhere, both for political and practical reasons. In fact, it does not even meet the minimum standard of improving transparency, which would reduce the possibility of a similar crisis in the future.
The main point of the Paulson plan is to make regulation more efficient. It notes that changes in the capital markets are
…pressuring the U.S. regulatory structure, exposing regulatory gaps as well as redundancies, and compelling market participants to do business in other jurisdictions with more efficient regulation.

So what does the plan actually propose? The one clear improvement is more regulatory oversight for mortgage lenders. Otherwise everything else in the plan consists of rearrangements and clarifications of current regulatory responsibilities, at least in the short and medium run.

For example, responsibility for regulating insurance companies would gradually be shifted from the state to the federal level. And the SEC and the Commodity Futures Trading Commission (CFTC) should be merged. The Paulson plan makes sure to note that the new combined agency should engage in faster approvals of new financial products. As the executive summary says:
The SEC should also consider streamlining the approval for any securities products common to the marketplace as the agency did in a 1998 rulemaking vis-à-vis certain derivatives securities products. An updated, streamlined, and expedited approval process will allow U.S. securities firms to remain competitive with the over-the-counter markets and international institutions and increase product innovation and investor choice.

I have nothing against regulatory efficiency, and I applaud financial innovation. But the Paulson plan belongs in a fictional world where financial institutions do a good job in regulating and monitoring themselves. Unfortunately, that’s not the world we live in.

The most striking thing about the current problems is just how much money the banks and the investment banks have lost. They apparently had no idea of how risky their own exposure was. The supposedly smart guys were simply stupid.

For me, the main lesson from this debacle is that both banks and investment banks must be required to fully report what securities they are holding, both directly and indirectly. No more off-the-book special purpose vehicles, no more hiding derivatives under the table. If a bank or an investment bank is holding a security, they have to publish the amount and the basic characteristics.

This requirement may seem onerous to Wall Street, and it is. But it’s for the benefit not just of the financial system, but for the banks themselves, who appear not to be able to keep track of their own risks without assistance. Everything should be fully reported. Without this simple step towards transparency, nothing else matters. With transparency, other market participants have the chance to make their own judgement.

For political reasons, nothing is going to happen until after the presidential election. The Democrats in Congress have no reason to sign onto the Paulson plan. But the next president—whoever it may be—should put financial transparency at the top of the regulatory agenda.

Fed eyes Nordic-style nationalisation of US banks
The US Federal Reserve is examining the Nordic bank nationalisations of the 1990s as a possible interim solution to the US financial crisis. The Fed has been criticised for its rescue of Bear Stearns, which critics say has degenerated into a taxpayer gift to rich bankers.

A senior official at one of the Scandinavian central banks told The Daily Telegraph that Fed strategists had stepped up contacts to learn how Norway, Sweden and Finland managed their traumatic crisis from 1991 to 1993, which brought the region's economy to its knees. It is understood that Fed vice-chairman Don Kohn remains very concerned by the depth of the US crisis and is eyeing the Nordic approach for contingency options.

Scandinavia's bank rescue proved successful and is now a model for central bankers, unlike Japan's drawn-out response, where ailing banks were propped up in a half-public limbo for years. While the responses varied in each Nordic country, there a was major effort to avoid the sort of "moral hazard" that has bedevilled efforts by the Fed and the Bank of England in trying to stabilise their banking systems.

Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country's top four banks - Christiania Bank and Fokus - were seized by force majeure. "We were determined not to get caught in the game we've seen with Bear Stearns where shareholders make money out of the rescue," said one Norwegian adviser.

"The law was amended so that we could take 100pc control of any bank where its equity had fallen below zero. Shareholders were left with nothing. It was very controversial," he said. Stefan Ingves, governor of Sweden's Riksbank, said his country passed an act so it could seize banks where the capital adequacy ratio had fallen below 2pc. Efforts were also made to protect against "blackmail" by shareholders.

Mr Ingves said there were parallels with the US crisis, citing the use of off-balance sheet vehicles to speculate on property. All the Nordic banks were nursed back to health and refloated or merged. The tough policies contrast with the Fed's bail-out of Bear Stearns, where shareholders forced JP Morgan to increase its Fed-led rescue offer from $2 to $10 a share. Christopher Wood, chief strategist at brokers CLSA, says the Fed's piecemeal approach has led to "appalling moral hazard".

"Shareholders have been able to lobby for a higher share price only because the Fed took over the credit risk on $30bn of the investment bank's dubious paper. The whole affair also amounts to a colossal subsidy for JP Morgan," he said.

M&A Bankers Suffer 35% Drop in Fees as Deals Dry Up From Record
Mergers and acquisitions bankers suffered a 35 percent drop in fees during the first quarter, just weeks after cashing bonuses from a record year. Advisory fees fell to about $8.7 billion from $13.4 billion in the first three months of 2007, data compiled by analysts at New York-based Freeman & Co. show. Executives at Lehman Brothers Holdings Inc. and Bank of America Corp. predicted in December that takeovers would decline about 20 percent this year.

"As recently as three months ago, we thought we had seen the worst and it was going to begin to get slowly better," said Eduardo Mestre, 59, the former head of Citigroup Inc.'s investment banking unit and now vice chairman of New York-based advisory firm Evercore Partners Inc. "It only got worse."

The collapse of the U.S. subprime mortgage market threatens to stifle economic growth and further curb corporate purchases. New York-based Goldman Sachs Group Inc., the world's leading M&A adviser, reported a 47 percent decline in revenue from providing takeover advice in the first quarter from the fourth. The value of announced mergers and acquisitions fell to $656.2 billion this quarter from $971 billion a year earlier, according to data compiled by Bloomberg.

January and March were the slowest months for takeovers since November 2004. Rising financing costs have hampered leveraged buyouts, which dropped to $60 billion in the first quarter from $201 billion a year ago, the data show. A record $4 trillion of takeovers was announced in 2007, including the $50.6 billion buyout of Montreal-based BCE Inc., Canada's largest phone company, by a group including the Ontario Teachers' Pension Plan, Providence, Rhode Island-based Providence Equity Partners Inc. and Madison Dearborn Partners LLC of Chicago.

LBO firms announced an unprecedented $748 billion of acquisitions last year, Bloomberg data show. "The first half of 2007 was very, very unusual," said Frank Aquila, 51, a partner at Sullivan & Cromwell LLP in New York, the top legal adviser on mergers last year. "The private equity guys are smart. There was plentiful cheap credit so they took that horse and rode with it."

Now even some announced deals are in doubt. Clear Channel Communications Inc., the biggest U.S. radio broadcaster, said on March 28 its sale to private-equity firms may collapse after banks backed out of financing the $19.5 billion transaction.
Clear Channel can't estimate a closing date for the sale, the San Antonio-based company said in a filing with the Securities and Exchange Commission. Bank representatives didn't attend a March 27 meeting scheduled to complete the deal.

Banks are reeling after $208 billion in credit losses and writedowns linked to rising mortgage defaults in the U.S. They're also stuck with $200 billion in loans and bonds from leveraged buyouts after failing to find buyers.

Piercing This Bubble For Good
In the past two weeks, the Federal Reserve has lent or guaranteed at least $57 billion to investment banks. This sudden infusion, the first to Wall Street firms since the 1930s, underscores the financial emergency facing the nation. Yet just last June, the markets were euphoric. How, within nine months, could a lending bubble inflate to gargantuan proportions and then burst into this credit market disaster?

Two points are fundamental as we piece together what happened. First, this is only the latest in a series of modern financial bubbles that have collapsed. Second, while we cannot prevent bubbles, we can prevent a recurrence of this one. Financial bubbles occur regularly on both the debt and equity sides of investing. Recent ones include the conglomerate stock craze in the 1960s, the junk bond and Japanese excesses of the 1980s, and the dot-com speculation of the late 1990s.

The interaction of crowd psychology and the betting nature of markets cause these episodes: After a certain upward point, market momentum can become self-perpetuating -- until it reaches such a peak as to collapse onto itself. Much like putting too much air into a balloon.

Over 2004-05, there developed an unusual combination of low interest rates and low inflation, reasonable growth, and a surplus of global savings recycling into the United States. This meant that all types of lenders were highly liquid but faced low yields from traditional lending practices. Seeking better returns, they lowered credit standards and lent to weaker parties, i.e., subprime mortgage borrowers and over-leveraged firms.

The headlines have been reporting what happened next, but the amount of credit that was extended to these weaker borrowers is amazing. Historically, C-rated borrowers have been unable to borrow much from public-debt markets because over decades more than 30 percent of such low-rated debt has defaulted before maturity. In 2006, more than $25 billion of these securities were sold; the previous 10 years, the average was $2 billion.

The music stopped when home prices, which had soared for five years, finally plateaued and then began to fall last year. This reversal spread nationwide and weakened the entire economy. Unable to refinance, countless overstretched homeowners could not make their mortgage payments. Suddenly, defaults loomed, and every lender changed his stance overnight. Deleveraging became the goal, and the credit spigot was shut.

It was, as always, too late. The Fed has poured emergency liquidity into the financial system to avert a collapse, but foreclosures have already skyrocketed, and hundreds of billions in credit losses have been realized. Our country is headed into a recession.

Capital flight puts Russia on the ropes
Capital flight from Russia over the first two of months this year reached $20bn (£10bn), exceeding the outflows seen at the height of the 1998 default crisis. Analysts said foreign funds had begun to unwind large positions in Russia, fearing the country is overheating and has become increasingly vulnerable to a fall in oil and commodity prices.

Alexei Kudrin, the finance minister, said there was no cause for alarm, citing Russia's huge cushion of foreign reserves: "This would have been a significant event in the past, but this time $20bn left the country in two months and the country did not even feel it.

"The crisis being experienced by global financial markets is unprecedented in scale and depth. It will create some additional challenges and risks for the Russian financial system this year, but we are not expecting a crisis to develop in Russia, " he told the Duma. Oil and gas exports have lifted Russia's foreign reserves to $502bn, the world's third largest. The central bank said that a surprisingly high 9pc of this huge stash is held in sterling.

The government expects foreign funds to return this year to finance energy companies and infrastructure projects, but many experts fear that the country's roaring boom may be starting to falter. Yakov Mirkin, head of the Institute of Financial Markets, said foreigners accounted for 70pc of Russia's debt market and are becoming wary of excess credit growth and other signs of stress in the economy. Russia's private sector has built up $378bn in foreign debts.

"When many non-residents leave the market, selling stocks and bonds as we're seeing now, it's called capital flight. It eventually leads to serious financial problems," he told Izvestia newspaper. About 80pc of Russia's exports come from energy and metals, distorting the economy through what is known as the "resources curse".

Moscow has become the most expensive city in the world for many goods. The manufacturing sector is also facing a serious cost squeeze, shifting plant out of the country. Even though oil has been trading at record prices, Russia's current account surplus has fallen rapidly from a peak of 9.6pc of GDP in 2006. Danske bank says it may turn negative within two years if imports of luxury goods continue to soar.

Car sales rose 67pc last year to $53bn, led by German models. Critics say the oil bonanza is draining into shopping malls. If oil drops below $60 a barrel for any length of time, the hard landing could prove painful.
"Debt payments are becoming a larger and larger negative on the current account," said Jonathan Schiffer, of rating agency Moody's.

Russia's inflation has hit 12.7pc. President-elect Dmitry Medvedev called it a necessary evil. "This is the price we are paying for our presence in the club of world economic powers," he said.

Careers vanish after subprime 'free fall'
Kent and Mysti Cope met and fell in love working for one of the nation's top subprime lenders. Now, their life has been turned upside down after the sudden implosion of the subprime mortgage industry. Mysti was one of the last people out the door at New Century Financial, once the nation's No. 2 subprime lender. She had been in charge of e-commerce customer service with dozens of employees reporting to her. It was at New Century where the Copes met in 2000.

Kent worked for several of the firms that helped give birth to the industry, which specializes in making loans to people with less-than-perfect credit, in the 1990s. He has been out of work since August when he was laid off by Friedman, Billings, Ramsey Group (FBR) unit First NLC Financial Services. "We're still both in shock that it could go from something so good to so bad so quick," said Kent, 59. "New Century in 60 days went from top of the heap to out of business."

The two didn't say exactly how much money they made at their last jobs but Kent admitted they each had six-figure incomes. Today, they're trying to get by on his unemployment benefits of about $450 a week, which covers only about an eighth of the basic payments they owe every month. Their home equity line, mortgage, health and life insurance premiums alone cost about $10,000 a month. Still, they are trying to hang onto what they call their dream home with a view of the Pacific Ocean where they live with Mysti's 11-year old son.

Kent estimates the mountainside home in San Clemente, Calif., which they bought in 2005, is worth 20% less than it was a year ago. And in the current market, he said he's not sure he could sell it for even that amount. "We've used up most of our reserves, cashed in her 401K," said Kent. "We're going Mach 1 into a wall. When we run into it, then we've got to decide what to do next."

CBI warns 11,000 City jobs axed by June
Up to 11,000 jobs could be cut from the UK's financial services industry over the three months, according to forecasts by the CBI. The employers' group said that based on analysis of its latest Financial Services Survey, there will be finance sector job losses of between 10,000 and 11,000 between from early March and the beginning of June.

The survey, conducted in conjunction with PricewaterhouseCoopers, reported that the sector endured a painful first quarter of 2008, with higher operating costs and a sharp fall in profitability, and gave a gloomy outlook of rising borrowing costs for the coming six months. Ian McCafferty, the CBI's chief economist, commented: "This is a very serious crisis."

"Some have suggested it's the worst financial crisis since the Second World War," Mr McCafferty said. "I think one of the key characteristics is that it will go on for quite some time to come." Almost 50 per cent of the companies questioned for the CBI’s survey reported a fall in business volumes that was worse than expected. Close to 20 per cent said that profitability was down, while 25 per cent had cut jobs during the quarter. Employment expectations for the coming three months were the bleakest since December 2002.

The Bank of England has been providing an extra £5 billion each week at its cash auctions for Britain’s banks, but Mr. McCafferty said that this would not solve the fundamental problem of the lack of trust in the financial markets that was plaguing companies. As a result, banks had refused to lend to each other and lending to other businesses has slowed dramatically.

“It’s clear that the credit crunch has worsened over the first three months of this year,” he said. “The interbank markets have become more gummed up, with banks even more unwilling to lend, and credit spreads have widened.” Companies said that their plans for spending on IT were flat and expenditure on land, buildings, vehicles, plant and machinery were the lowest since June 1992. Almost 10 per cent of respondents predicted that lending to industrial and commercial companies would decline in the next quarter.

Credit spreads were reported to have widened strongly by 35 per cent of the companies surveyed – the biggest gap since March 1993. Continued funding difficulties meant that respondents were more pessimistic about the credit crunch than they had been in the final quarter of 2007.

Europe Inflation Accelerates to 3.5%, Sentiment Drops
European inflation accelerated to the fastest in almost 16 years in March, heightening the European Central Bank's quandary at a time when the economy is cooling and confidence is falling. Consumer-price inflation in the euro area accelerated to 3.5 percent this month, the highest rate since June 1992, the European Union's statistics office in Luxembourg said today.

That is faster than the 3.3 percent median forecast of 36 economists in a Bloomberg News survey. A separate report showed consumer and business confidence fell more than economists expected. Rising food and energy prices are stoking inflation in the euro area, eroding consumers' purchasing power and pushing up costs at companies. ECB council member Erkki Liikanen said today that inflation expectations have "hardened" and the growth outlook has "become more subdued," summing up the dilemma for the central bank, which is resisting cutting interest rates as inflation accelerates.

"The ECB's hawkish stance will be reinforced, but hoping that the economic slowdown will be moderate and short-lived seems too optimistic to us," said Aurelio Maccario, an economist at Unicredit MIB in Milan, said before the report. Europe's economic growth "has settled below trend."

Consumer and business confidence fell to 99.6 this month from 100.2 in February, led by the construction industry, the European Commission said in a report today. Economists had forecast a decline to 100 from an initially reported 100.1 in February. The construction confidence measures in Germany, Europe's largest economy, Spain, Ireland and Italy, all fell.

Pound drops as expectations build for UK rate cut next week
The pound fell sharply against major currencies as expectations mount that the Bank of England will cut interest rates next week. A series of bad news for the United Kingdom economy out this morning has added to the bearish sentiment surrounding the pound at the end of last week and sent the euro to a fresh all-time record high of 0.7959 pounds.

The latest house price survey from Hometrack reported that United Kingdom house prices fell in March for the sixth consecutive month while a report from the Confederation of British Industry said profits in the UK's financial services sector are falling at their fastest rate since the start of the war in Iraq five years ago.

Last week Bank of England governor Mervyn King conceded that current conditions in the credit markets mean the Monetary Policy Committee is more pre-disposed to cut interest rates. Markets interpreted this as a sign that the next interest cut could come next week rather than in May which many economists had been expecting previously.

On Friday a key consumer sentiment survey reported that confidence was at a 15-year low and today's housing market figures have added to expectations that consumer spending is set to slow sharply. Hans Redeker, head of currency strategy at, said this means the pound is set to fall even further in the coming months.

'We continue to believe that sterling will be one of the most significant under performers of 2008 and the most recent data releases, which add to the evidence that the slowing housing market (and tightening credit conditions) is having a negative impact on the consumer, add to the case for a rate cut in the next couple of months, maybe even as early as April's meeting,' he said.

UBS Hit By New Write-Down Fears
UBS, the European bank worst hit by the credit crunch, could be preparing for a $16.1 billion capital injection to maintain its capital position, and prevent ratings downgrades. Shares in UBS tumbled 3.9%, or 1.14 Swiss francs ($1.15), to 27.84 Swiss francs ($28.03), on Monday morning in Zurich, after a Swiss newspaper said the bank may ask shareholders to approve a capital hike of 16 billion Swiss francs ($16.1 billion).

”If UBS wants to keep its capital ratio at 12.0%, the group needs 16 billion Swiss francs ($16.1 billion),” Switzerland's Sonntag newspaper said Monday, quoting anonymous sources. ”Sixteen billion dollars is certainly not an unreasonable figure, and is within the realm of possibility,” Helvea analyst Peter Thorne told

International banking covenants require banks to have a capital ratio of at least 4.0%, though Switzerland’s Federal Banking Commission prefers them to have a Tier 1 ratio of at least 10.0%. If UBS's capital position falls below this level, it could lead to further ratings downgrades that could increase the bank’s funding costs.

There has been much speculation over whether UBS will be forced to seek another capital increase at its annual general meeting on April 23. It has already received a capital injection of $18.2 billion, after writing down $19 billion during 2007. The bank’s continued high exposure to risky subprime related assets, including residential mortgage-backed securities, collateralized debt obligations and leveraged loans, has left analysts expecting massive write-downs of between $10 billion and $20 billion, largely expected in the first quarter of this year.

The massive losses have shaken confidence in the Swiss bank, and has left its wealth management business vulnerable, as worried clients have moved their funds into other banks, including rivals like Credit Suisse. According to the Sonntag newspaper, UBS is suffering from a cash drain, and customers in the Zurich area alone have withdrawn 700 million Swiss francs ($704.8 million) since the start of the year.

The bank’s credibility suffered another blow on Friday after it decided to write down the value of its $5.9 billion portfolio of auction-rate securities by an average of 5.0%. Investors had been left with the high yielding, high-risk bonds, after being unable to sell them at regular auctions, and UBS, fearful of taking on more illiquid assets onto its balance sheet, declined to buy them back.

Spanish Property Market in Freefall
Spain's once-booming property market is in freefall, official statistics have revealed for the first time.
The announcement that house sales had plunged has dashed government hopes for a "soft landing" in the sector that has driven the Spanish economy for more than a decade.

The buying and selling of homes fell by 27 per cent in January compared with the same period last year, Spain's National Statistical Institute (INE) announced yesterday. The collapse coincided with a 25 per cent fall in the granting of mortgages, the biggest drop since 2004. The size of individual mortgages has also fallen, by nearly 4 per cent, as providers fear for the security of their loans.

The indicators published by the state organisation for the first time confirm the widespread fear that Spain's property sector is not just cooling off, but falling sharply. "We have to accept this is not a gentle correction, but a full-blown crisis. We can only hope it will be sharp and short," says Fernando Encinar, a director of Spain's leading online estate agent,

The news will scare millions of Spaniards -- and hundreds of thousands of Britons and other northern Europeans -- who stretched themselves to get mortgages on homes they believed were a cast-iron investment. Miguel Blesa, president of the Caja Madrid savings bank, Spain's second leading mortgage provider, warned that things would get worse. "There will be more problems in the property sector in coming months, since the market in new homes is paralysed," Mr Blesa predicted.

"Many people thought that buying property, especially a second or third home, was an investment to make a profit. Now we'll see cascades of these homes up for sale." Mr Blesa was speaking in Vienna, where his savings bank yesterday inaugurated a new headquarters to handle credit lines for big construction companies operating in central and eastern Europe. The message seemed clear: leading financiers are forsaking domestic homeowners and shunning Spain's burst bubble to boost property development in livelier markets abroad.

Ilargi: I don’t quote Jim Kunstler much here, since he doesn’t know much about finance, as he’s acknowledged to me, and he never sent me the promised press-copy of his new book. Easier to say nothing than to say no?!

I’ll make an exception today, because Jim points to something, and he’s done this a hundred times, that nobody has the guts to address. That is, the rage of the crowds when they find out there’s nothing left for them. I’d go one step further than he does here: the entire Hamptons may well be driven into the ocean before they know what hit them. They are the quintessential “Let Them Eat Cake Crowd”. Who never realize that they better serve that cake.

  Things continue to slip, slide, and shift strangely Out There. Last Wednesday, a bunch of peeved mortgagees protesting government favoritism in the Bear Stearns case entered the lobby of the company's (soon-to-be-former) headquarters building in midtown Manhattan.

While it might not seem like much, I view the symbolic "penetration" of this corporate stronghold as the very first sign of a much broader citizen revolt against the extraordinary protections being shown to crapped-out investment banker boyz -- at the expense of millions of equally crapped-out poor shlubs facing the default and re-po of their McDwelling places.

Occupying an office building lobby peacefully in broad daylight is one thing. Wait until summer gets underway and The New York Post gossip page resumes its coverage of hijinks in the Hamptons. The executives of Goldman Sachs, J.P. Morgan / Chase, and other dealers in fraudulent securities, plus the art world and show biz glitteratti who party together out there, might all find themselves the object of considerable grievance and resentment as the beaching season ramps up, and the limos roll around the charity lobster roasts, and the guests stray down the lawns, chardonays in hand, to plot divorce from their over-leveraged husbands.... God knows what seekers-of-vengence will be creepy-crawling the privet plantings along Gin Lane in the crepuscular gloom, searching for trophy wives to garrote.

Perhaps a bankrupt landscaping contractor from Lake Ronkonkoma, recently stiffed by a hedge fund manager over the installation of a half acre of pachysandra, will be arrested on the Wantagh Highway with blood on his sleeves and a high-C piano wire in his pocket. The non-Hampton precincts of Long Island, which make up more than 90 percent of the fish-shaped appendage to New York State, will be full of angry re-po victims, and the Hamptons lie at the very dead-end tail of the geographical fish. Will the banker boyz attempt to flee by yacht? And where might they escape to? Newport, Rhode Island? Labrador. . . ?

I maintain, of course, that the media (and the public itself) has no idea how quickly things might get weird in this country -- or how weird they might get.

Citigroup to Separate Card Unit in Banking Overhaul
Citigroup Inc., battling to restore profit after a record loss, will set up an independent credit-card unit and overhaul consumer banking along geographical lines, two people with direct knowledge of the plan said. Steven Freiberg, the current co-head of consumer banking, will run the card unit, the people said, asking not to be identified before an announcement that may come as early as today. The rest of the consumer group, mainly bank branches and non-bank lending, will be led by five regional heads, the people said.

Vikram Pandit, who succeeded Charles O. "Chuck" Prince as Citigroup Chief Executive Officer in December, is reshuffling management at the New York-based bank after it lost more than half its market value in five months. The consumer chiefs will all report to Pandit as he bids to halt a profit decline for a unit that contributes 70 percent of revenue and was previously run by just two people, Freiberg and Ajay Banga.

"One should be supportive of major changes when past performance has been disappointing," said Guy De Blonay, a director at New Star Asset Management Group Plc in London who helps manage $1.2 billion in financial stocks. "In being quite aggressive in removing people and getting in fresh blood, hopefully they can turn around the story."

Lessons From Japan's Malaise
A little knowledge can be not just dangerous but grossly misleading. That is the right conclusion to draw from the latest, surprisingly reassuring data about the U.S. economy and from the interview in yesterday's Wall Street Journal in which Sen. Hillary Clinton warned that America must avoid a "Japanese-like situation."

Clinton should have researched what actually happened in Japan after its financial crash before using the bogeyman of a Japan-style malaise to support her proposal that taxpayers' money be used to bail out holders of troubled mortgages. She thinks that Japan's mistake was to rely excessively on monetary policy to rescue its economy, rather than on fiscal and other measures. The truth is the exact opposite.

Japan's stock market collapse began in January 1990 and continued throughout that year. The property market followed, with a lag. Yet the Bank of Japan did not try to prevent this financial crash from damaging the real economy by cutting interest rates, as the U.S. Federal Reserve has done spectacularly during the past three months.

To the contrary, Japan's central bank used its monetary policy as if to make sure that the country's asset-price bubble had truly burst: It carried on raising interest rates until September 1990 and did not make its first cut until July 1991, 17 months after the financial crisis began.

In fact, the Bank of Japan did not begin using monetary policy as an aggressive tool to arrest the slump until deflation had set in toward the end of the 1990s. Japan did do two things: It used a massive increase in public spending, particularly on construction projects, to try to rescue indebted firms and to inject public money into the economy; and it helped banks conceal the true extent of their losses and their bad-debt burdens, in order to prevent markets from clearing at painfully low prices.

McCain, the mortgage crisis, and voters with economic concerns
This week Sen. John McCain drew a sharp distinction between himself and the two remaining Democratic presidential candidates. He warned of the federal government doing too much in America’s mortgage crisis and said a McCain administration would adopt a more hands-off approach.

“[I]t is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers,” Senator McCain told a group of Hispanic businessmen in Santa Ana, Calif., Tuesday. It’s not exactly breaking news when a Republican opposes government involvement, of course. But considering the amount of economic pain some voters are feeling, the Arizona senator’s comments do represent something of a line in the sand in the campaign.

McCain is distinguishing himself on what is now the No. 1 issue to voters: the economy. In contrast, both Sens. Barack Obama and Hillary Rodham Clinton have proposed big plans for handling the mortgage crunch. People in two Patchwork community types, “Service Worker Centers” and “Emptying Nests,” are likely to pay special attention to the candidates’ economic proposals because in these areas many live on below-average or fixed incomes.

On the whole, those we contacted in Lincoln City, Ore., (Service Worker Centers) and Clermont, Fla., (Emptying Nests) agreed with McCain’s diagnosis of the problem, but did not agree as much with his prescription. “[I] agree with him that banks, lenders and mortgage holders were to blame for much of the problem,” Lincoln City Mayor Lori Hollingsworth wrote in an e-mail. “I don’t agree that real people need to suffer because of the mistakes and greed of those intuitions.”

Soybean Acres to Rise After Year of Soaring Prices, USDA Says
U.S. farmers will plant 18 percent more acres with soybeans this year, more than expected, after price gains made the oilseed more profitable than corn, the Department of Agriculture said. Growers will seed 74.793 million acres with soybeans, up from 63.631 million last year, after prices rose 67 percent in the past year, partly because of increased demand and reduced supplies, the USDA said today in a report.

Acreage may also increase because soybeans are less expensive to grow than corn since they produce their own nitrogen fertilizer. "Corn is a crop that has much higher input costs, especially with regard to nitrogen that is now over $900 per ton," said Joel Karlin, a product manager at Western Milling in Goshen, California. "Soybeans are a good option for those that want to replenish the nitrogen in their soil."

Soybean futures on the Chicago Board of Trade surged to a record $15.8625 a bushel on March 3 because of increased demand and because farmers last year planted the fewest acres in 12 years. The May contract fell 4.5 percent, or 60 cents, on March 28, closing at $12.6725 a bushel.

If realized, the soybean acreage would be the second- largest ever, behind 1996, the USDA said. Analysts and traders surveyed by Bloomberg News forecast growers would plant 71.7 million acres of soybeans. Corn acres will fall 8.1 percent, more than expected, to 86.014 million, as growers make room for soybeans, the USDA said. Most-active corn futures rose 44 percent in the past year before today, trailing soybeans.

Buyers' Revenge: Trash the House After Foreclosure
Eddy Buompensiero noticed eight pairs of shoes outside the door of the modest house on Mother of Pearl Street, evidence that the former owners were still living there even though the bank had foreclosed. Mr. Buompensiero, a gray-bearded inspector for REO Asset Services-1st Realty Group, rang the bell.

When no one answered, he taped a letter to the door offering the occupants $1,000 to move out. The catch: They won't get a cent if they trash the house before they leave. "If it was me, I'd take the money," Mr. Buompensiero said as he drove away. Either way, they're "going to get thrown out in a couple of weeks."

The stucco subdivisions of Las Vegas are caught up in the nation's foreclosure crisis. These days, bankers and mortgage companies often find that by the time they get the keys back, embittered homeowners have stripped out appliances, punched holes in walls, dumped paint on carpets and, as a parting gift, locked their pets inside to wreak further havoc.

Real-estate agents estimate that about half of foreclosed properties to be sold by mortgage companies nationwide have "substantial" damage, according to a new survey by Campbell Communications, a marketing and research firm based in Washington, D.C.

The most practical way to ensure the houses are returned in decent shape, lenders and their agents say, is to pay homeowners hundreds or even thousands of dollars to put their anger in escrow and leave quietly. A ransom? A bribe? "Yeah, somewhat," says John Carver, an agent specializing in foreclosed homes for Prudential Americana Group in Las Vegas. But "you lose a house, and then you get some financial help -- it's a good thing...It's a win-win for both parties."

No one tracks how frequently such payoffs are made. In Las Vegas, agents hired by the banks to handle foreclosed properties say the "cash for keys" approach, as it's known in the industry, is a regular part of the job. After all, formal eviction proceedings can take months and cost potentially much more than a payoff.

Sunday, March 30, 2008

The World's First No.1 Hit

Please don't miss today's Debt Rattle, March 30 2008

The year is 1860, and a woman is singing “Au Clair de la Lune” into a barrel-shaped horn, which causes etchings to be inscribed on a soot-blackened piece of paper. Called a phonautogram, it’s one spooky blast from the past. Listen to it. Its ghostly sound is eerie to be sure, but it's recognizable as that old song that was a hit before your great-great-grandmother was born.

They had no idea how to play back such things in those days, but we do now, using optical imaging and a “virtual stylus” developed by U.S. audio historian David Giovannoni. The inventor of the ancient (and first) recording process, Édouard-Léon Scott de Martinville, was understandably angry at all the attention given to Thomas Edison, who got credit for making the first audio recording 17 years later.

Ilargi: Let’s leave money alone for a moment, and travel back in time. What can I say, I'm fascinated and captivated. Ain't it grand to realize that neither did Bell invent the telephone, nor Edison the phonograph? I find that fascinating as well, because it makes me wonder: what else do we learn that is not true? Anyway, listening to 10 seconds of 1860 gives me the chills. Kind of weird: I'm a huge Rembrandt afficionado, and his work dates back over 350 years. Sound and vision: not the same, I guess.

The recording (link below) is from April 9, 1860, meaning it’s almost 148 years old, and it predates the American Civil War by more than a year. For reference, here are some choice events from the year 1860:
  • John Hanning Speke and James Augustus Grant leave Zanzibar to search for source of the Nile.
  • Battle of the Volturno, Garibaldi defeats the last organized army of the Kingdom of Two Sicilies.
  • Austria, Britain, France, Prussia and the Ottoman Empire form a commission to investigate causes of the massacres of Maronite Christians, committed by Druzes in Lebanon earlier in the year.
  • November 6 - U.S. presidential election: Abraham Lincoln beats John C. Breckinridge, Stephen A. Douglas, and John Bell and is elected as the sixteenth President of the United States, the first Republican to hold that office.

  • The first Convention of Peking formally ended the Second Opium War.
  • Victor Emmanuel, King of Sardinia seizes the whole of the Papal States except Rome (see Vatican City) and unites Italy.
  • Charles Dickens publishes the first installment of Great Expectations in his magazine All the Year Round.
  • South Carolina becomes the first state to secede from the Union.
  • The world's first ocean-going (all) iron-hulled and armoured battleship, the (British) HMS Warrior is launched.

'Magical' song from 1860 knocks Edison off the chart
Audio Researchers Confirm Frenchman's Recording Feat

Phonautogram, April 9, 1860. Courtesy:

Au Clair de la Lune" (French; MP3, 10 sec)

Her voice, sweet and smoky after 147 years, floats through the air, as if the young woman is walking out of a fog to serenade her listeners. "Au clair de la lune," she sings, stealing through the second verse of the classic French folk song by the same name. "Pierrot répondit."

Ten seconds, 11 notes. Then she's gone, her ghostly voice swallowed up again into the ether.

In what they say is the earliest recording ever made of a human voice, researchers at a Stanford University conference on Friday revealed to the world a sound clip with an extraordinary pedigree. Created in 1860 by an obscure French typesetter - nearly two decades before Thomas Edison's invention of the phonograph - the snippet was re-created thanks to the international sleuthing by audio historians, algorithmic alchemy by Lawrence Berkeley National Laboratory scientists who turned squiggles on paper into sounds, and the passionate push of a collaborative of audiophiles in search of the world's oldest sounds.

"Her voice is ghostly and it's magical, as if she were trying to come into the 21st century to sing for us," said David Giovannoni, the audio historian behind the research. He helped crack the case by unearthing the "phonautogram" that Édouard-Léon Scott de Martinville originally made for visual, not audio, playback.

And the detective work happened at a very fast rpm; it was earlier this month that new research sent Giovannoni and his colleagues racing to Paris, where deep in an archived file they discovered Scott's earliest vocal creation - a paper record of what was probably the lilting voice of Scott's daughter.

What would eventually turn out to be the Parisian inventor's historic contribution to the world's sound-scape was "recorded" on a phonautograph, the machine Scott created to capture sounds with a stylus. The device etched its waves onto lampblack-covered paper, a sort of precursor to the carbon copies that died out with the modern photocopier.

Once Giovannoni had optically scanned the squiggle-filled sheet, Earl Cornell and his colleagues at Lawrence Lab took over. Their task: to pick up where Scott had left off nearly a century and a half ago, using high-tech software to coax "Au Clair de la Lune" out of hiding.

"The tracing on the paper provides a picture of the sounds," Cornell said during a Friday session of the conference for the Association for Recorded Sound Collections. He said the challenge was to digitally map out the traces in the 1860 recording, essentially creating images of the sound waves that Scott's crude machine first captured.

Next, they had to clean up the resulting sound clip's "varying speeds and background noises," something they had already learned how to do with the grooves of old 78 rpm records.

As they hurried to decipher the recording in time for the conference, researchers with Giovannoni's First Sounds collaborative used noise-reduction tools to make the still-rough clip "recognizable as sound and somewhat pleasant to the ear," said Richard Martin, owner of a recording label that specializes in early recordings.

"We already knew Scott had invented sound recordings," said Patrick Feaster, the Indiana University professor who first pointed the way to the Parisian archives. "He just never got around to playing them back."

This week, a new breed of audio lovers finally figured out how to do it. In the process, they threw some spotlight on the little-known Frenchman whose achievements have long been eclipsed by Edison's later success at playing back a recorded sound.

"Edison was the guy we always thought" responsible for first recording sound, said Bill Wray, audio engineer with Dolby Labs, who was on hand for Friday's premiere. "These guys today didn't rewrite history - they rewrote what we thought was history."

The First Sounds team is looking for more funding, hoping to continue its quest to find even earlier recordings, though some doubt they exist. And the researchers hope further technological breakthroughs will allow them to spruce up the 1860 recording even more.

Meanwhile, Giovannoni says downloads of the recording are flying off the Internet. At least this week, he says, this ghostly cover of "Au Clair de la Lune" is "the world's No. 1 hit."

Debt Rattle, March 30 2008

cagle cartoons

Ilargi: There’s something I don’t understand. In several places the last few days I’ve seen the claim that proposals by Paulson and others to re-regulate financial markets are intended to make Wall Street firms “more competitive”.

Does that mean the world’s largest banks and financial institutions were not competitive until now? Wouldn’t they have said and done something about that earlier, if it were the case? And, pray tell, how did they get to be the biggest, with that terrible handicap? By the way, we’re talking about competing with whom, exactly? Upper Volta?

Also, the way to improve that ability to compete is apparently to give the Fed the power to raid all these powerhouses and demand to see their books. I hope one day someone will explain how that would improve competitiveness.

Wall Street's grim prophet
Meredith Whitney, the Oppenheimer analyst who has become the Jeremiah of the financial crisis, says there is a way out of the wilderness for banks like Citigroup. But like many of her pronouncements over the last five months, it's grim.

"The best-case scenario is that financial firms take the pain quickly and purge assets from their balance sheets. That could bring stock valuations down by as much as 50%, which would be enough so that you could legitimately buy long-term positions," says Whitney.

Given the fact that many large investment banks have lost a third of their value since the credit crisis began last summer (with Citi down by more than half), it's unlikely they'll take the pain. So Whitney fires off a worse case scenario. "They don't purge and there is a slow bleed of capital and pressure on share prices for an extended period of time," she says. "We'll most likely see a combination of the two, with more of the latter scenario. It won't be pretty."

Whitney may be singing from the same hymnbook as most Wall Street pundits these days, but she has the distinction of being one of the first and harshest critics of the financial services sector. Throughout the credit crisis she has been willing to throw stones at banks, monoline insurers like MBIA and Ambac, and the alphabet soup of bonds (CDOs, SIVs, RMBS) that have taken down stocks and the economy, cementing her place as this era's star prognosticator.

As anyone who has ever spoken with her knows, Whitney always has one more thing to say to sharpen her last statement or find another way to make her argument airtight. She's witty and thoughtful and very thorough, but her considerable charm only goes so far if she thinks you're wrong. Then it's time to be blunt and unyielding.

She famously met her husband, former professional wrestler and stock guru John Layfield, by shredding his bullish Citi call while on live TV. (He's 6'6" and 290 pounds. She took him to the mat.) This quality of fearlessness is in part why her bearish calls have walloped financial stocks and earned her a reputation as the sector's axe.

Most recently, she issued a report Friday that said Citi, along with Wachovia, Bank of America, and Wells Fargo, would have to cut their dividends due to "earnings headwinds." It was a busy week for Whitney.

On Thursday she said first quarter earnings from Citi, Merrill, and UBS will be a "rude awakening" and that these banks would need to raise even more capital. And on Tuesday, she said Citi could post a first-quarter loss four times greater than previously anticipated if it is forced to write down a predicted $13 billion. She also cut her estimates on JPMorgan Chase, Bank of America, and Wachovia. After the report was released, all four stocks fell.

Such has been the pattern since last October when she told investors to sell Citi in the wake of terrible quarterly earnings. Other analysts, including Deutsche Bank's Mike Mayo, also took the bank's management team to task during the earnings conference call; and the stock had been falling all month. But Whitney was the first to say the bank was wildly undercapitalized and that "in six to 18 months, Citi will look nothing like it does now."

She also predicted Citi would have to cut its dividend or sell its best assets to raise at least $30 billion. For her efforts, the stock plunged 7%, then-CEO Chuck Prince was ousted, investing legends including Jeremy Siegel said she was wrong, and death threats rolled in.

The bank not only cut its dividend by 41%, it also decided it needed a $7.5 billion cash injection from the Abu Dhabi Investment Authority in November. Whitney told Bloomberg TV that the deal wasn't enough to shore up the balance sheet and sure enough the bank was back on the streets in January, hat in hand.

Ilargi: Congress has some hard choices to make in the near future.

Or maybe not that hard. After all, there are only two options on the table: It’ll be either the Bulgaria Model or the Albania model. Both, of course, will greatly “enhance the competitiveness of the markets”.

A System Overdue for Reform
A week ago Thursday, just days after the big Bear Stearns crisis, Representative Barney Frank gave a speech to the Greater Boston Chamber of Commerce. Most people know Mr. Frank, a Democrat from Massachusetts, as one of the most liberal members of Congress.

He is also known for his quick wit and his sharp tongue. But ever since the Democrats regained control of Congress two years ago, Mr. Frank has taken on another identity: he’s the chairman of the powerful House Financial Services Committee, which oversees financial institutions and their regulators.

For months, Mr. Frank has been among the leaders of those pushing Congress and the administration to move quickly to help people who got subprime mortgages and are now in danger of losing their homes. He’s introduced legislation, for instance, to mandate that the Federal Housing Administration guarantee refinanced subprime loans — but only if the lender takes a write-down on some of the principal and the terms are ones that the borrower can actually repay.

At the same time, though, he has begun to think hard about a critical, longer-term issue: whether the country’s financial regulatory apparatus, which was first erected in the 1930s in response to the Great Depression, still makes sense today. “When I first became chairman,” he told me a few days ago, “I was a little daunted by the anti-regulatory view that held sway in Washington.”

Not anymore. As the crisis on Wall Street, and Main Street, has deepened, Mr. Frank has come to believe that the country needs new regulations that take into account, for instance, the enormous rise in lending — largely unregulated — that takes place outside the banking system, and that can better monitor the huge risks many Wall Street firms now take as a matter of course.

In his Boston speech, he laid out a series of ambitious ideas, including the creation of “a financial services system risk regulator,” with the power “to assess risk across financial markets regardless of corporate form and to intervene when appropriate”— perhaps by forcing companies to cut back on leverage or raise their capital requirements. He called for a consolidation and streamlining of the many overlapping financial regulators.

He also said that capital requirements for nonbanks needed to be reassessed, that consumer protection needed to be enhanced, that mortgage originators — indeed, all lenders — should have to carry a portion of their loans on their books so that they would bear some risk if things went wrong, and that companies should be regulated not according to whether they were a bank or an investment bank or a hedge fund but whether they did things like create credit. “We now see a situation in which more damage was done by inadequate regulation,” he said. He called for a new era of “sensible regulation.”

You may have noticed that when the Treasury secretary, Henry M. Paulson Jr., made his big Wall Street regulation speech a few days ago, in which he took a far more cautious — or tepid, depending on your point of view — position on the need for new regulation, he took a swipe at Democratic proposals like Mr. Frank’s, saying that most of their ideas “are not yet ready for the starting gate.”

But Mr. Paulson is wrong. Given Mr. Frank’s position as chairman of the central committee, his ideas are very much at the starting gate. He will hold hearings and get support, especially if the crisis deepens. Indeed, Mr. Paulson will release on Monday his own set of ideas, which were obtained Friday by The New York Times. Although his proposals are elaborate, they strike me as mainly an effort to keep new regulation to a minimum.

The Federal Reserve’s Power Grab
The Bush Administration’s Treasury Secretary Henry Paulson has proposed an excessive broadening of powers for the Federal Reserve; the move is thought to be in reaction to the recent panic in the financial markets and overall economic instability in the United States. The new powers granted to the Federal Reserve would include strengthened powers of oversight not only on Wall Street but in the broader scope of United States financial markets.

The New York Times is reporting that, “Many of the proposals, like those that would consolidate regulatory agencies, have nothing to do with the turmoil in financial markets.” Looking back at the historical precedence for such a proposal, the similarities are striking between the events that led to the Federal Reserve in 1913 and the current proposal of the significant broadening of powers of the private central banking institution.

In both cases J.P. Morgan emerged on the other side of the dark economic times in better shape than when a major financial institution collapsed. In the case of the 1907 panic it was the man Jack Pierpont Morgan that benefited from the strain in the market and in the 2008 panic the financial banking institution J.P. Morgan has taken advantage of the hard luck of financial giant Bear Stearns. The panic of 1907 eventually lead to the formation of the National Monetary Commission which was then the commission in 1913 that recommended the formation of the Federal Reserve Bank through the Federal Reserve Act.

The similarities in this current economic crisis that the United States economy faces and the panic of 1907 is that J.P. Morgan is once again the element that is bailing out failing financial institutions, this time around the name was Bear Stearns and the answer to the financial crisis, since the central banking system is already in place, is the strengthening of the central bank.

In 1907 the faltering bank that sent the country into a panic was the Kinkerbocker Trust Company, the difference between the 1907 situation and the Bear Stearns collapse being that the Kinkerbocker Trust was allowed to go completely under and J.P. Morgan stepped in to save the banks that the Kinkerbocker Trust was threatening to bring down with it while the Fed took steps to prevent the complete collapse of Bear Stearns.

Another interesting aspect of Paulson’s proposal includes a recommendation to broaden the President’s financial group’s authority to be “broadened to include the entire financial sector, rather than solely financial markets.”

There is a possibility that this broadening of powers is not Paulson’s idea, but rather the Federal Reserve’s power grab in a situation that lends itself to capitalization on the fears of the public, and the longing for “stability.”

Ilargi: And in case you’re still thinking that these plans must be positive in some way, let this sink in, please, I can’t make it clearer than that:

"[The plans] would not curb practices linked to the credit crunch, such as packaging risky sub-prime mortgages into highly-rated securities.”

Shake-up gives Fed a boost
The US government will tomorrow unveil a radical overhaul of financial regulation that would give the Federal Reserve greater powers to oversee market stability. The proposals are part of a wider effort to simplify labyrinthine US regulation, consolidate regulators and make the market more competitive. The review began last year, but has become increasingly critical as the Fed struggled to restore confidence in markets shattered by the credit crunch and bail-out of Bear Stearns.

While the plans would allow the Fed to scrutinise more closely the activities of Wall Street banks and intervene where an institution threatened the entire system, they would not curb practices linked to the credit crunch, such as packaging risky sub-prime mortgages into highly-rated securities.

The Securities and Exchange Commission, the main financial market regulator, could also see its powers reduced. Under the proposals, the SEC would be merged with the Communities Futures Trading Commission, which regulates exchange-traded oil, currency and commodity futures. Stock exchanges would be given greater freedom to regulate themselves and approval for new products could be streamlined.

According to a draft of the proposals, Hank Paulson, Treasury Secretary, will say: "I am not suggesting that more effective regulation can prevent the periods of financial market stress that seem to occur every five to 10 years. I am suggesting that we should and can have a structure that is designed for the world we live in, one that is more flexible." The US Congress would have to approve most of the proposals and Democratic leaders are expected to say they do not go far enough.

Meanwhile, fears are mounting of a serious recession in Japan as Asian banks, pension funds and insurers are poised to liquidate up to $300bn (£150bn) of yen "carry trade" positions.
The Japanese have been pulling back from world markets since the credit crunch began last summer. The yen has risen 24pc against the dollar, a staggering move for a major currency.

This flight to safety has been a major cause of stock market slides and currency stress in countries as diverse as Iceland, Turkey and Romania. Japan is still the world's biggest creditor by far, with net foreign assets of $3 trillion.

Now experts at Barclays Capital warn that there may be a second tsunami. Chinese, Indian, other East Asian institutions and pension funds have borrowed heavily in Tokyo at rock-bottom interest rates, using the money to buy US Treasury bonds.

Ilargi: It’s not just the US looking to enhance the Fed’s powers: the UK is in the throngs of a similar process.

Mervyn King ready to rock Bank of England's foundations
As you walk into the Monetary Policy Committee's opulent state room in the Bank of England, the first thing to catch your eye is not the grand wooden table at which the country's leading economists decide interest rates. It is a life-size portrait which hangs over the biggest chair in the room.

When the current Governor, Mervyn King, sits down to decide where he and his colleagues will guide the economy, he does so under the glowering gaze of the most renowned of all his predecessors, Sir Montagu Norman. It is more than a mere portrait. Sir Montagu stands for everything the Bank once was: fiercely independent, ruling with an iron hand over financial markets and doling out money to troubled institutions only when they were within a hair's breadth of failure - if at all.

Most MPC members testify that it is hard to make an interest rate vote without looking up, seeing those steely eyes staring back at you and wondering what Sir Montagu would have done. Heaven knows what he would have done in the current circumstances. The financial system is facing its biggest crisis in decades - perhaps since the Wall Street Crash and Great Depression which Sir Montagu guided the economy through.

More disconcertingly, it has become clear that the Bank's tool box for financial crises - fundamentally unchanged since Sir Montagu's days - is no longer up to the job. Appearing before the Treasury Select Committee during the week, King appeared to admit as much, saying the Bank was seeking out a "longer-term solution". This is putting it lightly.

The Bank is now gearing up for the biggest overhaul of its financial market controls in decades. After conferring last week with the heads of the five big banks - Barclays, HSBC, Royal Bank of Scotland, Lloyds TSB and HBOS - it has undertaken to find new, potentially radical ways to kickstart the frozen asset-backed security markets at the heart of the crisis.

It won't be easy; it will require a wholesale overhaul of the current Lender of Last Resort system, Walter Bagehot's 1873 invention, which has underpinned the relationship between central banks and financial markets almost ever since. The problem is simple: years ago, when banks were reliant for most of their funding on shareholders' capital and customers' deposits, they could usually be rescued by a quick infusion of crisp Bank of England notes.

Now they are also reliant for funding on the sale of securities and packages of home loans. When the market for these instruments dries up, it leaves institutions with a major illiquidity problem. It is this which lay behind the collapse of Bear Stearns and Northern Rock.

Treasury regulatory overhaul plan "timely" - Fed
Upcoming Treasury Department proposals to make the Federal Reserve the chief regulator of U.S. financial markets and give it sweeping new powers won praise on Saturday from the central bank and the head of the Securities and Exchange Commission.

"The Treasury's report presents a timely and thoughtful analysis and is an important first step in the complex task of modernizing our financial and regulatory architecture. We look forward to working with the Congress and others to help develop a policy framework that will enhance financial and economic stability," a Federal Reserve spokeswoman said.

Treasury Secretary Henry Paulson is expected to unveil a blueprint on Monday for fixing gaps in the U.S. financial market regulatory structure that have been exposed by the ongoing subprime mortgage crisis.
Lax regulation has been widely blamed for permitting a flood of inadequately documented loans to be made during the boom years of a U.S. housing market that has since soured and now threatens to drag the economy into a deep recession.

An executive summary of the Treasury proposals says a "market stability regulator" is needed and the Fed best fits that role, suggesting the central bank could use its control over interest rates as well as its ability to provide market liquidity to fulfill its functions.

Will Uncle Sam let the dollar collapse?
The dollar is taking a pounding. With the US sinking deeper into recession, the greenback recently hit an all-time low against the euro and a 12-year low against the yen. Last week, America's currency fell again - dropping more than 2 per cent in euro terms, to $1.5779. On a trade-weighted basis, the dollar is now south of its late-70s low point and close to its historic nadir of the mid-1990s.
The markets sense the US Federal Reserve, having already slashed interest rates by 300 basis points to 2.25 per cent since the credit crunch erupted last summer, will soon cut rates even more. The European Central Bank, in stark contrast, looks determined to keep rates at 4 per cent - where they've been since sub-prime broke. Eurozone inflation, at 3.3 per cent, is still way above target.

And with ECB Chairman Jean-Claude Trichet stressing upside price pressures last week, eurozone rate cuts seem unlikely. In other words, the gap between euro and dollar rates looks set to get wider - making the US currency even less attractive.

And, last week, just as fresh data showed America's housing and manufacturing sector weakening further, business confidence in Germany - the eurozone's largest economy - jumped up. That suggested an even bigger euro-dollar interest differential, piling still more pressure on the greenback.

But a falling dollar is not necessarily bad news for the American economy. The underlying reason for the currency's weakness, beyond the current woes on Wall Street, is that years of over-consumption have resulted in a massive US trade deficit - which, in 2006, reached 6 per cent of GDP.

The dollar's decline has lately helped address that - by making US goods more competitive. Over the last two years, American exports have risen 17 per cent in value terms, cutting the trade shortfall to 4.7 per cent of national income. In other words, as has often happened in recent decades, a falling dollar has shoved the burden of America's adjustment onto the rest of the world. And now - as the White House knows well - a further dollar slide will play a large part in rescuing the domestic economy.

The US takes a dim view of other countries - such as China - allowing their currencies to remain weak against the dollar. But when it comes to old-fashioned beggar-thy-neighbour exchange rate policy, the Americans are past masters. There are limits to this process. The euro has risen some 17 per cent against the dollar over the last year, with much of that rise happening since January. This makes life tough for the eurozone's exporting economies - which, apart from Germany, are now suffering badly.

Weber, Stark Say ECB Will Raise Rates If Necessary
European Central Bank council members Axel Weber and Juergen Stark signaled they are ready to raise interest rates if needed to contain inflation even as a global credit squeeze threatens the economy. The ECB "will act" to contain "alarming" price pressures if its inflation goal is threatened, Weber said in a speech in Luxembourg today. Stark said in Cape Town he "cannot be sure" that the ECB's benchmark rate, currently at a six-year high of 4 percent, is high enough to contain inflation.

The euro climbed after their remarks, which contrast with the views of other policy makers such as Portugal's Vitor Constancio and Belgium's Guy Quaden, who say that slowing growth will damp price pressures. Inflation in the euro region accelerated to 3.3 percent in February, the fastest pace in 14 years. The ECB has refrained from following the U.S. Federal Reserve in lowering borrowing costs to bolster economic growth.

The euro, which advanced to a record $1.5903 on March 17, climbed as much as 0.4 percent to $1.5839. The ECB aims to keep inflation just below 2 percent. Stark, who along with Weber is regarded by economists as one of the ECB's toughest inflation fighters, said today price pressures are a "matter of particular concern" and "it is very likely that the first quarter is better than expected."

A U.S. housing recession has caused a global credit squeeze for the past seven months, clouding the economic outlook globally. The cost of borrowing in euros and pounds for three months today held at the highest levels this year as banks hoard cash before the end of the quarter. Luxembourg's Yves Mersch said today the ECB will do what's needed to ensure "well- functioning" markets

Hedge fund legends hit by financial crisis
Even for the affluent residents of London's Holland Park, the arrival in the area last year of Gerard Griffin, head of Tisbury Capital, was big news. Curtains twitched as a multi-million-pound refurbishment of his house began. Rather than buy furniture or even appoint an interior designer, Griffin and his wife Sarah commissioned top artists to produce original work specifically for their home.

Soon the Griffins boasted a dining-room chandelier by glass artist Deborah Thomas, two installations by potter-sculptor Edmund de Waal (including a complete room of more than 600 porcelain vessels), and an architectural version of a Morandi painting in the gallery by ceramist Julian Stair. It was, Mrs Griffin modestly told one visiting reporter, "simply an extension of collecting on a domestic scale". To the neighbours, the house had been "hedged" - snapped up and spruced up by a rich hedge fund manager.

These flash Wunderkinder are branching out, and surpassing toffs, lawyers and even footballers' wives with their reputation for ostentatious opulence. As head of Tisbury, a $2.7bn (£1.35bn) event-driven fund founded in 2003, Griffin was the archetypal hedge fund manager: aggressive, arrogant and nearly always right. He audaciously took large positions in big public companies including ICI, J Sainsbury, EMI and Alliance Boots, and was listened to by their managements despite being smaller than other shareholders.

But just a year on from the refurbishment of his Holland Park house, this pillar of London's hedge fund industry is on shaky ground. The latest bite of the credit crunch has caught Griffin offguard and Tisbury offside with some of its biggest investments. The fund was down 8 per cent in the first two months of the year, according to Tisbury's monthly letter - and losses are getting worse.

Hamstrung by the lack of liquidity and savaged by increasing redemptions, Griffin has had to negotiate new terms with his prime brokers, beg for patience from investors and offered his business for sale to bigger rivals, including GLG Partners. One insider said: "Tisbury has gone from darling to disaster is a short space of time. Griffin is losing staff and probably won't get much for the sale. It's been amazing turn of fortunes."

Griffin is not alone. Some of the most successful players in the industry also have serious problems. The past month has been littered with high-profile calamities. At the end of February, Peloton Partners, the award-winning fund run by ex-Goldman Sachs star Ron Beller, imploded. Focus Capital, another EuroHedge fund of the year, wound up days later. Then came the biggest casualty so far: the spectacular collapse of Carlyle Capital Corportation after a $16bn debt default.

Last week, it was the turn of John Meriwether, the man behind the collapse a decade ago of Long Term Capital Market. His bond fund at JWM Partners is struggling with losses of 28 per cent this month.
One industry expert told The Sunday Telegraph: "This is just beginning. Somewhere been 40 and 100 hedge funds will liquidate shortly. It's a bloodbath and it will get worse."

Already investors are showing their fury. One said: "I thought volatility was what hedge funds lived for? Making money, or at least preserving cash, during volatile times is certainly what we pay them for. They have been poncing around during the good times and are now found wanting at the first sign of trouble. It's a debacle out there."

UBS Gives Haircuts
In its advertising, UBS tells clients "it's you and us," but on Friday it told investors "you're on your own." The Swiss bank told clients it was reducing the value of auction-rate securities in their accounts, by an average amount of 5%.

It also refused to buy the bonds back from investors who bought the securities, thinking they were getting an easy-to-sell, higher-yielding alternative to money market funds but instead found themselves stuck with illiquid securities and capital losses, courtesy of the global credit crunch that began in the U.S. subprime mortgage market.

"This is the right thing to do," said a UBS spokeswoman. "This is in the best interest of our clients regarding our accounts. Given the current market dislocation this the next logical step for any committed wealth manager." Auction-rate securities are long-term bonds issued by local governments, agencies, or corporations but sold in periodic auctions, say every 7 to 28 days, to set the interest rate. Firms that handle the auctions, like UBS and most of the big Wall Street concerns, used to step in an buy in the auctions if there weren't enough bidders.

But that all went by the wayside in January and February as investors fled the bond markets. Auctions failed after no buyers showed up and the banks refused to step in as they had previously done. That meant the auctions failed, leaving brokerage customers holding the bag and issuers paying much higher penalty interest rates. The Port Authority of New York and New Jersey, for example, saw its rate skyrocket to 20% from 4% when its auction failed in February.

UBS has been among the hardest hit of the banks, already writing down $17 billion worth of credit holdings and facing another $11 billion in write-downs in the first quarter, according to analysts at Oppenheimer. Its problems don't stop there. Massachusetts securities regulators subpoenaed UBS, Merrill Lynch and Bank of America about their sale of auction-rate securities to customers, particularly bonds sold in closed-end mutual funds. The state is looking at what the banks disclosed about the possible risks of the securities.

"We received calls from a young saver whose house down payment is now frozen; two siblings whose family trust is now frozen; and small business owners who find their business interrupted because money they thought was liquid is tied up in these frozen securities," said William Galvin, the Massachusetts secretary of the commonwealth, in a statement.

The timing of UBS's decision is perhaps telling. American investors are facing tax time, when many will need access to cash to pay Uncle Sam. The Swiss banking giant previously told customers who were unable to sell the securities in scheduled auctions that the bonds would retain their full value and receive enhanced interest rates, according to

Investors who feel betrayed are likely to sue, adding to the pressures on UBS from the global liquidity crisis that began in the U.S. subprime mortgage market. UBS was the first major global bank to be hit by a lawsuit over losses related to the subprime crisis.

Wall Street's Crisis Hitting Small Business
The ripple effect of the financial turmoil on Wall Street is spreading more deeply into the American economy.
The local hardware store is finding it more difficult to get the loan it needs to buy its summer gardening merchandise. Ivy-covered colleges and universities are finding that donors have second thoughts about contributions until the stock market quiets down.

Some small businesses that count on using credit cards to finance their business are getting letters informing them of reductions in their credit lines or increases in their rates. "Wall Street's woes are increasingly giving Main Street the blues," says Mark Zandi, chief economist at Moody's

One sign of the blues on Main Street: consumer-confidence surveys. On Tuesday, the Conference Board said that consumer confidence had dropped to a level not seen since the recessions of 1980 and 1973. "The plunge is directly related to the turmoil in the financial system," says Mr. Zandi.

Economists are particularly concerned about one development: CIT Group, a commercial finance company that lends to small business, used a $7.3 billion line of credit from banks because it was having trouble selling its debt. "CIT does lending to Main Street business," says Fred Dickson, market strategist at D.A. Davidson & Co. in Lake Oswego, Ore.

CIT, for its part, says it is looking to sell some nonstrategic assets or business lines and is looking for additional capital. "We recognize that given the current market environment, we need to operate a smaller, more focused company," writes Mary Flynn, a spokeswoman, in an e-mail.

Strains on CIT could pose just one more challenge for small to medium-size businesses, which are finding it increasingly tough to get loans. "Bank lending to small business is freezing in place," says George Cloutier, a small-business expert and chairman of American Management Services, a consulting group. "Availability of credit to small and mid-sized companies has almost dried up."

The decline in housing prices isn't helping either, in that many small-business people use their homes as collateral for loans, says Michael Leonard, executive director of the greater Richmond Small Business Development Center in Virginia. "What we're finding is that clients already somewhat highly leveraged are finding it difficult to get new money." Small-business owners are also increasingly running into late-paying clients, he says. "They need to borrow money to bridge that gap as well," he says.

Ilargi: Steve Forbes “himself” joins the choir, suggesting that all will be fine if and when the US unilaterally declares a moratorium on mark-to-market. In other words, the system can be saved by blatant lies about the true value of toilet paper.

This idea is ludicrous, if only because the US is in no position to make such decisions about paper that has been sold globally. Also, many parties (at home and abroad) would rather take their losses now than wait a year, with the risk that those losses will have grown substantially.

Here's How to End the Panic: No more mark-to-market
The Bush administration must take two steps immediately to quickly halt the unending, enervating credit crisis: shore up the anemic dollar and, for the time being, suspend "marking to market" those new financial instruments, such as packages of subprime mortgages.

The weak dollar is pummeling equities, disrupting the economy, distorting global trade and giving hundreds of billions of dollars in windfall revenues--through skyrocketing commodity prices--to our adversaries such as Iran and Venezuela. Not since Jimmy Carter has the U.S. had a President so oblivious to the damage done by an increasingly feeble greenback.

The Federal Reserve can rally the markets for a day or two by finding some new mechanism through which to lend more money to banks and other financial institutions. But this is the proverbial Band-Aid for a patient who is beginning to hemorrhage.
The Administration acts as if the dollar were like the sun, its rising and falling beyond any control. Countless times experience has shown that notion to be false. The U.S. Treasury Department could buy dollars in the currency exchange markets.

Our allies would gladly cooperate with such an operation; their exports are being hurt more and more. The Fed could mop up some of the excess liquidity it has created since 2004, even as it makes targeted loans to beleaguered banks and financial houses.
The other measure: The Treasury Department and the Fed should get together with the SEC, the Comptroller of the Currency and other bank regulators and announce that financial institutions for the next 12 months will no longer write down the value of exotic financial instruments (primarily packages of subprime mortgages). Instead, writedowns will occur only when there have been actual losses on those assets. If a mortgage defaults, a bank will then--and only then--recognize the loss.

It's preposterous to try to guess what these new instruments are worth in a time of panic. Such assets are being marked down to increasingly arbitrary low levels. But when a bank books such a loss, it must replenish depleted capital, even though cash flows for most financial firms are still positive. Worse, when forced by panicky regulators and lawsuit-fearing accountants to write down the value of these securities, institutions will dump assets in a market where there are temporarily few or no buyers.

The result is a spiraling disaster. So let's have a time-out on markdowns until we actually have real experience in what kind of losses are actually going to occur. These two steps would quickly end the panic. Until that happens, expect more trouble.

Ilargi: And if you think Steve Forbes is just a nut from left field, think again. The very regulator of this issue, the SEC, now encourages companies to lie about the value of their assets. No, they don’t call it lying, I know. Again, if the US moves along this path, it will get into enormous trouble internationally. And, at least financially, the US can not afford to do that.

For instance, what do you think will happen if European, Japanese or Chinese banks and/or governments do their own valuations of similar (or even the same) assets, and they DO mark-to-market, and come up with much lower numbers than US financial institutions? I guarantee you that would be very ugly.

If [Mark-To-]Market Prices Are Too Low, Ignore Them
The Securities and Exchange Commission is out today with a letter to companies that own a lot of financial instruments whose current market value must be reported to shareholders. For more than a few companies, disclosing market values is neither easy nor convenient.

The issue is the application of SFAS 157, which governs the way companies compute fair value of assets, assuming they have to do so anyway. (Banks and brokers have to do that a lot, but I won’t go into the details of when they can avoid it.) The rule took effect on Jan. 1, although some companies adopted it last year.

The rule sets out three categories of assets, with different ways to value them. Category 1 includes assets with easily observable market values. I.B.M. stock closed today at $114.57, and it is not easy to justify a different value if your quarter ended today. Category 2 is a little fuzzier, where there are observable markets that provide a good guide to prices of your asset, even though there is no direct market. And then there is Category 3, which is essentially mark to model.

In companies that adopted Statement 157 early, we have seen a lot of assets end up in Category 3. That may be proper, since there are plenty of complex financial instruments for which there is not much of a market these days. But it also provides companies with a way to fudge figures.

The S.E.C. letter asks companies for some disclosures on how they came up with those values, and on why a lot of assets may have moved into Category 3. Such disclosures can only help investors. But one part of the letter stood out to me, providing an excuse for companies to ignore a market value if they don’t like it:
“Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale. Only when actual market prices, or relevant observable inputs, are not available is it appropriate for you to use unobservable inputs which reflect your assumptions of what market participants would use in pricing the asset or liability.”

That sounds to me like an invitation to fudge. Some people on Wall Street think that nearly every sale today is a forced sale. There are entire categories of collateralized debt obligations where most, if not all, of the trades, occur because a holder has received, or expects, a margin call. What the S.E.C. should require is a disclosure when a company concludes that a market price should be ignored because it came from a “forced liquidation or distress sale.”

Then there should be a disclosure of how much lower that distress price was from the value the company is using in its own valuation. Alternatively, there could be a simple rule, at least for banks. If you will ignore this price as irrelevant when you decide whether to send out margin calls to those to whom you have lent money, then you can ignore that market price when you make your own reports. But if you won’t lend based on a valuation that ignores actual market prices, then you should not use that valuation for your own accounts.

Ilargi: Spain is way beyond redemption or salvation. The European Central Bank has been secretly propping up the Spanish banking system for at least half a year, to the tune of God knows how many billions. But that can’t last: as problems emergy in other European countries, credit support for Spain will dwindle.

I’ve hardly ever seen a better definition of the word “BUBBLE” than this one:

"Spain's economic growth[..] provided a quarter of [EU] new consumer spending during the past four years[..] That's more than five times the contribution of Germany, where the economy is three times the size."

Zapatero Depletes Surplus as Housing Shakeout Reduces EU Growth
Miguel Angel Lopez and Virginia Pardo watched the steady rise of interest rates last year as they expected their first child and wondered whether they would be able to keep up with the mortgage on their two-bedroom Madrid apartment.

Then the government introduced a 2,500 euro ($3,947) payment for each newborn, the first in a series of benefits and tax breaks aimed at cushioning the impact as Europe's biggest housing boom shudders to a halt. Permits to build new homes, which peaked in 2006 at 734,978, two-thirds more than Germany and the U.K. together, will drop to 500,000 this year from 675,000 in 2007, according to Banco Bilbao Vizcaya Argentaria SA, Spain's No. 2 lender.

"Lots of people may have to stop paying their mortgages if rates keep increasing," says Pardo, a 29-year-old homemaker whose husband makes about 1,000 euros a month as a warehouse manager. "This will give us room to breathe," she says, cradling their 2-day-old daughter, Ainhoa. Prime Minister Jose Luis Rodriguez Zapatero, whose Socialist Party retained control of parliament in March 9 elections, is increasing government spending to avoid a real estate fire sale.

In a country with an 86 percent home ownership rate, highest in the 15-nation euro region, the collapsing housing market is already slowing the economy. Growth will dwindle to 2.5 percent this year from 3.8 percent in 2007, according to forecasts by the Paris-based Organization for Economic Cooperation and Development.

Zapatero, 47, and his People's Party opponent, Mariano Rajoy, 53, made the economy the centerpiece of their campaigns. Both pledged to end the wealth tax on assets, which has ensnared more and more Spaniards because of rising home values. The Socialists also promised to give workers an annual income tax rebate of 400 euros and boost the lowest state pensions by 26 percent. That's on top of the surge in infrastructure investment already budgeted for this year.

"We've saved, we've managed our finances well and we've got a bigger surplus than expected, so we can stimulate the economy and help families," Zapatero said in a Jan. 29 interview on Spanish public television. "This is a prudent measure."
Residential construction, which accounts for about 6 percent of Spain's economy, peaked in 2006 after a decade-long surge fueled by a drop in interest rates, growing incomes and vacation home purchases by Britons, Germans and other northern Europeans. Housing prices gained 11 percent a year on average, as even ordinary Spaniards speculated in real estate.

Spain's economic growth, which outpaced the euro-region average, provided a quarter of the single-currency area's new consumer spending during the past four years, according to the European Union's Luxembourg-based statistics agency, Eurostat. That's more than five times the contribution of Germany, where the economy is three times the size.

Now, a glut of properties weighs on the market, and interest rate increases and tighter bank lending standards make it more difficult for buyers to finance. The supply of new homes in 2006 outstripped demand by about 50 percent, according to government estimates.

Mortgage interest rates more than doubled since 2005 as rising credit costs sparked by the U.S. subprime crisis compounded eight increases by the European Central Bank. The 12- month euro interbank offered rate, or Euribor, calculated monthly by the Bank of Spain and used to set mortgage rates, was 4.79 percent in December, the highest since 2000. It eased to 4.35 percent in February, 26 basis points above a year earlier. (A basis point is 0.01 percentage point.)

The slowdown can be seen on the streets of Madrid, where buildings are plastered with "For Sale" signs and it's getting easier to find a seat in the normally packed cafes. "People just don't have any money," Antonio Romero, a taxi driver, says. "With so many people on low wages, the price rises are really being felt and people are cutting back on unnecessary expenses."

German watchdog eyes $600 billion global bank losses
The financial market crisis could cause losses of up to $600 billion at banks and other financial institutions worldwide, a German magazine reported on Saturday, citing an internal report by German financial watchdog BaFin.

The $600 billion figure represents a worst-case scenario for losses linked to the financial turmoil sparked by the meltdown in the U.S. subprime mortgage market, Der Spiegel magazine said in a story released in advance of publication on Monday. "Based on current knowledge and the market situation, we believe $430 billion is more likely," the magazine quoted what it said was a 16-page report by BaFin as saying.

BaFin calculated that banks had already acknowledged about $295 billion in losses, of which Germany accounted for around 10 percent, the magazine said. Extrapolating from this percentage, German banks could suffer $60 billion in losses in the worst case and $43 billion in the more favorable scenario, the magazine added.

However, the magazine also said BaFin cited the risk that the financial crisis could spread beyond the banking sector to affect hedge funds, insurance companies, pension funds and even some non-financial companies.

A figure of around $300 billion for losses reported to date came from publicly available sources, she said.
German mass-circulation Bild newspaper reported on Friday that German banks could face as much as 70 billion euros ($110 billion) in writedowns on their investments as a result of the credit crisis, citing "speculation by banking insiders" for the report.

Florida's latest attraction is bringing in bargain hunters by the busload
It's breakfast time in Orlando and thousands of people are clambering aboard tour buses all over the city ready for fun in the Florida sunshine. One group, however, won't be following the others to Disney World or the area's many other theme park attractions. They'll be taking a shopping trip in the company of estate agents and mortgage brokers, hoping to find a bargain among a selection of repossessed and run-down homes.

The growing popularity of the six-hour "foreclosure express" tour is one symptom of the worst housing crisis to afflict the Sunshine State in recent years, a slump set off by the sub-prime mortgage crisis that has sent repossessions soaring and prices into freefall. The bus follows a pre-determined route through residential neighbourhoods and stops at up to a dozen empty houses already repossessed by lenders. The passengers disembark and size up the premises as they decide whether to offer an asking price often already below the open-market value.

"It pulls everyone together," said Orlando real estate agent Janice Ziesig, who organised the first tour for 24 would-be buyers last month after adapting a similar concept she saw in California two years ago. "It's really a rolling classroom with realtors, a lawyer, a property appraiser and a mortgage broker aboard with the buyers and investors. People can get a good idea of what's available."

Recent figures from showed 279,325 homes have been repossessed in Florida since January last year, making it second to California, where there were 481,392 foreclosures, among the worst-affected states. The news for those wanting to sell their homes, particularly in Florida's larger metropolitan areas, is almost as bleak. February sales of existing homes were down 25% on a year ago, at only 8,310 statewide, according to the Florida Association of Realtors.

Three-bedroom houses in Kissimmee that sold for $240,000 a year ago can now be snapped up for $198,000, a 17.5% decrease. And prices in Miami, which were rising by more than 20% annually as recently as 2005, showed a 19.3% decline from a year ago, the biggest drop in the US alongside Las Vegas, according to the Standard & Poor's/Case-Shiller home price index.

Ilargi: Just like everything else, logic is upside down in Australia. I still don’t see what this guy says. Plaese enlighten me?! It goes something like this:

Affordability is low, since demand oustrips supply. This is getting worse, fast, demand rises all the time. We’ll be saved, though, when interest rates come down. However, that willl push up demand even more, and therefore prices too, which in turn makes “dwellings” even less affordable. And somehow that is supposed to be a good thing.

Australia: House prices to jump 40% in five years
BIS Shrapnel director and chief economist Frank Gelber said housing affordability, already at record lows, would sink even lower as demand continued to outstrip supply. Mr Gelber said there was currently a construction shortfall of 30,000 dwellings, but has forecast that number would grow to 60,000 by June this year and 129,000 midway through 2009.

An environment of rising interest rates had compounded the problem with people choosing to wait before buying or building property, he said. This also meant that when interest rates stopped rising or eventually started to fall, there would likely be a surge in demand for housing which could result in a price explosion.

"We've got rising interest rates suppressing any upswing in demand for housing ... and we need to wait now before that demand comes through," Mr Gelber said. "But when it does, it will be very strong."

The figures quoted by Mr Gelber are largely in line with Australian Bureau of Statistics data. Calculations, based on the ABS established house price index, show that during the 10 years to December 2007, house prices rose an average of 9.9 per cent a year. The index rose 12.3 per cent in 2007. In the 10 years before that house prices rose an average 6 per cent a year. In the past 20 years they have risen an average 7.9 per cent a year.

Blindsided by the subprime storm
There may be no Canadian company that better epitomizes the financial turmoil wrought by the subprime mortgage crisis than Xceed Mortgage Corp. The alternative lender, which relied on the securitization of its loans to finance new mortgages, has been hammered by the collapse of the market for asset-backed commercial paper (ABCP).

The company, whose stock hit $10.45 a share in early 2006, is now trading at a little over a dollar. Xceed has suspended its dividend and its line of uninsured mortgage products. In the past two months, it has cut 100 staff, or nearly three-quarters of its work force, to help in its attempt to return to profitability. It's been a precipitous downfall for a company bursting with promise when it went public in June of 2004; one of few firms providing mortgage loans to people with shaky or unestablished credit histories, including new immigrants and the self-employed.

Despite their subprime status, these customers rarely defaulted on their mortgages in Canada, and the business model looked sound, said one industry analyst who declined to be named. By all rights Xceed would still be "chugging along" if its funding model hadn't fallen off the rails, although that's a moot point today, the analyst said. "This isn't a market issue and, unlike the U.S., we continue to believe the subprime mortgage market in Canada is sound," he said.

"The risk we always saw with Xceed was that they relied very heavily on the securitization model; that you'd have to keep rolling over all of that paper. That was a newer, unproven model in the market, and because of that we'd always applied a lower multiple to them to reflect that risk."

More people who don't qualify for traditional mortgages will be out of luck now, both when they try to purchase a home or refinance their mortgage, said Alex Haditaghi, CEO of "Xceed represented something wonderful for this industry, a way to service a unique clientele. Unfortunately we no longer have access to a lender such as Xceed for those customers," Mr. Haditaghi said.

A number of industry watchers say the most likely scenario is that Xceed will be sold. Toronto-Dominion Bank and the Bank of Nova Scotia, which are in the best shape of the Big Six banks in relation to their exposure to the frozen ABCP market, are considered potentially interested, according to two industry sources.

CIBC Finally fesses up to exposure
To some it was nothing more than a pleasant surprise. To others, this week's news that the Canadian Imperial Bank of Commerce has an additional $25-billion exposure to investments tied to the health of monoline insurers, was nothing more than a confirmation of what some market participants had known for a few months.

Indeed, there has been considerable talk about such exposure among some U.S hedge funds, who were presumably getting their information from other U.S. market participants. That talk had made its way into reports compiled by some Canadian-based analysts. And some of those details had appeared in the press. So the "new" information was neither a surprise nor pleasant.

But until this week, CIBC had played mum on the whole matter. CIBC, which has written off $4.2-billion, used to claim that its disclosure was the bets of all the banks. That may have been the case but Royal Bank of Canada's first-quarter results contained enough to satisfy the deepest probing analyst.

But overall, the way the banks have disclosed their exposure to U.S. problems and also to the asset-backed commercial-paper problems in Canada hardly passes the test of keeping the market informed. On the local matter, it was only after some analysts pressed the banks to break down their ABCP exposure between their own conduits and those in which they had liquidity agreements that the banks fessed up.

The information disclosed by CIBC is noteworthy for another reason. CIBC's $7.9-billion exposure to the U.S. residential-mortgage market shows almost 44%, or $3.45-billion, was with a CCC-rated guarantor. (The bulk of that has been written off.) On the other hand, CIBC has no exposure to CCC-rated guarantors for its non-U.S. residential-mortgage investments, which means that dealing with CCC-rated entities was probably a one-off.

One possible conclusion: CIBC had a system that it didn't follow when it dealt with the CCC-rated guarantors. The other conclusion: CIBC didn't have a system--and was bagged by Goldman Sachs.
Too many awards Maybe the Canadian banks are making too much money. Maybe the lobby group, the Canadian Bankers Association, should lighten up. Or maybe a consumers group should start a new award--but with a different emphasis.

We are speaking of the news the CBA is accepting nominations for the 2008 Canadian Banks' Law Enforcement Awards, "which recognize outstanding police performance in fighting crime against Canada's banks." The award will be given to those who have gone "beyond the call of duty in their efforts to fight crime against banks, their employees and their customers," the CBA said.

"This is our chance to recognize the excellent work done by members of law enforcement and to highlight their efforts." The award has been presented to 210 officers since it was initiated in 1972. An alternative award, of course, would allow consumers to rank what they see as the greatest abuses committed against them by Canadian banks.

Commons finance committee to vote on ABCP hearings
The asset-backed commercial-paper workout will become a political issue next week when the House of Commons finance committee votes on whether or not to hold hearings into the crisis. Committee members will vote on Monday on a motion tabled by Liberal finance critic John McCallum. It is expected there will be broad cross-party support for the proposed hearings, which would take place in the next two weeks.

A ‘yes' vote to the idea of hearings would give hundreds of disgruntled retail investors a chance to have their say in public. It would also likely mean bankers, brokers and other high-profile Bay Streeters would be called to Ottawa to account for their role in the crisis. The hearings, if they take place, would also likely involve officials from the Bank of Canada and Canada's top banking regulator, the Office of the Superintendent of Financial Institutions.

The notice of motion filed by Mr. McCallum this month says members of Parliament will try to find out "whether federal regulators and other stakeholders could have done a better job in anticipating the crisis and/or reducing its cost," and "what action the federal government, federal regulators and other stakeholders are taking so as to reduce the likelihood of experiencing a similar crisis in the future."

The ABCP crisis began last August when investors - from ordinary folks who had poured their savings into the paper to huge institutions holding many millions of dollars worth of the stuff - found the market had frozen up and they were left holding investments they had thought were safe and that could be rolled over on a short-term basis.

Since then, a committee of bankers, lawyers and accountants has worked on a plan to restructure the investments. Most of the large institutional investors in ABCP are thought to have backed the plan, which also has the support of Canada's big banks.