Friday, March 14, 2008

Debt Rattle, March 14 2008 - Part 1

Ilargi: There are so many files on my desktop already, I'll publish them now, and do a second part of today's Debt Rattle around noon. My sincere and profound apologies for any potential irregularities this may cause in your biorhythm.

Ilargi: While looking for news on the March 14 deadine in Canada’s ABCP morass, I saw quite a few articles describing how confident everyone is. Well, not. Many private investors and companies will get burned real bad here. The paper has very little worth, and much of what value there is left will be soaked up by European banks selling their share. When the freeze started on August 14, the total was $40 billion, $20 billion of which was held by Québec's Caisse de Dépot. To get the picture: Canada's economy is about one tenth of the US, so imagine $400 billion worth of paper going for pennies on the dollar. Québec pensioners are royally screwed, and don't be surprised if there are companies going into bankruptcy because of this. There is of course one alternative:(covert) nationalization, the Bank of Canada buying it all in some kind of discount window. But that wouldn't help smaller parties either.

Little hope seen for deal on Canada ABCP by deadline
The committee of investors seeking a fix for Canada's frozen $32-billion asset-backed commercial paper market has pushed back deadline after deadline in search of a way to get holders some money back, but today the group faces one that's much tougher to extend.

A standstill agreement that has kept peace in the market and prevented the potential collapse of the restructuring expires at midnight, and sources close to the so-called Crawford Committee say there is almost no way to get consent from all parties to push back the timeline again. That means that the committee must finally come to the elusive solution it has sought through seven months of intensive negotiations with the mainly foreign banks that are owed money by the trusts that issued the commercial paper to investors.

Unless a deal is struck, or another way is found to preserve the standstill - perhaps by asking a judge for a court order - the foreign banks could begin to call for the liquidation of the trusts. "After [midnight] it's playing with dynamite and hoping nobody lights the fuse," said one person familiar with the talks. Sources said that the committee may seek to use the provisions of bankruptcy law to have a judge continue the restructuring under some form of court protection.

Small investors are growing increasingly impatient with delays that have mounted since fall as the restructuring committee fought against deteriorating financial markets to nail down the final terms of a plan to swap the frozen short-term ABCP debt for new long-term notes that if held to maturity would pay back in full. Layne Arthur has been anxiously waiting for the ABCP market to untangle because he has much of his savings tied up. "Theoretically, it's two generations of wealth," the 52-year-old Albertan said in an interview yesterday. "I sold the family farm, and I was going to invest it in oil and gas properties if I was successful in the bidding process."

Mr. Arthur's not certain he'll support the committee's plan, because the committee's plan to ask investors to waive their right to sue has left him leery. Many key issues were still unresolved last night, including which Canadian banks would back a key line of credit that would help ensure that the new notes wouldn't freeze up in future the way ABCP did.

Toronto-Dominion Bank, which argues that it didn't sell the affected ABCP so shouldn't be involved, is nonetheless still in talks to back a small portion of the credit line. Battered Bank of Montreal is also likely to play along, though it is trying to preserve the right to pull out if need be should losses in other parts of its business increase, said a person familiar with the discussions.

US Dollar plunge sets off global alarm bells
The dollar has plummeted against all major currencies on dire US retail sales and fears that the Federal Reserve may need to slash interest rates further to stop the downward spiral in the credit markets. The greenback broke below 100 yen in a day of wild trading, setting off alarm bells at Japan's Keidanren industry lobby. It touched a record $1.5620 against the euro and came within a whisker of parity with the Swiss franc for the first time in history.

The plunge came amid an investor flight into commodities, seen as a way of insulating wealth from the dollar's decline. In the US, crude oil reached a record $111 a barrel despite rising inventories. A shock fall of 0.6pc in February retail sales cemented fears that the US is sliding into a fully fledged recession. The markets are now pricing in a three-quarter point cut in rates to 2.25pc next week.

The European Central Bank has so far refused to blink, holding rates at 4pc since the credit crunch began. The result is a yawning transatlantic yield gap, drawing huge sums of hot money into Europe. "We're in the eye of the dollar storm," said David Bloom, currency chief at HSBC. "The last phase of a sell-off is always the most extreme. We think the dollar will recover in the second quarter.

People are treating the euro as if it was the D-Mark. They are looking at how well German exports are doing, but ignoring the weakness in Italy and Spain. "This is a big mistake. We will soon see contagion from the US, and then both sterling and the euro will be in trouble," he said.

Peter Schiff, a dollar-bear at Security Pacific Capital, said the greenback faced the danger of outright collapse as countries in Asia and the Middle East mull plans to break their dollar pegs, which are fuelling inflation across the region. "The decline could accelerate rapidly. The world is still holding a lot of dollars it doesn't need," he said. The dollar's tumble over the past 10 weeks has begun to provoke murmurs from top central bankers, suggesting that we may be nearing official intervention.

Japan is alarmed by a 24pc surge in the yen since last autumn, fearing it will tip the country back into slump. "It is hurting profits at small firms rapidly, " said the economy minister, Hiroko Ota. The Bank of Japan has cautioned against of "excessive exchange rate moves". The wording is identical to that used this week by ECB chief Jean-Claude Trichet, himself under pressure from Latin bloc politicians to halt the euro's rise.

Hans Redeker, head of currencies at BNP Paribas, said the central banks may soon spring a trap on the markets, clubbing together to boost the dollar. The aim would be to chill the commodities, bringing down energy and food prices. "Shaking out speculators would be an indirect way of reducing the inflation impact from raw materials," he said.

The Fed's in a desperate race with spectre of collapse
Equity traders, being ever the optimists, decided to look on the bright side of yesterday's central bank intervention. London and New York did a jig after the US Federal Reserve and Bank of England pulled out all the stops to avoid markets falling into a pit of despair. And who can blame them? When you've got state institutions as big as the Fed supporting markets then where's the worry?

The Fed, with its latest $200bn offer of cheap cash, has provided yet more state aid for errant hedge funds and another Washington-backed bail-out for Wall Street bankers. The Bank of England joined in again, further shedding any notion of being wary of moral hazard. But as the bail-outs are getting bigger, then clearly the problems causing them must be getting bigger.

The Fed has saved the day again, but it will only be for a day or so. It was Friday remember when it had to pump $200bn of cash into the system. Yesterday it was offering to lend a similar amount to try and soak up some of the toxic debt out there which has left the lending markets hamstrung. How much further can the central banks go to support a system that is so obviously broken?

Arguably, having come this far, Mervyn King and Ben Bernanke have breached the point of no return. There is no going back. The US certainly is now relying on its central bank to keep its most important credit markets open, its equity markets from plunging and bring a veneer of normality to financial life. Traditional supports, such as confidence in normal commercial debt repayment, have been knocked away as institutions are engaged in a desperate dash for cash.

We have not seen anything like it since the decade of the Great Depression. Melodramatic as that might sound, it is a fact but a fact that markets seem unwilling to accept. While the Fed is willing to slash rates and hope, and pump liquidity into the system, markets will remain optimistic. But it is a race to the bottom. The Fed hoping it reaches the finishing line first and restores confidence returns before a bank goes bust. But the spectre of a collapse is neck and neck with Bernanke and it's still anyone's guess which will win.

Hank Paulson urges banks 'raise more cash' as credit crisis deepens
US Treasury secretary Henry "Hank" Paulson has warned that America's largest banks need extra capital on top of the $70bn (£34.4bn) raised to date in order to prevent the credit crisis from worsening. Mr Paulson, the former chairman and chief executive of investment bank Goldman Sachs, believes that although the money raised so far has been helpful, it is not enough to ensure that banks keep lending to customers and to one another.

"We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies," Mr Paulson told the National Press Club. "We need those institutions to continue to lend and facilitate economic growth." The remarks in Washington reflect a report released yesterday by the President's Working Group on Financial Markets, chaired by Mr Paulson.

The group, whose members include representatives from the Commodity Futures Trading Commission, the Federal Reserve Bank of New York and permanent Treasury officials as well as Federal Reserve chairman Ben Bernanke, has been looking at ways of preventing the sub-mortgage-led crisis from happening again. Mr Paulson's comments, coming in the week the US Federal Reserve injected $200bn (£98.5bn) into the US banking system in an emergency measure designed to boost liquidity, send a clear warning that the worse of the banking crisis is far from over.

Rumours persist that one or more major banks may yet hit the wall, with Bear Stearns continuing to fend off market whispers that it is close to insolvency. Bear's shares fell a further $7.26 at $54.32 yesterday, in spite of ratings agency Standard & Poor's saying that the worst of the sub-prime mortgage mess was behind the majority of major banks. Already fearful investors will now approach the banking season - which is due to start on Tuesday when Goldman Sachs and Lehman Brothers report first-quarter results - with even greater trepidation, concerned that further large asset write-downs may be on the cards.

Mr Bernanke is understood to have spent half a day refining the recommendations with the treasury secretary earlier this month to ensure that each and every message is taken seriously. The recommendations, the majority of which will need to be implemented by the US Securities and Exchange Commission and other financial regulators, form part of a bold blueprint to tighten up financial markets.

Admitting that all market participants, including regulators, were in part to blame for the current crisis, Mr Paulson said: "Regulation needs to catch up with innovation and help restore investor confidence, but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it."
He was keen to stress that no one single part of the financial services industry was being singled out for criticism, noting that "there were mistakes made by all" in the run-up to the current crisis. It is not about "finding excuses and scapegoats", he said.

Irish banks may need life-support as property prices crash
The Irish banking system faces acute strains and may require a phase of temporary nationalisation as the property slump leads to a wave of defaults, according to a leading Irish economist.

Morgan Kelly, of University College Dublin, said the government is almost powerless to stop the downturn becoming a severe slump. "We're in a classic post-bubble recession, yet we can't do anything that a country would normally do in this situation because we're inside the eurozone," Prof Kelly said. "We can't cut interest rates, we can't devalue, and there is a lot less room for fiscal stimulus than people think. We're stuck.”

"We have a domestic recession now colliding with a global recession. It is the state of the banking system that will determine how terrible this will be, and frankly that is looking very shaky." Irish house prices fell 7pc last year. The pace of decline has accelerated so far this year. The damage is spreading to the broader economy. Unemployment jumped to an eight-year high of 5.2pc in February, from 5pc in January.

"We are going to see banks on life-support with very big bail-outs. The precedent for this is what happened in the Nordic countries in the early 1990s when they had to take over the banks. We may have to do something similar," he said. Two of Sweden's largest banks were nationalised before being nursed back to health and refloated. The Nordic rescue is seen as a model of how to tackle a banking crisis. However, Sweden succeeded only after it left the ERM's fixed exchange system and regained control of its monetary instruments.

The Bank for International Settlements said in its latest report that there had been a surge in euro bond and note issuance in Ireland in the third quarter to $35bn (£17.4bn), up from $10bn. This is a huge sum for a country of 4.2m people.

It appears to reflect a distress move by banks to raise money for use as collateral at the European Central Bank after the credit crunch hit. "The increase in net issuance came mostly from financial institutions, whose borrowing in securities markets had largely dried up," said the BIS. Irish borrowers built up $123bn in cross-border liabilities.

Ireland has been a star performer over the past 20 years, transforming itself from a high-tax backwater in the early 1980s to a free-market tiger. However, the country is the most exposed in the EU to both the dollar and sterling blocs, leaving it more vulnerable to trade and investment effects of the soaring euro.

Can the Fed Go Bankrupt?
“The plan does seem sensible. The latest problem in the banking system is the illiquidity of even the best quality mortgages, which are clogging up banks’ balance sheets.”

The quote above from the Financial Times about the Fed’s plan to allow banks to swap “the best quality mortgages” for T-bills I think illustrates that people still don't really understand the problem. The latest issue to roil markets was solvency concerns first raised here in Minyanville about Bear Stearns. Add Fannie Mae and Freddie Mac to the list of financials facing legitimate questions about capitalization and one can see why the Fed felt compelled to act. 

Meanwhile, central banks are still trying to convince markets that the financial system is merely experiencing “liquidity” problems. But if liquidity were the only issue, all the pumping the Fed and other central banks have been doing already should have cleared up this problem. The problem isn't one of liquidity. It's one of solvency: loans banks made (especially through the derivatives market) are worth less now than when they made the loans. Because they made way (100 ways) too many of them, banks in general have no capital left. You can’t make loans if you don’t have capital. 

So the Fed has to give the banks capital. This latest scheme is extremely troubling, especially for the already-battered dollar. The Fed is taking on “AAA mortgages” from the banks in exchange for Treasury Bills to give banks the capital. Of course we don’t know the price they are taking on these mortgages at and that is the crux of the matter. Everything is price.

So now the Fed has mortgages on its balance sheet instead of T-bills. Why is this so troubling? It is a slippery slope to more currency debasement. Let’s say the mortgages continue to deteriorate in price (which is highly likely given the nature of our rating system to make them AAA) and then the banks are in no shape to take them back. If the Fed is stuck with declining assets it too will have a capital problem. But if the Fed loses capital it won’t go bankrupt like a regular company: It will just print the money to make up the difference. Literally.

If the Fed loses $50 billion, it can physically print (tell the Treasury to print) the currency to make up this difference. If there currently is $700 billion of physical currency in circulation, printing $50 billion new money would immediately devalue the dollar by 7%. If the Fed takes on riskier and riskier loans, it becomes more and more negative for the dollar. A collapse in the dollar is a de-facto bankruptcy by the Federal Reserve and the U.S. in general.

Mortgage Mess
Maybe it was just bad timing, but the Fed’s announcement of its new term lending facility seemed to be run over by Carlyle Capital’s news of its demise as a result of margin calls related to its investments in mortgage-backed debt. Mortgage-backed spreads, which had tightened in comparison to Treasurys as a result of the Federal Reserve’s announcement of its facility, but those spreads pulled back again today on the Carlyle news.

However, it’s too early to tell whether the improvement in market spreads would have lasted anyway, says Noah Estrin, strategist at RBS Greenwich Capital. He noted that the primary buyers in the days after the Fed statement were hedge funds and servicers, neither of whom are steady, long-term buyers in the market. “Servicers are hedging an asset, and the hedge funds are trying to make a quick buck,” Mr. Estrin says, and those groups were part of the selling in action today.

It may be overstating things to say the Fed “failed” to save Carlyle Capital, but the Fed’s first auction under this new facility isn’t for another couple of weeks, and one fixed-income dealer in London wondered, “Are there more Carlyle groups in the meantime which are going to create more stress on the marketplace?”

Ilargi: There are times that even I don’t know what to say, or at least have to find the right words. How’s this: I can’t seem to decide whether this is fcuking stupidity, or fcuking imcompetence. Henry Paulson has a key position in Washington, and the best he can do while his field, that would be finance, is fully ablaze, and turning the future of 9 out of 10 Americans into a dark pit of poverty, is to work on a fcuking utterly useless plan that may perhaps maybe have some kind of effect years from now. ”Major banks meanwhile were encouraged to disclose more information”. Go fcuk a dcuk.

What is this? Isn’t there anything better to do, or is he just trying to rub it in? Obviously, mutant slime like Paulson have long forgotten this, but really, elected officials are supposed to defend the rights and lives and futures of the people who voted for them. Maybe the US really deserves to turn into Bulgaria.

Mortgage broker, lender plan too little too late
The latest U.S. federal plan to restore confidence in U.S. mortgage bond and housing markets, promising strict home lender and mortgage broker standards, might thwart the next crisis but does little to quell this one. U.S. Treasury Secretary Henry Paulson unveiled the President's Working Group plan on Thursday, recommending "strong nationwide licensing standards" for brokers and tougher oversight of all mortgage originators.

Slack lending practices that fostered record U.S. home price appreciation earlier in the decade are faulted for the housing bubble and its subsequent bursting. Thursday's federal proposal, however, provides no relief to banks and investors currently overloaded with bad mortgages and loans backed by those loans. With home mortgage foreclosures escalating, there is a dearth of investor demand for bonds backed by many mortgages.

In addition, lenders are rejecting many more borrowers and house prices are falling in what is seen as the worst housing market since the Great Depression. "The horse is out of the barn on this cycle and recession," said Phil Immel, broker at Prudential California Realty in Dana Point, California, and founder of

Paulson's proposals "may be good for the next down-cycle in real estate, which happens every seven to 10 years, but it shouldn't have much impact of calming any markets, real estate or Wall Street, for years to come," said Immel. Even mortgage bonds issued by government-chartered Fannie Mae and Freddie Mac, considered among the safest mortgage securities, are paying some of the highest yield premiums above U.S. Treasury bonds in more than two decades.

Taken together, each of a growing number of federal and private plans aimed at returning order to chaotic housing markets help, economists and investors said. But one of the main flaws with the plan floated by Paulson is that it fails to address the burdensome stockpile of soured mortgages that are spurring corporate failures and stifling the willingness of banks to lend.

US financial chiefs urge mortgage, banking reforms
America's top financial chiefs urged mortgage firms, credit rating agencies and banks to overhaul their practices Thursday as a spreading credit crunch rocks Wall Street and the US economy. Treasury Secretary Henry Paulson, Federal Reserve chairman Ben Bernanke and Securities and Exchange Commission chairman Christopher Cox all endorsed a range of recommendations aimed at boosting business transparency and risk management.

"This effort is not about finding excuses and scapegoats. Those who committed fraud or wrongdoing have contributed to the current problems; authorities need to and are prosecuting them," the Treasury chief said. Paulson, a former chief executive of Goldman Sachs, said regulation needs to catch up with the growth in mortgage products and exotic securities to help restore investor confidence in America's battered financial markets. Speaking at the National Press Club in Washington, Paulson said the President's Working Group on Financial Markets wanted mortgage firms, credit rating agencies and banks to reform their business practices to avert further liquidity shocks.

Among numerous recommendations backed by the high-level panel was a call for federal and state regulators to strengthen oversight of mortgage lenders. State regulators were also encouraged to implement strong nationwide licensing standards for mortgage brokers. Analysts say lax lending standards led some mortgage firms to grant home loans to tens of thousands of borrowers who did not have the means to meet their mortgage payments when interest rates increased.

Credit rating agencies such as Standard and Poor's, Moody's and Fitch Ratings were urged by the panel to improve their influential reports and assumptions about a wide range of securities and corporations. Major banks meanwhile were encouraged to disclose more information about the securitization of complex credit instruments, such as mortgage, credit card and student loans, which they package or cut up and sell to other banks and investors.

Housing Market Has Further to Fall
Those looking for relief from the housing downturn shouldn’t get their hopes up for any recovery soon, according to economists in the latest Wall Street Journal forecasting survey. The majority of respondents say the U.S. is currently in a recession, and one of the major drags has been the housing sector. On average, economists see a 5.3% drop in house prices, as measured by the Office of Federal Housing Enterprise Oversight, in 2008 and a 1.3% decline in 2009.

“The bulk of inventory problem hits this year, pulling prices down,” said Diane Swonk of Mesirow Financial, referring to the imbalance between homes on the market and sales. When economists were asked when home prices will touch bottom, most said it won’t come until 2009. Just 28% think the worst will pass this year, while 10% don’t see a recovery until 2010. Ethan Harris of Lehman Brothers said the bottom won’t come until the third quarter of 2009, and warned that “home prices will bottom later in many bubble regions.”

The situation has deteriorated to the point that economists are looking at unconventional methods to help the market. Last week, Federal Reserve Chairman Ben Bernanke suggested that lenders could aid struggling homeowners by reducing their principal — the sum of money they borrowed — to lessen the likelihood of foreclosure. Some 71% of respondents agreed with the suggestion. Lawrence Yun of the National Association of Realtors says that the idea “provides incentive not to walk away.” But Bruce Kasman of J.P. Morgan Chase warns that the proposal enjoys “little support from lenders.”

The majority of economists also expect that public money will be used in response to the deepening housing crisis. Thirty-three percent said such a move if likely, but not certain, while 29% said it is a near certainty.

Twenty-two percent put the chances at 50/50, as 16% said it is not likely, but possible. None said they were almost sure that it won’t happen. “It’s a near certainty, either formally or informally,” said Michael P. Niemira of the International Council of Shopping Centers. “This may be either a good or bad thing, but this interference and encouragement is almost an asking of a favor which will cost U.S. taxpayer.”

Most Economists Say Recession Has Arrived as Outlook Darkens
The U.S. has finally slid into recession, according to the majority of economists in the latest Wall Street Journal economic-forecasting survey, a view that was reinforced by new data showing a sharp drop in retail sales last month. "The evidence is now beyond a reasonable doubt," said Scott Anderson of Wells Fargo & Co., who was among the 71% of 51 respondents to say that the economy is now in a recession.

The Commerce Department said Thursday that retail sales tumbled 0.6% in February; sales excluding volatile auto and parts decreased 0.2%. The decline reflected a sharp slowdown in consumer spending, the primary driver of U.S. economic growth, as Americans grapple with high gasoline prices and the credit crunch, as well as drops in home values and other asset prices.

The survey, conducted March 7 through March 11, marked a precipitous shift to the negative from the previous survey conducted five weeks earlier. For example, the economists now expect nonfarm payrolls to grow by an average of only 9,000 jobs a month for the next 12 months -- down from an expected 48,500 in the previous survey. Twenty economists now expect payrolls to shrink outright. And the average forecast for the unemployment rate was raised to 5.5% by December from 4.8% in the previous survey.

Much of the gloom stemmed from last Friday's employment report, which showed a loss of 63,000 jobs in February, the second consecutive monthly decline. "My recession call comes from the employment data," said Stephen Stanley of RBS Greenwich Capital. "It struck me as a recessionary number." Twenty-nine of 55 respondents said they expect the economy to contract in the current quarter and 25 expect it to do so in the second. The average of all the forecasts is for meager growth -- just 0.1% at an annual rate in the current quarter and 0.4% in the second.

Although the classic definition of recession is two consecutive quarters of declines in the gross domestic product, Mr. Stanley pointed out that the National Bureau of Economic Research, the nonpartisan organization that is the official arbiter of when recessions begin and end, doesn't necessarily follow that definition. "If you go back to the 2001 recession, there was only one negative GDP quarter, and there might not even be one negative quarter in this recession," he said.

The economists also expressed growing concerns that a 2008 recession could be worse than both the 2001 and 1990-91 downturns. They put the odds of a deeper downturn at an average 48%, up from 39% in the previous survey. Mark Nielson of MacroEcon Global Advisors said that "we recognize the previous two recessions were mild and, if a recession does occur, it is likely to be slightly worse than the previous two.".

Hedge funds on the brink as US Federal Reserve cash fails to ease crisis
Several hedge funds with assets of more than $4 billion (£2 billion) were on the brink of collapse last night or had halted withdrawals, despite moves by the US Federal Reserve this week to ease America’s deteriorating credit crisis with a $200 billion collateral lending facility.

The potential closure of six funds came as a leading private equity executive, who declined to be named, said that such funds were “snapping like twigs”, with one failing every day. Yesterday Patti Cook, Freddie Mac’s chief business officer, predicted that the Federal Reserve’s $200 billion bond lending facility this week would fail to solve the long-term problem of Wall Street’s deepening credit crisis.

The funds’ predicament – seven funds have been frozen this month – was seen as evidence that the initiative by America’s central bank to allow lenders to swap their risky mortgage-backed bonds for safer Treasury debt, will be of help only in the short term. Drake Management, a New York money manager, wrote yesterday to investors in its $3 billion Global Opportunities Fund, warning them that it was considering closing the fund. The fund, which lost 25 per cent last year, has already blocked investors from withdrawing their cash.

In its letter Drake, which manages $13 billion of assets, said that it may have to wind down the fund “in an attempt to maintain and maximise value for investors during this period of severe market downturn and contraction of liquidity”. Drake is also understood to be considering whether to close two other hedge funds, the Drake Low Volatility fund and the Drake Absolute Return, both of which lost almost a sixth of their value last year.

Ilargi: Our regular readers know very well how many times we have addressed the upcoming financial problems in lower level governments, states, counties and towns.

People who live in New Jersey should be grateful they have Jon Corzine for a governor. He is a straight talker, and knows where the trouble will come from. That should enable him to deal with it much better than all the others, who are more concerned with their re-elections, and remain stuck in denial.

New Jersey Governor Corzine Says Revenue Drop May Force Steeper Cuts
New Jersey Governor Jon Corzine said growing home foreclosures and unemployment are cutting into state tax revenue and he may have to make deeper spending cuts than the $2.7 billion he proposed last month. Corzine, a first-term Democrat, declined to say how much revenue had fallen in recent months. Collections for December, the last month reported, were $53.1 million or 1.7 percent below projections, according to the state Treasury Department.

"It's real and we've seen a dramatic change in revenue at the state level," Corzine said today in Trenton during an address to mayors. "This is not the time to raise spending. We need to have cuts." The warning comes as the Legislature deliberates on Corzine's proposed $33 billion spending plan for the year beginning July 1. His budget, which is $500 million less than the current year, would cut aid to hospitals and higher education and eliminate at least 3,000 government jobs. Lawmakers in the governor's own party oppose his plan to trim $190 million in aid for the towns and cities.

Corzine said the cuts are needed to overcome years of overspending and borrowing in New Jersey that have created chronic budget deficits and a record $32 billion of debt. "It's not a pleasant project but it's one that has to be done," Corzine told the New Jersey State League of Municipalities. "The dollars aren't there."

Corzine, in an interview later today on CNBC, said the U.S. economy may go into a worse recession than many expect because of a decline in consumer spending and higher costs for energy and food. He said port shipments have dropped 15 percent, the state lost 9,000 jobs in January and sales tax collections are dropping.

The governor told mayors the economic impacts of higher prices for gasoline and health care are contributing to lower revenue. December income tax collections were 1.4 percent below targets, while casino tax revenue was off by 24 percent and motor fuels tax revenue was 33 percent under budget, according to treasury department figures.

Ilargi: Yeah, yeah, and everyone and their pet parrot has predictions about how much prices will fall. Know what, I’ll add mine, and you can quote me on that: home prices in Southern Califonia will drop at the very least by 75% from their peak. You just wait till enough people have to sell, and nobody has the cash to buy.

Southern California home prices still dropping at record rate
Southern California home prices continued to fall at a record pace in February, and are now at 2004 levels, a real estate information service reported today. The median price for a Southland home last month was $408,000, down 17.6% from a year ago, according to DataQuick Information Systems. Area home prices have now fallen 19% on average from their peaks last year.

The steep price declines are putting many more homeowners "upside down" -- owing more on their homes than their homes are worth. Forecasters say foreclosures will likely continue to rise and prices will fall further. About one-third of Southern California homes sold in February had been foreclosed since January 2007, according to DataQuick. A year earlier, previously foreclosed homes accounted for 3.5% of sales.

Since September, each month's sales totals have been the lowest for comparable months since 1988, DataQuick said. The rapid pace of the decline has led Los Angeles economist Christopher Thornberg, who last year predicted a 20% decline in Southern California home prices, to revise his projection. He now thinks prices will fall 40%. In the last real estate bust, Southern California home prices dropped 19% between 1991 and 1997, according to DataQuick.

The median down payment on homes purchased last year was 9%, according to the National Assn. of Realtors. With median prices down by more than that percentage in Southern California, it is likely that the typical homeowner who bought last year is now upside down. Last week, the Federal Reserve reported homeowners now own less than half the equity in their houses, the lowest level since 1945. UCLA Anderson Forecast Director Edward E. Leamer also believes home prices are still declining. He had predicted a 20% to 25% decline from the peak.

Leamer thinks his prediction is still on target, and that other indices show a slightly smaller price decline so far. The Case-Shiller Index, for example, shows Los Angeles and Orange County home prices to be 15% below their peak. That index, Leamer said, shows the market is still correcting itself.

Massachusetts: Many more going bankrupt
Bankruptcy filings have surged 22 percent in Massachusetts this year, as more people are unable to afford their rising mortgage payments or refinance their homes to pay bills, according to court filings and bankruptcy attorneys. Massachusetts filings in US Bankruptcy Court increased to 2,493 between Jan. 1 and March 5, from 2,039 during the same period a year ago. Filings were also up sharply for all of 2007 compared with the previous year, despite a 2005 law change that was intended to reduce the number of bankruptcies.

Lawyers, trustees, and other bankruptcy specialists said the housing crisis is the single biggest reason that personal bankruptcy filings are rising rapidly. They said homeowners with subprime and adjustable-rate mortgages who cannot make their higher payments are resorting to bankruptcy. A decline in housing values has also limited the financial flexibility of homeowners who once were able to tap their home equity to pay off car loans or mounting credit card bills.

"People can't keep their houses because they can't afford the monthly mortgage payments, they can't refinance because there's no equity in the house, and they don't qualify for a loan," said attorney David Madoff, a US Bankruptcy Court trustee in Boston who oversees some 600 cases a year. "More and more people are coming up in front of me and saying, 'I'm surrendering my house to the bank.' "

Homeowners facing foreclosure are filing for bankruptcy protection, known as Chapter 13, because the process freezes a foreclosure proceeding, giving them a chance to save their homes by negotiating mortgage payments with their lender. If an affordable payment plan can be worked out, the borrower resumes paying the mortgage after emerging from bankruptcy. Homeowners who are able to keep their homes under Chapter 13 can protect any equity they have in the home.

People sinking in both mortgage and credit card debt tend to file Chapter 7 bankruptcy, which means they agree to liquidate their assets to pay off their debts. This process allows people who are deep in debt to simply walk away from large credit card bills or abandon a house in foreclosure. Michael Feinman, a bankruptcy lawyer in Andover, said the sluggish economy and fear of job loss are pushing more indebted homeowners into the courts.

"In a good economy, bankruptcy is a last alternative. In an economy like we have now, it's often the only alternative," he said.

Ilargi: Canada has declared inself a US lapdog. How smart is that, at a time when you claim you are doing well, while your master is going down the drain?

Canada's Carney Says End to Turmoil Not Yet in Sight
Bank of Canada Governor Mark Carney said an end to the turmoil in financial markets "is not yet in sight," though regulators should use their new understanding of the problems to craft a careful response. "While the need to restore well-functioning markets is of paramount importance, the official sector can afford to take some time to ensure that the actions they take are appropriate," Carney said today in a speech to the Toronto Board of Trade, followed by a news conference.

The Bank of Canada, acting alongside policy makers in the U.S. and Europe to ease a global credit shortage, on March 11 said it will lend commercial banks and brokers C$4 billion ($4 billion) for 28 days. The steps indicate the Bank of Canada, the U.S. Federal Reserve and other central banks are concerned that an exodus of investors from credit markets may deepen the global economic slowdown.

Carney, 42, gave no hint of how big the next policy move may be. The central bank cut borrowing costs on March 4 by half a point to 3.5 percent, the biggest reduction since 2001. The bank will keep its focus on the "real" economy and inflation, he also said. Inflation pressures in Canada are "well contained," Carney said in response to a question from the audience after his speech.

The central bank will set its benchmark lending rate based on conditions in the Canadian economy, Carney said, when asked whether he would match a move by the Fed. Still, he said, "whatever the Fed does will be for a reason, and we'll have to factor in those reasons into our deliberations."

Ilargi: A bit of background on the “nationalization option”, which is imminent and inevitable by now. I prefer to call it the Bulgaria model. It will be an earthquake in the US, from one day to the other there will no longer be a free market, and all pretense will be useless. Just one big state-directed economy. It is coming, soon.

Will Fed Try Something New to Aid Markets?
With worsening strains in credit markets threatening to deepen and prolong an incipient recession, analysts are speculating that the Federal Reserve may be forced to consider more innovative responses -- perhaps buying mortgage-backed securities directly.

"As credit stresses intensify, the possibility of unconventional policy options by the Fed has gained considerable interest, said Michael Feroli of J.P. Morgan Chase. He said two options are garnering particular attention on Wall Street: direct Fed lending to financial institutions other than banks and direct Fed purchases of debt of Fannie Mae and Freddie Mac or mortgage-backed securities guaranteed by the two shareholder-owned, government-sponsored mortgage companies.

Fed officials have said that, at times like these, the prudent course is to evaluate all sorts of ideas, many of which may be rejected. Since 1932, the Fed has had the authority to lend, against collateral, to individuals, partnerships or corporations other than banks in "unusual and exigent circumstances," subject to the vote of five members of the Board of Governors. (The board has seven seats, but two are currently vacant.) This power has never been used.

Mr. Feroli noted that Congress in 1966 gave the Fed temporary authority, made permanent in 1979, to purchase obligations of government-sponsored enterprises, such as Fannie Mae and Freddie Mac. So far, the Fed hasn't purchased GSE obligations except in its short-term repurchase operations. When the federal budget was in surplus, the Fed considered outright purchases of GSE obligations, but judged against such a move as it would reinforce the perception of an implicit government guarantee.

Last week, the Fed said it would lend banks $100 billion starting this week in 28-day loans through its new Term Auction Facility, at which banks can post a wide variety of collateral, including mortgages, corporate loans and other items that have become harder to sell in the open market. And it said it would make money-market loans of as much as $100 billion to its network of 20 bond dealers for 28 days, double the usual maximum term, and structure them to encourage dealers to submit mortgage-backed securities guaranteed by Fannie and Freddie Mac.

Sen. Christopher Dodd (D., Conn.), chairman of the Senate Banking Committee, has suggested creating a new government corporation that could buy mortgage-backed securities. But direct Fed purchases may be more practical and address current problems "head on and immediately," David Ader, U.S. government bond strategist at RBS Greenwich Capital, said in a note to clients. "Plans like Dodd's or ideas like an explicit guaranty for the agencies are far more political and will take a while to work out."

"If there is a message in the madness, it's this: The market is looking elsewhere for a 'solution' to the broad mess that started in housing and will presumably end with housing albeit with some big victims along the way," Mr. Ader said. "Meaning someone or something will have to buy mortgage-backed securities as a starter, to restore liquidity and confidence," he said. "We emphasize that this is what the market is saying, not that it will happen or won't."


. said...

Poor Paulson ... famous in ways he did not care to be ...

Anonymous said...

Hi ilargi,

Hans Redeker, head of currencies at BNP Paribas, said the central banks may soon spring a trap on the markets, clubbing together to boost the dollar. The aim would be to chill the commodities, bringing down energy and food prices. "Shaking out speculators would be an indirect way of reducing the inflation impact from raw materials," he said.

How would this work and do you think it will happen. I am right out of commodities but think one or two on the site might have for pocket book concerns. I am myself expecting a drop in commodities but only in the context of a general stock market drop but that is quite a different kettle of fish than a segment manipulation.

Anonymous said...

Re: Paulson. Leonard Cohen said it well:

"Everybody knows that the dice are loaded
Everybody rolls with their fingers crossed
Everybody knows that the war is over
Everybody knows the good guys lost
Everybody knows the fight was fixed
The poor stay poor, the rich get rich
Thats how it goes
Everybody knows

Everybody knows that the boat is leaking
Everybody knows that the captain lied
Everybody got this broken feeling
Like their father or their dog just died

Everybody talking to their pockets
Everybody wants a box of chocolates
And a long stem rose
Everybody knows..."

Anonymous said...

Eurozone inflation at 3.3%.

No rate cuts from the ECB in sight, as long as inflation is significantly higher than 2%.

The ECB is like the former Bundesbank, and so the EUR is much like the former DM. Just have a look at the EU treaty and at the statutes of the ECB.

Some countries might better leave the Eurozone sooner than later, instead of waiting for rate cuts that, if at all, will come much to late.

And, anyway, how could ECB rate cuts help Spain and Ireland any better than FED rate cuts help the US?

Anonymous said...

Hi Ilargi, I really appreciate the work you do pulling this all together for us. It's a daily read for me.

But I must differ, the US can't become Bulgaria----Bulgaria has a functioning rail transit system! Maybe Somalia or Zimbabwe....

goritsas said...


At least you got one thing correct, the Euro gained all its "value" as a proxy for the DM. If Germany hadn't joined the Euro would have been still born. Never born.

As countries leaving the Eurozone, maybe Berlin would be better off leaving now since they're the ones you seem to think have the most to lose. Get thee back to the Mark, Berlin.

As for rate cuts, at least we agree on something. Rate cuts haven't been and will not be the solution. Solvency is the problem. Solvency will only be returned once the failing institutions have become bankrupt and liquidated. Or, nationalised.

Enjoy your new German government owned banks, frank. They're on their way to a money centre near you today!

Anonymous said...


the state owned banks we already have are the ones with the worst exposure to the CDO mess, IKB and all the Landesbanks.

The private banks have either hidden their exposure really well, or they are not that exposed.

Anyway, if the German banks go down - I better don't think about that too much. Anyway, I sold all my shares a while ago, and I only keep minimal amounts on my bank account.

All the bank CEOs are not trustworthy, look at the BS guy. How can they get away with huge bonuses?

goritsas said...


Wishful thinking may spare you the trauma of facing reality directly, but it just won't change the pain you suffer when you get kicked in the testicles without wearing your box.

If you truly want to believe German based corporate banks are any less exposed to the harsh realities of wonky finance, carry on old chap.

Are you actually suggesting no German corporate bank wanted to earn the fees that came with writing all that business? Do you actually believe they are not counter parties to as much CDSs as any other player? Do you honestly think they have failed to place as much off balance sheet business as the rest? I'm simply stupefied at your almost childlike willingness to hang on to the myths of your indoctrination so steadfastly in the face of such overwhelming evidence.

On the other hand, maybe you're spot on and maybe the German money centre banks participated in nothing their global counterparts did and just kept doing the right thing, whatever that may be.

frank, greed is greed and there's not a German bank out there that's going to remain unaffected by the greed of the men running them.

Anonymous said...


I might be completely naive. Greed is greed. Then again, Germany is the one country without a housing bubble. It is the one country where banks don't even think about selling ARMs to people who can't afford them. Lending standards are still as strict as they used to be.

German culture is not that debt friendly - yet.

I am sure that the corporate banks have a limited exposure to toxic waste, but I still think it is limited exposure.

If you read the financial news, you find a lot of Deutsche Bank people warning about subprime relatively early, early enough to get rid of the toxic waste. Deutsche Bank was also the bank that pulled the IKB life support.

These little facts makes me think they left the party early enough. We will know soon.

Anonymous said...


Apparently, some people here are "stupefied at [Frank's] almost childlike willingness to hang on to the myths of [his] indoctrination".

Would those people care to put up some data? Some figures? Some solid information?

And until you do, please spare us the insults.

That behaviour is contrary to form on this blog.


Ilargi said...


I find the comments so far within the limits, or else I would have acted. But I do appreciate your concern for the manners here, don't get me wrong.

The last article in Debt Rattle Part 2 I just posted supplies more info on German banks.

What I see as the flaw in frank's view lies primarily in his focus on German subprime. We have long established that the problem we are in the middle of is not a subprime one. Subprime is but a small factor in it, albeit one of the first to surface. What's worse is that the media have take to using the term to mislead people into believing the problem is limited to a few lying brokers and borrowers.

German banks are as invested as all others in bad loans and high leverage. Until I see proof they are not, I see no reason to think they are the lone exception. Indeed, some of the loss numbers say they are very much in the middle of the mud.

There is a second issue, one that may be more or less typically German. In the care of bank problems, even failures, there are laws and stipulations in Germany that demand that "healthy" banks bail out the stricken ones.

Not only can that be detrimental enough, it will also, and I think pretty soon, run afoul of European competition laws, particularly on state help for industries.

All this ties german banks closer together than banks in most other countries. This can be very helpful as long as problems don't cut too deep. But if it gets real bad, it can be an impediment to survival.

Anonymous said...

"There is a second issue, one that may be more or less typically German. In the care of bank problems, even failures, there are laws and stipulations in Germany that demand that "healthy" banks bail out the stricken ones."

There are no such laws. There is an emergency fund to bail out savers, not more and not less.

The bailouts of IKB and Sachsen LB were more or less voluntary agreements, and legally absolutely voluntary.

The state, by the way, cannot really bail out corporate banks, EU regulations don't allow that.


Ilargi said...

ric, my fave lines from the song:

Everybody knows that you love me baby
Everybody knows that you really do
Everybody knows that you've been faithful
Ah.., give or take a night or two

Everybody knows you've been discreet
But there were so many people you just had to meet

Without your clothes

And everybody knows


PS Cohen taught me English (through song) when I was even younger than I am now. Years later, I lived just around the corner from him for quite a whlie.

He was inducted into the Hall of Fame this week, and at age 73 is about to depart on a world tour.

I'm a fan.

Anonymous said...

Yeah.... Those are my favorite lines too. But I didn't think they related to Paulson. But, who knows....

Unknown said...

Go Hans, we need gold to collapse for a little bit to provide an entry point.
Bear made me a couple of years worth of rice today.

See, Bear blows up and nothing happens, the sayanims always bail each other out.
BTW, did you see the THIS.
Como se dice "choking your chicken" in Hebrew. LOL.

Anonymous said...

ilargi & ric,
Big Leonard Cohen fan here, also. Some of my fav.lines...
You win a while, and then it's done--
Your little winning streak.
And summoned now to deal
With your invincible defeat,
A Thousand Kisses Deep.