Tuesday, March 18, 2008

Debt Rattle, March 18 2008

Updated 2.30 pm

Ilargi: This is disappointing to many. The Fed says it won't or can't meet expectations.

Fed Cuts by Three-Quarter Point, Suggests More Reductions Likely
A divided Federal Reserve cut interest rates by three-quarters of a percentage point, delivering less than the markets hoped for despite the magnitude of the move.

The Fed's policy-making Federal Open Market Committee voted 8-2 to cut its short-term interest rate target to 2.25% from 3%, bringing cumulative declines in less than two months to two percentage points, the most rapid pace of easing in years.

But it was less than the full percentage point investors had come to expect after the Fed's dramatic intervention to prevent Bear Stearns Cos. over the weekend signaled a heightened degree of concern that the severe credit crunch had put the stability of the financial system at risk. The Dow Jones Industrial Average, up over 300 points just before the Fed's 2:15 p.m. eastern announcement, quickly shed about 75 points.

However, in action that will likely hearten the Fed, the dollar, which was down against the euro, clawed back some gains, and the price of crude oil dipped. In recent months, the dollar had fallen as foreign investors questioned the Fed's willingness to act against inflation, and investors seeking a hedge against both inflation and a weaker dollar had put money into commodities.

"The outlook for economic activity has weakened further. Financial markets remain under considerable stress, and the tightening of the credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters," the Fed said in a statement accompanying the decision

Ilargi: The Fed’s full percent rate cut (1.25%?) later today (announcement set for 2.25 pm EDT) may look good to some market participants, but it will commit outright murder on the dollar. Foreign investment, to which the US economy is fully addicted, dries up fast, protesting Fed policies.

There are also plenty of protesting voices in the avalanche of behind the scenes and smokescreens news on Bear Stearns. That deal is not done yet; we might see some surprises.

The next victims of the Big Fall of ‘08 are lining up, starting with Washington Mutual and National City, all the way down to your local US bank, swept away as an afterthought alongside the country’s big lenders.

Foreign investors veto Fed rescue
As feared, foreign bond holders have begun to exercise a collective vote of no confidence in the devaluation policies of the US government. The Federal Reserve faces a potential veto of its rescue measures.

Asian, Mid East and European investors stood aside at last week's auction of 10-year US Treasury notes. "It was a disaster," said Ray Attrill from 4castweb. "We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed." The share of foreign buyers ("indirect bidders") plummeted to 5.8pc, from an average 25pc over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns.[..]

As of June 2007, foreigners owned $6,007bn of long-term US debt. (Equal to 66pc of the entire US federal debt). The biggest holdings by country are, in billions: Japan (901), China (870), UK (475), Luxembourg (424), Cayman Islands (422), Belgium (369), Ireland (176), Germany (155), Switzerland (140), Bermuda (133), Netherlands (123), Korea (118), Russia (109), Taiwan (107), Canada (106), Brazil (103). Who is jumping ship?

The Chinese have quickened the pace of yuan appreciation to choke off 8.7pc inflation, slowing US bond purchases. Petrodollar funds, working through UK off-shore accounts, are clearly dumping dollars amid rumours that Gulf states - overheating wildly - are about to break their dollar pegs. But mostly likely, the twin crash in the dollar and US agency debt reflects a broad exodus by global wealth managers, afraid that America is spinning out of control. Sauve qui peut.

The bond debacle last week tallies with the crash in the dollar index to an all-time low of 71.58, down 14.6pc in a year. The greenback is nearing parity with the Swiss franc - shocking for those who remember when it was 4.375 francs in 1970. Against the euro it has hit $1.57, from $0.82 in 2000. Against the yen it has smashed through Y100. Spare a thought for Toyota. It loses $350m in revenues for every one yen move. That is an $8.75bn hit since June. Tokyo's Nikkei index is crumbling. Less understood, it is also causing a self-reinforcing spiral of credit shrinkage throughout the global system.

Japanese investors and foreign funds are having to close their yen "carry trade" positions. A chunk of the $1,400bn trade built up over six years has been viciously unwound in weeks. The harder the dollar falls, the further this must go. It is unsettling to watch the world's reserve currency disintegrate. Commodities from gold to oil and wheat are taking on the role of safe-haven "currencies". The monetary order is becoming unhinged.

I doubt the dollar can fall much further. What is it to fall against? The spreading credit contagion will cause large parts of the globe to downgrade in hot pursuit - starting with Europe. Few noticed last week that the Italian treasury auction was also a flop. The bids collapsed. For the first time since the launch of EMU, Italy failed to sell a full batch of state bonds.

The euro blasted higher anyway, driven by hot money flows. The funds are beguiled by Germany's "Exportwunder", for now. It cannot last. The demented level of $1.57 will not be tolerated by French, Italian and Spanish politicians. The Latin property bubbles are deflating fast. The race to the bottom must soon begin. Half the world will be slashing rates this year to stave off credit contraction. The dollar will have a lot of company. Small comfort.

Ask Bear Stearns Stockholders About Moral Hazard
Minutes after news hit the tape Friday that Bear Stearns Cos. was getting emergency funding from the Federal Reserve, the Wall Street humor mill was busy at work.

"Thank you for calling Buy-a-Bank," said an e-mail from a long-time reader. "Please listen carefully as our menu items have changed.
  • For Mandarin, press 1.
  • For Arabic, press 2.
  • For takeover of Bear Stearns, press 3.
  • For Lehman Brothers, press 4.
  • For any monoline insurer, press 5.
  • To purchase residual assets of defunct hedge funds, please stay on the line and an operator will assist you."

We live in perilous times. Crises are cropping up faster than the Fed can propose solutions to stabilize them. Fearful that Asian markets would open the week with Bear Stearns's fate hanging in the balance (it wasn't, but markets tanked anyway), the Fed took yet another emergency action Sunday evening, lowering the discount rate by 25 basis points to 3.25 percent and opening its discount window -- previously a bank- only privilege -- to primary dealers, the 20 firms with which it deals directly.

Why lower the discount rate two days before a regular policy meeting? "Unless the Fed cuts an interest rate, most equity managers don't get it," said Jim Bianco, president of Bianco Research in Chicago. "I doubt 25 basis points would make a difference to primary dealers in need of funding."

The new lending facility came with a new acronym (PDCF, for primary dealer credit facility) and a broad range of investment- grade collateral eligible for overnight loans. Less than a week ago, the Fed created a Term Securities Lending Facility (TSLF) for the same primary dealers. (Give me your tired, your poor, the wretched refuse of your AAA mortgage- backed securities, and we'll lend you up to $200 billion of Treasuries for 28 days.)

To seal the deal on JPMorgan Chase & Co.'s purchase of Bear Stearns for the bargain-basement price of $2 a share (the stock closed at $30 on Friday), the Fed tossed in a $30 billion loan to fund Bear Stearns's "less liquid assets," or junk by any other name. When the central bank said Friday it would provide funding to Bear Stearns via JPMorgan (PDCF wasn't in place yet; just TAF and TSLF), it had "moral hazard" written all over it. The Fed, in bailing out a major financial institution, was encouraging risky behavior in the future.

Bear Stearns was too big to fail, too weak to continue operations, and too intertwined with counterparties to go down without causing serious collateral damage. It was the judgment of Fed policy makers that the risk to the national economy from a margin spiral was greater than the appearance of bailing out a bank. In retrospect, it seems that the too-big-to-fail bank served as a sacrificial lamb, held out (hung-out?) as an example.

Europe idle as US battles meltdown
The US Federal Reserve has resorted to the nuclear option in its ever-more depleted arsenal, invoking a Depression-era clause to shoulder the risk of losses stemming from the collapse of Bear Stearns, and to lend money directly to broker dealers.It is the first time since the Great Depression that the Fed has stepped in directly to absorb credit losses, crossing a line deemed unthinkable just months ago.

The dramatic late-night move on Sunday required dredging up Article 13 (3) of the Federal Reserve Act, which allows the Fed to shower money on almost anybody it wishes by a vote of five governors in "unusual and exigent circumstances". The Fed also took the extraordinary step of cutting the Discount Rate a quarter point to 3.25pc just two days before its scheduled policy meeting in Washington, a move underscoring the high drama of the crisis. The markets have priced in an emergency 100 basis point cut in the key Fed funds rate to 2pc today.

"These are massive, unprecedented actions," said Hank Calenti, from RBC Capital Markets. "Their gravity is likely to scare the markets to death, but the Fed is trying to inhibit a margin-meltdown." Bernard Connolly, global strategist at Banque AIG, said invoking a 1930s-era emergency clause was a "very big deal".

"We have moved one step closer to the direct purchase of assets by the US authorities. I'm afraid this has horrible implications but it may be the only way to avoid a serious risk of Depression. This is a Greek Tragedy set in motion by Alan Greenspan a long time ago," he said. The Fed's hyperactive coups are in stark contrast to the wait-and-see policy of the European Central Bank, which has held rates steady at 4pc since the credit crunch began - despite a jump in the (market-driven) three-month Euribor rate used to price mortgages.

Dominique Strauss-Kahn, the head of the International Monetary Fund, suggested yesterday that Europe had misjudged the severity of the crisis that now threatens to engulf the world economy. "Obviously the financial market crisis is now more serious and more global than a week ago," he said. "It will have significant implications for many countries. At this time, the priority for European governments should be containing the economic damage from the financial market crisis."

The hard-line policy of Europe's key central banks has been a major factor in the dollar's precipitous fall over recent weeks. The euro rocketed to an all-time high of $1.59 in Asian trading after the Fed's latest move. It is being lifted by the ever-wider yield gap between the two sides of the Atlantic. The dollar slide has now reached the point of disorderly rout, causing an investor flight from US bonds and aggravating America's banking crisis. There is a growing fear that these forces are now feeding on each other in a self-reinforcing spiral.

BNP Paribas said the ECB's unwillingness to take pro-active measures to head off a severe slowdown was now contributing to the mood of global crisis. "As long as the Fed is on its own trying to calm money markets, the dollar will fall and this will work as a catalyst to spread weakness," it said.

Jean-Michel Six, chief Europe economist at Standard & Poor's, said the Europeans were in no mood to rescue America. "There is monetary war going on. The ECB view is that Fed is a victim of its own mistakes and should pay for its past crimes. Frankly, they don't see why they should be cutting rates when inflation (3.3pc) is accelerating," he said.

Welcome to the Future
This week's Time Magazine has an article titled "10 Ideas that are Changing the World." Idea #8 is "The New Austerity:"
Americans simply don't have enough money to pay back the mortgage and credit-card debt they've run up. That reality is forcing banks to retrench as loans gone bad shrink their capital bases and falling house prices shrink the collateral that homeowners can borrow against. And it will presumably force chastened consumers to change their ways as well.
Americans simply don't have enough money... What does it mean? It means defaults, economic loss and a spiral of fear and more loss. It means more Bear Stearns. Time's article quotes David Rosenberg, an economist at Merrill Lynch: "I'm not saying we're going back to our parents' level of frugality, but what we have witnessed in the past 20 to 30 years - and especially the parabolic credit growth of the last five years - is going to be bursting in the next decade."

If not back to our parents' level of frugality, then what? To our grandparents' level?

How can anything less be avoided, in an era when most people are already working full speed, maxed-out and yet still need credit to survive? And now they're cutting off the credit!? The result for households will be the same as for Bear - massive liquidation.

And the Fed is in no position to do anything about it. The Fed is currently operating in triage mode - desperately trying to aid the banks and save the global financial system as we know it. But what ammunition does the Fed have to save the average American working stiff, who is up to his eyeballs in debt?

Take a look at these charts of the debt insurers MBIA and Amabac from the latest Elliott Wave Theorist. Notice how quickly the reversals came. The report states:

“When optimisim toward a market continues unrestrained despite deteriorating conditions, the only possible resolution is a "light-switch" type of reversal. When bulls have committed capital to a market and borrowed more to keep investing, and when the rising prices fund even more borrowing to keep them going, there is simply no cushion when the trend reverses.

There is no cash on the sidelines waiting to scoop up bargains; it has all gone into investments and the loans that back them. Additionally, there is no contingent of bears waiting for an entry point, and there are no short positions to cover. So there is nothing to stem a free fall.”

Ilargi: There’s no doubt that the Fed and the White House feel they’re above the law, but the Bear deal still has to be approved first. Shareholders may hold out for a better price. After all, they may have this attitude: "I don't know if there's much difference between Bear Stearns failing and Bear Stearns being sold for $2"

Is market betting on a higher bid for Bear?
Shares of collapsed investment bank Bear Stearns Cos. jumped by 6 per cent to $5.10 (U.S.) in pre-market trading Tuesday, adding to a growing view that investors may not be ready to accept J.P. Morgan Chase & Co.'s $2-a-share bailout bid for the time being. The shares closed at $4.81 on the New York Stock Exchange Monday, down 84 per cent, while J.P. Morgan's shares closed up 10 per cent at $40.31.

The bailout package, backed by the U.S. Federal Reserve Board, was unveiled Sunday. Morningstar analyst Ryan Lentell told MarketWatch that Bear Stearns shareholders may be betting that if they vote down the J.P. Morgan deal for several months, markets may settle down, the value of the brokerage may recover and they will be able to hold out for more money from either J.P. Morgan or even another bidder.

Bear Stearns faces action over cut-price takeover
Enraged shareholders at Bear Stearns are threatening an assault on the company's cut-price takeover by JPMorgan Chase, and its share price yesterday reflected hopes of an alternative outcome for the bank.

With JPMorgan having guaranteed all of Bear Stearns' trading liabilities between now and the closure – or collapse – of the deal, investors and some analysts speculated Bear now had breathing space to restore order to its business, plan a more orderly liquidation of its positions and hope for a rival suitor willing to pay more.

The $2-per-share takeover agreement, brokered by the Federal Reserve, was at a fraction of the price at which the company's shares had been trading on Friday, but it became clear over the weekend that a liquidity crisis would force it into bankruptcy protection in the absence of a deal. Because the book value of the company remained close to $84 per share, chief executive Alan Schwartz had suggested last week – and some investors, analysts and employees argued yesterday – that shareholders would have got more money back if the company had been liquidated.

Some complained Bear Stearns shareholders had been sacrificed by the Fed in its desperation for a fix that did not destabilise the financial system. The company's second largest shareholder, Joe Lewis, the British currency trader whose disastrous investment in Bear Stearns last autumn has lost more than $1bn, predicted shareholders would reject what he called "a derisory offer".

Anger began as early as Sunday night's conference call to discuss the deal. An individual Bear Stearns shareholder asked why the transaction benefited the bank's investors more than a liquidation, but JPMorgan's finance chief Mike Cavanagh said he should direct his question to Bear managers instead. The unidentified called concluded: "I vote not to approve this sale."

Fed faces political heat over Bear Stearns deal
The U.S. Federal Reserve walked into a political firestorm by pledging $30 billion in taxpayer money to guarantee Bear Stearns' assets while struggling homeowners at the core of the financial crisis default on their mortgages.
To be sure, the central bank could hardly sit idly by while the fifth-largest U.S. investment bank collapsed, potentially dragging down other financial firms with it. But by throwing out a lifeline believed to be the biggest single Fed bailout on record, it opened itself up to some pointed criticism.

"As the Fed rides to the aid of Bear Stearns, there is a growing disconnect between the Bush administration's willingness to help Wall Street and its willingness to aid the homeowners facing foreclosure," said Kurt Eggert, a professor at Chapman University's law school in Orange, California. "When it comes to reducing foreclosures, the Bush administration has adopted a 'What me worry?' attitude, hoping that the market will fix the problem with some cheerleading by federal regulators," he said.

In an emergency Sunday night move, the Fed not only gave its blessing to JPMorgan Chase & Co's plan to buy Bear Stearns for $2 per share -- a tiny fraction of where it was trading on Friday -- but agreed to $30 billion in funding. Should Bear Stearns' assets lose value, the Fed -- and therefore U.S. taxpayers -- would be on the hook.

Rep. Ron Paul, the Texas Republican and long-time vocal critic of the Fed, said the latest steps smacked of panic and would pile more pressure on the downtrodden U.S. dollar, inflicting added pain on taxpayers already struggling to cope with rising inflation. "To me, it's an immoral act. It's deceitful and it's stealing from the people who saved money. It should be unconstitutional because technically they have never been given direct authority to create money of out of thin air," he said in a telephone interview.

Sherry Cooper, chief economist at BMO Capital Markets, noted that the Fed's guarantee dwarfed the $3.6 billion deal that it brokered in 1998 to bail out hedge fund Long-Term Capital Management. And that time the money came from a consortium of banks rather than taxpayers' pockets.

Fed deal for Bear Stearns unclear
The Federal Reserve System holds about $900 billion in Treasury securities and other assets, on which it earns interest. The Fed deducts its operating expenses from this income and returns the rest to the federal government.

If the Bear collateral went bad, the Fed would suffer losses, which would reduce the income it turns over to the government. In that sense, these losses could be borne by taxpayers. "We have no way to know how much risk they are taking on," says Stephen Cecchetti, a finance professor at Brandeis International Business School.

Cecchetti notes that over the past three months, the Fed has committed about half of its $900 billion in assets to novel programs designed to ease the credit crisis, such as the term auction facilities and the term securities lending facility.
These are lending programs to banks and primary dealers. "They only have another half left," he says.

That sounds like the Fed could be running out of ammunition, but "half of a big number is still a big number," Cecchetti says. "There's still a lot they can do." The deal will put the Fed in the unusual position of holding assets backed by subprime and other mortgages. Does this mean the Fed will have an incentive to see homeowners bailed out of their mortgages? "I would say the chances are excellent for that to happen," says Robert Willens, a Wall Street accounting expert.

For Bear Stearns shareholders, the deal probably doesn't feel like much of a bailout. For each share they own, they will get about $2 worth of JPMorgan stock, even though Bear's shares closed at $30 each on Friday and were in the $80s most of February. "I don't know if there's much difference between Bear Stearns failing and Bear Stearns being sold for $2," says UC Berkeley economics Professor Martha Olney.

Ilargi: Take a good look. This is a slaughterhouse. The entire US banking system is falling apart, led by the mid-size banks and big mortgage lenders. In their fall, they will drag the rest down with them.

We will start to see bank failures very soon. There are no buyers out there. The only thing left to do is for Washington and the Fed to buy the mortgages and let the taxpayer and the shareholders swallow the losses. As we speak, Fannie and Freddie are being prepared for just that. The Federal Housing Administration and Federal Home Loan Banks will be used as well.

National City, WaMu Hit Hard As Worry Slams Midtier Lenders
Investors turned to an often overlooked corner on Wall Street: midsize and regional banks such as National City Corp. and Washington Mutual Inc., whose shares were hammered as fears spread that they could be in new danger from the expanding financial crisis. National City fell 43%, amid speculation the Cleveland company has put itself up for sale but has been unable to find a buyer. National City disclosed it has hired Goldman Sachs Group Inc. as a "capital adviser".

National City attributes the slide in shares to "the market's reaction to the Bear Stearns announcement," a spokeswoman said. Washington Mutual shares dropped 13%, or $1.35, to $9.24 on the NYSE, after Moody's Investors Service cut the company's debt rating Friday to one step above junk status. Analysts struggled yesterday to predict how the market gyrations would play out among the midtier banks. "Among people's big concerns is the pressing need for capital in the U.S. banking system," Chris Low, chief economist for FTN Financial, said in a research report. "How can banks raise capital after this example?"

Some bank executives said the federal government's role in encouraging the Bear Stearns Cos. bailout and providing as much as $30 billion in financing make it much more likely that buyers will wait for similar incentives or forbearance on their own capital levels. Others said the forceful role of banking regulators in structuring the deal for J.P. Morgan Chase & Co. to acquire Bear Stearns means the government will move aggressively to stop a domino effect of bank failures.

"What the Bear Stearns news means is, the federal government is not going to allow significant financial institutions to fail, and that would include WaMu," said analyst Frederick Cannon at Keefe, Bruyette & Woods. To be sure, few analysts and investors say they expect the failure of any sizable U.S. banks, or those with a market value of $1 billion or more.

What is more likely, they said, is that the Federal Deposit Insurance Corp., which insures bank deposits, and other regulators would encourage sales and negotiate incentives. One thing is clear: Regulators are pressuring banks of all sizes to air their dirty laundry now. Regulators have been increasingly vocal about the need for banks to raise capital. Bankers said regulators are taking an increasingly hands-on approach in evaluating their loan portfolios.

So what banks are in trouble? National City and WaMu top many investors' lists. Analyst David Hilder of Bear Stearns cites banks with big real-estate exposure relative to their asset size. WaMu has 71% of its loans in real estate, compared to 51% for National City and 47% for Huntington Bancshares Inc. of Columbus, Ohio. according to Mr. Hilder.

But further losses in the option-ARM mortgage portfolio of Downey Financial Corp., a small bank in Newport Beach, Calif., contributed to concerns that the crisis is deepening. Downey reported nonperforming assets of 10.93%. Moody's predicted WaMu would have to set aside loan-loss reserves of $12 billion, far more than previously predicted. WaMu has cut jobs and its dividend and raised $3.7 billion in preferred shares, limiting its options. Many investors fear that National City may face significant losses at the end of the current quarter March 31, on troubled assets, perhaps including some of the remaining $6 billion in loans it held on to when it sold First Franklin Financial Corp., the subprime lender.

WaMu, National City Plunge as Buyout Prospects Fade
National City Corp., Ohio's biggest bank, fell the most in 24 years in New York trading, while Washington Mutual Inc., the largest U.S. savings and loan, fell to its lowest since 1995 on waning prospects for takeovers. National City fell as much as 47 percent. Washington Mutual declined 13 percent. It was the second straight session in which they led the list of worst performers in the 24-member KBW Bank Index.

JPMorgan Chase & Co.'s $240 million purchase of Bear Stearns Cos. removed one of the largest potential buyers from the market. Analysts including Richard Bove of Punk Ziegel & Co. have said losses on home loans made Washington Mutual and National City takeover targets. The price for Bear Stearns -- 90 percent less than the firm's market value last week -- cast doubt on the value of other companies tied to mortgage lending.

"Morgan is out of the picture in terms of more deals until the end of the year at the very earliest," said Gerard Cassidy, an analyst at RBC Capital Markets, who rates National City "underperform." He attributed Cleveland-based National City's plunge today to "fear that there are more severe problems in its loan and securities portfolios."

"Our stock's volatility today is related to the market's reaction to the Bear Stearns acquisition," National City spokeswoman Kristen Baird Adams said. David Barr, a spokesman for the Federal Deposit Insurance Corp., the regulator that guarantees accounts up to $100,000, said his agency "doesn't comment on open and operating institutions." David Hendler, an analyst with CreditSights Inc., said in a report today that Seattle-based Washington Mutual is similarly vulnerable. "There could be a lack of many buyers in light of the deteriorating credit quality at WaMu and since potential buyers also have their own internal issues to contend with."

National City, which once ranked among the nation's biggest subprime home lenders, has been raising capital after losing $333 million in the fourth quarter. The bank is seeking a buyer, Dow Jones reported March 13, citing unnamed sources. "Given the asset quality problems facing National City, we sense buyers could be wary of stepping in until there is greater clarity about the downside loss potential," Hendler said. The fallout spread to Countrywide Financial Corp., the biggest U.S. mortgage lender, which fell 9 percent. Investors have been concerned that Bank of America Corp. may revise or scuttle its pending takeover bid for Countrywide, originally valued at about $4 billion.

IndyMac Bancorp, the second-biggest independent mortgage company, dropped 9 percent. The company is based in Pasadena, California. Banks stuck with the greatest amount of loans on which they don't receive interest may trade as low as 10 percent of book value, or assets minus liabilities, Cassidy said, noting these levels were last seen during the recession of the early 1990s. The average price of the banks in the Standard & Poor's 500 was more than 100 percent of book value at the end of 2007.

Large U.S. banks including Citigroup Inc. and Wachovia Corp. may tumble as much as 50 percent because of more loan losses and writedowns of securities, Oppenheimer & Co. analyst Meredith Whitney said in a Bloomberg TV interview today. "Banks have put on a lot of goodwill, which is going to turn out to be worthless after this credit cycle," Whitney said. Citigroup, the largest U.S. bank by assets, declined 5.9 percent while Wachovia slipped 3.6 percent. Wachovia is the fourth-biggest U.S. bank.

Plans Would Boost Funds For Mortgages
The Bush administration, in an effort to stabilize the housing market, is preparing two new initiatives aimed at creating more funding for mortgages by relaxing constraints on Fannie Mae, Freddie Mac and the Federal Housing Administration. Both efforts are in advanced planning stages, though neither has received final approval.

The Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae and Freddie Mac, is close to reducing -- but not eliminating -- an excess-capital requirement for the government-sponsored entities, people familiar with the matter said. This would give the companies more flexibility to buy and securitize loans. That, in turn, would allow the companies to play a bigger role in helping the housing market regain its footing.

Fannie Mae and Freddie Mac would both be expected to raise more capital, providing more of a shock absorber against potential losses. "I'm anticipating a conversation we'll be having with Fannie and Freddie about acquiring more capital here," Senate Banking Committee Chairman Christopher Dodd told reporters yesterday. The Connecticut Democrat said the companies would have to find a way to "walk the line between protecting shareholder interest" and meeting their mission to promote affordable housing.

Federal Reserve Chairman Ben Bernanke met with Fannie Mae Chief Executive Daniel Mudd yesterday. The session had been scheduled for several weeks. Both Mr. Bernanke and Treasury Secretary Henry Paulson have urged Fannie Mae and Freddie Mac to raise more capital. That would give the companies more leeway to pump liquidity into the conforming- and jumbo-loan markets. "We are putting things in place that give Fannie and Freddie good stuff to buy," House Financial Services Committee Chairman Barney Frank (D., Mass.) said in an interview.

Ilargi: Do we get the picture?”JPMorgan Chase has not invested a single cent in its [..] purchase of Bear.”

Thousands face redundancy as Bear Stearns' new owners look for cuts
Department heads from JPMorgan Chase yesterday began redundancy talks with their counterparts at Bear Stearns after securing a rescue deal late on Sunday evening to buy the bank for 6 per cent of its value last week. While JPMorgan Chase refused to comment yesterday, it is thought that the American bank may be considering making half of the 14,000 Bear staff redundant.

JPMorgan Chase is expecting the deal to cost $6 billion (£3 billion) in expenses, from severance and retention to waves of litigation and asset writedowns. That comes after $30 billion of Bear’s bonds were underwritten by the US Federal Reserve. Shares in Bear Stearns, which was acquired by JPMorgan Chase for about $240 million – representing a 94 per cent discount to Friday’s closing price, collapsed 84 per cent to $4.81, still above the $2 per share offer price. The deal was unanimously recommended by the Bear board but still requires shareholder approval.

Redundancy talks began as it emerged that JPMorgan Chase has not invested a single cent in its all share purchase of Bear. Yesterday, it became clear that the credit line, of an undisclosed sum, offered by JPMorgan Chase to Bear on Thursday night to keep the struggling bank afloat, used rescue funds which had been provided by the Federal Reserve Bank of New York. Jim Rogers, who co-founded the Quantum Hedge Fund with George Soros in the 1970s, said: “Jamie Dimon [chief executive of JPMorgan Chase] has done a great deal because the Federal Reserve is paying for it.”

Yesterday, executives who run JPMorgan Chase’s divisions such as investment banking and fixed income, walked over 47th Street in Midtown Manhattan to their neighbour Bear Stearns and began talks about integration. Significant redundancies are expected at Bear Stearns, which on Thursday evening, effectively experienced a run on deposits by its customers and counterparts, fearing that one of the world’s largest custodians was about to go bust.

It is understood that JPMorgan Chase wants to keep Bear’s prime brokerage, global clearing platform, equities and energy trading businesses. However, there is significant overlap between Bear and JPMorgan Chase’s fixed income and investment banking divisions - which form the bulk of Bear’s business. It is not clear whether JPMorgan Chase is seeking to sell the Bear Stearns tower, the bank’s global headquarters, on Madison Avenue, prime Manhattan real estate.

Bear fire sale marks start of capitulation
The Fed has supplemented its action in forcing the JP Morgan takeover with a whole raft of other, previously unthinkable, measures. Some $30bn of Bear Stearns' assets are to be directly underwritten by the Fed, and, perhaps even more significantly, the Fed's discount window is to be made available for the first time to the entire broker-dealer network.

What's more, the length of time bankers can borrow has been substantially increased and the quality of security accepted has been widened. Had all this been available a week ago, it might have saved Bear Stearns. As it is, Mr Dimon ends up with what may come to be seen as the bargain of the decade, assuming furious shareholders aren't able to scupper the deal. For just $236m, he gets Wall Street's fifth largest investment bank.

Bear Stearns' New York head office alone is worth more than $1bn. Bucking the trend among banking stocks, JP Morgan bounded nearly 10 per cent, helping to push the Dow Jones Industrial Average higher on another turbulent day for the index. For banking stocks as a whole, there was no respite as investors absorbed the full enormity of what's just happened. Yet looking through the smoke and dust, there are a few positives to be drawn from the demise of Bear Stearns. We are beginning to enter that phase of a financial crisis which is known as "capitulation".

Up until now, bankers, hedge funds and other investors have tried to hang on to their mortgage-backed securities and other forms of distress debt in the belief that eventually the market will recover and they'll be able to sell at a more reasonable price. That's changed in the last couple of weeks. As credit becomes ever scarcer, many no longer have any choice but to sell. They don't have the liquidity to ride it out.

Bear Stearns can be seen as a symbol of that process. To sell such a proud name for such a pittance is a point of surrender that would not have been even remotely conceivable six months ago. Yet it is events like this which provide markets with their eventual catharsis by creating bargains that bring back the buyers. Regrettably, Bear Stearns is unlikely to be the end of the workout but only one of a number of similar acts of capitulation, possibly lasting many months.

In wake of JPMorgan's rescue of Bear Stearns, worries over which investment bank may be next
Just a few blocks away from Bear Stearns' soaring headquarters on Manhattan's Madison Avenue, revelers in fuzzy green hats, beads and kilts were marching in the annual St. Patrick's Day parade. There was a parade of a different sort at the building, too.

Bear Stearns Cos. employees trudged boxes of their personal belongings out of the investment bank while managers from JPMorgan Chase & Co., which bought its rival on Sunday for a meager $2 a share, filed into it for the first time from their headquarters directly across the street. Other Bear Stearns employees huddled in the chilly New York wind to smoke cigarettes and talk. "It's my first job after school," said Ki Biyung, a Bear Stearns operations analyst. "It's overwhelming for me."

"I thought it was a big company, it'll be good experience," he said. "Now, after a couple of months, something like this happens."
It was an ignominious end for one of Wall Street's most storied investment banks — sold to JPMorgan for a bargain-basement $260.5 million. The deal was fast-tracked by the federal government to avoid a bankruptcy.

Investors had a rough day as well. JPMorgan's cut-rate buyout of Bear Stearns drove some jittery investors to dump shares of major investment banks and left others worrying about who may be next. Especially scary was the swiftness with which Bear Stearns was forced to sell out, for just 10 percent of its market value last week.

The federal government offered reassurances to a veering Wall Street that no other financial institutions were set to collapse. While people with bank accounts elsewhere may have little to fear, Bear Stearns' big investors will be getting a fraction of what their shares were worth. That includes the 14,000 employees, who own nearly a third of the company and will likely be facing mass layoffs.
The rescue effort, which came after the risks Bear Stearns took brought it to the brink of bankruptcy, may also have changed investment banking itself forever.

Investors can no longer bank on the certainty that the pillars of Wall Street will churn out profits even amid an economic downturn, which was once the case. "You're going to have some very weak players pushed out of business," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. He said JPMorgan's purchase of Bear Stearns and Bank of America Corp.'s acquisition of mortgage lender Countrywide Financial Corp. are probably not the only rescues the industry will see during this credit crisis.

Wall Street's other big investment houses — Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Morgan Stanley — will face some tough questions when they begin reporting first-quarter results Tuesday. Lehman CEO Richard Fuld denied the firm was facing similar liquidity problems, but the stock lost 20 percent of its value Monday.

My optimism on Bear Stearns and the US Fed was misplaced
I have a confession to make. I seriously underestimated the depth of the current crisis. The collapse of Bear Stearns and the failure of the world's most powerful central bank to disguise its rising panic is a sobering spectacle for an instinctive market optimist.The events of the past few days have shattered the illusion that the Federal Reserve can always ride to the rescue.

One by one, Ben Bernanke fires his silver bullets and one by one they bounce off the advancing credit Terminator. Indeed, Sunday's unscheduled intervention was the first that did not invite even a temporary market bounce. Investors suspect the Fed is losing the fight. Each new relaxed lending facility is a variant of the same desperate bid to right the listing ship.

The Fed is throwing open every spigot, flushing cash down the pipes, doing everything it can to free up the sclerotic plumbing of the world's financial system. I have no doubt that today it will throw another rate cut into the mix. Three quarters of a point looks certain, perhaps a full percentage point cut. The Fed is running out of road. Like the stuttering Brains from Thunderbirds, Bernanke is straining every mental sinew to think of something new to fend off impending disaster.

The difference between the TV show and reality is that we can't rest assured that International Rescue will pull it off before the next ad break. For the first time since the economic anarchy of the 1970s, sensible people are seriously considering the possibility that the machine might actually grind to a halt.

As the lubricant of trust between the world's financial institutions goes up in black smoke, the metallic screeching of imminent seizure is deafening. Forget Barings or Long Term Capital Management. These were the individual company failures that proved the system was robust. Today, the system itself is at risk.

White House Signals More Steps Are Possible
President Bush on Monday welcomed the Federal Reserve’s sweeping intervention in the nation’s financial markets over the weekend, while his press secretary suggested that other steps could be possible. After conferring with his economic aides at the White House in the morning in the first of two meetings on the turmoil, Mr. Bush singled out the Treasury secretary, Henry M. Paulson Jr., saying that he had shown “the country and the world that the United States is on top of the situation.”

“I want to thank you, Mr. Secretary, for working over the weekend,” Mr. Bush said. His press secretary, Dana M. Perino, said Mr. Bush had conferred with Mr. Paulson by phone at 4:45 Sunday afternoon as the Fed and JPMorgan Chase were laying plans to salvage the wreckage of Bear Stearns. As he did in New York on Friday, Mr. Bush again projected an optimistic front on Monday, though his remarks and his schedule reflected a growing concern about the markets on a day that would otherwise be devoted to the traditional St. Patrick’s Day meetings and lunches.

“One thing is for certain,” Mr. Bush said in brief remarks in the Roosevelt Room. “We’re in challenging times.”
He was surrounded by, among others, Mr. Paulson; the under secretary of the Treasury for domestic finance, Robert K. Steel; the director of the National Economic Council, Keith Hennessey, and the chairman of the Council of Economic Advisers, Edward P. Lazear. It was not clear what other steps the White House might be prepared to take, but Mr. Bush’s aides seemed sensitive to the accusation that the government had bailed out Bear Stearns, or at least facilitated a bailout.

“He recognizes that there’s going to be questions in terms of the moral hazard,” the press secretary, Dana M. Perino, said, echoing a phrase Mr. Paulson used on Sunday. Mr. Bush, however, suggested he would support additional measures. “We obviously will continue to monitor the situation and when need be, will act decisively, in a way that continues to bring order to the financial markets,” he said. On Monday afternoon, Mr. Paulson disputed any suggestion that the moves to save Bear Stearns signaled that Wall Street could expect more help from the government than could ordinary homeowners.

“What I would say is, if you would ask the Bear Stearns shareholder in terms of what has happened to their value, that I don’t think any of them would think that this has been a good outcome for them,” Mr. Paulson said. “And when we talk about moral hazard, I would say look at the Bear Stearns shareholder,” Mr. Paulson went on. “This is what happens when there is a liquidity problem, and there was a liquidity problem.”

Bear Naked Lenders
The best thing about Sunday night's Federal Reserve-inspired sale of Bear Stearns to J.P. Morgan Chase is the price. At $2 a share for a total of $236 million, this was less a "bailout" than a Fed-mediated liquidation sale. Bear wasn't too big to fail after all, though there's still the issue of the Fed expanding its own moral and financial hazard in the form of $30 billion in guarantees on Bear Stearns securities.

Bear shareholders will essentially be wiped out in this close-out sale, with British billionaire Joseph Lewis alone reportedly enduring paper losses of $800 million on his 9.6% stake. Even on Wall Street, that's real money. Jimmy Cayne, the Bear Chairman and former CEO who supervised this disaster, will lose a bundle on his nearly 5% holding. This makes the Bear sale different from the Fed-managed Long-Term Capital Management rescue of a decade ago, when investors were left substantially intact.

We doubt many bankers will look at Bear's fate and claim there's no punishment for financial error. Bear employees, who hold about one third of its shares, are angry and grousing that they could get more cents on the equity dollar in Chapter 11. Some may even be inclined to vote against the sale, but then they'd have to find a market for that $30 billion in mortgage securities that no one wants to finance.

The hard capitalist truth is that Bear's most senior managers have mainly themselves to blame. They bought their second or third homes with fabulous bonuses during the good times, and they must now endure the losses from Bear's errant investment bets. Bear took particular pride in its risk management, but it let its standards slide in the hunt for higher returns during the mortgage mania earlier this decade. There's no joy in seeing a venerable firm expire, but it has to happen if financial markets are going to have any discipline going forward.

As for J.P. Morgan and CEO Jamie Dimon, remind us to have him negotiate our next contract. He gets Bear's best assets, including a Manhattan building said to be worth $1.4 billion by itself. Meantime, he gets the Fed to backstop Bear's riskiest paper. We don't know the quality of that paper -- and we hope the Fed has done its due diligence -- but taxpayers are now on the hook for future losses. Some previous Fed officials might have told Mr. Dimon to take all of Bear or nothing at that $2 liquidation price, but Ben Bernanke and Tim Geithner of the New York Fed seem to have been desperate to get a sale announced before markets opened on Monday. Mr. Dimon took them to school.

Ilargi: Sign of the times: profits at both Lehman and Goldman Sachs plunge by more than 50%, and that’s seen as a good thing.

Lehman Net Income Declines 57%, Less Than Estimated
Lehman Brothers Holdings Inc. said profit fell 57 percent, less than analysts estimated, a day after the fourth-largest U.S. securities firm lost 19 percent of market value following the fire sale of Bear Stearns Cos. First-quarter net income declined to $489 million, or 81 cents a share, from $1.15 billion, or $1.96, a year earlier, the New York-based firm said in statement today. Lehman rose 14 percent in early trading after profit beat the 72-cent average estimate of 16 analysts surveyed by Bloomberg.

Chief Executive Officer Richard Fuld was forced yesterday to reassure shareholders when he said steps taken by the Federal Reserve to support brokerages eliminated the danger of a liquidity crisis. Bear Stearns ran out of cash as clients withdrew funds, forcing CEO Alan Schwartz to sell the fifth- largest U.S. securities firm to JPMorgan Chase & Co. for $2 a share, 90 percent less than the market value two days earlier.

"The game here is confidence," said James Hardesty, president of Baltimore-based Hardesty Capital Management LLC, which oversees $700 million for clients. "The profit figures depend on how illiquid assets are marked to market, and investors don't trust those numbers."

Earnings were depressed by a $1.8 billion writedown caused by the slump in the mortgage market. The reduction in asset valuation pushed fixed-income revenue 88 percent lower, to $262 million. Other business grew. Equities revenue rose 6 percent to $1.4 billion. Merger advisory fees climbed 34 percent to $330 million and investment-management revenue jumped 39 percent to $968 million.

Goldman Sachs Profit Falls 53%, Less Than Expected
Goldman Sachs Group Inc., the world's biggest securities firm by market value, reported a smaller-than-estimated 53 percent drop in first-quarter profit after asset writedowns and lower fees from investment banking. Net income fell to $1.51 billion, or $3.23 a share, in the three months ended Feb. 29 from $3.2 billion, or $6.67, a year earlier, the New York-based firm said in a statement today.

Chief Executive Officer Lloyd Blankfein is navigating a credit market crisis that led the U.S. Federal Reserve and JPMorgan Chase & Co. to organize a bailout and then takeover of Bear Stearns Cos. Goldman's profit dropped the most since 1999, reduced by $1 billion of writedowns for high-yield loans and a $135 million decline in the value of its stake in Beijing-based Industrial & Commercial Bank of China Ltd. Losses on mortgage loans and related securities were about $1 billion.

Goldman has stayed "above the fray and probably faces the least amount of risk," said Ralph Cole, who helps oversee $2.7 billion, including Goldman shares, at Ferguson Wellman Capital Management in Portland, Oregon, before the earnings release. "People have a tremendous amount of confidence in them and that's what it comes down to these days."

Greenspan: Economy worst since WWII
Today's economic condition could likely be seen as "the most wrenching since the end of the second world war," wrote former Federal Reserve chairman Alan Greenspan in the Financial Times on Monday.

The U.S. financial crisis won't end until housing prices stabilize, but that won't happen for months, wrote Greenspan.
The models used by the finance industry to determine risk and measure economic strength are too simple to fully account for human responses, he said. "We cannot hope to anticipate the specifics of future crises with any degree of confidence," he wrote.

However, Greenspan said that he hoped the fallout would not take away the finance industry's ability to regulate itself. Market flexibility and free competition are the most reliable safeguards against economic trouble, he said; the system which is supposed to guard against unanticipated losses will need to be overhauled

China to Take 'Forceful' Steps on Inflation, Wen Says
China's Premier Wen Jiabao pledged to take "forceful" steps to damp inflation at an 11-year high, a sign that overheating remains the government's main concern even as financial-market turmoil threatens global growth. The government's 4.8 percent inflation target for 2008 will be "difficult" to achieve, Wen said today at his annual press conference given at the end of the National People's Congress meeting in Beijing. China will tackle soaring prices with "appropriate and forceful" measures, he said.

Stocks tumbled the most in seven weeks on concern China's battle against inflation will slow the economy, which expanded 11.2 percent in the fourth quarter. Central bank Governor Zhou Xiaochuan signaled today he may raise interest rates just as the U.S. is poised to cut them to stave off a recession. "Fighting inflation remains the top priority for the Chinese government and there's room for more tightening," said James Liu, who helps oversee about $1 billion at APS Asset Management in Shanghai.

"A slowing Chinese economy won't be good for Asian neighbors." China's benchmark CSI 300 Index plunged 5.1 percent to the lowest in eight months in Shanghai, reversing an earlier gain. The index has slumped 30 percent this year on concern that a housing crisis would push the U.S. economy, China's biggest market, into a recession.

U.S. Feb. single-family housing starts fall to 17-year low
New construction on single-family homes dropped by 6.7% in February to a seasonally adjusted annual rate of 707,000, the lowest in 17 years, the Commerce Department reported Tuesday.

Total housing starts, including multifamily units, dropped 0.6% to a seasonally adjusted annual rate of 1.065 million, better than the 990,000 pace expected by economists surveyed by MarketWatch. Building permits, a leading indicator of construction, fell 7.8% in February to a seasonally adjusted annual rate of 978,000, the lowest since the autumn of 1991.

It was the biggest monthly decline in 13 years.

A gloomy outlook, especially in this country
Will the latest actions by the US Fed and by the Bank of England to increase liquidity in the market in the wake of the Bear Stearns collapse prove any more effective than its measures last week? Certainly, the US Fed and Treasury have acted with impressive determination and speed (in marked contrast to the stuttering response to the collapse of Northern Rock by the Bank of England and the Treasury).

The Bear Stearns rescue, the reduction in lending rates and the added liquidity are all there to prove that the US authorities will do whatever they think it takes to stop this crisis spreading and restore confidence. That is all well and good. The trouble is, however, that so long as there is no certainty about exposure, nor about the state of the housing market, then banks will continue to be cautious about lending. So long as this is true, reducing interest rates and even increasing liquidity will not serve to open up the credit markets.

The added problem is that the troubles in the financial section are occurring just as the US is moving into recession, while the economies of China and India, the new engines of growth, are beginning to slow under the pressure of rocketing raw material and commodity prices and rising domestic inflation. When the US sneezes, the rest of the world no longer necessarily catches pneumonia. But when the American economy freezes just as the price of raw materials goes through the roof and the banking system seizes up, then the global outlook is gloomy.

This is not the end of capitalism. Eventually, the bottom will be reached in the US housing market, the financial institutions will have a clear idea of their liabilities and, slowly, confidence and lending will return. But who knows how long this will take? In the meantime, the world faces the depressing prospect of a prolonged period of slowdown as the ramifications of a crisis caused by profligate American bankers are worked out around the globe.

That uncertainty is particularly profound in the UK, which has a similar reliance on housing prices as its main engine of growth, plus a greater dependence than any other major country on financial services as a mainstay of its economy, foreign earnings and investment.

Ilargi: The crunching credit on the local level goes on, even if it doesn’t have the headlines these days.

Auction-Bond Failures Deplete New Hampshire Fund
The fallout from the collapse of the auction-rate bond market has infected New Hampshire, where the state college and university system was forced to tap its reserves to cover more than $1 million in extra borrowing costs. "It hurts," Ken Cody, associate vice chancellor of finance for New Hampshire's state college and university system, said in a phone interview. "We have very limited resources."

Yields on the system's bonds rose to as high as 7.8 percent last month from 3.9 percent in January after auctions run by Wall Street firms failed, depleting funds for campus maintenance, Cody said. The system converted $84.3 million of bonds to debt with fixed payments and plans to bid at an auction of its remaining $63.6 million of securities this week to reduce rates, he said.
New Hampshire is among municipal borrowers likely to offer to buy their own securities after the U.S. Securities and Exchange Commission said March 14 that the bids wouldn't run afoul of laws against market manipulation. Lehman Brothers Holdings Inc., which managed the auctions, prevented the system from bidding last month, Cody said.

The $330 billion market for auction-rate securities imploded in February after dealers who supported it for more than two decades stopped bidding for bonds investors didn't want, pushing interest costs to as high as 20 percent. Since then, almost 70 percent of the auctions for debt sold by cities, colleges, student lenders and closed-end funds have failed each week, according to data compiled by Bloomberg.

Auction rates on debt that resets every seven days were 6.41 percent as of March 12, up from an average 3.94 percent in the previous year, according to a Securities Industry and Financial Markets Association index. The average rate reached a high of 6.89 percent on Feb. 20. Zurich-based UBS AG, Europe's biggest bank by assets, was sued on March 14 by a client for investing in auction-rate bonds. UBS marketed the securities as being "just as good as cash," according to the complaint filed in Manhattan federal court. A UBS spokeswoman, Kris Kagel, said in an e-mailed statement that the bank is "working with clients on a case-by- case basis, to restore their immediate liquidity needs."

Issuers from Cleveland to Chicago's school system to Jefferson County, Alabama, which was downgraded to below investment grade as a result of the higher auction costs, face resets on their debt this week. The Port Authority of New York and New Jersey, owner of bridges, tunnels and airports around New York City, sold $700 million of bonds March 12 to refinance auction securities after rates on its debt soared to 20 percent Feb. 12 from 4.3 percent the week before.

State and local governments sold more than $20 billion of bonds the past two weeks, about the same amount for all of February, data compiled by Bloomberg show. About $4.2 billion of bonds are scheduled to be offered this week, including Wisconsin, which is selling $965 million to replace auction debt. As issuers rush to get out of auction debt, the new bonds they sell are weighing on the municipal market. Long-term tax- exempt municipals fell last week, pushing 30-year yields 5 basis points higher to 4.88 percent, Municipal Market Advisors data show.

"There's been a big move up in yield," said Anthony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York. The higher yields are an "opportunity," said Crescenzi, and his company is establishing an asset management division to buy municipal bonds. The bonds, which are tax-exempt, yield more than Treasuries, whose interest is taxable. The 30-year Treasury bond yielded 4.36 percent on March 14.

The University System of New Hampshire converted two series of its auction-rate securities last week to one-year bonds yielding 3 percent, according to Cody. The $84.3 million in debt is insured by Ambac Assurance Corp. Ambac, a unit of New York-based Ambac Financial Group Inc., was cut to AA from AAA by Fitch Ratings in January. It's still rated AAA by Standard & Poor's and Moody's Investors Service. Concern that the creditworthiness of bond insurers may deteriorate amid writedowns on debt tied to subprime mortgages led investors to shun debt backed by the guarantees.

New Hampshire's university system has $63.6 million in auction debt outstanding insured by XL Capital Assurance, which was downgraded from AAA by all three rating companies. It will convert that debt to variable-rate demand bonds this month, Cody said.
"It's worse than worthless," he said about the XL insurance. The system is also converting $97.3 million in variable-rate demand bonds insured by XL, a unit of Hamilton, Bermuda-based Security Capital Assurance Ltd. Rates on that debt rose to 11.1 percent last month, accounting for almost half the higher borrowing costs the school is confronting, Cody said.

Ilargi: Kerviel was released today.

'Colleagues watched' SocGen trader Jerome Kerviel betting
Société Générale faces fresh embarrassment amid claims by Jérôme Kerviel, the rogue trader who lost €4.9 billion, that colleagues watched as he made unauthorised bets on European stock markets.

Mr Kerviel said he used his manager's computer to take positions of up to €600 million on occasions. His manager was present and looking over his shoulder as he did so, the trader told Renaud van Ruymbeke and Francoise Desset, the magistrates leading the inquiry

Mr Kerviel's comments appear to fly in the face of SocGen's claims that he was a machiavellian genius who hid his activities from other staff. They lend weight to his defence lawyers' argument that he acted with the tacit approval of executives when he built up positions totalling €50 billion. The maximum authorised ceiling for the entire Delta One desk, where Mr Kerviel worked, was €125 million

Dollars tough to sell on streets of Amsterdam
The U.S. dollar's value is dropping so fast against the euro that small currency outlets in Amsterdam are turning away tourists seeking to sell their dollars for local money while on vacation in the Netherlands.

"Our dollar is worth maybe zero over here," said Mary Kelly, an American tourist from Indianapolis, Indiana, in front of the Anne Frank house. "It's hard to find a place to exchange. We have to go downtown, to the central station or post office."

That's because the smaller currency exchanges -- despite buy/sell spreads that make it easier for them to make money by exchanging small amounts of currency -- don't want to be caught holding dollars that could be worth less by the time they can sell them.

The dollar hovered near record lows on Monday, with one euro worth around $1.58 versus $1.47 a month ago.

Ontario Teachers says talks to banks often on BCE
The Ontario Teachers' Pension Plan, which is heading a consortium buying Canadian telecommunications giant BCE Inc, is in regular talks with the banks funding the C$34.8 billion buyout deal, the pension fund's head said on Monday.

Teachers' Chief Executive Jim Leech said in an interview with Reuters that the pension fund, Canada's third largest, was working hard to satisfy all the conditions of the deal so that it could move toward closing the transaction.
Leech also said Teachers is interested in investments in the power and airports sectors.

ABCP restructuring plan gets court approval
An Ontario Superior Court judge has approved a plan to restructure 20 trusts tied up with $32 billion of frozen asset-backed commercial paper. In a filing under the Companies' Creditors Arrangement Act, the Pan-Canadian Investors Committee for Third-Party Structured ABCP asked the court to appoint Ernst & Young Inc. to act as monitor while the trusts are restructured. The motion was granted.

The committee has been working since last summer to get the money unstuck, and has asked the court to call a meeting of the ABCP noteholders to approve its restructuring plan. "The committee is unanimously supporting the plan, and I am recommending that all noteholders approve the plan in order to avoid a forced liquidation of conduits and the significant losses that would likely ensue if the plan were not to move forward," committee chairman Purdy Crawford said in a release.

Under federal creditor protection law, the restructuring plan must be approved by majority of the noteholders, as well as by voting noteholders who own at least two-thirds of the value of the ABCP. The noteholders will have a month to look over the details of the restructuring. They'll vote on it in April.

In a conference call Monday evening, Crawford said each noteholder would get one vote, regardless of the size of their individual stake. "We are really committed to do everything we can help individual or small investors," he said. But he said it's too early to say how much of that $32 million investors will get back.  "If things stabilize in the next few months, the chance of recovery will be much greater, but I wouldn't want to say that everyone is going to get all their money back at maturity."

While companies, pension funds and financial institutions are among the big noteholders who've been left with frozen debt they can't sell, hundreds of smaller investors who parked their money in what they thought was a secure spot have also been caught by the credit squeeze.


Anonymous said...

Will somebody PLEASE explain this rally in equities to me? Who on earth would buy? Why would they buy? Where did they get the funds to buy?

Seems like only yesterday the NYSE was:
"seeking to calm its floor traders by invoking a little-used rule that suspends the need to disseminate price indications and to obtain approval for prices prior to opening." Because of naked fear...

That was yesteday was it not?

scandia said...

When this site arose out of the Oil Drum. I was a complet financial illiterate! Boy oh boy but have I been getting an education since then! Now know enough to be overwhelmed by complexity. OSM's question was my question. How is solvency addressed by these rate cuts and injections? Clearly not everybody is broke! I'm putting money in a coffee can, others are buying equities. I don't understand!
For my education, what is a counterparty?

Ilargi said...


There are two parties in every transaction. In many contracts and all swaps, nobody (no clearinghouse) guarantees the performance of the contract.

Counterparty risk:
The risk that a party to a transaction will fail to fulfill its obligations.

Anonymous said...

Despite the original story, oil is back up over $109/bbl. Gold & silver are way down, which is somewhat counter-intuitive. The reaction of gold & silver to Sunday's rate cut was odd too. They shot up dramatically, and then sank back to a little below where they were before the cut. Then after today's cut, they're down sharply.

So too rate cuts coming in at the high end of what was expected last week, and gold & silver are down sharply, while oil shoots up.

Perhaps it is easier for TPTB to intervene in precious metals & currency than for them to intervene in oil?

scandia said...

Thanks, Ilargi...counterparty risk is high at the moment?....until trust is restored?

Anonymous said...

I have the same feelings as scandia.Your work here has helped me get a understanding of the depth and seriousness of this impending implosion.{I think implosion is a good term....as it was a structure built in a pure vacuum of value}
I am left with a bitterness to those who profited by this criminality.Who will never see the inside of a prison cell.Who should spend the rest of their lives being ass-raped by "bubba"in a hard joint.[Who now are sitting in Aruba sipping drinks and worring about their tan lines...]
"Some rob you with a 6-gun,and some with a fountain pen"

The one bright spot,if any ,is that the destruction of these dinosaurs will allow some evolution in our society.The wreckage of each economy is the foundation of the next.
Capital formation is going to be the greatest coming challenge to the evolution of America.The thieves stole the most valued item we had...our good name.This will force America to develop whatever we get with no help.The level of burn the world will feel when we go down will make investing in america by overseas investors a sick joke,for a generation.

I am starting to see the work dry up.How much longer I am employed full time is the 64$ question[I am fortunate that my company will cut everyones hours instead of layoffs as long as possible]
How long before joe+mama 6-pak know that its all over...and not coming back...there is the real question,and what will be their reaction?

Ilargi said...


counterparty risk is beyond high

first, in many cases, it's not at all clear who the counterparty is, somewhat analogous to the lack of clarity in who holds your mortgage, after it's been sold as part of a securities tranche

second, if the counterparty is known, it's not possible to see their balance sheets and the rest of their books.

for the same reason that banks refuse to lend to each other, because they don't know what garbage the others hold, they are extremely jittery about those books.

ironically, since they all have tons of bad paper, no-one volunteers to be the first to open the books; they'd rather stop normal dealing

Anonymous said...


The Telegraph article on "Europe idle" was very thought provoking. This whole thing started due to disregard for common sense and basic financial conduct in the U.S. But the Europeans were dumb enough to buy into it.

Is the responsibility of the Europeans limited to the extent of their purchases of bad debt from the U.S.? Do we not "owe" something to the U.S.? Are we not all together in the same boat? Or is the situation in the U.S. simply hopeless to the point that we should save our own skins?

DSK (Strauss-Kahn) is a very capable fellow and, I think, a person of integrity. He would appear to be saying that the Europeans should limit the damage, but it is unclear whether that means we should help the U.S. more or not.

The next paragraph mentions the "hard-line policy" of European central banks. I think there is an argument to be made that the rate drops by the Fed are simply a renewal of the policies that created this whole problem in the first place. So is it really the Europeans who are playing hard ball or the U.S. that is self destructing?

BNP would seem to be saying that Europe's lack of action is working against its own interests.

Finally, J.-M. Six says what I think many people in Europe feel, i.e. that the U.S. has screwed up royally and should pay for it.

Tough call, but after reading what Ackermann (DB chief) and Steinbrück (D finance minister) are saying, I would have to come down on the side of greater cooperation with the U.S.

I would be interested in reading the opinions of other people here, particularly those running the show.


Anonymous said...

Derivatives the new 'ticking bomb'

“To grasp how significant this five-fold bubble increase is, let's put that $516 trillion in the context of some other domestic and international monetary data:
• U.S. annual gross domestic product is about $15 trillion
• U.S. money supply is also about $15 trillion
• Current proposed U.S. federal budget is $3 trillion
• U.S. government's maximum legal debt is $9 trillion
• U.S. mutual fund companies manage about $12 trillion
• World's GDPs for all nations is approximately $50 trillion
• Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
• Total value of the world's real estate is estimated at about $75 trillion
• Total value of world's stock and bond markets is more than $100 trillion
• BIS valuation of world's derivatives back in 2002 was about $100 trillion
• BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion

The fact is, derivatives have become the world's biggest "black market," exceeding the illicit traffic in stuff like arms, drugs, alcohol, gambling, cigarettes, stolen art and pirated movies. Why? Because like all black markets, derivatives are a perfect way of getting rich while avoiding taxes and government regulations.”

Anonymous said...

Hello again,

Also of interest is the list of the 16 largest foreign holders of U.S. debt. Hmmm, who is missing in that list?

Why of course. The same country that is not in the news at all.

I have still not figured out if that is good or bad.

But I must say that Le Monde impressed me today with a remarkable interview of Daniel Cohen who made a clear, informative and concise presentation of the current situation. Really great, but tucked away in an obscure corner of the site. Oh well.


Bigelow said...

Dow is up 420. Bet it won't last an entire day.

Ilargi said...


I ran the ticking time bomb article a week ago.

Anonymous said...

"The Fed’s full percent rate cut (1.25%?) later today (announcement set for 2.25 pm EDT) may look good to some market participants, but it will commit outright murder on the dollar. "

Looks like the dollar rallied instead.

Ilargi said...


"Looks like the dollar rallied instead."

And the Dow went up as well. For today. But still, lowering interest rates can't but chase investors away.

US financials are having a party. But they still have vaults full of paper that has no value to speak of.

No dollar rally or bank party can lift that value.

Ilargi said...


Mighty many multi-faceted questions, in the EU vs US issue.

First, I see the IMF and Worldbank as organized crime, with a permit. And if Strauss-Kahn gets elected to head that, he may be capable, but only in the sense that Tony Soprano is.

Second, Daniel Cohen in Le Monde gets stuck in weird ideas of sovereign funds saving the world, which tells me he doesn’t understand that capital is disappearing on a grand scale. He thinks it’s just shifting elsewhere.

It’s not. That mistake leads him to talk about stagflation as well, while we really have no such thing, and it ain’t coming either.

See Mish today: ”It's time to stop pretending. Deflation is here and it is now. Anyone who sees stagflation or inflation out of what's happening now [is] missing the boat.”

Mish is dead on.

Then, Europe:

It’s not just a US problem that is unfolding. The media have fed us the term ‘subprime” ad nauseum, but the problem is much bigger. It’s highly leveraged really bad borrowing with assets for collateral that are not at all worth what they are (have been) perceived to be.

That leveraged borrowing has happened in Europe as much as it has in the US. Watch the UK, Ireland, Italy, Spain for evidence in local housing markets.

Still, it’s not in housing that the worst takes place, it is in credit markets. Derivatives that have run up beyond $750 trillion. Sure, some of it has used US homes as collateral. But far more is in credit default and interest swaps.

And hardly any of that has been unwound so far. That’s why, as a commenter remarked earlier today, there still seems to be a lot of money floating through the markets. Very little has been priced in reality terms.

Now, Bear Stearns has been sold for 1% of its book value. That will be the model that everything else will have to respond to.

But it doesn’t mean that Europe is responsible for US problems. Obviously, US consumers have gone far crazier than Europeans. Except for the Brits. And the Spanish. And the Irish (how happy will next year's St. Paddy's be?). Still, the US is on a path to nowhere but destruction, and the EU would be nuts to join it there.

Moreover, very soon, the EU will need all the strength it can muster to battle what’s coming at it. And then it will be everyman for himself, no matter what. There won't be any more coordinated action, it'll be cats fighting in a sack.

scandia said...

the penny is dropping- as aspect of the crisis is about counterparties in that one may not know who all the counterparties are in the contract, one may discover that one is a counterparty and didn't know it!
And this connects to derivatives?

scandia said...

Whoops I should have checked comments before thinking out loud! sorry...I think I've grasped it though!

Anonymous said...

New Accounting Rules Hasten the End

Many on Wall Street are complaining about Mark-to-Market, but no one is talking about what the problem actually is. The problem is new accountancy rules which took effect this year that will force companies to mark their assets in line with reality.

The new accounting rules force companies to mark-to-market and keep on their books all those derivitives. They also make the accountancy that signs off on those books financially reponsible for the accuracy of those books. This is a very profound accounting rule change that has taken effect 1st quarter this yr. These companies are about to report 1st quarter.

The Fed massively created money out of thin air to halt the collapse of the entire financial system this weekend, triggered by Bear Stearns. It didn't solve anything. It mearly postponed the collapse for a brief while longer, and gave the frantic denialist an opportunity mindlessly rally today, and an opportunity for some late players to get out.

The Fed cut interest rates 75 basis points today, the anticipation of which sparked the mindless rally. Already, the treasury auctions are failing because foreign investors are not willing to purchase anymore US debt. This cut will just accelerate the dumping of US Dollars and ensures no one will be loaning the US any more money. This is forcing the Fed to monetize debt internally, the equivalent of frantically printing money.

We are so far down the path to a Wiemar type hyperinflation, there is no way to avoid it. As a matter of fact, it is already happening. Notice the massive rise in commodity prices?

This will all play out this summer.

Hopefully enough people realize they will not have the means to survive a northern winter and will migrate south before then.

Shortages of food and heating oil may also take place as it becomes unprofitable to make deliveries to cities.

Nearly everything that will be available to you will be what's available locally. If you live where everything has to be brought in, you will not survive.


Anonymous said...

See Mish today: ”It's time to stop pretending. Deflation is here and it is now. Anyone who sees stagflation or inflation out of what's happening now [is] missing the boat.”

Mish is dead on.

Even the Fed today mentioned inflation and slow growth, so I disagree with the deflation.

"Growth in consumer spending has slowed and labor markets have softened.
Inflation has been elevated, and some indicators of inflation expectations have risen..."

I left a comment on that blog yesterday that I disagreed. He is using the short term yield as an argument. Investors have been shifting funds out of banks and money market accounts (into t-bills) because they don't trust their banks and brokerages. I think inflation will moderate a bit and commodity prices might correct a little, but not too drastically.

Anonymous said...

The problem is new accountancy rules which took effect this year that will force companies to mark their assets in line with reality.

The Fed did establish new facilities recently, however, for depository banks and investment banks. This will allow them to shift the bad paper off their books for a few weeks or months. Goldman and Lehman said they will probably use the facility.

perry said...

Lyle Gramley and Wayne Angle agreed just now (until Kudlow cut them both off!!!) that we are "very close, approaching, getting near to, closer than ever before [ pick the words you like...] to a 1930's Depression and that almost no one realizes how close we are to that".

The gall and discourtesy of Kudlow to cut off those who know so much more than he does!


Anonymous said...

I really only understand the mathematical meaning of derivatives. Wikipedia calls them futures, forwards, options and swaps. How exactly do they work.... "in credit default and interest swaps" as you mentioned... and how on earth did they get to such an astronomical amount of over $750 trillion?

Anonymous said...

The Fed did establish new facilities recently, however, for depository banks and investment banks. This will allow them to shift the bad paper off their books for a few weeks or months. Goldman and Lehman said they will probably use the facility.

Mearly delaying the Great Reconciliation. I guess you are talking about where they give them to the Fed as collateral. Dang, didn't recognize the intention of this to be to hide these assets to prevent them from being priced.

That was the whole purpose of having Bear Stearns be 'acquired' instead of declare bankruptcy. To prevent the liquidation, and thus the pricing, of these assets.

Man, they are desperate. We are so on the brink.

Wiemar Hyperinflation

Anonymous said...

Today the markets went up (sure, they dont read this blog). I wonder if the structure in itself is self preserving (after all, the brokers, the bankers, the traders, the billonaires) have personal interests: jobs, careers, children, mortgages, reputations, etc. etc.
The analysis carried out here and in similar blogs is so dire to them, that they are going to prove it wrong anyways with their bodies and souls, and this community is a rather powerful one.
So the big meltdown is not going to come easy: most things that happen in societies are not result of logic.

Anonymous said...

That was the whole purpose of having Bear Stearns be 'acquired' instead of declare bankruptcy. To prevent the liquidation, and thus the pricing, of these assets.

That was one reason. Big hedge funds were pulling their money out of BSC, so they went illiquid. The gov't also did not want a primary dealer and clearing member to go bankrupt, which would have sent shockwaves through stock and futures markets. The stock prices of CME and NYMEX plunged Monday on speculation of counterparty default, but then bounced back. The govt's end game may be a taxpayer bailout - anything but a bankruptcy of a big bank.

scandia said...

" mark to market" Is that a dark art? How /who establishes the price? The Bears price was marked outside the marketplace at $2 a share. Something fishy about that,no?

scandia said...

nick, not getting the bad paper marked to market maintains a risk foundation for the banks. Don't see how that would be to their advantage?

scandia said...

another penny dropping...are the Feds trying to hold things together until the election/Nov.? That's a long time to stall " normal trading". If the derivitive market starts to unravel before November is it possible that the election could be postponed?

Anonymous said...

Who's Nick?

Anonymous said...

not getting the bad paper marked to market maintains a risk foundation for the banks. Don't see how that would be to their advantage

It's worthless, or close to. Would result in fatal writedowns.

Anonymous said...

Who's Nick?

Sorry, now I see. Nick is who's responding to me.

. said...

re: gold dropping - that is an asset in someone's portfolio - its not all gold bugs, so some institutional player dropped a whole bunch on the market to meet a margin call.

Lehman is obviously doing the same chart dance that BSC did a few days ago and we hear their name. On the retail bank side (this is right, yes?) We hear Washington Mutual and there is one other regional that is at the edge.

I wonder how much of this action around the BSC acqusition was the Fed lining someone up to avoid the mark to market. It has been touted as JP Morgan's strength at work, but I think this is probably more like Bank of America's weakness, purchasing Countrywide not because it was a good deal, but instead out of the need to conceal the liabilities between the two organizations.

Anonymous said...

I keep hearing the MSM lie by omission. Today Kai Ryssdal on NPR’s Marketplace talked about gold dropping, as though this were a sign we were not going into recession. He didn’t mention that gold was at $990—he simply made an implication things were okay. Monday, someone commented on MSNBC that Lehman’s was higher. The news that day was Lehman’s stock had dropped, but was higher than what was expected—but that’s not what she said. I don’t think these people know they are lying—I think they believe they are fighting the good fight.

Yesterday I asked an Economics professor at our college what he thought of the economy. “Dismal,” he said. After ten minutes talking about how bad things are, he concluded with, “But you have to have confidence. Keep confident.”

American professionals are now reminding me of those folks in magical-thinking motivation seminars—or Hollywood musicals—if you think it, it will happen.