Friday, March 28, 2008

Debt Rattle, March 28 2008: Where was the media?

Non-borrowed reserves: Mar 12: - 17 billion • Mar 26: - 61 billion

Ilargi: As you can see above, the banks' non-borrowed reserves numbers, as reported by the Fed, get wilder by the day. Whatever interpretation one wishes to apply, and there are many different ones, there's no way this reflects any kind of healthy disposition. The exact numbers from the Fed:
Actual non-borrowed reserves: -61,788 billion
Required non-borrowed reserves: +39,856 billion
The shortfall is now over $100 billion.

Tail Wagging the Dog
The Federal Reserve, a private banking institution authorized by Congress to loan money created from nothing and charge interest for doing so, is already a powerful, rouge institution that operates without Congressional oversight. Should we now hand them more power?

The Fed's latest "unprecedented" act of lending of money directly to investment banks (swapping treasuries for valueless garbage) and their recent creation of the a) Term Auction Facility b) Term Securities Facility and c) Primary Dealer Credit Facility are all confirmation as to where their loyalties lie (not the people) -- and their mischievous, manipulative, rouge ways of supporting their brethren.

Additionally, the bailout of a private company (Bear Stearns) with US taxpayer money, without Congress's approval, is unfathomable -- Who is in control of these guys? So, the question of the day: does the dog (our government) wag the tail (fed) or does the tail (fed) wag the dog (government)? I think the answer is crystal clear...
  • If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation,(i.e., the "business cycle") the banks and corporations that will grow up around them will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.
    Thomas Jefferson, President of the United States 1801-1809

  • I believe that banking institutions are more dangerous to our liberties than standing armies.
    Thomas Jefferson, 1816

  • We have come to be one of the worst ruled, one of the most completely controlled and dominated, governments in the civilized world - no longer a government by free opinion,no longer a government by conviction and the vote of the majority, but a government by the opinion and the duress of small groups of dominant men.
    Woodrow Wilson, President of the United States 1913-1921

(Note: Federal Reserve's controlling stock is owned by: Rothschild Banks of London and Berlin, Lazard Brothers Bank of Paris, Israel Moses Sieff Banks of Italy, Warburg Bank of Hamburg and Amsterdam, Lehman Brothers Bank of New York, Kuhn Loeb Bank of New York, Chase Manhattan Bank of New York and Goldman Sachs Bank of New York)

I think Dr. Schoon said it best in his latest, must read article: The Die Is Cast The Cast Will Die
"The banker's credit money system is now everywhere as are their resultant unsustainable debts; and those who profit by that system, the bankers (and the corporations that grew up around them) now control the media, the political process, and the agencies charged with overseeing and regulating the economy - the US Federal Reserve Bank, the SEC, the US Treasury, and indeed the US government itself: the Presidency, the Congress, and the Supreme Court."

Massachusetts Subpoenas Banks On Auction-Rate Securities
Massachusetts issued subpoenas to UBS, Merrill Lynch and Bank of America for documents and testimony to determine whether Massachusetts investors were properly informed of the risks that auction-rate securities might become illiquid.

Until the auctions began failing earlier this year, auction-rate securities had been thought of as safe, cash alternatives. The demise in the market, which trades preferred stock or debt instruments with rates that are periodically reset at auction, has left many investors strapped for cash.

The auction-rate securities in question are primarily preferred shares in closed-end mutual funds. Last month, Secretary of the Commonwealth William F. Galvin, whose office issued the subpoenas, sought information from nine asset managers on their experiences with closed-end funds in the wake of auction failures in the auction-rate securities market.

"Within the last couple of weeks, my office has received many calls from people who thought they were investing in safe, liquid investments only to find that they had, in fact, purchased auction market securities that are now frozen and they cannot get their money." Galvin said.

The state is also investigating whether these investments were suitable for those investors. In addition, the state is looking into the role that the major investment banks which sold those securities had in the events that caused the auctions to fail.
Numerous closed-end funds are trying to help their investors get out of the securities.

Citigroup latest target in auction suits
Citigroup has been hit by a lawsuit by two clients who accused the bank of improperly marketing auction backed securities as an alternative to cash, according to published reports.

Auction-backed securities are long-term bonds periodically revalued at auction, where the interest rates of the bonds change and investors have the option of selling. The investors bringing the suit, which was filed yesterday, have claimed that Citigroup had not disclosed the risks inherent in auction backed securities. They are also seeking class-action status for their lawsuit.

Citigroup is the latest target in a series of similar lawsuits. On Tuesday, a client of financial giant Morgan Stanley brought similar charges against the company. The company denied the allegations and stated that the problems facing the auction-backed securities market were industry-wide. Lawsuits have also been leveled at Merrill Lynch, UBS, Ameritrade and Wachovia.

Ilargi: Where was the media? I know where. Right here. No, not just at the Automatic Earth.

Where Was Media When Sub-Prime Disaster Unfolded?
"It is somewhat surprising," Larry Elliott, economics editor of London's The Guardian observed recently, "that there is not already rioting in the streets, given the gigantic fraud perpetrated by the financial elite at the expense of ordinary Americans.” If such a fraud was taking place, and if Wall Street’s financial crisis, according to the usually staid Economist, was on the edge of “disaster” with a “financial nuclear winter” waiting in the wings, why were American news consumers among the last to know?

Was the press just not paying attention as hundreds of billions of dollars were swept into exotic structure investment vehicles over years, and then sliced and diced into CDO’s and so-called asset based securities? A New York Times columnist even admitted that experts and advocates first warned them in 2001 that predatory lending practices were devastating poor neighborhoods but the issue was not covered in any depth for five years. This has resulted in nearly three million families facing foreclosure and the rest of us losing share and home values.

Most of the coverage has been relegated to not widely read business sections that focus on the ups and downs of the markets and the way the collapse of these arrangements have affected the fortunes of CEOS and business enterprises, not citizens, consumers and most of all homeowners, many of whom are or will be losing their homes.

Dean Starkman ,who studied the spotty “business” coverage in detail for the Columbia Journalism Review, concluded: “Today, as the credit crisis unravels, the business press can be fairly blamed for inattentiveness to the growing strains on middle-income borrowers. Maybe that’s why so many middle-income people don’t read it.”

There is more to this very sad failure. Many newspapers and TV outlets were complicit. They accepted and made tons of money carrying slick and often deceptive advertising for shady mortgage lenders and credit card companies encouraging readers and viewers to accept more debt. Some major newspaper are tied into local real estate syndicates and get kickbacks from sales tied to their extensive advertising of homes for sale.

Was there a conflict of interest perceived in taking these ads—which were important sources of revenue in a soft ad market---and producing watchdog journalism warning of the dangers of buying into subprime loans and other injurious products?

Is the press too imbued to our government’s mission of inspiring consumer confidence? Is that, in turn, connected to using the news pages to benefit advertisers? Think of all those local TV reports “live at the mall” at Christmas time cheerleading for more shopping? At the time, it appeared as if everyone was buying everything. It was only later, well after the fact, that we learned that it was the worst Christmas season in five years.

What’s worse is that the coverage may have missed the truly criminal aspects of this crisis, the issue so far being raised mostly overseas. This will be fought out in courtrooms worldwide when those who purchased worthless mortgages sue the companies who sold them knowing their true value. Why are the RICO laws not being used to prosecute a scam involving so many “entangled” companies? There is no shortage of data on this fraudulent and discriminatory scheme.

Grim realty
After the gain for some, the pain continues for many American property owners. According to the newly published S&P/Case-Shiller index, house prices in ten metropolitan areas fell by 11.7% in January compared with the year before, the biggest fall since the index was created in 1987.

The larger 20-city index tumbled by 10.7%. Sunbelt cities which earlier saw the most dramatic price rises are now enduring the hardest falls. Only Charlotte has yet to succumb to declining prices. The OFHEO's index of homes guaranteed by Fannie Mae or Freddie Mac fell by 3% from 2007, also showing an accelerating slide.

Superbear says there's more to come
Nouriel Roubini, one of the biggest bears on Wall Street, wasn't surprised by the fire sale at The Bear Stearns. He said it just reinforces his 12-point gloom-and-doom outlook, which he unleashed on Wall Street in February, and he now thinks that total financial losses in the credit debacle may top the $1 trillion he previously projected.

Mr. Roubini, 49, a professor at New York University's Stern School of Business and founder of RGE Monitor, a New York-based economic research firm, was met by skepticism when he first predicted a downturn in a July 2006 report, "A Coming Recession in the U.S. Economy." Today, few doubt his early insight. Reached by phone in Stockholm, Mr. Roubini spoke about current conditions and what he expects next.

Q. The Fed agreed to provide financing of up to $30 billion to cover the Bear assets that were less attractive to JPMorgan Chase & Co., and this marked the first time the Fed has offered a bailout to a non-regulated bank since the Great Depression. Are you concerned?
A. It's the beginning of a radical change in monetary policy. It's not just the $30 billion that the Fed confirmed to Bear Stearns via JPMorgan — there were two other major options that went in the same direction. One was the decision [two weeks ago] to provide $200 billion so that all primary dealers, including non-bank financial institutions, would be able to swap their illiquid and toxic MBS [paper] for safe Treasuries. The other was the Fed giving any primary dealer, including non-banks, access to the Fed discount window on the same terms as banking institutions. This is a radical change; we haven't seen anything like this since the Great Depression.
These are financial institutions that are not regulated or supervised by the Fed. The Fed has no idea of whether they are just illiquid or insolvent, which creates a massive moral hazard problem. It's a radical shift in the way the Fed operates — and a dangerous way, I would argue.

Q. Dangerous in what way?
A. You're telling people that even if they have made reckless lending and investment decisions, mismanaged risk or continue to do stupid things, the government will bail them out. We are in a systemic financial crisis.

Q. In your 12-step prediction, you estimated total financial losses from subprime lending, credit cards and auto loans at $1 trillion. Has your view changed after Bear Stearns?
A. The losses that we're facing at this point — $1 trillion — is the floor, not the ceiling. Losses might be much bigger than that. Even if you believe subprime losses might be in the order of $300 billion to $400 billion, more losses are going to be derived from commercial real estate, credit cards, auto loans, student loans and leverage loans, as well as from corporate defaults and losses from city assets.
Eventually the monolines will be downgraded, which means we'll see another round of write-downs on the things that they insured.

Q. Where are home prices going?
A. Two years ago, I predicted home prices would fall cumulatively 20%, but now I believe it will be at least 30%.
With a 20% fall in home prices, about 16 million households are under water. They have negative equity, which means the value of their homes is below the value of their mortgages. With a 30% drop in prices, you have 21 million households that are in negative equity. And since the mortgages are no-recourse loans, essentially they can walk away.
Even if only half of the 16 million households were to walk away, that alone could lead to losses for the financial system of $1 trillion. Even a 20% drop in home values may imply losses of $1 trillion that are not priced into the market today. So that's the floor. Again, it could be higher — as much as $2 trillion — if prices fall 30% and more people walk

Subprime-hit German lender faces shareholder wrath
Directors of distressed German business lender IKB faced furious shareholders Thursday who voiced anger over the management of one of the country's biggest US subprime market victims. More than 1,000 small shareholders attended a general assembly of the bank, a former safe investment now in the midst of a storm that has had to be rescued several times from bankruptcy since August.

IKB shares have lost around 70 percent of their value over the past six months, and are now worth about 4.25 euros, most of its directors have left, and it expects to post a loss of around 800 million euros (1.26 billion dollars) for its 2007/2008 fiscal year, which ends on March 31. IKB, which specialises in loans to small and medium-sized enterprises, was one of the German banks hit hardest when the US market for high risk, or subprime, mortgages collapsed in August.

Supervisory board president Ulrich Hartmann told the assembly that the board had no way of heading off the catastrophe that almost pushed IKB into bankruptcy. "The crisis broke without warning," Ulrich Hartmann told the assembly in the western city of Duesseldorf. "We had no chance of being able to foresee the risks and ward off the crisis," Hartmann claimed, because the supervisory board had not been told until it was too late how exposed the bank was to the US subprime market.

"Why did you accept that," one angry shareholder asked to applause from the crowd. "You took my money," another accused. The group has benefited from a series of rescue packages put together by the German government and private banks worth around 10 billion euros so far. German officials have now ordered an outside audit of IKB, in which state-owned development bank KfW has a dominant holding.

IKB sharehoders rejected a management request for a vote of confidence. "They are completely incompetent," said shareholder Dieter Eisele, including the government, the central bank and regulatory authorities among those who he said bore responsibility for the debacle.

Shareholders were also asked to approve a capital increase of 1.5 billion euros, to which KfW has already said it will sign on, increasing its stake from 43 percent at present to around 90 percent. KfW wants to sell its holding at some point, but is likely to find it hard at the moment. "Does IKB have a chance to survive," a small shareholder wondered. "It should be shut down. It should be placed in bankruptcy, properly."

Germans Fear Meltdown of Financial System
The American economy is presumably already in a recession, which affects the rest of the world. Experts also predict noticeably less growth and fewer new jobs for Germany. If the economic situation worsens, the state could face tax losses in the billions. This could force Berlin's ruling grand coalition of Social Democrats and Christian Democrats to shelve its plan to consolidate public budgets.

In this situation, even the most zealous disciples of the free market are calling for more government intervention. "I no longer have faith in the ability of the markets to heal themselves," Deutsche Bank CEO Josef Ackermann confessed in a speech delivered last Monday in Frankfurt. Ackermann said that the American example shows that governments and central banks must now play a stronger role.

Even his counterpart at Commerzbank, Klaus-Peter Müller, agreed, saying that the current situation has the potential to develop into "the biggest financial crisis in postwar history" as long as "the markets are allowed to continue operating unchecked." According to Müller, "It would make sense to permit the banks -- retroactively to Jan. 1 -- to account for securities differently by eliminating the daily revaluation requirement." He argues that this would stop the downward spiral on the banks' financial statements.

The German Finance Ministry promptly rejected such calls, saying: "We see no need to become active at the national level." But this assertion is far from the truth. The ministry has become a place of nonstop crisis meetings, the chancellery is kept constantly apprised of the latest developments, and the Federal Financial Supervisory Authority (BaFin) has already set up a task force to address the issue. No one in the government has the slightest doubt that it will intervene the minute another bank begins to falter.

Germany's state-owned banks, which have been especially careless in recent years about investing in American securities backed by subprime loans, are considered greatly at risk. One of them, Bayerische Landesbank, is currently considering writing off €1 billion ($1.54 billion) -- or possibly even more -- in bad debt.

In the first two months of 2008 alone, the Bavarian bank's troubled securities portfolio has lost €1 billion in value, and it has fallen even further since. "There could be another billion in losses on top of that," says one banker. At another state-owned bank, Dusseldorf-based WestLB, €5 billion ($7.7 billions) in government bailout funds are apparently not enough. The bank is already losing its next billion.

"The numbers are completely irrelevant," says a senior executive at one state-owned bank, "but it is clear that before a bank goes under, the central bank will push a red button and provide as much money as is needed." This blatant display of nonchalance irritates Commerzbank CEO Müller, who is also the president of the Association of German Banks. "We must achieve greater transparency," says Müller. "It doesn't help when some banks hide behind outdated accounting regulations. All facts must be on the table and current."

Ilargi: Meredith Whitney’s word is close to being law on Wall Street. I don’t think that’s such a bad thing. Maybe the next president should consider her for the Treasury; that would inject a sorely needed dose of realism.

Oppenheimer sees dividend cuts at Citi, Wachovia, others
Citigroup Inc. and Wachovia Corp. will likely have to announce dividend cuts next month, as shrinking earnings will make it hard to support current payouts, Oppenheimer analyst Meredith Whitney said Friday in a note to clients.
Whitney, who has lowered her estimates for financial company earnings more than 30 times since November and who accurately forecast Citigroup's dividend cut last year, expects Citigroup to earn $1.43 a share less than its dividend payout this year and for Wachovia to have to pay out "just about all of its estimated earnings this year."

"Banks under our coverage are dangerously approaching earnings levels that simply will not support such high relative payouts," Whitney wrote. "We believe beginning with 1Q08 results, to be reported in two weeks time, banks will seriously address their ability to maintain their current dividend levels."

Citigroup and Wachovia shares traded near Thursday's closing price in premarket trading; Citigroup traded up slightly to $21.89 a share and Wachovia was down slightly at $26.90 a share. Any reduction in payouts would hit bank stocks hard, because investors have been holding shares entirely because of the big dividends, Whitney argued. She sees bank stock trading at least 25% lower than their current levels as more bad news is priced in.

Citigroup has already cut its dividend 41%, to $1.28 a share annually. Wachovia currently pays a dividend of $2.56 a share each year. Wachovia Chief Executive Ken Thompson said Jan. 22 that the bank doesn't need to cut its dividend, as it will generate enough cash in 2008 to cover dividends and also bolster its capital ratios

Ilargi: In unrelated news, I read this morning that Rep. Barney Frank is about to introduce a Federal Decriminalization Bill , for small amounts of marijuana. Henry Paulson, judging by his comments below, already has access to high quality pot.

Stimulus plan to create up to 600,000 jobs: Paulson
U.S. Treasury Secretary Henry Paulson said on Friday that an economic stimulus program that will put $168 billion into consumers' hands this year and next could help create hundreds of thousands of new jobs. "We know they're going to be helpful," Paulson said on CNN television. "These (tax rebate) checks should be a big part of adding 500,000 to 600,000 additional jobs this year."

Some 130 million Americans are to get tax rebate checks up to about $600 for individuals and $1,200 for couples, with the first of the checks to start flowing in early May. On other issues, Paulson said it was important to maintain stable, orderly financial markets and said the Treasury was trying to help mortgage-holders who are in difficulty voluntarily work out repayment options with lenders.

Treasury announced earlier this week that the Internal Revenue Service will keep about 320 offices open on Saturday to encourage an estimated 20 million Americans who do not normally file a tax return to do so. Only people who file returns will be eligible for rebate checks.

Paulson turned aside a question on whether the government should become more directly involved in helping mortgage holders who face trouble keeping up their payments and are facing foreclosure in growing numbers. "We've been doing a lot to reach out to the average homeowner," Paulson said, pointing out that only 2 percent of homeowners were facing foreclosure. "We have an effort to help all those who can avoid foreclosure do so."

Asset-Backed Commercial Paper Falls for Fourth Week
The market for short-term debt backed by assets including car loans, credit card receivables and mortgages shrank for a fourth consecutive week amid signs that credit quality is weakening. U.S. asset-backed commercial paper fell $2.6 billion, or 0.33 percent, to a seasonally adjusted $777.7 billion for the week ended March 26, the Federal Reserve in Washington said today.

Buyers are pulling back from the market as U.S. bank earnings are projected to tumble 84 percent in the first quarter, according to Oppenheimer & Co. analyst Meredith Whitney. Citigroup Inc., the biggest U.S. bank by assets, will post a quarterly loss four times as large as she previously estimated, Whitney said yesterday in a revised forecast.

"There is still a lot of fear out there regarding asset- backed CP," said Mark Amberson, the director of short-term investments and manager of the $6.2 billion Russell Money Fund at the Russell Investment Group in Tacoma, Washington. "Everyone is re-thinking their concept of `safe.'"

The broader commercial paper market rose $2.2 billion in the most recent week to $1.83 trillion, according to the Fed data. Companies typically sell commercial paper, which usually matures in three months or less, to help pay day-to-day expenses, including payroll and rent. Banks' troubles are arriving just as the U.S. economy is showing signs of a recession. Orders for durable goods unexpectedly fell in February, led by a slump in demand for machinery, as the housing downturn makes companies hesitant to invest.

Commercial-Mortgage Pain Is Spreading
Europe and Asia were latecomers to the boom in commercial-mortgage-backed securities, but that doesn't make them exempt from the pain the global credit crunch is delivering. CMBS, as the instruments are known, had become the most popular form of debt in the U.S. by the time they began gaining traction on other continents.

Now the European and Asian real-estate markets are being hit by the slowdown in CMBS, which are debt instruments created by investment banks by slicing up commercial-real-estate loans and packaging them into bonds with different levels of risk. Investor demand for the securities is so low that there has been only one new issue backed by European property this year, a €695 million ($1.07 billion) issue by Morgan Stanley, and part of that hasn't sold.

There have been a few new CMBS issues collateralized by Japanese real estate this year, with a combined value of about $1 billion, according to Standard & Poor's. This includes one issue from Morgan Stanley of about $500 million in February. Last year, there were about $20 billion in Japanese CMBS issues. "This year, we expect that figure to be 20% to 30% lower as securitization lenders are slowing down their new loan originations," says Takenari Yamamoto, a CMBS analyst at Standard & Poor's in Tokyo. Japan is the biggest CMBS market in Asia, accounting for the majority of issues.

While the first CMBS issue backed by European collateral took place in 1989, the market didn't take off until 1997. Since then, the market has grown swiftly, with $63.65 billion of issues last year, up from $6.75 billion in 2000, according to Commercial Mortgage Alert.

By comparison, there was a record $230.19 billion of CMBS issuances in the U.S. last year. In Asia, the first issue was in 1994 in Hong Kong. Last year, there were $15.86 billion of Asian issues, up from $4.18 billion in 2000. The growth in Europe and Asia has been driven in recent years by thriving real-estate markets.

Down $900 Million or More, the Chairman of Bear Sells
Only a year ago James E. Cayne’s stake in Bear Stearns was worth more than $1 billion. But on Thursday, Mr. Cayne, the chairman of Bear, disclosed that he had sold all of his shares in the troubled investment bank this week for just $61 million.

While the sale leaves Mr. Cayne a wealthy man, it nonetheless underscores the deep losses suffered by Bear’s shareholders after the company’s forced sale to JPMorgan Chase two weeks ago. And for Mr. Cayne, the liquidation evokes a deep sense of loss. It represents a humiliating capitulation for a brash executive who, with his ever-present cigar, suspender-snapping ways and Friday golf outings in the summer, epitomized the classic, if outdated, picture of the Wall Street chieftain.

To the end, Mr. Cayne heeded the advice he often gave his colleagues at Bear: hold on to your stock. Whether the stock was flying high, as it was early last year, at $171, or plummeting, as it did in recent months, Mr. Cayne kept the vast bulk of his 5.6 million shares. The sale, made on Tuesday, according to a securities filing, represents a final severing of ties with the firm where the 74-year-old Mr. Cayne has worked since he joined as a broker in 1969.

While he still comes into his office suite in Bear Stearns’s headquarters on Madison Avenue, Mr. Cayne has not been an active participant in the talks between JPMorgan and Bear executives on broad issues of integrating businesses and identifying which bankers stay and which go. JPMorgan this week quintupled its original offer for Bear, to $10 a share, in an effort to win over shareholders. The shares closed at $11.23 on Thursday, up 2 cents.

Fed's Lockhart Says U.S. Near a Recession, Sees Slow Recovery
Federal Reserve Bank of Atlanta President Dennis Lockhart said the U.S. economy appears to be on the verge of recession with little growth this quarter and a recovery in the second half of the year may be slower than expected.
"The economy is in a slowdown that resembles past periods that were the leading edge of a recession," Lockhart said in a speech to the Rotary Club of Chattanooga, Tennessee. "Following a sluggish fourth quarter, I expect that GDP for the first quarter of this year will show little, if any, growth."

The economy expanded 0.6 percent at an annualized pace last quarter and economists surveyed by Bloomberg News this month predicted the rate will slow to 0.1 percent in January to March. Martin Feldstein, the Harvard economics professor who heads the research group that determines when downturns begin, said this month that a contraction had already begun.

Lockhart said he didn't have enough evidence to declare a recession had started, though the economic outlook this year has worsened amid a housing slump and credit market turmoil. "The contraction in housing and the dampening effects of financial turmoil on household and business spending could persist through the remainder of this year," he said. "The recovery in growth I had expected in the second half of this year may be delayed."

The comments by Lockhart, who doesn't vote on interest rates this year, were his first since the Fed cut its target rate by three-quarters of a percentage point on March 18 amid increasing recession worries. Two colleagues -- Dallas's Richard Fisher and Philadelphia's Charles Plosser -- dissented and preferred a "less aggressive" move because they were worried about inflation.

Fannie, Freddie May Raise $20 Billion, Regulator Says
Fannie Mae and Freddie Mac, the U.S. government-chartered mortgage companies, may raise as much as $20 billion in capital as part of an agreement that allows them to buy more debt securities, their regulator said. "That's the top end of the range," James Lockhart, director of the Office of Federal Housing Enterprise Oversight, said in an interview in Washington yesterday.

While "there's no specific number" that was agreed upon, the companies and Ofheo discussed ballpark figures, he said. Fannie Mae and Freddie Mac must raise the money before Ofheo approves any further reduction in the capital they need to guard against losses on their combined $5 trillion of mortgage investments, Lockhart said. Ofheo agreed last week to lower their capital threshold to 20 percent from 30 percent, enabling the companies to buy as much as $200 billion in securities backed by home loans and help prop up the housing market.

The capital surcharge is one of the last remaining restrictions imposed on the companies after $11.3 billion of accounting misstatements. Ofheo had required the companies to increase their capital cushion to 30 percent more than normally required to ensure they were protected against losses.

The capital may either be in common shares, preferred shares or convertible preferred shares, Lockhart said. Fannie Mae, based in Washington, raised $7 billion in December by selling preferred stock. McLean, Virginia-based Freddie Mac sold $6 billion a month earlier. The companies will need to raise the capital "sooner rather than later," Lockhart said.

Ilargi: It’s kind of flattering and gratifying to see even some of the hardest heads start to melt on the inflation vs deflation issue.

Reconsidering the Deflation Risk
Today, the Fed is leading us into another battle against deflation, real or perceived. The problem is that assessing deflation's true risk potential requires knowing how bad the current correction will (or won't) be. There's little doubt that if the economic downturn now underway is deeper and longer lasting than the crowd expects, the deflation threat is higher than is generally realized.

So what's the bottom line? It's that deciding if deflation is or isn't a threat depends on your expectations for the cyclical downturn now underway. All the usual risks apply, of course, and so it's every strategic-minded investor for himself. Meanwhile, perspective helps improve the odds of making intelligent decisions, or at least decisions that are less erroneous than others. Maybe.

On that note, we recommend a recently published commentary that parses deflation's risks in some detail. Brian McAuley, portfolio manager at Sitka Pacific Capital Management, does a nice job of summarizing where we are now, we're we've been and what it implies for the future. Although he writes as someone apparently worried about deflation, everyone should give his paper a read if only to gauge how the view from the other side of the aisle, so to speak, sees the future. Here are two excerpts from McAuley's essay:
With all that has been going on the in the markets with the continued housing decline and the credit market problems, the Fed has over the past two months made their intentions quite clear. As they're fully aware, this is a very risky time for the U.S. economy – and not just because average housing prices are down close to 10% year-over-year.

They understand that our current circumstances are similar to past instances in economic history where a major economy faced significant deflationary risks. Given our debt burden, the Fed understands very well the deflationary risk if prices fall too far for too long.

Not only is there is a risk of debt service overwhelming current aggregate demand, there is also the risk that the psychology of consumers and businesses would begin to change from an inflationary attitude of “buy now and pay later” to a deflationary “save now and buy later.” In an economy in which 2/3 of GDP depends on “buy now,” the Fed will do everything in its power to prevent this from happening.

Fremont Ordered by FDIC to Find Buyer; Curbs Imposed
Fremont General Corp., the California lender forced to quit the subprime mortgage business, was ordered by federal regulators to raise new capital or find a buyer within 60 days. The Federal Deposit Insurance Corp. called Brea-based Fremont undercapitalized and told management to take "prompt corrective action," according to a company statement today.

The FDIC imposed curbs on how much interest Fremont can pay to customers and said the bank can't make any capital distributions to the parent company or affiliates. The agency also banned raises or bonuses to officers and directors. Fremont has lost more than 90 percent of its market value in the past 12 months as the U.S. housing recession deepened.

A year ago, regulators demanded the company stop making subprime loans because the bank hadn't ensured borrowers could actually repay. Fremont had been the country's fifth-biggest lender to consumers with poor or limited credit.
Fremont said March 18 it was evaluating alternatives that may include a sale or merger.

Fremont's operations include a bank with 22 branches. The bank had $7.96 billion in FDIC- insured deposits as of Sept. 30, according to a Nov. 8 news release. Ratings company Standard & Poor's on March 18 cut Fremont's long-term counterparty credit rating to the lowest junk rating of D from CC.

Taleb Outsells Greenspan as Black Swan Gives Worst Turbulence
On a freezing day in March 2007, Nassim Taleb walked into a conference room at Morgan Stanley's Manhattan offices on 47th Street and Broadway to address a group of the firm's risk managers. His message: Your models don't work.
Using a whiteboard to scribble out his calculations, Taleb, now 48, began one of his rants, this time against stress tests -- Wall Street lingo for examining how a market rout will play out. Stress tests are inherently risky because they ignore rare but potentially devastating events, Taleb said.

"Past shortfall doesn't predict future shortfall," the options trader turned best-selling author recalls telling the assembled group of about 40. The risk managers, part of a tribe of mathematical model makers known in the finance world as quants, stared back at him blankly, and a debate ensued, according to people who were there. Only six months later, Morgan Stanley experienced its own rout. The world's second-biggest mergers adviser announced in December that it had written down its subprime-related holdings by $9.4 billion after the firm's traders misjudged how fast and far prices of the debt would fall. Their risk management had failed.

The Lebanese-born Taleb, a balding man who labels himself a philosopher of randomness, has an eerie knack for timing things right. His most recent book, "The Black Swan: The Impact of the Highly Improbable" (Random House), came out in May 2007, just months before the subprime fiasco rocked global markets and led banks to announce at least $208 billion worth of writedowns. The book's message offered something of a preview of the crisis: that we're all blind to rare events and routinely fool ourselves into believing we can predict risks and rewards.

Taleb argues that history is littered with high-impact rare events, known in quantspeak as "fat tails," for their shape when plotted on a bell curve. He cites the Latin American debt crisis of 1982, the collapse of hedge fund firm Long-Term Capital Management LP in 1998 and the crash of the U.S. stock market in October 1987, to name a few. As the founder and manager of New York-based Empirica LLC, a hedge fund firm he ran for six years until he closed it in 2004, Taleb built an investment strategy based on options trading.

It was designed to bulletproof investors against blowups while profiting from rare events. His 20-year trading career has been marked by jackpots (like when he lucked out in trading options during the stock market crash of 1987) followed by long dry spells. "If you lose money on a steady basis and then make money in a lumpy way, people think you're crazy," he says.

While Taleb has stepped back from everyday trading, he remains an adviser to Santa Monica, California-based hedge fund firm Universa Investments LP. It opened its doors last year under the direction of Mark Spitznagel, 36, Taleb's former trading partner at Empirica. Universa has a so-called Black Swan Protection Protocol managed by Pallop Angsupun, a former Taleb student who's hedging roughly $1 billion of client investments against certain events that can cause market declines.

The firm has another $300 million pot betting on large positive jumps in individual stocks and is readying a similar, third fund several times that size, a person familiar with the funds says. "Nassim and I share this genetic flaw," says Spitznagel, a one-time Chicago pit trader who was a student of Taleb's at New York University. "We're not interested in the small frequent payouts. We want the infrequent huge payouts."

Taleb has gone from being a leading Wall Street heretic -- he rails against economists and quantitative model makers -- to a mini institution whose appeal reaches well beyond the realm of finance. More than 370,000 copies of "The Black Swan" are in print in the U.S. and the U.K. It spent 17 weeks on the New York Times best-seller list and is being translated into 27 languages. It even outranks Alan Greenspan's memoirs, "The Age of Turbulence: Adventures in a New World" (Penguin, 2007), among 2007 best-sellers on

The success of "The Black Swan" has led to a $4 million advance for the English-language rights to a follow-up book, according to a person familiar with the deal. It's tentatively titled "Tinkering" and will examine how to live in a world we don't understand.

Odd Crop Prices Defy Economics
Economists note there should not be two prices for one thing at the same place and time. Could a drugstore sell two identical tubes of toothpaste, and charge 50 cents more for one of them? Of course not.

But, in effect, exactly that has been happening, repeatedly and mysteriously, in trading that sets prices for corn, soybeans and wheat — three of America’s biggest crops and, lately, popular targets for investors pouring into the volatile commodities market. Economists who have been studying this phenomenon say they are at a loss to explain it. Whatever the reason, the price for a bushel of grain set in the derivatives markets has been substantially higher than the simultaneous price in the cash market.

When that happens, no one can be exactly sure which is the accurate price in these crucial commodity markets, an uncertainty that can influence food prices and production decisions around the world. These disparities also raise the question of whether American farmers, who rely almost exclusively on the cash market, are being shortchanged by cash prices that are lower than they should be.

“We do not have a clear understanding of what is driving these episodic instances,” said Prof. Scott H. Irwin, one of three agricultural economists at the University of Illinois at Urbana-Champaign who have done extensive research on these price distortions.

Professor Irwin and his colleagues, Prof. Philip T. Garcia and Prof. Darrel L. Good, first sounded the alarm about these price distortions in late 2006 in a study financed by the Chicago Board of Trade. Their findings drew little attention then, Professor Irwin said, but lately “people have begun to get very seriously interested in why this is happening — because it is a fundamental problem in markets that have generally worked well in the past.”

Market regulators say they have ruled out deliberate market manipulation. But they, too, are baffled. The Commodity Futures Trading Commission, which regulates the exchanges where these grain derivatives trade, has scheduled a forum on April 22 where market participants will discuss these anomalies and other pressure points arising in the agricultural markets.

The mechanics of the commodity markets are more complex than selling toothpaste, however. The anomalies are occurring between the price of a bushel of grain in the cash market and the price of that same bushel of grain, as determined by the expiration price of a futures contract traded in Chicago.

Ilargi: There is of course no such thing as “food price inflation”. But prices do rise a lot in Asia.

UN: Asia faces sharp food price inflation
Asia faces a sharp rise in food costs, due partly to surging demand for crops used in biofuels, and governments should do more to shield the region's poor from economic shocks, a U.N. commission said today. Economic growth in the region will slow as the U.S. credit crisis hurts demand for exports, but a robust expansion in China and India should help Asia avoid a major slump, the U.N. Economic and Social Commission for Asia and the Pacific said in a report.

"Rapidly rising food prices will be the key challenge in the coming year," Shuvojit Banerjee, an economist for the commission, said at a Beijing news conference. "With the march towards biofuels apparently unstoppable, the region has to prepare for sustained inflation through higher food prices."

Economic output for the sprawling region, which stretches from Japan to Georgia, should grow by 7.7 percent, down from 8.2 percent in 2007, the commission said. It said inflation should ease to 4.6 percent, down from 5.1 percent last year, though price rises in countries such as China will be higher.

In China, food costs in February were up 23.3 percent from the same month last year, driven by a 63.4 percent jump in the price of pork and a 46 percent rise for vegetables. Across the region, price rises are driven in part by surging demand for food crops to make biofuels, such as sugarcane used for ethanol, the commission said.

"We do view biofuels as quite a worry for food production in the region," Banerjee said. China has banned use of food crops for fuel and has imposed curbs on grain exports to increase domestic supplies and cool inflation. Banerjee appealed to other governments to follow Beijing's example.

"We would advise governments to be very cautious about biofuels" until the region can take advantage of technology being developed to make fuel from non-food crops, he said.

(Dis)continuous Time Finance
You see, the problem is that without transactions it is hard to get information, and without information it is hard for people to transact. We are caught in this Catch-22, the Fed's prescription for which is injecting hundreds of billions of dollars into the financial system. And while this creates money, it does not necessarily create liquidity in the instruments for which no bids are available. Why?

Because potential investors are sorely lacking information, either intrinsic to the securities or extrinsic in the form of observable market prices. This is partly due to the complexity of the instruments in question, the structured asset-backed market and related derivatives. And while this problem is not intractable, it is easy to imagine that getting sufficient information to make educated bids will take quite some time.

Another problem is that an element of liquidity was predicated upon the faith and belief in the ratings system. A AAA-rated security was available for purchase by trillions of investment dollars, AA-rated fewer trillions, A-rated hundreds of billions, and so on. But now that we've seen tens of billions of AAA-rated securities marked like junk, the very foundations of the institutional investment model have been shaken. Trust has been shattered. No trust, no liquidity.

This partly explains the strength of the rally in U.S. Treasuries, even in the face of a sharply declining dollar. Most investors aren't looking to a rating agency for comfort that the U.S. Treasury will make good (no chuckles, please), ergo, the trust issue is moot and liquidity in Treasuries is plentiful. But we can't and don't live in a riskless world. The problem is that too many investors and market intermediaries thought we did. This was telegraphed by the historically low levels of volatility during the latter part of 2006 and into early 2007.

Today we live in a world fraught with risks that we barely understand, risks that modern financial theory doesn't have great answers for. A new model is needed that incorporates the effects of discontinuity as an outgrowth of, among other things:
• Complexity - structured securities, derivative instruments;
• Interdependency - widely disseminated holdings that can pollute portfolios globally, hundreds of trillions in counterparty exposures;
• Intermediary errors  - ratings that don't reflect the risks, financial institutions with weak control environments and poor risk management practices; and
• Bad actors - originators, underwriters, traders and managers with mis-aligned motives.

We have seen examples of each of these in the past six months, seeming "black swans" that don't appear so unusual any more. It's not that these risks didn't exist before. It is that their confluence when experienced over a short period of time yielded results that were unforeseen to many. Our models and academic frameworks needs to be robust enough to handle these occurrences and to provide a model for maintaining liquidity, price discovery and information dissemination. Based upon today's market action we've got a long way to go.

Ilargi: Here’s a series of articles on Canada ABCP. Apart from the details and the neverending evasive language, one thing sticks out in this article: ”Mr. Crawford [..] said he was unaware until recently how many ordinary Canadians had bought the tainted paper.”. How is that possible for someone who has spent the better part of over 6 months looking at this very issue on a daily basis?

How can he not know such a significant fact? I don’t get it. But it doesn’t look to me to be a very comforting thought for the small investors. It tells me Mr. Crawford couldn’t care less, and the small investors shouldn’t trust a word he says.

Do you think perhaps Crawford's blunt ignorance is responsible for the fact that the small investors all got an equal vote with the big boys? I doubt we'll ever know, but that would be too funny.

ABCP retail investors need rescue deal: Crawford
As Purdy Crawford gets set to meet face-to-face with retail investors in Canada's asset-backed commercial paper market, he warned they will get little back on their investments unless a proposed restructuring goes through as planned, while also hinting there may be sweetener for the out-of-pocket investors.

If the plan does not get the go ahead, the retail investors "get damn little," Mr. Crawford said in an interview yesterday. "That's not a threat. It's a reality." Mr. Crawford is head of a committee that has tabled a restructuring plan for the $32-billion of frozen paper. The success of that plan now rests with hundreds of small investors who have the chance to vote on it at the end of April.

While the plan has the backing of the holders of most of the paper by dollar value - mostly large institutional investors - many of those smaller investors are thought to be against the plan that will see them take a significant haircut on their initial investments and also lose the right to sue the people who sold them the notes in the first place.

Significantly, the retail investors will have the final say in a vote that requires approval by more than 50% of the voting noteholders, which gives the little guys a lot of influence. "Because of the vote, the retail investors have the possibility of getting more on the table than what this rather good restructuring gets them," said Mr. Crawford, who begins a cross-Canada roadshow in Toronto on Monday when he will meet with small investors in a bid to get a ‘yes' vote.

Mr. Crawford expressed sympathy for retail investors and said he was unaware until recently how many ordinary Canadians had bought the tainted paper. His team, which includes banker and lawyers, also hinted yesterday that there could be a sweetener in the deal to make sure the vote goes through.

He would not give clear details of what this could mean, although the Crawford-team said liquidity was a key issue for small investors, and also said a third party could be involved in the next twist to the saga. A top-up to make small investors whole seems unlikely, though one option could be for companies that sold the paper to make up some of the difference between the par value and the market value of the restructured notes, sources said.

The proposed restructuring, which has put the notes into Companies Creditors Arrangement Act protection, could be amended to accommodate a change to the terms in favour of retail investors, said legal sources. "I'm rather confident small investors will be able to take advantage of their bargaining power," Mr. Crawford said.

Dig in your heels, and eventually the big banks will make everyone whole again
Here's two cents worth of asset-backed advice for Canaccord's beleaguered ABCP investors: Don't fall for the Montreal gang's bluff. You'll get your money if you don't panic and keep agitating. This is such an embarrassment of bungling and typical big bank behaviour that the odds are the big boys will dig deep and make this go away.

Canaccord's motto is "independent thinking." In a word, "huh?" The firm has 1,400 unhappy clients who bought non-bank asset-backed commercial paper on its advice. Some are suing. Rather than making its clients whole, Canaccord is digging in its heels, insisting it can't afford to and blaming Scotia Capital. Scotia sold Canaccord the paper that ended up with Canaccord retail clients.

But Canaccord's Dept. of Thought isn't looking terribly independent. In its court filing, it basically says Scotia should have warned it that this paper was risky, or getting risky, because Scotia knew. That is quite possible. But Canaccord could have known too. The main point of contention is an e-mail sent last July by Coventree, which sponsored the ABCP trusts in question. The e-mail was sent to Coventree's sales agents, including Scotia, and revealed that there were subprime assets in the trusts, although the percentages ranged.

A couple of weeks later, Scotia sold Canaccord another pile of paper from its inventory, most of which the brokerage placed with clients. Within days, that paper seized up and some clients face losing their homes. Canaccord contends that Scotia had material information about the trusts and that had it shared this information, it would never have bought and placed the paper. Scotia says the information in the e-mail was incomplete and therefore not material. Really? It was important enough that Royal Bank stopped selling Coventree paper, and CIBC stopped trading it. Point Canaccord.

That said, Canaccord had access to the list of assets the trusts held. Furthermore, Standard & Poor's published a research report in 2002 called "A leap of faith," which described the huge risks of owning non-bank ABCP. Canaccord tells me it wasn't aware of the report until after the market seized up last summer. Point Scotia.

Scotia was not only an official seller of Coventree paper, it also made money selling assets into the trusts. It was certainly familiar with some of the stuff backing the notes. While the bank claims there's a Chinese wall separating the bank, which would have sold assets to Coventree, and the brokerage, which would have sold Coventree paper, the fact is that the institution's chief risk officer is responsible for the entire organization, brokerage and bank. So much for that Chinese wall.

So while Canaccord's total exposure is disproportionately huge at about $300-million, it's hard to argue Scotia can't take any credit for that, having smartly moved a lot of its own inventory into the Canaccord selling chain. As for why Canaccord was so eager to sell this paper, it's hard to know. What's obvious is that, whether hoodwinked by a self-interested bank or not, it should have known. As for Scotia? It's role in this will come out in time.

But investors shouldn't have to wait. Purdy Crawford says retail investors are now his priority. And while he makes noises about how they should take a deal that involves getting paid back, hopefully, over a few years, I say don't. First, you're not likely to get full recovery on your money. Second, why should you wait? To make retail investors whole will cost the Montreal Accord players nothing. Canaccord is willing to pay a big chunk of the penalty. The rest is chump change to the players. The only question is optics. So keep embarrassing and threatening. They'll do the right thing soon enough.

ABCP investors get new lifeline
A group of Canadian financial institutions is in talks to create a unique market to allow individual investors to recover savings trapped by the asset-backed commercial paper meltdown last summer. According to people familiar with the negotiations, Vancouver-based brokerage Canaccord Capital Inc. is steering the initiative. Canaccord was the leading seller of ABCP to individual investors in Canada. About 1,400, or 80 per cent of an estimated 1,800 individual ABCP holders purchased the notes from Canaccord.

Many of these retail investors are balking at a court-supervised restructuring plan that calls for ABCP investors to convert the frozen paper into longer-term notes that won't be repaid for as much as nine years. Canaccord, which also holds a substantial portfolio of ABCP, is working with other major funds and companies holding the notes to create a new market only for retail investors so that they can exit quickly from the investments at minimal losses.

Although retail investors only account for more than $260-million of the total $32-billion of paralyzed notes, they collectively have enough votes to stop the court-supervised restructuring, which goes before investors April 25. ABCP investors such as Canaccord, the Caisse de dépôt et placement du Québec and Groupe Desjardins have a huge incentive to help smaller investors because most of the value of the $32-billion of frozen notes could be vaporized by margin and collateral calls if the restructuring plan fails.

According to people familiar with the talks, Canaccord's plan calls for other major ABCP institutions to set aside funds which could be used to buyout smaller investors. The biggest challenge facing Canaccord is support from other big players. As an independent brokerage, it doesn't have the capital to fully make its clients whole. The brokerage also doesn't feel that it should have to shoulder full responsibility for the ABCP meltdown.

The obstacle Canaccord faces is that other major ABCP holders such as Quebec pension fund Caisse de dépôt [are] worried that it would face a backlash from its own pension clients if it comes to the aid of other investors. The market value of the notes has fallen during the current credit turmoil, prompting many major investors, including the Caisse, to announce writedowns.

Despite the obstacles, the financial logic of Canaccord's proposal is compelling. "I'm not worried about $200-million blowing up a $33-billion restructuring," said one person close to the discussions

Crawford Ready To Deal
Amid a growing outcry from angry retail holders of frozen asset-backed commercial paper, the head of a committee overseeing the restructuring of the $32-billion market says he is ready to "make a deal." "I can't say what the deal will be; I can just tell you we will make a deal," said Purdy Crawford.

Mr. Crawford told a business luncheon in Toronto that it may be necessary to improve the terms of the restructuring for retail holders of ABCP to win their vote of approval. But he offered a word of caution: "I'm hopeful retail investors will get some good advisors and come to the table realistically."

Under the proposed arrangement, all investors will receive new restructured notes with maturities based on the underlying assets. But because of the ongoing credit crunch, the notes are expected to trade well below par, at least in the near future. Indeed, many analysts predict that even if investors can hold them to maturity, they may still end up facing losses.

Many retail investors who own the notes are angry because they say they were never warned by the banks that sold it to them about the associated risks. Indeed, some claim they were misled. Last week, a noteholder group led by Brian Hunter, a Calgary-based engineer with about $650,000 of his savings tied up in seized-up ABCP, said they would block the restructuring unless they are made whole by the banks and financial institutions that are backing it.

More than 80% of the notes are held by a few dozen companies and institutions such as the Caisse de depot et placement du Quebec. But there are about 1,600 retail investors -- putting them in the majority -- and that is key because in order for the restructuring to proceed it must get the nod from more than half of all noteholders. Mr. Crawford said he expects the crucial noteholder vote to take place at the end of April. He said he is optimistic the restructuring will get the green light, in which case it could be completed by the middle of May.

"I've talked to a fair number of the noteholders and some of them are angry, justifiably from their perspective," he said. "They know they have some power and are not going to hesitate to use it. My real concern is that they will overplay their hand and the whole thing will come crumbling down." Mr. Hunter said he is pleased the voices of individual noteholders will be heard. "This is about getting a seat at the negotiating table," he said.

One of the most controversial aspects of the restructuring are the legal releases provided for all the backers. The releases basically protect them from any lawsuits that might be filed by investors or other market participants. Mr. Crawford defended the decision to include the releases. "What we did was the art of the possible," he said.

He said investors will likely get most of their money back if they hold their notes to maturity. However, where they trade in the secondary market that is expected to develop, "God only knows," he added.

Big investors must watch their step with small ABCP holders, analyst warns
The banks and institutions that are the driving force behind a proposed restructuring of $32-billion of asset-backed commercial paper should be careful not to step on the toes of smaller noteholders, an analyst is warning. "If the big investors haven't already been warned not to overplay their hand, they should be," said Michael Goldberg, an analyst at Desjardins Securities.

The roadmap for the restructuring was conceived by a handful of major financial institutions led by the Caisse de dépôt et placement du Québec, the biggest holder of the notes. But when the restructuring comes to a vote next month, retail investors will be the decision-makers since they are far more numerous. And many of them are angry about the process, saying their interests are being pushed aside by the bigger players.

Mr. Goldberg's comments come a day after Purdy Crawford, the head of a committee overseeing the restructuring, told retail investors not to push their weight around. In the end, all the players need to come to an agreement, Mr. Goldberg said. "It's in everybody's interests. If they don't, it's like mutually assured destruction."

Canadian ABCP investors bullied
An estimated 1,500 individual and corporate retail investors have been left holding the bag on more than $900 million worth of junk credit they should never have been allowed to buy in the first place if Canada’s regulators, laws and intermediaries had done a proper job. In total, $32-billion worth of this stuff was exported by Wall Street to Canadian individuals and institutions, but the big banks and brokers recently cut a deal and threw the non-bank investors under the bus.

Purdy Crawford and the Bank of Canada put together a package among the banks, brokers and pension plans then wrapped it in a ribbon by getting bankruptcy protection. The smaller players were denied a seat at the table or opportunity to organize or sue even though the deal benefits big players but is ruinous for small ones. (Crawford extended an olive branch to small investors this week but without details or helping them organize.)

“The CCAA [bankruptcy protection] does not allow class action lawsuits against the parties so the only way we can get to a class action is to defeat the proposal,” said investor, Brian Hunter, a Calgary oil man whose broker, Canaccord Capital Inc., wiped out his $658,000 RRSP by replacing legitimate corporate bonds with worthless junk. (Canaccord is protected under the Crawford arrangement because it lost money and is a signator but it stranded its clients.)

The big chartered banks, to their credit, looked after their clients by taking back the junk, but Canaccord and some credit unions refuse to do so. The only “good” news is that the deal can be defeated if 50% of these small investors vote against it on April 25. The bad news is they have been denied a list of investors which makes organizing and getting legal advice impossible. Frankly, Ottawa is also to blame.

The fed’s bank regulator, the Office of the Superintendent of Financial Institutions, waived prospectus requirements on the junk credits because a third-rate credit rating agency rated them as top quality. By contrast, American and British regulators required prospectuses. “My broker told me it was GIC compatible,” said Hunter. “You couldn’t have known there were high-risk derivatives behind this without a prospectus.”

These investors have been orphaned by the government which should force all regulated intermediaries to take back this junk, as did the others. Canaccord and the credit unions should be stripped of their protection under the deal. The big boys’ arrangement ruins small investors but not big ones: the Caisse or banks can protect their balance sheets and recoup some of the losses because losses will shelter profits from taxation. “They claim there will be a gray market and somebody will buy it so they can put it on their balance sheet at 80 cents on the dollar which nobody will notice,” said Hunter.

Frankly, Crawford, the courts and auditor should have looked after all investors, not just the ones who could pay the big legal fees. The little guys weren’t even allowed inside the tent. The big boys could afford advice and got access to the Ernst & Young distribution list so that they could organize and lobby. The little guys were not only denied access but even their day in court.

ABCP meltdown erodes trust in small dealers
The ABCP debacle has likely done long-term damage to smaller, independent investment dealers. Clients occasionally curse the big, bad Canadian banks, but for millions of their customers, this asset-backed commercial paper crisis has had all the personal impact of a war in Africa. It's something distant to read about, not something painful to experience.

The only large institution with major exposure – National Bank – moved quickly and admirably last August to soak up $2-billion of frozen paper. The other five big banks had next-to-no frozen paper retail client portfolios. That's not the case for 1,800 investors at smaller financial institutions. They have seen a supposedly low-risk, liquid portion of their savings stuck in limbo for seven months. This wasn't mad money. It was cash set aside for buying a new home, or paying for retirement trips.

Now small investors are coming to realize what the pros have known since late summer: That each dollar of ABCP is worth 60 to 80 cents. And they are still two months away from getting access to their cash. The pain is being felt by about 1,400 individuals who bought $269-million of ABCP from Canaccord Capital, and 355 customers who bought $48-million worth of now-frozen paper from Credential Securities, the brokerage subsidiary of the Credit Union Central.

No matter what the outcome of the ABCP rescue plan, these investors and a whole lot of other Canadians will come to the conclusion that big is better when it comes to their savings. (This crowd will also think twice before ever relying on the endorsement of ratings agencies such as DBRS, which gave ABCP its highest endorsement through this entire meltdown.) There will still be assets given to smaller firms, but the ABCP debacle has eroded trust.

This reinforces a long-running trend. A decade back, after Royal Bank bought investment dealer Richardson Greenshields, CEO Chuck Winograd was asked if clients were leaving now the big bad bank had snapped up the feisty independent. Mr. Winograd, who took justified pride in how close his Rich Green advisors were to clients, gave a funny smile and explained the opposite was true.

He said long-time customers, including a great many rural investors, were cracking open the vaults to hand their Rich Green stockbrokers even more of their savings, now the dealer enjoyed the backing of familiar, safe Royal Bank. It was a little humbling, admitted Mr. Winograd, now the head of Royal Bank's investment dealer arm. 

Bottomless Financial Sector Bottom
Public investors bought hookline & sinker the tech telecom bubble by bidding up stocks for companies with no earnings. Public investors bought hookline & sinker the housing bubble by bidding up homes and related mortgage finance stocks, when homes had absurdly overstated values. The public will thus earn a strategic spot in bread lines, as their lifetime savings slowly vanish, as their home equity slowly vanishes, as their pension funds slowly vanish.

The consumer has fading job security, little credit to rely upon, and is increasingly under-water in upside down home loans. The USFed lost control of the monetary handle long ago, the monetary spigot, and the monetary cure. The historic decline in the USDollar is the global report card on their horrendously destructive legacy.

The rising gold price is the siren call of financial distress felt worldwide. When gold returns over $1000 mark, when silver returns over the $20 mark, the distress signals will be heard again. Give it another two weeks for sentiment to repair from the hedge fund margin call coordinated in the last ugly week. Raise suspicions that those margin calls occurred when JPMorgan was capturing Bear Stearns. A coincidence? Not a chance!
My full expectation is that more shoes will fall. Citigroup has stalled in finding fresh cash in exchange for capital from foreign investors, who maintain a ‘Wait & See’ attitude. Arab sheiks and their henchmen, along with European tycoons will be holding back. Joe Lewis realized a sudden $1 billion loss with his pet Bear Stearns project. The world of tycoons is watching. Lehman Brothers bears the closest profile to Bear Stearns, and is the most likely to suffer demise. It could be sudden.

Watch Citigroup merge in order to share its pain, in a gesture that hides its desperation. In the last week, a credit derivative meltdown centered on JPMorgan soil was averted. The next chapter in this unwinding disaster will probably not be so clean in its appearance. Lastly, Merrill Lynch gave away their weakness, trying to acquire an XL Capital unit. Merrill appears to hedge defaulted and reneged on a swap contract. Could Merrill be broke and out of cash? Will the crows on Wall Street kill them next, one of their own? Heck yes, if it attends their needs.

The ultimate requirement for a true valid bank sector recovery is for a halt in the housing price nationally. The S&P Case-Shiller metropolitan 10 city index registered a horrendous national decline of 10.7% in January, on an annual basis. That is not stable! In fact, it looks like it is growing worse as some heavy inventory is clearing at lower prices. Underlying bond collateral continues to erode. When that collateral behind the asset backed bonds, the mortgage bonds, and all their leveraged Collateralized Debt Obligations, declines in value, all such securities continue to fall in value, regardless of whether cheerleaders, conmen, and carnival barkers scream and yell to the contrary.

The big banks are desperately dragging their heels in reluctantly moving cratered bond securities to their balance sheets. We have seen newly devised shell games repeatedly inflicted upon the markets, what with SIVs, MLECs, UFOs, and SIEs, all intended to delay and deceive. Don’t even bother to understand what the acronyms means, just think fecal coated bonds worth less than posted, made to appear like M&M candies. The usual outcome of busted bubbles is a return to pre-bubble prices.

That means at least a return to 1999 housing prices, and possibly a return to 1992 prices if the new collections fail to deliver. The gigantic rescue platform for mortgages, the official bond refund lending facilities, the flimsy USGovt stimulus plan, these had better be designed as large, really large, because the current housing crisis and mortgage debacle is bigger than anything the nation has ever faced. It will require a remedy apparatus larger than anything ever devised.


Farmerod said...

From yesterday's comments, Scandia said: I must say, thanks to what I am learning on TAE, I actually sound like I know something. I know I know something contrary to what staff at our Cdn banks are saying on this day, March 27th. I find this lack of disclosure troubling/criminally misleading.

It is refreshing to hear of someone who is willing to strong arm the big bank and call BS when given the glossy charts. My own mother in law tried the same thing but when she said she wanted to sell her DPSP insurance company stock for cash, the bank rep told her to give her head a shake ... which she did. Alas, my MIL still has her insurance company stock.

TAE, and others in the know, seem to be saying we are in a whole new world.

Yes and no. Western society has pretty much been brainwashed into believing that declines are short lived. Galbraith's book, advertised below, A Short History of Financial Euphoria convincingly argues that we are simply in an ever repeating pattern of bursting bubbles. He starts from Tulipmania in 1630's Holland and writes up to the 1987 stock market crash. In today's case, Galbriath would probably identify the new 'riskless' financial paradigm of leverage to be CDS, CDO and so on, backstopped by the general population's belief that home ownership is a human right and achievable by all, thanks to very creative and highly leveraged mortgage products built on the premise of ever increasing home values. Or as Taleb says in Black Swan The book's message offered something of a preview of the crisis: that we're all blind to rare events and routinely fool ourselves into believing we can predict risks and rewards

It took 25 years after the crash of '29 for the US stock market to regain its pre-crash level, excluding inflation. My 60ish parents-in-law prefer to believe what they are being told by bankers who have a vested interest in spewing ignorance and/or deceit.

Stoneleigh said...


Galbraith's book is a must read for anyone who wants a short and readable introduction to the phenomenon of economic bubbles. They are indeed been going on since time immemorial, grounded as they are in human nature. Many are relatively small and local, but others drag in much wider areas and climb to greater heights before they collapse.

The difference this time is one of scale. There has never been a bubble of this size before, either in depth or breadth (ie the severity of the excesses and the geographical area affected). Although there are still valuable lessons to learn from the unwinding of previous episodes of extreme leverage, things may well happen this time that have not happened before.

Previously, unaffected areas might have provided a stabilizing effect that won't be there this time, as this time the bubble is global. We have so far to fall, and are so unprepared (individually and collectively) to face what's coming.

Farmerod said...

Galbraith's book is a must read for anyone who wants a short and readable introduction to the phenomenon of economic bubbles.

Indeed. I meant to give the book a bigger plug but then forgot. Mind you, my last post was ridiculously long without it. The book is probably a 3-hour read, highly informative and quite entertaining. Galbraith has a dry wit that takes understatement to a new level.

Other factors that might make a depression worse this time around are: the comparatively tiny proportion of people these days who are employed by farming directly versus the comparatively large proportion of people who are employed creating GDP from 'services' that we really don't need. Also, we're already fighting a war; manufacturing another war will have a lower marginal economic benefit. And, of course, peak energy. Oh, I just about forgot demographics. I'm going to stop thinking about this now.

Anonymous said...

I've seen this current situation referred to as a 'Great Depression' like event. I think it's a rhyme of history, not a repeat.

So in this vein I would like to nominate "The Great Unraveling" as the label of choice for this event.

The MSM will eventually have to come up with something catchy but will undoubtedly try to spin and sugar coat it, like "The Small Setback until the FED Straightens it All Out".

Farmerod said...

"I can't say what the deal will be; I can just tell you we will make a deal," said Purdy Crawford.

I wonder whether Poker-face Purdy can come to my Texas Hold 'Em night tomorrow? What a clown. And then he says, I'm hopeful retail investors will get some good advisors and come to the table realistically.

If you're a small ABCP investor, you'd have to have some pretty dumb advisors not to walk away from this without just about all of your money. These guys got lucky, given the debt climate these days. The only caveat is that the whole legal process might take so much time that nobody gets anything.

Anonymous said...

What they will spin the Depression as…“We’ve had worse.”

Monty Python-The Black Knight
Arthur has cut off both of the Black Knight's arms off
King Arthur: “ Look, you stupid Bastard. You've got no arms left.”

Black Knight: “Yes I have.”

King Arthur: “Look!”

Black Knight: “It's just a flesh wound!”

Ilargi said...

Just from the few articles I posted on Canada ABCP today, I think a good lawyer has enough to make case for bad faith on the part of Crawford and his committee.

Not knowing the number of investors for a whole 6 months, and therefore neither their identities, and then turning around and saying that you will make them a good deal, it all smacks like low beat second-hand car dealing.

He tops it off with veiled threats to the same people he doesn't care enough about to acknowledge their existence. Purdy better be careful, anything less than full payment for small investors, plus legal fees, may land him in rough waters now.

Farmerod said...

I think a good lawyer has enough to make case for bad faith on the part of Crawford and his committee

Surely all the big guys had their own lawyers at the table or, at least, had their in-house lawyers approve the deal.

On a related note, I have a question on ABCP:

Is Brian Hunter, a Calgary oil man the same Brian Hunter described as the most spectacular speculative screwball on the planet who single-handedly lost $6.6 billion in NG futures to sink Amaranth?

Suddenly I have less sympathy...

Ilargi said...


My gut said age was the factor, and it was right:

Brian Amaranth Hunter was 32 when he rose to fame in 2006. Brian ABCP Hunter is a 53 year-old engineer. i wonder: does this make a case for Calgary as a cesspool of incest?

Ilargi said...

Anon 835.824

I wrote something a long time ago called The Great Unraveling. That was about life on the planet, but still, it's been used. We need a better option.

Anonymous said...


Have spent some time on the St. Louis Fed site, playing with the graphs, etc.

Noticed that the BOGNONBR data was updated this morning, but the graph only shows to 2008.02.01 and refuses to move up any more to the present. Is this normal? When will the graph show to 1 March?

Second question. Both BOGNONBR and BORROW concern depository institutions. Does that include investment banks?

Thanks for the info.

Rayrick said...

I thought the non-borrowed reserves numbers were just a reflection of the TAF being a better deal than the fed funds market:

oswald said...

Where was the media?

Ask the Onion.

Ilargi said...


Since you can't make deposits at investment banks, or rather they can't legally accept it, they are not depository institutions. Simple as that. Unless that's been redefined as well. The ones that are: commercial banks, savings and loan associations, savings banks and credit unions.

I don't know why you went to the St. Louis Fed, but if you click on the text below the opening graph (Non-borrowed reserves: Mar 12: - 17 billion • Mar 26: - 61 billion), it takes you to data released by the Fed, as they were released yesterday.

My apologies to everyone if that was not clear. In general, most text displayed in RED on TAE holds a link, though not all. Just try, I'd say. I kind of like the palette I set for the site, and I think I'll stay with it for now, so red it is.

Ilargi said...


That Caroline Baum article was butchered when it came out and she's dead wrong. We ran the subject on Feb 8, 9 and 10. Geez, that seems so long ago... My Feb 9 comment:

"The next three articles all cover the same topic: the negative non-borrowed reserves numbers for banks that recent Fed documents are showing. Opinions vary, to put it mildly. First, a UBS strategist, second, Caroline Baum at Bloomberg, and third, Karl Denninger reacting to Baum. I'll let it speak for itself. The only thing I have to add is that when I read M(r)s. Baum's article yesterday, I had the impression that she's trying awfully hard, too hard, to make her "nothing going on here" point. And the "experts" she quotes have strange ideas:
"There is no such thing as a banking system short of reserves."
" a world where "the Fed can print money, there is no shortage...""

The Fed was available in the same role in 1929. What happened then, "expert"? What went wrong? If Citigroup pays 14% interest on its "capital infusions", doesn't that mean anything at all with the Fed Funds rate at 3%?"

Karl Denninger was more explicit:

This morning we had yet another "KoolAid Drinking Reporter" - this time its Bloomberg's Caroline Braun. She cites many "bloggers" who sounded alarm bells at the latest H.3 report.

I'm one of them, by the way.

Well, if I'm a tinfoil hat wearer (in her opinion) for noticing that Citibank was forced to borrow hard money from the Arabs at 14% interest, yet is allegedly a "perfectly solid and wonderful US financial institution", and the banks (in aggregate) are in fact funding their reserve requirements via the TAF specifically to avoid transparency in going to the discount window then I accept the label with pride.

Tell 'ya what Caroline - why don't you do your "journalism job" and tell us why Shitibank had to borrow money from the Arabs at 14% interest if everything is ok, why these other "safe and sound" banks are borrowing money via preferred issues in the 7%+ range when Fed Funds is 3%, and why this demonstrates that ALL THESE INSTITUTIONS ARE PERFECTLY GOOD AND SOUND BANKS WHEN THEIR DEBT ISSUES ARE PRICED AT JUNK BOND LEVELS!

I know that part of the media's "purpose" is to lead the sheep in where they can be SHEARED, but in my view this has gone well beyond the usual yellow journalistic pumping that compels me to wrap dead fish in the newspaper.

Rayrick said...

My bad, Ilargi. Missed that day, apparently.

Anonymous said...

Hello Ilargi,

No problem with the link, everything about the site is clear.

I sometimes check in with Fred (data base) at the St. Louis Fed because the site is full of interesting data series that can be put up on graphs. The pale blue background of the graphs is a telltale sign of the origin.

Several weeks ago, someone (you?) put up the BOGNONBR and BORROW curves together in a single graph and at the time, I did not note the distinction concerning "depository institutions", which led me think that this data also applied to investment banks. Apparently, that was wrong.

Now, following your link, I read that the Fed is including the PDCF in the Aggregate Reserves of Depository Institutions. Does that not strike you as odd? The document explicitely includes the "other credit extensions" to JPM and BSC even though they are not depository institutions. Do they not have another data series to put these figures? Why pollute the "depository institutions" data with these additions? Is the distinction being blurred?

Thanks for any info.

Ilargi said...


From what I see, you left something out: the PDCF is included in: "Aggregate Reserves Of Depository Institutions And The Monetary Base". That does not make Investments Banks depository, but the Fed does lend to them. That's what the PDCF was created for.

The "Other Credit Extensions" are relatively small, and likely the newer alpha soup instruments. I don't see JPM and BSC mentioned explicitly.

scandia said...

Darn, had to work late and missed all the news. I just discovered a call from the Scotiabank manager on my answering machine. Hm-m wonder what they will offer me on Monday? Also tickled pink to have the postings to-day on ABCP and Scotiabank's role in passing them on to investors. I'll continue to sound like I know something on Monday!
To-night CNN did a program on the housing bubble/how we got here. Set up as a poker game. No kidding! Comparisons were made with Japan, not Bulgaria.It closed with the good news that all will be well again by 2010! I don't think so. Not a word was said about derivatives/peak oil/water shortages/food prices...

scandia said...

About these stimulus cheques. That's a lot of money. Can't imagine it will be borrowed from the Arabs or the Chinese.Banks are apparently hoarding their stash of cash. So is the Fed just printing it up fresh for this mailing? Then I had a dark thought...what a perfect way to launder huge amounts of money!

Anonymous said...

Hi, all.
Just a comment, this article is very good and easy to follow. Its on Financial Sense Online, which I recommend.

Good to the Last Drop?
for today, friday

By the way, I see most Wall Sreet investment banks' stocks heading south; shall we have a busy week?? Please, markets, give Bernanke a free weekend!!

Anonymous said...

Treasury’s Plan Would Give Fed Wide New Power

"The Treasury Department will propose on Monday that Congress give the Federal Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system."

The Day Wall Street Ate the US Congress. The government wants a strong hand to guide and protect them.

Ilargi said...


I see i didn't read well, JPM/BSC are mentioned in the intro. Kind of looks like they make up categories as they go along. And it's about to get much wilder, as you can see today .

Anonymous said...

Ric, intreresting article and a hoot in spots, like this about new fed authority:
... even allowing automatic approval of securities products that are being traded in foreign markets

Now what sort of demented 'foreigner'
would buy a used or especially a new vehicle from these low lives, have to be barking mad. For instance I sure don't think those Norwegian pensioners are going to be lining up at that show room door ... too badly ripped off from the last go around I would imagine.