Thursday, March 6, 2008

Debt Rattle, March 6 2008: King Midas meets Pinokkio

Ilargi: As I read through the stories this morning, I couldn't shake the feeling that I'm increasingly looking at King Midas meets Pinokkio: all the wooden people involved in the credit shake-down, who once turned everything they touched into gold, now just grow long noses.

And I could throw in the Emperor's new clothes.

Updated 4.40 pm

Ilargi: Never mind the big banks. Credit at ground level is unraveling. That means the money used for your roads, you sewer system and water treatment, and your hospitals too, as we have predicted numerous times. What do you think will happen next?

Alabama county official says bankruptcy an option
Alabama's Jefferson County may consider a bankruptcy filing to resolve a financial crisis surrounding $3.2 billion of sewer debt, the county's commissioner for finance said on Thursday. "Bankruptcy is certainly an option," County Commissioner Bettye Fine Collins told a reporter at a commission meeting in Birmingham. Collins spoke a day after a lawyer representing the county, which is home to Alabama's largest city, said Jefferson County had no plans to file for bankruptcy protection.

Collins also said county officials were meeting in New York to work out a solution to a liquidity crisis that may force the sewer system to pay $184 million in costs tied to interest rate derivatives based on outstanding revenue bonds. But she said the county was not expecting to use any of the $400 million in a county liquidity fund, Collins said. "We are not looking at dipping into the fund," said Collins, who oversees the county's finance and general services operations.

Collins, in response to another question, said that customers of the county's sewer system should not have to pay higher rates as part of any workout of the debt crisis. "I don't believe that the people in this county need to be taxed anymore," Collins said. "I represent many citizens, and I don't know how they do it. I believe we will come up with a plan to deal with this without pain to the rate payers."

Ilargi: Here’s some Jefferson County background from March 3:

Alabama County Is Center of Muni Turmoil as Debt Cut
Jefferson County, Alabama, had $3.2 billion of bonds slashed to below investment grade by Standard & Poor's, putting it at the center of turmoil in the U.S. municipal bond market that has driven up borrowing costs.

The downgrade, made after the markets closed on Feb. 29, came after the county, which includes the state's biggest city of Birmingham, said it may be unable to pay banks holding floating-rate debt for its sewer system or make payments on related interest-rate swaps. Jefferson County, with $193 million in sewer reserves, faces the prospect of having to pay more than $1 billion to banks to buy back debt and unwind the swaps.

"It's a very bad situation," said Robert Brooks, the SouthTrust Professor of Financial Management at the University of Alabama in Tuscaloosa. Jefferson County is paying the price of a faltering credit market as investors and securities firms shun floating-rate securities, including auction-rate debt, guaranteed by bond insurers crippled by losses on securities linked to subprime mortgages.

The county's plight shows what can go wrong for public borrowers across the U.S. who rely on financial products engineered by Wall Street and peddled on the promise of lowering costs and reducing risk at little expense to taxpayers. The county, on the advice of JPMorgan Chase & Co., refinanced about $3 billion of sewer debt in 2002 and 2003 using floating-rate debt, including bonds with rates set at periodic auctions, mostly insured by FGIC Corp. and XL Capital Assurance.

Credit Swaps Thwart Fed's Ease as Debt Costs Surge
Credit trading models used by Wall Street have gone haywire, raising company borrowing costs even as Federal Reserve Chairman Ben S. Bernanke cuts interest rates. General Electric Co. is one of five U.S. companies rated AAA by both Standard & Poor's and Moody's Investors Service, making its ability to repay debt unquestioned. Yet when the Fairfield, Connecticut-based firm sold 2.25 billion euros ($3.35 billion) of five-year bonds last week, its annual interest payment was $17 million higher than on a sale nine months ago.

Borrowers from investor Warren Buffett's Berkshire Hathaway Inc. to Germany's HeidelbergCement AG face the same predicament. Yields on $5.12 trillion of corporate bonds tracked by Merrill Lynch & Co. average 2.05 percentage points more than U.S. Treasuries, the most since at least 1997. The higher costs are an unintended consequence of securities that allow investors to speculate on corporate creditworthiness.

So-called correlation models used to value them have become unreliable in the fallout from the U.S. subprime mortgage crisis. Last month some showed the odds of a default by an investment- grade company spreading to others exceeded 100 percent -- a mathematical impossibility, according to UBS AG. "The credit-default swap market is completely distorting reality," said Henner Boettcher, treasurer of HeidelbergCement in Heidelberg, Germany, the country's biggest cement maker. "Given what these spreads imply about defaults, we should be in a deep depression, and we are not."

Ilargi: WaMu is the US' biggest savings and loan association, and one of the principal mortgage lenders. A downgrade is potentially right up there with the bond insurers..

S&P Downgrades Washington Mutual
Standard & Poor's Ratings Services cut Washington Mutual Inc.'s credit rating on Thursday, saying the bank faces steeper losses on bad home loans than the ratings agency expected. S&P slashed Washington Mutual's rating to "BBB" from "BBB+." The rating still implies Washington Mutual's ability to repay its debts is "lower-medium grade." Based in Seattle, Washington Mutual runs more than 2,250 branches and has a loan portfolio of $227 billion, mostly real estate loans.

The bank wrote $1.62 billion off its portfolio last year and set aside almost that much bracing for more unpaid loans. Mortgage credit has deteriorated in the past year because home owners are besieged by flagging property values and an uptick in unemployment. S&P said it now believes the downturn in mortgage credit will be more severe than anticipated. The severity of losses on home loans will be higher than the ratings agency thought as housing remains weak, especially in key markets like California and Florida.

Ilargi: A very good description of the fast process of a failing highly leveraged fund:

Banks call time as Carlyle Capital fails margin calls
It’s been a short and unhappy life so far for Carlyle Capital. After listing last July the mortgage-backed securities fund, a so-called permanent capital vehicle for private equity group Carlyle, almost immediately hit trouble. Its share price slid, and it had to turn to its namesake for help in meeting margin calls in August - twice. Unfortunate and embarrassing for Carlyle, who were forced to apologise for lapses in communication when investors started asking more probing questions about the fund’s difficulties.

Carlyle Capital’s fortunes haven’t improved. It has now missed margin calls from four of its repo counterparties and has received a default notice - with another thought to be on its way. But the fund is still sticking to its original line - that its $21.7bn of investments in AAA-rated securities issued by Fannie Mae and Freddie Mac are good, carrying the “implicit guarantee of the US government”. They’re being mis-assessed by their counterparties. In fact, it looks like a stand-off. Carlyle has already paid out $60m in margin calls since the beginning of the month but:
However, on March 5, the Company received additional margin calls from seven of its 13 repo counterparties totaling more than $37 million. The Company has met margin calls from three of these financing counterparties that have indicated a willingness to work with the Company during these tumultuous times, but did not meet the margin requirements of the four other repo financing counterparties.
There’s bad blood between funds and their banks. And aggrieved Carlyle seems to be picking who it pays. Peloton has pointed to the doubling or tripling of cash required to be put up for loans in its own demise. Of course, everyone thinks they should be the exception as the banks turn off the liquidity spigot. After all, only a couple of weeks ago we were being told that all would be well this time round, as prime brokers and lenders would be more discerning in pulling the rug from under hedge funds. Carlyle Capital’s CEO said:
The last few days have created a market environment where the repo counterparties’ margin prices for our AAA-rated U.S. government agency floating rate capped securities issued by Fannie Mae and Freddie Mac are not representative of the underlying recoverable value of these securities. Unfortunately, this disconnect has created instability and variability in our repo financing arrangements. Management is actively working with the Company’s repo counterparties to develop more stable financing terms.
The signs are that the market for any variety of credit, top notch or sub standard, is spooked. Rumours that UBS is disposing of Alt-A securities at a heavy discount adds to the general sense of credit unease. One point of note in the Carlyle statement is that it now say it has sold almost $1bn in non-RMBS assets since last summer. But the fund got shot of $900m last August, suggesting that it has only managed to shift a further $100m since that time.

The losses from those sales pushed the fund to a third quarter net loss of $34.2m. The absence of further sales at depressed prices might explain how it notched up income of $17.6m in the final quarter of the year. The speed at which its on hand resources are being eaten up by its counterparties demands does not bode well for the fund.

Carlyle Fund Gets Default Notice After Margin Calls
Carlyle Group's publicly traded mortgage bond fund failed to meet margin calls and said it received a notice of default. Carlyle Capital Corp. missed four of seven margin calls yesterday totaling more than $37 million, the Guernsey, U.K.- based fund said today in a statement. The fund expects to get at least one more notice of default related to the margin calls.

The collapse of the subprime mortgage market has prompted investors to flee all but the safest forms of debt, leading to the failure of hedge funds including Peloton Partners LLP. The Carlyle fund raised $300 million in July and used loans to buy about $22 billion of AAA rated so-called agency mortgage securities issued by Fannie Mae and Freddie Mac.

"The credit crisis is spilling over to the next asset class, agency bonds," said Philip Gisdakis, senior credit strategist at UniCredit SpA in Munich. "There's never just one cockroach. If you see one highly leveraged hedge fund going bust, then there's another on the way."

U.S. Mortgage Foreclosures Rise as Owners 'Give Up'
U.S. mortgage foreclosures rose to an all-time high at the end of 2007 as borrowers with adjustable-rate loans walked away from properties before their payments increased, the Mortgage Bankers Association said today.
New foreclosures jumped to 0.83 percent of all home loans in the fourth quarter from 0.54 percent a year earlier. Late payments rose to a 23-year high, the organization said in a report today.

"We're seeing people give up even before they get to the reset because they couldn't afford the home in the first place,'' said Jay Brinkmann, vice president of research and economics for the Washington-based trade group. The Bush administration is urging lenders to avert foreclosures by modifying mortgage terms amid the worst housing slump in a quarter century.

The Federal Reserve has slashed its benchmark interest rate twice this year to try to avert the first recession since 2001. The central bank yesterday said the net worth of U.S. households decreased by $532.9 billion during the fourth quarter as home values fell. The share of all home loans with payments more than 30 days late, both prime and fixed-rate loans, rose to a seasonally adjusted 5.82 percent, the highest since 1985, the bankers' group said in today's report.

About 40 percent of all foreclosures are homeowners with prime or subprime loans who couldn't make their payments before the reset, Brinkmann estimated in an interview. Another 23 percent are borrowers who received some form of loan modification, typically a freezing or a reduction of their rate, and then default, he said. 42 percent of new foreclosures in the fourth quarter were people with adjustable-rate subprime mortgages, given to borrowers with limited or tainted credit records, according to the report. Those types of loans accounted for about 7 percent of all mortgages, the report said.

"It comes down to an overstretching of buyers to get into homes they couldn't afford and an overextending of credit by lenders who were more willing to take risk,'' Brinkmann said. Another 20 percent of new foreclosures were prime adjustable-rate mortgages, which accounted for 15 percent of all home loans, according to the report.

New wave of risk aversion sweeps credit markets
Despite repeated doses of medicine from central banks, short-term lending markets around the world are struggling again. In both Europe and the US, the rates that banks charge each other for short-term loans remain elevated, a sign of how cautious banks still are about using their capital. In other markets, investors are signalling distress about banks. For example, the cost to buy insurance against a bank debt default is soaring, in some cases to more than 20 times the cost last northern summer.

This unease is also filtering to other kinds of lending, pushing up interest rates on everything from municipal bonds to mortgages to corporate debt. The renewed turmoil in the credit system marks the latest fallout from the deflation of US housing values and the crisis in the sub-prime mortgage market. Banks are at the centre of the storm. Even though they have already taken billions of dollars of write-offs on troubled sub-prime debt, many banks still do not appear to have completed that reckoning process. This has left them constrained for capital, and reluctant to lend out money.

Other worries linger, such as the financial health of bond insurers, which guaranteed repayment on much of the troubled mortgage debt banks hold. Ambac Financial Group, the battered No2 US bond insurer, said it would try to raise $1.5 billion in fresh capital. Its share price tumbled 18.8 per cent. Short-term money markets are the grease that makes the wheels of financial markets spin smoothly. Banks and other financial institutions use short-term money every day for cash that ensures that customers have money when they need it to pay bills on time or jump into investments when opportunities arise.

Many short-term lending rates are still not as high as they were in December, when the market last seized up. Back then, central bankers in the US and Europe took aggressive actions to inject cash into the system and they seem prepared to act again as needed, which could reassure bankers and investors. The Federal Reserve and other central banks have used a variety of measures to calm the short-term lending markets since the credit crisis started disrupting them last northern summer, including interest rate cuts and special injections of cash into markets. Yet a wave of risk aversion is tightening the availability of credit even as the Fed tries to increase the supply. That suggests new, or deeper, remedies could be in store.

"There is still very much a liquidity crisis," says Dominic Konstam, head of interest rate strategy at Credit Suisse. "Banks do not want to keep lending against bad collateral when they are worried that they will need the money themselves." One sign of strain is showing up in the credit default swap market, in which investors can buy insurance contracts on debt defaults.

For instance, the cost of buying such insurance on $10 million of Citigroup debt - which would pay off should Citigroup default - has surged from less than $72,000 a year in January to more than $190,000 today. The cost was just $9700 last June.

It is rising by similar leaps for many other banks as well, suggesting "surging perceived systemic risk to the financial system", writes Hans Mikkelsen, an analyst at Banc of America Securities, in a research report.

Ilargi: Two comments here:
1/ $900 billion less available to banks means $9 trillion less available to borrowers (re:Roubini). That 10:1 factor is simply fractional banking. You can add a factor of 5 to 10 if you include the demise of securities markets. Yes, you're right, that's a huge amount of credit that disappears. Just like that.
2/ Ed Yardeni is not a serious economist.

Banks' Losses Could Put $900 Billion Squeeze On Consumers
Troubled loans – from homes to cars – could trim economic growth by 1 percentage point, a new forecast says.

The retailer Sharper Image offers a stark image of how the credit crisis on Wall Street is becoming a widespread credit crunch for the rest of America: The purveyor of gadgets recently declared bankruptcy, citing a tougher climate for financing among the reasons. That company is not an isolated case. Consumers and businesses now face an economic downturn made more difficult by a contraction among banks and other lenders. In fact, the health of banks has become perhaps the biggest source of uncertainty about the economy. How bad is the damage?

By one new estimate, troubled mortgages alone could knock a full percentage point off economic growth in the year ahead. And mortgages are just part of the problem. With losses also rising on loans for everything from cars to commercial real estate, banks effectively will have less money available to make new loans – perhaps $900 billion less.

"The reality is that banks are in trouble," says Ed Yardeni, an economist who until recently has been optimistic about the economy's prospects for avoiding recession. "I don't think they'll go bankrupt. [But] we're in the process of cleaning up the mess that the financial engineers created" by reselling shaky home loans to investors. The mess doesn't have to have an unhappy ending, he says.

First, not all banks and lenders are in equal trouble. Many large banks pushed as a herd into complex and risky financial products. Citigroup, for one, has lost more than half its stock market value in the past year and declined further Tuesday as a Wall Street analyst predicted deeper losses ahead. But small or mid-size banks, ones that avoided the push into subprime lending, may see the current environment as an opportunity to keep lending and grab a bigger share of the market.

Mortgage Millionaires to Answer to Congress
Three CEOs who made millions of dollars off the housing market -- even as homeowners and their companies started to suffer -- are expected to testify before Congress Friday about why they deserved such large compensation packages. Countrywide Financial Corp. chairman and chief executive officer Angelo Mozilo, former Merrill Lynch CEO E. Stanley O'Neal and Charles Prince, former chairman and CEO of Citigroup, have all been asked to tell Congress whether they believe their pay was justified. Take Mozilo.

As CEO of Countrywide, the nation's largest lender, he stands to make millions if Bank of America's proposed $4 billion acquisition of his company goes through. Facing mounting public opposition, Mozilo has already said that he would give up $37.5 million of severance pay, fees and benefits linked to his expected departure after the Bank of America deal closes. He also gave up some other benefits, such as use of the company's aircraft.

But he still won't leave empty-handed. Separate from his severance package, Mozilo will still keep various retirement benefits and deferred compensation already earned. Those add up to about $44 million. And there is more. Mozilo sold more than $127 million in stock options early on in 2007. Those sales came before he announced a $388 million write-down on profits and Countrywide's growing problems became apparent. As the company's troubles continued, Mozilo kept selling shares, cashing out an additional $30 million in options.

Now Congress wants to know whether he deserves such payouts, especially given that thousands of Americans have lost their homes and his company's stock has plunged, losing more than 78 percent of its value in 2007. As the mortgage market has collapsed, Countrywide has foreclosed on 90,000 loans, has laid off more than 11,400 people and has reported a loss of $704 million in 2007, its first annual loss in more than 30 years.

"According to recent press reports, if Bank of America completes its proposed purchase of Countrywide Financial, you stand to collect tens of millions of dollars in severance payments and other compensation," Rep. Henry Waxman, D-Calif., chairman of the House Committee on Oversight and Government Reform, wrote to Mozilo when asking him to testify.

"I request that you be prepared to provide your perspective on this reported pay package," Waxman continued. "You should plan to address how it aligns with the interests of Countrywide's shareholders and whether this level of compensation is justified in light of your company's recent performance and its role in the national mortgage crisis."

Pending Home Sales Down 19.6%
The hallucinogenic spin-meisters over at the National Association of Realtors are once again, misstating what their own data indicates:
Flat Existing-Home Sales Likely Before Gradual Recovery
The volume of existing-home sales is expected to hold steady through late spring, with a gradual recovery during the second half of the year as the mortgage situation improves in high-cost areas, according to the latest forecast by the National Association of Realtors. Lawrence Yun, NAR chief economist, said many buyers have been waiting for higher mortgage loan limits. “The higher loan limits for both FHA and conventional loans will increase consumer choice and provide greater access to lower interest rate mortgages in high-cost regions,” he said. “Therefore, a notable rise in home sales can be anticipated in the second half of the year."

This statement reflects a combination of wishful thinking and factual misstatements. Let's review the specifics. First, the Pending Home Sales Index fell 19.6% from year ago levels. This is hardly a "flat" number, as described by their PR release. This is significant, as the NAR itself notes in the footnotes to their The Pending Home Sales Index:
"There is a closer relationship between annual index changes (from the same month a year earlier) and year-ago changes in sales performance than with month-to-month comparisons."
Hence, the data that matters most is not the change from December to January, filled as it is with seasonal anomalies, but rather, the January 2007 to January 2008 comparison. That showed almost a fifth lower than the prior year's index. When we consider the rest of the data that's out there, its apparent that stabilization is not the correct word:
-U.S. foreclosures hitting another record high
-Inventory at or near all time highs
-Interest rates rising
Well, at least they stopped saying "Bottom" -- after two years of getting that word wrong

Regulators cite construction loan fears
Loans to homebuilders and other developers are the latest slice of the credit market under duress, and analysts say banks could face hundreds of millions of dollars in losses as a result.As commercial and residential real-estate prices decline, banks of all sizes face a growing number of loan defaults from builders unable to sell houses, and from developers whose malls and other properties turned out to be less desirable than anticipated.

These problems, if they worsen, are likely to rattle shaky credit markets and could cause more banks to fail in the coming years. They come after the prolonged real estate boom made such lending seem exceptionally safe, and default rates had been low. Those seemingly safe loans are proving to be anything but secure. For example, Dallas-based Comerica Inc. set aside $108 million for loan losses in the fourth quarter of 2007, primarily because of bad real estate development loans the bank made, particularly in California and Michigan.

Construction and development loans are loans made to builders for properties such as strip malls, office buildings and residential developments. They have been a key source of profit for small and midsize banks. The percentage of those loans that are 90 or more days past due rose to nearly 3.2 percent at the end of 2007, up from less than 1 percent a year earlier, and is now at levels not seen since the early 1990s, according to the Federal Deposit Insurance Corp.

Ilargi: The Bank of Canada doesn't even try hard to hide the fact that banks' losses will in the end be carried by taxpayers. Question: why now?

Bank of Canada to set terms for ABCP collateral
In a bid to give banks easier access to central bank cash, the Bank of Canada proposed on Wednesday a list of criteria for accepting more risky commercial paper as collateral for its overnight loans.

In a statement, the bank asked for comments on its proposal and said the final terms and conditions for accepting asset-backed commercial paper as collateral would be announced by March 31. The list of criteria included the stipulation that the ABCP not have any exposure to securitized assets, with the exception of those backed by mortgages approved by Canada's national housing agency, CMHC.

However, in an unexpected move, it said it would consider proposals for accepting ABCP with minimal exposure to securitized assets. Those assets can be tied to U.S. subprime mortgages, the source of the U.S. housing crash that sparked a global credit squeeze mid-2007, as well as credit card receivables and auto loans. "The Bank of Canada would also welcome comments on a modification of the proposed criteria to include acceptance of ABCP programs that (may) contain a minimal percentage of securitized assets, say 10 percent, subject to the application of a higher margin requirement," it said.

The bank first announced plans to broaden the collateral it uses under its Standing Liquidity Facility in December last year. Under the facility, the bank provides collateralized overnight loans to support institutions experiencing temporary shortfalls in their settlement balances. Other criteria the bank proposed were that the ABCP be from regulated financial institutions and that they have a minimum stand-alone credit rating of at least an "A".[..]

Colin Kilgour, an ABCP adviser, said he did not think the central bank's proposals would affect the ongoing restructuring of parts of the Canadian ABCP market. That is because third-party conduits that issued the ABCP that froze up last summer would not meet all of the Bank of Canada's proposed criteria for acceptance, Kilgour said. "Today, there's probably one or two conduits that would meet those criteria, out of all the ones that are outstanding," he said. In addition, the bank proposed to only accept those ABCP that agree to disclose details on the range and types of assets underlying their programs.

Ilargi: And here, ladies and gents, is the clincher:
"I think it will have some impact on how conduits are structured on a go-forward basis, because the banks will want to structure them so they can be used as collateral," Kilgour said.

ECB Keeps Benchmark Rate at Six-Year High on Inflation Concerns
The European Central Bank kept interest rates at a six-year high today to curb inflation, even as the euro's appreciation and a possible U.S. recession threatened to choke economic growth. The Frankfurt-based ECB left the benchmark refinancing rate at 4 percent, as forecast by all 54 economists surveyed by Bloomberg News. A weakening economy may force policy makers to reduce borrowing costs in June, a separate survey shows.

"Inflation remains the overriding concern for now," said Laurent Bilke, an economist at Lehman Brothers Inc. in London who used to work as a forecaster at the ECB. "But the economic slowdown will eventually force the bank to cut rates." So far, the euro-area economy is coping with record oil prices, the euro's 17 percent gain against the dollar in the past year and slowing growth in the U.S., its second-biggest trading partner. That's allowing ECB President Jean-Claude Trichet to focus on fighting inflation, which at 3.2 percent is running at the fastest pace since the euro's debut in 1999.

Bank of England keeps interest rates unchanged at 5.25 pct
The Bank of England has held its benchmark interest rate on hold at 5.25 pct, as widely predicted. The central bank did not release a statement explaining its thinking, but concerns over inflation clearly outweighed immediate fears about economic growth. 'A combination of less pessimistic activity numbers and rising price pressures (illustrated perfectly in this week's PMI surveys) led to the Bank holding rates today,' said George Buckley at Deutsche Bank.

The February purchasing managers' index (PMI) reading for the service sector showed price pressures at record highs. All but two of the 35 economists polled by Thomson Financial News had expected the BoE to hold fire today, but many expect the Bank to lower interest rates later this year, quite possibly in May, once it has the forecasts in its next quarterly Inflation Report to fall back on.

Crucially, inflationary pressures are expected to fall back as the year progresses. “We suspect that (inflationary) pressures will abate by the end of the year as growth weakens in the meantime,' said Buckley. James Knightly, senior economist at ING, agreed. 'Slower UK growth should hit corporate pricing power, and commodity price inflation is expected to slow, prompting a fairly steep decline in inflation in the second half of 2008 and into the first half of 2009,' he said.

Ilargi: Europe is still largely stuck in denial mode: everything looks rosy out there, or almost, and they can’t imagine what is bound to happen. But one look at Italy tells me enough.

Italy supports bond market as spreads soar
The Italian treasury has taken the highly unusual step of intervening in the debt markets to prevent a further surge in government bond yields as hedge funds with heavy exposure to the region scramble to raise liquidity.

A flight to safety has pushed the yield spread between 10-year Italian bonds and equivalent German Bunds to 55 basis points, the highest since the launch of the euro. A similar pattern has emerged across the southern belt of the eurozone, with spreads hitting post-EMU highs of 53 versus Greece, 44 for Portugal, 38 for Belgium and 36 for Spain.

A report in Italy's financial paper Il Sole said the sudden surge in spreads recalled the dramatic events of 1998 when the US hedge fund Long Term Capital Management was forced to liquidate huge positions in Italy and Spain, setting off a systemic chain reaction. The newspaper reported that the Italian finance ministry had stepped in late on Tuesday to support the market by mopping up 10-year BTP treasuries.

Investors had been encouraged to swap the "old bonds" for new five year instruments, alleviating the stress in the most neuralgic part of the financial system. An Italian treasury official told the Telegraph that the move was intended to help funds weather the current bout of severe turbulence. "We're helping them swap illiquid securities for more liquid. It is unusual for us to do this at this time of year," he said.

The European Central Bank said the action did not violate the rules of monetary union. The Italian central bank is prohibited from buying Italian government debt under EU treaty law as this would inflate the common currency, but the treasury can adjust debt maturities if it wishes. The latest action is nevertheless highly sensitive. ECB lawyers are likely to keep a close eye on all moves by Rome to support the bond market.

Mark Ostwald, a bond expert at Insinger de Beaufort, said there had been a mass dumping of risky assets worldwide as banks and funds sought to cut exposure to the swap markets. "Club Med bonds have been hit hard. People have realized that countries like Italy and Spain have not carried out the reforms needed to control wages and boost productivity, and are now getting into trouble," he said. "This has not yet become a serious issue because bond yields are low. It becomes a nightmare is if the yields start backing up again," he said.

Europe Outpaces U.S., Reaping Reward of Risk Aversion
Jean-Claude Trichet's European economy may be reaping the rewards of risk aversion. As the U.S. teeters on the brink of a recession after the end of a five-year housing boom, growth in the 15 nations that share the euro is poised to outpace the American economy for a second straight year.

The region's resilience lets Trichet, who today presided over the European Central Bank's monthly policy meeting, focus on fighting inflation instead of cutting interest rates. Because Europeans save more than Americans and splurge less on houses and stocks, the continent is better placed to withstand the global credit squeeze without the need for lower borrowing costs.

"To be thrifty is a good thing and definitely a plus for the European economy in this tough period," said Jean-Michel Six, chief European economist at Standard & Poor's in London. "The attitude to debt and credit is clearly very different between the U.S. and Europe." U.S. growth will slow to 1.5 percent this year from 2.2 percent in 2007, according to the International Monetary Fund. The Washington-based fund forecasts the euro-area economy will expand 1.6 percent after 2.6 percent last year.

While that has pushed the euro to a record against the dollar, German companies have compensated by improving efficiency and reducing labor costs. Adidas AG, the world's second-largest sporting-goods maker, reported a 63 percent jump in fourth-quarter profit yesterday, and sports-car maker Porsche SE said March 4 that first-half profit rose 44 percent. "We are seeing the best performance in years despite the exchange rates," ECB council member Nout Wellink said on Feb. 27. The euro has risen 17 percent against the dollar in the past year, reaching a record $1.5347 today.

Growth in Europe's service industries accelerated in February, unemployment fell to the lowest since records began in 1993 and business confidence in Germany, the region's largest economy, unexpectedly rose for a second month. The economy's performance allowed the ECB to keep its benchmark rate at a six-year high of 4 percent today, as predicted by all 54 economists surveyed by Bloomberg News. Inflation is running at 3.2 percent, the fastest since the euro's debut in 1999.

The ECB's inflation-fighting zeal contrasts with the growth- oriented policy of the Federal Reserve. The Fed has cut its key rate by 2.25 percentage points as the U.S. economy reels from the worst housing recession in a quarter century. The slump has made banks reluctant to lend and caused credit markets to seize up in August. U.S. manufacturing shrank at the fastest pace in almost five years last month and in January U.S. home sales fell to the lowest level since records began.

The euro area isn't completely immune, given the U.S. is the second-biggest customer for its goods. German exports to the U.S. dropped 5.9 percent last year. Spain, Ireland and the Netherlands may also be tripped up by housing busts of their own, while Morgan Stanley forecasts the Italian economy will slip into a recession this year.

Housing market slowing in Europe
A survey by the Royal Institution of Chartered Surveyors (Rics) said rising interest rates, not the credit crunch, were the prime reason for the slowdown. It predicted a further downturn in markets across the continent in 2008 but said that the UK was better placed than most for prices to stabilise. House prices rose fastest in Poland in 2007, but fell the most in Ireland.

The Rics European Housing Review blamed rising interest rates for the housing market weakness. But it said that rates were not rising as fast as they had during previous housing market downturns and added that "this gives optimism that the current 'correction' would not be too great". Europe's economy was in much worse shape during the last housing market crisis in the 1990s, it added.

"The European economy is still in good shape ... The combination of markedly higher interest rates and a sudden, sharp recession, which last sent Europe's housing markets tumbling in the early 1990s, is still remote," it said. But with inflation in the eurozone higher than the European Central Bank target of 2.0%, interest rates could rise again. With variable rate mortgages common in countries such as Ireland and Spain, homeowners could be hard hit.

"Housing market prospects in 2008 depend on what happens to interest rates," it said. The report said that banks, monetary authorities and commentators all said the sub-prime mortgage crisis in the US was unlikely to be repeated in Europe given the difference in the mortgage markets between the two continents.

Ilargi: Again, reading the stories about Citigroup these days, I get the feeling the old tales of King Midas and Pinokkio have been blended into one: whoever touches Citi, turns into a liar.

Citi Turns To Bond Market
Citigroup, under pressure to raise capital, is making a big bet that it can raise money from yield-hungry investors. It is selling a $2.5 billion bond issue, most of which it is underwriting by itself. Wednesday, Citigroup said it would sell a 30-year issue, underwriting the lion's share -- $2.1 billion, or 84.0% -- itself. The relatively long-term issue has a relatively yummy yield: 6.875% of face value. Shareholders were stoic: the company's shares slipped 3 cents, or 0.1%, to $22.12 in afternoon trading.

If a bond sale cannot be placed with investors, the underwriters -- which in this case is largely the issuer -- end up having to hold the paper. So the strategy contains an element of risk for Citi.[..] In November, the Abu Dhabi Investment Authority sunk $7.5 billion into Citigroup, shoring up its capital after billions in losses related to subprime mortgages. This bought the United Arab Emirates' sovereign wealth fund a 4.9% stake in the bank.

In January, Citigroup also sold $12.5 billion in stock to additional investors including the Kuwait Investment Authority and Prince Alwaleed Bin Talal Alsaud of Saudi Arabia. In January, the bank announced $18.1 billion in write-downs for the fourth quarter and a net loss of $9.8 billion. In a bid to shore up its capital, the firm secured $12.5 billion in cash from a collection of investors and slashed its dividend by 41%.

Citigroup made no approach for capital: Dubai
Citigroup Inc has not made any approach to Dubai International Capital (DIC) seeking funds, the investment agency owned by the ruler of the Gulf Arab emirate said in a statement on Thursday. It also said it had never expressed an opinion on the investment merits or financial condition of Citigroup.

The statement followed comments on Tuesday by DIC Chief Executive Officer Sameer al-Ansari regarding Citigroup's capital needs that helped knock the U.S. bank's shares to their lowest level in nine years. "We have not been privy to any non-public information about the company, neither has Citi approached Dubai International Capital for a capital raise," DIC said.

Al-Ansari said on Tuesday it would take "a lot more money" to rescue New York-based Citigroup, which since November has raised about $30 billion of capital from Abu Dhabi, Kuwait and Saudi Arabia's Prince Alwaleed

Citi CEO: We've got enough capital
Citigroup Inc. Chief Executive Vikram Pandit sought Wednesday to allay fears about his company's financial strength, a day after a Middle East investor said the Wall Street giant needs to raise more capital to survive. In a letter to employees obtained by, Pandit said the bank is well-capitalized and "extremely focused" on the strength of its balance sheet.

He noted that the bank received two rounds of financing in December and January, raising capital by more than $30 billion. "The financing we secured is a vote of confidence in Citi, our future and you," he wrote. Analysts, however, said Citigroup is facing a rocky road ahead.

Richard Bove with Punk Ziegel & Co. said in a report Wednesday that he expects the bank to take a $14.1 billion writeoff when it issues first-quarter earnings next month. He estimates Citigroup will report a quarterly loss of $1.42 a share, which slashes his 2008 earnings estimate to 50 cents a share, down from $2.16. A day earlier, a Merrill Lynch analyst said he expects Citigroup to take a $15 billion writedown and to record a first-quarter loss of $1.66 a share, according to published reports.

Pandit, in his memo, said the bank is continuing to focus on how to improve the company's operations. As part of its continuing strategic review, the bank Wednesday said it was selling eight branches in the Texas Panhandle area to Happy State Bank & Trust. It is also planning to shed a total of 11 branches in Florida, New Jersey, California and Maryland.

UBS Whopped By Fire Sale Talk
It usually puts investors in a good mood to hear that a company is selling something, but rumors that UBS was clearing out its portfolio of Alt-A mortgages was worrying on Thursday. It looked as if the bank was holding a desperate fire sale, in contrast to the largely orderly sale of assets within the global banking system so far.

"The fear is that if this is the stuff UBS can sell easily, what can the rest of their portfolio look like?" remarked Peter Thorne, an analyst at Helvea in London. "If Queen Elizabeth sold her crown for £20 on eBay, that would tell you a lot."

Shares in UBS tumbled 3.4%, or 1.10 Swiss francs ($1.07), in Zurich on Wednesday morning, after analysts at JPMorganbank said in a research note that it was "highly likely" that UBS had sold its 25 billion Swiss franc ($24.2 billion) Alt-A portfolio in a fire sale. A spokesman for UBS declined to comment on the note and press reports citing speculation of a fire sale.

Alt-A mortgages are a category of mortgage, one step above subprime in terms of risk. JPMorgan analyst Kia Abouhossein said that the sale was "highly likely" to have taken place and that the assets had probably been sold at a discount of 70 cents to the dollar.

Ilargi: I think it’s time for the Justice Department to issue a warning to anyone knowingly making misleading or false statements in the bond insurers case. This is getting ridiculous. The web of lies keeps growing on and on, just so none of the parties involved has to address what their own true worth is, and their true losses. In the meantime, we all are forced to continue to live in some kind of virtual world.

Ambac to Sell Half the Company, Bet May Not Pay Off
Ambac Financial Group Inc., the bond insurer seeking capital to salvage its AAA credit rating, will sell half the company in a bet some investors say won't pay off. Ambac said yesterday it plans to issue $1 billion of common stock, more than doubling the number of shares outstanding. The New York-based company will also offer $500 million of units that convert to shares in 2011.

Investors had anticipated Ambac would be bailed out by banks, which would backstop a capital raising of as much as $3 billion, enough to overcome record losses on subprime-mortgage debt. Instead, the company announced it would raise half that amount in a transaction that would dilute existing shareholders, sending Ambac down 19 percent in New York Stock Exchange trading.

"The new offering is highly diluting to existing shareholders," Jim Ryan, an insurance analyst at Morningstar Inc. said in an interview with Bloomberg Television. "The market was looking for a backstop, to say the least." The sale of common stock, managed by Credit Suisse Group, Citigroup Inc., Bank of America Corp. and UBS AG, is scheduled for tonight, according to data compiled by Bloomberg. Ambac fell 74 cents, or 8 percent, to $7.96 in early New York Stock Exchange composite trading. The shares have tumbled 90 percent in the past year, reducing the company's market value to $884 million.

By proposing a sale of common shares, Ambac is reverting to a plan it abandoned in mid-January. The company announced a $1 billion sale Jan. 16, sparking a 70 percent plunge in its stock, and canceled the offering Jan. 18. "Based on our estimate that Ambac will eventually absorb about $11 billion of losses from insured CDOs and mortgage backed securities related exposures, $1.5 billion of new capital at first blush does not seem like enough to fix the capital adequacy problem," Andrew Wessel, an analyst at JPMorgan Securities in New York said in a March 6 research report.

Ambac needs more than $1.5 billion capital raise - analysts
Hard-hit bond insurer Ambac Financial Group's plans to raise at least $1.5 billion in new capital are not enough to fix its capital adequacy problem, analysts at Goldman Sachs and J.P. Morgan Securities said. "Our analysis of expected losses suggests that Ambac needs to raise $2.5 billion instead of the $1.5 billion announced," Goldman analyst James Fotheringham said.

On Wednesday, the second-largest U.S. bond insurer had said it has begun a public offering of at least $1 billion of common stock and $500 million of equity units. New capital would give Ambac more funds to cover billions of dollars of claims it could face after insuring subprime mortgage bonds and other risky debt.

Following Ambac's announcement on Wednesday, rating agencies Standard & Poor's and Moody's Investors Service said the company may hang on to the "AAA" ratings of its bond insurance arm if the plans to raise capital were successful. "Although S&P and Moody's have signed off that the completion of this deal will get Ambac off negative watch at both agencies, we believe it is likely that another round of capital may be required this year to avoid a downgrade," JP Morgan analyst Andrew Wessel wrote in a note to clients.

Ambak "Bailout" Lands with Big Thud
This would be funny if it was not so pathetic. All these announcements of bailouts of Ambac (ABK) and banks investing cash, and splitting the company into two, etc., etc., landed with a big thud today.

Here is a 5 Minute Chart of the Action:

Inquiring minds may wish to take a peek at the press release.
Michael Callen, Chairman and CEO, commented on the offering, saying, “This capital raise, along with our recent strategic actions, our increased emphasis on risk-adjusted returns over the course of an economic cycle and a six-month suspension of the structured finance business, will strengthen our capital base.

We expect to be better positioned to take advantage of the current favorable market environment for credit enhancement.” He added, “In this offering, we are targeting our core investor base, the long term holders of our stock, who have been loyal to Ambac.”
Let me get this straight: "A six-month suspension of the structured finance business, will strengthen Ambac's capital base."

Wow. Why not further strengthen the base by suspending business for a year? How about forever? At any rate I am extremely relieved that suspending business was all part of the master plan. Otherwise, I just may have been worried about this: Ambac said it has written only "a limited amount" of business since November and almost "no new business thus far in 2008." On second thought, I notice that Ambac has written "no new business" in 2008 but the plan was only to suspend "structured finance business". Don't worry, I am sure that can be made part of the plan if necessary.

And I am equally sure shareholders will be relieved by this statement as well “In this offering, we are targeting our core investor base, the long term holders of our stock, who have been loyal to Ambac.” Banks would not provide capital because they are so capital impaired themselves. Nor can Ambac be split in two because it cannot dispose of the CDO rot. The same applies to MBIA. Nonetheless, the rating agencies keep pretending the monolines are a viable business. They are not.

You cannot stay in business, by not doing business, no matter what the business is.

Ambac To Pass The Hat
Ambac Financial Group shareholders seem willing to see their investment diluted in order to save the ailing bond insurer.On Wednesday, Ambac disappointed Wall Street, announcing it would raise $1.5 billion in the public securities markets to shore up its capital. But CreditSights analyst Rob Haines said it falls far short of the $2.5 billion the market had been expecting.

While both Moody's Investors Service and Standard & Poor's said on Wednesday that they would probably confirm Ambac's triple-A rating after the offering, Haines said the outlook will most likely remain negative. "The offering is just a Band-Aid," Haines said. "It doesn't solve the company's long-term problems." Ambac will not be able to write any new business and the markets are not going to regain their confidence unless the losses turn out to be far lower than the market's expecting or if Ambac can gain more capital in the future, he said.

On Jan. 16, Ambac said it was going to raise $1 billion in capital by issuing stock and stock-based securities, only to turn around two days later and rescind the offering citing "market conditions" that make raising equity capital an unattractive option.
"It’s very telling that it’s not a bailout--that Ambac's just simply raising capital," Haines said. "They could have done that months ago. Market conditions are no worse now then they were in January."

But Ambac may be worse off now than it was in January. It may have thought market conditions would improve or that investors or sovereign wealth funds would bail it out, but nothing panned out. "Their back's against a wall," Haines said.
Investors had been primed by press reports to expect a bank bailout of the bond insurer, whose triple-A ratings have been threatened for months. Instead it is turning to the financial market, including, it seems, its own long-suffering shareholders, for cash to bolster its balance sheet after an ill-fated expansion into providing insurance for mortgage-related securities.

Mark to Meltdown?
No task is more thankless than to write about accounting for a family newspaper, yet it must be shared with the public that "mark to market," an accounting and regulatory innovation of the early 1990s, has proved another of Washington's fabulous failures -- that is, if the goal were curing market uncertainty through "improved" accounting practices. The atmospherics around the big subprime write-downs currently roiling Wall Street tell the story.

Start with Merrill Lynch's giant $15 billion write-down of mortgage-related securities in January, which CEO John Thain introduced with a curiously contradictory "I think we're being conservative, but I don't think that we're likely to get much back on these things." Mmm. Either Merrill's write-downs are conservative, in which case many of the assets will come back, or they aren't. Is it any wonder Wall Streeters kibitzing about possible spectacular "write-ups" once the credit crisis passes point to Merrill as a top candidate?

Or take AIG's unexpectedly large write-down of subprime paper on Friday, blamed for the market's sell-off. Its chief told the world that its mortgages on paper had lost $11 billion in value, but sotto voce predicted these "unrealized" losses would eventually correct themselves. Or take Sam Zell, a real-estate investor whose pronouncements are given great weight in the markets. He pooh-poohed the red ink being liberally spilled on Wall Street, saying, "It's not a cash crisis, it's a 'mark' crisis," and predicted that write-ups would undo much of the damage once the "panic" subsides.

None of this should be surprising. Overstating the importance of accounting rules is, indeed, the essential error that leads to excessive twiddling with accounting rules. Whether a company values its assets at historic cost or market value or a value derived by some other formula, investors still have to make their own forecasts and judgments. A thermometer is equally useful whether it says water freezes at 0 degrees or 32 degrees -- though it still doesn't tell what the temperature will be next week.

But loose as well is a fear that exaggerated writedowns in the current credit crunch are rapidly chewing through the banking system's capital cushion. Banks will be forced to dump assets at fire-sale prices, leading to yet more writedowns and more fire sales. At best, banks will have to keep shopping cheap equity to foreign potentates to keep themselves afloat. At worst, massive regulatory insolvency lies ahead.

Countrywide Delays Foreclosure Sales
Countrywide Financial Corp. voluntarily postponed 103 foreclosure sales scheduled for yesterday in Texas in connection with a private lawsuit that accuses it of trying to foreclose on homeowners who emerged from bankruptcy and were current on their mortgages. That allegation, which the company denies, is also one of the issues raised by a federal bankruptcy watchdog in suits it filed against the company last week.

The Calabasas, Calif., lender, which has agreed to be acquired by Bank of America Corp. later this year, has been criticized for its handling of cases in bankruptcy proceedings by federal judges as well as lawyers at the U.S. Trustee Program, a division of the Justice Department that monitors the bankruptcy system.

The U.S. Trustee Program last week sued the company in three states for "bad-faith conduct" and "abuse" of the courts. In Florida, the U.S. trustee alleged that Countrywide tried to foreclose on a home after the borrowers had eliminated the company's mortgage through a bankruptcy proceeding four years earlier.

The Texas lawsuit, a putative class-action suit filed last month by five borrowers in Brownsville, alleges that the country's No. 1 home lender by volume is foreclosing or attempting to foreclose on borrowers who had been discharged from bankruptcy and were current on their loans, and that Countrywide added hidden fees to debtors' accounts. The suit seeks to stop the company from doing those alleged acts and asks for damages.

The suit claims the company, in part because of flawed computer systems, "does not have policies and procedures in place" to properly account for borrower payments. "Countrywide denies the allegations in the related complaint," the company said in a statement.

Lawmakers take aim at CEO compensation
High-profile former Wall Street CEOs and the head of the nation's largest home lender will testify before a Congressional committee examining the link between executive pay and the mortgage crisis.

Why were executives at the helm of some of the world's largest banks compensated so richly even as their industry was being pummeled by the mortgage meltdown? Lawmakers will pursue this question Friday when the House Committee on Oversight and Government Reform hears testimony from two former Wall Street CEOs, Charles Prince and Stanley O'Neal, and the chief of the nation's largest mortgage lender, Angelo Mozilo.

At issue are the salaries, bonuses, perks and stock awards that the executives received as the companies under their leadership took enormous losses on bad bets related to mortgage backed securities. Calls for accountability have become increasingly louder as the housing market continues to deteriorate and homeowners across the country face foreclosure.

Henry Waxman, the Democratic congressman who chairs the Committee, has developed a reputation as an aggressive reformer during his thirty years representing the Los Angeles area on Capitol Hill.

Thornburg: Lender to Use Default Rights
Thornburg Mortgage Says JPMorgan Will Exercise Default Rights; Shares Down 39 Pct. After-Hours

Home-mortgage lender Thornburg Mortgage Inc. disclosed Wednesday that its failure to meet a $28 million margin call caused a series of cross-defaults, and said that JPMorgan Chase Bank NA, which made the original margin call, will "exercise its rights." Thornburg shares plunged 39 percent in after-hours trading. Thornburg didn't specify the bank's rights in Wednesday's disclosure, but in a previous filing with the Securities and Exchange Commission, the company said that the lender has the "right to liquidate pledged collateral."

A company representative didn't immediately return a call for comment. Thornburg said it was loaned $320 million under reverse repurchase agreements made with JPMorgan. The notice of default from JPMorgan triggered cross-defaults "under all of the company's other reverse repurchase agreements and its secured loan agreements," the company said in Wednesday's filing. Thornburg offered no description of the amounts involved in the cross-defaults but said its "obligations under those agreements are material."

Even though the credit quality in Thornburg's portfolio is stellar, the value of the company's assets has plunged as other companies and investors liquidate mortgage debt. This has forced Thornburg to recognize that its assets are not as valuable, which in turn has prompted lenders to demand their money back.

Government: U.S. needs foreign cash
Federal regulators stressed the importance of leaving the United States open to investments by sovereign wealth funds Wednesday, but warned of the need to push for better transparency among these growing state-sponsored entities.

Testifying before two subcommittees of the House Financial Services Committee, representatives from the Treasury Department, Securities and Exchange Commission and Federal Reserve said that these funds not only foster domestic economic growth but have provided stability to financial markets and U.S. companies.

"If we were to prohibit sovereign wealth funds from investing in our market for fear they might introduce market distortions, there is a risk we might actually end up doing precisely this to ourselves," said Ethiopis Tafara, director of the office of international affairs for the Securities and Exchange Commission.

Congress is examining these controversial investments after foreign funds pumped more than $40 billion into Wall Street firms in recent months. Some world leaders, as well as the American public, are concerned that these funds may try to wield these investments as a diplomatic tool. The worries are fueled by the funds' lack of transparency about their operations.

A majority of American voters think these foreign infusions harm both the national security and the economy of the United States, according to a recent survey by Public Strategies Inc.

The Hans Brinker “Offensive”
The financial “lobbyists” seem to be spending most of their time looking to start up massive shaved coined operations. Typical of this are vague calls for “actions” from Pimco’s Bill Gross. Also typical of how the Pig Men offensive propaganda machine operates was a folksy interview with Warren Buffet on CNBC. Between all the gosh oh gollies, the interviewer asked who Warren thought was “smart”. Almost on cue he said, “Bill Gross”. And now we have Bill Gross leading the charge to “bail out” wild men and Riskloves for the “good of the economy”.
Something needs to be done quickly – not to bail out PIMCO, we’re doing fine, thank you – but to halt a destructive asset deflation which, if allowed to proceed, will move our economy in the direction of those Bushville railroad tracks – although still a far distance from them. Whatever the decision, be it a housing fix advocated by Alan Blinder or the one by Larry Summers or a massive expansion of Federal Housing Association lending authority, it has to be studied and acted on with urgency. And if the Fed needs to become even more vigorous by expanding the size of its TAF or the collateral it will accept, it must do it now.

You will notice that all this lobbying typically has the word “massive” or “expanding” attached to it. Apparently the plan is to have the US Treasury and government sponsored entities backstop “massive” losses and attempt to hold up fictitious capital by borrowing hundreds of billions from foreigners. This will be the ultimate Three Card Monte operation. The key will be to see if the UST and GSE markets hold up under this shaved coin scheme, and then who ends up holding the Old Maid Cards if it gets off the ground.

Perhaps one of the Aunt Millie foils of this operation is to get all the scared short term overnight repo and Treasury bill money market capital back into the game. But before doing so, the actual condition of this pool of money should be considered. Sure a bunch is in T-Bills but even more represents overnight repo borrowing between banks. And there is now every indication that stress from a series of financial failures could come in the banking sector. Then you will have people like Bill “Hans Brinker” Gross calling for even more zero sum game socializing of losses intervention.

Northern Rock bail-out beats covert US remedy
By Joseph Stiglitz

I estimate that lost output in the US - the difference between the economy's actual and potential output - will exceed $1.5 trillion. America has responded with a stimulus package that is too little, too late and poorly designed.

Because of President Bush's demands, for instance, that nothing be done for those losing their jobs, or for the states and localities whose revenues, and therefore expenditures, will be plunging, the stimulus package will have less of a "bang for the buck," less stimulus per dollar of deficit, than could or should have been the case. Meanwhile, those in the financial community - those who repeatedly give lectures about fiscal restraint, self-reliance, the importance of incentives - are asking for, and getting, a bail-out.

In the US, so far it has mainly been done in highly non-transparent ways, through low interest money from the Fed, or the Fed buying mortgages and other securities from banks, at prices that may or may not reflect their true riskiness. The UK's transparent Northern Rock bail-out is by far to be preferred to the non-transparent bail-outs going on in America.

The UK is in a tizzy about the nationalization of Northern Rock - as if some basic principle of good government or sound economics have been violated. Such principles had been violated, not by the nationalization, but by bad risk management of America's and the UK's private sector, and by the lax regulation and loose monetary policies in the public sector.

The notion that the private sector has demonstrated its ability to run financial institutions and manage risk, and that nationalization jeopardizes these important lessons, is balderdash. Now, the central issue is only how to minimize the costs to the taxpayer, and by all accounts, nationalization was the best deal.

Foreclosure fairs offer advice, support to desperate homeowners

An overflow crowd piled into the Merced Civic Center, spilling out of the main auditorium, into the halls and down the stairs. Some brought babies, others elderly parents. Everyone brought paperwork – the sum of their financial lives and wreckage of their American Dream. The recent foreclosure prevention fair on a brilliant Saturday afternoon was the place to be in Merced, a city of 65,000 best known as the gateway to Yosemite National Park.

The fair was one of the first of a series of events planned in March, or what local politicians are calling “Foreclosure Prevention Month,” to help desperate homeowners in and around the northern San Joaquin Valley. The world's most fertile farm region, the San Joaquin Valley includes three metro areas – Stockton, Modesto and Merced – with some of the highest foreclosure rates in the nation. “Clearly we've got a crisis,” said Democratic Rep. Dennis Cardoza, whose district includes much of the Valley. “You look around this auditorium and think this is America, hard-working family people who go to church on Sunday and want good schools for their kids.”

Organizers of the Merced fair had worried that attendance would suffer from too little notice; instead, they were overwhelmed by the response. That same day, another 200 mobbed a fair in Los Banos, an old farming city of 35,000 residents, also in Merced County. Five percent of Los Banos' 10,000 houses have already foreclosed and another five percent are expected to foreclose in the coming months, Cardoza said. “You're talking 10 percent of an entire city becoming homeless,” Cardoza said. “I don't know how much worse things can get.”

Sleepy Merced County, number five in RealtyTrac's national foreclosure rankings, also has other numbers to worry about: in January, the county's unemployment rate climbed to 13.3 percent, up from 11.9 percent in December, according to figures released last week by the California Employment Development Department. In contrast, the state unemployment rate was about 6 percent, and the national unemployment rate about 5.3 percent.

The median home price in Merced County in January was $215,000, down 33.8 percent from a year earlier, according to DataQuick Information Systems, a real estate research firm. In some towns in the county, such as Atwater, housing values have dropped 50 percent, officials said.

When Pyramid Schemes--a.k.a. Housing--Go Bad
Let's say there's a new pyramid scheme hitting town and J.Q. Citizen is itching to join the immensely profitable fun. But dang it, he doesn't have any money to speculate with. If only somebody would loan him some capital to play with....
A pyramid scheme, also known as a Ponzi Scheme after "financial innovator" Charles Ponzi, exploits the "something for nothing" greed inherent in human nature. A handful of speculators are persuaded to invest some capital, which is then distributed to a larger circle of new speculators as "profit." The "pyramid" of enticing new investors by distributing the previous speculators' money as tremendous "profits" continues ever higher until the pool of new speculators is exhausted. At that point the pyramid collapses and the last "layer" of speculators--the latest and largest--discovers their "investment" is worthless, as the pool of "greater fools" has been drained.

Amazingly, J.Q. is approached by someone willing to lend him $500 to join the pyramid scheme--and they only want $3 a month! J.Q. is incredulous--after all, earlier speculators have doubled their investment, and are hurrying to put their ever-increasing "equity" back to work in new speculation--it's a "no lose" proposition. Here is a lender who doesn't even demand J.Q. put up any of his own cash, and yet all the profits will flow to J.Q.

Talk about an easy decision. J.Q. borrows the $500, sets aside $20 to pay the monthly interest of $3 and then immediately buys into the scheme. Sure enough, he quickly "earns" a big profit, which emboldens him to borrow another $500. Imagine getting to leverage $1,000 for only $6 a month! It's like a printing press for free money.

The profits are so amazing that J.Q. "doubles down" and borrows another $1,000 and "invests" it. The monthly payments are only $24 and he's making way more than that with the borrowed $2,000. In fact, he's making so much easy dough that he peels off $500 for some spending money. To his astonishment, the lender is still willing to loan him another $500 for the same $3 a month in interest. Where the lender is getting all this cash is unknown, but it's the greatest "no brainer" deal J.Q. has ever seen.

The profits start slowing, and J.Q. becomes slightly nervous. There are rumors of people getting out, and then rumors of people not being able to pull their money out. J.Q. finally joins the horde rushing to cash out but it's too late: there are no buyers. J.Q. is busted, and with a heavy heart he informs the lender he can't make the monthly interest payments any longer--he's broke. The lender is none too pleased, but as the saying goes, "you can't get blood out of a turnip," and J.Q. reckons that it was a pretty dumb move to loan him all that money even though he never put up a dime of his own money.

Then J.Q. sees on TV that his lender has approached the government to cover the money which the lender lost lending to speculators in the pyramid scheme. This doesn't seem quite right to J.Q. After all, nobody forced them to loan $500 for $3 a month. They were idiots to loan all that money for so little return and no guarantees.

Add three zeros to these numbers and you have the Housing Bubble in its purest essence.

Filings for Bankruptcy Up 18% in February
Americans filed for bankruptcy in growing numbers in February, buckling under the combined weight of rising energy prices, a weakening housing market and sky-high personal debts. An average of 3,960 bankruptcy petitions were filed per day nationwide last month, up 18 percent from January and up 28 percent from a year earlier, according to Automated Access to Court Electronic Records, a bankruptcy data and management company.

February was the busiest month for filings since Congress overhauled the bankruptcy law in 2005. Bankruptcy experts said the rise was particularly worrisome because those changes made filing for bankruptcy more complicated and expensive. “This number of bankruptcies may be under-representative of the true financial distress consumers are feeling because of the steps Congress has taken,” said Jack Williams, a scholar in residence at the American Bankruptcy Institute and a professor at Georgia State University.

The latest figures show the financial pain is spreading from states like California and Florida, which exemplified the housing boom and subsequent bust, to those along the Eastern Seaboard like Maryland, Virginia and Delaware, which were among the 10 states with the largest percentage increase in filings in January and February. “You are seeing a good-size uptick everywhere,” said Mike Bickford, president of Automated Access.

Sinking economy the rising issue
John McCain is going to have a lot of fun over the next couple of weeks. The US media will gorge itself on the story of the tough old airman who became a presidential nominee by sticking to his beliefs, never giving up and loving his country like his mother. It will make quite a contrast to the slugfest in the Democrats, which is destined to get uglier now that Hillary Clinton has finally seen value in going the knuckle on Barack Obama.

Even the calendar is in McCain's favour right now. Next week marks the 35th anniversary of his release from Hanoi's Hoa Loa Prison, the infamous "Hanoi Hilton" where he spent nearly 5 1/2 harrowing years after being shot down in October 1967. Americans love their war heroes and McCain is a genuine one, so an orgy of patriotic chest-beating can be expected. But as McCain said in his victory speech yesterday, character and whole-of-life experience is not enough for a presidential candidate.

Voters also want to know what solutions they have for the challenges of the day. Exit polls in Texas and Ohio showed once again that voters regard the state of the sinking US economy as far and away the most important issue facing the nation. This trend has been evident since New Hampshire but unfortunately for McCain it is his weak suit. He can't deny this, because in a momentary fit of madness in the 2000 campaign he actually admitted to it.

Given that many financial experts believe the US is on the cusp of a severe recession, possibly the worst since the Great Depression, it's a huge obstacle McCain must overcome in the run-up to November's election. He didn't do himself any favours in his victory speech, concentrating on his foreign policy credentials and, apart from a dig at the Democrats over jobs and NAFTA, ignoring the fundamental challenges the US economy faces.


Ilargi said...

Because of that date issue, which I didn't know how to fix, I deleted the whole post and put it up again. Only thing lost was the comments. That I anticipated, so here they are:


Anonymous said...
March 9?

MARCH 6, 2008 10:22 AM

Anonymous said...
Can you folks check this item out and dissect..

UPDATE 2-Bank of Canada to set terms for ABCP collateral


MARCH 6, 2008 10:52 AM

Ilargi said...
anon 1:
hey, that was only there for 30 seconds!
(NOTE: not quite, hence the re-post)

thanks for that, I added the story and my comment.

MARCH 6, 2008 11:21 AM

Shibbly said...
Stoneleigh has mentioned the yen carry trade unwinding. What exactly is the yen carry trade?

MARCH 6, 2008 11:32 AM

Stoneleigh said...


The Bank of Japan held interest rates at essentially zero for a long period of time, trying to revive the domestic economy after the bursting of the Nikkei bubble in 1989. The yen carry trade developed as investors borrowed yen to invest in other countries where interest rates were higher, earning large returns. Japan was thus a major engine of global liquidity for years.

The yen fell so persistently that even ordinary people in places like Eastern Europe were taking out yen mortgages, on the assumption that continued yen depreciation would whittle away the size of the mortgage. Unfortunately, people forget that currency risk is real and valuations can move in both directions.

As the Bank of Japan moves to raise rates (as they inevitably will IMO), the yen will appreciate sharply, leaving a large number of investors owing much more (as denominated in their own currencies) than they did before. Those debts may then become an insurmountable burden. Another liquidity tap will be turned off.

A large percentage of the notional value of the derivatives market is in bets on currencies and interest rates. As these are judged to be reasonably stable, many financial analysts assume they pose little risk, and that therefore derivatives are not a huge problem. Unfortunately, the kind of financial upheaval that I think is coming is likely to involve considerable volatility in these markets. IMO many bets are going to go sour in a short space of time, exposing a large amount of counterparty risk.

Greyzone said...

And... another one's gone, another one's gone, another one bites the dust!

Today, Carlyle defaults. That's 5 margin call defaults in 4 days. And we've only just begun...

Yep, I'm in a silly mood and laughing at all this because it is absurd and otherwise I'd just cry.

Anonymous said...

Another situation first predicted here at TAE. These are some tough decisions to make.

Alabama County Won't Pledge $184 Million for Swaps

Anonymous said...


Ilargi said...


got that covered up top

Ilargi said...


couldn't find anything to rhyme that with?

Anonymous said...

I think the questioning of Countrywide CEO by Congress / shareholders is so funny.

For years in the US the pay of CEOs and CFOs has been thousands of times the pay of the average employee. The most dramatic example was ENRON, at the end Ken Lay died of natural causes and his family and children kept it all for themselves...

But this is part of the american dream, people would rather live in poverty just for the chance to be a millionaire, a chance that is getting more and more elusive (meanwhile in Europe they rather have the wealth distributed).

So let americans live their dream, spend more than they can earn, thanks to some foreigners depriving themselves of consumption and lending them their hard earned dollars. And when the irresponsible mortgage they agreed to pay cannot be afforded, go homeless while the CEO of the lending company drives away with 44 million compensation... this is so fun, I wish they could make a sitcom on this theme

Ilargi said...

wait, I found one:

Ik zeg Allez, allez, Pinokkio,
gij hebt ne neus van hier tot in Tokio
Allez, allez, Pinokkio,
gij hebt ne neus van hier tot in Tokio

Greyzone said...

Here's a possible next default, ilargi, tomorrow no less.

Jefferson County, Alabama.

I can't find it now but I also saw news of large late selloffs of 4 additional mortgage companies because of concern of margin calls. With 5 so far this week, are we looking at 2-5 more defaults tomorrow alone? What will that do to the market?

Anonymous said...

About Europe:

In Europe, there are great differences. I agree that Spain is in big trouble, and Italy as well, but for very different reasons.

In Spain, it's debt and the housing bubble; in Italy the state is the problem. Italy can't debase the Lira any more, a lesson they haven't learnt yet.

However, Germany and the Scandinavian countries are not in trouble at all. There is no housing bubble, a very positive saving rate. The trouble in the US hit some European banks, but the financial sector is not that important in Germany. Most of the exports are within the Eurozone, increasing exports to China, Russia and the oil producers offset the declines in the US.

The high Euro is good for Europe, it keeps energy and food inflation at a modest pace. Of course, the US recession will hit Europe as well, but it won't be as bad as in the US. The main difference is the different attitude towards debt.

Ilargi said...


See the top of the Rattle for Alabama.

Hedge funds could indeed fall like flies. Towns and counties, I think, would take longer to go down. As I said a few days ago, remember they don't just close shop in case of a bankruptcy.

The funds, Thornburg, and the county, by the way, are all broken by banks, a sure sign of how badly these need cash.

Ilargi said...


There are differences, but my idea is that these lie mostly in a time lag. Germany is not OK at all, banks will fall like dominoes there. Holland, Ireland and Club Med will all have housing crises, as will the UK of course. Spain would no longer have a banking system, period, if not for ECB loans. Portugal is a timebomb. You can go on and on.

Anonymous said...


banks won't fall like dominos here. So far, only state banks have been hit. These gangster managers knew damn well that the taxpayer would bail them out anyway.

The private banks are not that exposed.

You are right about the South and the Netherlands and the UK, and there are housing bubbles in the Baltic countries, but not in Germany. Subprime loans have never existed here. Even the government's budget had a surplus last year.

The Lizard said...

" Bruce Dobish, a buyer of distressed real estate and former staffer at now-wobbling bond insurer FGIC, cast the net wider to include credit-rating services.

"These (banks) and the ratings agencies and the monolines

(bond insurers) tend to be comprised of a lot of youthful, bright individuals who lack real-world experience," Dobish said. "They're not going to remember back 20 years ago."

Rob Haines, senior insurance analyst at CreditSights in New York, said: "They all got it wrong."


What I was getting at, days ago, when I commented on the intergenerational aspects of the financial crisis. The fresh-faced kids are easy to turn into believers. So they believed the system would work. They forgot to be sensible and responsible.

The sensible and responsible will just end up paying for it all...

goritsas said...


Just sit back and watch it all unwind. If you want to believe all is rosy in Germany, then you better explain the pending labour strikes. As for Scandinavia, please explain the hedge fund debacle that led to three Norwegian towns losing most of their invested money and the eventual fall of the broker that arranged the deals in the first place. A government vetted preferred supplier too.

What About UBS and Societe Generale and Barclays and HSBC and … Anyone that believes Europe is somehow in better shape than the U.S. is in denial just as ilargi suggests.

If Europe was being so prudent then please explain why the ECB is busy bailing out banks Europe wide in secret? Truth be told, you have no idea just how pervasive the problem is as the ECB keeps everything hidden. And now the UK is moving to do the same as well. If it had been possible for Northern Rock to have had help in secret, as all of Spain is being helped in secret, it would never have been nationalised and no one would have been any the wiser. Until it was far too late. Precisely what will happen in Europe. You’ll find out how troubled we are far too late.

Anonymous said...


I haven't seen any comments on the consequences for insurance companies(life, health, property, etc) in this "unwinding", (collapse seems the better term). It is my layman's understanding that the ins. industry holds very large percentage of capital invested in the markets; have they stayed away from the quicksand that has trapped credit institutions, and if so, won't they still experience collateral damage?

Stoneleigh said...


I think insurance companies are in at least as much trouble as banks. I wouldn't count on any insurance payouts beyond another year, or perhaps two if you're very lucky. Insurance company assets will be falling in value like everything else, while claims may well increase. For a while they may try to increase premiums, but people's ability to pay any premiums, let alone higher ones, will be decreasing. The business model for mass insurance will be broken.

Anonymous said...

So,It appears as if you think we have a 4-12 month window where things will remain " least on the surface.This is my great concern....too many will feel this is a minor hiccup and be wiped out before they understand the downturn is permanent.Here is the big question.How long before the hard cold truth of the bankruptcy of the USA is evident to the man in the street...3mons.?6,or a year?