Wednesday, April 30, 2008

Debt Rattle, April 30 2008: We are all underwater

Tennessee 1936

Ilargi: I saw a headline today claiming that the US economy grew slightly in the 1st quarter, and jobs went up too. This kind of media reporting is getting so out-of-whack, deceiving, if not simply lying, that I don’t want to read it anymore, let alone report it here.

No matter what "positive" numbers come out of the rabbit-filled high hats, or what authority figure pulls them out of there, the reality is that it’s a slaughterhouse across the board. There’s not much need for me to comment on the list below, it paints a very clear picture. If there are still people who feel good about the economy, wherever in the world they live, and who think that we have reached "a bottom", any bottom, I strongly suggest seeking professional help.

It is now safe to say we have moved from "We are all subprime" to "We are all underwater".

Still, being underwater is by no means the most perverse consequence of our criminal finance system. Last week the UN said it had so far received $18 million of the -additional!- $750 million it says is needed for emergency food programs. Don't fool yourself: we will only feed the hungry if Monsanto and Cargill can make a profit off it. That's what food aid has been all about for decades.

Fed Lowers Rate to 2%, Seventh Cut Since Credit Squeeze Began
The Federal Reserve lowered its main interest rate by a quarter of a percentage point to 2 percent, the seventh cut since the onset of a global credit squeeze that's eroded economic growth. "The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time," the Federal Open Market Committee said in a statement after meeting today in Washington.

"The committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability." While a nine-month contraction in credit and soaring fuel prices have pushed the economy to the edge of recession, confidence has begun to return to financial markets. Inflation expectations are also picking up, driven by near record prices for oil and higher food expenses.

"Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters," Chairman Ben S. Bernanke and his colleagues said in the statement. Oil prices marched to another record high of $119.93 a barrel on April 28. The Fed said indicators of inflation expectations have risen.

"The committee expects inflation to moderate in coming quarters, reflecting the projected leveling- out of energy and other commodity prices and an easing of pressures on resource utilization," the Fed added. "It will be necessary to continue to monitor inflation developments carefully," the Fed said. Uncertainty about prices "remains high."

The Fed Board of Governors also voted to lower the discount rate, the cost of direct loans from the central bank, to 2.25 percent. Officials reduced the normal 1-point spread over the federal funds rate in August to a half point to ease liquidity constraints. They further narrowed the difference on March 16, in the first weekend emergency move since 1979.
Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser dissented from today's decision, preferring no change. They also objected to last month's reduction.

The Fed’s Dilemma: Rescue the Housing Market, or Feed the Poor?
At their two-day meeting that started [yesterday], U.S. Federal Reserve policymakers will have to grapple with a moral choice that is well beyond the pay grade of central bankers - choosing between the financial stability of U.S. homeowners and world hunger.

That’s not an exaggeration. Interest-rate policy normally only affects the world economy at the margin, but it has now been so expansionary for so long that the Fed’s interest-rate strategy has turned into a moral dilemma of sorts. In short, the central bank’s monetary policy will likely determine whether millions of U.S. homeowners lose their homes or millions of the world’s poor starve.[..]

While Americans consume only moderate quantities of raw commodities as a percentage of total consumption, for poor people in the Third World commodities still account for the bulk of their budget. While increases in energy and metals prices simply raise the cost of living, food-price spikes are much more serious, since they directly and significantly erode the living standards of the world’s poor.

Still more disturbing is the fact that the recent surge in food prices (which has been extreme, rice alone having trebled in price in the last year) has caused the beginnings of a breakdown in the world’s free trading system in food. Rice exporters such as Egypt, Indonesia and Vietnam are restricting, or even prohibiting, the export of certain kinds of rice, moves they’ve made to try and keep prices of that commodity down in their home markets.

Since many poor countries such as India also subsidize basic food prices to limit urban unrest, national budgets are being thrown out of kilter. At the margin, for the very poorest people in the least competently run countries, the result of this food-price surge is likely to be starvation. New crop plantings will alleviate the problem within a year, but for many, that will be too late: You can defer an automobile purchase until next year, but you can’t stop eating.

Bernanke no doubt hopes that he can keep interest rates low and thereby stimulate the U.S. economy and solve the housing problem, wringing out any inflationary results by pushing rates higher once housing has stabilized and the U.S. market has moved back onto a growth track. That appears excessively optimistic. A prolonged period of low interest rates will perpetuate the bubbles in energy and commodities, which will have two effects.

In the United States, it will firmly establish an inflation level of 10% or more, which will require a wrenchingly difficult recession to emerge from, as it did in 1979-82, thanks to a managerial miracle by then-Fed Chairman Paul Volcker. But in poorer countries, a long run of low interest rates will not only cause inflation and hardship, it will bring starvation as food prices soar well beyond the means of the poor. Hoarding will result, until finally all the world’s food-market mechanisms end up collapsing. So if the central bank does cut interest rates this afternoon, think twice before you cheer.

Caution: Mortgage Explosions Just Starting
In 2006 and 07, as the housing bubble was starting to burst, tremendous market share "gains" were made in the ALT-A space. "ALT-A" are loans where income was undocumented (so-called "liars loans") or otherwise contained "tricky" features such as "Pay Option" mortgages. These "ALT-A" loans constituted huge percentages of production - hundreds of billions of dollars - in 2006 and 2007. And every study done on them thus far on the production during those years has shown that half of these mortgages - or more - contain significant overstatement of income.

That is, fraud. Each and every one of these mortgages is subject to being "put back" on the originator. These loans will flow backward just as they flowed forward originally, continuing upward until they find a "home." Where's the "home"? When the firm that originated or securitized the loan is found.

What if the originator is out of business? Then the investment or commercial bank that securitized that debt is going to wind up stuck with it, because there is no way they will win an argument in court claiming that they had no ability (or obligation) to detect this fraud, when the products were designed to enable it, and it required only marginal investigation for them to be able to detect it (such as pulling the borrower's tax returns.)

Let this sink in folks - HALF of all ALT-A production from 2005-2007 is subject to being "put back" on the issuer, and current recovery on defaulted mortgages is about 50%. This means that the actual "expected damage" in money (that is, loss) terms is roughly 25% of all ALT-A production from the years 2005-2007.

If the equity markets were half-rational every single investment and commercial bank that had securitized mortgages (that would be basically all of them) in the ALT-A space would be getting hammered - right now - down to single digits.

Every one of these firms is on the hook for tens if not hundreds of billions of dollars worth of these mortgages, and the ones they will end up "eating" are the ones that are non-performing - not only are they the ones that contained fraud but they're also the ones that will prove to be uncollectable![..]

Countrywide reported a monstrous loss this morning. Now remember, Mozillo told us all in the third quarter that they would be posting earnings starting in 4Q. Guess what - he was not only wrong, he was WAY wrong - two quarters running. Yet BAC says they're "committed" to the merger? Huh?

Here's another prediction - BAC is intending to use CFC as a "dumping ground" for its toxic waste, will keep the firm as a wholly-owned sub so it is legally distinct, will dump their trash in there and then BK the "subsidiary" with some swansong about how things were suddenly "worse than anticipated", keeping the servicing platform.

Oh, and since I believe this is their intent that would make the entire transaction and subsequent bankruptcy fraudulent, but they won't get tagged for it, because once again, fraud, if you're a bank or other financial institution, is not an offense any more in the United States.

Defaults Rising Rapidly For 'Pick-a-Pay' (Option ARM) Mortgages
As the growth in subprime mortgage delinquencies appears to be slowing, lenders are seeing a rapid rise in defaults on a type of mortgage that gives consumers with good credit several different monthly-payment options. These mortgages, which are sometimes known as "pick-a-pay" or payment-option mortgages but are generically called option adjustable-rate mortgages, are turning out, in some cases, to be even more caustic than subprime loans, in part because the loan balance and the monthly payments on some loans is growing even as home prices are falling.

These loans have become the focus of investigations and a spate of lawsuits by borrowers who believe they were misinformed about the mortgages' complicated structure. Losses on option ARMs could be "in some cases close to subprime" mortgage levels, according to a recent report by Citigroup.

On Tuesday, Countrywide Financial Corp. said that 9.4% of the option ARMs in its bank portfolio were at least 90 days past due, up from 5.7% at the end of December and 1% a year earlier. Countrywide also reported that it had charged off $125 million of these loans in the first quarter, compared with $35 million a quarter earlier. Bank of America Corp. said last week that it will stop making option ARMs altogether after it completes the acquisition of Countrywide Financial, which in recent years has been the largest originator of these loans.

Washington Mutual Inc. reported earlier this month that option ARMs account for 50% of prime loans in its bank portfolio, but 70% of prime nonperforming loans. At Wachovia Corp., non-performing assets in the company's option ARM portfolio, which was acquired with the company's purchase of Golden West Financial Corp., climbed to $4.6 billion in the first quarter from $924 million a year earlier.

Nationwide, delinquencies on subprime loans -- at about 28% as of February, according to First American CoreLogic -- remain much higher than for option ARMs. But recent reports from mortgage securitizations suggest that subprime delinquencies have started going bad at a lower rate while delinquencies on option ARMs are speeding up.

Unlike subprime loans, which went to people with weak credit, option ARMs were generally given to borrowers considered to be lower-risk. But lending standards weakened in recent years and many borrowers now have little or no equity. Many lenders reduced the teaser rates on these loans as home prices climbed, making them appealing to borrowers looking to make the lowest monthly payment possible.

Now, with home prices dropping in California, Florida and other markets where option ARMs were popular, a growing number of borrowers with these loans now owe more than their homes are worth, one reason delinquencies are climbing, lenders say. Meanwhile, at FirstFed Financial Corp., 30% of borrowers whose loans recast to this higher level fell behind on their payments in the fourth quarter. Most other lenders won't see large numbers of resets until at least 2009 or 2010.

Many borrowers now say they didn't understand the features of the loan. For example, borrowers who make the minimum payment on a regular basis can see their loan balance grow and their monthly payment more than double when they begin making payments of principal and full interest. This typically happens after five years, but can occur earlier if the amount owed reaches a predetermined level -- typically 110% to 125% of the original loan balance.

"My sense is that many option ARM borrowers are in a worse position than subprime borrowers," says Kevin Stein, associate director of the California Reinvestment Coaliton, which combats predatory lending. "They wind up owing more and the resets are more significant."

Fannie And Freddie - Short To Zero?
Unbelievable. I have commented before that I believe Fannie and Freddie are woefully under reserved and potential "short to zero" candidates, simply because of the depth of their capital (or more specifically, the lack thereof) behind their credit book. Now we get something far more ugly - proof that what I have been told was in fact happening - that Fannie and Freddie were buying "Liar Loans" - is in fact true.

"A federal probe of Countrywide, the nation's largest mortgage lender, is turning up evidence that sales executives at the company deliberately overlooked inflated income figures for many borrowers, people with knowledge of the investigation say.
Both Countrywide and Fannie Mae, the government-sponsored company that bought many of the loans, classify the loans as "prime," meaning low-risk.
John Sipes, a former loan officer at Countrywide in Los Angeles, said sales agents loved the loan. "In the good old days, that was the best loan we had at Countrywide," he says. Borrowers were required to sign a form allowing Countrywide to verify their incomes with the Internal Revenue Service, but "they never really checked," he says."

Yeah, right. Remember now, we were told last spring and summer this was a "Subprime" problem. Then that there were some "liar loans" but they were not considered "prime" paper, and that the "prime" mortgages that were written over the years were in fact safe - even from "bubble" vintages. Now, as the FBI digs into the matter, we get down to what appears to be the truth. Let's lay it out here, assuming that the FBI investigation proves out:
  • Countrywide (and presumably other lenders) wrote mortgages to people on "stated" income, allegedly with the right to verify income against tax returns, but in fact they never did.
  • These loans were then packaged up and sold to various channels, including the GSEs Fannie and Freddie, contaminating their "prime" credit book with garbage paper that is at high risk of default. These loans were bought by Fannie and Freddie despite both of those firms representing to its investors that they buy only "safe, prime" mortgage paper.
  • This was allegedly hidden from investors (In the stock? In the paper? From Fannie?), thereby inducing those investors to purchase things (stock, bonds, mortgages) they would not have otherwise bought.
  • Either Countrywide's folks in the corner office were incompetent (unaware) or complicit (worse) - so how is it that Sambol has been given a job by BAC?

Oh, and now that the firm has been gutted Countrywide lacks the ability to "buy back" the defaulted paper, so the buyers - including Fannie and Freddie - are going to wind up eating it. Is this the only instance of this sort of outrageous behavior and misrepresentation in the system, which now appears to have been promoted and enabled by the very same GSEs that are supposed to "help" Americans buy and own homes? Care to take a bet on it? I wouldn't.

More Subprime, Alt-A Mortgages May Head 'Underwater'
About half of recent subprime and Alt-A borrowers may soon owe more on their mortgages than their houses are worth or hold minimal equity, putting $800 billion of debt at greater risk of default, according to Barclays Capital. Subprime loans from 2006 and 2007 that exceed the value of the homes jumped 5 percentage points to 19.8 percent in the fourth quarter, and may reach 26 percent by midyear if prices drop at the same pace, Barclays analysts wrote in a report yesterday. Alt-A loans, a grade better than subprime, would grow to 23 percent from 16.3 percent.

Many of the loans are in areas where prices are falling faster than the U.S. average, so the size of the shift is underappreciated, New York-based analysts Ajay Rajadhyaksha and Derek Chen wrote. The odds that a borrower will default, saddling lenders and bond investors with losses, rises when a homeowner owes more on a property than it can sell for, they wrote. "Mortgage loans are moving underwater at a very sharp pace, far more than suggested by aggregate home price data," they wrote. Home mortgages held by households totaled $10.5 trillion on Dec. 31, according to Federal Reserve data.

Defaults on Insured Mortgages Rise 37% in U.S. From a Year Ago
Defaults on privately insured U.S. mortgages rose 37 percent in March from a year earlier for their 15th straight increase, according to an industry report released today. The number of insured borrowers more than 60 days late on payments rose to 58,131 last month from 42,362 a year earlier, the Washington-based Mortgage Insurance Companies of America said.

Mortgage insurers pay lenders when homeowners default and foreclosures fail to cover costs. The new data show the U.S. housing slump isn't over. Foreclosure filings more than doubled in the first quarter as payments rose for subprime adjustable mortgages and falling home prices left property owners unable to sell or refinance without losing money, according to RealtyTrac Inc., a provider of foreclosure data.

The number of new policies issued to homeowners in the month rose to 138,782, a 2.5 percent increase from a year earlier, as lenders sought protection against further losses. Mortgage insurers say they've tightened underwriting standards and raised prices as demand for the coverage grows.

Congress, the Bush administration and regulators have urged lenders to renegotiate terms for borrowers so they can stay in their homes, easing a glut of empty houses. Almost 650,000 properties were in some stage of foreclosure during the quarter, Irvine, California-based RealtyTrac said yesterday. That's 112 percent more than a year ago.

Crisis Catches Up to Deutsche Bank
Deutsche Bank won praise and envy in financial circles for appearing to weather the credit storm better than most of its peers, but its luck finally ran out on Tuesday. The bank reported a pretax loss of 254 million euros ($396 million) for the first quarter, its first loss in five years, after writing down $4.2 billion in tainted loans and mortgage-backed securities.

Deutsche Bank had warned about the write-downs earlier this month, so they stirred less concern among analysts than the effect of the financial crisis on the bank’s day-to-day sales and trading business. Revenues were down sharply in traditional Deutsche Bank franchises like credit- and equity-derivatives trading. The bank’s chief financial officer, Anthony Di Iorio, declined to reconfirm the bank’s earnings forecast for 2008, saying there was too much turbulence in the markets.

Deutsche Bank’s loss, analysts say, is less evidence of a bank that blundered into risky, poorly understood markets than a sign of how far this crisis has spread beyond its roots in the American mortgage market. The loss would have been even worse if Deutsche Bank had not booked gains from selling shares in Daimler, Allianz and Linde — part of a long-term strategy to divest itself of stakes in German companies. “Today’s numbers were disappointing,” said David Williams, head of banking research at the London office of the investment bank Fox-Pitt Kelton Cochran Caronia Waller. “Deutsche’s core business, their day-to-day, bread-and-butter operations have been affected.”

With the likelihood of further write-downs and the possibility that its trading business may not recover soon, some analysts have concluded that Deutsche Bank did not avoid the subprime crisis after all. It is merely suffering its effects six months later than Merrill Lynch, UBS and Citigroup. “Deutsche Bank did much better than its peers because it was less exposed to the subprime areas,” said Simon Adamson, an analyst at CreditSights, a research firm in London. “But now the focus of the write-downs has shifted, and Deutsche has a large leveraged loan book.”

Citigroup Sells $3 Billion of Stock to Boost Capital
Citigroup Inc., the U.S. bank hit with writedowns on subprime mortgages and bonds, is selling $3 billion of stock two weeks after reporting its second straight quarterly loss. The shares are being sold in a public offering, New York- based Citigroup said today in a statement. Citigroup already has raised more than $30 billion of capital since December. A weakening U.S. economy and rising consumer delinquencies forced Chief Executive Officer Vikram Pandit to rescind assurances earlier this year that the bank didn't need to raise more funds.

"This was extremely disappointing," William Fitzpatrick, an equity analyst at Optique Capital Management in Racine, Wisconsin, said in a Bloomberg Television interview. "We were hoping they wouldn't have to go the equity markets like this." Companies usually try to avoid forced stock sales because they dilute the earnings power of current shareholders. Citigroup, the biggest U.S. bank by assets, earlier this month sold $6 billion of preferred shares, a bond-like security that isn't dilutive to common shareholders.

Citigroup fell about 3.8 percent to $25.32 in extended trading after the stock sale was announced this afternoon. It fell 49 cents to $26.32 earlier today in New York Stock Exchange trading. Both Pandit and Chief Financial OfficerGary Crittenden had said earlier this year that Citigroup may avoid the need to raise more capital. In January, Crittenden said the company had "stress-tested" its assumptions under "multiple recessionary scenarios."

Then, on April 18, the bank posted a first-quarter loss of $5.1 billion. Crittenden, on a conference call with Wall Street analysts, was asked if the bank might seek more capital. He said, "You can never say never."

Citigroup Increases Stock Offering to $4.5 Billion
Citigroup Inc., seeking to bolster capital depleted by mounting losses, raised $4.5 billion in a stock sale, 50 percent more than it planned after "strong demand" from investors. Citigroup, the biggest U.S. bank, sold 178.1 million shares at a price of $25.27 each, it said in a statement today. Shares of the New York-based company fell 2.9 percent in New York trading.

The sale represents about 3 percent of Citigroup's shares outstanding as of March 31. The world's biggest banks, grappling with more than $300 billion of losses on mortgages, bonds and loans, have sought new capital to stave off credit-rating downgrades that might jeopardize client relationships and access to financing. Companies usually try to avoid forced stock sales because they dilute the earnings power of current shareholders.

"They need the additional capital," said Ben Wallace, an analyst at Grimes & Co. in Westborough, Massachusetts, which manages $800 million including Citigroup shares. "The dilution factor is a secondary concern these days."
Citigroup fell 76 cents to $25.56 as of 10:04 a.m. in New York Stock Exchange composite trading. They've fallen 52 percent in the past year.

The bank already has raised more than $30 billion of capital since December, including the sale of equity to investment funds controlled by foreign governments in Abu Dhabi, Singapore and Kuwait. Last week Citigroup sold $6 billion of preferred shares, a bond-like security that isn't dilutive to common shareholders, after it reported a $5.1 billion first- quarter loss and cut 9,000 jobs.

Countrywide Reports $893 Million Loss From Bad Loans
Countrywide Financial Corp., the mortgage lender that Bank of America Corp. plans to buy, reported a third straight quarterly loss as late payments and home foreclosures escalated. The net loss was $893 million, or $1.60 a share, compared with a profit of $434 million, or 72 cents, in the year-earlier period, the Calabasas, California-based company said in a statement today. Countrywide's losses aren't enough to prompt Bank of America to abandon its bid, said Credit Suisse Group analyst Moshe Orenbuch.

Countrywide trades for about 15 percent less than shareholders would get if the stock swap were completed today, reflecting investor concern that Bank of America may demand a better price or cancel the sale, valued at about $4 billion. "It's not likely to deteriorate enough to derail the deal," said Orenbuch. Countrywide gained 2 cents to $5.85 at 4:01 p.m. in New York Stock Exchange composite trading. The lender has declined about 85 percent in the past 12 months, with Chief Executive Officer Angelo Mozilo, 69, presiding over the company's first annual loss in more than 30 years.

U.S. foreclosure filings more than doubled in the first quarter as payments rose for subprime adjustable mortgages, according to data vendor RealtyTrac Inc. Bank of America, the nation's second-biggest bank by assets behind Citigroup Inc., said April 21 that the sale, announced in January, remains on course for completion in the third quarter. The Charlotte, North Carolina-based bank dropped 32 cents to $37.86 and has slumped about 25 percent over the past year.

The combination would make Bank of America the biggest U.S. mortgage lender, handling about one out of every four home loans. The bank ranked fifth in 2007, according to trade publication Inside Mortgage Finance. Countrywide, the biggest mortgage lender by value of loans last year, posted a $703.5 million loss for all of 2007 because of higher loan losses and writedowns of securities backed by home loans.

"The problem with Countrywide is that it comes with this portfolio that was not underwritten correctly and is very sloppy," said Paul Miller, an analyst at Friedman Billings Ramsey & Co., in an interview with Bloomberg Television. Miller expects Bank of America to end up buying Countrywide at a lower price than originally negotiated.

Bank of America plans to assist troubled borrowers holding $40 billion in mortgages
Bank of America said it plans to refinance or modify terms on $40 billion of mortgages for troubled borrowers over the next two years, after acquiring Countrywide Financial later this year. The bank expects the moves to aid 265,000 borrowers who are at risk of losing their homes. "No one benefits from a foreclosed home," said Liam McGee, BofA's president of global consumer and small business banking, said at a Federal Reserve hearing in Los Angeles Monday.

The Fed held the hearing as part of BofA's plans to buy Countrywide. BofA also plans to employ almost 4,000 people for a year to work out problem loans at Countrywide. BofA's plans to mop up the Countrywide mess suggest the scope of the problems afflicting Countrywide and its customers in the wake of the historic housing boom's bust. In a similar Fed hearing in Chicago, the bank disclosed that it will eliminate Countrywide's subprime lending operations and limit the menu of mortgages that contributed to Countrywide's spectacular downfall.

BofA is also tackling the problem of tenants residing in foreclosed homes head on. McGee said BofA will let tenants stay in a property 60 days after a foreclosure and will actually give them $2,000 under a "cash for keys" program for those vacating a property within 30 days. Some tenants have found themselves out on the street -- often without their security deposits -- because they had no idea their landlords were behind on their mortgage payments. The Charlotte, N.C,, bank also said it will double its community development investments to $1.5 trillion over the next decade. That money will help build affordable housing and expand mortgage financing for low-income and minority borrowers.

The bank also plans to make "concentrated efforts" in Southern California's hard-hit Riverside and San Bernardino counties, Janet Lamkin, president of Bank of America California, told those attending the Fed hearing. BofA will also make $30 million in charitable contributions to California nonprofits this year. "We have a significant stake in the economic vitality and quality of life in this state," Lamkin said.

GMAC Feels the Drag From Its Struggling Mortgage Unit
GMAC LLC's first-quarter loss illustrates how tightly the company is being choked by its mortgage-lending unit, Residential Capital LLC. That the broader economy is faltering adds to its woes. GMAC, the financing arm of General Motors Corp., said its first-quarter loss widened to $589 million from $305 million a year earlier, pressured by persistent weakness at Residential Capital. Cerberus Capital Management LP owns 51% of GMAC.

GMAC's results will affect those of GM -- which owns the other 49% of the company and includes its share of GMAC's figures in its data -- as the auto maker also attempts to return to profitability. Cerberus has also taken a hit on the investment, having marked down its GMAC stake by roughly 20% as of March 31, according to a person familiar with the situation. A Cerberus spokesman declined to comment. ResCap had a first-quarter net loss of $859 million, narrower than last year's $910 million loss. Its recent loss included a gain of $480 million from debt retirement.

ResCap, once a major U.S. subprime-mortgage originator, has been reporting losses for more than a year as a result of the blowup of the risky-mortgage market and the subsequent credit crunch. ResCap lost $4.3 billion in 2007, and GMAC spent much of the year restructuring the company, including job cuts and an overhaul of the business model.

In spite of GMAC's efforts to support ResCap, many credit-market investors suspect ResCap will become too much of a burden for its parent and ultimately will fail to meet its debt obligations. Within the coming year, ResCap has about $4 billion of unsecured debt and $13 billion of secured debt coming due. The company currently has a $4.2 billion cash cushion.

Opec head sees oil price hitting $200 a barrel
The president of Opec has warned that the price of oil could hit $200 (£100) a barrel, spelling more pain for the major crude-consuming economies. Chakib Khelil said there was nothing that the oil producers' cartel could do to bring down the high price, which he blamed on geopolitical tensions and market speculators.

His comments, coming as oil touched a record $120 a barrel on Nymex at one stage yesterday, are seen as rejecting pleas from America and Europe for Opec to turn on the taps and help rein in the price. Mr Khelil, Algeria's energy minister, said there is no evidence of a shortage of oil on world markets. He told El Moudjahid, Algeria's state-owned newspaper, that oil stocks in the US were at a five-year high.

The price is being pushed up by the weak dollar, investment funds speculating on a higher price, and fears over supply shortages created by events such as the Grangemouth strike in Scotland and another at ExxonMobil's operations in Nigeria. In such circumstances, Mr Khelil said he could not rule out oil going to $200 a barrel. While the power of Opec, which supplies about 35pc of the world's needs, is no longer as great as in the 1980s and 1990s, critics within the US government argue that its members could do more to increase supply.

The rising price of crude is not hurting the oil companies, however. Royal Dutch Shell is today expected to report record first-quarter profits, while BP should turn in one of its best quarterly performances for two years. During the quarter being reported, oil reached $100 for the first time. Shell's Q3 profits are forecast to rise 5pc to around $6.88bn, with BP's rising about 32pc to $5.26bn. Profits from refinery operations will fall, however, as the cost of crude oil rises.

In February, BP estimated that output will rise 13pc during the next five years to about 4.3m barrels a day. Tony Hayward, the chief executive, said BP will sustain production of at least 4m barrels a day until 2020 even without new finds.

Worst UK house price slide since 1996 raises negative equity fears
House prices across the nation are now falling year-on-year for the first time in more than a decade, Nationwide Building Society said today. The average price of a home in April dropped 1pc from a year earlier, and by 1.1pc compared with March. The prospect of property values falling below what they were worth this time last year raises fears that many homeowners may be pushed into negative equity - as the amount owed on their mortgage exceeds the price of their home.

The weakness in the housing market will only add to pressure on the Bank of England to reduce interest rates from their current level of 5pc. Danny Blanchflower, one of the nine people at the central bank who votes on interest rates, warned yesterday that prices could tumble by as much as 30pc in the next two to three years and, that without a sharp reduction in rates, the UK economy risks a recession.

Howard Archer of Global Insight said: "The longer the credit crunch goes on, and the deeper and longer the UK economic slowdown is, the greater the danger will be that an even sharper housing market correction will occur." The state of the housing market, which until this year enjoyed a decade-long boom, will add to the worries for Prime Minister Gordon Brown. Mr Brown said that he is “very worried” about the impact of rising fuel prices on families and pensioners.

Bank of England 'must act to avoid recession'
Britain faces the threat of a significant recession, with house prices at risk of falling by a third, a senior Bank of England policymaker has said. David Blanchflower, a member of the Monetary Policy Committee, said Britain was facing a US-style economic downturn and urged the Bank to take "aggressive action" to prevent it.

It came as the Bank of England reported a sharp fall in the number of new mortgages taken out, with the housing market entering its toughest period since the early 1990s. Prof Blanchflower, who teaches economics in the US as well as being one of the nine members on the Bank committee that sets interest rates, said: "We face a real risk that the UK may fall into recession, and aggressive action is required to prevent this from occurring.

"For some time now I have been gloomy about prospects in the United States, which now seems clearly to be in recession. I believe there are a number of similarities between the UK and the United States that suggest that in the UK we are also going to see a substantial decline in growth, a pick-up in unemployment, little if any growth in real wages, declining consumption growth driven primarily by significant declines in house prices. "The credit crunch is starting to hit and hit hard."

Bank of England policy?makers are usually quick to dismiss the prospect of a recession or a housing slump. However, Prof Blanchflower used his speech at the Royal Society to provide an explicit warning about home values. "In my view a correction of approximately one third in house prices does not seem implausible in the UK over a period of two or three years if house price-to-earnings ratios are to be restored to more sustainable levels," he said. Although many forecasters suspect house prices will drop in the coming years, few have issued forecasts quite as dramatic as Prof Blanchflower.

Spanish banks' negative outlook reflects weakened credit environment - Moody's
Moody's Investor Service said the negative rating outlook for the Spanish banking system reflects a weakening of the country's real-estate market, high levels of exposure and concentration to this sector and a more challenging funding market. Moody's expects to witness a further increase in delinquencies in 2008, in view of a weakening labour market and expected house price correction.

The outlook also takes account of the ongoing global credit crisis and an uncertain macroeconomic environment, particular as the construction and real estate segment -- which accounts for a significant portion of banks' books -- also accounts for a sizeable part of the domestic labour force, 13.2 percent as of the fourth quarter of 2007. 'The negative outlook for Spain's rated banks -- comprising commercial banks, savings banks and credit co-operatives -- is based on a sizeable proportion of property and construction companies in Spanish banks' balance sheets,' Moody's noted.

Moody's said that after several years of strong growth in lending, fuelled by relatively cheap access to market funding -- particularly securitisations and covered bonds -- the turmoil in the financial markets has translated into a sudden deceleration of business growth for Spanish banks.

Fed looks to extend debate on liquidity
Federal Reserve policymakers will discuss paying interest on bank reserves in a closed door meeting on Wednesday. Such a move could in theory allow the Fed to expand its liquidity support operations without limit. The discussion will take place alongside the Fed’s regular meeting on monetary policy, at which officials are expected to agree to cut rates another quarter point (25 basis points) to 2 per cent and hint at a possible pause in June.

Under a law passed in 2006, the US central bank will gain the authority to pay interest on reserves in 2011. The meeting on Wednesday is based on that timeframe and will not be followed by any announcements. However, the meeting could spark an internal debate as to whether the Fed should consider asking Congress to bring forward this authority to help it deal with the current credit crisis. Many experts think that would be a good idea. Vincent Reinhart, former chief monetary economist at the Fed, said paying interest on reserves would allow the Fed to “expand their liabilities to support more asset purchases”.

A number of other central banks already have the authority to pay interest on reserves, as well as the authority to lend banks money. In normal times they can use these deposit and lending rates to put a corridor around the main policy rate, and prevent it from being buffeted too far away from the level they aim to set.

But at times of financial market stress, the ability to pay interest on reserves takes on added significance. Currently, the Fed cannot expand or contract its balance sheet without altering the overall supply of reserves and changing its main policy rate, the Fed funds rate. All it can do is change the composition of its balance sheet – absorbing more duration risk, liquidity risk or credit risk from the private sector. But if the Fed was able to pay interest on deposits, it could use that rate to put a floor under the Fed funds rate.

Fed's Bailout Is Questioned by Ex-Staffer
The Federal Reserve's rescue of Bear Stearns Cos. will come to be seen as its "worst policy mistake in a generation," a former top Fed staffer said. The episode will be seen as comparable to "the great contraction" of the 1930s and "the great inflation" of the 1970s, Vincent Reinhart said Monday at a panel organized by the American Enterprise Institute, a conservative-leaning think tank where he is now a scholar. Until mid-2007, Mr. Reinhart was director of monetary affairs at the Fed and secretary of its policy-making panel, the most senior position on the Fed's Washington-based staff.

His appraisal is one of the harshest yet by a high-profile observer. The Fed last month lent Bear Stearns money to prevent a bankruptcy filing and then financed $29 billion of its assets to facilitate a takeover by J.P. Morgan Chase & Co. Former Fed Chairman Paul Volcker has said the move went to "the very edge of [the Fed's] lawful and implied powers," although he has since said that that wasn't meant as a criticism. Congress and analysts have deferred to the Fed's judgment.

Mr. Reinhart said the bailout "eliminated forever the possibility the Fed could serve as an honest broker."

In 1998, the Fed coaxed private creditors of Long-Term Capital Management to bail out the hedge fund but didn't have to put up its own money. If it ever tries a similar maneuver on a Wall Street cohort, he said, "The reasonable question any person in the room will ask is, 'How much will you contribute to the solution?'"

Mr. Reinhart said the Fed's move may have been justified if the alternative was a chain-reaction run on many other investment banks. But he asked if other options were available, such as taking a "tougher line" with J.P. Morgan, seeking other suitors, removing certain assets from Bear's portfolio or quickly implementing its previously announced offer to temporarily swap Treasury securities for dealers' less liquid assets. "All those things were possible but not pursued," he said.

What the Fed Could Learn from Europe's Central Bank
Never before have the central banks of the United States and Europe pursued such divergent strategies when it comes to dealing with a financial crisis. The increased value of the euro against the dollar reveals which strategy is working.

Trichet runs the ECB thoughtfully and with circumspection. The Fed, under Bernanke's leadership, is hands-on and decisive. But which approach is more successful during an acute global financial crisis? And is it possible that the two key central bankers are in fact fueling the seemingly unending banking disaster?

The ECB remains calm -- sometimes to the point of doing nothing. Since the turbulence in the financial markets began last summer, it has left European key interest rates unchanged. The Fed, on the other hand, seems to take action to show it is doing something, sometimes to the point of hysteria. Since August of 2007, it has brought down the key interest rate at record speed, from 5.25 percent to 2.25 percent, to avert a recession in the United States.

But now it seems that all of the Fed's efforts have been in vain. Testifying before the US Congress, Bernanke was forced to admit that he expects the US economy to grow very little, if at all, in the first half of 2008. It "could even contract slightly," he said.

If a currency's value is a measure of confidence in an economy and its central bank, then the Europeans and their ECB are clearly emerging as the winners in the current crisis. Last week the euro climbed to a new record high of $1.60.
This has damaged confidence in both the Fed and its chairman. "Bernanke and his Fed are well on their way toward gambling away their credibility," says Thorsten Polleit, chief economist at Barclays Capital in Frankfurt.

"Bernanke is making himself a slave to the stock markets," said Willem Buiter, a monetary policy expert at the London School of Economics. Trichet, on the other hand, has opted for a hands-off approach. Interest rates in the euro zone are still where they were before the crisis, despite a considerably worsened economic outlook for Europe.

The Pentagon Strangles Our Economy: Why the U.S. Has Gone Broke
By Chalmers Johnson
60 years of enormous military spending is taking a dramatic toll on the rest of the economy.

The military adventurers in the Bush administration have much in common with the corporate leaders of the defunct energy company Enron. Both groups thought that they were the "smartest guys in the room" -- the title of Alex Gibney's prize-winning film on what went wrong at Enron. The neoconservatives in the White House and the Pentagon outsmarted themselves. They failed even to address the problem of how to finance their schemes of imperialist wars and global domination.[..]

The pioneer in analyzing what has been lost as a result of military Keynesianism was the late Seymour Melman (1917-2004), a professor of industrial engineering and operations research at Columbia University. His 1970 book, Pentagon Capitalism: The Political Economy of War, was a prescient analysis of the unintended consequences of the U.S. preoccupation with its armed forces and their weaponry since the onset of the cold war.

Melman wrote: "From 1946 to 1969, the United States government spent over $1,000bn on the military, more than half of this under the Kennedy and Johnson administrations -- the period during which the [Pentagon-dominated] state management was established as a formal institution. This sum of staggering size (try to visualize a billion of something) does not express the cost of the military establishment to the nation as a whole. The true cost is measured by what has been foregone, by the accumulated deterioration in many facets of life, by the inability to alleviate human wretchedness of long duration."

In an important exegesis on Melman's relevance to the current American economic situation, Thomas Woods writes: "According to the U.S. Department of Defense, during the four decades from 1947 through 1987 it used (in 1982 dollars) $7.62 trillion in capital resources. In 1985, the Department of Commerce estimated the value of the nation's plant and equipment, and infrastructure, at just over $7.29 trillion ... The amount spent over that period could have doubled the American capital stock or modernized and replaced its existing stock." The fact that we did not modernize or replace our capital assets is one of the main reasons why, by the turn of the 21st century, our manufacturing base had all but evaporated. Machine tools, an industry on which Melman was an authority, are a particularly important symptom.

In November 1968, a five-year inventory disclosed "that 64% of the metalworking machine tools used in U.S. industry were 10 years old or older. The age of this industrial equipment (drills, lathes, etc.) marks the United States' machine tool stock as the oldest among all major industrial nations, and it marks the continuation of a deterioration process that began with the end of the second world war. This deterioration at the base of the industrial system certifies to the continuous debilitating and depleting effect that the military use of capital and research and development talent has had on American industry."

Nothing has been done since 1968 to reverse these trends and it shows today in our massive imports of equipment -- from medical machines like proton accelerators for radiological therapy (made primarily in Belgium, Germany, and Japan) to cars and trucks. Our short tenure as the world's lone superpower has come to an end. As Harvard economics professor Benjamin Friedman has written: "Again and again it has always been the world's leading lending country that has been the premier country in terms of political influence, diplomatic influence and cultural influence.

It's no accident that we took over the role from the British at the same time that we took over the job of being the world's leading lending country. Today we are no longer the world's leading lending country. In fact we are now the world's biggest debtor country, and we are continuing to wield influence on the basis of military prowess alone."

The Black Hole of Debt
In recent weeks, Haiti has been gripped by violent protest yet again. And yet again the inhabitants of this impoverished country are suffering the most brutal consequences of the fallout of the global economic crisis. This time it is the rise in global food prices, which has sparked riots in Port au Prince, Haiti's capital, where UN peacekeepers used rubber bullets and tear gas against protesters attempting to storm the presidential palace. Days later the prime minister was fired.

It is therefore particularly appropriate that on Tuesday this week -the anniversary of the death of Haiti's dictator, Francois "Papa Doc" Duvalier - hundreds of debt campaigners fasted for Haiti's debt to be cancelled. Haiti's fate has been tied up with the issue of international debt more than any other country. Despite the fact that it's debt is illegitimate by any standards and despite Haiti's sorry position as the poorest country in the western hemisphere, it still owes $1.3bn. Every year debt repayments flow from Haiti to multilateral banks, just as its resources once enriched the French empire.

Haiti became the world's first republic to outlaw slavery, after the slave population led a struggle for independence which they won in 1804. However, in 1825, in return for recognition, the new state promised to pay its former French overlords compensation amounting to $21bn in today's money. It did not finish paying this debt until 1947. Calls for restitution have been consistently rejected by French governments.

Some 40% of Haiti's current debt was run up by the Duvalier dictators - better known as Papa Doc and Baby Doc - who between 1957 and 1986 stole parts of these loans for themselves, and used the rest to repress the population. When the Americans flew Baby Doc out of Haiti in 1986, he is estimated to have taken $90m with him. The Duvaliers were anti-communist and all too happy to follow the economic policies prescribed by the west, so their misdemeanours were overlooked.

In the 1980s and 90s, like all indebted countries, Haiti had to follow structural adjustment policies designed by the World Bank and International Monetary Fund (IMF) - including cuts in government expenditure on health and education, privatisation and the removal of import controls. Indigenous Haitian industries were wiped out as American imports flooded into the country. In 1995 the IMF forced Haiti to slash its rice tariff from 35% to 3%.

According to Oxfam, this resulted in an increase in imports of more than 150% between 1994 and 2003, the vast majority from the US. Certainly this meant lower prices for Haitian consumers, but it also devastated Haitian rice farmers. Traditional rice-farming areas of Haiti now have some of the highest concentrations of malnutrition and a country that was self-sufficient in rice is now dependent on foreign imports, at the mercy of global market prices.

Today, 80% of Haiti's population live in poverty as defined by the World Bank (under $2 a day). Average life expectancy is just 52 years. Half of all Haitian adults cannot read or write. Yet Haiti failed to qualify for debt relief under the heavily indebted poor country initiative (HIPC), established in 1996 to make the debts of the most severely indebted poor countries more sustainable - surely the clearest proof of the arbitrary nature of the HIPC scheme.

Ilargi: Talk about a perfect storm: in order to feed themselves, people will increasingly destroy their living environment. Monsanto and Cargill are laughing in the background.

Shortages Threaten Farmers’ Key Tool: Fertilizer
Truong Thi Nha stands just four and a half feet tall. Her three grown children tower over her, just as many young people in this village outside Hanoi dwarf their parents. The biggest reason the children are so robust: fertilizer. Ms. Nha, her face weathered beyond its 51 years, said her growth was stunted by a childhood of hunger and malnutrition. Just a few decades ago, crop yields here were far lower and diets much worse.

Then the widespread use of inexpensive chemical fertilizer, coupled with market reforms, helped power an agricultural explosion here that had already occurred in other parts of the world. Yields of rice and corn rose, and diets grew richer. Now those gains are threatened in many countries by spot shortages and soaring prices for fertilizer, the most essential ingredient of modern agriculture.

Some kinds of fertilizer have nearly tripled in price in the last year, keeping farmers from buying all they need. That is one of many factors contributing to a rise in food prices that, according to the United Nations’ World Food Program, threatens to push tens of millions of poor people into malnutrition. Protests over high food prices have erupted across the developing world, and the stability of governments from Senegal to the Philippines is threatened.

In the United States, farmers in Iowa eager to replenish nutrients in the soil have increased the age-old practice of spreading hog manure on fields. In India, the cost of subsidizing fertilizer for farmers has soared, leading to political dispute. And in Africa, plans to stave off hunger by increasing crop yields are suddenly in jeopardy. The squeeze on the supply of fertilizer has been building for roughly five years. Rising demand for food and biofuels prompted farmers everywhere to plant more crops. As demand grew, the fertilizer mines and factories of the world proved unable to keep up.

Some dealers in the Midwest ran out of fertilizer last fall, and they continue to restrict sales this spring because of a limited supply. “If you want 10,000 tons, they’ll sell you 5,000 today, maybe 3,000,” said W. Scott Tinsman Jr., a fertilizer dealer in Davenport, Iowa. “The rubber band is stretched really far.” Fertilizer companies are confident the shortage will be solved eventually, noting that they plan to build scores of new factories. But that will probably create fresh problems in the long run as the world grows more dependent on fossil fuels to produce chemical fertilizers. Intensified use of such fertilizers is certain to mean greater pollution of waterways, too.

Click to enlarge


Anonymous said...

I am amazed by the reporting on the UK house prices. The Nationwide index shows prices have been consistently declining at an annualised rate of 10% since October 2007, yet the only comment is that the year on year change is a drop of 1%.

I have looked at a simple model of affordability to look at house prices. If you say affordability depends on earning growth, the excess of earnings growth over RPI and for the change in interest rates, then the prices track from 1991 to 2004. In 2004 interest rates started to rise, so prices should have started to go down, but they went up by 13% instead. At their peak in October 2007 prices were 86% higher than the affordability would predict. This means that UK prices have to would fall by more than 45% to get back to an affordable price.

Add economic migration back to Eastern Europe as unemployment starts to rise in the UK and you have the potential for a large overshoot.

I only hope I am wrong!

Anonymous said...

Hi Ilargi, welcome back.

Good rattle.

Here goes an interesting article on food and imperial capitalism exterminism:


el gallinazo said...

Regarding your article concerning shorting Fannie and Freddie down to zero. There is no question that they would go belly up shortly without federal intervention. But as someone who got seriously burned with the Fed intervention over the MLK holiday, have you taken federal intervention into account? They are TBTF and a GSE to boot. Won't the Federal Reserve just buy up all their toxic waste, thus buoying up their stock prices? Please comment a continuing Federal bail-out of Freddie an Fannie. Would this be done through the Federal Reserve or directly through a true arm of the federal government like FHA?

Finally, why is most of the good economic reporting coming from Canada and Germany? Never mind, we know why. When will the US Army move into Alberta? After Iran?

Anonymous said...

It is amazing how the US media is reporting such good economic news. You would think that we are not underwater but rather flying high above the water. On CNBC, guest after is guest claims that the worst is over and the good times are just ahead.

EBrown said...

I continue to be amazed at the reporting (or lack thereof) coming out of US financial media. I find it hard to reconcile my DEEPLY pessimistic understanding of a world economy about to pass a massive turd into the blades of a GE90-115B with what I read from media such as Marketwatch, CNNMoney, and others. Contributing to this strange sense of disconnect is the fact that few other people I interact with in my daily life are anywhere near as "depressing" as I am. I work in healthcare and only one other guy is aware of what we face. I'm an RN and most of the other nurses do NOT get it. They all have their pet hypotheses about why things are the way the are (oil companies holding back production is the most popular). And, from the way things look right now, life is still going on as before here in N. Vermont. I don't see significant changes (just as many cars on the road, some new buildings still going up, some new businesses opening) from when the crisis broke last August.
I guess I mean this as a reply to "we're all underwater now," and while I agree, I think we're not through what little reserve our lungs still hold. We're underwater, but still paddling, reaching for the surface while being swept ever deeper by undertow. I do wonder WHEN we will collectively exhaust what little breath we have left, and what that will look like... Will it be a dramatic final gasp of bubbles and thrashing, or will it being a whimper and gradual passing with only the occasional twitch?

Anonymous said...

Welcome back, many thanks to Stoneleigh for keeping the rattle shaking while you were away.

Anonymous said...

ebrown, the docs are just as stupid and resistant to info to the contrary.

Farmerod said...

Here's some Canadian reporting to be proud of: How to win a bidding war
For every offer made on a property, add $10,000 to the list price, one agent suggests

I would acknowledge, however, that the formula was almost exact for the sale of my home last month. I wonder when reality will hit in Ottawa.

Anonymous said...

In response to OuttaControl:

Yes, that article is, well, ridiculous. I usually have to hold my nose quite tightly when I wade into the G&M comments section, as the waves of idiocy drown out anything else, but I was a little heartened to see a near-universal agreement that the article was out to lunch.

Seems not everyone in Joe Public Land is assuming things are fine and dandy. Maybe regular folks are starting to see that we are actually underwater, despite that major media commentary remains mostly wilfully blind.

Anonymous said...

ebrown, anon et al,
I have tried to discuss the oil/energy/financial issues with some very intelligent people, and some not so intelligent. They all have the same reaction. They do not believe it for a minute regardless of evidence or facts. Intelligent people can easily deny things they don't want to hear. Almost everyone wants to believe in a rosy and bright future even if everything is collapsing around them.

Anonymous said...

I was recently reading

An Inconvenient Adjustment: The Unofficial Official Recession

an article in which (as in many others) the official figures for CPI are questioned.

Im sure few of you follow the headlines in Argentina; actually this country is like an economic laboratory where all kinds of economic theories are tested.
I remember reading some articles by Krugman calling the "argentinization of the US economy".
Well, all this intro is just for making the following point: since the middle of 2007, the CPI in Argentina is glaringly manipulated by the government. Nowadays it is so ridiculous that consumer prices are recorded LOWER than retailer prices. The official annualized inflation is about 12% whereas everybody else calculates about 30 - 40%.
Many people think this manipulation is absurd; well it is, but unfortunately it is not the only one. I guess the US, with all the PhDs and high profile economists are disguising the real figures just as the argentinian statisticians.

The problem is, this stealth inflation is exported around the globe. With low fed rates, the actual present value of U$ dollar is NEGATIVE!!

snuffy said...

I have given up on "official"statistics of any sort.If there is a political bend to them,any and all would/will be massaged.especially if it is impossible to check.I don't know if words can truly convey the sadness and near despair I,and many feel when the subject of the destruction of the data bases,as well as the smashing of federal government/ civil service system,and damage to federal regulatory agencies
that 8 years of Bush and Cheny
have done.The years ahead will need a operational fedgov to deal with the crisis ahead....That is if we can keep from slipping into a medieval styled dark ages that seems on the horizon.
I once read a account of living in Argentina during their economic collapse.Some very eye-opening reading on how one survives,and how societies evolve.I will try and remember the links for those who would be interested

Ilargi said...

el pollo

The nationalization or bail-out (pick a term) of F&F will not lift share prices. The shareholders won't get anything. After all, it will go belly up first, even if only in a Bear sense.

The FHA could be an option for day to day management, but the debt load will have to move elsewhere.

Stoneleigh said...


Here's a link to the story you mention:

Life in Post-Collapse Argentina, Oct. 2005

(scroll about a third of the way down)

The author also has his own blog.

Anonymous said...

Little something for today....