Sunday, April 6, 2008

Debt Rattle, April 6 2008

See also today's earlier post How to blow a bubble

Ilargi: What I see developing is the beginning of the end in EU-US economic cooperation. It can be seen as an extension of what happens with NATO these days, where contradictory interests are played out against each other, with France and Germany refusing to seek increasing confrontation with Russia. Then again, the economic deliberations, at this point, trump all that.

In practical terms: American and British interest rates will come down, but not so in the eurozone. And that will make many problems bigger and more unbalanced. Everyone will elect to tackle their own specific problems. Russia and China already do so. We are entering the phase of cats fighting in a sack.

Germany to warn against intervention in favour of U.S. dollar
The German finance ministry plans to warn against intervention in favour of the U.S. dollar at the forthcoming G7 meeting, Der Spiegel reported, citing an internal draft ahead of the talks.

The ministry's experts believe verbal interventions that talk up a currency are inefficient, the magazine said. It said interventions on the international capital markets to back the U.S. dollar could not be financed if they are to reach a volume that has an impact.

The ministry also sees a cut in interest rates in the euro zone as "highly unlikely" given the current high levels of inflation in the region. The G7's finance ministers and central bank presidents are set to meet at the end of this week in Washington.

Ilargi: Hmmm, I’d say the credit squeeze threatens more than global economic growth. In fact, I think it’s a ridiculous statement. Still, it’s a good point to remind everyone that the world economy will collapse if and when there no longer is growth.

Side note: Bloomberg states here: Banks and securities firms have posted $232 billion in asset writedowns and credit losses. I see so many different numbers, I think I’ll keep this one in mind.

EU Seeks Coordinated G-7 Response to Credit Squeeze
European finance ministers will press their counterparts from the Group of Seven major industrialized nations for greater coordination in battling the credit squeeze that threatens global economic growth, according to the draft of a confidential report prepared for next week's meeting.

Central banks and governments around the world have struggled to rein in a surge in the cost of credit that began in August. Banks and securities firms have posted $232 billion in asset writedowns and credit losses stemming from the collapse of the U.S. subprime mortgage market.

"It is important to coordinate global responses, not least within the G-7, to the challenges the world economy is facing in terms of financial-market turbulence," according to the European document, which was discussed by euro-area finance chiefs yesterday. "Authorities must remain vigilant to further policy responses that may be needed, in particular aimed at stemming mechanisms with a potential to amplify the effects of the turmoil," the paper, which was obtained by Bloomberg News, said.

The final version of the report will be presented to finance ministers and central bankers from the G-7 when they meet in Washington on April 11 to discuss the economic outlook. European Central Bank President Jean-Claude Trichet said yesterday that international monetary policy makers continue to discuss possible solutions to the financial crisis. "The general sentiment is that the turmoil is not over, that there is still possible bad news in the pipeline," Italian Finance Minister Tommaso Padoa-Schioppa said in an interview with Bloomberg Television in Brdo.

While central banks say they are in constant communication, there has been little in the way of a uniform response beyond December's decision to auction dollars. The U.S. Federal Reserve has slashed its benchmark rate by 3 percentage points since last August, while the ECB has left its rate at a six-year high of 4 percent. Each G-7 central bank also has differed on how much money it has been willing to pump into the banking system and what collateral it is willing to accept.

In spite of the central banks injecting liquidity into markets, the cost of borrowing in euros for three months this week reached 4.7 percent, the highest since Dec. 27, according to the European Banking Federation. "If ever there was a time to try and agree on some things and to coordinate policy to help the world economy and financial system, this is it," said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York. "A common set of responses would benefit everyone."

To ease the stresses in markets, the European ministers want banks to disclose their exposure to distressed assets and improve their management of risk, the document said. It warned that "it cannot be excluded that global operating banks will face further deterioration in the credit quality of their assets, perhaps even extending to corporate loans."

With the record prices for oil and other commodities compounding the threats to the world economy "the risks are clearly tilted on the downside" for global growth, the briefing document said. The International Monetary Fund said this week it cut its 2008 forecast for expansion in the world to 3.7 percent from 4.1 percent in January and called the financial crisis the worst since the Great Depression.

Bankruptcies Jump 30% in March, Led by Housing-Bust States
The jump in March bankruptcy filings is another indication the U.S. economy is in recession, led by states where the housing boom turned to bust. The more than 90,000 bankruptcy filings in March were the highest since insolvency laws became more restrictive in October 2005, according to statistics compiled from court records by Jupiter eSources LLC. At a daily rate, filings in March were 30 percent above the pace in 2007.

Rising bankruptcies, together with mounting foreclosures and fewer jobs, are further signs the biggest housing slump in a generation is hurting consumers and businesses. Federal Reserve Chairman Ben S. Bernanke this week for the first time acknowledged the economy may be facing a recession and vowed to act to cushion the slowdown.

"We're seeing fairly high readings in these measures of distress like bankruptcies, foreclosures and mortgage defaults," said Chris Low, chief U.S. economist at FTN Financial in New York. The most affected states are "also where the most housing-related business growth was," said Low. The states most affected by the housing recession, including California, Nevada and Florida, were among those with the largest increases in bankruptcies.

They are also among states where unemployment rates exceed the national average. The jobless rate in California is 5.7 percent and Nevada's is 5.5 percent in February. Nationally, 5.1 percent of workers were unemployed in March, the highest level since September 2005, the Labor Department reported yesterday.

California led the nation with a 42 percent increase in bankruptcy filings at an annual pace in the first quarter, according to Jupiter eSources LLC. Florida had a 35 percent increase and Nevada saw a 32 percent rise. Nevada led the nation with the highest foreclosure rate in February, with filings up 68 percent from a year before, and with one in every 165 households in default or foreclosure, according to RealtyTrac Inc., a seller of foreclosure data

Investment bank's reputation demolished
UBS, one of the world's largest investment banks, wrecked its reputation as a bastion of financial stability after it admitted this week that losses stemming from the United States sub-prime mortgage crisis had spiralled by £10-billion in the first three months of the year to a total of almost £19-billion.

The enormous size of the write-downs, which were larger than any of its US rivals, underlined the gamble taken by the Swiss bank on complex mortgage-backed securities that have become almost worthless since the onset of the credit crunch. Switzerland's financial watchdog, unnerved by the scale of the losses, said it would rewrite its rule book to prevent further reckless lending and re-establish Zurich's reputation for stability. Ratings agency Standard & Poor's said it had cut the Swiss bank's credit status and would keep a watchful eye on its progress.

Stock markets reacted positively to the news in the expectation that the bank had drawn a line under its exposure to sub-prime mortgages. The bank's share price rose sharply, trading up 7% at £15,50 on the Zurich exchange. Investors also pointed to Deutsche Bank's £2-billion write-down later in the day, which several argued showed banks were taking steps to clear out their bad debts. However, workers at the bank were braced for bad news after UBS pencilled in further redundancies.

The measures mean that UBS is now a restructuring stock, analysts at JP Morgan wrote in a note to investors. "We conclude UBS is aiming to put a line below its risk-exposure problem and refocus on operational business," JP Morgan's Kian Abouhossein said.

But Octavio Marenzi, head of financial consultancy Celent, said the UBS disclosures were "a clear indication that we are not out of the woods yet in terms of the credit crisis". "Indeed, the storm clouds are gathering ever more rapidly over the banking industry and, in particular, the US banking industry, where most of UBS's losses originated from," Marenzi said.

Swiss banks were once bywords for caution, but have become caught up in the US subprime mortgage debacle like their rivals elsewhere. UBS remains the bank of choice for wealthy investors, but the recent revelations that it holds billions of pounds of worthless subprime mortgages has knocked confidence. Marcel Ospel, the outgoing chairperson, admitted thousands of customers had withdrawn their deposits in recent months, though this had not reached critical levels.

Ilargi: Look, he’s a renowned economist, and it’s not that I think Robert Shiller is a complete nutcase. He’s just one more in a long line of people who can’t look beyond the viewpoint of those who feel “the system” needs to be preserved at any price.

I don’t share that view. Making individual people pay for institutional gambling debts is simply wrong. And besides, there is no way to bail out the parts of the system. Those parts will be swallowed up for next-to-nothing by the biggest players, but only after the money of the smallest players, you and me, have been pledged and lost into them.

And in that light, Shiller’s article reeks of dishonesty. Saying that the Fed’s new power grab is ”a natural step in a historical trend”is simply devoid of critical thinking; it’s more like kissing the ass that feeds you.

The Fed Gets a New Job Description
The plan of Treasury Secretary Henry M. Paulson Jr. to overhaul the financial system includes a crucial proposal: it would officially transform the Federal Reserve into a “market stability regulator” rather than merely a banker’s bank.

This aspect of the Treasury plan is a natural step in a historical trend. The Fed is no longer just a regulatory agency presiding over a narrow group of businesses called banks. Rather, its mission increasingly is to maintain macro confidence — confidence that the entire financial system is functioning well as part of the whole economy.

In contrast, traditional securities regulators like the Securities and Exchange Commission have as their primary mission the maintenance of micro confidence — confidence that individual firms are disclosing the truth about their own internal operations and are not manipulating information. But as the current financial crisis attests, it is macro confidence that requires the most subtle attention. The instability in even in the most modern economies accounts for the growing respect for the financial stabilization offered by central banks.

Moreover, the nature of financial institutions is changing, and as finance becomes more sophisticated, the traditional boundaries of banking have blurred. In the current crisis, for example, there have been significant liquidity problems associated with “special-purpose vehicles” or “conduits,” which issue asset-backed commercial paper. These entities resemble banks but are not technically banks. In the new financial order, in fact, we do not clearly know what is or is not a bank, so a narrow definition of the mission of the central bank is no longer appropriate.

In recent years, central banks have not always managed macro confidence magnificently. The Fed failed to identify the twin bubbles of the last decade — in the stock market and in real estate — and we have to hope that the Fed and its global counterparts will do better in the future. Central banks are the only active practitioners of the art of stabilizing macro confidence, and they are all we have to rely on.

The trend toward greater powers for the Fed isn’t new. In 1932, Congress extended the Fed’s power by giving it the authority “in unusual and exigent circumstances” to make discount-window loans to any organization or individual, not just to member banks. In 1980, Congress gave the Fed the authority to use its discount window in the normal course of business for all depository institutions, including savings associations and credit unions, and to set reserve requirements for them as well.

The Fed has been taking an expansive view of its own powers recently, for the most part with considerable public approval. Witness its decision to give a $29 billion line of credit to JPMorgan Chase to encourage the purchase and rescue of Bear Stearns. There was very little criticism of this move because so many people rightly feared the systemic effects on financial institutions if the Fed did not act. Bear might have had to dump its troubled assets on the market, and the whole financial house of cards could have collapsed. Because we sense that maintaining confidence in our financial system is so important, we are permitting the Fed to expand its role.

The trend toward greater reliance on central banks has been global. These institutions have been given more independence, as with the Bank of Mexico in 1994, both the Bank of England and the Bank of Japan in 1997, and the creation of the European Central Bank in 1998. Independence, of course, means more power.

Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LL

In the Shadow of Foreclosures
In the mortgage squeeze, some regions are feeling the pain more acutely than others. Although many Southern metropolitan areas have high percentages of subprime mortgages, homeowners in those areas have largely been able to pay their bills, so subprime foreclosure rates are low.

Not so in the Rust Belt, where subprime mortgages are less common but foreclosure rates are sky-high, mostly a result of rising unemployment. And overbuilding in regions of Florida, California and other states with housing bubbles lured overeager residents to become speculators, buying up many homes with the expectation that their values would rise. Getting subprime loans was all too easy.

But paying the loans as housing prices fall is all too hard, and many economists believe that foreclosures will continue to rise. “The collapse will affect other markets, like New York, Boston and D.C.,” said Dean Baker, co-director of the Center for Economic and Policy Research. “Suburban areas near those cities are already seeing prices plunge.”

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Carry Trade Crisis Looming?
The following was taken from the transcript of this week's TFN Smart Trading Action Alert video featuring Jack Crooks.

Laura Cadden: Carry traders borrow low yielding currencies, like the Japanese Yen, to buy bonds denominated in higher yielding currencies, like the Australian dollar or the Icelandic krona or the U.S. dollar. But strong exchange rate fluctuations increase the risk that over leveraged traders will have to pay back more expensive currency with less valuable currency.

With the U.S. dollar plunging and the fed slashing interest rates, what does this mean for Forex traders? I’ve invited Jack Crooks, editor of The Money Trader to give us his take. So Jack, tell me, what is the danger in the present situation?

Jack Crooks: Well the danger is kind of what it’s already been built up in the carry trade. These carry trades have created a massive amount of liquidity in the world. Much of it has gone into other high yielding currencies. Much of it has gone into merging markets and bonds. But much of it also has gone to this dangerous growth in derivatives and this massive leverage we have around the globe.

When you can borrow at a half percent and money looks like it’s cheap and all these asset markets look like they’re going up – stocks, bonds, commodities all at the same time – it’s kind of a lay up for these major traders. But now we’re in a situation where we’re starting to face the great unwind and it’s very, very dangerous for the global economy.

Laura Cadden: I know some analysts have mentioned that they see strong parallels with the situation back in 1998 during the Asian currency crisis. Do you feel that’s a realistic fear?

Jack Crooks: Oh, absolutely. It’s a very good parallel and very analogous to 1998. In 1998, there was at the time a very massive yen carry trade going on. Interest rates were a half percent in Japan then. The institutions were all pouring in borrowing the yen in order to buy the emerging market countries, the Asian tigers, Malaysia, Indonesia. They were all hot as could be.

Then we had the Asian financial crisis. The whole system broke. We had long-term capital management and we had a real payback or deleveraging at that time of the yen carry trade. At the time the carry trade was $138 billion, which is very large. Fast forward to 2007. We have a massive carry trade again because interest rates in Japan are at a half percent.

We’re playing the same game. Major traders and institutions around the world are borrowing this yen and placing their money everywhere on all these hot assets. But what’s different this time – a couple things different – they’re leveraging them more. They’re leveraging, they’re borrowing up five, ten, 15, 20 times and the amount of borrowing in yen is about seven times larger in 2007 than it was in 1998.

So this has created a massive, massive build-up and we’re starting to see that unwind. That’s why the yen’s starting to drive higher. It goes back to this idea of great unwind going on. This leverage is starting to unwind now in the global economy. When traders and investors do that that have borrowed yen, they have to pay back in. When they pay back in they’re effectively buying yen and that provides that powerful lift for the yen in a world where a lot of other currencies are starting to take a hit.

Ilargi: Oh great. Wall Street is about to turn into one giant Enron operation, and none of the regulators cares that it is against the law. Laws are for wimps these days in the US.

Bear Stearns's Energy Unit Draws Interest
One little-known bonus for J.P. Morgan Chase & Co. in its hastily arranged acquisition of Wall Street's Bear Stearns Cos. is a two-year-old energy-trading company that can transform and expand the bank's presence in commodities. Michael Cavanagh, J.P. Morgan's chief financial officer, has called it one of the deal's "nice add-ons."

J.P. Morgan has reason to be pleased: Despite federal legislation that effectively restricts commercial banks from operating in the power industry, it expects to be able to keep key assets owned by Bear Energy. The unit trades natural gas and power and also controls the operations of several power plants.

Under the law, the Fed must deem such nonfinancial activity "complementary" to the bank's financial activities or the bank must divest or close the business within two years. The Fed's Board of Governors has not formally said that J.P. Morgan can hold the assets indefinitely, but people familiar with the matter say the bank has been assured by Fed officials that they are comfortable with its acquisition of Bear Energy.

This could be yet another advantage accorded J.P. Morgan in its extraordinary buyout of the 85-year-old investment bank. When the J.P. Morgan-Bear deal was struck in mid-March, the Fed hadn't yet approved another commercial bank's foray into the type of long-term power deals Bear was doing.

Less than two weeks after this deal was brokered, the Fed approved another commercial bank's application to enter into power agreements similar to Bear's. But that bank, Royal Bank Group PLC of Scotland, had to go through a lengthy review over several months. Now other banks contemplating similar businesses are likely to ask for a quick answer, people in the commodities business say.

Across Wall Street, investment banks have been diving into physical gas and power trading. Brokerage firms such as Morgan Stanley, Goldman Sachs Group Inc. or Bear aren't restricted like commercial banks from owning power plants or signing long-term deals that give them the right to control their output.

Like Bear, many have entered into risky, long-term agreements both to supply fuel and buy power from plants at set prices for up to 20 or 30 years, known as tolling agreements. Such deals once were the domain of Enron Corp. and other energy merchants.

Investors Stalk the Wounded of Wall Street
Investors have fled some kinds of assets indiscriminately in recent months. Standard & Poor’s data shows that corporate bonds are selling for less than 90 cents on the dollars — across the board. In the 2002 downturn, particular bonds like those in telecommunications fell far more than the average bond.

The broad flight this time leaves an opening for firms that can pick out the valuable ones, said Leon Wagner, chairman of GoldenTree Asset Management, an investment fund in New York. “People know there will be money made out of this,” Mr. Wagner said, adding that “distressed” has become a buzzword on Wall Street.

Already in the private equity world, more distressed companies are under review. Stephen Presser, a partner at Monomoy Capital Partners, said a year ago he was seeing 15 to 20 midsize companies a month that were in trouble. Now, that figure is 30.

“There is an actual consumer spending slowdown that we can see almost throughout the companies,” Mr. Presser said. “The same companies have typically borrowed their way out of trouble in the past.”

Banks are also trying to sell the mortgage loans that they did not bundle into bonds and resell, said Stanford L. Kurland, the former president of Countrywide. Mr. Kurland now runs a joint venture that will buy mortgages on the cheap and rework their terms. The venture is backed by the investment funds BlackRock Inc. and Highfields Capital Management.

Mr. Ross predicted that the debt troubles of ordinary Americans will spread far beyond mortgages. And on Wall Street, some hedge funds are selling good assets on the cheap

Ilargi: The UK is now in the firm grip of a reality check. The Government speaks of the healthiest economy in years (?!), but this small selection of articles tells a different story. Not that anyone is yet ready to face the full scale of potential consequences; the wake-up has only just started. in other words: the denial phase is over, and fear sets in.

Seeking a cure for the credit crunch
The brightest minds in central banks, finance ministries and the private sector are fully engaged in ending the credit crunch. It will be the focus of the International Monetary Fund and World Bank’s spring meetings in Washington this week. Things have moved on since their autumn gathering. Now most economists think America is in recession and “normalisation” in financial markets is a long way off.

These issues are fiendishly complicated. Few can be addressed by one country alone. When the dust settles, banks can expect to be more tightly regulated than before, because through a combination of greed and incompetence some fell down on the job. The Financial Stability Forum will report to G7 finance ministers and central banks this week. In an interim report in February, it said: “Events have shown that the quality of risk management varied significantly among the largest and apparently most sophisticated market participants.”

The regulatory response will come later. What should be happening here and now? The crunch is the result of a series of market failures. It is the job of policy to try to offset such failures. Here are some suggestions how.

The Bank of England’s monetary policy committee has pursued a cautious line on rate cuts, steering between slowing growth and higher inflation. That has been right so far, but there is now a case for more aggressive action. The problem is the renewed rise in money-market rates, with three-month Libor (London interbank offered rate) at nearly 6% and lenders increasing their rates when the trend for official rates is down. The Bank should cut and, if necessary, cut again, until rates across the economy are falling.

The “shadow” monetary policy committee, which meets under the auspices of the Institute of Economic Affairs, agrees. It votes 6-3 this month to cut rates, with one member, Patrick Minford, opting for a half-point reduction. Minford and the other cutters - John Greenwood, Ruth Lea, Kent Matthews, Peter Spencer and Peter Warburton - had a similar message. While hard evidence suggests the economy has weakened only slightly, the tightening of credit conditions, confirmed in the Bank’s own survey, points to significant downside risks and the need for action.

As Minford put it: “The Bank needs to take action to cut money-market rates (not Bank rate which is now increasingly irrelevant) by around 1%, with a further bias to easing. The aim should be to get market rates down to 5% now, ready for further falls.”
Of the other shadow members, Tim Congdon and Trevor Williams had a “bias to ease”, but not now. Only my near namesake David B Smith has a bias to raise rates.

The Federal Reserve has cut aggressively and will do so further. What about the European Central Bank? There is admiration for the ECB’s antiinflationary stance, so it is easy to forget it has a bigger inflation problem than Britain. Its inflation ceiling is supposed to be 2% but the flash estimate of March inflation was 3.5%, not far below the official 4% interest rate. That has happened despite the helpful effects of a strong euro. Even so, the ECB will eventually have to look through current high inflation, which slower growth will take care of, and cut.

Bank of England to cut rates as economic gloom grips
The Bank of England faces its most critical interest rate decision in 11 years this week as a key survey will show business confidence collapsing and bankers warn of a further squeeze on homebuyers. The British Chambers of Commerce economic survey due this week will highlight rising fears among British firms, while the housing market will face a further battering as more banks are expected to tighten their mortgage terms or scrap loan deals altogether.

Signs that the credit crunch is hitting the wider economy are likely to push the Bank towards a cut in interest rates. But some economists fear this will fan inflation and stoke the threat of a public-sector pay row. On balance, City economists are betting on a quarter-point cut to 5% from the Bank's Monetary Policy Committee on Thursday as the gloomy quarterly survey from the BCC and the mortgage market turmoil are expected to outweigh inflation fears. But the decision is one of the hardest yet faced by the nine-member rate-setting panel, which was set up in 1997.

This weekend, Halifax joined other lenders in tightening terms. Halifax borrowers who cannot offer a 25% deposit will pay higher rates, though the bank has cut rates for those with a deposit of more than 25%. This follows moves in the past week by lenders including Barclays, the Co-op and Nationwide either to scrap mortgage products, raise rates or demand bigger deposits. Bankers believe that now Halifax has joined the trend, more lenders will follow suit.

Meanwhile, the BCC survey for the first quarter is expected to show both the manufacturing and service sectors shrouded in gloom as the credit crunch and financial turbulence take their toll. It is likely to show domestic orders slowing, along with investment in both sectors. And manufacturers are expected to report slowing exports.

Were that the whole story, the MPC could cut rates with a clear conscience. But the survey will also show that firms are planning to put up prices, making it harder for the Bank to cut rates without risking higher inflation. On top of Thursday's likely cut, money markets are betting on at least one more by the end of 2008, with rates then possibly being as low as 4.5%.

Darling Plan May Relieve Banks of Damaged Loans
U.K. Chancellor of the Exchequer Alistair Darling is drawing up plans to relieve commercial banks of mortgage-backed securities damaged by the subprime crisis and move them onto the Bank of England's balance sheet, the Observer newspaper reported, citing no one.

Under the plan, which would be used if market tensions don't ease, the securities would be held by the central bank for as long as three years, the paper said. U.K. and U.S. officials have discussed the proposal and any action would have to be coordinated, the Observer said.

Darling will discuss plans to ease the financial market crisis with colleagues from the Group of Seven nations in Washington this week. He will say the G-7 must act immediately to force banks to reveal the full scale of their subprime loans, the newspaper reported.

Labour MPs' fury over homes crisis
Gordon Brown's government came under attack from one of his closest allies last night for failing to help families threatened with losing their homes in the credit crisis. George Mudie, a senior member of the Treasury select committee, called for ministers to strike an urgent deal with lenders to delay repossessions and help struggling householders through short-term difficulties.

His words reflect backbench MPs' fears of a rise in people losing their homes as around two million Britons come off cheap fixed-rate deals this year and struggle to get another affordable mortgage. They are concerned that a relatively temporary global banking crisis could become a long-term social problem if people are made homeless as a result.

Ministers' insistence that the economy is sound are failing to reassure householders, Mudie said. 'Their answer to any problem is "This is the most stable economy we have had in our history". Well, fine, but that is history. I always quote Lloyd George: "You can't feed the hungry on statistics of national prosperity".'

He said while repossessions had not yet reached the scale of the 1990s recession, 'every one of those figures is a human tragedy' because it meant people had been forced out of a cherished home. 'The starting point, which I think the Americans are accepting, is to try to do everything to keep people in their houses. I don't think the government has actually grasped that.'
The intervention from Mudie, a loyal ex-whip who played a critical role in the cabal around Brown when he was Chancellor, follows criticism of Downing Street last week over the scrapping of the 10p tax rate just as many low-income families feel the pinch.

Around 40 Labour MPs have now signed a Commons motion tabled by backbencher Austin Mitchell warning that a 'large and growing number of houses' will be repossessed because of this year's credit squeeze. It urges councils to buy up the empty homes, allowing former owners to stay under their own roof as council tenants and helping councils expand housing stock.

Ilargi: Well, sir, I’m sorry my fears were sillly. But please allow me one question. Why do you only ask me to become owner when there’s losses to be doled out?

Let's get over our silly fears of public ownership
Even 12 months ago nationalisation seemed a quaint notion from yesteryear - as remote from today's concerns as big band music, ration coupons and nylons. Nobody who wanted to be taken seriously by mainstream opinion could ever champion the self-evidently economically wasteful and amoral act of nationalisation.

But a credit crisis that has forced the reluctant nationalisation of one bank in Britain, Northern Rock, and the socialisation of some £15bn of loans of another in America, Bear Stearns, is forcing mainstream opinion to think the unthinkable. The chief executive of Deutsche Bank, Josef Ackermann, has announced that he no longer believes in 'the markets' self-healing power' and wants extensive government intervention. It was always true that companies, the market and the state are inextricably linked and that public action is crucial to a well functioning market economy. Now it is newly legitimate.

It is an important moment. Most of the electorate accepted the argument that a period of public stewardship for Northern Rock represented the best pragmatic deal for the taxpayer while safeguarding the financial system. If there was any complaint it was that the government had been too slow to act rather than that it was returning to the dark days of statist socialism - however hard the Conservative party tried to press home the attack.

Pragmatism and nationalisation may seem to modern eyes mutually exclusive, but, as I have discovered in exploring postwar nationalisation for a documentary, they have always been closely intertwined. There has been a mutual conspiracy of right and left to portray nationalisation as the ultra-ideological attempt to 'secure the full fruit of the workers' industry by hand or by brain through organising the common ownership of the means of production' as the now abolished Clause 4 of the Labour party constitution declared. It suited the left as proof that socialism was happening, and it suited the right as proof that privatisation dismantled socialism.

How first-time buyers' dreams are shattered
Location, location, location, the mantra of Britain's property owning classes, has turned into frustration, frustration, frustration. Cheap and easy mortgage loans have for the past decade fuelled a housing boom that has turned Kirstie Allsopp and Phil Spencer into TV stars and spawned a host of glossy 'property porn' mags and supplements encouraging us to fantasise about grander, more expensive homes.

Dizzyingly high house prices seemed to offer the keys to the good life. Even a modest semi-detached could be turned into a personal cash register, giving access to a seemingly endless supply of borrowed funds to pay for new kitchens, holidays and cars. But the mortgage feast has turned into a famine because of an unwelcome American export: the credit crunch.

Millions of borrowers who have become used to having a pile of attractive loan deals to choose from are instead confronted with a marketplace that has virtually shut down. It has left many vulnerable to what the banks euphemistically call 'payment challenge' - in plain English, they will struggle to meet the monthly bill.

Worse, the International Monetary Fund last week issued research suggesting that residential property in the UK is overvalued by as much as 30 per cent and could be on the brink of a significant fall. The first portents of a collapse may already be here: approvals for new mortgages - an indicator of the strength of the market looking forward - are down 40 per cent on a year ago, and leading lender Nationwide has registered falling prices for five months in a row.

'There is no doubt this is a very difficult situation,' said one bank executive. 'Some borrowers will really feel the pinch, and repossessions will rise, though they are low at the moment. We are already seeing house prices begin to fall across the country.' Homebuyers who were once swamped with offers of credit are now desperately scrabbling around in the hope of grabbing an affordable deal - and anyone not classed as an ultra-safe prospect will face a real struggle.

'Everyone has been spoilt over the last few years,' said Andrew Montlake, partner at mortgage brokers Cobalt Capital. 'Now it is almost like the clocks have been turned back 15 years. Then there were fewer lenders, they were wanting bigger deposits and they were strict on their lending criteria.'

The mortgage panic was sparked last week by First Direct, owned by the international banking giant HSBC, when it temporarily withdrew its entire range after being deluged by five times the normal level of applications. It said it would continue to offer home loans to existing customers only.

World Bank sees difficulties for East Asian economies
East Asian economies face major economic and political challenges in the months ahead as they deal with slower growth, higher prices and the need to continue critical policy reforms, said World Bank Managing Director Juan Jose Daboub in Da Nang yesterday. He emphasised that the Bank is prepared to contribute to the efforts of ASEAN countries to move forward, and encouraged them to find solutions for current and long-term challenges

Speaking on the sidelines of the ASEAN Finance Ministers Meetings in Da Nang, Daboub said the region was well positioned to weather the downturn, thanks to sound economic management, strong overall growth and accumulated reserves over the past decade. He said the Bank predicts growth for developing countries of East Asia will drop one or two percentage points in 2008, topping out at 8.5 per cent.

"East Asia’s strong long run growth has not been driven by year-to-year fluctuations in world demand, but, rather, by improvements in productivity, innovation, quality control, education and skills. These underlying strengths of East Asian economies will neither be undone by the financial turmoil nor by a slowing global market," said Daboub.
"Indeed, it is already becoming clear that East Asia, and especially China, is emerging as a growth pole in the world economy, providing a useful counterweight to the slowing industrial economies."

But high and rising food prices – especially rice prices – pose a special challenge, he said. Governments need to take short-term steps to protect the poor, but also to ensure that long-term solutions are found to relieve shortages. More secure land tenure and property rights for farmers will encourage more agricultural production, and give farmers better access to credit for machinery, seeds and fertilisers that can help to raise yields."

Kept in the dark on ABCP crisis, union says
Despite the spectre of billions of dollars of losses that might be suffered by its members, the largest public service-sector union in Canada says the managers of its pension funds have kept it in the dark about the asset-backed commercial paper crisis.

The Public Service Alliance of Canada has 165,000 members across Canada, mostly in the federal government. Member pension plans are handled by several major institutions, some of which hold significant quantities of seized-up ABCP, such as PSP Investments, believed to be the second-biggest institutional owner of the illiquid notes.

In an e-mail obtained by the Financial Post, James Infantino, the union officer responsible for monitoring pensions, complained that "to date, there has been absolutely no consultation [with the union] concerning this most serious situation." The e-mail was sent to Brian Hunter, the head of a group of retail noteholders that is lobbying to get its money back.

PSAC was forced to turn to Mr. Hunter after failing to get an explanation of the crisis from its pension fund managers. "When [Mr. Infantino] sent me that email, he said he didn't know anything about this," Mr. Hunter said. "That's how bad it was. They should be able to ask what were these money managers doing and what happened here."

The union members' pensions are overseen by a several asset managers, including PSP Investments, Canada Post Corpation Pension Plan and NAV Canada Pension Plan. Those managers are also part of an investors' committee overseeing the restructuring of the stalled ABCP market.

PSP Investments is one of the main pension managers for federal government employees. A spokeswoman for PSP declined to discuss the matter. "We never comment on our investments," said Anne-Marie Laurendeau. Like many pension managers, PSP provides financial updates to its members just once a year, most recently in December. But the information covered only the fiscal year ended March 31, 2007, which predates the ABCP meltdown.

PSP has never revealed the size of its ABCP investment, but insiders put the figure at about $5-billion. The biggest holder is the Caisse de depot et placement du Quebec, with about $13.2-billion. NAV Canada, an air traffic control services provider, is understood to have an immaterial amount of frozen notes in its pension fund, about $100,000.

The $35-billion third-party ABCP market ground to a halt eight months ago after issuers were unable to roll over maturing notes and banks that had agreed to provide emergency liquidity declined to step in. A plan to restructure the market proposed by a group led by the Caisse is be put before noteholders at the end of the month.

But now retail investors led by Mr. Hunter are threatening to band together to vote against it unless they get their money back. Insiders predict the big institutions backing the restructuring will meet their demands if only because of the potential losses if the plan fails. The good news for PSAC members is that most of their pensions are guaranteed. Even if their pension plan ends up footing the bill for a deal with Mr. Hunter's group, the federal government will step in and cover any losses they might suffer, according to union officials.


Anonymous said...

Hi Ilargi.
Re your pieces about the UK's reality check, and Darling's responses to it. Over here, we have become used (numbed?) to; constant oxymorons ("sustainable growth"), misleading statements ("Strong financial sector"), distractions ("Oh- look everyone, Olympics coming soon...") and downright nonsense ("Inflation is 2.5%") - that we as a country have not even remotely tuned in to this crisis. Like a slow motion car crash, it is coming apart week-by-week but the average bod hasn't a clue.
There was even a story in the press about some twenty-somethings who were disappointed that they couldn't raise GBP250k mortages against small apartments in London - and hence have to continue renting. The man at the Bank did them the greatest favour ever, but the MSM told it as a catastrophe.
I am seriously doubting that "sold-the-gold" Gordon & Darling 'get it' at all - if they really are investigating the BoE buying mortage debt. Strewth - don't these people read Karl Denninger ever?
Thanks for pulling all these reports together guys!

Anonymous said...


I went to the site for French population indicated by anonymous in yesterday's Rattle and was immediately sceptical.

It shows a population of about 3.8 million for the ages 0 to 4 in the year 2000, whereas INED, the national demographics institute, indicates 2 984 421 births during the four years in question.

Deaths would reduce that number somewhat, immigration would increase it, but those factors cannot account for the difference of about 800 000, which is more than all births in any of the four years, including 2000 which was a strong year.

For what it is worth.

On another subject, I continue to wonder about the relative impact of overpriced housing in different countries.

On the basis of what we are reading, in the U.S., houses are overpriced, mortgaged to the hilt and have HELOCs on top of that. A drop in housing prices is clearly a catastrophe.

In Germany, (at least last year while I was living there), housing prices were in a slump and had been for a while. From a number of discussions, I gathered that mortgages are almost never 100% and I am not sure they even have HELOCs (which would be difficult given current prices). So even if the banks have taken on a lot of risk from the U.S., the underlying real-estate fundamentals are much more solid than in the U.S. (This is pretty speculative, any solid data would be appreciated.)

Concerning France, housing prices started rising in about 1996 and have since levelled off. Current prices are clearly too high and everyone now thinks they will start to drop this year. Paris is still rising steadily. Concerning mortgages, 100% exists, but is certainly not the norm. As for HELOCs or the equivalent, not only have I never heard of anyone in France ever having one, but the very notion was new to me when I read about them on TOD-C and TAE. It took me a while to understand what people were talking about. And I think I can safely say that for 75% of the French population (parts of Paris and the Mediterranean are different), the idea would appear insane or obscene.

So, what does that say about the relative strengths of countries with respect to dropping housing prices? Are those relative strengths significant in light of all the rest that is coming at us? I do not know and would appreciate your opinion.


Anonymous said...

Kaixo Ilargi eta Stoneleigh;

Hemen Euskal Herrian etxeen prezioak bikoiztu baino gehiago egin dira, azken hamabost urteetan.

Biana Espainiako legeek ez dute giltzak itzultzen uzten (gingle mail), baizik eta lepotik harrapatzen zaituzte, etxearen izenean.

Komentariorik horretaz.

Eskerrik asko zuen blogagatik



Stoneleigh said...

Hello Auskalo,

We can manage quite a few European languages between us, but unfortunately Basque isn't one of them (beyond the odd word here and there that is). Internet resources are also somewhat limited, so we eventually had to admit defeat. Any chance you might be able to run your comment by us again in English?

Anonymous said...

Anonymous said...

This link works.

Rick said...


What happens when the EU banks mark their assets to market and the U.S. banks, under the directions of the SEC, continue to mark to fantasy? Do our banks simply claim the EU banks' valuations are based on distressed or forced sales? Won't this increase the conflicts between the EU and the U.S.?

On a similar note, how will accountants react to banks continuing to mark to fantasy when there are prices for the assets out there? Aren't the accountants now on the hook since banks can't indemnify them? Will they try to hide behind the SEC rules and claim they take precedence over FASB 157 and hope that shields them from lawsuits? (Yeah, good luck with that one.) Will the accountants refuse to verify audits with the SEC then accepting unaudited financial statements from banks as sufficiently accurate for SEC purposes?

"Oh what a tangled web we weave."


Ilargi said...


When one party starts marking to market, the game is up. I said as much a few days ago.

As for the US accountants, FASB, there was a directive late last week, about which Karl Denninger said:

"It appears that the FASB has removed the concept of QSPEs, which is the enabling "piece" to make off-balance-sheet securitizations possible, from the FASB set of regulations, specifically, FAS 140.

Firms have 6 months to take all SIV's back on their balance sheets. So it doesn't look like accountants will play ball any longer.

scandia said...

Ilargi,Stoneleigh. I don't have any sense of the condition of Cdn banks. Are they yet marking to market? Is there info anywhere on transparency of the balance sheet? I have noted only silence from the Gov't and Mr. Carney at the Bank of Canada. I find this public silence disturbing.
If the EU wins the move to transparency this will affect Canada as well as the US.
Not encouraging is a report that an agreement was signed to integrate the US military with the Cdn military. All in order to respond to civil discord should it arise????Looks like the means are in place for a lock down of society. As Joe Bageant says, " TOTOLAND ' SHORT FOR TOTALITARIAN STATE.

Stoneleigh said...

I eventually managed to translate Auskalo's comment written in Basque above.

Here in Euskal Herria the prices of the houses have more than doubled in the last fifteen years. But Spanish laws do not allow giving back to the keys (jingle mail) - they take you by the neck in the name of the house.

Comments on this?

Thank you very much for your blog.