Tuesday, April 8, 2008

Debt Rattle, April 8 2008: The end of the road

Ilargi: $945 billion in losses. That's today's number from the IMF. They’ve all known this for a long time, rest assured. They’re just feeding it to you piecemeal, so you’ll keep on borrowing and spending as long as possible. Meanwhile, this means less than 25% of the total has been accounted for so far, and booked as writedowns and losses.

I’m willing to bet that as the derivatives start falling like Jericho, $1 trillion is just a beginning. Even if we accept the notion that only 2% of the total outstanding poses actual risk, that still would mean, considering an estimated $700 trillion derivatives “market”, losses of $14 trillion. Don’t believe it? Keep watching.

For every dollar in losses or writedowns that banks have to put in their books, 10 dollars of available credit disappears. There is now consensus among the more aware “experts” that aggregate losses will be at least $1 trillion. Do the math. And keep in mind what I said above: $1 trillion is just the start. The inevitable consequence: there will be no money left for banks to hand out as credit of any kind. Which in turn will mean that banks lose their reason to exist. This money will not magically re-appear, it is gone. And it is time we all start realizing that.

We are witnessing the first preliminary stages right now, with credit vanishing for instance in housing, leveraged buy-outs, municipal bond issues and auction rate securities. But they are not the full-blown disease, they are the first slight headache that precedes it. This is still the denial phase. Fear and anger are around the corner.

Experts and analysts, for a long time to come, will keep insisting that central banks can save the markets by pumping in cash and credit. They cannot. Nor can they cause inflation. George Soros was right yesterday when he said: "I think we have come to the end of the road".

Credit crunch losses will top $945-billion: IMF
The International Monetary Fund is pegging the losses related to the global financial crisis at $945-billion (U.S.), and warns that the side-effects of the credit problems will be harsh.

“It is now clear that the current turmoil is more than simply a liquidity event, reflecting deep-seated balance sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper, and more protracted,” the Fund says in its Global Financial Stability Report, released Tuesday morning. The IMF issues the report twice a year to assess the fragility of the state of global finances. The April report raises the alarm, warning central banks and financial institutions that they should prepare for the worst.

“Notwithstanding unprecedented intervention by major central banks, financial markets remain under considerable strain, now compounded by a more worrisome macroeconomic environment, weakly capitalized institutions, and broad-based de-leveraging,” states the report, issued just days before central bankers and finance ministers meet in Washington for their bi-annual meetings which are expected to focus on how to resolve the crisis.

The increased strain on the global financial system is coming from a simultaneous deterioration of credit quality, a drop in valuations given to structured credit products, a market liquidity drought and the ongoing de-leveraging in the financial system. “The critical challenge now facing policy makers is to take immediate steps to mitigate the risks of an even more wrenching adjustment, including by preparing contingency and other remediation plans, while also addressing the seeds of the present turmoil,” the IMF paper warns.

The estimate of potential losses at $945-billion is on the pessimistic side, but is not outrageously high. More pessimistic analysts have pegged total losses at well above $1-trillion when all is said and done. Still, the IMF warns that the losses may circle back to hurt financial institutions in a second round of effects, especially as monoline insurers run into trouble. Plus, the risk of litigation is growing, the report warns.

While the United States remains the “epicentre” of the crisis, the spillover effects to other industrialized countries is major. The head of the IMF, Dominique Strauss-Kahn, said this week that the need for government intervention in credit crisis is becoming more evident, but the Global Financial Stability Report steered clear of such sensitive issues. Rather, it stuck to suggestions for private-sector action and urged central banks to devise ways to stabilize the financial system without increasing moral hazard and fiscal costs.

In question is whether the rescue of investment bank Bear Stearns, led by the U.S. Federal Reserve last month, was a one-time event, or just the beginning of a string of major financial institutions hovering on the brink of insolvency. The debate will likely dominate the spring meetings of the IMF and Group of Seven this weekend.

Jim Rogers: More Pain for the Greenback, and the Failure of the Federal Reserve
Keith Fitz-Gerald (Q): There’s a confluence of money flowing into and around China.  Do you believe that the U.S., with all its current problems, will get left out?

Jim Rogers:
Absolutely. The U.S. dollar is a terribly flawed currency.  I’m trying to get all of my money out of U.S. dollars.  I don’t know why anybody would put money into the U.S. dollar, and by extension into the U.S., as we stand here today. The U.S. is probably the largest debtor nation the world has ever seen!

The United States’ foreign debts are increasing at the rate of $1 trillion U.S. dollars every 15 months.  U.S. foreign debt is over $13 trillion, and rising rapidly. It’s the official policy of the central bank to debase the currency. They’re trying to drive down the value of the dollar. 

Q: The government has succeeded wildly, so far.

You haven’t seen anything yet!  They’re trying to drive down the dollar. I’m trying to be patriotic. I’m trying to sell dollars. That’s what they want. I’m trying to help them drive down the value of the currency.  All Americans should. There are certainly probably good reasons to put some money in dollars. For instance, if you have to buy cotton, you have to have dollars.

But for the most part - I, anyway - am joining other people who’re trying to avoid the U.S. dollar, because Washington has sent a very clear signal: "We want the dollar to decline. We’re gonna do our best to make it decline." Well, everybody has to make their own decision. I’m trying to do what the Federal Reserve wants me to do, and I’m selling dollars. 

Q: My take is that former Fed Chair Alan Greenspan and current Fed Chairman Ben S. Bernanke may go down as the worst central bank chairmen in history. Do you see it differently?

[Bernanke] and Greenspan together will probably bring [about] the end of the Federal Reserve. We’ve had two central banks in America that failed. This third central bank will probably fail, too, because of Bernanke and Greenspan.  The Federal Reserve last week put $200 billion more onto its balance sheet of mortgages.  Now I don’t know how big they can expand their balance sheet, but if they keep doing it, there’s only so much - [and] they just bought Bear Stearns. 

There’s just so much they can do. Maybe that balance sheet is infinite. I doubt it. And it can be said to be infinite; they just print money like Zimbabwe or someplace. But that has to come to an end, eventually.Maybe Bernanke is going to get into his helicopter and fly around collecting rents now. 

Maybe when they repossess all the property, he’s going to be the rent collector. But then when they eventually take on all the car loans, I guess he’s going to be collecting car payments, too. And credit card debt, when they take over all the credit card payments, I guess he’ll be hauling us all out saying: "Your credit card’s overdue." 

This is insanity.

Greenspan Says Credit Crisis Is Worst in 50 Years
Former Federal Reserve Chairman Alan Greenspan said the current credit crisis is the worst in at least 50 years. "The current credit crisis is the most wrenching in the last half century and possibly more," Greenspan told a conference in Tokyo today via satellite from Washington.

Greenspan's remarks echo the assessments of economists including those at the International Monetary Fund, and may add to pressure on policy makers to strengthen their response to the credit crunch. Federal Reserve officials last week acknowledged that capital markets remain distressed even after the fastest interest-rate cuts in two decades. Greenspan, 82, said the extent of damage stemming from the collapse of the subprime-mortgage market won't be known for months.

"Have we reached a point where prices are stable? We cannot know that for a couple of months," he said. He added that prices may begin to stabilize by the start of 2009 as home inventories decline. The yield on the 10-year note fell 1 basis point to 3.53 percent as of 10:07 a.m. in Tokyo, according to bond broker Cantor Fitzgerald LP.

Greenspan said inflation will be contained during the current slowdown before picking up as the world economy recovers momentum. "It's difficult to imagine any major breakout of inflation as economic slack continues to increase," he said. "What we will see is gradually rising inflationary pressures that will probably be subdued during the current period of slack, but that will surely reemerge when economies pick up."

Distressed debt levels rise to five-year peak
The number of companies with debt trading at distressed levels hit a five-year high last month as the corporate world came under increasing strain from the financial crisis, according to Moody's Investors Service. Moody's distressed index, which measures the percentage of junk-rated issuers that have debt trading at 1,000 basis points over safe government bonds, rose to 24.7 per cent in March from 22 per cent in February.That is the highest level since November 2002.

The ratings agency also said global default rates of high-yield rated companies rose for the fourth consecutive month to 1.5 per cent in March from 1.3 per cent in February, although these levels are low compared with the historical average of 5 per cent. Kenneth Emery, director of corporate research at Moody's, said: "Issuers with debt trading over 1,000 basis points have pretty high default rates over a one-year horizon, so we will see some of these companies default. We expect distressed levels and defaults to rise, although we are coming from a low base.

"Overall, balance sheets look relatively strong compared with previous periods when the economy has gone into recession. A lot of companies issued longer-term debt before the credit crisis, which could allow them to avoid default, but if the weakness of the US economy remains, then it will catch up with some of these companies." There were a total of 15 defaults in the first quarter of 2008 compared with only three in the same period last year.

Of this year's 15 defaults, 13 were from the US, where the economy is weaker, Moody's said. The default rate among US junk-rated issuers was 1.7 per cent in March, up from 1.5 per cent in February, while the European speculative-default rate was 0.7 per cent in March, unchanged from February. Globally, Moody's predicts an average of 10 defaults a month until the end of the year, when the rate is forecast to rise to 5 per cent.

Asian Inflation Begins to Sting U.S. Shoppers
The free ride for American consumers is ending. For two generations, Americans have imported goods produced ever more cheaply from a succession of low-wage countries — first Japan and Korea, then China, and now increasingly places like Vietnam and India.

But mounting inflation in the developing world, especially Asia, is threatening that arrangement, and not just in China, where rising energy and labor costs have already made exports to the United States more expensive, but in the lower-cost alternatives to China, too. “Inflation is the major threat to Asian countries,” said Jong-Wha Lee, the head of the Asian Development Bank’s office of regional economic integration.

It is also a threat to Western consumers because Asian exporters, even in very poor countries, are passing their rising costs on to customers. Developing countries have had bouts of inflation before. Indeed, some are famous for them, like Brazil, which experienced triple-digit inflation in the late 1980s and early 1990s. But two things make this time different, and together promise to send prices higher at Wal-Mart and supermarkets alike in the United States, just as the possibility of recession looms.

First, developing countries now produce nearly half of all American imports. Second, inflation in these countries is coming at the same time that many of their currencies are rising against the dollar. That puts American consumers in a double bind, paying at least some of producers’ higher costs for making their goods, and higher prices on top of that because the dollar buys less in those countries.

Asian businessmen say they do not have a choice about charging more. “This is a tough time to do business,” said Le Hoai Vu, the sales manager for the Quang Vinh Ceramic Company here in northern Vietnam. The company just increased by up to 10 percent the prices it charges Pier 1 Imports in the United States for hand-painted vases because labor costs are rising 30 percent a year.

Over all, in Vietnam, one of the fastest-growing destinations for manufacturing investments and one of the fastest-growing sources of American imports, prices rose 19.4 percent from March 2007 to March 2008. In China, Foshan Shunde Augustus Bathroom Equipment Ltd. in Foshan City is about to raise prices by 10 percent for a range of bathroom fixtures exported to North America. “Rising inflation is a way of life in China these days, you see it everywhere,” said Faye Kong, the company’s international business supervisor.

Citi, Wells Fargo May Fuel Recession by Slowing Lending After Downgrades
Bank holding companies including Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. have the thinnest safety cushion against losses in seven years. The margin may erode further in coming weeks. Credit ratings on $704 billion of bonds have been cut this year following the collapse of the U.S. housing market.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., said last week that the downgrades may compromise bank capital ratios enough that some of the largest institutions will no longer be considered well capitalized. Falling below a regulatory benchmark that is intended to maintain a minimum level of capital to protect depositors against losses would subject banks to more scrutiny from regulators than they have ever experienced.

"This is a nightmare for the country," said William Isaac, who was chairman of the FDIC from 1981 to 1985. Banks will "raise what capital they can, then they'll slow down their growth and stop lending, and what should be a mild recession becomes a much more serious one."

The biggest danger to the economy is that to preserve their ratios, banks will cut off the flow of credit, causing a decline in loans to companies and consumers. Banks have already raised $136 billion in capital, based on data compiled by Bloomberg, and cut dividends. More stock sales and payout reductions are likely to follow, says analyst Meredith Whitney at Oppenheimer & Co.

The credit crunch has already cost the world's biggest financial companies about $232 billion and forced a government bailout of New York-based Bear Stearns Cos., the fifth-largest U.S. investment bank. The International Monetary Fund said last week that banks were in the worst financial crisis since the Great Depression.

"Banks have to maintain their ratios," said Dennis Santiago, chief executive officer of Institutional Risk Analytics, a Torrance, California-based research firm that monitors banking statistics. "This is an institutional panic. At what point will consumers feel the panic? I don't know."

A buck that can't be passed
There is enough blame to go around for the global housing bubble, but give Alan Greenspan and the U.S. Federal Reserve their due: they did more than their share. In a piece Monday in The Financial Times titled "The Fed is blameless on the property bubble" Greenspan argues that the debacle was not caused by loose monetary policy from the Fed or lax regulation, but rather by collective foolish behavior of investors that could not be predicted. In The Wall Street Journal on Tuesday, he was quoted as saying: "I am now being blamed for things that I didn't do."

For Greenspan, the major cause of the global bubble was the fall in global long-term interest rates, which, although he was chairman at the time of the most powerful central bank in the world, apparently had nothing to do with him. Up to a point, Mr. Chairman, up to a point. The Fed sets U.S. short-term interest rates and is the dominant, but not only, force in guiding long-term ones, which in turn are one of the most powerful forces in determining global interest rates.

And reacting to the shocks of the dot-com bubble and Sept. 11, the Greenspan Fed cut the U.S. benchmark rate from 6.5 percent to 1 percent between 2001 and 2003 and then held it there, only very gradually raising rates in 2004 and 2005 even as the bubble inflated.

"Greenspan is also responsible for those other property bubbles in large part because the climate of low long-term rates which was established by the Fed led to the easy borrowing terms in markets all around the world," said Stephen Lewis, economist at the fund manager and private bank Insinger de Beaufort in London. "To have a 1 percent rate when the real economy was growing at 4 percent would seem to be highly incautious."

Albert Edwards, global strategist at Société Générale Cross Asset Research in London, was blunter: "He is the midwife of serial bubbles that are unraveling." Bubbles from New Zealand to Spain to California developed under varying circumstances, it is true, and it would be churlish to place all of the blame on the Fed and Greenspan, but they must come in for the lion's share.

There is also the issue of the Fed's "asymmetric" response to asset bubbles, under which it does not seek to identify and prick them while they are developing but still must stand by to pick up the pieces in the aftermath, lowering interest rates to ease the pain. Many economists, while admitting that bubble pricking is a dangerous game, say that a policy of being active only when asset prices fall encourages speculation.

Ilargi: Well, we saw a few days ago that US accountants organization FASB has read the last rites on SIV’s. So no surprise here.

SIVs' Last Men Standing Entangled by Gordian Knot
Gordian Knot Ltd. founders Stephen Partridge-Hicks and Nicholas Sossidis, who started the $400 billion market for structured investment vehicles that crashed last year, are fighting for the survival of their flagship fund.Gordian's Sigma Finance Corp. must refinance $20 billion of debt by September in a market where even the biggest banks are struggling to borrow, according to Moody's Investors Service.

Moody's cut the $40 billion fund's Aaa rating by five levels to A2 last week because of concern about Sigma's ability to weather the credit crunch. Standard & Poor's downgraded Sigma yesterday to AA- from AAA. The inability to replace the debt may cause Sigma to dissolve.

The London-based duo, who created the first SIV at Citigroup Inc. in 1988, has dodged the turmoil by finding financing alternatives after demand for the industry's primary source of cash, commercial paper, dried up. A failure would signal a credit market freeze that began in July and led to the collapse of Bear Stearns Cos. isn't close to ending, and may force firms from Fidelity Investments to Federated Investors Inc. to prop up money funds they run that invested in Sigma.

"Sigma is the foremost concern among money-market funds right now," said Peter Crane, whose Westborough, Massachusetts- based Crane Data LLC tracks more than $3.3 trillion of money. "The money-market business is pulling for it." Sigma is the last of the largest companies that specialized in issuing commercial paper, or debt due in nine months or less, and using the proceeds to buy longer-term, higher-yielding assets such as bonds sold by banks and debt securities backed by mortgages.

The group included SIVs managed by New York-based Citigroup and HSBC Holdings Plc in London. SIVs with at least $31 billion of debt defaulted in the past nine months, according to S&P. Concern was so great that SIVs would dump their holdings and further roil credit markets already contaminated by losses in securities related to subprime mortgages that U.S. Treasury Secretary Henry Paulson attempted a bailout in the fourth quarter.

Gordian Knot's SIV found financing through repurchase agreements, or by putting up collateral for bank loans that it agreed to buy back at a later date. It also sold assets to repay debt, shrinking to $40 billion from a peak of $57 billion.

LBO Freeze Cuts First-Quarter Fees to Wall Street by 75 Percent
The freeze in leveraged buyouts is slashing fees for investment banks by more than 75 percent as Blackstone Group LP and Kohlberg Kravis Roberts & Co., the industry's two biggest firms, put takeover plans on hold. Private-equity companies paid $1 billion to securities firms in the U.S. and Europe during the first quarter, down from $4.3 billion a year earlier, data compiled by New York-based research firm Freeman & Co. and Thomson Financial show.

Revenue from loan underwriting plunged more than 91 percent, and fees from advising on takeovers dropped 51 percent. The crisis in the debt markets that started with the collapse of the subprime mortgage market in the U.S. shows no sign of abating. No buyout firm has announced a deal worth more than $3.1 billion since borrowing costs started climbing last July, according to data compiled by Bloomberg.

Banks are now in the process of clearing about $230 billion of loans that they committed to finance acquisitions, sapping their interest in funding new deals. "Until the banks sort out their credit issues, there will be a follow-on impact on the larger M&A deals," said Bruce Barclay, a London-based managing director at Advent International Corp., which this week raised 6.6 billion euros ($10.4 billion) for LBOs.

Deutsche Bank AG, Europe's biggest investment bank by revenue, earned less than $5.8 million from private equity firms in Europe in the first three months of 2008, a fraction of the $165 million it received a year earlier. In the U.S., New York- based Goldman Sachs Group Inc., the country's largest securities firm, suffered the biggest decline, with fees from private-equity firms dropping 83 percent to $42.1 million, the Freeman data show.

Japan says U.S. banks may need bailout
The Bank of Japan said on Tuesday Washington may have to use public funds to bail out U.S. banks hit by the credit crisis as Tokyo joined European calls for the Group of Seven states to work together calm financial markets. The collapse of a mortgage bubble has so starved some U.S. banks of capital that the government may have to step in if private investment does not work, said Masaaki Shirakawa, deputy governor and acting head of the central bank said before a G7 meeting this week.

“First of all, it should be efforts by the private sector. But if the efforts by the private sector are not enough, a public capital fund injection, among various options, may become necessary,” Mr. Shirakawa, the government nominee to head the BOJ, told a parliamentary hearing considering his candidacy.

European finance officials have been stepping up calls for G7 nations to act together to protect the global economy and prevent another credit crisis from infecting markets. The Financial Stability Forum, comprising central banks and finance ministries of countries with major exchanges, has drafted a paper that includes a plan to recapitalise banks and repurchase mortgages, with the possible use of taxpayer funds.

The idea – one of the more drastic options to combat the credit crisis – is expected to be discussed when Group of Seven finance chiefs meet in Washington on Friday, although a U.S. Treasury official played down the idea as not among mainstream options under consideration on the G7 agenda.

Merrill does not plan to raise capital: CEO
U.S. investment bank Merrill Lynch & Co Inc. does not plan to raise more capital and will continue to shrink its balance sheet amid the global credit crunch, Chief Executive John Thain said on Tuesday. Mr. Thain, who met with reporters on a visit to Merrill's Tokyo offices, declined to lay out plans for job cuts but said it made sense for the bank to lower costs.

Even though Merrill has been hammered by the U.S. subprime market – its shares are down about 45 per cent over the last 12 months – Mr. Thain said it was betting on growth, especially from outside the United States. “We deliberately raised more capital than we lost last year ... we believe that will allow us to not have to go back to the equity market in the foreseeable future,” Mr. Thain said.

“We have not announced layoffs ... however, in this difficult environment, to focus on expenses is also a logical thing for us to do.” Merrill has so far written down $24-billion (U.S.) worth of investments related to the troubled U.S. mortgage market, which pushed the bank to a loss of more than $8-billion in 2007.

It has since raised about $12.8-billion, with about half of that coming from a group that includes Japanese, Korean and Kuwaiti investors. While Merrill would continue to shrink its balance sheet, Mr. Thain said he was also betting on markets beyond the United States to provide growth in the future.

IMF to sell 12.5% of gold stake in efficiency drive
The International Monetary Fund said it would sell more than 14.2 million ounces of gold, currently valued at more than $13 billion, and cut substantial costs as part of an efficiency drive. The agency, with 185 member countries, aims to promote monetary cooperation, foster economic growth and employment, and provide temporary help to countries that have problems with their balance of payments.

In a statement on Monday, Managing Director Dominique Strauss-Kahn said the IMF had made "difficult but necessary choices" to close an income shortfall and make the agency more efficient through a "new and sustainable income and expenditure framework." With the changes, the IMF's income model would be based largely on generating funds from various sources rather than relying on lending, the agency said.

The restructuring also includes broadening the IMF's investment authority to help it boost returns. Safeguards would be put in place to ensure that the IMF's new investments don't create conflicts of interest, the IMF said. And the new model includes $100 million of spending cuts over the next three years. The Associated Press reported that the reductions would include as many as 100 job cuts.

Reuters reported that the IMF holds about 113.5 million ounces of gold, so the gold to be sold amounts to 12.5% of its holdings. The metal would be sold "in a transparent manner with strong safeguards" to avoid disrupting the market, the IMF said. The new model "could generate an additional $300 million in income within a few years," the IMF said.

The proposal faces at least two key hurdles. One is that the U.S. Congress must approve the IMF's proposal to sell gold. And most member countries also will have to enact legislation to expand the IMF's investment authority.

Ilargi: Note: this article comes from the “industry”. Good to know in detail what kind of money is being passed out.

$15 Billion Housing Market Relief Plan
Capitol Hill was buzzing late last week about what was included -- and what got left out -- of a sweeping $15 billion housing market relief plan. Though the final details won't be nailed down until both the House and the White House weigh in with their own changes, the odds now look good that some sort of bipartisan legislative package will move forward.

Among the key components in the Senate's initial plan:
• Upgrading the FHA mortgage program with permanent new loan limits. The statutory maximum would be increased to $550,000 in high cost markets. That limit would kick in after Dec. 31, when the temporary "super jumbo" limits up to $730,000 authorized by the economic stimulus legislation expire.
• A $4 billion fix-up fund to be shared by communities experiencing high rates of foreclosure and vacant, deteriorating houses. The money could be used by local governments to acquire, rehab, and resell the properties to private or nonprofit owners.
• One hundred million dollars in additional funding to support housing counseling services that work with delinquent homeowners to avoid foreclosure.
• Tougher financial penalties - up to $4,000 per violation - for lenders who do not provide timely truth-in-lending disclosures about loan terms to borrowers.
• New federal tax deductions for an estimated 28 million homeowners who do not itemize on their income tax filings. They'd be eligible to take a standardized writeoff of between $500 for single taxpayers, and $1,000 for married owners filing jointly, in lieu of local and state property tax deductions.
• Up to $10 billion in new tax-exempt bond authority for local and state housing agencies to refinance subprime borrowers facing payment increases they can't afford.
• A $6 billion tax benefit for home builders, allowing them to write off net operating losses that extend back four years, double the current two year limit.
• And finally: A non-refundable $7,000 tax credit for buyers of foreclosed homes. This is intended to be an incentive to get these properties off the market, and into productive use, quickly.

The bipartisan relief effort announced last week drew lots of critics, who were mainly upset by what got left out. Consumer groups were particularly angry that Republicans blocked a Democratic plan allowing bankruptcy judges to reduce borrowers' mortgage debts to lenders. They also complained that too much relief is going to builders, and not enough to ordinary homeowners struggling to make payments.

However this all finally gets straightened out, Congress clearly is trying to send a message to the voters back home: Hey, we're really doing something about the housing crisis out here . So please - please -- don't punish us this November.

UK house prices have steepest drop since 1992
House prices across the nation saw the largest monthly fall since 1992 last month, according to Halifax, prompting the country's largest mortgage lender to cut its forecast for prices for the rest of the year. Halifax, which is part of the HBOS group, reported that property prices fell an average of 2.5pc overall, and as much as 5pc in some areas.

The lender, which previously had predicted flat growth for the current year, now expects a "low single digit" fall in house prices this year - indicating that prices could fall by up to 5pc. The monthly decline is the largest since September 1992, when average prices across the UK fell 3pc and the economy was enduring its last recession. During the same month, then Chancellor of the Exchequer Norman Lamont lifted interest rates to 15pc in a vain attempt to keep sterling in the Exchange Rate Mechanism.

As shadow Chancellor, Gordon Brown accused then Prime Minister John Major of betraying the British people after making huge errors of judgement. Today's news follows February's 0.3pc slip, dragging property prices for the quarter - the three months to the end of March - down by 1pc compared to the final quarter of 2007.

Meanwhile, the annual rate of house price growth fell back to a 12-year low of 1.1pc. Paul Robinson, a former Bank of England adviser now at Barclays, said: "It's a weak number and no one can deny that. The market is slowing and it's a clear concern.

"But there's also a bit of hysteria about house prices right now. In the early 1990s housing crash people were losing their jobs but we're in a different world now. If the employment picture were to weaken that would be different."

Britain's Pound Falls to Record Against Euro on Housing Slump
The pound fell to a record against the euro after the U.K.'s biggest mortgage lender said house prices dropped by the most since 1992 last month, adding to the case for an interest-rate cut this week. Britain's currency also declined versus the dollar after HBOS Plc said the average cost of a home fell a more-than- forecast 2.5 percent as high street banks restricted mortgage lending amid the credit squeeze.

The Bank of England will cut its main rate a quarter-percentage point to 5 percent April 10, according to 50 of 61 economists in a Bloomberg News survey. "The housing market is one of the key areas of concern for the U.K. economy and the pound," said Paul Robinson, a currency strategist at Barclays Plc in London and a former Bank of England economist. Falling house prices are "consistent with a weaker pound."

The pound dropped to 79.88 pence per euro, the lowest level since the euro's 1999 inception, and was at 79.87 pence as of 12:10 p.m. in London, from 79.02 pence yesterday. It has declined almost 9 percent versus the European currency this year. The pound also weakened to a six-week low of $1.9691, from $1.9883. It may fall to $1.93 in six months, Robinson said. The pound dropped against all 16 most-traded currencies tracked by Bloomberg, slipping the most versus the Swiss franc and South African rand.

UK: Warning over £20 billion tax shortfall
Economic growth next year will fall significantly below government forecasts, creating a tax shortfall of up to £20bn that will jeopardise one of the Treasury's key stability rules, says the Institute of Directors.

In its spring economic forecast, the IoD warns that the Government is "almost certain" to miss its sustainable investment rule of keeping the national debt at less than 40pc of the national income, because it expects economic growth next year of 2.25pc-2.75pc. The IoD claims growth is unlikely to top 1.5pc in 2009. Echoing yesterday's attack by the Labour-dominated Treasury Select Committee, the IoD said the Government has underestimated the damage wrought by the credit crunch.

Peter Patterson, senior economist, said: "Public sector borrowing will have to be at least £10bn or £20bn higher than the Treasury expects. The Chancellor will almost certainly break his sustainable investment rule." The Treasury plans to borrow £43bn this year and £38bn next, taking national debt to 39pc of GDP - within a whisker of the threshold.

Graeme Leach, IoD chief economist, said: "What happens if the economy undershoots the Chancellor's optimistic forecasts? Will the Chancellor be forced to raise taxes or cut spending in the middle of a downturn? After 15 years of economic growth we shouldn't be boxed into this fiscal corner." Mr Patterson said the IoD believes "it will be a fairly slow downturn" as "difficulty in getting credit will hold households and the economy back".

The Treasury, which expects growth of 1.75pc-2.25pc this year against the IoD's 1.7pc, said its forecasts are "not over-optimistic". "Since 1997, we have outperformed the consensus. Our projections are based on cautious assumptions and we're meeting our fiscal rules," a spokesman added.

UK housing bubble is bursting and it's serious
Prior to the events of last summer, the UK had undergone the biggest investment boom since the late nineties. This was not the promise of new technology that will revolutionise business and increase profitability, like the dotcom bubble. Instead, the latest craze was something you could paint magnolia and turn over at a 15pc profit - housing.
But the issue goes well beyond house prices. In the scramble to accumulate housing, the UK economic landscape has altered significantly. Households have taken on substantial amounts of debt at ever increasing multiples of income. Their spending has outpaced take-home pay, lowering the savings rate to unprecedented levels. And the UK's current account position has deteriorated to a position not seen for the past two decades.

It could be argued that there is no need to fret about such developments. The resilience of house prices and consumer spending may be telling us that UK households are confident about their future earnings and rightly so. In that case, increased borrowing will be easily repaid when future gains are reaped.

Or perhaps due to a chronic lack of supply, households have no choice but devote an ever increasing part of their salaries to housing. If gains are a result of a demand-supply imbalance, current house prices may be perfectly sustainable.

But there are rather less benign interpretations. Income expectations, particularly accounting for ever higher inflation, may have been overly optimistic. And house price gains may have been built on the shakiest of foundations - speculation based on expectations of unrealistic returns and overly loose credit conditions

Owning a home is overrated
How can it be that the older I get, the less likely I feel it is that I will ever be a grown-up? Twenty-seven years old I am, and yet adulthood feels no more in reach than it did that time I meted out an earthquake on my little sister's village of Sylvanian families. I may have a job, the right to vote and a painful awareness that, no, perhaps it won't get any better.

But given that I don't own a house, a flat or even a vermin-infested room that is just about heated by a faulty boiler, I feel I don't yet have a right to call myself an adult. Why is this? When I tell people - grown-ups - the flat I live in belongs not to me, but to some girl called Fifi, whom I have never met owing to the fact that she lives in a commune in India, they re-assess me. One moment, I am a mature human being with prospects; the next, I am no better than a student living in a squat.

"Oh, dear," they say, making the kind of eyes one makes only at the terminally ill or terminally stupid. "Do you think you will have to rent for long? I'm sure you'll be able to get on the property ladder soon. Just you wait. Have you thought of speaking to your parents? How about finding a rich husband? Ha, ha, ha! Only joking! [They're not] You could always try contacting the…" Long pause. Deep breath. "the housing association."

Their pity has caused me to spend many long, dark nights of the soul in my rented flat, its rented walls closing in on me like a prison as I listen to the rented dishwasher clean my rented dishes, the whooshing taunting me as if to say: "You don't own me! You will probably never even own a mini-version of me, you pathetic excuse for a human being!"

As tears - the only thing that are truly mine - trickle down my face, I wonder: when, oh when, will I be free of this wretched place I call somebody else's home? Never. That's the answer. I will probably never own my own property. When I die, my only assets will be a wardrobe full of Topshop frocks, and the wardrobe won't even belong to me.

But I am OK with this now. I am even slightly proud of the fact that I don't have a mortgage. When I read about the credit crunch and sub-prime mortgages - things that sound as if they belong in a Terminator film, not on a street near you - I have to question why anyone would want to own property nowadays.

Listening to smug contemporaries who point to their studio flats in London's zone six and say, "It's not much, but it's mine", I think: it's not yours yet, matey, not until you've paid off that ballooning mortgage of yours. And while this flat may not be mine, at least it has two bedrooms, is located within 50 miles of the office and, should its roof start to let in the rain, someone else will sort it out. At no extra cost to me.

So while I may not be on the property ladder, at least I am not about to fall off it either. It's called Schadenfreude, and, while it may be childish, it does feel rather good.

Oil peak theorist warns of chaos, war
Matt Simmons sounds the alarm like the Cassandra of the oil industry, warning that crude production has peaked and that looming energy shortages could derail global growth and even spark armed conflict. As a prominent “peak oil” theorist, the veteran oil industry financier paints a grim picture of a world facing resource scarcity.

Still, it doesn't take a “peak-ist” to conclude that the global oil producers will find it increasingly difficult to keep up with growing demand. He squared off yesterday against other experts who argue that the world has yet to reach the physical limits of oil production. But while they disagreed on the extent of the problem, the panelists at a U.S. Department of Energy conference in Washington concurred that future crude production will be constrained by physical, economic and political factors that add up to tight markets and higher oil prices.

Despite oil prices that have topped $100 (U.S.) a barrel, there was little sense at yesterday's conference, put on by the Department of Energy's Energy Information Administration, that high prices would spark either a boost in oil output or a sharp fall in global demand. Record pump prices – and a sharply slowing economy – have cut into U.S. demand, which represents 25 per cent of the world's total. But analysts who follow the emerging economies said there is no sign yet that triple-digit crude prices have seriously dented demand in China or India.

Global demand for oil will continue to grow, analysts forecast, even as the developed world reduces consumption in the face of high prices and environmental concerns. Economic growth and rising living standards in developing countries like China, India and the Middle East will more than offset reduced energy consumption in the mature economies of North America and Europe.

The views of Mr. Simmons, who runs Houston-based Simmons & Assoc. investment bank, bordered on apocalyptic.
Oil shortages “could lead to social chaos and war,” he warned. “The issue is the most serious risk to sustaining the 21st century. Peak oil is real, and we have to take it seriously.” He argued that production of conventional crude peaked in May, 2005, at 74 million barrels a day.

Since then, the world has met rising consumption – now at about 88-million barrels a day – by cutting inventories, tapping natural gas liquids that typically are included in crude production figures and using better refinery efficiencies.

Ilargi: And once more, I hereby pay my respects to Bob Shaw.

Potash leaps as Goldman forecasts fertilizer riches
Potash Corp. of Saskatchewan Inc., Mosaic Co. and other fertilizer makers rose in New York trading after Goldman Sachs Group Inc. said nutrient prices were set to extend gains. Potash, the world's largest fertilizer maker, rose US$5.28, or 3.1%, to US$176.17, at 11 a.m. in New York composite trading, its fifth consecutive gain. Mosaic, the largest phosphate producer, climbed US$6.28, or 5.5%, to US$121.35, after rising 10% on April 4.

"We believe the tight potash market is allowing producers to raise prices at will," Goldman analyst Edlain Rodriguez said on Monday in a note to clients. "Given the underlying strength in commodity prices, farmers are still more concerned about maximizing yield and profits rather than controlling fertilizer costs."

Mr. Rodriguez, who rates Saskatoon, Sask.-based Potash a "buy," raised his 12-month price target by US$45 to US$225 and increased his full-year profit forecasts for 2008, 2009 and 2010. He said he expects profit this year of US$9 a share, up US$1.65 from his previous estimate.

Plymouth, Minn.-based Mosaic said April 4 its fiscal third-quarter profit rose 12-fold because of advancing nutrient prices as farmers sought to take advantage of record corn, wheat and soybean prices. Calgary-based Agrium Inc., the largest agricultural retailer in the U.S., rose $2.41, or 3.4%, to $72.42 in Toronto Stock Exchange trading. The shares increased 56% in the year ended April 4.

Ilargi: The entire counrty is a broken Dubya record?!

Consumers will shelter Canadian economy
The Conference Board says robust consumer spending this year will shelter the Canadian economy from the U.S. recession. The economic think-tank says the Canadian economy will expand by 2.2 per cent in 2008, among the most optimistic of recent private sector forecasts.

The board says Canadian exporters and manufacturers will have a miserable year in the face of waning U.S. demand.
But consumer spending, which was the major driving force behind last year's 2.7 per cent growth, will hold up despite the U.S. slowdown.

The Conference Board notes that consumer spending grew at an annualized rate of 7.4 per cent in the fourth quarter of 2007. It predicts that strong employment, health wage gains, the stable housing market and low interest rates will ensure that Canadians keep spending throughout 2008.

Brokerage watchdog probing ABCP complaints
The body regulating Canada's brokerage industry is investigating multiple complaints from individual investors whose brokers sold them commercial paper investments that have since run into trouble, an official with the organization said Monday.

Connie Cradock, vice-president of public affairs at the Investment Dealers Association of Canada said the body, which can fine, suspend or ban members for wrongdoing, has registered a higher number of grievances than is usual over a single issue. “It is not often that you have a situation where you have multiple complaints,” Ms. Cradock said. “I don't think any of us can recall one situation which has affected this large a number of retail investors in different ways,” she said.

About 1,800 individual investors collectively have an estimated $350-million trapped in asset-backed commercial paper issued by groups other than Canada's big banks. Some 1,400 are clients of Vancouver-based brokerage Canaccord Capital Inc.

Ms. Cradock said investors had a variety of complaints relating to sales of ABCP, including misrepresentation of the investment by their broker as well as the suitability of the investment. “We did not know what ABCP was until we heard they were frozen,” Wynne Miles, a Victoria resident with a significant part of her and her husband's life savings tied up in ABCP, said at a meeting in Vancouver last week.

Ms. Cradock said she couldn't say how long it will take the IDA, which is a national, self-regulatory organization governing more than 200 member firms, to finish its investigation and make a decision whether to hold hearings. “It is an extremely complex issue so it is involving lots of looking at documentation,” she said.

Canadian housing starts surprise
Housing starts fell only slightly in March, the Canadian Mortgage and Housing Corp. said on Tuesday, confounding expectations of a steeper decline.

The seasonally adjusted annual rate of housing starts came in at 254,700 units last month, compared with 255,600 units in February, according to CMHC. Economists had been calling for a 15% decline to about 220,000 units.

"The high level of starts posted in February continued in March, thanks to the multiple segment and particularly condominium starts, which registered a significant rise in Alberta," said CMHC chief economist Bob Dugan in a statement.

Bear Stearns Customers Were Not at Risk
Thursday's Senate Banking Committee hearing regarding the Fed's involvement in the purchase of Bear Stearns by J.P. Morgan was somewhat enlightening, but also disturbing. Probably the most important and responsible statements came from Christopher Cox, the head of the Securities and Exchange Commission, who correctly noted that “Despite the run on the bank to which Bear Stearns was subjected, its customers were fully protected.” Cox continued “At no time during the week of March 10th through the 17th were any of the customers of the Bear Stearns' broker-dealers at risk of losing their cash or their securities.”

Cox also clarified the distinction between capital (a solvency buffer) and liquidity, noting that SEC regulations are designed to ensure the adequacy of both. But he noted that the surprise in the Bear Stearns case – not well covered by existing regulations – was the unforeseen possibility that the markets would be unwilling to provide capital that was fully collateralized even by Treasury securities and the mortgage securities of government sponsored entities like Fannie Mae.

My impression is that this is exactly the situation in which the Fed has an important role – the short-term provision of liquidity against government-backed collateral. The Fed always had the ability to provide funds to Bear Stearns, fully collateralized by Treasury and agency securities of the type and quality regularly accepted by the Fed, with the expectation of being made entirely whole even in the event that Bear Stearns went bankrupt.

The troubling aspect of the Fed's action was not that it lent to a non-bank entity. That ability is clearly authorized by Section 13(3) of the Federal Reserve Act. The problem is that it made its “loans” as “non-recourse” funding – meaning that it would not stand to be repaid if the collateral itself was to fail, even if Bear Stearns and J.P. Morgan survived. This feature converted the “loans” by the Fed into unauthorized “put options,” benefiting private entities at potential public expense. This is a terrible precedent, and it deserves far more scrutiny and reluctance before we accept that this was the only available option.

Another troubling aspect was that shortly after making an initial non-recourse loan to Bear Stearns, and indicating the funds would be available for “as much as 28 days,” the Fed pulled the funding over the weekend. By doing so, the Fed itself forced the de facto collapse of Bear Stearns.

Bear Stearns' CEO Alan Schwartz testified “We believed at the time that the loan and corresponding back-stop from the New York Fed would be available for 28 days. We hoped this period would be sufficient to bring order to the chaos and allow us to secure more permanent funding or an orderly disposition of assets to raise cash, if that became necessary.”

As the New York Times summarized, “by the end of the day, with continuing problems surfacing and the downgrading of the firm's credit rating, he said he was told by the Federal Reserve of New York that he had misunderstood the terms of the deal. He was told that the loan would expire on Sunday, and that he had to find a buyer for the bank by then — before the Asian markets opened. The decision, Mr. Schwartz testified, left him with no negotiating leverage as talks proceeded with JPMorgan.

“On Friday night, we learned that the JPMorgan credit facility would not be available beyond Sunday night,” Mr. Schwartz said. “The choices we faced that Friday night were stark: find a party willing to acquire Bear Stearns by Sunday night, or face what my advisers were telling me could be a bankruptcy filing on Monday morning, which could likely wipe out our shareholders and cause losses for certain of our creditors and all of our employees.”

Over the Top Fed Actions Feed Conspiracy Thinking
Given the fact that it is the target of more than a few conspiracy theories since it was created in 1913, the Federal Reserve System, more commonly known as the "Fed," in media and finance parlance, could be acting with a bit more prudence during these dark economic times.

But no, it's gone ahead and damned the depression by doing what the New York Times described as the "unthinkable": bailing out Bear Stearns while giving away hundreds of billions to banks and other institutions whose labyrinthine securitization of our debt economy started this whole mess in the first place. In other words, rewarding the criminals and screwing the victims.

That kind of behavior is only going to make the conspiracy theorists even cozier. When you already think the Fed has made a serious living from doing everything from transferring public wealth to private hands to signing off on the assassination of John F. Kennedy, you're not going to start thinking better of them when they offload billions onto Bear Stearns, which is a securities firm and not a bank at all.

You're not going to get the opposition to stop parroting the usual party lines about the Fed being a privately owned bank that screws Americans by charging interest or compromises the overall interests of the United States by unconstitutionally printing up money like it was going out of style. You're only going to further invigorate them. That, my friends, is known as reality.

Which is something the Fed doesn't seem to be connected to anymore, judging by how it has, in the words of Bloomberg's Craig Torres, "thrown out four decades of monetary history" in favor of not only bailing out obvious criminals, but also taking on their worthless debt as collateral. The move makes zero sense to anyone outside of those who understand the back channels of America's tangled financial networks, which are beginning to look more and more like Ponzi schemes by the minute.

The fact that the Fed has taken on America's prodigious debt, and the already drowning Fannie Mae and Freddie Mac have loosened their capital requirements to do the same, there's nowhere to go but down, down, down for the economy, no matter how many billions of dollars -- or "liquidity" -- the Fed or their partners in crime manage to inject. In other words, to mangle Shakespeare, the Fed's recent actions are full of money and fury, signifying nothing.

"The Fed is trying to encourage more reckless borrowing and spending," argues Peter Schiff, president of Euro Pacific Capital and a longtime caller of bullshit on the irrational exuberance that debt securitization. "Obviously, its bailout of Bear Stearns creditors means that Americans are going to absorb their losses. The Fed is monetizing the mess and spreading out the losses among those who own dollars, whether in their savings or income. They're the ones being asked to shoulder the burden."

What kind of burden? It depends on who you ask. I'm not alone in arguing to anyone within earshot that the recession we're in -- and if you don't think you're in one, I'll have what you're smoking -- will rival if not outdistance the Great Depression. Others, like the Bush administration, who kick-started this recession with a program of easy money, batshit spending and rampant militarism, seem to think, as the president laughably asserted, that "our financial institutions are strong and that our capital markets are functioning efficiently and effectively." But that suspiciously rosy estimation could not be further from the truth.

"We've never had this type of this crisis before," Schiff adds by phone, on the way to a television appearance where he no doubt delivered the same doom prophecy, "and we never had this type of Fed trying to hold onto the economy. Why is it up to the Fed to stop this from happening? If recession is what we need, then postponing it won't help. We've got to restore order to the economy, and the Fed doesn't want to process that short-term pain, so its replacing the pain with one that will hurt even worse later."

"Where are we?" asks Danny Schechter, award-winning producer for CNN and ABC, graduate of the London School of Economics and the man behind the prescient debt economy documentary In Debt We Trust. "We're in a disaster zone. It's like bird flu in the financial system. Buyers overseas who bought all of these securities have found out that they've been scammed. No one knows how to value this stuff. The Fed has unsuccessfully injected hundreds of billions into the system as well as slashed rates. But it hasn't solved the problem."

Why? If the Fed is just a bunch of highly credentialed money wonks rather than the dark-hearted star chamber that conspiracy theorists make it out to be, then why wasn't it smart enough to realize that just throwing money at the wall wouldn't stick? After slashing rates down as low as 2.25 percent and handing out billions in duffel bags like Wall Street was Baghdad, how is it possible that the collective economic genius of the Fed hasn't been able to make a single noticeable dent in the oncoming depression? How could so many smart people be so stupid? The answer is as boring as you think: greed.

"Nobody ever wants to upset the apple cart," Schiff explains. "No one wants to tell taxpayers that they've stumbled on a new get-rich-quick scheme where home ownership takes the place of hard work and savings, especially since they're making a lot of money. We've learned nothing from the past at this point. What we've done to ourselves with this attitude is create a situation where there is no way to postpone the unbearable destruction."


Anonymous said...


WASHINGTON — President Bush urged Congress on Monday to resist efforts by Democrats to pass a second economic stimulus package, saying that while the economy is “in a rough time right now,” he is confident it will begin to rebound by the end of the year.


Anonymous said...


"Even if we accept the notion that only 2% of the total outstanding poses actual risk, that still would mean, considering an estimated $700 trillion derivatives “market”, losses of $14 trillion."

About a week ago, I ran that exact calculation past the director of the life-insurance company holding some of my funds, adding that the Fed holds less than 1 T$ (teradollar) in reserves.

Guess what? I am still waiting for a reply.

Does anyone else have the sneaking impression that the lull of the past month is coming to an end?

By the way, is Bob Shaw the one on TOD who questions whether humans are smarter than yeast?


Anonymous said...


Yes that Bob Shaw. I believe he was touting POTash as an investment choice when it was around $60 per share. It's a Canadian ferilizer company. Now it's 170. I wish I had bitten.

Anonymous said...

Hi ilargi,

Whats with your Pay Pal thing? I am trying to add some $ to your tip jar to buy you that Soros book but all I get is the following:

Error Detected

We were unable to decrypt the certificate id.


Well there is always API on the Toronto exchange at aprox $6.00. but don't go by anything I might say as to it's value, I am just giving you a chance to either kick yourself 10 times as hard or maybe end up ten times a winner:)

Ilargi said...


Thanks for letting me know. I was diddling with the spacing yesterday, and the secure pic code is so complicated that something went wrong, apparently.

I fixed it.

Anonymous said...

One comment I heard about when 'the present lull' will begin unraveling in earnest again is that the Whitehouse (and their faithful Meat Puppets, B-52 Ben and Paul 'Hey Boss, Can I Be Payed in Euros?') want to make sure that they get their Last Big Pay Check on April 15 from the taxpayers of this Great Nation.

It all straight down the crapper from there.

Anonymous said...

Excuse me for my overseas ignorance, but what happened in the end with congressional hearings on Bear Stearns?

Have they decided to undo the whole scheme already and send to court Bernanke et al.??

Has any Supreme Court judge ruled that it was unlawful for the Fed to award 30 Billion bucks to some nice face?

Please, keep me up to date, I cant miss a single chapter of this soap opera.

Anonymous said...

Ilargi / Stoneleigh dont miss this article on Scientific American

The Economist Has No Clothes

Unscientific assumptions in economic theory are undermining efforts to solve environmental problems


scandia said...

Prometheus, I can guess that Bush & Co. think a war with Iran will turn things around? Or the G7 will agree next week, on the count of 3, to simultaneously open their books- transparency, mark to market, get through the pain and recover.
Oh dear, more magical thinking!
As a former co-dependent I recognise the language, that it gets better "by the end of the year", always later, never now. Promises of a better future are irresistible it would appear. What will be the tipping point? How many laters can be tolerated.
The other not so covert meassage embedded in the script is that Americans have been told to spend the cheques being issued by the gov't. It is made clear that if the people stop being consumers the system crash will be their fault. Not Greenspan, not the Feds, not the Wall St. sharks, not the bankers...Yup,its our responsibility to save the day! Add that to the burdensome suggestion that if America loses the war in Iraq it will be the fault of all those who don't support the war.
I certainly didn't expect resistance to arise from the trucking industry! A proposed national trucking strike! My sickened heart was restored by the news! Some sign of life!