Wednesday, April 9, 2008

Debt Rattle, April 9 2008: Nationalization goes global

Dust storm South Dakota 1934

Ilargi: When the IMF releases a report, we should pay attention, because a lot of clueless "deciders" will use it as their reference for policy making. Still, it’s the IMF, an institution we trust as much as the World Bank or John Gotti, so we should read the report, and the reporting on it, with our eyes fully open.

• The IMF doesn’t do doom. So if and when they estimate $945 billion in losses, far more than any "official" estimate thus far, we know they know it’ll be much higher. And isn’t it cute that, while they emphasize these are estimates with high degrees of uncertainty, they manage to come up with a number just below $1 trillion?

• There are "hidden warnings" in the report. It says US banks have reported "most of their estimated losses" (we know that is nonsense), but European banks have not. In other words, the IMF says there’s much more to come, but it doesn’t really say it.

• At least as important is their statement that these are only the losses from banks, while other institutional investors, such as insurance companies (don’t forget pension funds!), have yet to start reporting losses and writedowns.

• The IMF is the first to start promoting nationalization of bad debt and losses on a global scale. In order to make sure the losers can stay at the crap table (the winners demand that the game goes on), you and me will have to open our wallets, and our kids’ piggybanks and college funds. Not just in the US and UK, where the Bulgaria model, has already been enthusiastically endorsed by the ruling politicians. The IMF now wants this to happen all over the world. Yes, probably also in Bulgaria.

IMF bites the bullet as crisis deepens
"We all have to be a little humble about this." You can say that again. Jaime Caruana's conclusion when presenting the International Monetary Fund's Global Financial Stability Report (GFSR) in Washington yesterday summed up how dramatically the economic mood music has changed during the past year.

This time last year, the IMF predicted confidently that the sub-prime mortgage slump would not affect America's economy. Chief economist Simon Johnson memorably said he did not expect "the financial tail to wag the economic dog". How wrong both he and the broader financial community were. Yesterday's GFSR was among the gloomiest reports that has ever been published by the IMF - an institution that is hardly renowned for hyperbole.

The weighty 190-page document will be pored over for many months but the overall tone and conclusions are already clear: that this is the worst financial crisis in many, many decades, and banks, ratings agencies and regulators will have to overhaul themselves dramatically if they are to prevent a similar disaster in the future. It is a sobering thought. Much of the economic growth enjoyed by western economies - particularly the United States and the UK - has been directly or indirectly fuelled by the advances of the financial sector. Such impetus has gone, much of it never to return.

Most galling of all is the fact that the crisis is a direct result of the hubris which dominated for so long. The report's chief conclusions are worth quoting at length:
• There was a collective failure to appreciate the extent of leverage taken on by a wide range of institutions - banks, monoline insurers, government-sponsored entities, hedge funds - and the associated risks of a disorderly unwinding.
• Private sector risk management, disclosure, financial sector supervision, and regulation all lagged behind the rapid innovation and shifts in business models, leaving scope for excessive risk-taking, weak underwriting, maturity mismatches, and asset price inflation.
• The transfer of risks off bank balance sheets was overestimated. As risks have materialised, this has placed enormous pressures back on the balance sheets of banks.
• Notwithstanding unprecedented intervention by major central banks, financial markets remain under considerable strain, which is now compounded by a more worrisome macro-economic environment, weakly capitalised institutions, and broad-based de-leveraging.

The report also issues a highly unusual veiled criticism of the Federal Reserve for keeping its interest rates too low even as the US housing market started to power ahead. Jaime Caruana, the lead author, said: "One of the elements that have contributed [to the crunch] has been a long period of time of low interest rates and future optimistic expectations about the prices of assets."
Regardless of who takes the lion's share of blame, the consequences will be brutal: $945bn of losses - shared equally by banks and investors - and dramatically lower economic growth this year and next in the US and the UK. The IMF will elaborate on this in today's closely watched World Economic Outlook. A swath of emerging economies from the Baltic to the Black Sea are also at risk, and there is certainly more pain to come, including for hedge funds.

In the private sector, banks must improve their transparency when it comes to valuing and announcing the value of their assets, the report said. The confusion and paranoia about possible losses have only served to intensify the crisis. Among the most intriguing suggestions is that central banks, including the Bank of England, widen the types of collateral they accept in return for their cash injections to the money markets. Mr Caruana also appeared to endorse suggestions that central banks ultimately consider buying up asset-backed securities.

He said: "It might be worth using public balance sheets - to some extent this has already been done in the case of Bear Stearns." Governments should also realise that they might have to follow the United Kingdom's lead and nationalise stricken institutions, Mr Caruana added. "Our approach here is saying you have to be ready and in some cases you may have to go as far as that [nationalisation]."

IMF Puts Cost of Crisis Near $1 Trillion
Worldwide losses from the credit crisis could near $1 trillion, the International Monetary Fund said yesterday, reflecting the massive cost of the breakdown in markets for home mortgages and other kinds of debt. The IMF, which is holding its semiannual meeting in Washington this week, urged banks to disclose losses quickly, raise extra cash if necessary, improve their techniques for dealing with risk and reconsider how top managers are paid so that they have better long-term incentives.

The IMF estimated that banks, insurance companies, pension funds, and other kinds of investors will suffer huge losses: $565 billion on U.S. home mortgages, $240 billion on debt backed by commercial real estate such as office buildings and shopping centers, $120 billion on corporate loans such as those used to acquire businesses, and $20 billions on consumer loans such as credit cards. Those figures add up to $945 billion in losses expected within two years. That would be about $143 for every person on Earth, or $3,100 for every U.S. resident.

"What began as a fairly contained deterioration in portions of the U.S. subprime market has metastasized into severe dislocations in broader credit and funding markets that now pose risks to the macroeconomic outlook in the United States and globally," the IMF said in its Global Financial Stability Report.

The IMF emphasized that the numbers are estimates. But they are similar to those of a growing number of private analysts, such as those at Moody's and Goldman Sachs, who have also estimated losses in the trillion-dollar range. The IMF report shows that predictions of such losses, which were extreme outliers a few months ago, have become mainstream.

Already, banks and other financial institutions that report publicly have marked down the value of their assets by about $200 billion. Hedge funds and other investment vehicles that do not have to disclose their losses have probably also recognized significant losses. The report indicated that by mid-March, U.S. banks had reported "most of their estimated losses," with European banks now catching up. But institutions other than banks, such as insurance companies, "may yet also report sizable additional writedowns."

G7 readies response to market crisis
The Group of Seven economic powers are likely to deploy an international team to keep closer tabs on the world's big banks as well as demanding better risk management and information disclosure across financial markets. Finance ministers from the G7 countries have also invited the bosses of about 10 banks to discuss the global markets crisis which could cost close to $1 trillion in losses and downgrades in the value of toxic assets accrued over years of investor euphoria.

The moves to improve the behavior of banks, and supervision of financial markets more generally, are due to be announced at a meeting on Friday in Washington. They are based on a list of recommendations from the Financial Stability Forum, a body they created in response to Asian financial crises of the late 1990s.

Among the key FSF ideas, elements of which were published in the Wall Street Journal and confirmed to Reuters by a G7 source on Wednesday, is the creation by the end of this year of a team of supervisors to watch over the biggest international banks.

"Uncertainty in the markets remains very strong as a whole," a Japanese finance ministry official told reporters at a briefing about the meeting of the G7 -- the United States, Japan, Germany, France, Britain, Italy and Canada.

Ilargi: Future improvements in regulations and accounting practices are useless, and waste precious time. All the tools that are needed to report losses accurately are in place. The reasons nobody uses them are 1/ they get away with it, and 2/ the losses are huge.

If any large financial corporate entity and/or institutional investor would come clean on the true numbers in their books, 90% of them would have to file for some form of Chapter 11 tomorrow morning. The horses are not just already out of the barn, they have all long since moved to the pampas of Bulgaria.

Banks must get handle on complicated securities: IIF
A global association of hundreds of financial institutions says the financial system must quickly figure out how banks can properly value complicated securities, and is recommending changes to how bankers are paid, in a report aimed at preventing a recurrence of the credit crisis.

An “urgent priority” must be to get rating agencies, investors, analysts and supervisors to talk about how to make the value of complicated securities such as collateralized debt obligations clearer on banks' financial statements, the Institute of International Finance said in a report Wednesday.

“In recent months outside observers – and occasionally even market participants – often struggled to understand why banks apparently had difficulties in providing hard figures as to losses sustained as a result of the market turmoil,” stated Josef Ackermann, chairman of the IIF's board.

“In particular, there has been criticism that banks seemed to disclose additional losses quarter after quarter, rather than coming up with one definitive figure. Indeed, some commentators have argued that banks did so deliberately in order to hide losses.

“While, unfortunately, the repeated disclosure of additional losses has indeed led to continued uncertainty in the markets, it is in fact easy to explain in principle: in a mark-to-market accounting framework, banks have to value the exposures and assets they hold at the prices prevailing on the respective balance sheet date, quarter after quarter.”

An emphasis on short-term profits and employee bonuses has skewed incentives in the industry, the IIF suggests.
The report says that severance pay packages should be tied to performance, and that, in general, compensation programs should take into account the cost of capital, not just revenues. Financial institutions should look at ways to adjust compensation so that risk is not overly rewarded, it suggests.

Rick Waugh, CEO of the Bank of Nova Scotia and co-chair of the IIF committee that wrote the report, told reporters that risk management must be a core competency of financial institutions. "Risk management is much more than just a monitoring function," he said. "It is a core responsibility of the CEO and all executive management." A key message of the report is that "expert judgment and critical analysis are always needed," he said.

Soros: Credit Default Swaps, the Next Leg of the Crisis
George Soros, the legendary hedge fund manger, is now 78-years-old and as active as a man half his age, using his multi-billion dollar fortune to purse interests in philanthropy, political activism and writing (eight books and dozens of articles/speeches). On Saturday, he released his ninth book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.

He wrote in the Financial Times of London Friday that there are more shoes to drop in the credit crisis if authorities don’t prepare to head them off. One area is credit default swaps:

“Instead of reshuffling regulatory agencies, the authorities ought to prepare for the next shoes to drop …. There is an esoteric financial instrument called credit default swaps. The notional amount of CDS contracts outstanding is roughly $45,000 billion … The market is totally unregulated and those who hold the contracts do not know whether their counterparties have adequately protected themselves. If and when defaults occur, some of the counterparties are likely to prove unable to fulfill their obligations.

This prospect hangs over the financial markets like a sword of Damocles that is bound to fall, but only after some defaults have occurred … One possible solution is to establish a clearing house or exchange with a sound capital structure and strict margin requirements to which all existing and future contracts would have to be submitted.”

Financial crisis forces closure of German bank
A small German lender closed its doors on Wednesday, making it the first European banking fatality since the onset of the global credit crunch. Weserbank AG Chief Executive and co-owner Gerold Lehmann blamed market turmoil for the demise of the former cooperative bank for butchers which was hit by a dramatic slump in the value of debt instruments it had bought.

Germany has been one of the countries worst affected by the global financial markets crunch which forced the emergency rescue of small-company lender IKB and regional state-backed lender SachsenLB. "The bank would never have had to be closed in a normal market environment," Lehmann told Reuters. "We won't be the only ones to go under (in the crisis). But while SachsenLB and IKB got billions of euros of aid, all we got was a kick in the teeth."

The 69-year-old banker said the shrivelling of 75 million euros ($118 million) of Floating Rate Notes (FRN) -- which the regulator BaFin demanded be reflected on the bank's balance sheet -- ultimately forced the Bremerhaven-based bank's closure.
FRNs -- a type of short-term debt issued largely by banks -- have seen their value dip in the wake of the global credit crunch as banks became more reluctant to lend to one another.

BaFin, however, said that the financial crisis was not decisive in its decision to shut the loss-making bank and played down the idea that the credit crunch, which has already forced the rescue of three German lenders, was bubbling up again. A bank in Germany fails roughly every year, it said.

[BaFin pinned Weserbank's downfall to internal management decisions, not the downturn of global markets. "The collapse was entirely a result of prevailing management conditions," said a BaFin spokesman. In a statement, BaFin assured the bank's customers that their deposits and investments would be insured by the government.]

Eastern Europe 'in danger of a hard landing'
Eastern Europe faces the growing risk of a "hard landing" as the world's financial crisis spreads wider, with serious spill-over dangers for Scandinavian, Italian and Austria banks that have lent heavily to the region, the IMF has warned.

Current account deficits have reached extreme levels across much of the ex-Soviet bloc, hitting 22.9pc in Latvia, 21.4pc in Bulgaria, 16.5pc in Serbia, 16pc in Estonia, 14.5pc in Romania and 13.3pc in Lithuania.

"Eastern Europe has a cluster of countries with current account deficits financed by private debt or portfolio flows, where domestic credit has grown rapidly. A global slowdown, or a sharp drop in capital flows to emerging markets, could force a painful adjustment," said the fund in its Global Financial Stability Report.

The IMF said lenders in Eastern Europe had built up "large negative net foreign positions" during the boom, especially in the Baltic states. "Liquidity for these banks has all but dried up and [interest] spreads have widened 500 basis points." Many of these countries rely on credit from branches of West European and Nordic banks, but these foreign lenders are having difficulty raising money on the global capital markets.

"A soft landing for the Baltics and south-eastern Europe could be jeopardised if external financing conditions force parent banks to contract credit to the region. Swedish banks, the main suppliers of external funding to the Baltics, could come under pressure," it said. The IMF cited Dexia, Natixis, Raiffeisen, Danske Bank, Swedbank, Handlesbanken, Nordea, SEB, Intesa Sanpaulo and Rabobank as institutions that raise over 30pc or more of their money on the wholesale capital markets, and may therefore face constraints.

Belgium's Dexia is over 65pc reliant on this sort of funding. The Swedish banks are most vulnerable as the average debt maturity on their funds is less than four years. In Bulgaria and Romania there is a "danger that local banks may underestimate the deterioration in the quality of loan portfolios that often accompanies rapid credit growth".

Private credit grew 62pc in Bulgaria last year, 60.4pc in Romania, 55.2pc in Kazakhstan, 45pc across the Baltics and 39.6pc in Poland. All are above the safe speed limit. The rapid growth of corporate debt issued by emerging market companies may prove a mixed blessing if the crisis persists, opening a "new potential channel of contagion". So far, capital flows into these markets have held up well, often supported by the "carry trade" from Japan, Switzerland, and now the US. This may prove fragile.

Volcker Says Fed's Bear Loan Stretches Legal Power
Former Federal Reserve Chairman Paul Volcker questioned the central bank's decision to rescue Bear Stearns Cos. with a $29 billion loan, saying it was at "the very edge" of its legal authority. "The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices," Volcker said in a speech to the Economic Club of New York.

Fed Chairman Ben S. Bernanke last month agreed to lend against Bear Stearns securities, paving the way for JPMorgan Chase & Co. to buy its Wall Street rival. Bernanke, who worked with Treasury Secretary Henry Paulson to broker the bailout, last week defended the move as necessary to prevent "severe" damage to financial markets. Volcker, the Fed chairman from 1979 to 1987, had implicit criticism for U.S. regulators and market participants who allowed "excesses of subprime mortgages" to spread into "the mother of all crises." The Fed's Bear Stearns loan was unusual, he said.

"What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return," he said.

Lawmakers, while praising the Fed and Treasury for averting a financial collapse, have also questioned the plan to subsidize Wall Street while the Bush administration resists using government funds to assist homeowners cope with the worst housing crisis in 25 years. Volcker said the Fed's loan may send investors the wrong message.

"The extension of lending directly to non-banking financial institutions -- while under the authority of nominally 'temporary' emergency powers -- will surely be interpreted as an implied promise of similar action in times of future turmoil," he said. Volcker said the modern financial system has "failed the test" of the marketplace. When asked whether he predicts a "dollar crisis," he said, "you don't have to predict it, you're in it."

Roubini Now Says House Prices to Fall 30%
Nouriel Roubini, a professor of economics, foresaw the current mess in U.S. housing and financial markets. He recently gave an interview and had this to say:
“Two years ago, I predicted home prices would fall cumulatively 20%, but now I believe it will be at least 30%. With a 20% fall in home prices, about 16 million households are under water.

They have negative equity, which means the value of their homes is below the value of their mortgages. With a 30% drop in prices, you have 21 million households that are in negative equity. And since the mortgages are no-recourse loans, essentially they can walk away.

Even if only half of the 16 million households were to walk away, that alone could lead to losses for the financial system of $1 trillion. Even a 20% drop in home values may imply losses of $1 trillion that are not priced into the market today. So that's the floor. Again, it could be higher — as much as $2 trillion — if prices fall 30% and more people walk.”

Fed May Slow Rate Cuts in Face of Shrinking Economy
Federal Reserve officials signaled they will slow the pace of interest-rate cuts even as they concluded "some contraction in economic activity" is likely. Some Federal Open Market Committee members saw the danger of a "prolonged and severe downturn," according to minutes of its March 18 meeting released yesterday. Still, "monetary policy alone could not address fully the underlying problems in the housing and financial markets," the minutes said.

"It holds out the prospect that the committee will continue to be cautious going forward, and rather than dropping a half- point would be more inclined to drop a quarter-point," J. Alfred Broaddus Jr., former president of the Richmond Fed, said in a Bloomberg Television interview.

Policy makers cut the benchmark lending rate 2 percentage points in the first 11 weeks of the year, the fastest pace in two decades. They may now need to assess the impact of the reductions, $168 billion of fiscal stimulus, and several steps to increase liquidity in financial markets. The Fed's target rate for overnight loans between banks is 2.25 percent, down from 5.25 percent in September. Economists anticipate officials will stop lowering borrowing costs after cutting the rate to 1.75 percent in June, according to the median of 62 estimates in a Bloomberg News monthly survey published today.

"The most important factor is, I think, they know that the fiscal stimulus is about to go out," said Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, referring to tax rebate checks scheduled for distribution from May. Fed policy makers "are very reluctant to go below 1 percent. And they're pretty reluctant to go below 2."

Fed pumps another $50 billion into banking system
The Federal Reserve, still working to combat the effects of a severe credit squeeze, said Tuesday that it had auctioned another $50 billion to cash-strapped banks. Separately, some Fed officials said they were concerned about a "prolonged and severe" economic downturn when they cut interest rates last month.

The Fed auction marked the ninth in a series that began in December that so far have pumped $310 billion in short-term loans into the nation's banking system. Federal Reserve Chairman Ben Bernanke and his colleagues hope the increased resources being supplied in the Fed auctions will encourage banks to keep lending to consumers and businesses and alleviate the economic drag from a severe credit squeeze.

Bernanke told Congress last week it was possible that all the blows the economy has sustained from the credit crisis, a prolonged housing slump and now rising unemployment could push the country into a recession. But he said he still believed that the period of weakness would be short and the economy would resume growth in the second half of this year. The Fed has been holding its auctions to supply direct loans to commercial banks every two weeks starting in December.

Meanwhile, Fed policymakers anticipated the economy will shrink in the first half of the year, with some concerned about "a prolonged and severe economic downturn," as they cut interest rates by three-quarters of a percentage point, to 2.25 percent, last month. "Many participants thought some contraction in economic activity in the first half of 2008 now appeared likely," the Fed said in minutes of the March 18 Federal Open Market Committee meeting released Tuesday. "Some believed that a prolonged and severe economic downturn could not be ruled out," the minutes said.

IMF to sell gold reserves to plug budget deficit
The International Monetary Fund is to sell an eighth of its vast gold reserves in a deal with the big powers to plug its budget deficit and reform its bloated structure, ending years of high living.
After lording it over the world for the past 50 years - ordering every improvident state from Britain, Argentina and Indonesia to slash costs - the fund is now on the receiving end of bitter medicine. It has literally run out of business as client states pay back loans.

The reform proposals dictated by the White House and key allies involve $100m (£51m) of cuts over three years and 100 job losses. IMF staff in Washington are famously coddled, enjoying tax-free salaries and use of an elite country club. Dominique Strauss-Kann, managing director of the IMF, said the beleaguered institution was reinventing itself for the modern age. "We have made difficult but necessary choices to close the projected income shortfall and put the fund's finances on a sustainable basis, but in the end it will make the fund more focused," he said.

IMF spending will fall from $922m to under $800m a year by 2010. The Bush administration has backed the plan to sell 403 tonnes of gold worth $13bn as part of the broader overhaul, but it is unclear whether there is enough support in the US Congress to carry the measure. James Steel, a gold expert at HSBC, said Congress can effectively block the sale. America holds 17pc of the IMF's votes. Any major change requires a super-majority of 85pc. "A number of senators representing mining states may not look too favourably on this," he said.

The US has so far refrained from selling any of its own gold reserves, in part because such a move would infuriate a substantial and passionate bloc of voters - broadly known as "gold bugs". The IMF said the sales would take place over several years and would be part of an existing agreement that limits central bank sales to 500 tonnes a year.

Ross Norman, director of, said the IMF sales had been discounted long ago and were not likely to have any major impact. "The markets can easily cope with this amount of extra gold. There's a global shortage because mines are not producing enough," he said. Gold fell slightly to $914 an ounce yesterday. It is well off the highs of above $1,030 reached in February when the Federal Reserve slashed interest rates, it but has still enjoyed a spectacular performance since the credit crunch began.

"Gold is still up by over 50pc since we all learned the meaning of the word 'sub-prime'. It is perfectly healthy to have a breather now. The correction may have further to run because we have not yet flushed out the speculative positions," said Mr Norman.

The IMF has chosen a better moment to sell bullion than the British Government, which ordered the Bank of England to start selling half the country's reserves at the bottom of the market in 1999. The first auction sold at $254 an ounce, marking the exact nadir of an 18-year slide. Gordon Brown's controversial sales have cost British taxpayers roughly £4bn.

Citigroup To Sell $12 Billion of Loans
Citigroup Inc. is in talks to sell $12 billion of loans at a loss to Apollo Management LP, Blackstone Group LP and TPG Inc. as part of an effort to shrink the bank's balance sheet, a person briefed on the matter said. A sale to the private equity firms would shield the bank from further declines in the value of the debt, said the person, who wouldn't be identified because negotiations are private. The loans are part of the $43 billion in financing that Citigroup agreed to provide for leveraged buyouts last year before credit markets froze and saddled the New York-based company with hard- to-sell assets.

Citigroup plunged 19 percent in New York trading this year, partly on concern that writedowns of leveraged loans, which currently trade at about 90 cents on the dollar, might add to $24 billion of losses the bank has taken so far on mortgages and bonds that tumbled in value. Chief Executive Officer Vikram Pandit is shedding high-risk holdings to shore up capital.

"As a Citigroup investor you won't have to worry about more mark-to-market writedowns on these loans," said William B. Smith, senior portfolio manager at New York-based Smith Asset Management Inc., which oversees about $80 million, including about 66,000 Citigroup shares. "There's now a consortium of private-equity firms saying what they're worth."
Citigroup rose 3 percent to $24.39 in German trading today.

The company's so-called Tier 1 capital, the core measure of solvency demanded by regulators, was 7.1 percent as of Dec. 31, down from 8.6 percent a year earlier. A "well-capitalized" bank must have a ratio of Tier 1 capital to assets of at least 6 percent, according to rules set by industry regulators. Citigroup had about $2.2 trillion of assets at the end of 2007, more than any U.S. bank.

Citigroup is planning to complete the sale to Apollo, Blackstone and TPG as soon as next week, when the bank reports first-quarter results, the person briefed on the talks said. Analysts estimate the bank will report a loss of more than $4.7 billion, or 93 cents a share, according to a survey by Bloomberg.

The deal may help clear the $200 billion logjam of unsold loans, said Chris Taggert, an analyst at CreditSights Inc. in New York. Money managers who have raised funds to invest in distressed debt are striking deals with Citigroup and other banks now eager to unload them, he said.

Blackstone, TPG and Apollo in Citigroup deal
Citigroup is close to selling $12bn (£6.1bn) of its leveraged loans to a trio of private equity houses in its latest attempt to draw an end to its own credit crisis. The deal – which, it is understood, is being negotiated personally by Citi chief executive Vikram Pandit – involves Blackstone, TPG and Apollo Management buying the loans at a discount of approximately 90 cents in the dollar.

The package of loans under discussion includes those that have been used to finance major acquisitions by three houses, as well as debt used to fund deals led by rivals. It is believed that Apollo will take on around half the portfolio, while the other two will take on the remainder. If the deal is completed, it will be the largest sale of its kind to date in the current credit crisis, and come as something of a landmark as banks attempt to clean up their own balance sheets.

The involvement of private equity groups in the potential deal is an interesting one, providing a new avenue for the billions of dollars of fresh equity the sector has raised over the past 18 months. In addition, it places private equity, alongside sovereign wealth funds, as one of the new points of call for Wall Street banks looking to raise fresh finance.

Only yesterday, TPG sealed a deal to buy $2bn of a new $7bn ordinary and preferred share offering by Washington Mutual, as part of the savings and loans bank’s attempts to stay afloat. TPG’s founder and principal, David Bonderman, negotiated much of the restructuring, and TPG will take two seats on the company’s board in return.

It is understood that Citi’s initial plan was to announce the sale of the leveraged loans at the time of its first-quarter results next Friday, April 18. However, that may now be brought forward. Analysts are expecting the results to contain considerable bad news, including further write-downs and provisions as the result of continued deterioration in both its corporate and retail businesses.

Don't Fall For Citibank's Alleged Sale Being Good!
Think folks.

Let's look at what's out there:
"Citigroup Inc. is in talks to sell $12 billion of junk-grade corporate loans to Apollo Management LP, Blackstone Group LP and TPG Inc. as part of an effort to shrink the bank's balance sheet, a person familiar with the matter said."
First, the alleged sale-in-process (which nobody will confirm) is at 90 cents on the dollar.

Second, these are loans made to the buyers that were made when these guys did LBO deals in the last year or so.

Circle, meet Jerk.

This is extremely bad for two reasons:
  • Citibank was almost certainly carrying these loans at par (100) on its books. This is an immediate markdown of $1.2 billion if so.
  • The only reason to sell these assets off at a discount like this if this is all you have that you CAN sell and you NEED to sell!

Is Citibank in ratio trouble?

Nothing else makes sense. They don't want to dilute shareholders (good) but they just sold off paper that should have been "money good" at a significant discount (very bad) and my money would be on that being, effectively, a forced sale (extremely bad.)

Now from the P/E guys this deal makes an insane amount of sense. They were in the position of first loss (typically 10% they put up on the transaction) which was looking dicier by the day. They just zeroed out their loss because they got the debt at a 10% discount!

This severely constrains their liquidity, but what other sort of deals are they going to be doing here for a while in a recession? None! So why not remove what is otherwise a certain loss and deploy that capital into assets they have control over (the companies in question.)

I think it makes all sorts of sense for Apollo, Blackstone and TPG, but it sure as hell doesn't for Citibank, unless they had no other choice.

My "10 cent back of the envelope" analysis - take it for what you think its worth, but I wouldn't be going anywhere near Citibank's stock.

UPS' earnings warning is FAR more important to the economy and the markets than this crap, and the downgrade from S&P on Mortgage Insurers - which came after the Citi "leak" - is a REAL bombshell, and not of the positive sort. Here's a tidbit:

"The agency said it now expects home prices to decline 20 percent from the peak in 2006 compared with an 11 percent drop it projected last November. It also sees unemployment rising to 5.8 percent in 2009."

Don't worry, its all good - go buy some stocks (sucker!)

Ilargi: For me, Cramer's pay is on par with Angelo Mozilo's. Lots of people stupid enough to listen to him, certainly his Bear Stearns call, lost millions. And his fee goes up. Perverse.

Jim Cramer gets more Mad Money
He may have blown a call on imploded investment bank Bear Stearns Cos., but Wall Street's loudest market commentator Jim Cramer is still getting a raise from Inc., the financial media company he helped found.
In fact, a new three-year employment agreement between the company and Mr. Cramer, best known as the star of the Mad Money TV show on CNBC, calls for a raise in each year.

The agreement, filed with U.S. securities regulators Wednesday and retroactive to Jan. 1, will give Mr. Cramer a salary of $1.3-million (U.S.) in 2008 – up from $1-million in 2007 – rising to $1.56-million next year and $1.87-million in 2010.
He also is getting a $100,000 signing bonus, and will be eligible for an annual target bonus equal to 75 per cent of his salary, based on reaching unspecified financial targets the company will determine.

As well, Mr. Cramer has already been awarded restricted stock units on 300,000 shares under the company's incentive plan for 2007, the filing says. On March 11, the popular market pundit posted a “buy “ recommendation on Bear Stearns in a column on when the brokerage's stock was trading at $62.

The same day, in one of his trademark yells on Mad Money, the hyperactive Mr. Cramer declared that “Bear Stearns is fine! Do not take your money out of Bear.” And the rest is history: by the next weekend, Bear Stearns's stock had collapsed and the firm was being bailed out by competitor JPMorgan Chase and Co., aided and abetted by the U.S. Federal Reserve Board.

U.S. Economy to Stall as Consumer Spending Cools
Economic growth in the U.S. will come to a halt in the first six months of 2008 as consumer spending cools, a Bloomberg News survey showed. The world's largest economy will not expand at all from January through June, according to the median estimate of 62 economists surveyed from April 2 to April 8. A majority now projects the U.S. is, or will soon be, in a recession.

Job losses, falling home values and credit restrictions are plaguing consumers already burdened by soaring food and gasoline bills. Federal Reserve Chairman Ben S. Bernanke, who conceded for the first time last week that the economic expansion may end, will cut interest rates again, the poll showed.

"The economy is not going anywhere in the first half," said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. "The American consumer is pretty dismal right now. We're in the middle of a recession and we've got another three to six months to work our way out of it." The deepest reductions came in the outlook for the second quarter as economists slashed the growth estimate to zero from last month's projected 0.5 percent annual pace.

Increases in fuel prices and the unexpected pickup in firings since the start of the year explain the downgrade. "Those two things are hitting the consumer hard," said Stephen Stanley, chief economist for RBS Greenwich Capital Markets in Greenwich, Connecticut. "Demand is deteriorating rapidl

Mr Mortgage Exposes Wells Fargo's Toxic Waste

WaMu doles out more gloomy news to shareholders
Washington Mutual heaped more bad news on its beleaguered employees and shareholders Tuesday, announcing layoffs, a capital infusion deal that sent the stock price tumbling, another dividend cut, and first-quarter results that will be even worse than already low expectations. The slim piece of good news was that the Seattle-based company found investors willing to put $7 billion worth of new capital into the company.

That infusion is designed to help WaMu weather the storm of delinquent and defaulted loans that threatens to spread from subprime lending to conventional home loans, home equity lines of credit and credit cards. "This substantial new capital — along with the other steps we are announcing today — will position us for a return to profitability as these elevated credit costs subside," said WaMu Chief Executive Kerry Killinger in a statement.

But the announcements also raised even more questions about WaMu, including whether credit problems are getting worse (and if so, will the additional capital be enough to carry the company through these problems) and whether this deal is an interim measure to prepare WaMu for a sale. Certainly, investors weren't thrilled with the news. In trading Tuesday, WaMu closed at $11.81, down $1.34 a share. A year ago the stock was trading at more than $39 a share.

Among the announcements: WaMu sold 176 million shares of common stock at $8.75 a share to an investment group headed by TPG Capital. TPG founding partner David Bonderman, who once served on WaMu's board, returns as a director. Larry Kellner, chief executive officer of Houston-based Continental Airlines, will become a board observer. WaMu plans to close all 186 of its freestanding home-loan offices, which will mean laying off 3,000 employees.

Why lenders may ignore the Bank of England’s cut in interest rates
The Bank of England is in the unusual situation whereby it may not be able to influence the mortgage market, as changes it makes to interest rates may not be passed on to mortgage rates charged to homeowners or businesses. Because of the credit crunch banks are reluctant to lend to each other, which has pushed up interest rates in the interbank money markets, known as Libor, which lenders use.

That, combined with a growing reluctance by banks to lend on properties they feel could fall in value, has led to lenders withdrawing mortgage products and raising rates on those remaining. The past week has seen lenders increase rates not just to first-time buyers wishing to borrow 100% of a property's value and five times their salary, but to all sorts of homeowners, many of whom have a far lower loan-to-value ratio and income multiples.

So, although the Bank of England is expected to cut its key lending rate by a quarter of a point tomorrow, it may not make much difference if lenders decide not to pass on the cut to their borrowers. Banks are facing losses related to the sub-prime mortgage crisis in the US. They are retreating from risk and looking to rebuild their capital base. That means less, and more expensive, lending to British homeowners.

This is one reason why many economists think that the overvalued British housing market is likely to fall, and possibly quite sharply, depending on how long the credit crunch takes to work itself through the system. If first-time buyers and budding landlords find they can't raise finance to buy a property, their demand is effectively taken out of the housing market. That, other things being equal, would lead to prices falling. Many argue that it is already happening.

Ilargi: Alistair Darling will be sacrificed before Christmas, possibly well before.

Alistair Darling 'optimistic' on economy despite slowdown
Chancellor Alistair Darling insisted he was "optimistic" about the economy today, despite the "unprecedented shock" from the worldwide slowdown. He was speaking as the International Monetary Fund prepared to release growth forecasts which paint an increasingly gloomy picture. The UK's economy is forecast to expand by 1.6 per cent this year and in 2009 – lower than the 1.75-2.25 per cent predicted by the Chancellor in last month's Budget.

But Mr Darling said: "The IMF has downrated every country's growth forecast in the light of what's been happening in the world economy. "However, they have lowered their expectations in relation to us by less than other countries." Mr Darling insisted he stood by the growth forecast he had made in the Budget and said he remained "optimistic". He added: "We do have a very strong economy, it has proved remarkably resilient over the years."

The South West Edinburgh MP said he believed the UK would get through a "pretty unprecedented shock to the economic system". But, he said: "We cannot be complacent about these things. We are going through a difficult time, but I do believe that we are far better prepared than we have ever been in the past."

Mr Darling also announced the launch of a new working group to help the UK's ailing mortgage market. Sir James Crosby, deputy chairman of the Financial Services Authority, will work with lenders, the Bank of England and Treasury to "reopen" a mortgage market increasingly constrained by the global credit crunch.

As housing falls, short sales becoming common
The Village at Green River in Corona, Calif., began marketing 19 newly-built townhouses in July 2007, just as the national real estate market began flagging. The average price of the homes, which vary in size from 1,400 to 1,640 square feet, was $505,000 at the time. Three price drops later, the homes finally began selling in March — at an average price of $309,000, says listing agent Dominic Kurtyan.

Sure, it’s another story of home prices dropping in a sour real estate market, by about 39 percent in this case. But Kurtyan says there’s more to it. Short sales have become so mainstream in some markets, such as this region of central California, that during March he and the developer behind the complex began promoting these properties’ status as re-priced “short sale” homes — homes priced below what the seller owes on their mortgage — in order to lure skeptical, price-conscious buyers.

The Village at Green River has hung a banner advertising “short sale” prices, and the complex’s voicemail greeting discusses its status as “a short sale situation.” “We had a significant response just from changing the sign so that it advertises prices starting at $299,000,” Kurtyan says. “It’s a negative situation for everyone involved, except for the buyer who gets a good deal.”

Indeed, while buyers will get townhouses each boasting a two-car garage, two bedrooms, and two and a half bathrooms, the developer behind the estimated $8 million project will walk away empty-handed at these prices, and the multiple lenders involved will either break even or lose money, Kurtyan says. Last week Bethesda, Md.-based Inside Mortgage Finance, and Washington-based Campbell Communications released a real estate industry survey indicating that roughly 20 percent of all U.S. home sales in March were “short sales.”

“Our numbers suggest that 20 percent of completed home sales nationwide are short sales,” said Guy Cecala, publisher of Inside Mortgage Finance. “The number would be larger if it weren’t for the fact that one-third of all attempted short sale deals don’t go through.”

So why so many short sales? The combination of falling home prices and homes financed with low down payments means many homeowners owe more on their properties than they’re currently worth. Add to that the population of homeowners who face foreclosure due to resetting mortgages or who must sell for other life reasons (relocation, etc.) in the middle of a bad market, and it makes sense that lenders hoping to avoid more foreclosures on the books will take this alternative.

According to IFM/Campbell research, two-thirds of short sales are initiated by homeowners and one-third are launched by mortgage lenders (as a foreclosure alternative). IFM/Campbell data indicates the top reason for short sales initiated by homeowners is their inability to make mortgage payments, followed by other factors such as the value of the property declining.

In a typical home transaction the seller gets final say on which buyer gets the home, but in a short sale the lender weighs in on that decision, since it’s the lender who won’t recoup 100 percent of the seller’s mortgage balance as in a “normal” home transaction.

Bigger Bubbles To Pop
Everybody knows about the housing bubble. In nine months, it has gone from blog-talk to front page newspaper headlines. As for the Recession, our government has yet to forecast even one. What has been ignored is the intertwining of three major bubbles: Government Funded Programs, Private Sector Finances and the "Hot" housing market! The degree of overlap between bubbles is meant to suggest that they have implied financial liability. Any thing overlapping the Government bubble would have insurance protection (ie [housing bubble, Fanny Mae] [Finance bubble, FDIC Bank Insurance]).

The financial markets supplied the easy money for the housing bubble. They also supplied the cash that funded all of our credit card debt and our soaring stock market. Where did the money come from? It isn’t hard to figure out; it came from someone’s savings account. Total US retirement assets are at 17 trillion dollars. Here is a Link with more information. This is Bubble Two and it is maturing at a rather fast rate. Just ask anyone who worked at Bear Stearns.

The biggest bubble is the promised government benefits to retirees in the form of Social Security, SSI and unlimited health care to seniors(estimated to be 50 trillion). Bubble One has popped (loss range estimates are one to six trillion). When Bubble Two pops, there goes our retirement savings (estimates range six to twelve trillion). At that point we are really going to need the benefits promised by Bubble Three (try not to laugh).

Bernanke is adding 30 billion to the financial bubble (a loan from Bubble Three to Bubble Two). More funds may solve an immediate problem but all this will do is buy time and increase the size of the mess. The road to hell is paved with good intentions. Ben's going to loan us his hand basket, such a nice touch. I guess he doesn't have to take the trip.

World Bank Climate Profiteering
The World Bank’s long-running identity crisis is proving hard to shake. When efforts to rebrand itself as a “knowledge bank” didn’t work, it devised a new identity as a “Green Bank.” Really? Yes, it’s true. Sure, the Bank continues to finance fossil fuel projects globally, but never mind.

The World Bank has seized upon the immense challenges climate change poses to humanity and is now front and center in the complicated, international world of carbon finance. It can turn the dirtiest carbon credits into gold. How exactly, does this work, you ask?

Quite simply: The Bank finances a fossil fuel project, involving oil, natural gas, or coal, in Poor Country A. Rich Country B asks the Bank to help arrange carbon credits so Country B can tell its carbon counters it’s taking serious action on climate change. The World Bank kindly obliges, offering carbon credits for a price far lower than Country B would have to pay if Country B made those cuts at home.

Country A gets a share of the cash to invest in equipment to make fossil fuel project slightly more efficient, the World Bank takes its 13% cut, and everyone is happy. Everyone, that is, who is cashing in on this deal. If you’re after a real solution to the climate crisis, these shenanigans can and should make you unhappy.

Consider a project the International Finance Corporation (IFC) had scheduled for board consideration on March 27, but is now, according to its press office, slated for approval in April. (The World Bank Group’s boards virtually never reject anything sent to them). The IFC, the World Bank’s private sector lending arm, plans to back a massive coal-fired power plant in Mundra, a town in the Indian state of Gujarat.

The complex of five 800 megawatt plants will cost $4.14 billion to build and be owned and operated by Tata Power Company Limited, a scion of India’s largest multinational corporation, the Tata Group.
To put this in perspective, Tata Motors, a division of the same conglomerate, recently announced plans to buy the luxury car companies, Jaguar and Range Rover from U.S. automaker Ford for $2.3 billion.

And Tata Power’s 2007 revenues totaled $1.6 billion. So, it’s hard not to ask how much help Tata needs from the World Bank, which has as its motto: “our dream is a world free of poverty.” Several other corporations are involved. Toshiba, for example, will supply the steam turbine generators. Once operational, the Mundra power plant will be India’s third-largest emitter of greenhouse gases. But it doesn’t stop there. Now, the World Bank has planned for the Tata coal burner to be eligible for carbon credits under Kyoto’s Clean Development Mechanism. Carbon credits for a coal burner, you ask?

In the bizarre logic of the carbon market, a market the World Bank is both shaping and investing in, yes, Country B can get credits for helping a corporation, even one of the world’s wealthiest corporations such as Tata, capture a few carbon emissions, as long as these emissions are captured in a “poor” country, like India, regardless of how rich the company involved may be.

And it gets stranger still. One would hazard a guess that the IFC is lending $450 million, “considering investing up to $50 million in equity as part of its exposure to the project,” and possibly helping Tata obtain $300 from other sources at favorable rates for the Tata burner because India has no other choice but to burn its own abundant supply of coal. But, no, the IFC plans to import coal from Indonesia to fuel the plant in India. In fact, Tata bought a 30% stake in two Indonesian coal-mining units for $1.3 billion in April 2007 in order to secure the coal resources for the Mundra plant.

On its Website, the World Bank division offered this feeble justification for this transaction: “IFC is supporting thermal power projects which have better GHG (greenhouse gas) and environmental performance than the average plants in India, given the country’s large needs for incremental electricity supply.”

Surely, if the Bank is involved, the poor, if not in India, then somewhere else are better off as a result of this project? Well, in a word, no. Indonesian coal regulations are largely incoherent and open to manipulation, giving often-corrupt local officials control over the resource wealth, stripping local communities of their resources, and leaving them with a legacy of environmental problems.

Don't Blame NAFTA for Downturn, Many Economists Say
The North American Free Trade Agreement is once again a prime scapegoat for the nation's growing economic troubles, drawing blame for sending jobs overseas and flattening wages for U.S. workers. That sentiment has intensified as the economy has deteriorated, a fall punctuated last week by the steepest job decline in five years.

Sens. Hillary Rodham Clinton (N.Y.) and Barack Obama (Ill.) have fed the anti-free-trade view in campaigning ahead of the Pennsylvania Democratic primary April 22. Facing voters in a state that has lost more than 200,000 manufacturing jobs since 2001, Obama has promised to stand against trade deals that cost U.S. jobs, while saying Clinton supported NAFTA in the past. Clinton counters that she has always opposed the deal, even as her husband signed it as president, and she has promised to call a "timeout" on future trade deals if elected president. "I don't think NAFTA has been good for America," she said.

But is that judgment fair? Many economists do not think so. It is true that the United States has lost about 4 million manufacturing jobs since 1994, the year NAFTA went into effect and eliminated most hurdles to trade and investment between the United States, Mexico and Canada. Not only are items such as clothing, toys and televisions increasingly made abroad, but so are more complex goods including sophisticated magnets that help steer military smart bombs and radio frequency identification chips embedded in new U.S. passports.

But many economists blame the march of technology and the increasingly dominant manufacturing role of China, not NAFTA, for that shift. Overall, they said, NAFTA has been a net plus, if a modest one, for the U.S. economy. Even as the number of factory jobs dropped, manufacturing output in the United States was up 58 percent between 1993 and 2006, as U.S. plants produced more goods with fewer workers. Exports are at a record high, and trade among the three NAFTA partners has tripled since 1994.

Meanwhile, overall employment in the United States has grown 24 percent and average unemployment is down since NAFTA went into effect. Some cities along the border with Mexico have grown, and farm exports have gone up. "On balance, researchers have found NAFTA a slight positive for the U.S. as a whole," wrote Anil Kumar, a Federal Reserve Bank of Dallas economist who studied the impact of the agreement.

The Flipping Industry
I am sure glad to see the first quarter of 2008 behind us. It seemed as if every couple of days there was more bad economic news. Each announcement was worse than the last. The banks, investment houses, hedge funds, etc. just pumped out the bilges with their financial gray, brown and black water. It didn’t matter if the tide was coming in or going out. The whole economic bay seemed to be polluted.

As the quarter unfolded, it became clear that the world’s credit system was drifting aimlessly, like a ship sailing with no wind. A lot of business that should have gotten done just did not happen, for lack of funding. Funding went away because risk aversion kicked in with a vengeance, and for a very real reason. The last 12 months or so have been a time of repricing risk – and this occurred on a global scale. But the repricing was not orderly. The U.S. dollar was steadily drifting downward in value, and prices for most things were readjusting just on this monetary basis alone.

Add to this some severe industrial disruptions, from power shortages in South Africa to floods in Australia to economy-stopping winter weather in China. Closer to home, the downward repricing of risk rapidly became a collapse as flaws in the U.S. rating agency process bobbed to the surface. With so much distressed commercial paper floating around, many people were paranoid about risk. It was like the old game of “hot potato,” except nobody could pass their potatoes onto the next guy down the line.

For example, in one major presentation, I heard General Electric CEO Jeff Immelt spend a large part of his discussion defending GE’s “triple-A credit rating.” Normally, Immelt would be up there slapping the pointer against the screen and bragging about all the great products that GE makes and sells. Instead, he was busy trying to “prove a negative,” that GE does not hold bad paper in its money operations. But Immelt believed he had to defend GE’s stock price by dispelling fears of a rating markdown.

And through it all, the resulting stock market gyrations were a reflection of investor confusion about the future. Are we at the end of something good? Are we at the beginning of something bad? Is this the beginning of the end? Or is it only the end of the beginning? Really, what comes next? Will credit markets liquefy? Or will they stay dried out? Can we do business? Or should we hold tight and sit on the cash?

Paul Krugman of The New York Times recently told Fortune , “Large parts of the financial system will have to be reinvented.” And there’s no argument from me on that one. But so much of the financial system is broken that the question is where to even start.

It is apparent that much of the old way of doing business – particularly in the realm of lending money – was rotten to the core. In my view, it begins with the dollar itself. The dollar has been steadily deteriorating in value for decades, so inflationary expectations are part of the worldwide consciousness. That is, just because of the long-term decline in the value of the dollar, most people expect most things to go up in price most of the time.

So is it any wonder that people developed a “speculation expectation”? This fed into an entitlement mentality, as well, that tainted every rung of the credit ladder. A lot of people wanted to buy and flip, whether it was houses or stocks or commodities. So other people lent to people to enable buying and flipping. Flipping became a dominant, if not defining, element of the financial “industry,” of sorts.

But what an industry! For example, in the past five years, many people just plain lied through their teeth on everything from credit card applications to mortgage applications to the lending documents for multibillion-dollar takeovers. It was pure and brazen fraud in many instances, verging on burglary in plain sight. The next level up the food chain – the brokers and loan officers – often just looked the other way and rubber-stamped the papers. “Hey, not my problem.”

This kind of bad buck-passing went all the way to the top of some firms, many with familiar names. There in the ethereal reaches of the nice office buildings in Irvine, Calif., and Fort Lauderdale, Fla. – let alone Wall Street – the chief executives knew, or should have known, how risky the portfolios were becoming. (If I may say so, we’ve been writing about it at Agora Financial for at least the past four years.)

But these corporate worthies let it happen. The pressure to “make the numbers” was too much. The money was just too good. The bonuses were too sweet. And besides, there is always the old excuse that “Everybody does it this way.” Yet it was not for nothing that the ancients defined greed as a deadly sin. At each step of the ladder of financial deceit, people just let it slide. They should have known better, and maybe they did know better.

Now looking ahead, we have a hell of a rocky road before us. And can we as a society really “regulate” our way out of that situation? Or is there a systemic problem with deeper roots? Really, what do the Furies have in store for us?

Ilargi: As I predicted, when Purdy Crawford put both of his big feet in his huge gaping mouth, everyone of the small guys get their money back. Congrats. But now, what will happen with the Caisse’s pension clients? I fear for them.

The large investors will now, most likely, have their short-term ABCP converted to long term paper, which will mature in 9 years. It's not worth anything today, but in 2017 the economy will have fully recovered?! I don't think so, but in any case, the uncertainty is far too high for anyone's taste.

Canaccord to buy back ABCP from individual investors at par
Canaccord Capital Inc. plans to offer to buy out the holdings of 1,430 clients stuck with frozen asset-backed commercial paper at par, meaning almost all Canaccord clients will get all their money back.

Canaccord said Wednesday it will buy back ACBP from clients holding less than $1-million of the paper, which will mean repurchasing $138-million of notes. The proposal will cover 97 per cent of clients with the paper, and leave the brokerage with a big writedown to cover the costs.

The buyout proposal should smooth the way for the restructuring of $32-billion of ABCP that has been locked up since the market for the short-term paper failed in August. Big holders of ABCP, including the Caisse de dépôt et placement du Québec, put forward a restructuring proposal last month but small investors have since been fighting for more money.
The small investors have a lot of leverage because while they hold only a small amount of paper, because of their sheer numbers they can control a vote on the fate of the whole restructuring. There are about 2,000 small investors, most of whom are clients of Canaccord.

“We appreciate our clients' patience during this difficult time and we regret that this process has taken so long to complete and the hardship this has caused our clients,” said Canaccord chief executive officer Paul Reynolds. “We hope they will view the Canaccord Relief Program as a successful outcome to this unprecedented disruption in the Canadian capital markets.”
Canaccord said the buyout will cost the firm $54.2-million, but a spokesman said the firm doesn't plan to disclose where the rest of the money for the deal is coming from.

Speculation has centred around the Caisse de depot, which has the most to gain from a successful restructuring because the pension manager has almost $13-billion of the paper that would be vastly reduced in value if the small investors vote down the restructuring. Mostly due to the cost of the buyout, Canaccord plans an 82 cent-a-share writedown, totalling $39.6-million after tax.


Anonymous said...

The FED is going broke … needs more funds to give to their coconspirators
From Marketwatch

"These backup plans include having the Treasury borrow more money than necessary to fund the government and keep the excess proceeds on deposit at the Fed; issuing debt under the Fed's name instead of the Treasury's; and asking Congress for authority for the Fed to pay interest on commercial-bank reserves……"

The end is near…… The FED is lining up the funds to complete the nationalization of banks and brokerages.

Anonymous said...

I have heard about Credit Default Swaps for a while (I first read about them in Time) but I don't understand what might trigger a default. Can anyone explain this? Does anyone know?

Anonymous said...

CDS are essentially private guarentees of insurance. For example, let's say that Bear Sterns personally guarenteed that a subprime mortgage backed security (MBS) that it sold to a group of investors would maintain a certain value. If the value dropped below this value, it would kick in it's own funds to make it "whole". Bear Sterns didn't just file its agreement away to be pulled out if needed. It essentially offered someone like Goldman Sachs $X number of dollars each year if Goldman Sachs would pony up the dough if the Bear Sterns MBS fell in value below a certain level. Now, Goldman Sachs didn't just collect the premium from Bear Sterns and hope that the Bear Sterns MBS would hold value. Instead, Goldman Sachs offered companies like a Teacher's Pension Fund $Y dollars (which is some number less than the $X it received from Bear Sterns) if they would agree to make the Bear Stern MBS whole in the unlikely event that the MBS lost value. The Teacher's Pension fund then sold the risk (for a slightly smaller premium) to some smaller, less sophisiticated investor, and the chain continued to expand. Now, someone at the far end of the chain, perhaps well outside the regulatory sphere of the US, agreed to "insure" the MBS for some regular premium of $Z (where $Z<$Y<$X). All is good until the MBS falls in value and the investors come to Bear Sterns and ask them to make good on their agreement to keep the MBS whole. Bear Sterns will turn to Goldman Sachs who will turn to the Teachers Pension fund who will turn to small time investor from Zimbabwe who will say "I can't pay". Thus, the Teacher's Pension Fund will have to pony up the $$ or declare itself insolvent. If insolvent, then the problem shifts up the chain to Goldman Sachs, etc, etc. Thus, all it takes is a few small time players to have bitten off more than they could chew, and the losses spread up the chain in rapid-fire response. If a big company like Bear Sterns went under, then it would lead to massive defaults across all kinds of CDS that they initiated or participated in.

. said...

Made it tiny but it's a CNN link - 850 American Airlines flights grounded due to safety checks. So the little ones liquidate and the big ones cut corners until it becomes dangerous. Anything with wings should be treated as part of the Air Republica de Banana fleet until this all shakes out.

Anonymous said...

Regarding the AA flight groundings.

Forget safety precautions, could they be sitting planes because it is more profitable to do so, considering fewer passengers and higher fuel costs?


Anonymous said...

Weserbank was forced out of business because of an overly optmistic management trying to develop some tiny banking operation from a remote place in Germany to become an investment bank. Such foolishness of course is not mitigated by a global crisis but they would have gone bust anyway.

Anonymous said...

I sent an email to stoneleigh, but never got a reply, so I hope you guys don't mind me posting it here.

Hello Stoneleigh,

I first starting following your posts in the monthly financial roundups
at theoildrum. Later, when you and ilargi started theautomaticearth, I
became a daily reader. I truly respect the financial insight you guys
bring, for without it, I would have a hard time seeing the big picture.

I was hoping you'd have the time to answer some of my questions and
concerns--if it isn't too much trouble.

I'm a second year college student at the University of California - San
Diego. I'm majoring in Computer Engineering and at my current rate of
study, I will graduate within the next three years. The good news is
that I'm not in debt, but the bad news is that due to financial
difficulties, my parents will soon be unable to cover my tuition fees.

I'm thinking of taking some time off from school to work, and resume
school when I have enough money to finish my degree. I'm averse to
taking out student loans from private organizations, and don't want to
see myself with a hundred-thousand dollars of debt by the time I
graduate. However, I am open to taking federal grants that have
relatively low interest rates.

Given the state of the financial markets, what would be my best course
of action? Is it a poor decision to take out loans that could be
catastrophic in the event of mass deflation?

I'm still in school right now. My parents promised that they'd be able
to help me through this quarter, but past this school year there would
be no guarantees. I'm doing the best I can to save. I make around 15
dollars an hour working as a tutor for the engineering department, and
I'm looking to pick up a second job over the weekends to make more

As for where to store my money, I'm not really sure what I should do. I
know you guys have been saying that the FDIC wont hold up, and that
insolvency is a major problem (since all the banks were over-leveraged
in bad subprime investments), I just have an issue with keeping all my
paycheck money in my dorm room, since it really isn't safe. I do have a
checking and savings account account at Bank of America, but recently I
haven't made many deposits because of this fear.

I read Dmitry Orlov's article over at LATOC (a website I find much less
objective than theoildrum and theautomaticearth) which gave advice to
people my age (I'm 19). He said that the best thing to do would be to
drop out of school and work different trade jobs that would be more
useful in a steady-state or declining-state low-energy economy.

This is kind of a scary idea for me--dropping out of school so early. I
think that engineering is really useful and will definitely be around in
the future, and hope I will be able to finish my degree.

To get to my question: Stoneleigh, what would you do if you were in my
shoes? I'm open to any criticism or advice that you could give me, and I
have tremendous respect for both you and ilargi.

Thank you.

Anonymous said...

Anon college student:

While I agree that there is reason for concern, and some kind of societal collapse is in the realm of possibility, it is not the only possibility. Betting on just one outcome would be a huge mistake at this point in your life. Your assets are your good mind (i.e. you are in engineering), your youth, and your adaptability. If the SHTF, you would easily be able to pick up some common labor skill if need be. DO NOT DROP OUT OF SCHOOL NOW TO LEARN TO DO COMMON LABOR JOBS. If the SHTF, the way that even common jobs would be done will be radically different. However, by continuing with your schooling now, you will continue to develop your problem solving skills, which will become much more highly prized than just about anything else. If you really want to prepare, then continue to expand your education in orthogonal pathways. Take a horticulture or botany course. Take organic chemistry. Get some paramedic training. Take a course in mechanical design. I am a physician with an engineering background, and I know what I'm talking about. You won't regret that it.

Stoneleigh said...

Hello Anon,

I don't remember your email, but I'm sorry I missed it. Just in case the address might have been the issue, my email is Stoneleigh2006(at)msn(dot)com.

Your situation is a challenging one. College is very expensive in the US, and debt is something to be avoided if you possibly can. One could argue that at least no one can repossess your education once you've got it, but there could be other consequences to being in debt in the future that don't exist now. I very much doubt that all debtors who can't pay will simply be let off the hook. In the past there were debtors' prisons and indentured servitude, and being drummed into the military against your will could also be possible. (Of course that could happen debt or no debt unfortunately, if the draft is reinstated in order to fight foreign resource wars.) I'm not trying to frighten you, but it's something to think about.

If there's any way you could study part time and work part time so as not to accumulate debt, that would probably be your best bet. In Canada that would be possible, but then university here is much less expensive. I'm not sure how the math would work out for you where you are. In Canada there are co-op programs where you work for 4 months then study for 4 months, year round. Most co-op students graduate with no debt at all, even though their program takes an extra year to complete. Employers currently queue up at the University of Waterloo (for example) to hire their co-op engineering students during their work periods.

Engineering is a fundamentally useful skill, although my instinct would be to emphasize hands-on, practical stuff as much as possible. People who are handy are less dependent on money as they can do far more for themselves, as well as having a tradeable skill that can put food on the table.

In the meantime, earning money by tutoring (as you do) is good, as long as you don't have much prep time. Because prep time is unpaid, it can drastically lower your effective hourly rate. (I speak from personal experience from having done a lot of science and math tutoring in my younger days.)

As for where to keep your money, I agree that a dorm room is certainly not the ideal place. Perhaps your parents could find a more secure spot for some of your savings where they live. I firmly believe that we'll see bank runs, and that FDIC coverage won't be worth the paper it's written on during a systemic crisis. I wouldn't trust the banking system as a result.

Best of luck to you.

Anonymous said...

Thank you!