Saturday, May 31, 2008

Debt Rattle, May 31 2008: I used to be Snow White, but I drifted

I used to be Snow White, but I drifted

Ilargi: Another great quote from the brilliant Mae West, perhaps more than anyone -well, there's W.C. Fields- a child of the Great Depression and Prohibition:

No gold-digging for me... I take diamonds! We may be off the gold standard someday.

Al-Assaf, Paulson Agree on Saudis Keeping Dollar Peg
U.S. Treasury Secretary Henry Paulson and Saudi Arabian Finance Minister Ibrahim Al-Assaf agreed that the Gulf kingdom benefits from keeping its currency pegged to the dollar. The riyal's peg "has served this country and the region well," Paulson said today at a joint press conference.

"I totally agree with Secretary Paulson," al-Assaf told journalists in Jeddah. "As we have said many times, we have no intention of de-pegging or of revaluation." Paulson is getting an update on the fixed exchange rates retained by most oil-rich nations in the Middle East on his four-day trip to the region.

Gulf officials in April agreed to strengthen efforts to establish a currency union by 2010, diminishing speculation of a quick change to the dollar pegs. Any change to currency regimes in the region "is a sovereign decision," Paulson said. Forward agreements to acquire Gulf currencies have fallen as investors bet the nations, including Saudi Arabia and the U.A.E., will keep their pegs for now.

The Treasury chief is touting the U.S. as an investment destination for Persian Gulf funds flush with $4 trillion thanks to oil prices that have doubled in the past year. He is aiming to persuade Middle East investors to continue putting money in the U.S. as American banks seek to raise capital, while encouraging Gulf countries to avoid political objectives in investing through government-run sovereign wealth funds.

"The major purpose of my visit is open investment," Paulson said. "The issue that I'm most concerned about, looking globally, is a protectionist sentiment around the world at a time when it makes no sense." The Treasury chief said investing in developing better oil production technology as well as alternative energy sources is necessary as oil prices continue to soar.

"There's no doubt that the current prices are a burden on the world," Paulson said. "This situation doesn't lend itself to quick, easy fixes." Saudi Arabia, the world's largest oil producer, said during a visit this month by President George W. Bush that it would boost output by 300,000 barrels a day. "As our oil minister has indicated many times, we are for stability in the oil market," al-Assaf said. "We don't like extreme volatility."

The U.S. and Europe have pushed for more disclosure from sovereign funds, calling on them to agree to guidelines being drafted by the International Monetary Fund and the Organization for Economic Cooperation and Development. Some countries have resisted. Bader al-Sadd, head of Kuwait's $250 billion fund, said in April that "imposing regulations on sovereign wealth funds will result in an adverse impact on global capital flows."

Paulson also reiterated his belief in a "strong dollar," and said the currency will benefit over time from the U.S. economy, which is in "a tough time" right now. "A strong currency, a strong dollar, is very much in our nation's interest," he said. "I believe the long-term economic fundamentals are going to be reflected in our currency."

Ilargi: The Gramms are a dangerous couple, unscrupulous foot soldiers for their masters. They are responsible for much of the deregulation that has made it possible to greatly accelerate the concentration of wealth in ever fewer hands. They leave debt-ridden US home-"owners" and starving African children behind in their wake. Phil Gramm is both a senator and a lobbyist for UBS. For some reason that’s no longer a conflict of interest: hence, corporate lobbyists now effectively run the country. With McCain in the White House, the Gramms will be the vanguard of the next batch of neocons.

Who is responsible for the global food crisis?
In the search for answers, pundits have attempted to pin the blame on the usual suspects: rising demand from China and India, bad crop conditions and booming ethanol production. Yet one major culprit behind these gyrating markets and unprecedented price spikes has been largely overlooked: the deep-pocketed pension and index funds upon which most Canadians and Americans depend for their retirements.

These funds have plowed hundreds of billions of dollars into agricultural commodities as a way to diversify their assets and improve returns for their investors. The amount of fund money invested in commodity indexes has climbed from just $13-billion (U.S.) in 2003 to a staggering $260-billion in March, 2008, according to calculations based on regulatory filings.

Michael Masters, a veteran U.S. hedge fund manager, warned a Senate hearing this month that this number could easily quadruple to $1-trillion, if pension funds allocate a greater portion of their portfolio to commodities, as some consultants suggest they are poised to do. Because agricultural markets are small – relative to stock markets – the amount of cash pouring in gives these funds substantial clout.

Mr. Masters estimated that that these big institutional investors control enough wheat futures to supply the needs of American consumers for the next two years, and blamed the “demand shock” from these recent entrants to the commodities markets as arguably the primary factor behind the sudden take-off in food prices.

“If immediate action is not taken, food and energy prices will rise higher still,” he told the hearing. “This could have catastrophic economic effects on millions of already stressed U.S. consumers. It literally could mean starvation for millions of the world's poor.”

The massive influx of cash has only occurred in the past few years. But its roots stretch back to the Reagan era, when a court battle over oil price manipulation set off a domino effect that would ultimately transform the arcane world of commodities trading.

Beginning with the energy market, regulators made a series of far-reaching decisions that gradually loosened oversight of complex commodity derivatives and created loopholes for large speculators, allowing them to trade virtually unlimited amounts of corn, wheat and other food futures. Only now, nearly two decades later, are the full consequences of those decisions being felt.!

For months, governments and international bodies have been struggling to avert catastrophe. The United Nations created a special task force on food security and called for emergency donations. Leaders of the world's wealthiest countries are expected to make the food crisis a priority when they gather for a G8 summit in July.

And the U.S. Congress has convened hearings into the matter, as have various other governmental and regulatory bodies around the world, all in an attempt to understand how markets and prices careened out of control. They would do well to ask Fowler West. At a pivotal moment almost 20 years ago, Mr. West warned that a series of rapid-fire moves to deregulate commodities trading could wreak unintended – and perhaps calamitous – effects on these markets. His alarms went unheeded.

In the early 1990s, Mr. West held a seat as a commissioner on the Commodity Futures Trading Commission, the U.S. regulator charged with overseeing trading in hundreds of staple items, from corn and wheat to oil and cotton. Mr. West was a lifelong Democrat; his boss, CFTC chair Wendy Gramm, was a devout Republican and a believer in the laissez-faire, free-market philosophy espoused by president Ronald Reagan, who once described her as his “favourite economist.”

In the fall of 1990, the two clashed over the CFTC's response to a New York court decision involving a little-known Bermuda energy company called Transnor Ltd. Long forgotten by most, Transnor paved the way for wide-ranging deregulation of commodities trading, an effort that helped to spur the rise of Enron Corp. and which has enabled the stampede of large fund speculators into food markets.

In the winter of 1986, Transnor filed suit against some of the world's largest oil companies, alleging that they manipulated prices on the Brent market, an informal oil trading system that at the time determined the daily price of oil.[..] Judge Conner ruled against the companies, effectively rendering all Brent trading in the U.S. illegal. Within days, international oil companies stopped trading with U.S. companies and the entire Brent market was verging on collapse.

Foreclosure Phil
Years before Phil Gramm was a McCain campaign adviser and a lobbyist for a Swiss bank at the center of the housing credit crisis, he pulled a sly maneuver in the Senate that helped create today's subprime meltdown. Who's to blame for the biggest financial catastrophe of our time? There are plenty of culprits, but one candidate for lead perp is former Sen. Phil Gramm.

Eight years ago, as part of a decades-long anti-regulatory crusade, Gramm pulled a sly legislative maneuver that greased the way to the multibillion-dollar subprime meltdown. Yet has Gramm been banished from the corridors of power? Reviled as the villain who bankrupted Middle America? Hardly. Now a well-paid executive at a Swiss bank, Gramm cochairs Sen. John McCain's presidential campaign and advises the Republican candidate on economic matters.

He's been mentioned as a possible Treasury secretary should McCain win. That's right: A guy who helped screw up the global financial system could end up in charge of US economic policy. Talk about a market failure. Gramm's long been a handmaiden to Big Finance.

In the 1990s, as chairman of the Senate banking committee, he routinely turned down Securities and Exchange Commission chairman Arthur Levitt's requests for more money to police Wall Street; during this period, the SEC's workload shot up 80 percent, but its staff grew only 20 percent.

Gramm also opposed an SEC rule that would have prohibited accounting firms from getting too close to the companies they audited—at one point, according to Levitt's memoir, he warned the sec chairman that if the commission adopted the rule, its funding would be cut. And in 1999, Gramm pushed through a historic banking deregulation bill that decimated Depression-era firewalls between commercial banks, investment banks, insurance companies, and securities firms—setting off a wave of merger mania.

But Gramm's most cunning coup on behalf of his friends in the financial services industry—friends who gave him millions over his 24-year congressional career—came on December 15, 2000. It was an especially tense time in Washington. Only two days earlier, the Supreme Court had issued its decision on Bush v. Gore. President Bill Clinton and the Republican-controlled Congress were locked in a budget showdown.

It was the perfect moment for a wily senator to game the system. As Congress and the White House were hurriedly hammering out a $384-billion omnibus spending bill, Gramm slipped in a 262-page measure called the Commodity Futures Modernization Act. Written with the help of financial industry lobbyists and cosponsored by Senator Richard Lugar (R-Ind.), the chairman of the agriculture committee, the measure had been considered dead—even by Gramm.

Few lawmakers had either the opportunity or inclination to read the version of the bill Gramm inserted. "Nobody in either chamber had any knowledge of what was going on or what was in it," says a congressional aide familiar with the bill's history. It's not exactly like Gramm hid his handiwork—far from it. The balding and bespectacled Texan strode onto the Senate floor to hail the act's inclusion into the must-pass budget package.

But only an expert, or a lobbyist, could have followed what Gramm was saying. The act, he declared, would ensure that neither the SEC nor the Commodity Futures Trading Commission (CFTC) got into the business of regulating newfangled financial products called swaps—and would thus "protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century."[..]

But the Enron loophole was small potatoes compared to the devastation that unregulated swaps would unleash. Credit default swaps are essentially insurance policies covering the losses on securities in the event of a default. Financial institutions buy them to protect themselves if an investment they hold goes south.

It's like bookies trading bets, with banks and hedge funds gambling on whether an investment (say, a pile of subprime mortgages bundled into a security) will succeed or fail. Because of the swap-related provisions of Gramm's bill—which were supported by Fed chairman Alan Greenspan and Treasury secretary Larry Summers—a $62 trillion market (nearly four times the size of the entire US stock market) remained utterly unregulated, meaning no one made sure the banks and hedge funds had the assets to cover the losses they guaranteed.

In essence, Wall Street's biggest players (which, thanks to Gramm's earlier banking deregulation efforts, now incorporated everything from your checking account to your pension fund) ran a secret casino. "Tens of trillions of dollars of transactions were done in the dark," says University of San Diego law professor Frank Partnoy, an expert on financial markets and derivatives. "No one had a picture of where the risks were flowing."

Ilargi: To know what the Fed really thinks, forget Bernanke and listen to the various other voices.

Smaller banks at risk if home woes persist: Boston Fed chief
To date, the financial market turmoil has impacted mostly large international banks, but smaller financial institutions may yet get dragged into the tumult, said Eric Rosengren, the president of the Boston Fed on Friday.

A weak housing market has turned into one with "major declines" and have begun to impact some financial institutions that had taken outsized positions in construction loans or focused on other types of consumer debt, he said.

Research into the collapse of housing prices in New England in the 1990s shows that foreclosure issues can last much longer than most economists assume, Rosengren said.

Riskier loans in general have made delinquencies in this downturn about the same as the 1990s even though economic conditions are not as bad this year, he said. Should the economy worsen, the housing problem could become much more severe, he said.

June could be crazy month for stocks
"The whole month of June is kind of a magic month." Citi Investment Research equity strategist Lori Calvasina wasn't referring to weddings, graduations or wildflowers blooming. She was talking about the stock trading that will take place in the next few weeks in anticipation of the annual reconstitution of Russell Investment's indexes.

It may seem like a wonkish matter that few individuals would pay attention to, but the reshuffling of the stocks that make up Russell's indexes, including the widely followed Russell 2000 index of small companies, will have a big impact on stock and mutual fund holdings.

"Your benchmark index is going to change," Calvasina explained. Those changes will affect some $4.4 trillion in assets that Russell says is tied to one of its indexes, which were launched in 1984.

Citi estimates there were 120 funds passively linked to Russell's 26 U.S. indexes as of Dec. 31, holding nearly $535 billion in assets -- nearly five times as much as such funds held in 1999. Morningstar Inc. says there are 20 Russell 2000 index funds alone, among 246 that use the small-cap list as a gauge for their performance.

The managers of all those funds will have to adjust their holdings to follow the new lineup in the indexes. But before that happens, hedge funds and others will try to take advantage of the changes. "Hedge funds are going to try to game this," Calvasina said. "To a certain extent it's already been happening."

Wall Street analysts have been pumping out notes on a near-daily basis with their educated guesses for which stocks will be added, deleted or moved between indexes. They are able to come up with fairly accurate lists, because Russell makes its methods for picking the stocks in its index public, unlike, for instance, Standard & Poor's, which uses a committee system to develop its S&P 500 and other indexes.

Here's how it works: At the close of Friday's trading, Russell Investments will take the first step of the reconstitution by taking a "snapshot" of approximately 13,000 stocks traded on U.S. exchanges.

It ranks the companies from largest to smallest, and filters out those that don't meet its criteria, including companies not based in the U.S., stocks that trade below $1 or those that trade over the counter, or on what are called the Pink Sheets, which do not need to meet minimum requirements or file with the Securities and Exchange Commission.

After factoring in a few other matters, the largest 4,000 companies are picked to be part of the Russell 3000E Index, which represents approximately 99 percent of the U.S. equity market. All its other indexes are subsets of this master list; for instance, the biggest companies become part of the large-cap Russell 1000, while Nos. 1001 through 3000 make up the Russell 2000.

ECB's Draghi Says Oil Prices 'Limit' Monetary Policy
European Central Bank council member Mario Draghi said record oil prices are dictating the level of borrowing costs. "The main element of concern remains the continued rise in the price of energy and other commodities," Draghi said today at the Bank of Italy's annual assembly.

This is "fueling inflation and limiting the direction of monetary policy. Medium- term price stability was and remains the objective." The ECB defines price stability as keeping inflation just below 2 percent "over the medium term" and has struggled to meet that goal since taking charge of monetary policy in 1999.

The central bank left its key rate at 4 percent on May 10 to try to curb the surge in energy and food prices. Still, the inflation rate in the 15-nation euro economy rose to 3.6 percent, the ninth month it held above the ECB's target.

There are few signs of inflationary pressures abating. Crude oil prices have gained 33 percent this year, reaching a record $135.09 a barrel on May 22. Food commodities have also surged in the last year, boosting how much consumers are paying for staples such as bread and milk. Wheat, corn, rice and soybeans have risen to records this year as stockpiles shrink and demand climbs.

Inflation in the euro region is "worrying" and will stay at current levels for some months before slowing, if the oil price doesn't rise further, said Lorenzo Bini Smaghi, an ECB executive board member, in a speech today in Trento, northern Italy. "Based on the data that we have and based on oil-price data, which is very difficult to forecast, we predict inflation will stay at these levels for some months and then come down," Bini Smaghi said.

The global rise of oil and commodity prices makes inflation more difficult to manage for central bankers, Nout Wellink, an ECB council member, told Dutch newspaper De Telegraaf. "Inflation is not 'home made,' like it used to be, so it's harder to tackle by a central bank," Wellink told the newspaper.

Faster inflation is already eroding confidence among households. European consumer confidence unexpectedly dropped to the lowest in almost three years in May, the European Commission in Brussels said yesterday. In Germany, Europe's largest economy, consumers also grew more pessimistic, according to a survey released this week by GfK AG.

The Fading of the Mirage Economy
Suddenly, it seems, we're getting hit from all directions. Energy and food prices are soaring. The housing market continues to collapse. Government revenue is falling, and taxes are rising. Airlines are jacking up fares and fees while reducing service.

Banks are pulling credit lines. Auto companies are cutting production once again. Even investment bankers are losing their jobs. The tendency is to see these as separate developments, each with its own causes and dynamic.

Fundamentally, however, they are all part of the same story -- the story of the global economy purging itself of large and unsustainable imbalances that for a time allowed many Americans to think they were richer than they really were.

Most of us understand that an overabundance of cheap, easy credit created a housing bubble that artificially inflated the price of land and housing, produced too many homes and homeowners, and persuaded too many Americans to dip into their home equity to support a lifestyle their income could not sustain.

Now that the bubble has burst, we are coming to accept the reality of lower prices, reduced production, declining homeownership rates and the wisdom that a house is not an ATM or a substitute for a retirement fund.

Put another way, residential real estate is finding a new equilibrium, that magical place in the economist's imagination where supply and demand of houses and mortgages come back into some sort of rough balance at a lower price.

But the thing to remember is that it's not just residential real estate. The same factors that were behind the housing bubble were also at work, to varying degrees, in the auto bubble, the commercial real estate bubble, the travel bubble, the college tuition bubble, the retail bubble, the Web 2.0 bubble and most recently the commodities bubble.

Unlike housing, which began losing steam two years ago, these other sectors have just begun the painful process of repricing and finding a new balance between supply and demand.

Ilargi: When media and politicians make a overblown bundle of noise about an investigation that everyone knows will never lead anywhere, it’s time to peek behind the curtain.

Oil trading probe may uncover manipulation
Amid soaring oil prices that some say are caused by nothing more than rampant speculation, the government Thursday announced a wide ranging probe into oil price manipulation and said it would get more information on the effect investors are having on the market.

The measures, undertaken by the Commodity Futures Trading Commission after pressure from angry lawmakers, do two things. First, they'll attempt to gather more information from index funds and other non-commercial users of oil. They'll also seek information on oil trades made outside the U.S. on exchanges like the IntercontinentalExchange Europe (ICE) where the CFTC has no oversight and has been unable to get more detailed information.

The second thing on the CFTC's agenda is an actual investigation into possible price manipulation - most likely by a commercial user of oil like a production company, shipping company, or storage company. Recent investor interest in commodities is an issue of intense debate.

Some say investors, who have been funneling money into oil and other commodities over the last several months amid rising inflation and falling stock prices, are unjustifiably driving up the price of oil and gas simply because they have no other place to put their money.

Others say tight supply and strong demand are the real reasons behind this investor interest, and the market is functioning properly to limit demand and increase supply. CFTC has previously said that it has not found any evidence that speculators were artificially inflating prices.

"Data used by Commission staff show that price changes are largely unrelated to fund trading," according to written testimony before a Senate hearing earlier this month by CFTC Chief Economist Jeffrey Harris. "Broad-based manipulative forces are not driving the recent higher futures prices in commodities across-the-board."

Neither Harris nor any other economist at the CFTC could not be reached for comment. According to a chart presented in its congressional testimony, it appears the CFTC used data from 2007 to reach its conclusion.

Additional reporting by index funds and other non-commercial buyers of crude will help CFTC make better analysis, said Michael Haigh, head of U.S. commodities research at the investment bank Société Générale and a former economist at the CFTC. Even so, he doesn't expect the CFTC's overall conclusion - that investors aren't unjustifiably driving up oil prices - to change much.

But Haigh said oil traders see this request for additional information as perhaps a precursor to broader regulation, like decreasing the amount of contracts speculators are allowed to hold or raising the amount of money investors have to put down to buy those contracts.

First Housing, Now Oil
In Charlotte, N.C., gasoline at nearly $4 a gallon is cracking "the survivors," as credit counselor Bruce G. Hamlett calls them. They're the people who played by the rules and kept up their mortgage and utility payments even as neighbors gave up and moved away, leaving empty homes. Now, crazy prices at the pump are pushing even these survivors over the edge.

"They're asking, 'Do I put gas in my car or do I pay this utility bill or do I pay the mortgage?'" says Hamlett, director of economic independence for Charlotte's United Family Services. "It's getting to the point where it's an impossible choice." For the U.S. economy, the twin shocks from oil and housing have become mutually reinforcing, potentially turning what may be a mild recession into something more threatening.

Even those economists who think the U.S. might dodge a recession are concerned. Home prices are seemingly in free fall in much of the country. The Standard & Poor's/Case-Shiller National Home Price Index fell a record 14.1% in the first quarter from a year earlier, S&P reported on May 27. And now oil.

After surging nearly 30% in two months, to $131 a barrel on the New York Mercantile Exchange on May 28, oil is twice as expensive as a year ago. "Up until now, housing has been the bigger story. Now I would put energy at potentially the same size," says James D. Hamilton, an economist at the University of California at San Diego.

It's enough to make a lot of people downright depressed. According to the Conference Board Consumer Confidence Survey released on May 27, Americans' expectations for the economy over the next six months hit their lowest point since the dark days of December, 1973—during a long recession triggered by an Arab oil embargo.

Businesses aren't feeling exuberant, either. New orders for durable goods fell half a percent in April, the third decline in four months. Michael S. Hanson, senior U.S. economist at Lehman Brothers, expects the U.S. economy to grow at a slow 1.2% in 2008 and an even weaker 0.6% in 2009 as the headwinds from oil, housing, and the credit crunch continue.

Given enough time, history shows, Americans can adjust to almost anything, from the demise of the family farm to the decline in factory jobs. In the long run, they can adapt to high oil prices by buying fuel-efficient vehicles or finding jobs closer to home. Likewise, with enough time, if they can't afford their homes, they can eventually cut a deal with their lenders or quietly move to a cheaper house or rental.

Trouble is, this ain't the long run. The one-two punch of rising energy prices and falling home prices has landed so quickly that many American families and businesses are breaking rather than bending.

New Overdue Home Loans Swamp Effort to Fix Defaults
Newly delinquent mortgage borrowers outnumbered people who caught up on their overdue payments by two to one last month, a sign that nationwide efforts to help homeowners avoid default may be failing. In April, 73,880 homeowners with privately insured mortgages fell more than 60 days late on payments, compared with 39,584 who got back on track, a report today from the Washington-based Mortgage Insurance Companies of America said.

Mortgage insurers pay lenders when homeowners default and foreclosures fail to cover costs. Foreclosure filings surged 65 percent and bank seizures more than doubled in April compared with a year earlier as rates on adjustable mortgages increased, according to RealtyTrac Inc.

Lawmakers and Federal Reserve officials are trying to ease the worst U.S. housing slump since the Great Depression through tax rebates, expanded federal mortgage insurance and other programs. "It's going to take a while before you see the impact of the government's plans, if you can even see a discernable one," Steve Stelmach, an insurance analyst at Friedman, Billings, Ramsey Group Inc. in Arlington, Virginia, said in an interview.

In April, a record 183,000 homeowners were able to work out new borrowing terms with lenders and avoid foreclosure filings, according to the Hope Now Alliance, a mortgage industry coalition formed last year at the urging of U.S. Treasury Secretary Henry Paulson. The same month, foreclosure filings were reported on more than 243,000 properties, a 65 percent increase compared with April 2007, said Irvine, California-based data provider RealtyTrac.

One in every 519 U.S. households is in some stage of the foreclosure process, RealtyTrac said. The Hope Now program has so far proven insufficient, Sandra Braunstein, the head of consumer and community affairs at the Fed, told the Conference of State Bank Supervisors at a meeting in Florida last week. The mortgage crisis "is bad and it's getting worse," Braunstein said, repeating the central bank's plea for lenders to consider forgiving portions of mortgages.

Lenders typically require borrowers to buy insurance when their down payment is less than 20 percent. Last month's 54 percent "cure ratio" among defaulted mortgages compares with 80 percent a year earlier and 87 percent in March. Comparisons with previous months may not be valid because one lender changed the way it calculated defaults and cures reported to the insurers.

The lender switched to defining defaults as 60 days overdue rather than 90 days for its April data. Because loans are less likely to return to good standing after falling three months behind, the switch to a 60-day threshold probably boosted the number of cures disproportionately to the increase in defaults, Stelmach said.

As TNK-BP director Jean-Luc Vermeulen quits, spy allegations fly in Moscow
The dispute over ownership of BP’s joint venture with Russia erupted again yesterday as a senior director abruptly resigned after admitting he could no longer help to resolve the issue.

The departure of Jean-Luc Vermeulen, a former executive of Elf Aquitaine, the French oil group, from TNK-BP came at the end of a week of high drama for TNK-BP and the Russian billionaires who own 50 per cent of the venture. Mr Vermeulen was one of five directors appointed by the Russian side after TNK-BP’s formation in 2003. Five other directors were appointed by BP.

Compounding the company’s problems yesterday, the Tvoi Den newspaper claimed in a front-page story that the Russian Federal Security Service (FSB) had unmasked a senior BP manager as a spy. It did not name the man but published what it said was a photograph of him with his face blurred out. The paper, which has close ties to the FSB, alleged that the man was linked to Alexander and Ilya Zaslavsky, brothers who were arrested on espionage charges in March. Ilya Zaslavsky had been employed by TNK-BP.

The FSB accused the brothers, who are prominent members of the alumni club of the British Council in Moscow, of collecting classified information on behalf of foreign companies that “wished to have advantages over their Russian rivals”. The story claimed yesterday that the documents related to the negotiating strategy of Gazprom, the state-controlled gas group, before a Kremlin summit between Vladimir Putin, the Russian Prime Minister, and President Yushchenko of Ukraine.

It said that details of Gazprom’s development plans to 2020 had also been leaked. The link with Gazprom appeared to be the latest element in an intense Kremlin campaign to force TNK-BP, Russia’s third-largest oil producer, to turn over its assets to a state-controlled company. Last year it was forced to sell to Gazprom a controlling stake in the giant Kovykta gasfield in Siberia.

Gazprom, whose former chairman is President Medvedev, is seen as the most likely beneficiary of a sale. Neither BP nor the three Russian billionaires who own 50 per cent of the company have expressed willingness to sell.

Putin Says He Warned BP of TNK Joint Venture Fighting
Russian Prime Minister Vladimir Putin said he warned BP Plc and its billionaire partners against setting up a 50-50 venture, TNK-BP, which is now racked by disputes over strategy and control.

"I warned them several years ago that such problems will emerge," Putin said in an interview with French newspaper Le Monde yesterday that was transmitted live to journalists in Paris. " Choose one side to have a majority stake. And we don't mind if it's BP, or the Russian side of the joint venture," Putin said he told the shareholders when they consulted him as Russian president when TNK-BP was formed.

The shareholder dispute became public when TNK-BP Chief Executive Officer Robert Dudley described some disagreements in an interview with the Vedomosti newspaper published May 26. London-based BP, which produces more oil in Russia than any other foreign company, rejected a demand this week by the four billionaires to fire Dudley, amid reports state-run OAO Gazprom wants to buy the venture.

Mikhail Fridman, German Khan, Viktor Vekselberg and Len Blavatnik, who control half of TNK-BP, said Dudley ignored their interests, including plans to expand abroad. "Mr. Dudley is managing the company in the interest of only one shareholder, namely BP," they said in an e-mailed statement.

"For five years my role has been to balance the interests of the shareholders," Dudley said in comments to the press in Moscow today. "I'll try to continue to maintain this balance." Dudley said he was "committed" to remain TNK-BP's CEO and hopes to continue to "lead it to success."

"The problem is that they created a joint venture several years ago with a 50-50 shareholding," Putin said. The shareholders consulted Putin when TNK-BP was being formed in 2003. "I said: `Don't do this,"' Putin told reporters. "When there's no clear chain of command in such a structure, there'll be problems."

Ilargi: There’s much more still to come from the dark vaults at CIBC. I’d like to see them elaborate on their underwriting involvement in the US monolines, but nothing so far.

CIBC losses reach $6.7 billion
The first rumours of a crisis at Canadian Imperial Bank of Commerce a year ago were roundly dismissed by the bank, whose staff said reports of billions of dollars of exposure to the U. S. subprime market were inaccurate. Twelve months later the bank has now taken $6.7-billion in writedowns on structured products, about twice as much as the combined charges taken by the rest of the big Canadian banks put together.

CIBC's huge losses -- the bank added another $2.5-billion to the heap yesterday when it reported a $1.1-billion loss for the second quarter of 2008--dwarf the bank's 2005 Enron settlement of $2.4-billion, which cast a shadow over its reputation for two years.
The writedowns now stand at more than CIBC's combined earnings for the whole of 2006 and 2007, and there are fears more losses will be recorded in future quarters.

The bank's ongoing problems "suggest extended and systematic general risk-management breakdown" said Blackmont Capital analyst Brad Smith, who added there is still room to write down another $1.4-billion in exposure to some of the troubled areas of the capital markets in coming results.

On a conference call to discuss the results, CIBC's executives also warned of several billions of dollars of additional losses if market conditions worsen. Already only 15 other banks around the world have suffered bigger writedowns than CIBC since the financial crisis began. CIBC's stock price fell almost 2% yesterday, dropping $1.39 to $69.46 on the Toronto Stock Exchange.

The bank's shares have lost about one-third of their value during the past 12 months. Worse still for CIBC investors is that the bank's second-quarter performance was not good even after stripping out the impact of the writedowns on structured products. Bay Street analysts were braced for more charges and lower earnings, but CIBC failed to meet even these reduced earnings targets.

Ilargi: For those Canadians who still haven’t clued in, and it looks like that’s 99% of the population: the 40-year amortization mortgage is Canada’s version of the subprime loan. No more, no less. Today, 35-40% of all mortgages is 40-year. Disaster follows.

From boom to gloom?
Leave it to Garth Turner to throw cold water on the notion Canada can achieve a soft real estate landing, when history and the slump south of the border show that is a rare feat indeed. The personal-finance author-turned-Conservative-turned-Liberal MP for Halton, Ont., was one of the first to warn of the 1990s property flop - albeit several years too early.

Now he thinks Canada is facing precisely the same mix of elements that burst the U.S. real estate bubble. "We are in a monumental denial phase," says Mr. Turner, who's book Greater Fool - The Troubled Future of Real Estate was published in March. "My theses is now reality, we are starting to see substantial sales declines that were ruled out only six months ago as impossible," he says. "But now people are saying prices aren't moving down. They will."

The figures do show a noticeable retreat in the Canadian housing market this year. Nationally, resales fell 6.1% year-over-year in April, while price gains have slowed to 4% from around 10% in each of the prior five years. Calgary saw sales drop 31.2% over the year, Edmonton, 25.4% and Victoria 14.2%. Calgary and Edmonton also saw prices dips.

According to Urbanation, a condo tracking firm, the condo market has defied the trend and remained fairly steady through the first quarter, even as a several new buildings hit the market. Mr. Turner says housing markets blow themselves out when prices rise beyond the reach of average buyers. This is what happened in the United States.

"To keep the party going, the mortgage industry, the credit industry, backed by the banks, decided to lower the bar to ownership," he says. The subprime industry was born and home buyers with scant credit history and skimpy income were drawn into the market, enticed by no-money-down mortgages and interest rates that started out low, then ballooned to unsupportable levels.

Similarly, in Canada, prices have risen beyond the reach of the average buyer, Mr. Turner argues. "What has been the response?" he asks. "The 40-year mortgage." Economists estimate amortizations longer than 25 years now constitute about 70% of all insured mortgage applications and about half of that amount is for the 40-year product.

Mr. Turner reserves his starkest warnings for sprawling suburbs mushrooming around Canada's major cities. He says many new home developments have mortgage representatives onsite offering the same kind of no-money-down deals that dragged down the U.S. market. Buyers just have to come up with 1.5% of the house value to cover closing costs.

These will become the "particle board slums of the future," Mr. Turner says, as smaller families and surging energy costs cause the suburbs to fall out of favour. But the Toronto condo market is heading for trouble too, as overbuilding swamps demand, he says.
"We are classically at the end of a bull market," Mr. Turner says.

Toronto's Condo Kings: Is their boom sustainable?
From his penthouse in Toronto's hip fashion district, Peter Freed can track the development of his six next condo projects taking shape along King Street West. One of Mr. Freed's buildings will have interiors by Philippe Starck, the must-have French designer of the moment. Another will be inspired by the Neoplasticism art movement made famous by Mondrian, where design is pared down to the basics of lines and the primary colours red, yellow and blue.

Mr. Freed has eight projects on the board worth a total of half a billion dollars, a tiny fraction of the record 33,980 units under construction in the city. Canada's biggest city has become North America's biggest condo market, with more units now under development than Manhattan, Chicago and Los Angeles.

As Mr. Freed looks off his terrace, where the lap pool and giant padded loungers are looking a little forlorn on a wet spring day, he is confident Toronto will not also become North America's biggest condo meltdown. "Right now, there's very large demand," says Mr. Freed, dressed casually in jeans, shirt-tails hanging out, no laces in his shoes.

At 39, the laid-back developer is the fresh face of an eclectic group of condo kings who are transforming the very skyline of the city. Along with other design-focused builders like Cityzen Development Group, stalwarts like Tridel Corp. and Menkes Developments Ltd., and newcomers like Bazis International Inc., Mr. Freed is banking on the view Toronto is undergoing a seismic housing shift.

Figures show a marked slowing in the Canadian housing market this year, including a 7.3% year-over-year drop in existing homes sales in Toronto in April and a subsiding of the mania that drove the condo market into overdrive last year. But builders say demographics, immigration, government regulation and cultural change will continue to skew demand for housing toward the condominium.

Housing hotspots like Calgary may have already burned themselves out in a frenzy of building and soaring prices, but Toronto's rise as a global city will allow it to ride out any short-term weakness, they say. "We understand there's 75,000 people a year for the next 20 years projected to move into the city core," says Mr. Freed.

Ilargi: The Canadian media are well on their way to outdoing the US in emptiness. One moron squeaks, another writes it down. That’s modern journalism.

Economists sees no reason to worry
Derek Holt, vice-president of economics for Scotia Capital, is adamant Canada will not follow the United States into a real estate black hole. "On multiple angles we're night and day away from the U.S.," Mr. Holt says. He dismisses Mr. Turner's theory the suburbs will become real estate wastelands.

Every year since the 1960s, newly built homes have expanded in size, despite the fact family size keeps shrinking, he says. "Over the long term the demand for living space has always been driven by income and wealth," he says. "If those two factors hold up over long-term projections, then people will still be demanding bigger living spaces." He believes development in Ontario, for example, will continue to swell around satellite cities like Barrie, aided by improved rail networks.

"At the margin, there is higher density planning that will also be an influence in Toronto, but that doesn't mean the bottom will fall out of the standard two-storey by any stretch," he says. As far as comparisons with the United States, Mr. Holt says mortgage-qualifying standards are much more rigorous in Canada.

"That's where everything fell apart in the U.S," he says. To qualify for subprime loans, many homebuyers didn't even have to provide supporting documentation on work or income. Not much of that goes on here. "There's also more control over who's originating the products in Canada than in the U.S., where they were just dumb frankly in outsourcing their sales function to mortgage brokers that didn't have any skin in the game," Mr. Holt says.

In the short term, the trend to longer amortizations will help to sustain the Canadian housing market, he argues. "The equivalent of a one percentage point drop in your mortgage rate is to go from a 25- to a 34-year mortgage product," he says. "For the first time ever, you've got a generation that isn't constrained by 25-year conventional cookie-cutter mortgage products," Mr. Holt says, adding the result is reduced interest-rate sensitivities and more money in household budgets.

The U.S. real estate meltdown may have benefitted Canada in that it helped to take the froth out of the market and pushed the Bank of Canada to reverse its interest rate-hiking campaign and start easing rates. Mr. Holt says the real test for the Canadian real estate market will come in three or four years if homeowners, already stretched by payments, face a possible employment or interest rate shock. When they are already at a 40-year amo, there is not much room to lower payments further.

Mr. Holt believes longer amortizations are still too small a portion of outstanding mortgages to have much of an impact if such a scenario unfolds. If it does, then the Canadian market will be undone by the factors that bring a halt to real estate booms always and everywhere: rising interest rates, rising unemployment, rising costs, rising prices and overbuilding.

Ilargi: In Canada, as all over, experts and politicians can bleat and oink whatever they want, without ever being pressed by reporters to substantiate their words.

"I would be cautious about calling it a capital-R recession. At this stage it's more like a stall-out in growth"..

Is Canada recession-bound?
Canadian growth shrank 0.3% in the first quarter, as a wrenching restructuring in the manufacturing sector hobbled an economy half-way in recession. It was the first decline in annualized growth in nearly five years and the weakest in the Group of Seven, behind the United States, Britain, Europe and even Japan.

"This is a bitterly disappointing and surprising result," said Dale Orr, chief economist at Global Insight in a note. "Global Insight, as well as most economists, were expecting the first quarter to be weak, but slightly positive and certainly stronger than in the U.S." A recession is classically defined as two consecutive quarters of contracting activity.

With growth retreating 0.2% in March on top of a 0.3% monthly decline in February, it will take huge effort for the economy to pull into positive territory in the second quarter, analysts said. Jim Flaherty, the finance minister flatly rejected such fears.

"If some people are saying that (Canada is recession-bound) I disagree with them," Flaherty told reporters after a two-day meeting with provincial and territorial finance ministers in Montreal.

"The strengths in the economy across the country are quite remarkable." And economists said they were reluctant to contemplate the R-word. "We can definitely say we will have back-to-back negative growth," said Ted Carmichael, chief Canadian economist at JP Morgan Securities, who is forecasting another 0.3% decline in the second quarter. "However, I would be cautious about calling it a capital-R recession. At this stage it's more like a stall-out in growth."

The big drag on the economy in the first quarter was continued turmoil in the auto sector which was sideswiped by the retooling of model lines and a strike at a major U.S. parts supplier, in addition to an ongoing restructuring. Manufacturing overall declined at twice the pace of last year while inventory accumulation plummeted.

Canada has borne the brunt of the slump in U.S. auto sales because of its close geographical proximity but it is also lagging other G7 countries on the growth front because most other countries have already jettisoned much of their manufacturing sectors.

"We still have a substantial weight in industries that are on the way out," said Avery Shenfeld, senior economist at CIBC World Markets. "We're still unwinding the legacy of a cheap Canadian dollar that let some of our manufacturing industries hang on while those same sectors in the U.S. had been wiped out by imports from the developing world."

Ilargi: Long. Must. Read.

How the Pentagon shapes the world
5. The Pentagon as domestic disaster manager: When the deciders in Washington start seeing the Pentagon as the world's problem-solver, strange things happen. In fact, in the Bush years, the Pentagon has become the official first responder of last resort in case of just about any disaster - from tornadoes, hurricanes and floods to civil unrest, potential outbreaks of disease or possible biological or chemical attacks.

In 2002, in a telltale sign of Pentagon mission creep, Bush established the first domestic military command since the civil war, the US Northern Command (Northcom). Its mission: the "preparation for, prevention of, deterrence of, preemption of, defense against, and response to threats and aggression directed towards US territory, sovereignty, domestic population, and infrastructure; as well as crisis management, consequence management, and other domestic civil support."

If it sounds like a tall order, it is.

In the past six years, Northcom has been remarkably unsuccessful at anything but expanding its theoretical reach. The command was initially assigned 1,300 Defense Department personnel, but has since grown into a force of more than 15,000. Even criticism only seems to strengthen its domestic role.

For example, an April 2008, Government Accountability Office report found that Northcom had failed to communicate effectively with state and local leaders or National Guard units about its newly developed disaster and terror response plans. The result? Northcom says it will have its first brigade-sized unit of military personnel trained to help local authorities respond to chemical, biological or nuclear incidents by this autumn. Mark your calendars.

More than anything else, Northcom has provided the Pentagon with the opening it needed to move forcefully into domestic disaster areas previously handled by national, state and local civilian authorities.

For example, Northcom's deputy director, Brigadier General Robert Felderman, boasts that the command is now the United States's "global synchronizer - the global coordinator - for pandemic influenza across the combatant commands". Similarly, Northcom is now hosting annual hurricane preparation conferences and assuring anyone who will listen that it is "prepared to fully engage" in future Katrina-like situations "in order to save lives, reduce suffering and protect infrastructure".

Of course, at present, the Pentagon is the part of the government gobbling up the funds that might otherwise be spent shoring up America's Depression-era public works, ensuring that the Pentagon will have failure aplenty to respond to in the future.

The American Society for Civil Engineers, for example, estimates that $1.6 trillion is badly needed to bring the nation's infrastructure up to protectable snuff, or $320 billion a year for the next five years. Assessing present water systems, roads, bridges, and dams nationwide, the engineers gave the infrastructure a series of C and D grades.

In the meantime, the military is marching in. Katrina, for instance, made landfall on August 29, 2005. Bush ordered troops deployed to New Orleans on September 2 to coordinate the delivery of food and water and to serve as a deterrent against looting and violence. Less than a month later, Bush asked Congress to shift responsibility for major future disasters from state governments and the Department of Homeland Security to the Pentagon.

The next month, Bush again offered the military as his solution - this time to global fears about outbreaks of the avian flu virus. He suggested that, to enforce a quarantine, "One option is the use of the military that's able to plan and move."

Already sinking under the weight of its expansion and two draining wars, many in the military have been cool to such suggestions, as has a Congress concerned about maintaining states' rights and civilian control. Offering the military as the solution to domestic natural disasters and flu outbreaks means giving other first responders the budgetary short shrift. It is unlikely, however, that Northcom, now riding the money train, will go quietly into oblivion in the years to come.

Ilargi: Note: parts of Satyajit Das’ as always excellent work on the CDS market can be found below.

Warning: Credit Default Swaps May Not Work As Advertised
(And That's Even When They Do Work)

Two aspects of Das' article merit mention. First, he goes through what most may find a surprisingly long list of various ways CDS might not fully cover the risks they are supposed to guarantee even before getting to the big bugaboo of counterparty failure.

One case that Das has mentioned elsewhere is that in the one big test of the CDS market to date, Delphi. CDS protection buyers got 37 cents on the dollar when the recovery value on the senior bonds was set by Fitch at 1-10%, meaning the fall in the value of the credit was 90+ cents per dollar, yet the CDS holder got only about 40% of that. That's a considerable shortfall.

Second, he alludes to rather than spells out the coming-to-a-courtroom-near-you battles over defaulting LBO debt. In this world of covenant lite deals, creditors lack the big stick they had to force either bankruptcy or a restructuring of the debt, namely, if you breached the covenants, the lender could accelerate (demand payment of) the debt. Now if borrowers don't pay, creditors don't seem to have much (any?) leverage.

How does this affect CDS? Per Das, for many CDS, non-payment is NOT an event of default. So what good is insurance if it doesn't cover the most likely outcome for the debt in question? This will make for some interesting theater.

The Credit Default Swap (“CDS”) Market – Will It Unravel?
By : Satyajit Das

In May 2006, Alan Greenspan, the former Chairman of the Fed, noted: “The CDS is probably the most important instrument in finance. … What CDS (credit default swaps) did is lay-off all the risk of highly leveraged institutions – and that’s what banks are, highly leveraged – on stable American and international institutions.” It will be interesting to see whether reality proves to be different.

The CDS is economically similar to credit insurance. The buyer of protection (typically a bank) transfers the risk of default of a borrower (the reference entity) to a protection seller who for a fee indemnifies the protection buyer against credit losses.
The CDS contract and the entire Structured Credit Market originally was predicated on hedging of credit risk.

Over time the market changed focus – in Mae West’s words: “I used to be Snow White, but I drifted.” The ability to short credit, leverage positions and trade credit unrestricted by the size of the underlying debt market have become the dominant drivers of growth in the market for these instruments.

The CDS market has grown exponentially to current outstandings of around US$ 50 trillion. Even eliminating double counting in the volumes, the figures are impressive, especially when you considered that the market was less than US$1 trillion as at 2001. However, the size of the market (which has attracted much attention) is not the major issue.

Banks have used CDS contracts extensively to hedge credit risk on bonds and loans. The key issue is will the contracts protect the banks from the underlying credit risk being hedged. As Mae West noted: “An ounce of performance is worth pounds of promises.” Documentation and counterparty risk means that the market may not function as participants and regulators hope if actual defaults occur.

CDS documentation is highly standardised to facilitate trading. It generally does not exactly match the terms of the underlying risk being hedged. CDS contracts are technically complex in relation to the identity of the entity being hedged, the events that are covered and how the CDS contract is to be settled. This means that the hedge may not provide the protection sought. In fairness, all financial hedges display some degree of mismatch or “basis” risk.

The CDS contract is triggered by a “credit event”, broadly default by the reference entity. The buyer of protection is not protected against “all” defaults. They are only protected against defaults on a specified set of obligations in certain currencies. It is possible that there is a loan default but technical difficulties may make it difficult to trigger the CDS hedging that loan.

Some credit events like “restructuring” are complex. There are different versions – R (restructuring); NR (no restructuring); MR (modified restructuring); MMR (modified modified restructuring). Different contracts use different versions. “PAI” (publicly available information) must generally be used to trigger the CDS contract.

Recent credit events have been straightforward Chapter 11 filings and bankruptcy. For other credit events (failure to pay or restructuring), there may be problems in establishing that the credit event took place. This has a systemic dimension. A CDS protection buyer may have to put the reference entity into bankruptcy or Chapter 11 in order to be able to settle the contract.

A study by academics Henry Hu and Bernard Black (from the University of Texas) concludes that CDS contracts may create incentives for creditors to push troubled companies into bankruptcy. This may exacerbate losses in case of defaults.
In case of default, the protection buyer in CDS must deliver a defaulted bond or loan – the deliverable obligation – to the protection seller in return for receiving the face value of the delivered item (known as physical settlement).

When Delphi defaulted, the volume of CDS outstanding was estimated at US$28 billion against US$5.2 billion of bonds and loans (not all of qualified for delivery). On actively traded names CDS volumes are substantially greater than outstanding debt making it difficult to settle contracts.

Shortage of deliverable items and practical restrictions on settling CDS contracts has forced the use of “protocols” – where any two counterparties, by mutual consent, substitute cash settlement for physical delivery. In cash settlement, the seller of protection makes a payment to the buyer of protection. The payment is intended to cover the loss suffered by the protection buyer based on the market price of defaulted bonds established through a so-called “auction system”. The auction is designed to be robust and free of the risk of manipulation.

In Delphi, the protocol resulted in a settlement price of 63.38% (the market estimate of recovery by the lender). The protection buyer received 36.62% (100% - 63.38%) or US$3.662 million per US$10 million CDS contract. Fitch Ratings assigned a R6 recovery rating to Delphi’s senior unsecured obligation equating to a 0-10% recovery band - far below the price established through the protocol [see James Batterman and Eric Rosenthal Special Report: Delphi, Credit Derivatives, and Bond Trading Behavior After a Bankruptcy Filing (28 November 2005);].

The buyer of protection depending on what was being hedged may have potentially received a payment on its hedge well below its actual losses – effectively it would not have been fully hedged. The settlement mechanics may cause problems even where there is no default. One company refinanced its debt using commercial mortgage backed securities (“CMBS”). The company was downgraded by rating agencies.

A shortage of deliverable obligations (the company used the funds from the CMBS to repay its bond and loans) meant that the CDS fee for the company fell sharply (indicative of an improvement in credit quality). This resulted in mark-to-market losses for bemused hedgers. This is known in the trade as an “orphaned CDS”.

In the case of actual defaults the CDS market may provide significant employment to a whole galaxy of lawyers trying to figure out whether and how the contract should work. There is the risk that contract may not always provide buyers of protection with the hedge against loss that they assumed they would receive.

CDS contracts substitute the risk of the protection seller for the risk of the loan or bond being hedged. If the seller of protection is unable to perform then the buyer obtains no protection. Currently, a significant proportion of protection sellers is financial guarantors (monoline insurers) and hedge funds. Concerns about the credit standing of monolines are well documented.

Recently, a number of banks took charges against counterparty risk on hedges with financial guarantors including Merrill Lynch (US$ 3.1 billion) Canadian Imperial Bank of Commerce (“CIBC”) (US$2 billion) and Calyon (US$1.7 billion).
For hedge funds, the CDS is marked-to-market daily and any gain or loss is covered by collateral (cash or high quality securities) to minimise performance risk.

If there is a failure to meet a margin call then the position must be closed out and the collateral applied against the loss. In practice, banks may not be willing or able to close out positions where collateral isn’t posted. ACA Financial Guaranty sold protection totaling US$69 billion while having capital resources of around US$425 million. When ACA was downgraded below “A” credit rating, it was required to post collateral of around US$ 1.7 billion. ACA was unable to meet this requirement.

The banks have agreed to a “forbearance agreement” whereby the buyer of protection waived the right to collateral temporarily. ACA subsequently has been downgraded to “CCC” reducing the value of the CDS contract and the protection offered. The problems at ACA are not unique.

Friday, May 30, 2008

Debt Rattle, May 30 2008: The Inevitable

Dorothea Lange "If you die, you're dead – that's all" June 1938
Nettie Featherston, wife of a migratory laborer with three children. Near Childress, Texas.
(Ilargi : Nettie was 40 years old in the picture. She died in 1984, 86 years old.)

Ilargi: Isn’t that funny: It’s starting to look as if the banks who are consulted for setting the LIBOR rate have helped out troubled borrowers by understating their own (inter-bank) borrowing costs. This has saved these borrowers $45 billion in ARM resets to date.
  • Why did the banks do it? For one: They don’t want to be seen borrowing at high rates, that makes them look desperate. Second, they also know of course that it will keep defaults, foreclosures and other inconveniences down. For now. Which saves both Washington and Wall Street from some nasty trouble. For now.
  • What’s wrong with bogus LIBOR rates? First: Just ask anyone -think: pension and mutual funds- who has invested in the underlying securities, expecting returns to go up. Second: the rates will eventually go up anyway, potentially plunging a huge group of borrowers into misery all at once, when rates go through the roof.

Sounds like good enough reasons for me. But there may be a much bigger, largely hidden reason. The LIBOR rate sets daily valuations for $350 trillion in derivatives and -corporate- bonds (this is according to Bloomberg, it's probably more than that, if you ask me).

If I didn't know better, I'd think there's a fierce competition for crime of the century going on here.

PS: What do you think the chances are that we leave that tribe in the Amazon alone? We haven't learned a single fukcing thing since 1492, have we? We still "discover" people, just as Columbus discovered a continent. When we're done with these people, the handful kept alive will be caged in a zoo, and we'll buy tickets to go see them. If there's one thing you can say about Mankind; there's nothing kind about man.

LIBOR Mess Promises to Squeeze ARM Borrowers
An international uproar over allegations that some banks intentionally manipulated LIBOR, a key interest rate used to determine rate adjustments for many adjustable-rate mortgage holders, is likely to have a real-world impact for many adjustable-rate mortgage borrowers, sources told Housing Wire Thursday.

At the heart of the debate is a report by the Wall Street Journal, first published on April 16, that questioned the accuracy of the benchmark lending rate; the Journal provided evidence that suggested some major banks were helping keep reported LIBOR rates artificially low. The WSJ Journal revisited the story on Thursday, ahead of adjustments to the LIBOR system that appear likely to be introduced by the British Bankers Association on Friday.

The one-month and six-month dollar LIBOR is used to benchmark a large number of adjustable-rate mortgages in the U.S.; the one month rate has remained extremely low, currently at 2.46 percent, and has fallen dramatically from 5.22 percent just six months ago. The six month LIBOR follows a similar trajectory.

The result has been an veritable erasing of any potential adjustable-rate payment reset shocks for subprime and Alt-A borrowers — certainly a positive outcome for millions of potentially troubled borrowers, given that the U.S. is still facing a flood of subprime resets through the end of this year (Alt-A resets don’t begin in earnest until the middle of 2009, according to available data).

The WSJ estimates that an artifically-depressed LIBOR may have given homeowners and other consumer debtholders a $45 billion break through the first four months of this year. What happens with that sort of unintended stimulus vanishes? It’s not known exactly how many borrowers with adjustable-rate mortgages are tied to LIBOR, versus the yield on short-term Treasuries, but HW’s sources suggest that number could be as large as half of ARM borrowers.

That number is likely even higher among subprime borrowers, our sources said. “We’ve got an entire class of borrowers right now that is absolutely dependent on LIBOR sitting low,” said one source, an MBS analyst who asked not to be identified by name.

“Tinkering with the how the rate is calculated doesn’t seem likely to push it down, although I can see plenty of reasons it might jump upward.” The Journal, citing sources close to the BBA, said that any changes to LIBOR calculations aren’t likely to represent a “radical redesign.” Which means that — even if only for a brief moment — the interests of millions of subprime borrowers and those of the banking crowd are in alignment.

Libor Proxies Gain as Traders Seek Truth With Swaps
Traders are starting to use alternative measures for borrowing costs as the British Bankers' Association struggles to keep the London interbank offered rate as the global standard.

Libor, the benchmark for 6 million U.S. mortgages and more than $350 trillion of derivatives and corporate bonds, has been called into question since the Bank for International Settlements said in March some lenders may have understated borrowing costs to keep from appearing like they are in financial straits.

One option growing in popularity is overnight indexed swaps, a gauge of expectations for central bank rates. The Federal Reserve uses the one-month OIS rate to set the minimum bid level when it lends cash to banks through its Term Auction Facility. The Fed has auctioned $510 billion through the TAF since December.

"The OIS rate is something I look at a lot more closely than I used to," said Nish Popat, head of fixed income in Dubai at Emirates NBD PJSC, the Persian Gulf's biggest bank by assets. "It gives you a better idea of where the lending and borrowing level between banks is and it's a market-traded price.'

Study Casts Doubt on Key Rate
Major banks are contributing to the erratic behavior of a crucial global lending benchmark, a Wall Street Journal analysis shows.

The Journal analysis indicates that Citigroup Inc., WestLB, HBOS PLC, J.P. Morgan Chase & Co. and UBS AG are among the banks that have been reporting significantly lower borrowing costs for the London interbank offered rate, or Libor, than what another market measure suggests they should be. Those five banks are members of a 16-bank panel that reports rates used to calculate Libor in dollars.

That has led Libor, which is supposed to reflect the average rate at which banks lend to each other, to act as if the banking system was doing better than it was at critical junctures in the financial crisis. The reliability of Libor is crucial to consumers and businesses around the world, because the benchmark is used by lenders to set interest rates on everything from home mortgages to corporate loans.

Faced with suspicions by some bankers that their rivals have been low-balling their borrowing rates to avoid looking desperate for cash, the British Bankers' Association, which oversees Libor, is expected to report Friday on possible adjustments to the system. That report isn't expected to recommend any major changes, according to people familiar with the association's deliberations.

In order to assess the borrowing rates reported by the 16 banks, the Journal crunched numbers from another market that provides a window into the financial health of banks: the default-insurance market. Until recently, the cost of insuring against banks defaulting on their debts moved largely in tandem with Libor -- both rose when the market thought banks were in trouble.

But beginning in late January, as fears grew about possible bank failures, the two measures began to diverge, with reported Libor rates failing to reflect rising default-insurance costs, the Journal analysis shows. The gap between the two measures was wider for Citigroup, Germany's WestLB, the United Kingdom's HBOS, J.P. Morgan Chase & Co. and Switzerland's UBS than for the other 11 banks.

One possible explanation for the gap is that banks understated their borrowing rates. The BBA says Libor is reliable, and notes that the financial crisis has caused many indicators to act in unusual ways. "The current situation is extraordinary," said BBA Chief Executive Angela Knight in an interview.

A BBA spokesman says there is "no indication" that the default-insurance market provides a more accurate picture of banks' borrowing costs than Libor. Representatives of the 16 banks on the Libor panel either declined to comment, didn't respond to questions, or said they provide accurate rates.

The Journal's analysis doesn't prove that banks are lying or manipulating Libor. Analysts offer various reasons why some banks might report Libor rates lower than what other markets indicate. For one, since the financial crisis began, banks have all but stopped lending to each other for periods of three months or more, so their estimates of how much it would cost to borrow involve a lot of guesswork.

Ilargi: Even the Economist, capo di tutti cheerleaders, puts US property prices decline at "a staggering" 18% in the past year. The Case-Shiller graph suggests about a 30% drop in 2 years. Oh, we'll get to the 80% I predicted, don't worry. Or do worry, if you still own property in the US. Or the UK, or Spain, or Holland, or.....

House prices through the floor
As house prices in America continue their rapid descent, market-watchers are having to cast back ever further for gloomy comparisons. The latest S&P/Case-Shiller national house-price index, published this week, showed a slump of 14.1% in the year to the first quarter, the worst since the index began 20 years ago.

Now Robert Shiller, an economist at Yale University and co-inventor of the index, has compiled a version that stretches back over a century. This shows that the latest fall in nominal prices is already much bigger than the 10.5% drop in 1932, the worst point of the Depression.

And things are even worse than they look. In the deflationary 1930s house prices declined less in real terms. Today inflation is running at a brisk pace, so property prices have fallen by a staggering 18% in real terms over the past year.

Ilargi: Until now, the southern European countries were known as Club Med in the financial world. That name has been "updated".

Today, they are "PIGS" (Portugal, Italy, Greece, and Spain).

Euro suffering from 'reserve currency curse' as investors pull out
Long-term private investors are pulling their money out of the eurozone at the fastest rate since the creation of the single currency, according to a report by the French bank BNP Paribas.

Foreign direct investment (FDI) in plant and factories has turned deeply negative, reaching minus €149bn (£117bn) over the past year. It dropped to minus €19bn in March alone as the soaring euro pushed labour costs in southern Europe to uncompetitive levels. The annual exodus of private funds from eurozone equities and bonds has reached almost $280bn.

Taken together, the total outflows have topped €400bn in 12 months and may spell trouble for Europe's industry as the economic downturn gathers pace. Airbus is leading the rush to hollow out production inside the currency bloc, switching operations to the US, Mexico and India. "It really worries me that private accounts are selling assets like this," said Hans Redeker, BNP's currency chief.

The euro is being held aloft by central banks in Asia, Russia, and the Middle East seeking an alternative to the dollar as a place to park their mushrooming currency reserves. In effect, the eurozone is now suffering from the reserve currency curse. While Asian funding has helped ease the credit crisis in Europe, it has also pushed the exchange rate to damaging levels.

There is a trade-off effect. The eurozone has gained financial flows, but has lost industrial and investment flows. These official investors appear to be picking and choosing eurozone bonds more carefully than before, demanding a higher premium for Latin debt. Data collected by the Bank of New York Mellon shows large withdrawals from Italy and Greece since August.

The eurozone racked up a record current account deficit of €15.3bn in March, seasonally adjusted. BNP Paribas said the so-called "PIGS" (Portugal, Italy, Greece, and Spain) are dragging down the trade performance of the bloc.

All have suffered a relentless loss of competitiveness since EMU was launched. The deficits have reached 10pc of GDP in Spain and 14pc in Greece. None has begun to narrow the gap in unit labour costs with Germany, ensuring that the inevitable adjustment will be more severe when it comes.

Indeed, Spain's inflation surged to a record 4.7pc in May. The country now faces the most acute "stagflation crisis" in the developed world. House prices have fallen 15pc nationwide since September, according to the developers' association (APCE). Madrid University warned this week that Spain's property slump could throw 1.1m people out of work.

Mr Redeker said the 'PIGS' quartet was now facing "collapse", with mounting signs of stress in France as well after consumer confidence fell to the lowest level in 20 years. French property sales fell 28pc in the first quarter.

"There are a lot of ugly surprises in store as deleveraging finally hits Europe. Investors are going to stop treating the eurozone as if it were Germany, and take very close look at the deficits of the southern countries. We can expect bond spreads to widen significantly," he said. "We will discover in this downturn whether the eurozone is really an 'optimal currency area'. This is the test."

Jean-Claude Trichet, the president of the European Central Bank, told Italy's Il Sole that the euro had been a shield against the financial storms of the past year. "We've strangely forgotten what happened in the 1980s and 1990s when we all our national currencies created so many problems. Today, we've had an impressive correction in global finances. Imagine what would have happened without the euro," he said.

Fresh fears for US economy as corporate profits tumble again
Corporate America caused fresh fears of a US economic downturn yesterday as first-quarter profits fell at an annual rate of 6.2 per cent, their sixth consecutive quarter of year-on-year decline. Profits in non-financial businesses for the first three months of this year fell by an annual 2.6 per cent while those in financial groups were down by 12.2 per cent, before writedowns.

Economists said that the figures raised questions over the Federal Reserve's expectation that its past series of steep cuts in US interest rates, alongside a fiscal boost from tax rebates to American consumers, will suffice to stave off a severe downturn lasting into next year. Some analysts argued that the worst may be over because the profit figures for the first quarter of this year were higher than the final quarter of last.

The toll on financial firms abated, with their profits down only $3 billion (£1.5 billion) in the first quarter, against a $74.4 billion plunge in the previous three months, while non-financial businesses recorded a quarterly profit gain. However, a number of economists said that the continuing slide in profitability, against a year earlier, remained ominous.

Rob Carnell, of ING Financial Markets, said: “A negative spin would be that, after so many quarters of declines, we seem no nearer a turn in the profit cycle.” Persistent concern over the profitability of “America Inc” took some shine off an upward revision to the US economy's growth in the first quarter. That lifted Wall Street hopes that the economy will avoid a technical recession, despite the slowdown's depth.

Overhauled data upgraded first-quarter growth to a still anaemic 0.9 per cent annual rate, from an initial estimate that GDP had risen only 0.6 per cent on an annual equivalent basis. The upward revision came as cuts in America's estimated appetite for imports in the first quarter (Q1) flattered its trading performance compared with the initial data.

Imports of goods and services in Q1 are now estimated to have fallen by 2.6 per cent, against the 2.5 per cent rise previously reported. Exports were also weaker than first thought, rising only 2.8 per cent, rather than 5.5 per cent as initially reported.
However, America's net trade showing in Q1 is now shown to have added 0.8 percentage points to growth - four times its previously calculated contribution.

Could the end be nigh for stocks?
“We are on the cusp of an equity meltdown that will shred and slash portfolios like Freddie Kreuger,” says Société Générale’s Albert Edwards in a recent note. “We are not through the worst of this crisis. The worst is still to come.”

The legendarily bearish strategist recommends investors cut global equity exposure in their portfolios to 30%, with 50% in AAA-rated government bonds – a bet, says Ambrose Evans-Pritchard in The Daily Telegraph, “on gruelling ‘Japanese’ deflation”.“This truly is the stuff of sandwich boards and loud hailers – a message that the end is nigh,” says Paul Murphy on’s Alphaville.

Still, from Edwards, that’s no surprise – he has “ploughed a lonely furrow” over the past decade, says The Economist. “He turned bearish on the stockmarket more than 10 years ago, just before the dotcom boom that took share prices into the stratosphere.” Still, for investors who took his advice on a long-term view, the result hasn’t been bad – equities have (just) been outperformed by government bonds.

The core of Edwards’s argument is that stockmarkets are entering an “ice age”, in which the prospect of slow earnings growth will lead to a decline in valuations. In essence, he expects low inflation or deflation – partly the result of the credit crunch – to mean lower nominal earnings growth going forward and a steady decline in p/e ratios as investors adjust to this new world. Japan is the template – “the comparison ... is uncanny”, says Edwards.

This could lead to a brutal bear market. “We expect global equity prices to fall by up to 75% from their peaks as a deep global economic downturn unfolds over the next few years,” he says. “The credit bubbles which sustained economic bubbles in many countries (especially the US, UK and Spain of the majors) will suffer badly from The Great Unwind as inevitably as night follows day.”

Edwards’s views are a long way from the mainstream, but although his thesis hasn’t yet been proved right, it isn’t clearly wrong either. Often unremarked upon amid the earnings-driven bull market, “equities have been de-rating for several years”, says The Economist (see chart, above). “Who is to say that the process has stopped?”

Bad Omens for Banks?
Nobody was expecting an easy year for U.S. banks, but many observers thought the bulk of the industry's credit troubles would come in the first quarter. Now, it seems the rest of the year may be even worse. Case in point: A May 28 announcement from KeyCorp. Mounting loan losses at the regional bank company suggest the banking industry's troubles with bad loans are just beginning.

Cleveland-based KeyCorp, which holds $97 billion in assets, says the year's net loan charge-offs—a measure of how much bad debt the bank may have to write off—could almost double previous predictions for 2008. The bank expected charge-offs of 0.65% to 0.9% of total loans just three weeks ago, but now says they could be in the range of 1% to 1.3%.

The main culprit is the bank's portfolio of loans to residential homebuilders, KeyCorp said in a Securities & Exchange Commission filing. Losses have also increased on education loans and home-improvement loans.

Investors responded May 28 by fleeing banking stocks. KeyCorp shares tumbled 11%, to 19.59, on May 28, just above the stock's 52-week low. Other similar, regional banks suffered, too. Shares of Wachovia, Fifth Third Bancorp, and Regions Financial all dropped 4% or more to 52-week lows.

Subprime securities had already decimated Wall Street banks and other financial firms. For investors, the worry now seems to be shifting from debt securities to simple, traditional loans, and from Wall Street to Main Street. "Near-term credit trends appear to be getting worse," said R.W. Baird analyst David George. Those hoping for a recovery in the second half of the year will be disappointed, he wrote in a May 28 note, "as loss rates appear to be rising."

Higher losses on loans to developers and homeowners are disturbing enough. But what also unnerved investors was the suddenness of the change in KeyCorp's outlook. Estimates for losses jumped just a month after the company's most recent earnings announcement. That suggests, Deutsche Bank analyst Mike Mayo wrote on May 28, "either misjudgment before, or a significant deterioration in, asset quality."

The news flow from banks had been relatively quiet since they reported first-quarter financial results in April.
After months of a credit crisis and a weakening economy, most banks did see profits fall. But since the collapse of Bear Stearns in March, there was a sense that losses on subprime-related securities had peaked. Major banks "have now probably weathered the worst marks on holdings of various asset-backed securities" and other debt instruments, Stifel Nicolaus analyst Anthony Davis noted earlier this month.

However, other troubling trends remained, and threatened to get worse. There is no sign the depressed housing market is perking up. In data released May 27, the S&P/Case-Shiller national home price index dropped 14.1% in the first quarter of 2008, the largest drop in 20 years. Loans to struggling homebuilders are a primary credit issue right now, according to Davis' note, but concerns are also rising about consumer loans.

Investment bank hedges crumble in second quarter
Investment banks have been trying to hedge against losses from the mortgage meltdown and broader credit crunch for at least a year. But as parts of the credit market showed tentative signs of improvement in the second quarter, some of those hedging strategies failed.

That could exacerbate already weak performances when big brokerage firms Lehman Brothers, Morgan Stanley and Goldman Sachs report quarterly results in coming weeks, analysts say. These firms still had $158.6 billion of exposure to mortgage-related securities and other asset-backed securities at the end of their fiscal first quarters, according to Bernstein Research.

As efforts to hedge such risks break down, big brokers may now be judged on how quickly they can jettison these holdings permanently. "Until these firms can significantly reduce their exposures to these troubled asset classes, their earnings will be beholden to the directional movements of the credit markets and the effectiveness of their hedges," Brad Hintz, an analyst at Bernstein, said earlier this week.

"While the second-quarter results of these firms are important, we believe that the balance sheet evolution these firms exhibit this quarter is a more important measurement of the health of these companies," he added. Big investment banks often hedge mortgage holdings and other exposures to things like leveraged loans by betting against market indexes that track derivatives linked to these types of assets.

The ABX indexes track derivatives tied to some subprime mortgage-backed securities. The CMBX indexes focus on commercial mortgage securities, while the LCDX indexes track leveraged loans. CDX indexes cover credit default swaps, widely used derivatives that provide insurance against defaults.

Since April, the value of derivatives tied to corporate bonds and commercial mortgage debt has rallied, but the actual bonds haven't. Spreads, a measure of the extra interest rate paid on debt that's riskier than U.S. Treasury bonds, have narrowed by more than 50% on credit derivatives linked to investment grade corporate debt. At the same time, spreads on the bonds themselves have narrowed by less than 30%, according to Ken Worthington, an analyst at J.P. Morgan.

"The performance of the cash positions and the index-based hedges have diverged, resulting in less effective or value-destroying hedges," he explained. Such divergence between cash and derivative spreads is known as basis risk. Worthington and other analysts reckon it's going to be a big drag on brokerage firm's earnings during the second quarter.

Ilargi: I am no expert on the legal aspects of it all, Kerl Denninger is better at that, but as far as I can see, making emergency measures, such as the Term Auction Facility, permanent, is simply illegal.

Fed might accept foreign collateral: Kohn
The Federal Reserve is actively considering creation of a lending facility that would accept "very safe" foreign collateral from "sound" global banks in case of a widespread liquidity crisis, Fed Vice Chairman Donald Kohn said Thursday.

A new global discount window is "under active study," Kohn said. "It is possible that over time, major central banks could perhaps agree to accept a common pool of very safe collateral, facilitating the liquidity management of global banks," he said, stipulating that such loans only be made to sound institutions.

Kohn's suggestion came in prepared remarks wrapping up a special conference in New York on liquidity in money markets that was sponsored by the New York Fed and the Columbia Business School. "Market functioning remains far from normal," Kohn said, pointing in particular to large spreads between overnight bank rates such as Libor and other short-term rates. Such large spreads indicate that markets still are in shock.

Kohn argued that the Fed and other central banks had prevented a global run on Bear Stearns and possibly other major financial institutions in March, but the emphasis of his talk was on what lessons central banks and the financial system should take from the liquidity crisis that spread like topsy from subprime mortgages to asset-backed securities to the collapse of one of the world's biggest investment banks.

"One of the things we have learned over recent months is that broker-dealers, like banks, are subject to destructive runs when markets aren't functioning well," Kohn said. The biggest question is: What to do about the broker-dealers and investment banks that, since the run on Bear Stearns, have now been given unprecedented access to the Fed's lending facilities? Should that access be continued on a permanent basis? Or should it be provided only in emergencies?

Kohn had no simple answer to that question: "Unquestionably, regulation needs to respond to what we have learned," he said. "Whether broader regulatory changes for broker-dealers are necessary is a difficult question that deserves further study." Permanent access to the Fed's balance sheet at attractive rates would distort markets without well-designed and well-executed supervision.

On the other hand, everyone in the markets knows that the Fed will step in with funds in an emergency, so in some sense the markets have been irredeemably distorted already. Kohn suggested that the term auction facility, which was created in December and expanded in early May, should be retained on a permanent basis after the crisis is over. The TAF allows banks to bid to borrow funds from the Fed's discount window for 28 days.

"The Fed's auction facilities have been an important innovation that we should not lose," he said. "They have been successful at reducing the stigma that can impede borrowing at the discount window in a crisis environment and might be very useful in dealing with future episodes of illiquidity in money markets."

Standard & Poor under fire for optimistic outlook
Standard & Poor’s was attacked yesterday for its overoptimistic outlook for $34 billion of US mortgage bonds even after the ratings agency announced a series of downgrades. The agency lowered its ratings for 1,326 classes of American mortgage-backed alternative A bonds, which are backed by mortgages sold to borrowers one rung above sub-prime.

So-called Alt A mortgages – nicknamed “liar-loans” – are often sold to people not eligible for prime mortgages, possibly because they are self-employed and unable to prove their income. S&P said it assumed that should some of the bonds default entirely, it believed that investors would be able to recover two thirds of the value of the bond.

Toby Nangle, fixed income investment manager at Barings, said: “They are sticking with a very optimistic set of assumptions. One might assume that you could recover 66 per cent at the top of the housing market but not in the current environment.”
The downgrade for such a substantial chunk of mortgage-backed bonds reinforced concerns that the worst is not yet over for the global credit crisis.

While bonds that have used sub-prime debt as collateral have already been downgraded to junk or written off as worthless, fixed-income specialists are expecting the rate of defaults to extend to less risky borrowers such as Alt A, second-line mortgages such as home equity loans and also prime. Mr Nangle said: “The rating agencies are still playing catchup. They are still far too conservative.”

At the same the Bank for International Settlements – the central banks’ bank – accused ratings agencies of ignoring signs of a severe slow-down in the US housing market and of factoring in the effect on to the value of some of the securities they rate. Next month the Securities and Exchange Commission is expected to propose rules that will force ratings agencies to apply a more transparent risk ranking for different types of debt.

The regulator is expected to tell agencies to differentiate more clearly between the risk associated with ordinary corporate and local government bonds and those backed by mortgages.

Eroding Loss Coverage at Banks a “Worrisome Trend,” FDIC Says
Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation continued to see their loss coverage ratios erode during the first quarter, despite ever-increasing provisions for expected loan losses — a troubling trend that suggests the full impact of the mortgage crisis has yet to be absorbed by many of the nation’s insured banking institutions.

According to the FDIC’s latest quarterly profile of banks, released Thursday, loan-loss reserves increased by 18.1 percent to $18.5 billion — the largest quarterly increase in more than 20 years — but the larger increase in noncurrent loans meant that the coverage ratio fell from 93 cents in reserves for every $1.00 of noncurrent loans to 89 cents. That’s the lowest loss reserve level since 1993, the FDIC said.

“This is a worrisome trend,” FDIC chairman Sheila Bair said. “It’s the kind of thing that gives regulators heartburn. “The banks and thrifts we’re keeping an eye on most are those with high levels of exposure to subprime and nontraditional mortgages, with concentrations of construction loans in overbuilt markets, and institutions that get a large share of their revenues from market-related activities, such as from securities trading.”

Loans that were noncurrent — defined as 90 days or more past due, or in nonaccrual status — increased by $26 billion to $136 billion during the first quarter, the FDIC said. That followed a $27 billion increase in the fourth quarter of 2007. Almost 90 percent of the increase in noncurrent loans in the first quarter consisted of real estate loans, but noncurrent levels increased in all major loan categories.

And then the Brits woke up to realize that they had the most obvious and laughable property bubble in the world
My only question is - what took so long? Gordon Brown, get ready to be blamed for the biggest housing crash in UK history. Even though in the end the Housing-Ponzi-Scheme-obsessed Brits only have themselves to blame.

Anyone in the US want to give our friends in the UK any advice when it comes to housing crashes? Here's mine, it's pretty simple: Last one out's a rotten egg... Any suggestion that Britain's overblown, over-hyped and over-valued property market is due for a soft landing after the excesses of recent years has just been exploded. We've had the boom: welcome to the bust.

House prices have fallen for seven successive months. Over the past six months, prices have dropped at an annual rate of 11.4% and over the past three months at a 16.1% annualised rate.

The International Monetary Fund has said that 30% of the rise in house prices in the UK cannot be explained by economic fundamentals: a fall in prices of that magnitude is now on the cards. A crash was inevitable.

Northern Rock to double debt management staff
Northern Rock is to more than double the number of people who work in its debt management arm, according to a document seen by the BBC. The internal memo said the recently nationalised bank had the equivalent of 176 full time workers in the division at the end of April.

But this number is set to increase to 444 by the end of March next year, the memo reportedly said. It suggests Northern Rock is expecting to see a big increase in the number of people having trouble paying their mortgage.

In a trading statement issued earlier this month, executive chairman Ron Sandler said the level of mortgages three months and over in arrears was 0.95% at the end of April, up from 0.57% at the end of last year. The bank is trying to reduce its loan book from £100 billion to about £50 billion as part of moves to repay about £24 billion of Government debt.

As part of the post-nationalisation restructuring, staff numbers are being slashed from about 5,400 people to 3,400 by 2011, with most jobs going this year. The memo said the number of customer service staff at Northern Rock would be cut from 1,152 to 478 next year, eventually falling to 369 by 2011. Contact centre staff numbers will also more than halve, from 744 to 350.

But there are no plans to make cuts among staff dealing with savings as bosses try to increase deposits held.
Northern Rock was nationalised in February after the credit crisis forced the bank to seek emergency funding from the Bank of England.

Under the plan to slash the bank's assets and repay the Government loans, Northern is stopping its pro-active mortgage retention programme, with customers instead being offered help to transfer their mortgages to other lenders. Earlier this year Mr Sandler said Northern Rock had between £25 billion and £30 billion of mortgages coming up for renewal this year.

Recent figures have suggested more and more people have been finding it harder to make ends meet this year as household budgets are squeezed by soaring fuel and food costs. Government data showed a total of 27,530 mortgage repossession orders were made during the first three months of 2008, up 17% from the same period a year ago.

The Government was right on house prices: they're falling even faster than we thought
When Caroline Flint, the Housing minister, wandered into a meeting with her briefing notes visible to photographers, most of the attention focused on her embarrassment and the fact that the Government was now planning on the basis house prices would fall this year. But the depth of Ms Flint's gloom attracted less comment.

To recap, she told colleagues that prices would, at best, fall by between 5 and 10 per cent this year, and that there was a good chance the decline could be more substantial. Though this humiliating little episode occurred just three weeks ago, at the time Ms Flint's warning was much more downbeat than most forecasts.

It is becoming increasingly clear, however, that while her PR skills may have been lacking, Ms Flint's analysis was spot-on. Nationwide Building Society's snapshot of the housing market in May, published yesterday, was its gloomiest monthly report since it began such surveys in 1991. Nor is there any prospect of the survey proving to be a statistical blip.

Economic data from GfK on consumer confidence and the CBI on the retail sector, also published yesterday, made equally gloomy reading. This has become a vicious cycle. Consumer confidence is at its lowest level since 1990, says GfK. Not surprising given the fact that the correlation between house prices and confidence in the UK is higher than in any other major industrial country.

Equally unsurprising is the fall in retail sales last month reported by the CBI. If consumers are worried about the future, they don't spend so much. Against this backdrop, it would be reasonable to expect the Bank of England's Monetary Policy Committee to cut interest rates next week.

Unfortunately, its hands are tied by the darkening outlook for inflation, a threat reiterated by the CBI's data, which showed prices in the retail sector rising at their fastest rate for 16 years during May. Not that interest rate cuts would necessarily have the desired effect. Cutting the cost of borrowing ought to result in improving confidence amongst both existing and new homeowners.

But with the mortgage market in turmoil and so many borrowers coming to the end of very cheap deals arranged two or three years ago, a very large number would see no reduction in monthly repayments even if the MPC were to cut rates.

Future pensions less than minimum wage
The average UK household can expect to see its income fall by 53 per cent on retirement, new research from Fidelity International, a pension provider, has shown. The resulting pension is less than many expect and lower than the minimum wage.

According to Fidelity's annual retirement index, a worker on the median salary of £457 a week - £23,764 a year - will receive just £215 a week in retirement, including savings and state benefits. That is £6 below the minimum wage. The research also highlights the gulf between the prospects for workers in final salary, or defined benefit, schemes and those in increasingly common money purchase, or defined contribution, plans.

Fidelity said that final salary pensioners could expect to retire on two thirds of salary after 40 years of service. A money purchase pensioner, whose pension is tied to contributions and investment performance, will replace 38 per cent of their final salary.

The gap is likely to grow because companies have exploited the shift to money purchase schemes to cut employer contributions. Simon Fraser of Fidelity said: “Many young people do not even open a pension, and those who do usually pay just 5 per cent of their salary.”

The cost of soaring public and private debt levels
Is Kevin Phillips right that something funny is going on in the economy? Yes, although just how funny is less clear. The numbers do suggest he's correct about one thing at least: public and private debt has indeed reached unprecedented levels.

Recently, we described Phillips' thesis, in his new book "Bad Money: Reckless Finance, Failed Politics, and the Global Finance of American Capital" that the U.S. economy has been run by a Washington-Wall Street mercantilist alliance for the benefit of the finance sector. Phillips doesn't flat-out predict that the resulting distortions will result in a crash. He says it's too early to say.

But he meaningfully quotes a number of authorities, such as Yale economist Robert Shiller, to the effect that it will. Phillips relies heavily on charts, which we like. In this column, we look at one that is at the heart of his book: public and private debt as a fraction of Gross Domestic Product.

It looks like a barbell, with peak debt of 299% in 1933 falling to below 150% from the 1950-1980s, spiking again to a recent 353%. We've checked the numbers -- updating them to 2007 -- and he's right.

Phillips calls this "The Great American Debt Bubble". He says, somewhat melodramatically, that the financial media haven't been running it recently "Analogies to the 1920s would have been too disturbing." This hurts our feelings. Early this year, we ran a chart of the unprecedented level of foreign holdings of federal debt, which is one part of America's dubious debt development, and is equally disturbing, especially because it suggests the dollar is very vulnerable.

Phillips is also right that that the finance sector has been involved in this leveraging up more than any other sector -- because of securitization, derivatives and highly leveraged hedge funds. He traces this finance sector debt expansion to easy money and to a series of bailouts orchestrated by the Federal Reserve, going back to the Arab rescue of Citibank in 1981.

Ilargi: ” of the most terrifying bank runs in history”? What kind of "journalism" is that??

Bear's Final Moment: An Apology and No Lack of Ire
Bear Stearns Cos., a powerhouse on Wall Street for nearly nine decades, ceased to exist Thursday in a meeting that lasted about 11 minutes.

Gathered in a crowded second-floor auditorium of Bear's Madison Avenue headquarters, several hundred stockholders voted to approve their company's sale to J.P. Morgan Chase & Co. for $1.4 billion. In doing so, they sealed a deal made in haste two months ago amid one of the most terrifying bank runs in history.

The meeting was led by Chairman James Cayne, 74 years old, who ran Bear Stearns as chief executive for 14 years before stepping down in January. Mr. Cayne, a tough-talking former broker, has operated largely below the radar since the leadership transition.

As the votes were counted, Mr. Cayne made his first public comments in months, expressing for the first time his own sadness at the shocking turn of events. "I personally apologize," he said, according to attendees, fiddling with the microphone as he spoke. "Words can't describe the feelings that I feel."

Mr. Cayne said Bear ran into "a hurricane" and summed up his feelings on the firm's demise as "remorse" as opposed to "anger." Moments later, the deal was approved -- by holders of 84% of Bear Stearns's stock. No questions were asked.In early 2007, before the rout, Bear's market capitalization was $25 billion.

Ilargi: Through the past week, the Wall Street Journal ran a free, 3-piece, exposé of the Bear Stearns situation. It’s still all cheerleading the cabal; after all, the paper is part of it. Click on the link to see all.

The Fall of Bear Stearns
Twelve hours after agreeing to sell Bear Stearns Cos. for $2 a share, Alan Schwartz wearily made his way to the company gym for a much-needed workout. It was 6:45 a.m., March 17, and Bear Stearns's chief executive had slept little since hammering out the ugly details of his fire-sale deal with J.P. Morgan Chase & Co.

When Mr. Schwartz, already dressed in his business suit, trudged into the locker room, Alan Mintz, still in his sweaty gym clothes, made a beeline for the boss. "How could this happen to 14,000 employees?" demanded the 46-year-old senior trader, thrusting his face uncomfortably close to Mr. Schwartz's. "Look in my eyes, and tell me how this happened!"

Two and a half months later, Mr. Schwartz still isn't quite sure. To Mr. Mintz and others, he has blamed a market tsunami he didn't see coming. He told a Senate committee last month: "I just simply have not been able to come up with anything, even with the benefit of hindsight, that would have made a difference."

But many who lived through the seven tense months before the deal say Bear Stearns imploded because it was at war with itself. Buffeted by the most treacherous market forces in a generation and hobbled by indecision, the firm's leaders missed opportunities that might have been able to save the 85-year-old brokerage.

Those missteps are expected to have a lasting impact beyond the people who once worked at Bear Stearns or owned its stock. Unlike Wall Street meltdowns in decades past -- from Drexel Burnham Lambert Inc. to Long-Term Capital Management -- the Bear Stearns collapse spurred direct intervention from the Federal Reserve. That step is likely to increase the central bank's role in solving future financial catastrophes and bring securities firms further regulation in the bargain.

As shareholders prepare to approve the deal on Thursday -- at a price that angry investors forced up to about $10 a share -- interviews with more than two dozen current and former Bear Stearns executives, directors, traders and others involved in the action paint the first detailed picture of the fractious last weeks before the Fed helped underwrite J.P. Morgan's purchase of the trading powerhouse.

Months before regulators pressured the firm to sell itself, nervous traders futilely begged Mr. Schwartz and his predecessor, James Cayne, to raise more cash and slash Bear Stearns's huge inventory of mortgages and the bonds that backed them. At least six efforts to raise billions of dollars -- including selling a stake to leveraged-buyout titan Kohlberg Kravis Roberts & Co. -- fizzled as either Bear Stearns or the suitors turned skittish.

And repeated warnings from experienced traders, including 59-year Bear Stearns veteran Alan "Ace" Greenberg, to unload mortgages went unheeded. Top executives resisted, in part, because they were concerned the moves would upset the delicate calculus of appearances and perceptions that is as important on Wall Street as dollars and cents. If Bear Stearns betrayed weakness, they worried, skittish customers would pull their money out of the firm, and other financial institutions would refuse to trade with it.

Instead of managing these fickle forces, though, a brokerage whose culture and fortune were rooted in the trading floor's steely manipulation of risk was swamped by them.
Part One: Missed Opportunities. As the firm's fortunes spiraled downward, executives squabbled over raising capital and cutting its inventory of mortgages.
Part Two: Run on the Bank. Executives believed they were about to turn a corner, but rumors and fear sent clients, trading partners and lenders fleeing.
Part Three: Deal or No Deal? The Fed pressured Bear Stearns to sell itself, but a misstep in the hastily drawn agreement nearly scuttled the deal.

Fed's Fireman On Wall Street Feels Some Heat
As the credit crisis batters Wall Street, Timothy Geithner has been the Federal Reserve's man on the front lines. The president of the Federal Reserve Bank of New York has worried more about the economic impact of the crisis than most of his Fed colleagues and has pressed hard for aggressive action, say people close to the central bank.

His involvement culminated in the March rescue of Bear Stearns Cos., which is expected to be taken over on Friday by J.P. Morgan Chase & Co. in a deal brokered primarily by Mr. Geithner and Treasury Secretary Hank Paulson. Controversy over that move has Mr. Geithner feeling some heat.

Many on Wall Street say he helped avert a catastrophic loss of confidence. But even with the crisis seeming to ebb, criticism over the rescue has lingered. Many argue that the deal creates so-called moral hazard: It could encourage market participants to take more risk because they expect the Fed to rescue them if they fail. Privately, a few Fed officials share those concerns, according to people close to the central bank.

In April, 17 Republican congressmen called for a hearing on the bailout, saying it "exposed the American taxpayers to unknown amounts of financial loss." Vincent Reinhart, a former top Fed staffer who worked with Mr. Geithner, said recently that the rescue "eliminated forever the possibility that the Federal Reserve could serve as an 'honest broker.'"

When the Fed tries to manage another crisis, he said, market players will expect it to contribute money. As early criticism of the rescue swirled, the president of the Dallas Fed, Richard Fisher, sent Mr. Geithner an email in Latin: "Illigitimum non carborundum," along with his translation, "Don't let the bastards get you down." Mr. Geithner replied that his grandfather had the same slogan on his kitchen wall.

Mr. Geithner, 46 years old, has had a hand in responding to financial crises for nearly 15 years -- first at the Treasury Department, and since 2003, in his current post at the New York Fed. Fed Chairman Ben Bernanke has set the Fed's overall strategy during the current crisis, and Mr. Geithner has been instrumental in executing it. At times, Mr. Geithner has counseled Mr. Bernanke against acting too aggressively, which would risk signaling panic, and on other occasions about the danger of not acting aggressively enough.

Ilargi: Rule no.1: Never trust anything said or done by the World Bank, the IMF, the Asian Development bank, the African Development bank etc. They use these emergency loans to get a tighter grip on the countries they are "helping“. They done so for decades, and they won’t stop. Why do you think Paul Wolfowitz was made World Bank President? To do the Lord's work?

World Bank Forms $1.2 Billion Credit Line to Combat Food Crisis
The World Bank said it will establish a $1.2 billion loan facility to help impoverished countries ease social and economic strains caused by rising food prices. The plan includes the launch of derivative products and $200 million in grants to the world's poorest countries, the Washington-based lender said today in a statement.

The funding will boost the World Bank's support to agricultural and food projects to $6 billion next year, up from $4 billion this year. Total lending by the bank reached $24.7 billion in 2007. Government-funded lenders from Abidjan to Washington are scrambling to make hundreds of millions of dollars available in loans and grants to prevent a reversal of progress made in recent years fighting malnutrition.

World Bank President Robert Zoellick called last month for a "New Deal" to end hunger worldwide, a reference to social programs in the 1930s designed to pull the U.S. economy out of the Great Depression. "These initiatives will help address the immediate danger of hunger and malnutrition of the 2 billion people struggling to survive in the face of rising food prices," Zoellick said in the statement.

The announcement follows the Inter-American Development Bank's decision May 27 to form a $500 million line of credit for countries in Latin America and the Caribbean. Food prices that rose 68 percent worldwide between January 2006 and March this year threaten the well-being of the world's poorest citizens, the IDB said.

The World Bank said today it approved $5 million in grants for Djibouti, $10 million for Haiti and $10 million for Liberia.
The World Bank is also setting up risk-management tools to hedge against bad weather or crop failure. The bank's governing board is considering a facility for Malawi that would use financial derivatives to protect the country against drought.

"Should Malawi suffer a drought, then it would be protected against a rise in the price of imported maize," the bank said in the statement. Earlier this month, the Abidjan, Ivory Coast-based African Development Bank said it aims to raise $500 million to help subsidize fertilizer costs to farmers on the continent. The AFDB gives low-interest loans to poor countries to help boost economic growth and cut poverty.

The Asian Development Bank, based in Manila, said in a report earlier this month that the global rise in food prices may push 5 percent of low-income households in the Asia-Pacific region into poverty this year. "The effects of high prices on Timor-Leste and the Fiji Islands are of particular cause for concern," the ADB said May 8.

Dominique Strauss-Kahn, the managing director of the International Monetary Fund, said in April that rising prices for wheat, corn and soybeans could wipe out a decade of progress in the developing world.