Friday, May 2, 2008

Debt Rattle, May 2 2008: Grand Theft Auto on Wall Street

Hoboes, 1934

See also today’s The Great American Debt Sentence

Ilargi: I don’t know about you, but I am starting to feel overwhelmed by all the new monies and facilities and added monies to the facilities and liquidity injections and contradictory statements about all of the above.

Job numbers make so little sense nobody with a single remaining active neuron would have any faith in them. The economy grows? Let me quote John Crudele:

".. if the people of Peoria, Ill. had all suddenly gone on the wagon and stopped buying liquor for a day the economy probably would have contracted."

None of this keeps stocks from rising today though. Maybe the people who claim that playing Grand Theft Auto prepares you for the real world are on to something.

I think I’m going to quietly find out where I should be positioned in order to qualify for the hand-outs and bail-outs and buy-outs that are all the rage around the crap tables these days. I’m thinking: hey, I’m going to wind up paying for them anyway, why not get some for myself?

So, this recession will be mild, huh? Listen, bunch of LSD adepts, none of the underlying problems has been addressed, not one of them.

And no, if you see a pig fly by with lipstick on, that is NOT a sign that things are getting back to normal.

World's central banks boost liquidity to tackle credit crisis
The US Federal Reserve announced Friday coordinated action with the European Central Bank and the Swiss National Bank to pump more liquidity into the distressed global financial system. The Fed said it and the European central banks had expanded their efforts to open up credit "in view of the persistent liquidity pressures in some term funding markets."

The Fed has taken a series of steps to help get credit flowing in the global financial system that seized up in August amid rising defaults on US subprime, or high-risk, mortgages. The Fed said it had raised the amount of lending available in its biweekly Term Auction Facility to banks by 25 billion dollars to 75 billion, beginning with the auction next Monday. That increase will bring the amounts outstanding under the TAF to 150 billion dollars, the central bank said in a statement.

In addition, the Federal Open Market Committee (FOMC) authorized increases in its temporary reciprocal currency arrangements with the European Central Bank (ECB) and the Swiss National Bank (SNB). Those arrangements will now provide dollars in amounts of up to 50 billion dollars to the ECB, an increase of 20 billion, and 12 billion dollars to the SNB, a rise of six billion. The FOMC extended the term of the arrangements through January 30, 2009.

The Fed also expanded the scope of collateral that can be pledged in its Schedule 2 Term Securities Lending Facility (TSLF) to securities firms that are not banks. This progam, set up to help distressed brokerage firms, may include AAA/Aaa-rated asset-backed securities, beginning with an auction next Wednesday.

Already eligible for the Schedule 2 TSLF are residential- and commercial-mortgage-backed securities and agency collateralized mortgage obligations. The Schedule 2 TSLF launched in mid-March eased the collateral requirements for firms seeking credits, particularly making it easier for companies holding some mortgage-backed securities that were being shunned in the market.

Fed acts again to ease credit markets
The Federal Reserve expanded its cash-loan auctions for banks by 50 percent to $75 billion each after higher borrowing costs blunted the impact of the four-month-old program. The Fed also increased its currency-swap arrangement with the European Central Bank by two-thirds to $50 billion and doubled the amount with the Swiss National Bank to $12 billion, extending their terms through January. In a third move, the Fed said it will accept other AAA/Aaa-rated asset-backed securities as collateral for Treasury loans through another program.

The Federal Reserve chairman, Ben Bernanke, created the TAF and two other programs to reverse a decline in liquidity that began last year with the collapse in the market for subprime mortgages. Friday's move may reduce loan payments for some companies and homeowners with variable-rate mortgages. The actions were taken "in view of the persistent liquidity pressures in some term funding markets," the Fed said in a statement.

The Term Auction Facility, which provides 28-day loans to commercial banks, will sell $75 billion per biweekly auction, starting with a sale on May 5, the Fed said in a statement. The decision will increase the amount outstanding under the auctions to $150 billion from $100 billion. It was the third increase since the program started in December at $40 billion per month. The expanded collateral under the Term Securities Lending Facility will take effect with the sale to be announced May 7 and settle on May 9, the Fed said.

The Fed announced the program in March, auctioning as much as $200 billion in Treasuries. In several of the sales, the Fed has failed to attract enough bids to cover the securities at auction. The Fed already accepts residential and commercial mortgage-backed securities and agency collateralized mortgage obligations through the TSLF. "The wider pool of collateral should promote improved financing conditions in a broader range of financial markets," the Fed said in a statement.

Along with its efforts to revive liquidity, the Fed has lowered its target rate for overnight loans between banks by 3.25 percentage points since September. Even with economic growth faltering, the Fed signaled on April 30 it may pause after seven interest-rate cuts. The central bank did not rule out other actions aimed at making it easier for banks to borrow. A gauge of bank funding costs, a premium on three-month bank loans over the overnight indexed swap rate, which is a measure of what traders expect for the Fed's benchmark rate, reached 87 basis points on April 21. That was the highest since the Fed announced the TAF on Dec. 12.

The rates at last month's TAF auctions were 2.82 percent and 2.87 percent, above the then-2.5 percent rate on direct loans through the discount window. This "seeming anomaly" of the higher rate may have resulted from banks' willingness to pay a premium to avoid any stigma from discount-window borrowing, the president of the Federal Reserve Bank of Boston, Eric Rosengren, said in an April 18 speech.

Friday's decision comes after criticism from a Stanford University economist, John Taylor, who wrote in a study last month that there is "no empirical evidence" the TAF has reduced the premium that banks charge each other to lend cash for three months.

ECB sees persistent liquidity pressures and hikes U.S. dollar liquidity auctions
The European Central Bank (ECB) said it sees persistent liquidity pressures in 'some term funding markets' and therefore expands its liquidity measures in conjunction with the U.S. Federal Reserve. The ECB said it will increase the amount of U.S. dollar liquidity provided to the counter-parties of the Eurosystem to $25 billion in each bi-weekly auction under the U.S. dollar Term Auction Facility (TAF).

It said the operations will be conducted every second week with a maturity of 28 days. ECB said it intends to continue the provision of liquidity in the U.S. dollar for as long as the central bank's Governing Council considers it to be needed in view of the prevailing market conditions.

Over the past months, central banks including the Bank of England and the Swiss National Bank have launched several coordinated actions to help relieve liquidity pressures in funding markets caused by the crisis on international capital markets.

Bulls, Bears And Pigs
Well well well. So The Fed comes out with more expansions of throwing their balance sheet to the wind, and the market spikes, then thinks - "heh, wait a second, what are they REALLY trying to pull here?" and pulls back. Then the employment number (which The Fed had, by the way) comes out and its better than expected - but negative.

Why not down huge? Government hiring. Lots of it. Oh, and a "Birth/Death" adjustment of over a quarter of a million jobs - fictional jobs, I argue. "Birth/Death" is a model attempt to count small businesses that otherwise don't get counted, and either die or are born. Let me ask you - drive around your town - are small businesses going under or starting up? On balance. Well, the BLS says they are starting up to the tune of over 250,000 jobs in the last month alone. Do you believe it?

Then let's add that we now have 306,000 people who are now working part-time for "economic reasons." This, by the way, are people who were full-time employed and are now part-time. 306,000. Oh, and that's 849,000 people more than the same time last year. And average weekly earnings were down. Is all this good? Well, actually, no it’s not. Tax receipts are way down at the national level and in fact sales tax receipts are down on a national basis too.

So how did we "birth" all those jobs if nobody paid taxes into the state government from all these allegedly created small businesses? Folks, Bear Markets are irrational. Always. If you do not have sound money management behind your actions in a market like this you will be destroyed - no matter whether you are a Bull or a Bear.

Go back and look at the Bear Market of 2000-2003. There were twenty percent moves in both directions during that market, which is more than enough to destroy your account several times over if you're imprudent and/or leveraged beyond where you should be. It is not my place to offer investment advice, and as the disclaimers all over the blog and forum point out, I don't. I neither want to run someone else's money nor do I. That's your responsibility.

I don't know how many times I have to pound the table on the fact that most investors are best off in Cash during Bear Markets, not trying to play short. The reason is simple - Bear Markets have a long and storied history of blowing up both Bear and Bull believers accounts!

People try to draw parallels to 1987, but is that fair? I think not, for the simple reason that in 1987 there was no economic weakness to go along with the market stupidity. This time we have the largest credit bubble in the history of the United States - ranking even ahead of the 1920s stupidity - and it has burst.

Folks, there is a real $10 trillion worth of wealth that will be lost among American Consumers in their home values, and a real $2.5-3 trillion in actual credit losses that will be taken. We've seen $300 billion in derivative losses written down, but near-zero in credit losses thus far.

So before you smile, consider this - if things are so good, and worthy of trading just a few percent off all-time highs in the equity markets, why does The Fed have more than half its balance sheet committed to propping up the credit markets, and why are they taking trash paper as collateral?

Dow 14,000: A Rally For The Ages
As hard as it may be to believe, the Dow is withing 200 points of where it was a year ago, and above where it was last August. There is now plenty of talk that the recession may not be very deep, if there is one at all. The Wall Street Journal wrote that job cuts in this downturn could be modest.

The market may be back in rally mode. Part of the euphoria is due to the fact that corporate earnings were not awful. Big companies like Caterpillar (CAT), Microsoft (MSFT), Google (GOOG), Intel (INTC), and Apple (AAPL) did fine. The Fed has cut, just enough. The tight credit markets may be less tight Even in the face of ugly credit news and rising oil prices, the Dow moved from 12,846 on August 16 of last year to 14,280 on October 9. All that in seven weeks.

If the employment numbers are good over the next month and retail sales for major store chains are not too bad, the Dow may start another ascent toward the summit. It will not be climbing a wall of worry at that point, It will be scaling the ladder of relief.

A sucker rally? Almost certainly. The fact that banks and brokerages are still raising money and hitting the Fed discount window like stick-up men is a clear sign that the financial world thinks it will have to weather more bad quarters. How many months can car sales drop 14%. Oil may be off slightly from its peak, but it still trades at $114. To saps, that looks good.

If the dollar actually starts to recover, hedge funds and wonks and quants will begin to go long the Dow. The Dow will start to go long. But, out on the unemployment lines and at gas stations and bank branches they know the truth better. It is always the guy in the caboose who finds out about the train wreck last.

$536 Billion Worth of Household Assets Evaporated in February?
It sure is a good thing that $150 billion of checks from the IRS are in the mail to U.S. households because these same households experienced an evaporation in paper wealth in February to the tune of about $544 billion according to my admittedly back-of-the-envelope arithmetic. It was reported today that the Case-Shiller house price index for 20 major metropolitan areas fell 2.66% month-to-month in February.

Applying that percentage decline in house prices to the fourth-quarter value of $20,154.7 billion for household residential real estate from the Fed's flow-of-funds data yields a decline of $536 billion. Now, this is a very rough approximation for at least two reasons. Firstly, the Case-Shiller price index is for only 20 metropolitan areas, not the whole country. So, the Case-Shiller index captures the decline in house prices in the Manhattan, New York area but not the Manhattan, Kansas area.

Second, the value of residential real estate in the Fed's flow-of-funds accounts is based on the OFHEO house price index. But even with these qualifications, I feel confident in saying that the value of households' residential real estate assets fell in February by some multiple of the aggregate value of the checks households will receive as part of the Economic Stimulus Act of 2008.

Of course, the check from the IRS is cash in hand and the decline in the value of residential real estate is a "paper" loss. But when residential real estate values were going up, households were turning these "paper" gains into cash in hand by borrowing against the rising value of their houses.

Back in 2006, households were extracting more than $500 billion of equity from their houses (see chart below), which was about 6% of their after-tax income. That home equity is now in full-scale retreat. Moreover, it is tougher to qualify for a mortgage or home equity loan with which to extract any remaining equity. This is one of the strong headwinds aggregate demand is experiencing now.

Bank of America May Not Guarantee Countrywide's Debt
Bank of America Corp., the second- biggest U.S. bank, said it may not guarantee $38.1 billion of Countrywide Financial Corp.'s debt after taking over the mortgage lender, fueling speculation that Countrywide's bondholders face renewed risk of default.

"There is no assurance that any such debt would be redeemed, assumed or guaranteed," the Charlotte, North Carolina-based bank said in an April 30 regulatory filing, adding that no decision has been reached. Investors have grown more optimistic the bank would back Countrywide debt, and Standard & Poor's said this week it may raise Countrywide's rating to match Bank of America's.

Bank of America agreed to buy Countrywide, the largest U.S. mortgage lender, for about $4 billion amid speculation that the worst housing market since the Great Depression would bankrupt Countrywide. Bondholders have been counting on the merger to put Bank of America's AA credit rating behind Calabasas, California- based Countrywide's $97.2 billion of debt.

Countrywide's $1 billion of 6.25 percent notes maturing in 2016 traded at 90.25 cents on the dollar yesterday with a yield of about 7.9 percent, according to data compiled by Bloomberg. The debt traded as low as 46 cents in January, with a yield of 20 percent, just before Bank of America announced the purchase. "I'd be quite concerned if I was a bondholder if the intent of Bank of America is as it reads in the filing," said Gary Austin, founder of PDR Advisors LLC in Charlotte. PDR manages about $600 million and doesn't hold Countrywide debt.

Ilargi: Obviously, these experts and analysts have access to better and stronger mind-expanding drugs than I have, as well as to numbers fudged more funnily, so I won’t say a thing. It’s a parallel universe.

One little note: the US needs to add over 200.000 jobs a month just to play even. In the universe I live in at least.

U.S. Loses 20,000 Jobs in April; Unemployment at 5%
The U.S. lost fewer jobs than forecast in April, and the unemployment rate dropped, signaling that the economic slowdown may be milder than the 2001 recession. Payrolls shrank by 20,000 workers, following a revised 81,000 drop in March that was larger than previously estimated, the Labor Department said today in Washington. The jobless rate fell to 5 percent, from 5.1 percent in March.

"We are in a recession, this report doesn't change that," said Ellen Zentner, economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who had forecast a payrolls cut of 25,000. "What it does is support the idea that the downturn will be mild. Consumer spending isn't going to tank." Treasury notes fell and the dollar gained on speculation the Federal Reserve will refrain from cutting interest rates next month after seven reductions since September. An average of 121,000 jobs a month were eliminated in the first four months of the 2001 recession, compared with an average of 65,000 this year.

"Obviously a negative number is still negative," said Bill Cheney, chief economist at John Hancock Financial Services in Boston, in an interview with Bloomberg Television. "But it is still so close to zero that essentially it means flat," just as government tax-rebate checks are being mailed, which will be "almost guaranteed" to boost job growth.

Economists forecast payrolls would fall by 75,000 in April after a previously reported 80,000 decline the previous month, according to the median of 82 projections in a Bloomberg News survey.

Ilargi: 20.000 jobs lost in April, right? Well, according to this report, the financial world alone shed more than that, while large corporations laid off 90.000 people. ”In February, for instance, a total of 1.35 million workers were let go.

Layoffs jump to 19-month high in April
Led by cost-conscious financial companies, major U.S. corporations announced 90,015 job reductions in April, up 68% from March and the most since September 2006, according to a monthly tally released Thursday by outplacement firm Challenger Gray & Christmas. Announced layoffs through the first four months of the year have grown to 290,671, up 9% from a year ago.

Financial companies announced 23,106 layoffs in April, including major reductions by Merrill Lynch and Citigroup. April marked the largest cuts in the sector since last September. Telecommunications companies announced 8,007 layoffs, more than half at AT&T. While the bust of the housing bubble is responsible for most of the cuts in financials, it's rising energy costs that are responsible for the reductions in transportation, manufacturing, agriculture and services, said John Challenger, chief executive officer of the company that bears his name.

The nonscientific Challenger Gray survey covers announcements of job reductions by major companies, government agencies and nonprofits. The figures represent only a small fraction of the workers who lose their jobs each month. In February, for instance, a total of 1.35 million workers were let go, representing about 1% of total employment, according to the latest available data from the Labor Department. By comparison, 2.06 million people quit their jobs voluntarily in February.

The layoff announcements as tracked by Challenger Gray could take place immediately or over time. The reductions could be accomplished by voluntary means such as retirements, buyouts or workers leaving for other jobs, and they could be offset by hiring in other divisions of a company.

Fed Is Running Out Of Room To Help Economy
So a quarter-point rate cut is all that the Fed could spare, what with the dollar declining to record lows on a regular basis, gasoline and other commodities being held captive by speculators and foreign governments bemoaning the lack of self control on the part of Americans. In another eight weeks the Fed will meet again and it will do NOTHING.

The second thing that happened yesterday was the first-quarter estimate of the nation's gross domestic product - which is nothing more than the financial statement of the country. I'll apologize here in advance because the rest of this column is going to be numbers - important numbers, to be sure, but mind-numbing digits for which the reader will need a load of caffeine. Starbucks for everyone! Borrow money from the Fed if you can't afford it.

The Commerce Department estimated yesterday that the nation's economy grew at an annual rate of just 0.6 percent in the first three months of 2008. That was the same growth reported for the fourth quarter of last year. There are several things that have to be kept in mind. First, the 0.6 percent is simply an estimate that isn't based on many actual, hard numbers. In fact, it's such a squishy guess that the margin of error is an enormous plus or minus 3 percent.

And before you break out the champagne (or Propel if you're driving) the "annualized" growth of 0.6 percent means the economy in the first quarter expanded at a slothful 0.15 percent. (Divide the 0.6 percent by the four quarters of the year to come up with that figure.)
In other words, if the people of Peoria, Ill. had all suddenly gone on the wagon and stopped buying liquor for a day the economy probably would have contracted.

Worse, it was government spending and inventory building by corporations that created most of the first-quarter gain. Neither of those is something you want to rely on for a recovery. But the situation was even more dismal than that. In coming up with the 0.6 percent annual growth figure, the Commerce Department decided that inflation was just 2.6 percent. That's lower than Wall Street had been expecting and a tad higher than in the fourth quarter.

Still, the 2.6 percent figure for price increases used for the GDP calculation was nowhere near the 4 percent inflation calculated by other government agencies. If inflation, for instance, had been 4 percent then the nation's economy would have contracted by an 0.8 percent annualized rate. And not only that, if inflation was being honestly reported the economy would have contracted in the fourth quarter of 2007 as well. In other words, there would have been two straight quarterly declines in GDP and the debate over whether or not we are in a recession would be settled.

Don’t Mistake a Silent Mortgage Volcano for Being Inactive: The New Face of Alt-A and Subprime Mortgages
There seems to be a false sense of security that somehow, the credit (debt) crisis is now slowly floating away into space. The market rally is indicative of this false sense of security. All bad news is ignored while slim glimmers of good news are enough to spark a rally. We are starting to look like the first quarter of 2007 when the idea that sub-prime was going to be contained in a tightly sealed silo and the market rallied all the way through August, only to be slashed to its current level.

I’m not sure what data the bulls are looking at but it really doesn’t point to a recovery for sometime. In fact, many states are now revising their budgets for the fiscal year and things are a lot worse than they once appeared. California is now looking at a $20 billion budget deficit revised from the earlier $14.5 billion deficit only a few months ago.

These are things that I hope most of you are already aware of. Yet the focus has been taken away from the actual data in these toxic mortgages. Have things reached their apex of crap? Unfortunately they have not and let us go through a few reasons for this.[..]

What you’ll notice is how quickly these notice of defaults are turning into foreclosures. If this is any guide to the future, these loans are going to get hammered into the ground. And of course, California is living in another dimension assuming that we are at a bottom. Now take a look at the California “non-prime” aka banana republic mortgage profile:

Okay, so the share of loans that are non-prime and ARMs is 73.8%. 58.9% are current. 43.2% of these are resetting in the next 12 months. And things are bottoming out because?

And by the way, anyone that bought in California in the last three years is most likely already underwater so any of these additional bailouts will not help since these folks are in negative equity positions.  Severe negative equity. And you notice how the above is first liens? A high percentage have junior liens and they have no desire to let the property go since it will very likely wipe their loan out completely. That is why you are seeing such a delay in short sales getting done.

Fed Discount-Window Lending to Banks Rises 8% to $11.6 Billion
The Federal Reserve's cash loans to commercial banks rose 8 percent in the past week, reflecting borrowers' continuing need for funds. Loans to commercial banks through the traditional lending facility increased $857 million in the week ended yesterday to a daily average of $11.6 billion. Lending to Wall Street dealers fell for the fourth straight week, dropping $4.1 billion to a daily average of $18.6 billion from the previous week.

Chairman Ben S. Bernanke created the Primary Dealer Credit Facility March 16, two days after the Fed arranged an emergency loan to Bear Stearns Cos. to stave off bankruptcy. The chairman is combining the financial-market efforts with the most aggressive interest-rate reductions in two decades to prevent a prolonged economic downturn. The central bank's Primary Dealer Credit Facility allows Wall Street banks to borrow money overnight at a 2.25 percent interest rate, the same charged to commercial banks.

Yesterday, the Federal Open Market Committee lowered its main interest rates by a quarter point and signaled it may pause from the most aggressive reductions in two decades. The discount rate was cut to 2.25 percent, while the more closely watched federal funds rate was lowered to 2 percent. As of April 30, $17.8 billion of overnight loans through the primary-dealer program were outstanding with Wall Street firms, while commercial banks had $12 billion of discount-window loans, the Fed reported.

Bear Stearns had borrowed $32.5 billion from the Fed as of March 21, according to a JPMorgan regulatory filing on April 11. The central bank doesn't disclose who is borrowing from the discount window or other facilities. Futures traders expect the Fed to leave its main rate unchanged for the rest of the year, based on prices on the Chicago Board of Trade.

The Fed's holdings of U.S. Treasury securities were little changed, rising $29 million for a daily average of $548.7 billion. The central bank had about $713 billion of Treasuries two months ago.

S&P Stops Rating Some Mortgage Bonds for First Time
Standard & Poor's will stop rating new bonds composed of U.S. second mortgages, saying it's too hard to assess the debt while the housing slump continues. The recent deterioration of the loans has been "unprecedented" and the "market segment does not allow for a meaningful analysis," New York-based S&P said in a statement.

The ratings company hadn't previously refused to rank broad classes of securities linked to U.S. home loans since the mortgage-market crisis began unfolding two years ago, said Adam Tempkin, a spokesman. Investors and lawmakers have criticized S&P and Moody's Investors Service for failing to foresee the record surge in U.S. foreclosures and then being slow to downgrade debt, enabling looser lending ahead of the crash and costing bondholders. In response, the companies have announced a series of changes to models and methods.

"In terms of an entire category, an asset class, this is probably unprecedented," Tempkin said in a telephone interview, referring to the announcement today. The change covers bonds backed by closed-end second mortgages or one-time home equity loans, as opposed to equity lines of credit. On April 24, S&P cut $13.1 billion of second- mortgage bonds created last year, or 73 percent of the total.

The unit of McGraw-Hill Cos. said today that it will continue to assess outstanding securities by looking at delinquency and default levels. The downgrades last month left all of the securities with ratings of BBB or lower, compared with 20 percent before the action. BBB is S&P's second-lowest investment grade. About 96 percent dropped to non-investment-grade, or junk, assessments.

Bankers spent $2.2M lobbing in 1Q
The American Bankers Association spent $2.2 million to lobby the federal government in the first quarter.

The trade group lobbied on accounting rules, legislation affecting home loans, credit cards, appraisals, foreclosures, tax rebates, student loans, Internet gambling and numerous other issues, according to a disclosure report filed April 22 with the Senate's public records office.

The trade group's members include Bank of America Corp., JPMorgan Chase & Co., Wachovia Corp., Washington Mutual Inc., U.S. Bancorp and Citigroup Inc. among others.

Lobbyists are required to disclose activities that could influence members of the executive and legislative branches, under a federal law enacted in 1995.

The Mortgage Meltdown's Dirty Secret
Anyone wondering why America's mortgage system melted down should flip through a little-noticed government report issued last October on the financial literacy of recent mortgage customers. The study, put together by the Federal Trade Commission for the Federal Reserve, contained some startling statistics: Of those surveyed, 25% could not identify the annual percentage rate of their mortgage, and 25% could not identify the amount of settlement charges.

Half could not correctly identify the amount of the loan. Two-thirds were unaware of prepayment penalties that could be charged during refinancing. Three-quarters did not recognize that the loans included charges for optional credit insurance. It's a point you don't hear much about. Yes, lenders maliciously tricked borrowers, and yes, frenzied speculators bought houses they knew they could not afford. But it's just as true that a lot of well-intentioned people simply signed mortgages they did not understand.

"It's strange that we have to study to get a driver's license and a real estate license, and now even to declare bankruptcy, but many people do little more than scan the Internet, the multiple listings, or drive around to look for their first home," Ronni Cohen, executive director of the Delaware Money School, told a Senate panel meeting Thursday.

The session, euphemistically dubbed "The More You Know, the Better Buyer You Become: Financial Literacy for Today's Homebuyers," didn't draw much of a crowd, though taking steps to ensure that borrowers at least understand their loans is likely to be far cheaper solution than dramatically increasing the amount of loans insured by the Federal Government or having the Federal Reserve save investment banks from collapse.

The complexity of loan documentation is a major problem. "Trying to describe 100% of the details in legalese and bureaucratese results in essentially zero actual information transfer to the borrower," says Alex Pollock, former president of the Federal Home Loan Bank of Chicago and fellow at the American Enterprise Institute. It's a full-employment program for lawyers at closing as well. Pollock proposes "downsizing" to a simple, one-page mortgage form that clearly spells out the details of a loan, a scorecard that says "Amount of loan: $____" and "Your beginning interest rate is ____%. This rate is good for ____ months/years" as an obvious and inexpensive way to provide borrowers with the answers.

Says Pollock of his proposal: "Should lenders be able to make risky loans to people with poor credit records if they want to? Yes, provided they tell borrowers the truth about what the loan obligation involves in a straightforward, clear way." True enough. Will it happen? Ask a lawyer.

Is Bank of America headed towards principal reductions?
Reader Paul pulled a key comment out of the B of A press release issued earlier this week that addressed Bank of America’s efforts to help homeowners keep their home. The comment, burried at the bottom of the release was:
“We will continue to work with distressed borrowers to match the customer’s repayment ability with the appropriate loss mitigation option, including loan modifications, forbearances, repayment plans, lower rates and principal reductions,” McGee said. “

Paul thought it was absurd that no one pressed McGee on the last point which was “principal reductions.” This, he argued correctly, is a massive change in policy for the industry, as banks have been fighting tooth and nail to make sure that court-ordered principal reductions (cram downs) aren’t enforced from the bench. The Implications of a BofA-led Principal Reduction Effort Would be Staggering

If Bank of America is truly making principal reductions a part of it’s “home-saving” playbook it would have incredibly wide-spread implications across not only the banking industry but the housing market and general economy. As Paul mentioned, the press didn’t have a chance to grill him on this point and I agree with him that McGee needs to be held accountable for what he said and to outline in greater detail just what role these principal reductions are playing (or will play) in BofA’s loan modification process.

Bank of America, if they are making principal reductions even a trivial part of their options in keeping homeowners put they will set a precedent which will inexorably alter the housing market. Think of the ramifications of this action. First of all, Bank of America’s adoption of this policy would make it essentially an industry-accepted practice overnight. Lenders of all types would gladly follow their lead in an effort to keep their REO rolls from growing exponentially. Why wouldn’t a lender take a $25,000 principal reduction if it keeps the mortgage current than risk the pain and headache of foreclosing for a property that might only sell for 50% of the current note?

Homeowners who are struggling with their payments due to myriad reasons (from fraudulently overstating their income to a resetting option-arm to death of the primary wage earner) will see principal reductions to keep them in their home. The homeowner next door in a comparable home will not see that relief as long as they continue to make their payments on time.
Homeowners are rewarded for feigning problems with their mortgage payments to get the reduction. It’s a less-painful version of mailing in your keys. Go down 60-days on your mortgage and get a nice chunk of your loan balance forgiven.

The argument that the mere idea of a damaged credit score is enough to keep full-balance folks paying right along while their neighbors get gifted $50k loses credibility in the current environment. If I’m a homeowner (which I am) and I’m current on my mortgage (yes, again) and I’m seeing all of the bail out plans and changes being made and I see Bank of America add principal reductions to their loan modification tool kit for delinquent borrowers I might start to think that there is going to be some government intervention on future credit as a result of this mess too.

UK banks hit hard
Royal Bank of Scotland and HBOS (owner of BankWest) still don’t look cheap. Between them, the two UK banks are raising £20 billion in fresh capital. That has bolstered their defences against the credit crunch and a slowing domestic economy. But it doesn’t insulate either bank from the effects of a wider downturn in the UK economy. Both banks may be trading at big discounts to their historic multiples, but that looks quite rational.

According to financial theory, banks should trade on a multiple of book value equal to its return on equity divided by its cost of equity, minus adjustments to both figures for economic growth. On that basis, HBOS appears to be trading at half its fair value. Assuming a return on equity of 15 per cent - based on its latest guidance of a “mid-teens” returns target - a cost of equity of 10 per cent and nominal UK growth of 5 per cent, it should trade at twice book value, yet actually trades on a multiple of one.

The same is true of RBS. While the bank hasn’t given a new returns target, its £16 billion capital raise looks, on its own, enough to trim five percentage points from its return on equity, which has averaged 18 per cent in recent years. On that basis, and making the same cost of equity and growth assumptions as for HBOS, RBS should be worth roughly 1.6 times book – twice the 0.8 times it is trading at now. So why the big discounts to theoretical fair value? There are two reasons why these may be justified.

First, if the UK economy performs worse than expected, returns on equity will be lower, leading investors to give the shares a lower multiple. Second, if future losses are worse than expected, current book value assumptions may be too high. Sure, it’s hard to see writedowns alone being enough to warrant the banks’ discounts. HBOS would need to impair its book value by £11 billion – more than enough to write down all its US mortgage backed assets to zero. RBS would need a hit of more than £30 billion, enough to swallow its remaining exposure to subprime, monolines and leveraged loans with roughly £10 billion to spare.

But it is easy to envisage a big drop in profitability if the UK economy continues to slow. To justify the current discounts, returns on equity for HBOS and RBS only need to fall to 10 per cent and 9 per cent respectively. That may look low by recent UK bank standards, but they look healthy by the standards of the late 1980s and early 1990s, the last time the UK economy took a significant dive. That slowdown depressed returns on equity at Bank of Scotland, one of HBOS’s parents, as low as 7 per cent and at RBS to less than 2 per cent, while Barclays and Lloyds reported annual losses.

Construction slump wrecks plan to boost supply of new homes
The Government's plans to ease the UK's housing shortage by building some two million new homes by 2016 were close to collapse last night, as official figures revealed that private and public housing starts slumped in the first quarter of this year.

The Government wants to see 240,000 new properties built each year, but is already behind on its targets with only 200,000 homes completed in 2007. Yesterday, the Office for National Statistics said that private housing orders fell by 29 per cent in the three months to March compared with the same period in 2007.
Some £1.4bn worth of private housing was started during the period, the lowest figure since the final quarter of 2000.

The slowdown in the private new homes sector appears to be gathering pace, with the level of starts falling for the fourth month in a row during March to just £420m worth of properties, the lowest figure since November 2000 and nearly half the recent peak of £793m in May last year. Public housing and housing association orders are down by even more, with the ONS reporting a 36 per cent decline.

The figures were published a day after the Prime Minister reaffirmed his determination to ease the problems in the housing market. Mr Brown said on Wednesday: "My aim and my priority is that we can lead the people in Britain through this economic problem and do so by taking the right decisions to get liquidity to the banks, to make sure that the housing market starts moving again." Caroline Flint, the Housing minister, said: "It is essential – and in their own interest – for house-builders to base their decisions on the solid footing of the economy and longer-term trends."

So far, however, construction companies have been reluctant to take ministers' advice. Yesterday, Hammerson became the latest company in the beleaguered industry to report challenging times, warning that banks' reluctance to lend money was hampering the launch of new projects in the commercial sector. Hammerson said it had suffered from further falls in property values and an easing in City of London rents as banks cut staff numbers because of the credit crunch.

The company, which owns shopping centres including Brent Cross in London and West Quay in Southampton, said retailers faced weak conditions, but added it continued to attract firms to major developments in Bristol and Leicester. The group said: "The banking sector has remained cautious about advancing new loans, particularly to the commercial real estate sector. Activity in real estate markets remains restricted and it is apparent that there have been further declines in UK property values."

UK job cuts feared in economic slowdown
Britain could be heading for an "avalanche of redundancies" in the coming months as economic reality finally catches up with the jobs market, a leading expert has warned. John Philpott, of the Chartered Institute of Personnel and Development, said that the labour market was now close to its peak, and that the rise in unemployment could be more sudden and sharp than in previous economic downturns.

At 5.2pc, the unemployment rate is currently the lowest in many years. The warning comes amid growing fears that, having enjoyed some of its best months on record, the jobs market is set for an imminent deterioration. He said: "I don't believe the labour market can defy gravity. It would be a miracle if there weren't some softening. We probably have peaked and unemployment will go up a little bit.

"The conditions are building for an avalanche - the question is whether there will be a trigger point. I suspect the housing market will hold the key. If you get a bigger shock than people are anticipating that will have a knock-on effect, which could cause jobs to tumble." He said that because of the way employers had behaved in recent years, tending to hoard labour and limit wage increases rather than laying off workers, there may be a sudden rise in redundancies rather than a gradual increase.

This would mirror the experience in the US, where unemployment suddenly leapt dramatically a few months ago. Stephen Nickell, Warden of Nuffield College, Oxford, and a former Bank of England policymaker, warned that with the economy slowing unemployment was likely to creep up. "It's a lagging indicator," he said. "If there's a slowdown in output growth then it will go up, and the amount it goes up depends on the slowdown.

UK: Office rents tumble as City firms cut jobs
Hammerson, the commercial property company, said rents in the City of London office market were falling because banks were shedding jobs in the wake of the credit crunch and needed less space. At the same time more office developments are being completed, so there is more space available just when demand is diminishing, pushing rents down.

Last week Moody's downgraded the City's office market to a "code red" rating, deeming it under "imminent stress". The ratings agency said London's financial district was experiencing the fastest growing vacancy rates across Europe. The retail property market is also being hit, Hammerson said, as retailers respond to low consumer confidence and a reduction in spending.

Hammerson, a FTSE 100 company, said in a trading statement yesterday that the vacancy rate within its shopping centre and retail parks portfolio was 2.6pc. Falling values and demand for space have made the commercial property sector one of the worst hit by the credit crunch.

Yesterday, the Bank of England said Britain's banks could lose as much as £5bn, a fifth of their profits, from their investments in commercial property. The Bank said in its Financial Stability Report that despite 15pc price falls in the sector, banks continued to invest and would pay the price eventually with write-downs.

Hammerson has borrowed £750m since December 31. Chief executive John Richards said the company had invested only in "prime" property and would "weather" the downturn well. The vacancy rate of its portfolio as a whole is 2.1pc. Tenants have an average of 10 years left on their leases.

Fixed-rate borrowers pay extra £600 a year
The six million home owners on fixed-rate mortgages are paying more on their loans than at any time in the past eight years, according to official figures. The average fixed-rate mortgage holder has to pay £600 a year more than at the start of last year even though the Bank of England base rate is the same at 5 per cent.
The figures were published by the Bank of England as Cheltenham & Gloucester, the fourth biggest lender, increased its rates to new customers for the third time in a month, suggesting that the turmoil in the mortgage market has yet to subside. The Bank data is regarded as highly significant. It shows the rate at which banks are actually lending households money, as opposed to the mortgage rates they advertise.

So far, the credit crisis has affected only borrowers taking out new deals. This data shows the impact on fixed-rate borrowers. They paid 5.47 per cent during March on average, up from 5.43 per cent the month before and 0.40 percentage points higher than at the start of 2007. The increase equates to an extra £50 a month or £600 a year on a typical £150,000 interest-only home loan. Philip Shaw, an economist at the asset management firm Investec, said: "The figures are significant because they apply to outstanding mortgages rather than just new mortgages."

Cheltenham & Gloucester increased its fixed rate and tracker rate by up to 0.56 percentage points. The most popular two-year, fixed-rate deal was increased from 5.99 per cent to 6.25 per cent. Melanie Bien, director at the mortgage broker Savills, said it showed that the Bank's pumping of £50 billion into the financial system was not having an effect in the short term.

Hopes of a further cut in the base rate next week were dashed yesterday after figures showed that inflationary pressures are still growing. Manufacturers are passing on the soaring costs of food, energy and oil-related items such as packaging to customers at the fastest pace since 1999, when the Chartered Institute of Purchasing and Supply started its records. Most economists expect inflation to increase from this month's 2.5 per cent to 3 per cent over the summer. The Bank's Monetary Policy Committee's aims to keep inflation at the Government target of 2 per cent.

A record number of people, at least 10,000 a month, will become insolvent this year, financial experts warned yesterday. Official figures will show today that in the first three months of the year about 26,000 people were declared bankrupt or took out an Individual Voluntary Arrangements – a less stringent form of bankruptcy.

Ilargi: I’m not quite done with the insane statements oozing out of the Bank of England. They present zero proof of their assessment that over-pessimism haunts the markets. Instead, they seem to prepare themselves for a situation in which they can say that all would have been well if people wouldn’t have been so afraid; in other words, don’t blame us.

In the meantime, they take on worthless securities in order to get banks ready to write more mortgages for grossly overvalued homes. And that is not just insane, it’s criminal. It’s not a central bank’s task to suck more people into debt that they can’t pay off.

The British housing market will never, NEVER, return to the levels and numbers it has seen in the past 5 years. Anyone buying a house today is an idiot; but there’s plenty of them, more often than not encouraged by statements like these from Mervyn King. England is so doomed.

Credit crisis exaggerated - Bank of England
The Bank of England said overnight that British commercial banks had overestimated their exposure to the collapsed US subprime home loan sector and the subsequent global squeeze on credit. The bank did not quantify the overestimation, which it said could be a factor in a loss of confidence that has afflicted certain financial institutions.

A large number of global banks have declared heavy losses from US mortgage-backed securities, which were effectively bets placed on high-risk American borrowers repaying their mortgages. The credit crunch erupted last August, as many subprime US borrowers failed to keep up with their home loan repayments, forcing major commercial banks to tighten up their lending criteria.

"Estimates of the ultimate losses to the financial system and real economy implied by current market prices are a significant overestimate," the Bank of England (BoE) said in a half-yearly report on financial stability. "Over-pessimism about these losses may itself be denting confidence and may be delaying the return of investor risk appetite and the recovery of asset prices."

Furthermore, the BoE said that commercial banks were becoming too cautious in their lending criteria. "The pricing of risk in credit markets seems to have swung from being unsustainably low last summer to being temporarily too high relative to fundamentals," said John Gieve, BoE deputy governor for financial stability.

Last week, the central bank had unveiled a £50 billion ($106 billion) plan to get banks lending again in the latest attempt to combat the global credit crunch. Under the plan, the BoE will allow high street banks to swap British mortgage-backed securities for government bonds in a bid to boost their liquidity amid stubborn and widespread fears of subprime exposure.

"Rising US sub-prime defaults were the trigger for a broad-based repricing of risk and deleveraging in credit markets," the BoE said in its report. "An adjustment was needed after the credit boom and will inevitably have costs, but it is proving even more prolonged and difficult than anticipated.

"Prices in some credit markets are likely to overstate the losses that will ultimately be felt by the financial system and the economy as a whole, as they appear to include large discounts for illiquidity and uncertainty," said the British central bank. With some assets undervalued, investment should soon flow back into the financial sector, helping companies' balance sheets, the BoE added.

Credit Rally Won't Save The Bank Of England
The Bank of England put a positive spin on the credit crunch on Thursday, but the threats to economic growth are still there--and are likely to require some easing of monetary policy. Even if the somewhat surprising rally in the credit markets this month suggests that investors are slowly but surely re-considering the unpopular world of debt, identifying a knock-on effect in terms of macroeconomic confidence may be still far off.

"Recent weak data and survey evidence relating to consumer confidence, retail sales, the housing market and manufacturing raises concern that the U.K. economic downturn is deepening," said Howard Archer, chief European economist for Global Insight, "and adds to the pressure on the Bank of England to cut interest rates further sooner rather than later." The key rate in the U.K. is currently 5.0%, and, even if it is too soon to see a cut to 4.75% this month, Archer said a cut would still probably take place in June.

The Bank of England's stability report on Thursday was more bullish than usual. It spoke of the improving atmosphere in the credit markets, with better bond pricing and narrowing credit default swap spreads; it even dreamed of the day when banks would start marking up--not marking down--their unloved asset-backed securities. "The Bank of England is probably a little bit behind the curve," said Leigh Goodwin, an analyst with Fox-Pitt, Kelton Cochran Caronia Waller. He told that a lot of what the Bank of England had observed in the credit markets had been spotted earlier by analysts and commentators; the overall view of the report was backward rather than forward looking.

But, on a more fundamental level, the fact is that improvement in credit does not directly lead to an improvement in equities. While narrowing spreads in the credit market suggest that there is less fear of companies defaulting on their debt, British banking equities are still under pressure from holes in the balance sheet and a difficult trading environment.

Major banks in Britain are on the hunt for capital, with Royal Bank of Scotland set to launch a record 12 billion pound ($23.8 billion) rights issue and HBOS looking for a more modest 4 billion pounds ($7.9 billion). The situation looks less urgent for Barclays, but investment banking profits will necessarily take a hit as less business comes in.

A Wrong Policy and Its Consequences: Blaming the Yuan for the Deficit with China
The U.S. deficit with China had reached a record high, and the Americans were increasing the pressure on the Chinese government to further revalue the yuan to help reduce the trade gap when I visited Charles Lee in his medium-size factory in Shenzhen one late evening last summer.

Clad in hooded uniforms, young men and women were busy, making decorative soap, baby shampoo, bubble bath, and soap crayons. Elsewhere on the compound, others were packaging the products, preparing them for shipment to Walmart stores in the United States before the Christmas Season. A picture of Spiderman decorated the small blue packages of bubble bath trademarked by a company in New Jersey. There were no sign of Lee's factory. 

Charles Lee and his workers are among the unknown faces behind the vast and elaborate production chain used by American companies, and the rising deficit with China. His factory is one of the thousands of labor-intensive enterprises supplying the American market through subcontracting agreements. The yuan appreciation was hurting Lee's business, and many others like his, but the deficit was showing no sign of decline.

Conceding to American pressures, China relinquished its decade-long policy of pegging the yuan to the dollar in July 2005. The yuan rose by more than 5% in the first year, 12% by the end of 2007, and 14.13% by March 2008. Meanwhile, the trade deficit with China continued to swell by more than 15 percent, from $201 billion in 2005 to $232 billion in 2006; it reached $256 billion by the end of 2007.

An otherwise potent policy instrument had become ineffective in narrowing the trade gap. Instead, it was leading to harsh consequences for workers of many small and medium size factories in China. The American policy makers had gotten the story of China and its role in the U.S. economy all wrong.

Argentine Bonds Plunge on Mounting Default Concerns
Argentine bonds show growing speculation that the country will default for the second time this decade as inflation and anti-government protests swell. The nation's $10.8 billion of floating-rate dollar bonds due in 2012 yielded 7.20 percentage points more than Treasuries of similar maturity at 5:43 p.m. in New York. That implies an almost 20 percent chance of Argentina halting payments in the next two years, according to Credit Suisse Group. No other emerging-market government securities have as high a probability of default.

The 19 percent decline in bond prices since President Cristina Fernandez de Kirchner took office in December shows investors are losing faith even as record commodity exports spur the longest economic expansion in at least two decades. Confidence waned after statisticians accused the government of fabricating data to hide an inflation surge and farmers alienated by a tax increase staged a nationwide strike that caused food shortages last month.

"Argentina has serious problems," said Igor Arsenin, an emerging-markets strategist at Credit Suisse in New York. "There's a lack of investor confidence. They are concerned lenders won't be willing to extend credit if this continues."
The country's floating-rate dollar bonds fell 19 cents on the dollar to 54 cents in the past year. Argentina's bonds are the worst performing emerging-market debt, according to JPMorgan Chase & Co.

Credit-default swaps tied to the country's debt and expiring in 2010 rose 1.88 percentage points to 4.92 percentage points this year, according to Bloomberg data. That means it costs $492,000 to protect $10 million of bonds from default. Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. The bonds are falling even though growth exceeded 8.5 percent in each of the past five years amid a rally in soybeans, wheat and corn that pushed up prices by more than 100 percent.

Foreign reserves jumped to a record $50.5 billion in March. Credit Suisse forecasts a budget surplus equal to 1.1 percent of gross domestic product this year, a reminder of late Citibank Chairman Walter Wriston's comment following Mexico's default in the 1980s that a "country does not go bankrupt." The expansion increased inflation that Fernandez's predecessor, her husband Nestor Kirchner, tried to conceal last year by tapping a political appointee to rig the data, according to union workers at the National Statistics Institute.

Jobs may be about as safe as houses from now on
Since August it's been pretty much bad news all the way for the economy. House prices, interest rates, inflation (that's the real inflation you and I suffer, not the official version) and consumer confidence. The rare bright spots have been manufacturing, bolstered by a weakening pound, and employment. People's jobs have appeared remarkably secure, given the turmoil surrounding us in the credit markets and a banking crisis which has seen Northern Rock, Bear Stearns, UBS and Royal Bank of Scotland, among many others, suffer trauma.

Jobs have been lost in financial services, but can employment levels more generally keep defying gravity while most other economic measures are falling to earth? Perhaps employers, in the private sector anyway, are more efficient than those entering our last sustained downturn in 1990. Costs have been regularly extracted in recent years, companies having learned the lessons of the dotcom excesses. Private equity has had a part to play in that but quoted companies have been under particular scrutiny as well from investors.

Corporate Britain is already lean and mean and in a fit state to face the tough times - perhaps. We've imported large amounts of employment from places such as Poland, so can export unemployment back to markets where there is a labour shortage. This would be Europe's more flexible labour market working in practice.

We've also had rapid employment growth in the public sector where forced redundancies are less likely for political reasons - they may have been non-jobs in the first place but they're likely to remain non-jobs for the foreseeable future. Pay has also changed and more people are remunerated partly through bonuses, which are related to economic performance, so can fall to reflect a downturn but don't necessarily require cutting jobs.

Hoarding labour also avoids hiring it back more expensively when the economy turns. But the employment rate is a lagging indicator and job losses are now making the news. Employment has reached a peak and from here, reports of an avalanche of future job losses may not be exaggerated.

GM Canada sales slide 13 per cent
Long-time market leader General Motors of Canada Ltd. had a 13 per cent drop in sales volumes last month, while Chrysler Canada Inc., Toyota Canada Inc. and especially Honda Canada Inc. recorded increases compared with April, 2007, according to statistics compiled by DesRosiers Automotive Consultants Inc. GM saw its once-dominant market share eroded even further, falling to 22.5 per cent last month from 24.7 per cent a year earlier, as sales of cars and light trucks fell to 38,599, down from 44,651 vehicles in April, 2007.

Ford Motor Co. of Canada Ltd.'s sales volume also fell, but less dramatically. Its sales fell to 20,991 units from 21,973 in the same period last year, pushing down its market share to 12.6 per cent from 13.3 per cent.. Chrysler, the only North American-based auto maker to increase Canadian sales, also saw its markets slip, but only slightly, to 14.6 per cent from 14.9 per cent. Its sales volumes increased by 7 per cent to 24,136 units from 22,514 last year.

But despite the declines at GM and Ford, overall Canadian sales volumes were up in April, according to DesRosiers. Sales of light vehicles of all nameplates rose to 175,205 from 168,984 — an increase of 3.7 per cent. Sales of passenger cars accounted for most of the increase, rising by 6.1 per cent to 98,327 from 92,641, while light truck sales were essentially the same as last year at 76,878 (compared with 76,343). The three Detroit-based companies saw their market as a whole fall to 49.7 per cent, from 52.9 per cent, while Asian and European nameplates gained proportionately.

Ilargi: The same crime is being committed all over the world. Time to call your MP’s, Canadians.

Carney seeks wider powers for Bank of Canada
Bank of Canada Governor Mark Carney asked parliamentarians to give him the power to take more assets onto the central bank's books to help ease strains in financial markets. Mr. Carney, taking questions Wednesday at the House of Commons finance committee, said the central bank lacks the “full modern flexibility” of peers such as the U.S. Federal Reserve and European Central Bank to deal with crises of liquidity.

While those institutions moved to break jams in financial markets by agreeing to lend cash to commercial lenders in exchange for asset-backed securities as collateral, the Bank of Canada was forced to sit on its hands because the Bank of Canada Act prohibits policy makers from accepting riskier securities, Mr. Carney said. That limits the Bank of Canada's ability to target corners of the credit market that aren't working, he said. “The issues we are facing right now are issues of liquidity to core bits of the market,” Mr. Carney told the committee.

Parliament is debating legislation backed by Finance Minister Jim Flaherty that would provide the changes Mr. Carney is seeking. On Tuesday, the Bank of Canada said it would extend a facility that will make $2-billion available to lenders on a 28-day basis in exchange for securities backed by the federal and provincial governments and some short-term paper such as bankers' acceptance contracts. Mr. Carney said the Bank of Canada rolled over the program because credit markets “remain somewhat strained.”

Carney urges perspective on economic slowdown
Bank of Canada Governor Mark Carney said policy makers are looking past a report that showed the economy shrank in February and urged other Canadians to do the same. “There needs to be a lot of perspective here,” Mr. Carney said at a press conference in Ottawa. “There is a lot of strength in this economy.”

Mr. Carney made the comment in response to a question about whether he was concerned about newspaper headlines and analysis that imply Canada is flirting with a recession. Statistics Canada reported Wednesday that Canada's gross domestic product contracted by 0.2 per cent in February, a decline that caught many economists by surprise.

Mr. Carney said policy makers don't put much emphasis on any one piece of data, and that the Bank of Canada stands by its projection that growth will slow from last year's pace of 2.7 per cent over the first half of 2008 and speed up by year's end. The Bank of Canada last week estimated that Canada's economy will expand 1.4 per cent this year because weaker demand in the U.S. and other countries will sap demand for exports.

Carney 'confident' Canada will dodge recession
Bank of Canada Governor Mark Carney said he believes the Canadian economy has "a lot of strength" and won't sink into a recession. "I'm confident," Mr. Carney told reporters Thursday after testifying to the Senate banking committee in Ottawa, when asked if Canada would avoid a recession. "There are things both in the domestic economy and in the global economy that sustain the Canadian economy."

Mr. Carney said potential losses from the global credit crisis are hard to gauge, because financial institutions have used derivatives to estimate the value of some assets that are difficult to trade. The derivatives have "implied default probabilities" that are "substantially higher" than history would indicate and thus may be overstated, he said. The central bank would be hard-pressed to rescue financial institutions as the U.S. Federal Reserve did with Bear Stearns Cos. earlier this year, Mr. Carney hinted.

"People bear the cost of their decisions," he said. "In the case of financial institutions which would have taken excessive risk, the people who bear the consequences of that are the shareholders and the senior management. There should never have been any doubt about that." The 43-year-old central banker also said Canadian policy makers need more flexibility in conducting auctions of securities, such as being able to include assets such as corporate bonds and money-market securities.

"We're restricted in conducting auctions, which is the best method to get the best price and to get the most information about where the liquidity issues are," Mr. Carney said, adding that most other central banks have the freedom the Bank of Canada is seeking. The central bank, on its own and in tandem with counterparts in the U.S. and Europe, in the past year has pumped billions of dollars into the financial system, accepted new collateral on loans and sought wider powers to mitigate problems in markets.

A proposal in Finance Minister Jim Flaherty's budget would expand the central bank's powers to provide liquidity during financial crises. Before his recession comment, Mr. Carney reiterated in his testimony that he likely will need to lower interest rates again after four cuts since December, citing the slowest economic growth in 16 years and an inflation rate below target. The central bank aims to keep inflation at 2%, and it was 1.4% in March.

Policy makers lowered the key rate half a percentage point on April 22 for the second straight meeting, to 3%, the lowest since 2005. The economy will slow in the next two years because of the global credit shortage and a slump in exports to the U.S., the country's biggest market, the bank predicts. The next interest-rate decision is June 10.

Mr. Carney also said on Thursday that Canadian banks have not yet met the central bank's criteria for taking asset-backed commercial paper as collateral. "We have the program in place and the banks continue to work on it," Mr. Carney told the Senate banking committee. "We're continuing to meet with the banks. My view is it will take some time for them to fully get there, but at the end of it we'll have an asset we're comfortable taking."

The Canadian subprimes
I have been arranging mortgages for the last 18 years in Canada, brokering for the last 12 and have seen many changes in the industry. However, find it absolutely shocking that most Canadians don’t think we even have a Subprime market in Canada.

The introduction of the 40 year amortizations, true no money down financing and stated income programs allowing clients to fabricate their income and purchase with 5% down are truly the driving force in the market. Do I agree with these programs? No…. But these programs have seemed to become acceptable by the Bank’s and the public as the new industry standards.[..]

I find it amazing that the number of children a family has does not effect servicing. If you have no children or 6, the application is exactly the same. I have 3 children ages 13,10 and 7 and my monthly food bill now tops $1000 per month and yet this expense does not appear on the application.

Fortunately I no longer require daycare, but at one point I was paying in excess of $1000 per month for that as well. And yet that expense does not appear either. Families with young children are likely paying out $2000 per month in daycare, food, diapers, clothing that has not been factored in as an expense.

Now let’s also look at a parent on a maternity leave who is now receiving usually less then half of the income for a full 12 months…..during that same period of added expense. Guess what, the banks will approve a mortgage based on the full income. So my next addition to the subprime market is the young Canadian family.

Berlin Drops the Ball on Tackling World Hunger
The German government is failing spectacularly to find a common strategy to address the current global food crisis. Ministers seem to prefer protecting their pet projects and are pointing the finger at each other rather than working together to ease the suffering in developing countries.

It’s a worrying situation. Thirty-three countries are on the verge of hunger riots, according to World Bank President Robert Zoellick, while United Nations Secretary-General Ban Ki-moon warns that high food prices risked wiping out progress towards reducing hunger and poverty that has been made up to now.

Yet in Berlin, no one seems particularly concerned. Just how apathetically the German government is reacting to the growing danger could be seen last Wednesday, when most ministers were absent during a parliamentary debate on the issue. Only Development Minister Heidemarie Wieczorek-Zeul from the Social Democratic Party (SPD) seemed to follow the debate on the world food crisis with much attention. Deputy Foreign Minister Gernot Erler, also from the SPD, let his head fall sleepily to his chest. Agriculture Minister Horst Seehofer of the conservative Christian Democrats (CDU) wrote text message after text message on his mobile phone.

In between messages, Seehofer spoke a few lackluster sentences into the microphone -- then told the parliament that the food crisis was not his area of responsibility. “What needs to change is not agricultural policy, but development policy,” he said. The comment was directed at Wieczorek-Zeul and her tightfisted aid to farmers in developing countries.

That makes the development minister angry. In her opinion, German agricultural policy shares the blame. Export subsidies for farmers in Europe aggravate the global food shortage, she says, and they have “promoted unfair competition at the expense of small farmers in developing countries.”

The finger-pointing between Seehofer and Wieczorek-Zeul is typical of the government’s handling of the crisis. No minister wants to be held accountable, much less own up to conflicting interests. Fault always lies with another politician, in a high-level governmental blame game. There is not even a consensus when it comes to analyzing the origins of the food crisis.

Ilargi: A few points:
1/ US food aid moves through ADM/Cargill, Monsanto etc., who use their position to further increase their grip on agriculture in the developing world
2/ Look at where the “new aid” is located:
"The new monies are in a 70-billion-dollar spending measure that includes funding for the wars in Iraq and Afghanistan and was sent to Congress on Thursday".
There’s a lot of hunger in both countries the US invaded this decade. No further comment.

Bush seeks 770 million dollars to face food crisis
US President George W. Bush urged lawmakers Thursday to approve 770 million dollars in new aid to cope with soaring food prices that have left many hungry and fueled angry protests around the world. "With the new international funding I'm announcing today, we're sending a clear message to the world that America will lead the fight against hunger for years to come," he said in a hastily called public appearance.

Warning that "more needs to be done," Bush said the monies would be in addition to another 200 million dollars the White House freed up earlier this month and urged the US Congress to act "as soon as possible." "In some of the world's poorest nations, rising prices can mean the difference between getting a daily meal and going without food," he said, as millions of workers around the world made soaring food prices their May Day battle cry. "The American people are generous people and compassionate people. We believe in the timeless truth, to whom much is given, much is expected," said the US president.

Experts blame soaring prices on a confluence of factors, including trade restrictions; increased demand from a changing diet in Asia; poor growing weather; rising use of biofuels that rely on staples like corn; and soaring fuel prices that make transporting foodstuffs more expensive. The World Bank said last month that a doubling of food prices over the past three years could push 100 million people in poorer developing countries further into poverty.

The Bank, which launched a "New Deal" to fight hunger, estimated that 33 countries were threatened with political and social unrest because of the skyrocketing costs of food and energy. House Speaker Nancy Pelosi pledged in a statement that lawmakers "will respond rapidly to the growing urgent need for international food assistance," though she did not explicitly mention Bush's request. In the United States, rising food costs have piled on top of other woes battering the world's richest economy, including skyrocketing gasoline prices and a jump in housing foreclosures amid a mortgage crisis.

"At home, we are working to ensure that the neediest among us can cope with the rising food prices," Bush said, citing gradual increases in government aid since he took office in 2001 and emergency bumps this year. The new monies are in a 70-billion-dollar spending measure that includes funding for the wars in Iraq and Afghanistan and was sent to Congress on Thursday.

Pakistan food crisis worsening: UN
Pakistan has advanced from 14th to 6th place among the countries entrapped in serious food crises. This was stated by United Nations Information Centre spokesperson Amina Kamal while briefing about the release of a new report from United Nations.

The report has been issued from Geneva according to which the UN is aiming to come up with a new strategy to counter the global food crisis in June and has announced to introduce a new high-powered task force to organize responses to the global rise in food prices. She said that the food crisis has gripped the globe and Pakistan is among the most affected countries which is not only facing the food shortage but also the price-hike in the staple food items like wheat and rice.

"Main issue is not only limited to the food shortage but the price hike is affecting the malnutrition here due to which the people are changing their priorities and compromising on their basic needs like health, shelter and education." UN spokesperson said.

Highlighting the UN future strategy, she said that the UN agencies here have been activated earlier and are monitoring the whole issue very seriously, as United Nations Food and Agriculture Organisation and World Food Programme are conducting surveys across the country to study the issue deeply and to come up with positive remedies.


peakto said...


You sound like I feel this far as I can see everything was contradictory this week in economics, and resources.

Massive resource disruptions (albeit temporary), yet oil goes down, potash and other resource stocks take hits.

USD goes UP!!! WTF?

Only 20,000 jobs lost...yeah right. 2 businesses on my block(Toronto) are already in heavy recession cut backs and mine too...we feel the pain. 20,000 yeah right.

But the behind the scenes(FED, etc) action is so impossible to comprehend that I am fear mentioning thoughts or predictions to friends.

It just might do the opposite in the short term.

In the longer term, I think I am confident that they can't get around the consequences.

Stoneleigh said...

Don't expect markets to be rational, either on the way up or the way down. Most market participants have no real information. All they can do is to copy others - jumping on passing bandwagons too late, and being stuck with the empty bag when the decline starts again.

This latest rally is nothing more than a baseless and temporary resurgence of optimism. It has nothing to do with the fundamentals because fundamentals don't really drive the markets - herding does. Feel-good messages in the media reflect that optimism and look for rationalizations for it.

Once the mood turns again - and it can do so on a dime - the coverage will change with it and the rally will be over. I don't think we're far from that point. I would expect the rally to top this month, and quite possibly sooner rather than later. The next phase of the decline should then pick up speed quite quickly and should lead to some serious fireworks in the markets.

Counter-trend rallies of various sizes are simply part of how markets function, even during seizures, because they reflect the very human tug-of-war between greed and fear. There's absolutely nothing rational about them, just as there was nothing rational or justified-by-the-fundamentals about the mania that went before (a spectacular collective suspension of judgment functions if ever there was one).

Anonymous said...

According to Bank of Canada Governor Carney, we have little to fear on the recession front. Just ignore the man behind the curtain, who is

(1) Continually lowering interest rates,

(2) Continually "injecting liquidity" into the banking industry, and now

(3) Asking to take bad debts onto the Bank's books, for which there's no other purpose than to bail out banks.

Whatever you say, Mr. Wizard. How many times do I click my heels to get back to Kansas?

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