Wednesday, May 28, 2008

Debt Rattle, May 28 2008: Record highs and lows

Dorothea Lange Imperial Valley March 1937, Imperial Valley, California
Migratory Mexican field worker and baby outside home next to pea field.

Please see also: What is the earth worth?

Ilargi: Many people will find it hard to believe my prediction that US home prices will fall 80%, or more, peak to trough. And I don’t blame them, it's a big number.

I have no doubt I'm right though. To see why, I think everyone should contemplate this little set of numbers:
• Nationwide, home prices are down over 14% in the past year.
• Q1 ‘08 was 6.7% lower than Q4 ‘07.
• March was down 2.2% over February, which was 2.6% lower than January.
• This suggests accelerating price losses: at the lower number, 2.2% per month, the annual decline is 26.4%.
Note: these are homes for which buyers were actually found.

And then realize that prices today are still 60% higher than they were in 2000.

Would you be willing to bet they can’t revert to what they were just 8 years ago? With inventory at record highs, and new home sales down 42%? Here's another quote from today:

"Construction is expected to drop to the slowest pace since the 1940s and prices are expected to decline by the largest amount since the Great Depression."

Case-Shiller index makes the bottom of the housing market look distant
S&P/Case-Shiller first quarter home price indexes released May 27 should be a reality check for anybody still arguing that the real estate market is bottoming out. The national index showed that prices fell 14.1% from a year earlier — the biggest drop in 20 years.

Sales of foreclosed properties are pushing down prices, especially in weak markets such as South Florida, Nevada, Southern California, Arizona and Rhode Island. The problem isn’t just that prices are plunging. It’s that the inventory of unsold homes is growing and must shrink dramatically before a turnaround is possible.

The number of homes available for sale jumped 10.5% to 4.55 million at the end of April, representing an 11.2-month supply at the current sales pace. Compare that to January 2005 when the market had a tight 3.6-month supply of homes. Nationally, prices have returned to levels that haven’t been seen since June 2004 (though they’re still 60% higher than they were in 2000), [said] David Blitzer, chairman of the index committee at Standard & Poor’s.

Blitzer said banks have finally gotten aggressive about cutting prices to remove foreclosed homes from their books and that’s pushing the index down. “To get the housing market to turn around and stabilize, you have to have less supply out there,” Blitzer said. The declines aren’t necessarily contained to a few bad markets – though only a handful of states are seeing massive drops.

A recent report by the National Association of Realtors, which reported a 7.7% drop in first quarter median home prices, showed that prices in two-thirds of the more than 150 metro areas that it monitors were down. Of course, not all markets are in free fall. Charlotte, N.C. actually saw an 0.8% gain in the first quarter compared to a year earlier, according to Case-Shiller.

Those looking for signs of a recovery will likely point to today’s new home report released by the Commerce Department, showing that new home sales jumped 3.3% in April – the first increase in six months. But the slight rise comes after a 11% drop in March. Even the National Association of Builders saw little to trumpet in the data despite a slight reduction in new home inventory, which dropped from a seasonally adjusted 11.1 months supply in March to 10.6 months in April.

“The modest bounce-back in new-home sales recorded for April followed a sharp decline in March and belies the fundamental weakness that continues to exist in the nation’s housing market,” NAHB Chief Economist David Seiders said in a prepared statement. “Indeed, sales were down 42% on a year-over-year basis, the largest such reversal since September 1981. Our latest builder surveys actually show that home buying has not yet stabilized, and we are anticipating some further erosion over the coming months.”

Ilargi: After a few months of relative quiet, facilitated by capital injections, the monoline insurers are back in the headlines (or should that be "headlights"?). They’re clinging to the only hope they have: a Lazarus act in the US housing market.

A Debt End For Banks
Battered investment banks trying to dump billions in soured mortgage securities are being challenged by struggling insurance companies that claim such efforts could cause them further pain. It's a battle that pits large financial firms like UBS, Merrill Lynch and Citigroup against insurers MBIA, Ambac and others.

These insurers, which the industry refers to as "monolines," provide specialty insurance used to protect investors from losses on various types of debt securities. At issue is a type of protection that banks have obtained against defaults that is now preventing them from purging portions of their holdings of arcane mortgage securities known as collateralized debt obligations.

Under the terms of this protection, the banks need approval from the monolines in order to unwind these securities - and obtaining that OK is proving difficult in some cases. For the past several months as the credit crunch has pummeled mortgages and other forms of debt, a lot of collateral used to form CDOs has triggered defaults due to rating agency downgrades.

As a result, if the banks begin dumping these problem securities, financial guarantors would be forced to pay default claims almost immediately - a tall order for companies whose financial future is already murky. Typically, monolines pay out claims on losses over a period of 20 or 30 years, but the types of sales that the banks are looking to score would accelerate those payments and further hammer companies already hurting.

The banks appear to recognize that the insurers are unlikely to be able to cough up the cash needed to pay off these losses. That has led to discussions about whether to waive claims payments in exchange for cash or warrants in certain publicly traded monoline companies.

"Clearly, liquidation into this market is tough but holding on long term might not be your best case," said Joe Messineo, who runs a New York-based structured finance consulting firm. "Not many people envisioned the magnitude of this would come down to documents."

Although there are hardly any buyers for CDO paper, the banks would be able to unwind the CDOs and essentially purchase the assets that comprise the complex debt structures - a move that might allow them to better assess the value of the assets and at least eliminate the fees associated with holding onto the debt as CDOs.

Second-lien fallout
There’s a monoline-related barney going on. >After raising capital in February and March, temporarily easing concerns about their future, the bond insurers are back in the spotlight. First there’s the matter of accountancy -  and the prospect of having to set aside money to cover losses on troubled securities earlier, namely when there are signs of deterioration rather than on default.

Shares fell on Friday on the news - and deteriorating sentiment over the past week has pushed MBIA and Ambac’s 5-year CDS back towards record wides seen in April, according to Gavan Nolan at Markit. There’s been other bad news for the sector, with the downgrade of CIFG to junk status.

There is also a growing spat over second-lien exposure (or exposure to second mortgages) - a brouhaha which now involves Moody’s, MBIA, Ambac, and research outfit CreditSights. The rating agency earlier this month put out a comment, noting the “persistent poor performance and continued downward rating migration among 2005-2007 vintage second lien mortgage securities.”
Moody’s notes that financial guarantors have significant exposure to second lien RMBS, primarily through guaranties on direct RMBS transactions, and to a lesser extent, through exposure to ABS CDOs, where second lien RMBS securities typically constitute less than 5% of collateral within such CDOs.
In a nutshell, the agency thinks that losses on these securities will be higher than previously thought, with ensuing impact within the monolines’ RMBS and ABS CDO portfolios.
Moody’s now expects 2005 vintage subprime second lien pools to lose 17% on average, 2006 vintage pools to lose 42% on average, and 2007 pools to lose 45% on average.
The two largest monolines begged to differ.  At least as far as their portfolios are concerned. From MBIA:
…we believe that there are significant differences between subprime second lien pools referenced in Moody’s report and the prime second lien securitizations we have guaranteed. As we discussed on our earnings call on Monday, May 12, we have modeled our portfolio on a deal by deal basis using issuer specific data and we are comfortable with the resulting loss reserves and stress analysis we reported to the market.
Ambac too responded with details of its exposure to home equity lines of credit (HELOC) and closed-end second mortgages (CES), arguing that it had been aggressive in its reserving against its exposure.

Then CreditSights got involved. The research outfit last week published a note arguing continued deterioration in second-lien exposure would be problematic for the two largest bond insurers. Specifically, the analyst wrote:
If losses were to migrate toward the higher end of Moody’s stress test, we think that a downgrade of both companies would become inevitable. Based on Moody’s most stressed case scenario, Ambac could be facing losses of more than $8bn and MBIA could be facing losses of more than $10bn. In our opinion, it is likely that both Ambac and MBIA will see continued deterioration in their second lien exposure in the second quarter.
Which is arguably where the matter should have been left. Moody’s had raised the issue first off, and both companies had responded robustly and publicly. But Ambac is apparently in fight-back mode.  The monoline has put a 23-slide presentation, running through second-lien RMBS on its website - and issued a statement taking issue with the CreditSights note.
The Credit Sights article offers little independent analysis, fails to consider the basic structural arrangements of individual transactions (one cannot simply multiply a cumulative loss assumption by net par outstanding to determine ultimate loss)  and does not attempt to reconcile to Moody’s previously reported RMBS losses for Ambac.
To which CreditSights has this week responded in kind, in support of its analyst. They argue that the note was merely running a worst-case scenario, and that “in the context of ABK’s myriad issues, we looked at the piece as relatively benign given the many slings and arrows that the monolines face on a daily basis.”  It concludes:
In the end, we stand by our analyst and his right to an opinion (misrepresented by third parties or otherwise) based not only on the data presented but also a minor dose of common sense based on what has transpired over the past year. Ambac has a right to its view as well.

Regardless, the market appears to have made some decisions long before this point, and the conclusions do not reflect well on Ambac or the credibility of risk models in place and underlying assumptions. The experience has been a bitter one for securities holders and more painful than the minor “sticks and stones” of critical analysis.
None of which serves to inform us whether the Armageddon-esque second-lien scenario will come to pass. But there is now, for those interested, ample more information to ponder in sizing up the possibilities.

Mark-to-market: Can we stop shooting the messenger now?
AIG's announcement last week that it will raise $20 billion in fresh capital ought to put an end to complaints that fair-value accounting has little or nothing to do with economic reality.

Only weeks earlier, the insurance giant argued that investors should ignore large reported losses on credit default swaps that it sold to banks and other buyers, contending such losses were the artificial result of accounting rules that required the company to mark to market financial instruments it did not own.

The implication, puzzling though it seems to us, is that the contracts AIG sold weren’t assets belonging on its balance sheet, as if the exposures they represented were somehow materially different from ordinary insurance AIG sells. The company also noted it had not experienced any cash losses on its derivative positions, as if its income statement and balance sheet could be safely ignored.

True, AIG’s complaint is somewhat different from that of other critics of fair-value accounting. They’ve argued that disclosures based on such rules were causing panic selling of derivatives tied to mortgages at risk of default and were therefore responsible for no small part of financial companies’ losses.

Yet panic selling is just as likely if investors think companies are hiding losses, which would be much easier to do in the absence of such disclosures. And if, on the other hand, losses produced by them are meaningless, as AIG has argued, then why does the company now find it necessary to raise so much new capital? The $20 billion is about $7.5 billion more than management recently suggested it would need.

Could it be that fair value actually gives investors a more accurate reading of financial conditions than the alternative—historical cost—does? That’s what the Financial Accounting Standards Board insists. And investors apparently agree: They’ve driven AIG’s stock down more than 25% since late February.

To believe otherwise is to suggest AIG is willing to raise a significant amount of capital, diluting shareholders’ interests in the process, for no good reason. We believe instead that the company is finally facing up to reality—and that it’s time to stop blaming accounting for the financial industry’s problems.

Investors Bet Persian Gulf Will Loosen Dollar Pegs
Hedge funds and other investors made bundles of money in the 1990s betting currency pegs around the world would break. They are at it again, only this time they are gambling currencies will soar, not plummet.
Among the prime targets are Persian Gulf nations that link their currencies to the U.S. dollar.

An economic boom has touched off rampant inflation in these countries. That is putting pressure on policy makers to allow their currencies to strengthen, something they have said they have no plans to do. But some investors are so keen on these economies that they think the currencies have nowhere to go but up.

Everest Capital Ltd., a $3 billion hedge fund based in Bermuda and specializing in emerging markets, wrote in a first-quarter note to investors that it was betting that Saudi Arabia, Qatar and the United Arab Emirates would loosen the hold on their currencies, allowing them to strengthen.

Trades like that represent a remarkable shift from the 1990s. Then, places like Mexico, Thailand and Russia linked their currencies to the dollar as a way to provide financial stability. As their economies floundered, investors pushed governments to break the pegs, which caused their currencies to tank and sparked broader financial crises.

Now the situation is reversed. Everest was founded in 1990 by Swiss-born Marko Dimitrijevic, who steered his firm through a near-death experience during Russia's 1998 default and currency crisis. His Everest Capital Global fund has posted an average annual gain of 26% over the past three years, despite being down in the first quarter of this year.

Everest wrote investors that as inflation mounted in the Gulf, fixed exchange rates "would be put under significant pressure." One bet already paid off. Last year, it made a wager on the Kuwaiti dinar, which became the first currency in the region to abandon a strict peg to the dollar.

Immediately after the link ended last May, Everest bet that the dinar would strengthen by buying currency forward contracts, which allow buyers to purchase a currency at a set price at some future date. It hedged the trade with options to sell.

The pressures in the Middle East are present in a less-extreme form throughout the developing world. Ukraine announced last week that it would revise its peg to the dollar at a new level that would strengthen the local currency, the hyrvnia. The currency is up about 10% since early April.

Art Steinmetz, who manages a $12 billion international bond portfolio at OppenheimerFunds, likens currencies pegged to the dollar to buoyant rafts dragged underwater by a heavy boat anchor. "The rope is pretty strained, and once it breaks, the rubber raft is going to shoot to the surface," he says.

Smart money is betting against the dollar
Not long ago, I wrote a post about the dollar's value and its relationship to interest rates. Part of that piece was concerned with the pressure some countries are feeling to break their currencies' peg to the dollar, in particular the petro states and China. Their economies are importing dollars by the plane-load, which they receive in exchange for exports to the U.S.

These countries maintain a constant--or near constant--exchange rate to the U.S. $. This peg enables their export industries to continue profiting from sales to the U.S.To maintain the peg, they buy up the dollars that flood into their economies with their own currency, flooding their economy with their own currency instead. This maintains the dollar peg, but it sparks inflation in the home currency.

At a certain point, it's more important to combat inflation than to support export-oriented industry. This is more of an existential threat to the American economy. If multiple countries dump their dollar pegs, it could spark a world-wide run on the dollar, which could make many of the exports we've come to depend on much more expensive.

Here is another quick explanation of the dynamic at play from an IMF paper that, ironically, was published only a year before the 1998 international currency crisis:
Many developing countries have reaped handsome rewards from surging capital inflows in recent years. This is widely regarded as a very welcome phenomenon, raising levels of investment and encouraging economic growth.

But surging capital inflows can also be something of a double-edged sword, inflicting rather less welcome and destabilizing side effects, including a tendency for the local currency to gain in value, undermining the competitiveness of export industries, and potentially giving rise to inflation.

Why inflation? Capital inflows result in a buildup of foreign exchange reserves. As these reserves are used to buy domestic currency, the domestic monetary base expands without a corresponding increase in production: too much money begins to chase too few goods and services.

UBS tells unit staff to avoid US visits
UBS has told members of its former private banking team responsible for rich US clients not to travel to America.
The Swiss bank has also made lawyers available to the more than 50 bankers involved, many of whom have left UBS since it decided last November to wind down its cross-border private banking business for US customers.

The move follows the recent indictment of one of the unit’s former senior executives, Bradley Birkenfeld, who US authorities have accused of helping a billionaire client evade taxes. Mr Birkenfeld has pleaded not guilty and his lawyers have made no public statement on the matter.

Lawyers for Mr Birkenfeld and the US government are due to appear before a judge next Monday “to resolve pre-trial motions and discovery problems”, according to court documents. Many members of UBS’s former US team have left the bank amid concerns about the investigations and fears that the bank might not support them if arrested. “Many of us have the feeling we’d be expendable,” said one former team member.

People familiar with the situation said these anxieties were exacerbated by UBS’s decision last December to send most of its Swiss-based US team to Art Basel Miami, a Florida arts event the bank sponsors, even though US authorities were increasing their scrutiny of the bank’s activities. UBS’s travel restrictions suggest it is concerned that the investigations by the US Department of Justice and the Securities and Exchange Commission may widen.

Martin Liechti, UBS’s Swiss-based head of international private banking for North and South America, was detained by the US authorities last month and remains in the US as a “material witness.” The Financial Times has learnt Mr Birkenfeld has been able to provide only two names to the US authorities, which may be fewer than investigators hoped for.

One, Igor Olenicoff, a US real estate tycoon, reached a legal settlement with the US DoJ last December and is co-operating with the authorities, people with knowledge of the situation said. Bankers suggested Mr Birkenfeld’s client list may have been significantly smaller than the 20 big clients senior members of the UBS team typically handled.

Mr Birkenfeld’s relationship with the bank soured after UBS claimed he had not performed to expectations. Mr Birkenfeld took legal action against UBS over his termination and then co-operated with the US authorities.

Fed Keeps Watch on Wall Street -- From the Inside
In the two months since the government rescue of Bear Stearns, the Federal Reserve has built on the fly a new system of monitoring investment banks, radically redefining the central bank's role overseeing Wall Street.

New York Fed employees are working inside major investment banks every day, alongside the Securities and Exchange Commission staff members who are the firms' main regulators. The Fed employees are trying to gather information the central bank can use to make sure the billions of dollars it is lending the investment firms, through a special emergency loan program enacted in March, are not being put at undue risk.

This new approach, which is still at a relatively small scale, offers a window into how the nation's system of regulating financial firms might evolve as policymakers sift through the financial wreckage of the past nine months. The Bush administration has proposed that the Fed become an all-purpose guarantor of the financial system, with the power to poke its head into any company that poses risks -- not just the large commercial banks it now supervises. Congress is likely to consider legislation overhauling financial regulation next year.

"Bear Stearns has forced an issue that we should have been thinking about anyway," said Douglas Elmendorf, a senior fellow at the Brookings Institution. "The issue isn't just that the Fed did this thing in March. It's that the Fed did what it did in March because investment banks posed risks to the overall financial system and the economy."

But it also creates risks. With the Fed having made emergency funds available to investment banks, lenders and those who work with them might become complacent about risks, expecting a government bailout if anything goes wrong. That could destabilize the financial system further. "Once the Fed starts investigating and looking at the risks that they're taking, the market could back off and say, 'Well, the Fed's in there, so there can't be much risk,' " said Peter J. Wallison, who studies financial regulation at the American Enterprise Institute.

The Fed currently lacks the legal authority to order investment banks to strengthen risk control systems or change their accounting for exposure to complicated derivatives. The SEC has those powers, though its historical mission has been to ensure that investors are protected, not to protect the integrity of the financial system as a whole.

On March 16, the Fed backed the emergency acquisition of Bear Stearns by putting $30 billion (since changed to $29 billion) in public funds at risk and opened an emergency lending window that last week lent $14.2 billion to investment firms. Both actions, meant to prevent panic from causing a cascade of failures that could have had a catastrophic impact on markets and the world economy, defied 90 years of precedent, insinuating the central bank into the workings of Wall Street as never before.

Fed leaders concluded that they would have to step up their involvement in Wall Street, if only to make sure that those loans were likely to be paid back. So it insisted that banks, in exchange for the new lending, open up about the details of their operations -- a deal that the investment firms readily agreed to.

They have not, however, reached any firm conclusions about what form the ultimate regulation of the financial system ought to take and are not presuming that the improvised system established in the past two months will expand and become permanent once Congress acts.

Fannie, Freddie Appraisal Agreement May Violate Law
Fannie Mae and Freddie Mac's agreement to restrict banks from using in-house appraisal companies may violate federal law, U.S. Comptroller of the Currency John C. Dugan said in a letter to the companies' supervisor.

The two companies, which own or guarantee about 45 percent of the $12 trillion in U.S. home loans, made a deal in March with New York Attorney General Andrew Cuomo and the Office of Federal Housing Enterprise Oversight to stop buying mortgages from lenders that use in-house home appraisals for their loans.

The agreement and new appraisal code "violate or conflict with federal law in fundamental respects" and should be withdrawn, Dugan said in a letter to Ofheo Director James Lockhart. The Office of the Comptroller of the Currency, which regulates national banks, has "substantial concerns about the unintended adverse consequences" on U.S. banks, he said.

The OCC is joining mortgage and appraisal industry groups and the Office of Thrift Supervision in criticizing the deal, intended by Cuomo and Ofheo to make home valuations more accurate by separating them from the lenders making the loans. Reworking the agreement could make it harder for Fannie Mae and Freddie Mac management to address other investor concerns such as the $7.1 billion in cumulative losses Fannie Mae has posted over the last three quarters, analysts said.

"It's a distraction they don't need," said Jim Vogel, a debt analyst with FTN Financial Capital Markets, a division of First Tennessee Bank N.A. in Memphis, Tennessee. "If this heats up the way the OCC seems to think it should, then you're going to throw sand in the gears of a number of other initiatives that are probably more important for today," he said.

The "appraisal process for home loans is broken," Cuomo's office said in an e-mailed statement. Cuomo began a probe of the U.S. mortgage industry last year as foreclosures among subprime borrowers climbed to a five-year high. The agreement with Fannie Mae and Freddie Mac is "groundbreaking" and will "help consumers and restore integrity to this crucial market," the statement said.

Ofheo forwarded Dugan's letter to the companies and expects Fannie Mae and Freddie Mac to "review this letter and the many other comments they received and to propose changes to the code to address unintended consequences," Mullin said in an e-mail.

Washington has been increasingly leaning on the government- sponsored enterprises to do more to back the U.S. mortgage market. The Senate Banking Committee approved legislation last week that overhauls their oversight while also requiring the two to help foot the bill for a federal program insuring mortgages for struggling borrowers.

Ofheo has also lifted portfolio restrictions and eased their capital constraints while lawmakers temporarily raised the limits on loans the companies can buy from $417,000 to $729,750 to help back the market. The companies are now lobbying Congress to make some of those changes permanent. Lockhart has pushed for stronger oversight and this month said the companies are a "point of vulnerability" to the U.S. financial system because their liabilities are so high.

The fair value of Freddie Mac's assets dropped to negative $5.2 billion in the first quarter. Fannie Mae's fell 66 percent to $12.2 billion.

"Flawed appraisals artificially inflate home prices and are often a sign of mortgage fraud and undue influence on appraisers," Ofheo and Cuomo's office said in a joint statement when they announced the deal. It will likely prohibit lenders from also using appraisals from firms they own or control in processing loans sold to Fannie Mae or Freddie Mac.

Because Fannie and Freddie control so much of the market, the OCC said the new policy "would impose new structural and organizational requirements on lenders accountable for financing an overwhelming portion of the U.S. residential real estate business." Ofheo didn't follow the proper rules to make the change and doesn't have the authority to set policies affecting U.S. banks regulated by the OCC, Dugan said.

The appraisal code conflicts with current bank laws, would result in a "significant and costly change" in lending practices and will not apply to national banks, he said. Dugan said he is concerned that "major portions of the code will undermine, rather than enhance, the quality and reliability of appraisals. "Second, the application of the code will unnecessarily raise mortgage origination costs for lenders, thereby increasing the cost of mortgage loans for consumers, without actually enhancing protections and other consumer benefits".

Auditor: Supervisors Covered Up Risky Loans
Now that millions of people are facing foreclosure because they got into loans that never should have been approved, everybody's looking for someone to blame. Borrowers, or their brokers, lied on loan applications. Others got high interest rates they couldn't afford.

A big unanswered question is whether the Wall Street investment banks that were packaging these mortgages knew they were selling garbage loans to investors. A wave of litigation is starting against these firms. One former worker whose job was to catch bad loans says her supervisors covered them up.

Tracy Warren is not surprised by the foreclosure crisis. She saw the roots of it firsthand every day. She worked for a quality-control contractor that reviewed subprime loans for investment banks before they were sold off on Wall Street. It was her job to dig into the loans and ferret out problems. By 2006, they were easy to find.

"I'd see people who were hotel workers saying that they made, in California, making $15,000 a month so that they could qualify for a $500,000 home," Warren says. "If a hotel worker is making $15,000 a month changing sheets at the Days Inn, everybody would want to do it. It just really made no sense."

Warren has worked in the mortgage business for 25 years, the past five in quality control. Most recently, she was a contract worker for a company called Watterson-Prime, which did loan audits for investment banks. She says their biggest client was Bear Stearns, which recently all but collapsed because of its exposure to bad loans.

Warren thinks her supervisors didn't want her to do her job. She says that when she would reject, or kick out, a loan, they usually would overrule her and approve it. "The QC reviewer who reviewed our kicks would say, 'Well, I thought it had merit.' And it was like 'What?' Their credit score was below 580.

And if it was an income verification, a lot of times they weren't making the income. And it was like, 'What kind of merit could you have determined?' And they were like, 'Oh, it's fine. Don't worry about it.' After a while, Warren says, her supervisors stopped telling her when she had been overruled.

She figured it out by going back later and pulling the loans up on her computer. "I would look every couple of days, and just see, if it was a loan that I thought was a bad loan, I'd go back and see if it was pulled." About 75 percent of the time, loans that should have been rejected were still put into the pool and sold, she says.

Lehman, Goldman, Morgan Estimates Lowered by Analysts
Lehman Brothers Holdings Inc., Morgan Stanley and Goldman Sachs Group Inc. had their second-quarter profit estimates cut by Bank of America Corp. and Sanford C. Bernstein analysts on the risk of further asset writedowns.

Lehman, the largest underwriter of mortgage bonds before the subprime market collapsed, has lagged behind Wall Street rivals this year as it tries to shed unwanted assets and convince investors that writedowns taken so far fully reflect the decreased value of the firm's holdings.

The largest U.S. investment banks may be overstating their net assets by about 20 percent because of the way they've booked hard-to-value stakes for which market prices are scarce, the Bank of America report said. "We believe this will continue to be a key reason why investors continue to stay on the sidelines" when it comes to investing in brokers and that they will "at least not dive head first into the group for reasons like `the group looks cheap' or has `bottomed-out' from a valuation perspective," Hecht wrote.

Potential losses from the U.S. market aren't limited to U.S. banks. HSBC Holdings Plc, Europe's biggest bank by market value, may post more losses at its U.S. home-loan business, Chief Executive Officer Michael Geoghegan told shareholders in Hong Kong today. "I believe we have further losses to make," Geoghegan said. "We are not convinced yet the worst is over."

Bernstein's Brad Hintz:"We do not think the brokerage stocks are out of the woods concerning their current exposure to CDOs, mortgages and commercial real estate. Mortgage-market woes "are proving to be deep-rooted and long-lived." Lehman and Goldman have exceeded analysts' estimates in each of the last four quarters, according to data compiled by Bloomberg. Morgan Stanley missed analysts' estimates in two of the quarters.

Four analysts have switched their earnings expectations for Lehman to a loss in the second quarter after the firm said hedges used to offset declines in the value of mortgage assets didn't work well. At least nine analysts have reduced their profit estimates for Goldman and Morgan Stanley this month.

"It is hard to imagine it will get much worse, but things aren't going to get so much better," Oppenheimer & Co. analyst Meredith Whitney said today in an interview with Bloomberg Television. "You have a revenue scenario that has not rebounded at the pace any of the CEOs or I would like."

As a group, large investment banks are trading at 1.43 times book value, compared with a five-year average of 1.96 times, the Bank of America report said. When adjusting their price-to-book ratio for "a growing amount of illiquid assets on the balance sheets," their price relative to the value of their assets rises to 1.78 times, the analysts said. This suggests that the banks have "not likely bottomed yet from a valuation perspective," the analysts said.

"I believe the financial crisis is over, but that's because we've inflated our way out of it and by inflating our way out of it we've created a bigger problem than the financial crisis," Richard Bove, an analyst at Ladenburg Thalmann & Co., said in an interview today.

Plenty of 'For Sale' signs but actual sales lagging
Like spring flowers, the "For Sale" signs are sprouting in front yards all over the country. But anxious sellers are facing the most brutal environment in decades, with a slumping economy, falling home prices and rising mortgage foreclosures.

And even the faint promise of better days ahead might not come true, given all the headwinds the housing industry is facing at the moment. "This is going to be another difficult spring," said Mark Zandi, chief economist at Moody's

"I think we are at the beginning of the end of the housing downturn, but it is going to be a long and painful end." The devastation is certainly a far cry from the boom years from 2001 to 2005 when sales of new and existing homes were setting records for five straight years. During that time, home prices were soaring, luring thousands of investors into the market, hoping to buy homes and flip them for quick profit. But since 2006, the country has been mired in a housing bust which, in many ways, is the worst since World War II.

Construction is expected to drop to the slowest pace since the 1940s and prices are expected to decline by the largest amount since the Great Depression.

Hardest hit are the states where sales boomed the most: California, Florida, Nevada, Arizona and parts of the Northeast. In the Midwest, the problem is shrinking jobs in the auto industry, making homes hard to sell. But virtually all of the country has felt the aftershocks of the housing slump, either through weaker home sales or the massive drag housing has imposed on the overall economy.

Housing has shaved more than a full percentage point off economic growth, trimming the gross domestic product for the past two quarters to a barely discernible 0.6 percent rate and raising the threat that the country could topple into a full-blown recession. The National Association of Realtors reported that 46 states saw sales decline in the first three months of this year compared with the same period in 2007.

Two-thirds of 149 metropolitan areas saw prices decline during the same period, the largest percentage of cities reporting price drops in the history of the NAR survey, which goes back to 1979. The state with the biggest sales decline was Maryland, with sales down 38.6 percent in the first three months of this year compared with the same period in 2007. The drop nationwide was 22.2 percent.

The price decline nationally was 7.7 percent in the first quarter, with the biggest plunge a 29.2 percent decline in the Sacramento, Calif., area. As the spring sales season got under way, the slump was continuing. The Realtors reported Friday that existing home sales fell 1 percent in April, the eighth drop in the past nine months, with the median home price falling 8 percent compared with a year ago, the second-biggest drop on record.

The Realtors' latest report showed the number of unsold single-family homes jumping to a 23-year high, reflecting, in part, a rising tide of mortgage foreclosures, which are dumping more homes on an already glutted market. Adding to the foreclosure problem is the weak economy, which has resulted in four straight months of job layoffs, an indication to some analysts that the country has already fallen into a recession.

Rising job layoffs and higher gasoline and food prices have sent consumer confidence plunging — not a great environment to mount a rebound in housing. And then there is the problem of the huge overhang of unsold homes generating further declines in prices, which seem to be keeping more prospective buyers on the fence. "Right now a lot of people are staying away because they don't want to buy an asset that might lose value right away," said Patrick Newport, an economist at Global Insight.

Newport predicted that prices, which by some measures have fallen by about 15 percent nationwide from their peak two years ago, will decline another 10 percent before bottoming out in the spring of 2009. A 25 percent fall in prices would be the biggest since home prices plunged by about one-third during the Great Depression of the 1930s..

Foreclosures in Military Towns Surge at Four Times U.S. Rate
U.S. Air Force Technical Sergeant Jeffrey VerSteegh, who repairs F-16 jets for the 132nd Fighter Wing, departed Des Moines, Iowa, in April for his third tour in Iraq. The father of four may lose his home when he returns.

The four-bedroom farmhouse he and his wife, Kathleen, own near the Iowa State Fairgrounds went into default in December after their monthly mortgage costs doubled to $1,100. Kathleen missed work because of breast cancer and they struggled to keep up the house payment, falling behind on other bills. Their bankruptcy was approved by the court a week after VerSteegh left for Iraq.

In the midst of the worst surge in mortgage defaults in seven decades, foreclosures in U.S. towns where soldiers live are increasing at a pace almost four times the national average, according to data compiled by research firm RealtyTrac Inc. in Irvine, California. As military families like the VerSteeghs signed up for the initial lower rates and easier terms of subprime mortgages, the number of people taking out Veterans Administration loans fell to the lowest in at least 12 years.

"We've never faced a situation like this, not in the Vietnam War, World War II, or the Korean War, where so many military are in danger of losing their homes," said Paul Sullivan, executive director of Veterans for Common Sense, a Washington-based advocacy group started in 2002 by Iraq and Afghanistan War veterans. "No one asked them for their credit score when we asked them to fight for us."

Foreclosure filings in 10 towns and cities within 10 miles of military facilities, including Norfolk, Virginia, home of the Navy's largest base, rose by an average 217 percent from January through April from a year earlier. Nationally, the rate was 59 percent in the same period, according to RealtyTrac, which tallies bank seizures, auctions and default notices.

The biggest surge was in Columbia, South Carolina, home to Fort Jackson, where the Army trains recruits for combat in Afghanistan and Iraq. Properties in some stage of foreclosure rose 492 percent from a year earlier, RealtyTrac said. The second-biggest increase was 414 percent in Woodbridge, Virginia, next to the Marine Corps Base Quantico.

Foreclosure filings tripled in the cities surrounding Norfolk Naval Base and the Camp Pendleton Marine Corps Base near Oceanside, California, RealtyTrac said. Havelock, North Carolina, site of Marine Corps Air Station Cherry Point, saw foreclosures more than double.

Military families were targeted as customers during the boom in subprime lending because their frequent moves, overseas stints, and low pay meant they were more likely to have weak credit ratings, said Rudi Williams of the National Veterans Foundation in Los Angeles. In 2006, at the peak of U.S. subprime lending, the number of VA loans fell to barely a third the level of two years earlier, according to VA data.

Ilargi: I haven’t looked into this further, but I must say I find it strange that a whole series of power plants shut down at the exact moment when wholesale electricity prices rise by 13%.

Blackouts sweep Britain in electricity shutdown
Britain was hit by electricity blackouts as a string of power station shutdowns wreaked havoc on the national generating system yesterday. National Grid issued a highly unusual plea to electricity suppliers to reduce the voltage to homes after a raft of power plant closures threatened a supply shortage during the hours of peak demand last night.

The operator of the country's power grid sent out its plea after several regions, including south-west London, Merseyside and Cheshire, suffered power cuts following the unexpected shutdown of British Energy's Sizewell B nuclear reactor during the morning. British Energy refused to reveal the reason for the incident but said it had already begun to get the plant up and running again.

National Grid cut off supplies automatically to "protect the integrity of the network," a spokesman said. As the day wore on, however, a total of nine power stations shut down for various reasons, forcing National Grid to issue three increasingly urgent notices. The last – a so-called "demand control imminence" notice – is rare and is sent out about once every four years.

It was issued yesterday after it became clear that the country's electricity supply could fall short by about 400 megawatts – equivalent to just under 1 per cent of national demand. David Hunter, an energy analyst at McKinnon & Clarke, said theincident reflected "the crumbling nature of the insufficient infrastructure on which homes and businesses depend".

A spokesman for National Grid said some customers would have noticed a "slight dimming" of the lights last night as the power delivered to their homes was reduced slightly to spread the load elsewhere. There was speculation among energy traders that the highly unusual shutdown of so many plants at once was caused by some companies trying to cash in on the rising wholesale price of electricity by taking supply out of the market.

The wholesale price jumped by 13 per cent yesterday as the margin between supply and demand tightened. However, others experts said this was unlikely because any generator that closed down a plant had to buy the power to cover its commitments. More power was pumped into the grid as a result of the notices and National Grid said it expected it to be "business as usual" today.

Treasury struggles with Northern Rock valuation for shareholders
The Treasury is struggling to find an independent valuer to calculate how much Northern Rock's former shareholders should be paid in compensation, and is now considering advertising for the post. More than three months have passed since the Treasury revealed plans to pass the sensitive issue of compensation to an "independent valuer".

The arrangements were enshrined in law less than a month later, on March 12, but the "competitive process" of finding a valuer has yet to begin. Industry insiders say it has been delayed because the obvious candidates are reluctant to apply for the role, widely considered a "poisoned chalice". "Everyone's ducking for cover," one banker said.

The big four accounting firms and some of the City's leading investment banks have been approached but are reluctant to get involved. One insider said: "No one really believes the valuation can be a transparent process. The feeling is the Treasury is just looking for a rubber stamp."

Companies also fear being caught up in the legal action brought against the Government by Northern Rock shareholders, who have launched a judicial review into the way compensation must be determined. The Treasury has instructed the valuer to assume that "Northern Rock is unable to continue as a going concern and is in administration".

SRM Global, the hedge fund that owned 11.5pc of Northern Rock and was its largest shareholder, claims that the "scheme can be expected to produce a nil value whereas Northern Rock's book value was at least £4 a share". Any company that takes on the role is likely to demand indemnity from prosecution. Even with those guarantees, though, there are concerns that they could be caught up in a lengthy and complex trial should the shareholder case ever reach court.

The Treasury declined to comment, but sources said it hopes to launch the "competitive process" soon and may advertise for the position. To establish independence, it has agreed to consult the Institute of Chartered Accountants in England and Wales before making any appointment. Before Northern Rock was nationalised, it was supported by £25bn of taxpayer loans and £35bn of state guarantees.

SRM, the UK Shareholders' Association and RAB Capital have applied for a judicial review of the Government's compensation guidelines. L&G on Friday said it was an "interested party". This means it is not joining the action being brought by the other three. But with a shareholding of almost 5pc, it has a strong interest in the outcome of the decision on a judicial review.

The judge will treat the various applications for a judicial review together but they remain separate cases. One issue which could be a source of tension between the different shareholders is that they have paid different sums for their shares. Hedge funds SRM and RAB, which bought in after Northern Rock's distress became known, would make a profit on their shares at anything above about £1.50, whereas small shareholders may have bought their shares in the market before Northern Rock's bear collapse, at about £9 or £10.

D-Day for bids as RBS sells insurance business
Royal Bank of Scotland will today learn which of seven suitors are throwing their hats into the ring for its insurance business, potentially sparking a £7.5bn bidding war, as the group looks to offload the asset by the end of the summer.

This comes as rival banking group Barclays announced it was considering selling its life assurance business, after saying it was not a core operation. Today is the deadline for interested parties to lodge indicative proposals for RBS's insurance business, which has been valued at between £6bn and £7.5bn.

With bidders pushing the deadline to the limit, RBS had not received any proposals yesterday. One source close to the group said: "We were told not to expect anything until Wednesday." RBS declined to comment on the timing and identity of potential bidders yesterday.

Front-runners are believed to include Zurich Financial Services, the Italian insurer Assicurazioni Generali and China's Ping An Insurance. Other potential bidders are American Insurance Group (AIG), Allstate and Travelers in the US, and Allianz in Germany. The shortlist is expected to be whittled down to two or three in a few weeks. When the business was put up for sale, more than 15 companies showed interest.

Berkshire Hathaway, Warren Buffett's conglomerate, publicly ruled itself out last week. AIG is also thought to be an unlikely bidder as it "wrestles with some pretty hefty problems", according to one source close to the process. The US insurer has $20bn of unrealised losses in the previous two quarters.

This initial round was not open to private equity firms, as RBS targeted insurance companies that could provide a strategic fit. "I'm sure buyout firms will take part at some stage, whether teaming up with a trade buyer or on their own," the source said.

The banking group put the insurance arm up for sale last month, at the same time as it launched a £12bn rights issue to sure up its balance sheet.

The asset, which includes the Churchill and Direct Line brands, is expected to be sold "by the end of the summer". Meanwhile, Barclays announced yesterday that it "is currently reviewing options for the Barclays Life Assurance Company business". It added the operation was "not core to the group's franchise. This review may or may not result in a sale."

Fears for UK house sales are fuelled by 39% fall in mortgage lending
The property market slump seems set to intensify after the major banks revealed that the number of new mortgages approved in April was the second lowest on record.

Total home loan approvals came in at 38,704 last month, well below the six-month average and 39 per cent down on the level a year ago, the British Bankers' Association reported yesterday. The total was up slightly from 35,546 in March, the lowest figure since the BBA launched its monthly survey in September 1997.

The effect of the credit crunch was especially acute in the month following the collapse of the US investment bank Bear Stearns, as near-panic in the money markets pushed commercial rates ever higher and way beyond the levels set by the Bank of England and other central banks.

The freeze in the wholesale money markets pushed the real costs of a mortgage to an eight-year high in April, according to the most recent statistics from the Bank of England. However, the "mortgage famine" may be easing slightly as market rates respond to renewed efforts by the central banks to stabilise the markets and restore confidence in the banking system by swapping mortgage-backed securities for government bonds.

The recapitalisation of some large banking groups has also bolstered confidence, but most opinion polls suggest credit conditions are still severe. In overall terms, April's underlying net mortgage lending was up slightly on the March figure, from £5.2bn to £5.4bn. However, that relatively optimistic-sounding improvement was accounted for largely by remortgaging activity, This was more than 20 per cent up on the figure for April 2007 as home-owners shopped around for lower rates.

HSBC chief urges Bank of England to raise interest rates
The chief executive of Europe's biggest bank today urged the Bank of England and the European Central Bank to raise interest rates to help fight inflation. Michael Geoghegan, group chief executive at HSBC, said central banks were not yet committed to taming inflation, and predicted US interest rates would rise after the US presidential election in November.

He also said more regulation may be needed in the wake of the credit crunch. "Inflation is a long-term problem because there is no long-term will to solve it," Geoghegan said in a speech to the Asia Society in Hong Kong. "I'm not a great fan of regulation ... but there will be a need to look at the model in that area," he said, adding that banks should focus on lending and investment advisers on advising clients, although he did not call for specific measures.

"The investment banking model is flawed," Geoghegan said. "If banks aren't strong, they should be restructured or taken over."
Geoghegan's words come after Jean Claude Trichet, head of the ECB, said central banks should not to be tempted to make further cuts to interest rates, claiming it could lead to more problems. The Bank of England has cut interest rates three times as a result of the credit crunch, but kept rates on hold at its last meeting due to rising inflation.

Spiralling fuel and food prices pushed the official inflation rate to 3% in April, 1% higher that the Bank's target. However, many economists believe the Bank's monetary policy committee may make further cuts. "We continue to expect a deeper and more prolonged downturn in the economy than the Bank of England monetary policy committee currently expects, eventually leading to considerably lower levels of interest rates," said Jonathan Loynes, chief European economist at Capital Economics

Indonesia will pull out of OPEC; it no longer exports oil
Indonesia is leaving the Organization of Petroleum Exporting Countries because declining production and investment have made it difficult to meet its own needs, the energy minister said Wednesday. Purnomo Yusgiantoro told reporters it no longer makes sense for Indonesia, the only Southeast Asian member of OPEC, to stay in the cartel.

"Even though we are sometimes a net importer and sometimes a net exporter, we are a consuming country," he said. "Indonesia is pulling out of OPEC." Indonesia is the region's largest oil producer, but the nation of 235 million people has had to import for years because of aging wells and disappointing exploration efforts. A weak legal system and red tape has scared foreign investors away, even as domestic oil consumption rises.

Purnomo said the decision to leave OPEC was made by the Cabinet of President Susilo Bambang Yudhoyono, which is being forced to slash fuel subsidies due to soaring global prices. In the last few days, consumers have seen prices at the pump jump around 30%. "We are not happy with the high oil price," he said.

The move means Indonesia will loose its vote at OPEC, a 13-member body that has used its vast production capacity to influence global oil prices during times of crisis. The government could rejoin if it is able to boost exports in the future, Purnomo said.

Victor Shum, an energy analyst with Purvin & Gertz in Singapore, said it will save Jakarta the $3.1 million annual membership fee, but cost it some prestige on the international scene. "I don't see any substantive loss, other than on the prestige," he said. "They have been an oil importer ... they really have not had much influence within the OPEC organization."

The End of Free Trade: Revolt Begins Against British Policy
Not a moment too soon, a group of seven former European heads of state, five former finance ministers, and two former presidents of the European Commission, including former EU Commission head Jacques Delors, former French Prime Minister Michel Rocard, and former German Chancellor Helmut Schmidt, have gone public with an open letter to the EU Presidency and the EU Commission.

They warn that the systemic collapse of the global financial system—a collapse which had been foreseen by "farsighted individuals"—brings with it the threat of unprecedented poverty, the proliferation of "failed states," migration of entire populations, and further military conflicts. The financial world, they argue, has accumulated a massive amount of "fictitious capital" (!), with very little improvement for humanity.

Among the immediate countermeasures they propose, is creation of a European Crisis Committee, and the convening of a world financial conference to "reconsider" the current international system and the globalized world order.

Although their letter, which was made public on May 21, does not expressly state so, its unusually sharp tone clearly reflects that the signers are aware of the imminent danger of the eruption of a new fascism: "But when everything is for sale [for profit—HZL], social cohesion melts and the system breaks down."

And even though the letter's call for an emergency conference does not use the term "New Bretton Woods system," its tenor clearly reflects the years-long campaign which the LaRouche movement has been waging for just such a conference. It is also an implicit admission that, in view of the current systemic collapse, the entire design of the Lisbon Treaty, with its cementing into place of a neo-liberal policy, is a non-starter.

The reaction came promptly from one of the most notorious mouthpieces for the British Empire, Ambrose Evans-Pritchard. Writing in the Daily Telegraph, he characterized the letter's "fulminating text" as the clearest proof of the existence of a European-wide publicity campaign for a "super regulator," who would protect citizens from the social risks of modern capitalism. And that, in turn, threatens to reduce Britain's Financial Services Authority to "a regional branch," and would thus "pose a grave threat to the City of London" (!).

Mr. Evans-Pritchard deserves our thanks for his frankness! He couldn't have been more direct: Any impediment to vulture capitalism in defense of the citizenry, represents a threat to London, which wants to remain the undisputed headquarters of the British Empire and certainly not a "regional branch."

The champions of what 19th-Century German-American economist Friedrich List termed the "British free-trade doctrine," also must surely be irked that this "fulminating text" has been made public just at the point when the World Trade Organization (WTO) is attempting to bring the so-called "Doha Round" to a conclusion, so that, in conjunction with the EU, the last remaining measures to protect physical production and citizens' general welfare, could be entirely eliminated in favor of unrestricted profit maximization.

And the last thing they need right now, is a new round of the "financial locust" debate earlier sparked by former German Vice-Chancellor Franz Müntefering—only now with 14 former top political leaders backing it. Already before the 14 former leaders had issued their letter, an open confrontation had broken out between Pascal Lamy, director-general of the WTO, and French Agriculture Minister Michel Barner, with the latter rising to the defense of the last remnants of protectionism provided by the European Common Agricultural Policy (CAP), and even proposing the CAP as a model to be followed by Africa and Latin America.

The former UN Special Rapporteur on the Right to Food, Jean Zeigler, in his 2002 book The New Rulers of the World and Those Who Resist Them, describes how at the time of writing, the WTO had already registered over 60,000 transnational firms for trade, finance, services, etc., but that world trade is dominated by only 300-500 firms in the United States, Europe, and Japan. He calls the WTO a "fearsome machine in the service of pirates." And it is precisely this war machine which is now attempting, in cahoots with the EU—yet another non-elected, and therefore non-accountable bureaucracy—to achieve optimum conditions for speculators to make a profit.

When one hears that the United States or the EU are negotiating, Zeigler says, in reality it is the planet's 200 most powerful transcontinental corporations which are setting the tone; and that is why the WTO has always been dominated by the transcontinental corporations' rationales, and never by the interests of peoples and their respective states.

This unbridgeable conflict of interest between people on the one side, and the British imperialist, free-trade doctrinaire vulture capitalists on the other, who are threatening entire continents and are plunging ever greater masses of people into poverty, has never been clearer than it is right now, at a time when even the financial media are mooting that central banks could go bankrupt, and that the taxpayers will have to pay for speculative losses suffered by private firms.

Mrs. Zepp-LaRouche is the founder of the Schiller Institute and the chairwoman of the Civil Rights Solidarity Movement (BüSo) in Germany. Her article has been translated from German.

How rice farmers face catastrophe
Just after dawn, Marlon Tayaban makes his way down the terraced paddies in Banaue, in the northern Philippines where the rice farmer has his home and fields. It is a stunning vista. The steep, thin steps and strips of cultivated land mottle the mountain slopes in infinite shades of green.

As the 36-year-old descends the narrow path, he is surrounded by rice as far as the eye can see. On one side is a flooded paddy full of light green shoots. Higher up the distant hillsides on the other side of the misty valley are darker fields almost ready for harvest. Every inch of land appears to be given over to rice.

It is hard to imagine a more abundant symbol of Asia's most important crop. But Tayaban's journey down the giant steps highlights the growing problem facing millions of small-scale farming families. The farmer is on his weekly trip to the market, where he has to buy more food than he sells because his ability to produce children has far outpaced the capacity of his land to feed them.

Thirteen years ago, when Tayaban started tilling the paddies, he had two fields and two mouths to feed. Today he has no more land, but six children. The producer has had to become a consumer. That was not a problem when grain was cheap. But in the past year, global prices have tripled.

Tayaban has little inkling of the reasons why. There is no television reception at his home, so he hasn't heard about UN warnings of a food crisis or seen the reports about tortilla rallies in Mexico, pasta protests in Italy and onion demonstrations in India. He hasn't heard about climate change or biofuels, and knows nothing about the cyclones in Bangladesh and Burma that worsened the global balance between supply and demand.

But he can feel the consequences with each weekly journey to market. A year ago, he spent 2,200 pesos (£25.40) on rice each month. Today, after a surge in the price, he has to find 3,700 pesos. In a good month, Tayaban earns 3,000 pesos by fixing the rice terrace walls or other labouring jobs. "Life is more difficult now. Even though the price of rice is going up, we still have to buy it. I will just have to work harder," he says.

That the price hike is hurting here seems odd at first. In 1995, the United Nations declared this part of the northern Philippines a world heritage site - and not just for its beauty. The high-altitude terraces of the Cordillera mountains are one of the oldest and best preserved examples of hydrological engineering on the planet. The stepped paddies, said to date back more than 2,000 years, are an ancient testament to man's ability to cultivate crops in the most uncompromising of environments.

But it has been many years since the area was self-sufficient. The main problem is population growth. The average couple here has five or six children. Tayaban is one of eight siblings as well as being a father of three sons and three daughters. Despite migration to the cities, Banaue's population is steadily rising. Fifteen years ago it was 18,000. Today it is 21,500.
But the amount of land is fixed and yield increases are limited because it is difficult to harvest more than one crop per year in this high-altitude environment.

Tayaban's two fields yield 150kg of rice per year, enough to last the family just six weeks. It is a similar story throughout Banaue, where local officials say the average family produces barely enough rice to last half a year. The same problem of demand exceeding supply applies to the country. The Philippines is the world's biggest importer of rice. It expects to ship in 2.7m tonnes this year, almost 10% of the total needed to feed a population of 91 million that is growing annually by more than 2%, one of the fastest rates in the world.

Large tenders by the Philippines on the international market helped drive up rice prices by 76% between December 2007 and April 2008, according to the UN Food and Agriculture Organisation. But the fault does not lie only with the Philippines. The world has been consuming more food than it produces for five years now. Global rice stocks are down at levels not seen since 1976.

The reasons for the global food crisis are manifold, including rising consumption in fast-developing nations like China and India, droughts in Australia, the rising cost of oil, and the increasing use of crops for fuel. But more than any of these, in the Philippines the pressures are demographic. "At the end of the day, it is about the huge population more than biofuels or climate change," says Duncan Macintosh of the Philippine Rice Research Institute.

Such is the value of rice that some farmers in Thailand have started camping out in their fields with shotguns to prevent rice rustlers. Several big rice-producing nations, including Cambodia, Vietnam, Egypt, India, Pakistan and China have capped or halted exports to ensure food security for their own people. With so little rice traded internationally even during a good year, this makes the market volatile. The best Thai rice has tripled in price from $334 (£170)to $1,050 per tonne.

Ken Deffeyes: Oil Production, Oil Price
They finally got my full attention: Last week I paid $100.96 for a tank of gasoline. It wasn't the most expensive grade of gas; it wasn't at the highest-price filling station in San Diego. The crisis reached into my wallet and it hurts.

In 2005, world oil production stopped growing and oil prices shot up uncontrollably. My graph of production versus price is now two weeks old and the price is already off the top of the paper. This morning, West Texas Intermediate is $130 per barrel. In Econ 101, they taught us that increasing prices would enlarge the supply. The economists may have envisioned a large inventory of oil wells, temporarily shut down because of low oil prices.

Value of World Oil Production

What happened? We hit "peak oil" – also called "Hubbert's peak," – a geological limitation to the oil supply in the ground. With no additional supplies, a bidding war began in 2005 over the remaining oil in the ground. This is not a news story that goes away after a month.

The news media are only partially addressing the story. Two different friends e-mailed me about Paul Krugman's op-ed column in the New York Times of May 12, 2008. Krugman's primary conclusion was that today's high current oil prices are not simply a speculative bubble. However, his preferred explanation came down to a single phrase, " . . . mainly the growing difficulty of finding oil." Krugman does not distinguish between repairable and un-repairable difficulties. Repairable causes would include shortages of terrain open for drilling, of deep-water drilling rigs, of roughnecks, of geophysicists. The huge un-repairable shortage is undiscovered oil.

How big is the problem? Multiplying production (barrels per year) times the oil price (dollars per barrel) gives a total cost in dollars per year. It's an enormous number; tens of trillions of dollars per year. To put a scale on it, the three thin curves on the graph show the oil cost in contrast to the total world domestic product; the annual value the goods and services added up for all the world's countries. The three curves show the oil cost at one percent, two and a half percent, and five percent of the total world economic output. At $130 this morning, we are at six and a half percent.

If we see oil at $300 per barrel, we will be looking out over the smoldering ruins of the world's economy.

Oil production obviously cannot consume 100 percent of the world's income. My intuitive, uninformed guess is that it cannot go above 15 percent. If we see oil at $300 per barrel, we will be looking out over the smoldering ruins of the world's economy.

The raw numbers aren't deep, dark secrets. The oil production and oil prices are posted by the US Energy Information Agency. The EIA keeps two sets of books on oil production. I used the smaller one that includes conventional oil (and gas condensate) but does not include synthetic fuels. For the 2007 world economic output, almost identical numbers come from the International Monetary Fund and the CIA.

The scales on the graph are simple linear scales. Prices have not been adjusted for inflation. (I claim that correcting oil prices for inflation is circular; inflation is often driven by energy prices.) The prices and production are as-is, without being converted to a year-on-year basis.

So what about the experts and the oil companies who assure us that peak oil won't happen anytime soon? They have plenty of stories to tell:

  • The USA is now a service economy; we don't need as much oil as before.

  • Energy and food prices are too volatile to be included in the "core price index."

  • Oil prices have gone up, but we are still surviving, sort of.

  • Oil companies could find plenty of oil if they were allowed access for drilling.

  • Alternative energy sources will appear that replace conventional oil.

An additional message says that the 1930s lessons from the Great Depression taught us how to stabilize our economic system. Big Ben Bernanke has pushed large piles of chips into the middle of the table. He placed his bets to prevent a major depression, but unfortunately he has a finite pile of chips. I fervently hope that he wins. (This is a collegial matter: Bernanke was a professor of economics for 20 years at Princeton; I was a professor of geology at Princeton for 30 years.)

Despite the all the arguing, the oil problem really does matter.

  • Been to the grocery store lately? Agriculture is a heavy user of energy.

  • Ford and General Motors are having difficulty selling big SUVs.

  • By my count, seven passenger airlines have flown to that great airport in the sky.

  • After many consumers pay for gasoline and food; they don't have money left to make their mortgage payments.

One remaining sweet spot in the economy involves companies like Google, Intel, and IBM. Notice that they are all pushing around bits of information. The other major sweet spot is the producers of oil and other basic commodities.

Although there apparently has been some good news out of the oil patch recently, it may not be big enough, or soon enough, to solve our oil-supply problem. For instance, the government of Brazil, and their national oil company Petrobras, announced a major offshore discovery. Various numbers from 10 billion barrels to 30 billion barrels have been tossed around. Give it your wildest dreams and call it 30 billion barrels. That would postpone the world oil problem for just one year. Further, there are only a dozen drilling rigs in the world with the capacity to work in 6000 foot water depth and handle 20,000 feet of drill pipe. Before their discovery announcement, Petrobras signed contracts for additional drilling rigs. One published account said that 80 percent of all the deep-water drilling rigs in the world are now under contract to Petrobras. (I have to confess that I bought a modest block Petrobras stock on February 20, 2008. It wasn't insider trading; Petrobras had rather large oil and gas reserves compared to its market cap. In the first month after I bought it, Petrobras stock lost 20 percent of its value. It's OK now; buy-and-hold investors have thick skins.)

What do we do? First – admit that there is a problem . . . It's the oil supply, stupid.

What do we do? First – admit that there is a problem. Several analysts are still in the initial denial stage: Jad Mouawad, Michael Lynch, Daniel Yergin, and ExxonMobil. You can cheer up a little by looking at They sell 273 different items indexed under "peak oil." However, you may not want to carry a book bag that reads, "When you say 'cannibal' you make it sound like something bad." During the upcoming presidential campaign, let the candidates know that peak oil is the issue of overwhelming importance. A modest tax write off for wind energy is too little and too late. It's the oil supply, stupid.

You will find that there is a duality. What is best for you may not be the best for the world. I buy oil stocks because I am trying to protect the value of my savings. For the world, I've been writing and talking for six years telling people that "Houston, we have a problem."


Anonymous said...


Stoneleigh wrote yesterday:
"After all, we managed to have a credit boom, market crash and depression in the 1920s/1930s when resources were plentiful (and so were practical skills). The only shortage was of money thanks to credit deflation exposing the fundamental differences between money and credit."

I have been trying to come to grips with money and credit for a few weeks and fully agree that there is a difference between the two and that they both serve to define inflation. And because I am now aware of the difference, the last sentence by Stoneleigh really threw me. A shortage of money due to credit deflation?

I suppose we have to define things. By "shortage of money", do you mean the overall, general money supply? Which is made up of... what? M3 plus credit?


Ilargi wrote this morning:
"As long as we run our societies on that system, there is no other possible outcome than what we are witnessing today."

I have been wondering for a while what a system without interest would look like. I suppose credit and debt could continue to exist, though certainly on a very small scale. It is the interest that drives the system. Could you suggest any reading on such a system?

Other quote:
"Erwin Schrodinger (1945) has described life as a system in steady-state thermodynamic disequilibrium that maintains its constant distance from equilibrium (death) by feeding on low entropy from its environment—that is, by exchanging high-entropy outputs for low-entropy inputs. The same statement would hold verbatium as a physical description of our economic process."

The idea of a steady-state disequilibrium is interesting. Could you give some examples of high-entropy outputs and low-entropy inputs? That would help in understanding.


bicycle mechanic said...

Meredith Witney appeared on Bloomberg TV yesterday.

Meredith argued that the bill would have consequences unintended by its passage.

This, she claimed, would tighten credit, and make "money" disappear, because the ability to borrow would be restricted. .

WHITNEY: Oh my gosh, they've going to do everything they can to lobby against it. Because, what they will say is, this results in unintended consequences, which means stripping liquidity from everyone and you strip liquidity and you've got a higher probability of default. But -

POPPER: How can these regulatory agencies think this is better then for the consumer?

WHITNEY: Well, because -

POPPER: And for the system.

WHITNEY: - you're not going to be charged excessive fees.

POPPER: Longer term.

WHITNEY: Longer term, you're going to pay down your higher interest debt first. You're going to get more of a window to pay back your bills. But -

MASSAR: So, doesn't longer term make sense, Meredith?

WHITNEY: I think over the years you've had excessive billing and excessive - over charging of a lot of low end consumers. Because the low end consumers that end up revolving their debt get hurt the most.

But, the flip side is, they have access to credit. Now, after this, I think they're going to have significantly limited access to credit.

here is a link to a transcript of the interview. It has a whole lot more on credit issues etc.

Lisa Zahn said...

The Mexican guy standing by his shanty during the Depression looks exactly the same as the men and women with their babies in the shanties of Tijuana, Mexico just 15years or so ago when I visited there as part of a church group. I'll bet those shantytowns are still up and running! The workers in the maquiladoras (American border factories) live in them, and unlike this picture where you only see one, they were one on top of each other when I was there.

. said...

The electric grid is fairly fragile - that one plant going down could cause a ripple effect is not at all surprising. Yes, there have been financial shenanigans associated with grid issues (California/Enron) but they're more likely technical (Florida/fire) (Texas/cold, still air) (U.S. northeast/tree down).

We're seeing housing emptying out now for economic reasons - credit seizure, the dollar's collapse, etc. I'm roaming around New England talking to people who are paying cash for wood boilers because of oil prices and the very next wave is going to be those on the margins here just getting up and leaving. They couldn't stand $4/gallon heating oil last winter and this winter we'll see $6/gallon and the construction guys are laid off ... it's very scary.

People have not yet internalized what is happening - those in unfortunate circumstances are judged to be somehow deficient or simply unlucky. The light hasn't come on that it's systemic yet ... but the first glimmers are visible.

Anonymous said...

I read this forum and other forums that there will be a financial collapse in this country. I am in the process of taking money out of regional banks and putting the money in a local credit union. I have some cash dollars at home. I have all debts paid off. My neighbors have a huge garden and share with me every summer. So, I am kinda prepared.

Yet, it's still hard to visualize a complete systemic meltdown is going to occur in this country and likely worldwide.

Anonymous Reader

Ilargi said...


Schrödinger's "Life as a steady-state disequilibrium system" derives from thermodynamics.

• Steady state, since energy/matter cannot be created, only converted from one form into another.
• Disequilibrium: in an equilibrium, no energy flow takes place, hence no activity ("work") can be done. Life requires disequilibrium. Equilibrium equals death.

Entropy is the tendency in an isolated system from energy that can be used for work towards energy that can not. Equilibrium equals maximum entropy.

All activity increases entropy. Examples of high and low entropy: easy, all activity. The food you eat is useful, it allows your body to function. What comes out at the other end has lost that capacity. The gas you put in your car makes the engine run, the exhaust cannot do that.

While there are activities that leave energy forms that are useful, entropy always increases, energy can never be used 100%. So there will never be perfect recycling, nor can you build a perpetual motion device.

It's important to note that Daly's definition centers on the fact that energy YOU use in a process is no longer useful to you. It may be to other life forms, though. Flies eat shit, plants inhale CO2.

Indeed, many forms of energy you used to perform work useful for you will convert to forms hazardous to you. Hence: "an organism cannot live in a medium of its own waste products".

Though it's not strictly according to thermodynamics definitions, we may view our entire environment as a medium rapidly filling with our waste products, hence unlivable for us.

NOTE: Our planet is an isolated, not a closed, system. Energy enters, mainly through sunlight, and leaves through radiation, "heat" leaving the atmosphere. The two are in an inexplicably fine balance, without which we would either freeze or boil.

Anonymous said...

With current home prices 60% higher than 2000, it would take a 37% drop to reach 2000 levels again, not 60%.

Still a sizable drop. An 80% drop would bring prices to 1/3 of their 2000 values.

Stoneleigh said...


Sorry to confuse you. Money and credit have functioned as equivalents during the expansion phase, and credit has a large part of the effective money supply. When I say there will be a shortage of money due to credit deflation I mean a shortage of purchasing power, as the credit element will have been mostly removed from the equation and there will be relatively little actual money. (There is relatively little actual money now, but now we don't notice as we still have credit available.)

What money there is will be will not be enough for our economy to function without having a 'seizure'. Money functions as the lubricant in the economic engine - without money that engine will seize up. You end up with no way to connect many potential buyers and sellers when the buyers have no money, and the sellers can't afford to give away what they produce as they have their own money-denominated costs to pay. During the Great Depression, people starved while food went to waste due to a lack of money.

Farmerod said...

ftiller said With current home prices 60% higher than 2000, it would take a 37% drop to reach 2000 levels again, not 60%.

I concur. Not sure if ilargi meant so say that exactly but hard to know. As near as I can figure, an 80% drop from the top would take us back to the mid-80's i.e. prices have risen ~5-fold since then to the peak a couple of years ago. That seems entirely probable, even a bit optimistic. I believe Stoneleigh is in the 90% camp.

Stoneleigh said...

I think at least 90% on average, although it wouldn't surprise me if the average concealed considerable local variation. I fully expect many homes to be worth essentially nothing within a very few years. Homes near potential employment hold far more value than those which are not, and the definition of 'near' is likely to change substantially.

After all, in England during the relatively minor house prices fall of the early 1990s, houses were being virtually given away (for one pound sterling in some cases) in parts of the north where it was almost impossible to find any work within a few hundred miles. I remember large and quite new 4-bedroom homes in Gateshead for under ten thousand pounds.

Even in the more affluent south, my cousin bought her nice new terraced council house in Aylesbury for 39 thousand pounds in the 1990s, and that house would now be worth (at a guess) 250 thousand. I think it'll end up at much less than she paid for it as the market undershoots on the way down, as markets always do when boom turns to bust.

Anonymous said...

The pictures you have been showing latly remind me of my grandmothers tales of the great depression .Her first child ,my uncle,was born in suchlike,a soddy in Oklahoma,when my grandfather was searching for work on the the railroads.He died there,at 18mon. From starvation.Our entire family has had it pounded into our heads that you always ,always always keep 6-10 months of food in the house.

That may be a lesson many will learn here again soon.

So many dirty little secrets are coming out now....That ex-presidential press mouthpiece had better avoid dark places for awhile.He has really stirred the toilet...


Anonymous said...

Pentagon Watchdogs Swamped by Military Spending; $152 Billion a Year Goes Unaudited

“Ten years ago, there was a financial auditor for every $642 million in Pentagon contracts. Today, that ratio stands at one auditor for every $2.03 billion. The overwhelmed staffers are only able to produce half the number of audits they did, a decade back.

Crime -- and even threats to national security -- have also been allowed to flourish, thanks to the staffing shortages. Working with other agencies, the DOD IG's criminal investigators have brought in "770 criminal indictments, 644 convictions, and over $3.14 billion in criminal, civil, and administrative recoveries." But many other incidents are going unchecked.”

“According to some estimates, we cannot track $2.3 trillion in transactions.”
--Donald Rumsfeld Sept. 10, 2001

Ilargi said...

With current home prices 60% higher than 2000, it would take a 37% drop to reach 2000 levels again, not 60%. I concur. Not sure if ilargi meant to say that exactly but hard to know.

I don't see why anyone would think a 60% drop would lead to 2000 levels, or think that I said so. I can’t very well comment on every comment that claims things are not what I did not say in the first place. People think they’re smarter than me, be my guest. Not very interesting; The trend is though. What I have said is 80% or more, peak to trough. You can look it up.

March '08, prices were down some 20% already, if we take 6% drop pre-March ‘07. Current decline rates point to another 30% drop by March '09, which may well accelerate; inventory as well as new home sales show deterioration speeding up. So that's roughly 45-50% from the ‘05-’06 peak.

With no bottom anywhere in sight.

Meanwhile, April foreclosures were over 250.000. Banks must unload them, at a certain point, no matter what the haircut. We’ve seen Detroit homes already lose 90%, going for $5-10K, that had property tax valuations of more than ten times as much. We’ll be at 2000 levels by Summer ‘09, but by then the index calculations will look surreal, because there won’t be hardly any buyers left. Between now and then, scores of cities will be taken to court over property tax assessments, and banks will start failing for real.

Anonymous said...

Much as I like this blog, I think you're doing people like Ken Deffeyes a disservice by copying his entire article, charts included, to your site. You should copy some juicy quotes from it and let the reader click on the link so other sites (you know, the ones that actually write the content) receive traffic too.

Greenpa said...

"Much as I like this blog, I think you're doing people like Ken Deffeyes a disservice by copying his entire article, charts included, to your site. You should copy some juicy quotes from it and let the reader ..."

No, I disagree- this style is one of the reasons I come here; I don't have to chase all over the place to find out what they REALLY said.

My own blog works the way you suggest- there's room for both, and I like having this one, this way. Personally.

timekeepr said...

I see that farm land prices are going up:

Ilargi said...

Anon 645742369578946754936758439615478,

My goal here is to inform people. To that end, I post links to, and quotes (juicy or not) from, dozens of articles daily.

I know I am losing thousands of potential readers every day by posting longer quotes than most, since the average attention span is limited.

Attendance would jump if quotes were shorter. But it wouldn't be nearly as informative to work that way: I know that people will not click those 20-30 links per day.

So I choose to read the material, and get the relevant parts, even if they are longer. I'm sure my readers understand at a certain point that they can get a full view here, without necessarily reading even any additional material.

It's a format that I have chosen.

As for Deffeyes, and any other material I provide at great length: the link to the original is always there. Besides, I weigh these things, always, and always with care. Deffeyes article is on a Cornell page, and doesn't get robbed of anything by me quoting him.
Instead, he, and they, would lose by people not clicking and not reading the article.

I'm not going to defend my format a lot, that seems a waste of time, but there it is.

Anonymous said...

I don't see why anyone would think a 60% drop would lead to 2000 levels, or think that I said so. I can’t very well comment on every comment that claims things are not what I did not say in the first place.

Sorry, didn't mean to create such a fuss - I wasn't actually doubting your estimate of 80%, but the logic that was presented seemed like this to me:

Home values will drop 80%, because they are still 60% higher than their 2000 values.

I certainly wasn't trying to put words in your mouth. Heck, you had an article I think within the past few weeks about some homes in Atlanta going for low 10's of thousands.

How does inflation affect the price of homes? Does it push them down due to increasing foreclosures from people trying to afford food? Or do they adjust up with inflation as everything gets more expensive?

Ilargi said...


there is no inflation in North America, and home prices are the no. 1 proof of that

Anonymous said...

there is no inflation in North America, and home prices are the no. 1 proof of that

No no, I think you misunderstand my angle. I'm not looking for some evidence that you're wrong, or anything like that. Rather, I'm interested to know whether/how inflation affects home values, historically. i.e. what can we expect if we start to see significant inflation in the US?

I'm trying to educate myself as best I can, not grasping for evidence that BAU is sustainable or that all will be well. I fully expect the opposite.

Ilargi said...

you won't start to see significant inflation in the US, you just finished seeing it. it was merely hidden to most, because home price rises are not recognized as inflation.

Anonymous said...

But other costs didn't seem to rise as much (food/energy/clothing/etc). Or is it that they did rise and people just used the 'equity' in their homes to afford the rising costs of everything else?