Thursday, May 8, 2008

Debt Rattle, May 8 2008: Broken Levers

Dorothea Lange: Mobile Home, 1939
"To serve the crops of California, thousands of families live on wheels. Near Bakersfield, California."

Ilargi: It’s leverage that will break all camel’s backs. Whether rates are cut, as in the US, or not, as today in the EU and England, doesn’t make much difference, that’s just temporaray window dressing. There’s so much inevitable de-leveraging coming up that the poor animal’s back will need to be broken.

And all you read about bail-outs and rallies and opportunities and market bottoms is nothing else than attempts to make the trillions of straws come down on your back. There's a lot of weight in a trillion straws, far too much for you to carry. Still, I don't see you do much to avoid that weight.

I promise you, your life as it has been so far is over, and it's about to get very different, and you should get ready for it. The sun may shine, and everything might look normal, and spring is in the air, I know. But if you look up for a second, you'll see the anvil that's headed for your skull. Never mind your back.

Will Taxpayers Be On The Hook For Subprime Crisis?
Federally linked entities like Fannie Mae now back 98 percent of home loans sold by banks.

With a nationwide housing crisis far from over, the risk of future mortgage losses is rapidly shifting from the private sector toward government – and potentially US taxpayers. This is occurring partly by choice, as policymakers try to stop a wave of foreclosures. It is also happening by circumstance, as the crisis has left government-linked entities as the lenders of last resort in a troubled marketplace.

One symbol of rising risks came on Tuesday, as mortgage giant Fannie Mae announced a $2.2 billion loss for the year’s first quarter. The Federal National Mortgage Association, the official name that has been shortened to Fannie Mae for convenience, is not officially part of the government. But its public charter, created in the wake of the Depression, is to help make sure that home loans remain available in bad times as well as good.

That mission has helped avoid a total shutdown of mortgage markets over the past year. But it means that Fannie, along with entities with a similar mission, are assuming the risks that come with making loans at a time when house prices continue to fall. “They are fulfilling their mission ... but concentrating risks on themselves,” Edward DeMarco, deputy director of the Office of Federal Housing Enterprise Oversight, told a conference of mortgage bankers this week in Boston.

Home prices have been falling by double-digit rates in many metro areas, yet the inventory of homes for sale remains sky-high. The great worry is that, rather than stabilizing, the housing market will spiral downward. Homeowners default in greater numbers when their loan balances exceed the value of their homes. That, in turn, results in more foreclosures and downward pressure on prices. This explains the pressure on the government-linked enterprises to steady the market.

The House of Representatives appeared poised to vote Wednesday on a bill designed to stem a record tide of foreclosures.
Among other things, the bill would call for the Federal Housing Administration, a government agency, to let cash-strapped homeowners refinance into more affordable, fixed-rate mortgages. Before the FHA agreed to refinance the loans, the current lenders would have to agree to take substantial losses.

That means the federal agency would insure a loan that’s smaller than the original one, for about 85 percent of the current value of the home. The approach might help half a million borrowers keep their homes, according to the Congressional Budget Office. That would help at a time when foreclosures are running at a pace of more than a million a year.

But it would leave the government vulnerable if a high number of borrowers later default on their new, FHA-insured loans. Traditionally, FHA borrowers pay premiums that cover this default risk. Taxpayers might be on the hook in a scenario of high defaults and collateral (property) that falls another 15 percent or more in value after the refinancing.

Ilargi: Please take a good look at the example of leverage and its consequences here. I don't think many people intuitively understand that a 10% price drop can lead to 50% -or higher- losses.

The cost of a broken lever
Now that money market funds have stopped buying commercial paper issued by SIVs, banking regulations require the banks to bring them onto their books, and that means they must shore up their capital base by selling new shares or shedding other assets.

Every dollar that is used for this purpose is a dollar that can't be used to make loans for corporate buybacks, commercial customers or hedge funds. Without such loans, banks' earnings growth will be greatly impaired. Worse still, the buying power of two key drivers of the last bull market -- hedge funds and corporate Treasurys -- has been crippled because the leverage they've used to reap big profits has suddenly turned against them.

Here's an example of how that leverage works: Assume a hedge fund has $20 of real capital. If a bank allows it to leverage five times its capital, the fund can acquire $100 of risky assets with $20 of equity and $80 of debt. Now assume the assets fall by 10% in value, or $10. The hedge fund's leverage suddenly increases to nine times -- that's $10 of equity (the original amount less the loss) and $80 of debt now supporting $90 of assets.

If the permitted leverage stays constant at five times, then the hedge fund must sell $50 of assets, or 50% of its holdings. If lenders more realistically reduce permissible leverage to three times the loss, then the hedge fund must then sell $70 of assets, or 70% of its holdings. This process is bad enough in normal markets, but when buyers are scarce, prices of these involuntary sales are knocked down to levels that can wipe out the fund.

This scenario continues to play out across the global economy with occasional timeouts. As hedge funds deleverage in fits and starts, much of their inventory is going back to bank balance sheets. This is known in the banking business as involuntary asset growth, and it isn't good. It forces banks to issue more new equity to comply with international capitalization rules, further undermining current shareholders.

Deleveraging is going on among corporations and individuals as well, leading to less buying power for both. That leaves less money available for homes, cars, televisions and travel, further leading to the sort of buyers strike characteristic of long periods of slow or stagnant economic growth

Fitch - Horrid Alt-A Performance Drivers Revealed
A Fitch must-read just came out. Other than Egan-Jones, I feel that Fitch is the best rater out there, although they are a little slow at this one. But, then again much faster than S&P, Moody’s, most mutual and hedge funds and 99% of the mainstream press. Fitch concluded that ‘high-risk attributes coupled with continued home price declines and the sharp contraction in available NON-AGENCY mortgage capital’ are the primary factors in ‘The Alt-A Implosion’, playing in city near you this very minute.

They cite that in the Alt-A arena, as with subprime, that loans with ’simultaneous second liens (SSLs, aka piggybacks) are defaulting at very high rates relative to other loans and to history’. They say the ‘performance divide between loans with SSL compared to those without exhibit delinquency levels 71% to 300% higher’. They also say ‘borrowers with perceived equity default at lower rates than those without’. This is the ‘negative equity effect’ I have talked about so many times in the past year.

Fitch says ‘hybrid ARMs are exhibiting the highest rate of delinquency and fixed rate the lowest’. OPTION ARM performance is comparable to that of fixed rates ONLY FOR THE FIRST 12-MONTHS AND THEN DELINQUENCIES QUICKLY APPROACH HYBRID ARM LEVELS BY MONTH 18.

For those of you who are not acknowledging the ‘Alt-A Implosion’ is real and is here, this is more evidence for you. It has been my opinion for a very long time that ‘The Alt-A Implosion will make the Subprime Implosion look like a bad earnings report because Alt-A cuts across all socio-economic boundaries and the loans in most cases are truly exotic.’At least with subprime, the principal mortgage balance does not GROW each month as with the soon-to-be infamous Alt-A Pay Option ARM.’

Credit crisis over? Not likely
Yet Satyajit Das, an independent debt derivatives expert who for years has warned of an impending disaster in credit markets, doesn't buy it. I caught him at his Sydney, Australia, office a few days after he emerged from a three-month backcountry trek, and he leapt at the chance to scoff at U.S. bank presidents' vows that the worst of the credit crisis is over.

Das, who wrote the global credit derivatives business's most widely used textbook, argues that no matter how much equity investors try to ignore the imbalances in debt that continue to weigh on banks' balance sheets, the problem won't go away. "Given that the bank presidents have been consistently wrong about everything they've said about their losses until now, why on earth would anyone believe them now?" he asked.

Das' point was driven home last week by Citigroup's announcement of the sale of an additional $4.5 billion worth of shares -- its fifth attempt to raise capital in the past five months, each of which management hinted would be the last. The troubled bank has now raised $40 billion in the most expensive possible way -- diluting current shareholders -- while contending that everything's fine. Analysts at Goldman Sachs said they were surprised at the paltry amount raised in this round, suggesting it was the best the bank could do for now given its worsening prospects.

Why would anyone want to purchase Citigroup shares on the open or private markets? Buyers believe banks such as Citi have, at their cores, outstanding franchises that the hyenas who have run them recently haven't entirely ruined. Sellers disagree, with Das in particular contending that such wishful thinking ignores the massive "de-leveraging" of the global financial system under way now that threatens to impair banks' ability to lend and grow for years to come.

To believe the worst is over, Das notes, you would have to believe that bank managers have obtained a firm grip on their credit-related losses and have written down at least half of the ultimate total, and that declining home values won't create more losses. He thinks this is impossible because the banks own many of the same losing securities yet have variously written off anywhere from 30% to 80% of their face values.

Das figures that since few banks likely overestimated their losses, the variance in the write-offs means most banks continue to underestimate their losses. Thus he calculates that the $200 billion raised from outside sources so far is just a down payment and that banks have up to $700 billion more to go -- an amount far in excess of their total earnings over the past half-decade.

Today's state of the U.S. economy may not seem apocalyptic, but a slow and steady economic beating could prove disastrous. And it's not just losses on current holdings that are the problem. Das wishes to remind investors of the $1 trillion to $3 trillion that's still in the process of moving onto the banks' balance sheets from related entities where they were hidden.

These off-balance-sheet units were created to permit banks to buy vast sums of credit derivatives that they had designed in exchange for big fees. The holdings of the units, called structured investment vehicles, or SIVs, were then used as collateral to do more borrowing from money market funds, again generating more fees. Keeping these highly leveraged units off the books meant banks did not have to counterbalance them with any permanent capital, or equity. This was a crucial link in the global liquidity factory that provided funds for this decade's credit bubble.

Now that money market funds have stopped buying commercial paper issued by SIVs, banking regulations require the banks to bring them onto their books, and that means they must shore up their capital base by selling new shares or shedding other assets. Every dollar that is used for this purpose is a dollar that can't be used to make loans for corporate buybacks, commercial customers or hedge funds. Without such loans, banks' earnings growth will be greatly impaired.

Thievish Thursday
"Tending to larceny....." So what sold off the market yesterday? Having to cease tending to larceny:
"There is simply no provision in the law that requires investment bank holding companies to compute capital measures or to maintain liquidity on a consolidated basis. Nor does the law provide for a consolidated supervisor that is knowledgeable in their core securities business, and that would be recognized for this purpose by international regulators. The CSEs will institute public disclosure of their capital ratios computed under the Basel Standard later this year, and then phase in additional disclosure related to concentration of exposures."

Ding ding ding ding ding. Let me translate into one sentence: "You're gonna have to tell us what you hold and how you're valuing it, and that is going to be publically disclosed." That this resulted in a two hundred point selloff in the Dow, with every financial stock getting hit in unison when this ditty crossed the wire, says more about our capital markets than anyone can put into print. It should wake every single member of Congress out of their somnolence right now.

If you don't get this, as investors, as regulators, as Congress, as President Bush, as Treasury Secretary Paulson, and as Chairman Bernanke, you're either blind, stupid or both. Probably both. The market has gone up over the last two months, since Bear Stearns was bailed out, because companies are lying and the "regulators" have been explicitly allowing them to lie. In fact, that is exactly what Bloomberg reported:
"Data on capital and liquidity will be required this year 'in terms that the market can readily understand and digest,' Cox said in a speech today before the Securities Traders Association in Washington. The SEC already collects much of this information without giving it to the public, he said.

The five biggest Wall Street firms had their largest share-price declines in at least a month. Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, led the way, losing $2.67, or 5.8 percent, to $43.64 as of $:31 p.m. in New York Stock Exchange trading."

There 'ya go, reported by the media - the threat of having to tell the truth resulted in the largest selloff in more than a month. Never mind Merrill "we don't need more capital" Lynch who has a CEO that loves to repeat his mantra every time there is a microphone within 60' - and then immediately turns around and - you guessed it - raises more capital.

"Tending to larceny....." Or shall we count JP/Morgan that pulled the same stunt, selling $1.6 billion in hybrids @ 8%. Heh, that's great - I can get a mortgage at a lower coupon! So tell me, is Mr. Dimon's firm in worse financial shape than I am, since they have to pay a higher interest rate for a shorter maturity (their notes can be called in 2013; my 30 year mortgage could not be.)

"Tending to larceny....." If that's not bad enough, I have to hammer on Fannie again, this time using their Press Release:
"The initiatives include 1) a new refinancing option for up-to-date but "underwater" borrowers with loans owned by Fannie Mae that will allow for refinancing up to 120 percent of a property's current value."

Oh that's rich. Fannie proposes to allow borrowers to instantaneously saddle them with at least a 40% loss should they default? (20% underwater plus another 20% in foreclosure, rehabilitation and marketing expense) This is part of Fannie's "great idea" speech for how to navigate a market that they have admitted is bad and getting worse?

OFHEO and Congress are allowing this sort of manifestly-unsound nonsense? The very same practice - having an outstanding balance that exceeds the value of the property - that is now causing massive numbers of defaults? Add to this that Fannie claims 11.2% of their credit book is ALT-A. Their credit book, in total, exceeds two trillion dollars. So that's $200 billion, roughly.

Credit Cards: Terminal Ponzi Finance
Any intelligent observer who understands the fundamental concepts and realities of a Ponzi finance based economy knows that borrowers will move from one worm hole to another until credit is exhausted and withdrawn. Meanwhile the same cast of characters who never saw the mortgage rout develop, fail to see a new disaster coming.

The last Joe Ultra Light Sixpack (JULS) kamikaze assault has spilled into credit card borrowing, which soared last month. My theory holds that these borrowings are not exactly trips to the mall either, but represent desperate attempts to purchase essentials like food, gasoline and utilities.

Of course such borrowings are quite problematic because of the usury rates being levied. It is problematic for the lenders and ABS holders because it is the end of the line in terms of Ponzi finance from other sources to service the old debt. The timing of this surge couldn’t be worse either, given that credit conditions in the card sector were already worsening.

The consumer credit card market is nearly a trillion dollars in receivables at present. So far it has been spared the worst effects of the housing bust and inflationary wipe out of JULS. The reasons for this are simple. Cards give no questions asked access to credit to a large number of the Gente, and the payments are minimal. Once debtors run up one card, they wash, rinse, repeat the process on a second, and a third, using Ponzi finance to do it. The math of paying fees, fines, and 15-20% or more interest rates is of course nasty.

Coupled with the complete lack of wage growth, less access to HELOCs and devastating inflation, I would expect these conditions to erode very fast over Mad Max summer. Here’s how this scam works: according to the Fed surveys 85% of lenders tightened standards on subprime mortgages in the first quarter. However, direct mail offers to high risk households- defined as those using more than 30% of their available credit grew 5% between the 2Q-3Q, 2007. The Boyz sent out 363 million mailers to this group!

And this is what your future will feel like:
A little montage from Karl Denninger’s Ticket Forum:

Ilargi: People at Countrywide will go to jail over this. Wonder if Mozilo will be among them. How well has he prepared his “I didn’t know” defense?

Judge rejects Countrywide settlement
A bankruptcy judge has rejected Countrywide Financial Corp.'s proposal to settle accusations that it fabricated evidence used in a bid to foreclose on a home. Judge Thomas Agresti of the U.S. Bankruptcy Court in Pittsburgh on Tuesday dismissed the company's request to settle a dispute with Sharon Diane Hill, a Pittsburgh area woman who was threatened with foreclosure by the country's largest home lender. Agresti said he wanted more information about the alleged false documents.

Hill was up to date on her payments, yet Countrywide threatened to take her home if she didn't pay thousands more in fees, according to court documents. It later backed off, and offered to pay her lawyers. But Hill said her credit was permanently marred by the unjustified foreclosure attempt.

Details of the settlement proposal were filed under seal, which Agresti said was unjustified. He also said the settlement documents were deficient because they failed to reveal what Hill's lawyers found out about the alleged fabricated evidence. Agresti said the settlement proposal "fails to sufficiently apprise the court of the results of the discovery that has been conducted to date into the 'recreated letters' that came to light at the hearing held on Dec. 20, 2007."

Countrywide, to demonstrate that Hill had been late on her mortgage payments, sent letters to her attorney that were dated Sept. 22, 2003, Oct. 25, 2004, and March 29, 2007. The letters referred to changes in escrow requirements that showed she was delinquent on her loans. But the attorney said he never received the letters, and was able to show in court that the letters were phony. Countrywide later said one of its technicians "recreated" them electronically. Bankruptcy court officials demanded a full investigation, and Agresti authorized it.

On Tuesday, Agresti said he would not approve a settlement until he got to the bottom of Countrywide's suspected forgeries. He said he was concerned about "the potential effect that a settlement in this case may have in other cases involving Countrywide."

Some Banks' Loan-Loss Estimates Use Rose-Tinted Housing Data
Wachovia Corp.'s and Washington Mutual Inc.'s embrace of a government home-price index may help their reports of expected mortgage losses appear less dire than competitors'. In recent weeks, Wachovia and WaMu have cited housing data from the Office of Federal Housing Enterprise Oversight when detailing their exposure to the crumbling U.S. housing market.

Yet a rival index, the S&P/Case-Shiller Home Price Indices, is a good deal more gloomy, and also the popular choice among other large banks. To be sure, neither firm has been accused by regulators of intentionally diluting their estimates of future home-loan losses. But their moves to rosier home-price data nonetheless highlight how both banks' future loss estimates, which underpin ongoing financial performance, are founded in part on data whose reliability is very much up for debate.

Moreover, the two banks have embraced Ofheo data even as both reported first- quarter net losses and raised billions in fresh cash to shore up their balance sheets. In mid-April, when Wachovia reported a quarterly net loss and raised $8 billion in cash, the bank cited Ofheo housing data to forecast the nation's housing crisis would end in "mid-2009" and that prices would fall an additional 7% nationwide before then, or 12.9% from their peak.

The forecast raised eyebrows, since Wachovia had previously disclosed a more dire forecast that prices would fall 20% nationwide between the middle of 2007 and the end of 2008 alone - a rate of national decline much closer to Case- Shiller's statistics. A Wachovia spokesperson said the new forecasts apply specifically to the bank's troubled $121 billion book of Pick-a-Pay mortgages. The loans are widely referred to as "option-Arms," or mortgages that allow typically riskier borrowers to pay less than full monthly payments and increase the loan's balance.

In the first quarter, losses from Pick-a-Pay loans accounted for 70% of Wachovia's total losses from home loans. The spokesperson declined to describe the forecasting models that Wachovia applies to its other books of loans. Wachovia's move to Ofheo-based forecasts troubled analyst Meredith Whitney at Oppenheimer & Co.

"We are unaware of any financial institution that solely relies on Ofheo to formulate its loan loss estimates," Whitney said in a note to investors. Whitney said she was confused by Wachovia's move to "a more positively biased home price guide" and that the change will lead to more "catch-up provisioning," which will weigh on the bank's earnings outlook.

OPEC sees no oil shortage, would pump more if needed
World oil markets have enough supply now, but OPEC is willing to pump more if needed to keep pace with demand, the group's secretary-general said on Thursday. Adbullah al-Badri also said in a statement that the 13-member Organization of the Petroleum Exporting Countries holds more than 3 million barrels per day of spare production capacity for use if needed.

"There is clearly no shortage of oil in the market," the statement quoted him as saying. "The Organization stands ready to act if the market shows a need for any further measures," he added. The statement comes a day after crude oil prices hit a record high of $123.93 a barrel and a renewed call from the United States, the world's top oil consumer, for more oil from OPEC to quell the rally in prices.

Oil prices fell almost $2 after the statement was released, even though it underscored OPEC's view that factors other than supply and demand are lifting prices and there was no need for an immediate boost in supply. "The turmoil in some global equity markets and the considerable depreciation in the U.S. dollar have encouraged investors to seek better returns in commodities, particularly in the crude oil futures market," Badri said. "This has driven prices higher."

"The Organization will continue to strive for a stable and balanced market, with prices that reflect fundamentals, and are favourable to both producers and consumers."

Your house is so underwater you need a submarine to get in the front door
You bought at the peak of the market. You put next to nothing down. (Maybe you even took out one of those 105% LTV loans to cover closing costs.) Now prices are falling, falling, falling, and you are underwater on your mortgage. Deep underwater, where the strange sea creatures dwell.

If it’s any comfort, you are not alone. Here’s what, the real estate website, says today:
“Of homeowners nationwide who purchased when U.S. home values peaked in 2006, one out of every two (51.6%) now owes more on their mortgage than their home is currently worth.”

You’re in better shape if you bought before or after the 2006 peak in prices. Here’s the percentage of homes that are underwater on their mortgages based on when they were bought, according to Zillow:
2003 7%
2004 16%
2005 42%
2006 52%
2007 45%

Las Vegas may look dry, but from the point of view of homeowners, it’s deep underwater. Zillow says that buyers in 2006 posted a median downpayment of just 2%, and since then, home values have fallen 25 percent year-over-year, so 89.9% of homeowners now owe more than their home is worth.

Stockton, Calif., is worse: 95.8%. No wonder it’s known (unofficially of course) as the Foreclosure Capital of the U.S.A.

Citigroup's Pandit gets ready for his close-up
Vikram Pandit's first five months as Citigroup chief executive have been no honeymoon. Since taking over in December from Charles Prince, who quit under pressure, Pandit has presided over nearly $15 billion (7.6 billion pounds) of reported losses, much of the bank's efforts to raise more than $40 billion of capital and a 41 percent dividend cut.

Pandit has also faced repeated demands from investors that he slash costs, divest poorly performing businesses and perhaps even break up the largest U.S. bank. In a four-hour presentation to analysts and investors on Friday, Pandit and other top executives will lay out their vision for Citigroup. Pandit, known for his caution, has promised details on how he will make it run better.

"If people are expecting a grand design, they may be disappointed," said Marshall Front, who oversees $800 million at Front Barnett Associates LLC in Chicago. "I think he will give us the state of the union: where have we been, where are we now and where are we headed. We'll have a better idea of his stewardship in six months."

Investors have long viewed New York-based Citigroup, which has $2.2 trillion of assets and operates in more than 100 countries, as a bloated work in progress. The bank's shares are down about one-fourth since Pandit took over and by more than half in the last year. At the bank's nearly four-hour annual meeting last month, shareholders vented anger over the share price and executive pay, and employees expressed dismay over their treatment.

"I would like to hear some definition of how far they have to cut," said Michael Holland, who runs the money manager Holland & Co in New York. "Pandit would be smart to avoid any kind of time frames, keep expectations modest -- and try to outperform those expectations."

Pandit has so far moved in smaller steps. He has agreed to sell most of the CitiCapital commercial lending and leasing unit, resulting in a $325 million after-tax loss and the bank's stake in the CitiStreet benefits servicing venture, resulting in a $200 million gain.

The Wall Street Journal said he may sell Primerica Financial Services, an insurance and mutual fund sales unit.
Pandit reduced risk by cutting back on mortgage lending and deciding to unload $45 billion of loans, and selling $12 billion of loans to fund corporate buyouts at a discount.

Bear Stearns sale to JPMorgan Chase set for vote May 29
Bear Stearns Cos. shareholders are scheduled to vote on the proposed acquisition of the investment bank by JPMorgan Chase & Co. on May 29, according to a regulatory filling. If the vote on the sale fails, Bear Stearns said in the filing it will likely have to cut "significant numbers" of staff, would not ensure those fired would receive severance packages and could possibly have to file for bankruptcy.

A shareholder lawsuit trying to stop JPMorgan Chase from voting the minority stake in Bear Stearns it acquired in early April has been withdrawn, according to filings made with the Securities and Exchange Commission on Thursday. Current shareholders will continue with lawsuits trying to stop the acquisition from being completed and are seeking unspecified damages, according to the filing.

In early April, JPMorgan acquired a minority stake in Bear Stearns as part of a plan to eventually acquire the entire company. JPMorgan was issued 95 million shares of Bear Stearns common stock last month -- a move that limited the chances the vote on the deal could fail. In March, JPMorgan originally agreed to acquire Bear Stearns for $2 per share, but increased the price to $10 per share in an effort to alleviate shareholder unrest.

JPMorgan stepped in to buy the ailing investment bank with the support of the Federal Reserve in an effort to avoid a potentially catastrophic collapse of Bear Stearns. Just prior the announcement of the acquisition, Bear Stearns' liquidity all but disappeared in a matter of days as investors, creditors and customers started withdrawing funds because of worries about the bank's solvency.

NY Assembly Passes One Year Foreclosure Moratorium Bill
The New York State Assembly today passed a rather robust legislative package aimed at addressing the “national sub-prime lending crisis.” The four-bill bundle contains legislation that, if enacted, would offer assistance to homeowners in default or facing foreclosure, establish requirements on all home loans, provide consumer info to all residential mortgage applicants, and most notably, create a one-year foreclosure moratorium for New York residents.

“The federal government was quick to bail out big businesses like Bear Stearns from near-collapse, but seems to have all but forgotten the everyday common household victims of this national crisis,” said Assembly Speaker Sheldon Silver.

“We in the Assembly Majority want to see New York’s families stay in their homes and our communities to remain intact. Our package is not a bail out. It’s an assistance program to help homeowners in our state keep the American dream from turning into a nightmare.”

The first bit of the legislation would provide assistance payments up to an amount equal to three months of mortgage payments and provide legal services and counseling to help select homeowners in default or facing foreclosure.

The second part of the package would establish the duties of mortgage brokers and remedies for violations, ensure that lenders verify borrower income and the ability to repay loans, and prohibit practices such as balloon payments, negative amortization and prepayment penalties.

The third bill would permit the courts to delay foreclosure up to one year for subprime borrowers who meet specific conditions, allowing at-risk homeowners to work with their respective lenders to avoid losing their homes. “This encourages lenders and homeowners to settle cases out of court through modification, refinancing or other means to avoid the devastation of losing a home,” said Assemblyman James Brennan (D-Brooklyn), sponsor of the foreclosure moratorium legislation.

The final piece of the legislative package would create a “Mortgage Applicant’s Bill of Rights,” which requires mortgage lenders and brokers to provide consumers with a pamphlet that must be read and signed by the borrower prior to applying for a mortgage.

ECB keeps rates on hold as oil hike spurs inflation fears
The European Central Bank's 21-head rate-setting council kept interest rates on hold Thursday for the 11th consecutive month with ECB chief Jean-Claude Trichet warning that spiralling oil and food prices were threatening to spark a renewed surge in inflation.

Despite a series of rapid-fire US rate cuts and signs of crimping economic growth in the 15-member eurozone, the ECB's governing council left its benchmark refinancing rate unchanged at a six-year high of 4.0 per cent at its meeting, which was held in Athens.

The decision was in line with analysts' forecasts. The build-up to Thursday's meeting has been accompanied by oil prices soaring to a record high just short of 124 dollars a barrel, adding to worries that rising energy costs could also undercut world economic growth.

Speaking at at his regular monthly press conference following the governing council's meeting, Trichet talked tough again about the risks facing consumer prices in the eurozone saying fighting inflation remained the ECB's 'highest priority.'

The ECB chief also warned that 'the level of uncertainty (in markets) remained unusually high and tensions persist' in the wake of the US subprime mortgage market crisis. But he was cautiously optimistic about the outlook for global growth saying the world economy remained 'resilient' as a result of the solid expansion rates in leading emerging economies which was also helping to underpin the eurozone's economic performamce.

Thursday's ECB meeting coincided with an announcement from the Bank of England that it had also kept its benchmark rates on hold at 5 per cent. However, unlike the ECB, analysts believe that sinking British housing prices and a steady stream of downbeat economic news could open the way for the Bank of England to press on with its rate- cutting cycle, possibly as early as next month.

What is more, while the ECB has sat tight on rates throughout the financial turmoil unleashed by the US subprime mortgage crisis, the US Federal Reserve has trimmed borrowing costs seven months in a row cutting the cost of money in the world's biggest economy to 2.0 per cent last week. But although data released last week showed eurozone inflation slipping from 3.6 per cent in March to 3.3 per cent in April, inflation in the currency bloc remains well above the ECB's annual 2- per-cent inflation target.

Bank of England keeps interest rates at 5pc amid inflation threat
The Bank of England has resisted pressure to cut interest rates as Governor Mervyn King holds firm in the fight against inflation even as the UK economy faces a sharp slowdown. The decision was widely expected by City economists who now are pencilling in a reduction in borrowing costs in June. If the Bank had cut today, it would have been its first back-to-back reduction in almost seven years.

Governor King and his eight fellow members of the Monetary Policy Committee have left borrowing costs on hold despite a slew of miserable economic data this week. Figures from the Office for National Statistics yesterday showed that factory output fell 0.5pc in March, compared with a 0.4pc increase in February. The fall is of particular concern since economists had expected the weak pound to boost the fortunes of exporters.

That data came on top of worse-than-expected news from the UK's services sector, which showed that the lion's share of the economy is now close to outright contraction. Economists at JPMorgan warned that taken together the services and manufacturing data suggested that overall economic growth is running at an anaemic 0.2pc quarterly rate.

Howard Archer of Global Insight said: "The recent stream of weaker data and survey evidence relating to consumer confidence, retail sales, the housing market, the services sector and manufacturing activity suggest that the UK economic downturn is deepening and widening. At the very least, interest rates look certain to be down to 4.75pc by June."

Deflation rather than inflation may be the Bank of England's eventual battle
This rate decision was not a surprise. But I fear it may have been a mistake. After all the last-minute speculation from economists, from traders and from pundits on the possibility of a back-to-back cut in interest rates, the Bank of England, true to form, has taken the cautious option. There is little doubt that this will have been a particularly fraught one, with the Committee split on the decision to leave borrowing costs unchanged at 5pc.

That said, it feels these days as if every month's MPC meeting is a close call, and for good reason: the Committee members are faced with a rather nasty dilemma. On the one hand, the economy really does look as if it is facing a serious slowdown, if not a potential recession. In such circumstances, the natural reaction would be to cut rates as quickly as possible.

However, the Bank's first priority (laid down by Gordon Brown) is not to prevent recessions but to prevent inflation getting out of control. The Consumer Price Index is currently sitting well above the 2pc target at 2.5pc, and the Bank's Governor Mervyn King has himself admitted that it will probably soon rise above 3pc, forcing him to write a letter of explanation to the Chancellor. Oil at around $120 a barrel will only make matters worse.

The balancing act between these two extremes has split the MPC, resulting last month in a highly unusual three-way split. Two members thought rates should be unchanged; six wanted a quarter percentage point cut and one, David Blanchflower, wanted a full half percentage point reduction.Given such a split even on a month when rates were actually cut, it is hardly surprising that the Bank could not muster enough votes for a further cut today.

As the Committee itself admitted in a recent set of minutes, it is usually very reluctant to cut rates twice in a row, the fear being that people will infer that its stance on inflation is softening. Still, one can probably assume now that the MPC will go on to cut rates next month, or perhaps in July.

After all, the flow of bad news on the economy over the past few weeks has been almost unremitting. According to the most reliable surveys the services and manufacturing sectors, which together account for the vast majority of Britain's economic growth, are now close to contraction.

All the mainstream housing surveys show that the property market is now experiencing its worst downturn since the last crash in the early 1990s. Unemployment may still be close to a record low on the slow-moving official measure, but all the surveys show that it is about to leap higher. And, as Prof Blanchflower pointed out in a recent speech which was unusually dreary, by concentrating on keeping down inflation today we may be fighting yesterday's battle.

Inflation could ultimately fall very sharply as the effects of the credit crunch, the US and the UK economic slowdown actually serve to deflate prices. It sounds almost counterintuitive, but there is good reason to fear that unless the Bank starts cutting rates faster, in a few years' time the real enemy will be deflation rather than inflation.

Europen Monetary Union is more unworkable than ever
To those loudly insisting all this week that Britain should have joined the euro ten years ago, I can only say: are you completely mad? As travellers, we all love the euro. It made my life marginally easier as the Telegraph's Europe correspondent in Brussels, sparing me the toil of filling out separate expense forms in marks, lira, francs, escudos, and so on.

But let's be serious. A minor convenience is nothing set against the fate of nations. Currencies are formidable instruments of economic management, for good or ill. Every great financial crisis over the last century has been linked to a currency cock-up. It was the perverse workings of the fixed exchange Gold Standard that turned the US slump into a global depression in 1931. (See 'Fetters of Gold' by Berkeley’s Barry Eichengreen. A brilliant book.)

EMU is the modern Gold Standard, at least for those caught in its web. (Though Eichengreen, oddly, does not see it. He will.)
I would acknowledge that the European Central Bank came through the credit crisis less bloodied that the Bank of England, but only because Frankfurt engaged in a pre-emptive bail-out, on a huge scale, accepting mortgage debt as collateral - and moral hazard be damned. It had no choice.

Euroland cannot risk a Northern Rock or a Bear Stearns. To do so would risk the implosion of EMU itself, for there is no 'lender-of-last-resort' in this system, (as the IMF has warned). Who would undertake such a rescue? The ECB is forbidden to do so by EU law. There is no EU Treasury, no Euro-Darling, no Euro-Paulson.

The mere suggestion that German taxpayers might have to fund a lifeboat for the Latin region is politically poisonous. Europe's authorities will go to great lengths to ensure that such a situation does not arise - though it will arise, soon enough, anyway.
Be that as it may, surely the last decade has shown once again - if such a demonstration were necessary - that Britain's rumbustious, credit-driven, Mid-Atlantic economy is incompatible with the economy of Greater "Carolingian" Germany (DE, NE, BE, LUX, O, DK, and France above the Loire).

The UK cycle is at least a year ahead. The trade and capital flows are more intertwined with the dollar zone. The UK sensitivity to interest rates is much higher (floating mortgage rates, vis fixed in Germany, etc). If Britain had joined EMU, the country would now be facing an even more almighty smash-up than it is facing already. We would face a repeat of the 1992 ERM debacle, but at higher levels of debt and with no hope easy liberation by the likes of Saint George (Soros).

Lest we forget, eurozone interest rates fell to 2pc after the dotcom bust and stayed there as late as December 2005, to help Germany recover from perma-slump. (UK rates were 4.5pc at the time, and not nearly high enough to check credit growth - as we now know). Sir Eddie George, the former Governor of the Bank of England, says he can scarcely bear to think what would have happened to British house prices with rates anywhere near 2pc.

As it is, UK household debt levels have reached a world-beating 103pc of GDP. Home equity withdrawal - that piggy bank for holidays, and over-powered cars - hit 4pc of GDP last year. Think a step further. Once the post-bubble bust had begun under EMU, Britain would have been almost powerless to take countervailing action. Monetary policy would have tightened into the downturn - as it has been for Spain and Ireland over the last eight months. (Euribor lending rates have actually risen 85 basis points since the credit crunch began).

Britain would have faced a surging currency at exactly the wrong time. To those pro-euro readers who see the crashing pound as some sort of indictment of our independent monetary regime, I reply Hallelujah. A crashing pound is what we need, just as we needed it after the ERM liberation in 1992. (in other circumstances, of course, a devaluation might be a problem, but we are not in other circumstances).

As Neil Mellor from the Bank of New York Mellon points out, the pound has been perfectly hedged in this cycle. Sterling has fallen hard against the euro, giving a shot in the arm to British manufacturers (yes, they still exist, 13pc of GDP) who rely heavily on Europe’s markets: yet it remains overvalued against the dollar, softening the effect of oil, metal, and commodity inflation.

Northern Rock investors begin legal battle
Northern Rock shareholders are today expected to lodge a legal challenge to claim back compensation they allege they are owed from the nationalisation of the Newcastle-based bank. The UK Shareholders Association and SRM Global, the hedge fund run by former UBS trader Jon Wood, will submit an application for a judicial review into the terms of Northern Rock's nationalisation. If the application for review is approved, the case will come to court in about nine months time.

Shareholders believe that the Government has fixed the terms by which they are to be compensated, meaning that they will receive practically nothing. At present, shareholders are set to receive what their shares would have been worth had the Government not propped up the bank. However, shareholders want an independent valuer to assess a fair compensation level and argue that this could value the bank's shares at £5. At this level, the Government faces a compensation bill of around £2.1 billion.

Around 15 shareholders have signed up to the application, representing around 8,000 investors who are backing the action. RAB Capital, another hedge fund with a large holding in Northern Rock prior to nationalisation, is also expected to join the legal action. The case will argue that the Government nationalisation was a breach of human rights law.

Northern Rock was nationalised in February after the credit crisis forced it to seek emergency funds from the Bank of England. The move triggered the first run on a UK bank in more than a century. Prior to nationalisation, Northern Rock's shares were suspended at 90p, valuing the bank at around £380 million. David Greene, a partner at Edwin Coe, the law firm which brought the Railtrack shareholders' action against the Government three years ago, is representing some of the shareholders.

He believes that without the legal challenge, shareholders would get almost nothing for their stake. "Right to the end, there were private bidders who were willing to purchase Northern Rock," he said. "Shareholders had no reason to believe there would be nationalisation," Mr Greene said.

At the time of nationalisation, the Government tried to head off a legal challenge by promising to appoint an independent valuer. However, three months down the line there has been no appointment amid suggestions from industry sources that accountants, investment banks and other potential valuers are wary of taking on the job because of the potential legal and reputational risks involved.

UK banks face mass legal action over loan insurance policies
Consumers mis-sold loan protection insurance will be asked to join a class action case which could force compensation payouts worth more than £300m and a rash of other claims against high street banks. The City law firm Clyde & Co is seeking to hear from 163,000 people who have been inappropriately sold personal payment protection (PPI) for loans by HFC Bank, a sub-prime lender owned by the high street giant HSBC.

If the action is successful, Clyde & Co will consider bringing claims against other financial providers found guilty of mis-selling PPI, which is fast becoming one of the biggest scandals in the personal finance industry. Although protection policies can help people who fall ill or lose their jobs, up to half of the 20 million policies in force are believed to have been mis-sold, making the amount reclaimable £10bn.

Many policy-holders were wrongly told by commission-hungry salespeople that loans would not be granted without insurance, or were not told they could never have claimed because they were self-employed or had a medical problem.

The Financial Services Authority (FSA) has so far fined 12 companies for mis-selling PPI, with the largest penalty, £1m, levied on HFC Bank. Between January 2005 and May 2007, staff at HFC's 136 branches failed to ensure that the policies were sold appropriately, and did not have any system in place for monitoring their sale.

Most of the 163,000 policies were for unsecured loans, with PPI adding an average of £2,000 to the cost of the borrowing. Clyde & Co said it needed a minimum of around 500 customers to start an action. If all the customers affected came forward the compensation being sought would be £326m.

Ilargi: Funny, everyone has the idea of China as this huge exporter. Well, take a look: ”Germany has been the world's largest exporter of goods since 2003“.

Germany industry loses momentum as exports fall
Germany's exports and industrial output both fell in March as foreign demand waned, leaving the world's top exporter of goods vulnerable to a slowdown in economic growth in coming months. Preliminary figures on Thursday showed that exports fell by 0.5 percent on the month, hit by weaker European demand in a fresh sign euro zone growth is slowing.

Imports rose 0.8 percent, trimming the trade surplus to 15.4 billion euros ($23.61 billion) from 16.3 billion in February. Germany has been the world's largest exporter of goods since 2003 and sold almost 1 trillion euros worth abroad last year. For years, foreign trade has been an engine of growth but a weaker global economy and the strong euro are sapping its drive.

"Exports are clearly losing momentum," said Ulrike Kastens, economist at private bank Sal. Oppenheim. "The export train continues to roll, but at a much slower pace." The fall in exports from Europe's largest economy was the second in a row and confounded expectations for a small rise. Industrial output also lost some momentum late in the first quarter, falling by 0.5 percent in March.

The drop was marked by a 12.3 percent decline in construction output as the sector eased after profiting from mild weather earlier in the year. Output rose 2.3 percent in the first quarter but a drop in manufacturing orders for the fourth month in a row in March pointed to a weaker outlook for industry. The orders data, released on Wednesday, compounded evidence of weakening momentum in the economy after business morale fell sharply in April.

Growth in the manufacturing sector also slowed in April, a survey of purchasing managers showed last week. "For the manufacturing industry, the decline in orders in recent months and the significant clouding over of sentiment point to a weakening in output momentum in the coming months," the Economy Ministry said in a statement with the output data.

Airbus' Cost Cuts Don't Fly
Airbus will have to go back to the drawing board. No, it's not a plane that needs redesigning -- it's the European company's increasingly desperate plan to regain its cost competitiveness against Boeing. On May 7, Airbus' parent European Aeronautics Defense & Space confirmed it had halted negotiations to sell two of the planemaker's French factories to Latécoère, a French aerospace equipment supplier. Its plan to sell three German factories to other buyers also has fallen apart.

Disposing of the factories was a key element in its push to find billions in cost savings in order to battle the dollar's decline, which has sent costs at its European factories soaring far above those of Boeing. Now that the effort has failed, Airbus will have to contemplate "brutal, radical measures" that could shift thousands of jobs outside Europe to lower-cost countries, says Sandy Morris, a London aerospace analyst with ABN Amro.

At the same time, Airbus faced new uncertainty this week over its troubled double-decker A380 plane, as it sent a letter to customers saying meeting the aircraft's delivery schedule would be "challenging." Airbus said the letter did not warn of slippage in the schedule, but Middle Eastern carriers Emirates Airline and Etihad Airways said they were bracing for more delays. Emirates has ordered 58 of the planes, and further slippage "will do us serious damage," the carrier's president, Tim Clark, told Reuters.

The A380 is already two years behind schedule because of wiring problems caused by mismatched design software. The problem wasn't discovered until the planes were on the assembly line. Workers are having to rewire 25 planes, which has slowed production to about one superjumbo per month. Airbus has said that to meet current delivery targets it will need to boost that to four per month within two years. That, a spokeswoman said, is what prompted the company to tell customers about the "challenging" schedule.

But she said Airbus won't know whether more delays could be in the offing until it completes a review of the program in the next few weeks. While a further A380 delay could lead to millions in penalty payments to airlines, those sums pale in comparison to the billions Airbus is losing from the weak dollar. Because aircraft sales are priced in dollars, but Airbus builds planes mainly in Europe, every 10 cent rise in the euro's value against the dollar slashes more than $1.6 billion off its bottom line.

Early last year, when Airbus announced its so-called Power8 restructuring program, it figured it needed to cut costs by $3 billion annually to offset those losses. But since then the euro has risen another 20 cents against the dollar, to about $1.55 currently. That means Airbus needs to find another $3 billion in savings, according to ABN's Morris. "It has become a matter of survival," he says. "If things stay as they are, Airbus ultimately will be driven out of business."

Ilargi: Yes, that’s really brilliant, put your pension money in asphalt.

Main Street, Not Wall Street, Should Fix Crumbling U.s. Infrastructure
Repairs will cost trillions. Public pension funds can help pave the way.

At its best, America's infrastructure has powered our economic prosperity, created well-paying jobs, and served the public interest. Today, however, it has fallen into a dangerous state of disrepair. The Minnesota bridge collapse last summer brought home the urgency of repairing and modernizing our nation's system of highways, bridges, tunnels, power plants, transmission lines, and airports.

But doing so will be prohibitively expensive. Current plans seek to exploit the nation's need for private profit. But there's a better source of capital at hand: public pension funds. The American Society of Civil Engineers estimates that $1.6 trillion is needed in the next five years alone just to maintain the adequacy of existing infrastructure.

But even if every bridge was repaired, it still would not be enough – trillions more will be required to build the new systems necessary to keep our economy competitive. As anyone who commutes every day knows, we need to reduce congestion on our roads and in the air, speed the transportation of people and goods, increase energy efficiency, and do so in ways that are environmentally sustainable.

The thought of coming up with the money necessary for all this, makes people wince – understandably. This is a time when many states face budget shortfalls and our federal deficit is at an all-time high. Leaders of both the Republican and Democratic parties know the US cannot raise money from traditional public sources of financing, including municipal bonds, user fees, and taxes.

The financiers on Wall Street already have positioned themselves to take advantage of this national crisis for their own gain. Where most Americans see crumbling bridges and traffic congestion, the money managers see a treasure trove of fees, profits, and more record bonuses for CEOs. It's why some private equity firms and banks on Wall Street are raising massive funds to buy these assets that have typically been owned and managed by the government.

In recent years, new infrastructure funds have been established in North America with capital commitments of $40 to $45 billion. These private funds have sprouted up like weeds, structured for short-term profits and sky-high fees – usually up to a 2 percent management fee plus up to 20 percent of the profits. It would be a monumental mistake to turn the future of America's infrastructure over to the same crowd that brought us the subprime crisis, an economy loaded down with debt, and recession.

We should know better by now than to create a scenario where bridges and highways are sliced and diced like subprime loans into financially engineered "collateralized infrastructure obligations." America needs a large source of stable, long-term capital to build the system of buildings, roads, and power supplies needed to sustain the country. We need a source of capital that values infrastructure because it provides a reasonable rate of return, strengthens the overall economy, and doesn't burden users with excessive fees.

Enter that source of capital: Public pension funds, which are responsible for the retirement benefits of more than 18 million Americans, have more than $3 trillion in assets, and a long-term investment approach consistent with the stable returns that infrastructure assets generate. Pension funds could buy and build infrastructure, putting the profits to work for the retirement of workers, not for the benefit of Wall Street CEOs.

California screaming: Tales from the housing bust
People in L.A. are coping in ways they never imagined with a crisis they never saw coming. Like it or not, California's reputation as a national trendsetter is going to remain intact.

Spring in southern Orange County has come on spectacularly. The autumn fires that blew smoke and ash into neighborhoods here also destroyed a lot of dark-hued scrub and chaparral. Now the hills along the 241 tollway are painted in bright green grasses and yellow and violet wildflowers.

Near the end of the 241 lies Ladera Ranch, a nine-year-old (and still growing) planned community of 25,000. Nestled into the foothills, the place is a visual metaphor for the American dream, California division, in which the residents of the postmodern townhouses at the lower elevations aspire to the gated $4 million spreads at the top.

Yet there's a whiff in the air - not of smoke - but of despondency. According to Foreclosure Radar, a Web service that searches public records, more than 100 homes in Ladera Ranch are in "pre-foreclosure," which starts when a bank sends the homeowner a first notice of default. Another 100 are in the hands of the lender or being sold at auction. So many distressed properties translate into fast-falling prices, and an owner trying to sell has a rough go of it when banks are the competition. Climbing that hill is looking harder and harder to do.

There are a lot of Laderas, and far worse, all over greater Los Angeles today. Median prices in the metro area's five counties are down 18% to 28% for the 12 months ended in March, according to DataQuick Information Systems, making Southern California a particularly lousy place to be selling a home right now. But the pain here isn't hard to find elsewhere. The past year has given the lie to the old saw about there being no national real estate market.

Of the country's top 100 markets, 56 saw price declines; foreclosures increased in 98 of them. The same mix of crazy loans and speculative frenzy that pushed up and then pulled down L.A. was at work in Florida, the Southwest and much of the Northeast. The Midwest inflated less but in the end still proved vulnerable to a weakening economy and the debased lending standards of the bubble era.

The L.A. story, in other words, is likely to be your story too. Unlike some famous bubble towns - hello, Las Vegas - L.A. has a mature economy and a diverse housing supply. There's a house and a neighborhood like yours here, whether you live in a city, a leafy older suburb or a brand-new exurb.

In Money Magazine's annual special report on real estate, you'll see how homeowners in the greater L.A. area are coping and how the drama might play out here and in your hometown too. We'll also answer some key questions for buyers and sellers in a game where none of the rules are the same as they were just two years ago, and we'll look at five big changes in real estate that will outlive the crash.

First, however, the big question: When will the hurt stop? Judging from what's going on in Southern California, it's likely to be years, not months, before real estate blooms back to life.

'False hope' seen in April store sales gains
Analysts, citing numerous headwinds, aren't buying that last month's gains indicate a rebound in consumer spending. Although many retailers reported improved April sales, following a disastrous March, analysts cautioned Thursday that it's premature to declare a resurgence in consumer spending.

"It's false hope to think that these numbers show that a rebound is about to take place in consumer spending," said Ken Perkins, president of sales tracking firm Retail Metrics, adding that there are still too many "headwinds" constraining consumers' discretionary budgets. Specifically, Perkins pointed to four months of job losses, record-high gas prices, higher food prices, tighter credit availability and declining home values as the primary culprits.

Perkins estimates that sales at stores open at least a year, which is a key measure of retail performance, have averaged about 1% monthly growth so far this year. "That compares with a monthly average increase of 2.6% last year and 3.7% monthly same-store sales increase in 2006," he said. "Monthly sales growth has tailed off significantly." "I'm not expecting monthly sales to get anywhere near 2% or over this year," he added.

What's more, retailers benefited last month from much easier year-over-year sales comparisons. So even though sales tracker Thomson Reuters expects total April sales for the 36 of the nation's largest chains it tracks to have increased 2.5%, that compares with a 1.8% drop in total sales for the same month a year ago.

Thomson Reuters senior research analyst Jharonne Martis said most analysts typically look at March-April sales together because of the impact of the Easter holiday weekend. This year, sales for the two months combined are forecast to rise 0.9%. That still would trail last year's 2.1% increase for the two months, she sai

Ilargi: The Dumbest Deal of the Decade is still on, or so it seems. I’ll bet you there’s parties in the discussions that stand to gain nice bonuses if it is finalized. The biggest leveraged buy-out in history should NOT take place in 2008, and certainly not with pension funds.

Funding, bondholder suit and CRTC filing key hurdles for BCE deal
In what may be BCE Inc.’s final earnings report as a public company, first quarter results were in line with expectations, with strength in landlines offsetting lighter wireless business. Investors reacted positively to news that the telecom giant’s business fundamentals appear stable and there have been no material changes that should jeopardize the private equity buyout, giving the stock a bit of a lift.

However, BCE shares remain 14% shy of the $42.75 takeover price, despite the company’s indication that it still expects the Ontario Teachers’ Pension Plan-led buyout will close in June. Analysts are also confident that the buyout will close as planned, but a few questions remain nonetheless. One that should interest investors is the possibility of a June dividend.

BCE’s board deferred declaring this quarter’s 37.5¢ dividend that would have been payable July 15. UBS analyst Jeffrey Fan thinks BCE’s board will wait until they are more clear on the deal’s specific closing date before making a decision. “While this does not mean BCE will not pay the June dividend, it is less certain whether existing shareholders will actually receive the dividend given the uncertainty around the transaction close date,” he told clients.

Joseph MacKay at Desjardins Securities is optimistic that it will be completed by June 30, but also said it could be extended. The analyst cited his concerns regarding the three events that must occur before it closes: an outcome of the bondholder appeal, filing of documents with the CRTC by May 13, and the big one – funding of the transaction. Mr. MacKay noted that three of the banks involved in the BCE deal (Citibank, Royal Bank of Scotland and Deutsche Bank) are involved in litigation over the funding of Clear Channel Communications Inc.’s privatization.

“Given the BCE transaction has not cleared regulatory and legal hurdles, it is unclear how the three banks and the Teachers’ syndicate will settle on the terms of the funding of the transaction,” he told clients.

Canada housing starts fall in April
Housing starts in Canada dropped to 213,900 in April, coming back to earth after a surprisingly strong first quarter, the Canada Mortgage and Housing Corp. says. Economists had been expecting an annualized, seasonally adjusted 225,000 new houses, after March's robust 243,000 level.

Analysts have been surprised at the strength of residential construction during the first three months of the year, and have been predicting a slowdown. It's the second time this week that recent data have pointed to a slowdown in Canada's housing boom. Building permits fell 4.5 per cent in March from a month earlier, led by weakness in Alberta.

And the Canadian Real Estate Association has said that it expects existing home sales to fall 11.5 per cent in Canada this year. “This doesn't mean housing is collapsing; it just means the construction peak is best viewed through a rearview mirror,” said Derek Holt, economist at Bank of Nova Scotia.

“This is still a strong number, but it fits our view that new home construction will cool this year.” Most of the decrease in April reflected a drop in multiple starts, which had soared to their highest levels in 30 years earlier this year, said Bob Dugan, chief economist for CMHC's market analysis centre.

Urban starts in April fell by 16.3 per cent from March, to 185,400 units, CMHC said. Urban multiple starts fell to an annualized 113,900 in April from 141,000 in March, while single homes fell 11.3 per cent to 71,500. Declines were also noted in all regions of Canada except British Columbia, where starts rose 17.1 per cent.

India: coal shortage to fuel power crisis
Even as countrywide demand for electricity rises with the temperature, generation units across the country are finding it tough to cope with the situation owing to shortage of coal as state-owned monopoly Coal India Ltd has lowered its supply projection from 305 million tonnes to 292.15 million tonnes for 2008-09.

This means utilities will be running short of a total of 86.15 million tonnes of black diamond as they had projected a requirement of 378 million tonnes for the fiscal. Coal fuels nearly two-thirds of power generation in the country and any shortage will affect people's lives directly. Combined with the near-constant shortfall in gas supplies and seasonal problem with hydel units, the situation looks grim.

The country is already facing about 14% power shortage at peak hours. Efforts to make up the shortfall through imports, as suggested by the power ministry, too will not provide a fool-proof solution.

One, the utilities have failed to tie up the quantities. Two, the number of ports that can handle coal is limited.
Three, even when coal is imported, lack of rail wagons and shortage of locomotives, come in the way of transporting consignments to the power plants for timely replenishment of stocks.

Genocide through engineered food shortage
Just a handful of European families control world''s food supplies, raw materials and oil. Interlinked, they determine who should eat and who should not. During colonial expansion these European families acquired far reaching control over resources and in the process caused a global genocide that few talk about. They are at it again, this time by engineered food scarcity.

Historians frequently bury hard data that reveal the true nature of western (with western I am specifically referring to European) domination of the planet since the beginning of the nineteenth century. In a special report, Nafeez Mosaddeq Ahmed has documented that European expansion in the Americas probably cost over 21 million lives (some researchers estimate over 100 million deaths) and in Africa anything from 17 to 65 million. In South Asia, which is now India, Pakistan and Bangladesh, from 1770 to 1947 about 79 million people died in various famines and these deaths were avoidable.
Thus, European expansion into Americas, Africa and Asia caused anything from 117 to 244 million deaths. There is agreement among serious writers that whilst famines in India were caused by drought but starvation deaths occurred largely due to British administrative and economic policies. India’s food was stolen to feed Europeans to fight their wars all over the world. And this devastation does not even appear as foot note when historians write about world wars and the Jewish holocaust.
What makes this genocide worth remembering is the official conspiracy of silence. Everywhere, in every academic circle, except a few brave ones who are re-evaluating history. To discuss the manner in which European colonialists actually forced hunger and starvation on people they enslaved is often uncomfortable. Even economists shy away from these unpleasant realities; they prefer to concentrate on trade and commerce instead of concentrating on the real value of complex economic systems that were ruined.
The most significant impact of European expansion was that it made people all over the world dependent on them for food. When the United States of America became the dominant power after the Second World War, it could starve people at will. It is now starving its own people as well.
I have written several times in the last two years that the armed forces of the United States are the private army of a handful of powerful European families who control most of the natural resources on the planet and control its food supplies. These families can AT WILL starve any nation. They control agriculture production, processing, transportation and distribution of food.
Just eleven firms, closely held and tightly controlled, no accountability because most of them are not listed, run by family members, can starve the world. And they control many banks, and majority of politicians are sent from their pocket boroughs although western people believe they have a nice, working democracy. These firms are: Cargill (Swiss), Continental Grain (US), Louise Dreyfus (US),, Bunge and Born (Dutch), Andre (Swiss), Archer Daniels Midland/Topfer (US), ConAgra (US), IBP (US) (this oil company is also into food and feed business, now owned by Occidental Petroleum), Nestle (Swiss) (world’s number 1 in dry milk powder, condensed milk, chocolate, mineral water, etc), and Unilever (British), Phillip Morris (US).
As Richard Freeman says, “Ten to twelve pivotal companies, assisted by another three dozen, run the world’s food supply. They are the key components of the Anglo-Dutch-Swiss food cartel which is grouped around Britain’s House of Windsor. Led by the six leading grain companies-Cargill, Continental, Louis Dreyfus, Bunge & Born, Andre and ADM/Topfer-the Windsor led food and raw materials cartel has complete domination over world cereals and grain supplies…”


. said...

Made tiny for your viewing pleasure, but no worries - it's just my latest DailyKos diary about being on the road and TAE got a bit of play in this one.

Stoneleigh said...

Thanks Iowa Boy. I enjoy reading your work as you put self-sufficiency into practice. I wish I had some of your practical skills :)

. said...

OMG it's juicy today - pension fund dollars being drained for automobile infrastructure? How stupid is that? Is there even an English word to describe it?

Anonymous said...

Do you think that it is a good idea to keep a retirement fund, (401k or RRSP) even if it is not in equities... or with this banking situation and long-term problems, do you think it is better to cash out now even though there is a tax penalty?

Lisa Zahn said...

I've been wondering the same thing for quite a while now, shibbly. Would love to hear some thoughts on it...

Lisa in MN, who luckily bought a house we can afford in 2004 in an area that didn't get ridiculous, but still...

Stoneleigh said...


Others know more than I do about the specifics of US tax law and what the full range of your options might be within a 401K.

In general terms though, pots of money sitting there for a later date will probably attract predators, much as large public pension funds are now being eyed hungrily. Being liquid within a retirement plan doesn't necessarily mean being safe, although it would be better than holding assets destined to lose much of their value.

In an era where the banking system faces an unprecedented insolvency risk and money will be very scarce, money held for later within the current institutional framework is very likely at risk. At a rough guess, at least ninety-nine percent of the current money supply is credit rather than actual money, hence credit implosion will decimate the effective money supply.

Credit expansion creates multiple and mutually exclusive claims to every scrap of real wealth through layers of IOUs (ie leverage), meaning that when the expansion kicks into reverse, a scramble for that underlying wealth will ensue and most claims to wealth will be extinguished. Possession will be nine tenths of the law, and those odds don't favour the little guy.

I personally hold no retirement savings in the conventional sense, as I don't fancy the odds of there being anything left for me to collect in a couple of decades time. If I did have resources tied up in a retirement scheme, I would probably cash them in despite the tax penalty.

Anonymous said...

Hi Stoneleigh & Ilargi,
I love reading your blog. I too have wondered about liquidating my 401k which has a money market fund and a bond index fund. I gather from reading this blog, that these aren't really safe for longterm. What is safe? Where should the cash go? FDIC bank CDs? Store the cash in the freezer? Convert the cash to gold and/or silver? I have already paid off all my debts and house too. Thank you!
Anonymous reader

Anonymous said...

Hi ilargi, my son just mentioned some sledgehammer humour, to go with your anvil witicism. After I suggested he read the article
The cost of a broken lever
He said it sounded like the Marx Brothers movie where they are ripping apart the train to feed the engine.

I would think that the longer the current maniacs do keep the train running would mean time for more of the 'just plain folks' to get off as well as the 'just plain despicable '.

I will make that article a keeper to pass along. (especially to my brother who I think with another gentle blow or two to the head may start to look out for those anvils)

Thanx guy and gal, got to go plant some victory garden beans now.

Ilargi said...


Good to see someone understands why I think that article is important. It's not obvious to most that a $10 asset price drop can force you to sell $70 worth -or even more- of that asset (or another).

But that's a direct effect of leverage, and that's what makes it so insidious. We've seen plenty parties which are leveraged 30 times or more. Nice math exercise.

"The Cost of a Broken Lever", by the way, is not an article in itself, it's the 2nd chapter of an article I posted below it, entitled "Credit crisis over? Not likely" The first one got -too- long, so I "cheated" and split it up.

I've seen a number of articles lately in which Satyajit Das explains these matters real well. His book on derivatives is yet another one I have to read, I'm afraid.

Stoneleigh said...

Anonymous reader,

It sounds like you're in quite a good position, being debt free. There's no such thing as an entirely safe option, as we're moving into an era of extreme risk, and we're all going to have to learn to live with that. It's going to be very uncomfortable making that mental adjustment.

Basically, I wouldn't trust the banking system because of its fundamental solvency issue. FDIC is irrelevant as it was never designed to cope with a systemic problem. It can rescue a few failed institutions, but if bank runs become widespread, as I believe they will, FDIC hasn't anywhere near the funds to make a significant difference.

Also, there's the FHLB super-lien on FDIC funds to consider. After the FHLB claim is processed, there may well be nothing left to cover depositors. If depositors get anything at all, it certainly wouldn't be quickly, which means losing access to even the small percentage of your funds that you could hope to see again for at the very least a long period of time. I would proceed assuming that deposit insurance doesn't exist, because for all practical purposes it doesn't.

Holding what you have under your own control is best, although for some this may not be practical. You would need to be very careful indeed if you're going to keep assets at home though - at least protect yourself from fire, flood and/or theft. If you have too much to want to do that, then short term treasuries (in your own name rather than through a fund) are a good bet for the time being. Whatever you do with most of it, you should always keep several months worth of money on hand, and be prepared to make it last for longer than you would previously have thought possible.

You could consider gold and silver, since you seem to have many other bases covered already, but the spot price is still very high right now. Deflation should temporarily lower it considerably, but don't wait too long or you may lose the ability to purchase such things.

Gold and silver need to be thought of as a long term insurance policy rather than as the liquidity that you really need during a deflation. Don't put money into metals if you're going to need it any time soon, as trading very valuable things can be difficult and dangerous in times of great upheaval. Ownership may become illegal as it was during the Depression, which doesn't stop you owning gold, but makes it more dangerous to trade for anything you might need. If you live in a rural area, trading would be even more difficult.

Gold could make sense for someone with all other bases covered, but there are a lot of things I would do first. I usually suggest that self-sufficiency measures are a better store of value than precious metals for most people. Personally, I'd rather have solar panels, water filters and hand tools than precious metals, but then I live on a farm. For you the best choices may be different, and for renters they would be different again.

Anonymous said...

I withdrew all of my 401k and took the 10% penalty. I'm glad I did. If I had kept my money in those mutual funds, I would have lost well over 10% (more like 20-30%). This has saved me money right there. I used that $$ to pay off my debts, and I'm selling my half of the equity in my home to my house mates, and am purchasing a large plot of land in which I'm building a new smaller, efficient home, workshop, and a greenhouse. "Heading for the Hills" as it were...

Stoneleigh said...


Sounds great :)

A 10% penalty is not much of a price to pay for having no debt and control over your funds. As you say, losses inside a 401k can be much larger than the tax penalty.

A lot of mutual funds will be nothing more than wallpaper at the end of the day. Why own a share in a fund that owns assets when you could own those assets yourself if you wanted (or better yet be liquid). The indirect ownership set up just means management fees for no good reason, and the need to find a buyer in order to extract your money. Indirect ownership is a mechanism for middle men to profit from, not clients.

If you decide you want short term treasuries, for instance, then you can own them outright. You won't need to find a buyer as the government will owe you your money back every 30-90 days, and you can decide if you want to roll them over. You can get hold of your money on short notice if you need to.

If you're building a home, you'd be surprised how little space you really need. I don't know where you live, but if it gets uncomfortably hot or cold then insulation is very important. Here in the Great White North the best bet is cellulose insulation, as it performs far better than fibre glass under field conditions. Another option is ICF (insulated concrete forms), which would give you a very solid and well insulated home. A small, well-built home is worth far more than a larger one where compromises had to be made, especially if you ever end up having to do something like heat with wood you have to cut by hand (which might be the case for us).

Anonymous said...

Most of my saving are in German federal 5 year treasuries which I bought last August at 1.35 and pay 4%. I own them in my own name but they are in a personal portfolio with UBS who I use for my dealings in currencies other than USD. So are the Krugerands which I bought. They are physically held by UBS who charges me annually for their storage. Is it safe to leave these assets in this portfolio, or can the predators eat them some how? Should I move them to my freezer a la Representative Jefferson of La.? I live in the United States Virgin Islands which is technically not part of the USA in some respects and brings up tariff and import duty problems.

Stoneleigh said...

El Pollo,

Living in the Virgin Islands must be nice, even if you have to put up with import restrictions :)

UBS isn't an institution on safe ground unfortunately, although Switzerland itself is still a good place to store assets if you can find a sufficiently (financially) conservative bank. You need to be particularly careful with gold ownership, as 'paper gold' doesn't really count as ownership if push comes to shove. Even physical gold stored in a troubled institution could be impossible to access at some point.

You might want to check out the Safe Wealth Group ( Capital preservation during a depression is their raison d'etre. I've been reading their publications for years (although I'm not a client) and they're well aware of the coming banking crisis. They would tell you that the only truly secure banks in the world (ie very financially conservative and not exposed to systemic risks) are in Switzerland and Singapore. There may be lower limits on account size though.

Anonymous said...

Concerning short term treasuries in my own name rather than through a fund (Vanguard VMPXX)... Why is this safer in my own name? Aren't all treasures looked at equally by the government?

By leaving the treasuries in IRA, I'm delaying taxes, but if I withdraw the money from the IRA, not only will I pay a penalty, but I would pay taxes when I have treasuries in my own name. I think I'm a little dense today. Thank you for your explanations.
Anonymous reader

Stoneleigh said...

Funds that own only short term treasuries are certainly safer than funds containing most other kinds of assets, but you still don't really own the treasuries, just a share of the fund. Given that there are no 'no risk' options, keeping your money in the fund and avoiding the tax penalty may be the way to go for you. It would depend on a lot of your personal circumstances. I'm not an expert on US tax law by any means.