Thursday, July 24, 2008

Debt Rattle, July 24 2008: Drop the pretense

Dorothea Lange Waiting for the Oranges November 1936
"Drought refugee from Polk, Missouri.
Awaiting the opening of orange picking season at Porterville, California."

Ilargi: One of the first things that occurred to me this morning was that now the Fannie/Freddie/Housing Bill has been pushed through, a number of things are in the cards.

First, financials’ share prices can be allowed to free-fall in earnest, since there is no longer much need to keep up appearances. Second, for Washington and Wall Street, it’s time to start working on gutting and liquidating what’s left of the American economy. There is no longer a need, after last night, to keep pretending. Fannie and Freddie presently guarantee $3.7 trillion in third-party securities, and they can now buy a few trillion dollars more of them.

Fannie and Freddie can buy all the mortgages and securities they want, at any price they want. There is an avalanche of supply, and Congress yesterday created a virtually endless artificial demand.

The Housing part of the bill, I think it’s about $300 billion worth, though there may well be more, is supposed to "help homeowners". That of course is not going to happen; it’s not even possible. The money will be used in selected cases to help people stay in their homes, but they will never see a single penny. That goes straight to the lenders and banks.

And since the renegotiated loan terms will inevitably be based on over-optimistic expectations of the home’s values, the main effect for the homeowner is that (s)he will still be stuck in a property that is highly overvalued. So the owner is still underwater, no change there, but the bank has received a nice little bundle of cash from the taxpayer.

The Fannie and Freddie part will develop as follows: their share prices will plummet not just to a single digit level, but all the way to a single dollar. Bondholders will be fine, but there is no need to guarantees the share price, nor a reason to do so. The US government debt ceiling was raised by $800 billion yesterday to accomodate the plan. That was not done because, as Paulson claimed, it would not be needed. It will be, and soon. It would be a shame to just let it sit there, wouldn’t it?

And we also have to look beyond the Paulson Plan, and figure out what other segments of the economy will come calling for mass bail-outs. The $800 billion, after all, is not pegged exclusively for Fan and Fred; it’s simply more of your money that can go from the Treasury to their golf partners. Throw in fractional reserve banking, and off you go.

There will be no shortage of takers. Home sales and prices keep falling, unemployment keeps rising. But I think the first pack of candidates will be the failing banks, and I expect the failure rate to start rising fast and furious before summer is over.

First, there will be lot of consolidation, where smaller banks are bought for pennies on the dollar by larger competitors, leaving shareholders and depositors in the cold. If a bank doesn’t fail, does the FDIC guarantee anything? Don’t forget, Bank of America announced this week that it will NOT take up $35 billion of Countrywide's banking and mortgage debt. That will be the start of a behavioral pattern.

Update 4.15 pm EDT Ilargi: Looks like I wasn't that far off this morning: No more need to prop up financials. And Fannie and Freddie, who just got an unlimited bill of credit, lose almost 20% of their remaining value. The DOW off by 2.43%, and tomorrow should be just lovely in the land of money. Here's today's close for the keepers of the nation's gates:

Why You Should be Worried About the Rescue of Fannie Mae and Freddie Mac
The moves by the government to calm the waters over the perilous health of Fannie Mae and Freddie Mac , the mortgage finance giants, have had a temporary Xanax effect on the markets, similar to the Federal Reserve’s shotgun marriage between JPMorgan Chase and Bear Stearns.

This, despite the fact that the moves have kicked into high gear the haymaker of inflation now coming a cropper through family budgets. What puts me near to having a stroke is when Congress thinks it can whip a fast ball by Americans by saying the moves to bolster Fannie and Freddie will cost $25 billion, in order to sell the $300 billion housing bailout bill. The $25 billion number is a fake number, the cost will be dramatically higher. Read to the bottom to find out why.

The Congressional Budget Office spitballed this one and came up with a best guesstimate based on its averaging out of what it thought the losses might be. The $25 billion tossup represents an average of the odds of no government money spent whatsoever (weighted at better than 50-50 odds, who is the fantabulist who cooked those odds up?), what the CBO believes is the smaller odds of spending in excess of $25 billion and then in excess of $100 billion (pegged at a rosy 5% probability).

Don’t believe for a second that you can make money following these pie-eyed Grandma bureaucrats at the slot machines in Las Vegas. More importantly, the $25 billion arises despite the fact that the Congress just this week sent in the Eliot Nesses from the Federal Reserve and the Office of the Comptroller of the Currency to go find out what the heck is really sitting on Fannie and Freddie’s books, as it clearly doesn’t believe the management at these two levered up examples of crony capitalism.

And don’t forget the history here, CBO’s estimates on the annual cost of tax code legislative changes (federal tax revenues gained or lost) are often way off by $150 billion or more. But here’s what should concern you.

The legislation would increase the statutory limit on the national debt by $800 billion, to $10.6 trillion, as the two would now get to buy and back jumbo loans worth $625,000 each. However, the House bill doesn’t force Fannie and Freddie to wipe out, or even cut, their dividends to investors in the event they draw down on the government’s line of credit, a pipeline into the Treasury worth $2.25 billion each, now expanded and open for the next year and a half. Treasury gets to make that call.

I don’t know where to begin with the stink bombs, potholes and steam pipes bursting in these two reckless publicly traded companies, which have a total $5.3 trillion book of business and another $3.3 trillion off balance sheet. Why taxpayers now must now be forced to own a piece of these publicly traded disasters, who exhibit zero fiduciary responsibility, is beyond me.

The two have much higher leverage ratios than banks or hedge funds, but lower borrowing costs due to their implicit government backing, capital cushions they whittled down after they gunned their lobbying engines on Capitol Hill, showering elected officials with money. Here’s a list–notice none of these issues are addressed in the housing bailout bill:
  • Both have a total of a microscopic–did you see it, did you catch it?–$54 billion in net worth, generally assets minus liabilities (don’t listen to the $81 billion figure tossed around for their total capital, that’s a pro forma fake number that doesn’t include certain losses).
  • Teetering atop that razor thin wedge is a pyramid of debt.
  • One stink bomb is the total of $260 billion in securitized assets backed by subprime and Alt-A loans, loans which sit in between subprime and prime. Those sums dwarf their capital positions.
  • Freddie has $156.8 billion in level three assets, those illiquid securities it can’t get a pricetag on because no one wants them now.
  • Fannie has $56.1 billion in level three assets, or about a seventh of its fair valued assets.  
  • Fannie and Freddie have combined debts of $1.59 trillion, borrowings they made merely to operate their businesses. Again, that’s against just $54 billion in total net worth. Their guaranteed liabilities were 29 times their net worth at the end of the first quarter.
  • They each have $2.25 billion pipelines into the Treasury, which the government now wants to expand. Forty years ago, when they went public, Fannie had debt of about $15 billion. Do the math against Fannie’s $804 billion in liabilities today, and the pipelines should be about $120 billion each.

Still believe that $25 billion figure Congress is selling you?

Isn’t it interesting that Fannie and Freddie went public after former US president Lyndon Johnson, worried about the effect of the Vietnam War on the federal budget, moved both off of the government’s books, in an off-balance sheet, adumbrated move presaging Enron? 

Remember for the first time in the late ‘60s, Congress changed the rules to let it get its mitts on taxpayer’s our Social Security funds, which it since spent on pork to buy votes. The ‘60s were when all fiscal and monetary responsibility went into a ditch, and when taxpayers were loaded into the backseat of Congress’s spaceship pointed directly at the center of the sun.

U.S. House Approves Fannie-Freddie Bill by 272-152
The U.S. House of Representatives approved legislation designed to shore up confidence in Fannie Mae and Freddie Mac and stem the record surge in mortgage foreclosures, sending the bill to the Senate.

House members voted 272-152 in favor of the measure, which lawmakers and administration officials expect will be passed in the Senate and signed into law by President George W. Bush. The bill gives Treasury Secretary Henry Paulson power to inject capital into Fannie Mae and Freddie Mac and provides for a federal agency to insure refinanced home loans.

Paulson overcame opposition within his own party after some Republicans said the bill risked taxpayer funds and fell short on overhauling the mortgage-finance firms. The Treasury chief said the measure was critical to U.S. financial-market stability and persuaded Bush to drop a veto threat.

"This is the most important piece of housing legislation in a generation," Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, told reporters in Washington today. Paulson said he was "pleased" with the vote and would "look forward to working with the Senate" to get the bill to Bush's desk this week. Senate Majority Leader Harry Reid, a Nevada Democrat, said earlier that he aimed to get it through the Senate by the end of the day. The bill is "a very good piece of legislation," he said.

Senator Jim DeMint, a South Carolina Republican threatened to postpone a final vote until later this week unless he's given a chance to amend the bill. He has proposed an amendment that would bar government-sponsored enterprises Fannie and Freddie from lobbying Congress during the course of the bailout plan. Reid rejected the request, saying it would delay the measure by forcing the House to vote on it again

The legislation divided Republicans, with House Minority Leader John Boehner criticizing the Bush administration for supporting a bill he said didn't go far enough to reform Fannie Mae and Freddie Mac and would leave taxpayers on the hook for "billions and billions of dollars." "I am disappointed that we couldn't do better -- I'm even more disappointed that the White House will sign this," Boehner, an Ohio Republican, said in a speech on the House floor. Three-quarters of the chamber's Republicans voted against the bill.

The Treasury secretary would get power to make unlimited equity purchases in and lend to Fannie Mae and Freddie Mac to prevent a collapse in the firms that account for 70 percent of new U.S. mortgages. The bill also provides for a federal agency to insure as much as $300 billion of refinanced mortgages for struggling homeowners. The Treasury chief said today that the bill will send a "very strong message" and is "key to helping us turn the corner" after a slide in confidence in the firms.

The White House dropped a veto threat over a measure to buy up foreclosed properties, spurring Reid to predict the Senate would also approve the bill. White House spokeswoman Dana Perino said today that Bush will sign the bill, removing the previous veto threat over a provision to include $3.9 billion in aid to communities hit by the housing recession. The administration had maintained the measure would aid lenders who now owned the vacated properties rather than struggling homeowners.

Bush met early today with Chief of Staff Josh Bolten, senior counselor Ed Gillespie and others, and they sided with Paulson's recommendation that he sign the bill, Perino said. Paulson's ability to sway the president and his willingness to abandon the government's opposition to giving financial succor to the two mortgage companies demonstrates the Treasury chief's clout within the administration, analysts said.

Paulson and predecessor John W. Snow had repeatedly urged limiting the role of Fannie Mae and Freddie Mac and reducing their implicit government guarantee. "There's no other person in the administration with the experience and influence Paulson has in these matters," said Bruce Bartlett, who served as a Treasury Department economist under President George H.W. Bush. "There was a political necessity to be seen as doing something, regardless of ideology."

The bill would create a stronger regulator for Fannie Mae and Freddie Mac and give the Federal Reserve a consultative role in overseeing their capital. "The legislation will give the new regulator the tools necessary to ensure the safety and soundness of the GSEs so they fulfill their mission of providing stability, liquidity and affordability to the mortgage market," James Lockhart, director of the current regulator, the Office of Federal Housing Enterprise Oversight, said in a statement.

Representative Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, helped steer the talks after backing Paulson's call for the emergency measures for Fannie Mae and Freddie Mac, which would last through 2009.
Lawmakers, intent on limiting any losses to taxpayers, tied the potential aid to Fannie Mae and Freddie Mac to the federal debt limit. They also raised that ceiling to $10.6 trillion from the current $9.815 trillion.

Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac own or guarantee about half of the $12 trillion of U.S. home loans outstanding. The companies face mounting losses stemming from the collapse of the subprime market. "This is about not only our housing markets, but it's about our capital markets more broadly," Paulson said in an interview with Bloomberg Television yesterday.

The housing bill would create a program aimed at helping an estimated 400,000 Americans with subprime home loans refinance into 30-year, fixed-rate mortgages backed by the government. Fannie Mae and Freddie Mac would have a new, higher cap on the size of mortgages they may purchase.

The new limit would be $625,000, or the median home price plus 15 percent, whichever is lower, Frank said. The cap wouldn't drop below $417,000. States would be able to offer an additional $11 billion of mortgage-revenue bonds to refinance subprime loans.

House Approves Sweeping Effort to Help Housing
The House approved far-reaching government assistance on Wednesday for the nation’s housing market, including broad authority for the Treasury Department to protect the nation’s two largest mortgage finance companies from collapse.

The measure also includes an aggressive plan to help hundreds of thousands of troubled borrowers avoid foreclosure by refinancing their mortgages with more affordable government-insured loans.

The White House, citing an urgent need to restore market confidence in the two mortgage giants, Fannie Mae and Freddie Mac, said President Bush would sign the measure despite his opposition to the inclusion of nearly $4 billion in grants for local governments to buy and refurbish foreclosed properties.

Mr. Bush’s support assures that the bill will become law after final passage by the Senate, possibly on Saturday. The House approved the bill 272 to 152, with just 45 Republicans joining 227 Democrats voting in favor. The weak support among House Republicans was remarkable given the president’s position, and suggested an emerging split between Mr. Bush, who is nearing the end of his term, and lawmakers in the House, who are all up for re-election in November.

Republicans said they would not support a bill that puts taxpayer money at risk while potentially bailing out irresponsible borrowers and greedy lenders. Lawmakers and experts described the legislation as a landmark shift in the government’s role in the housing market, extending a helping hand to both Wall Street and Main Street.

They said it would rank in importance with the creation of the Home Owners’ Loan Corporation to prevent foreclosures in the 1930s as part of the New Deal, and legislation in 1989 responding to the savings and loan crisis.

“We are at a time of considerable turmoil in the private financial markets, and that is a traditional time when government support is needed and called upon,” said Thomas H. Stanton, an author and expert on the mortgage finance industry. Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, said: “This is the most important piece of housing legislation in a generation.”

Mr. Dodd appeared at a news conference with Senator Richard C. Shelby of Alabama, the senior Republican on the committee. They said they expected the Senate to pass the bill with overwhelming support.

Representative Barney Frank, Democrat of Massachusetts and a primary author of the legislation, said troubled homeowners might get relief within days of Mr. Bush signing the bill, because lenders have long known details of the legislation and could move quickly to help borrowers refinance. “Many of these institutions know this is coming,” he said. “I hope they will be able to take advantage of it right away.”

But the legislation, much of which has been debated and fretted over on Capitol Hill for months, also leaves numerous questions unanswered. The biggest unknown is whether the measure will be adequate to slow the downward spiral of home prices and help the economy recover from what many analysts now expect to be a prolonged slowdown.

Perhaps most significantly, the legislation hardens the government’s long-implicit assurance that it would step in to rescue the two mortgage giants who together own or guarantee about $5.2 trillion of the nation’s $12 trillion in mortgages. Currently, Fannie Mae and Freddie Mac guarantee financing for about 80 percent of new mortgages.

To accommodate a potential rescue for Fannie Mae and Freddie Mac, the bill raises the national debt limit to $10.6 trillion, an increase of $800 billion.

SEC's Cox Seeks More Authority Over Investment Banks
U.S. Securities and Exchange Commission Chairman Christopher Cox asked lawmakers to bolster the agency's authority to police investment banks, as the Federal Reserve seeks to expand oversight of the world's biggest financial firms.

Firms including Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. should have mandatory SEC oversight of their capital, liquidity and risk management, Cox told the House Financial Services Committee today. Federal Reserve Bank of New York President Timothy Geithner asked the panel for more authority over firms that can borrow from the central bank and play a "critical role" in markets.

"Legislative improvements are necessary" Cox said. "The Commission should be given a statutory mandate to perform this function at the holding company level, along with the authority to require compliance."

Representative Barney Frank, the Massachusetts Democrat who leads the financial services panel, has said he supports giving the Federal Reserve a role in setting capital, liquidity and risk management policies at investment banks. Former securities regulators say a more powerful Fed risks undermining the SEC and its responsibility for protecting investors.

Goldman, Lehman, Merrill Lynch & Co. and Morgan Stanley now voluntarily submit capital and liquidity positions to the SEC. That arrangement didn't keep a run on Bear Stearns from putting the company on the brink of bankruptcy. The crisis led the Fed to let brokers borrow from its discount window, typically open only to commercial banks, to prevent additional failures.

With the Fed "lending money to investment banks, they can do a great deal" to influence regulation of securities firms, former SEC Chairman Arthur Levitt said in an interview. "It's up to Cox to make sure that great deal doesn't run over the SEC." Frank is holding hearings on revamping financial regulation in response to the March collapse of Bear Stearns and the worst U.S. housing slump since the Great Depression.

The collapse of the U.S. subprime-mortgage market has contributed to $467.9 billion in writedowns and credit losses since the start of 2007. The Fed and SEC agreed this month to share more data about the financial companies they regulate, giving the central bank a permanent role in determining how much money and assets investment banks must keep on hand.

"We need to adopt an integrated approach to the design and enforcement of capital standards and other prudential regulations critical to systemic stability," Geithner said in his prepared remarks for the hearing. "Strong supervisory authority is required over the consolidated financial entities that are critical to a well-functioning financial system."

Congress will ultimately decide which regulator has sway over securities firms' capital and liquidity, Erik Sirri, who heads the SEC's trading and markets division, said last month. The Fed, as the primary regulator of commercial banks such as Citigroup Inc. and JPMorgan Chase & Co., is focused on keeping financial institutions solvent.

The SEC's priority has been protecting shareholders from fraud, not keeping securities firms from going out of business. "The risk is that the culture of safety and soundness, which is the bank culture, will trump the culture of investor protection," Levitt said.

Applying commercial-bank regulation to securities firms "would be a mistake," Cox said in his testimony today. Intentionally discouraging risk and restricting business "would fundamentally alter the role that investment banks play in the capital formation that has fueled economic growth and innovation domestically and abroad."

Builders Sue Banks That Pull Financing As Construction Projects Lie Unfinished
The love affair between banks and builders during the housing boom has deteriorated into a series of divorces now spilling into the courts.

As lenders rush to curtail their real-estate exposure and preserve sorely needed capital, they are triggering lawsuits from builders that say the banks have unfairly cut off their construction financing, stopped their projects midstream and forced their companies to the brink of bankruptcy. "Lender-liability lawsuits are coming. It's only just beginning," says Michael Hackard, a lawyer in Sacramento, Calif., who focuses on real-estate law. "There are going to be builders who argue that the lender forced me into insolvency by not acting in good faith."

Developer John Thomas says he had nearly finished building a 222-unit condominium and hotel project in Stockton, Calif., when his lender, First Banks Inc.'s Missouri-based First Bank, wouldn't release the final $6 million from his $40 million construction loan.

The bank indicated on "multiple occasions" that it would finish funding the loan, but never did, according to a lawsuit Mr. Thomas's company, Regent Hotel LLC, filed against First Bank in Superior Court in Sacramento County. As a result, Mr. Thomas's lawyer says, liens have piled up against the project, the condo units haven't been completed, and the hotel has been taken over by a receiver.

"In our view, the bank took a healthy project and destroyed it," says the lawyer, Matthew Quint. "It's our belief that they had no legal grounds and no legitimate practical concerns for refusing to continue funding it." The clampdown on construction financing comes as banks face intense pressure from regulators and shareholders to reduce their real-estate exposure. Regional and small banks have been reeling amid fears that they face potentially crippling real-estate-related losses.

Tuesday, KeyCorp, a major lender to home builders, reported a $1.13 billion loss, saying its second-quarter results were "adversely affected" by higher loan losses related to its efforts to "aggressively reduce its exposure to the residential properties segment of its commercial real-estate construction loan portfolio." The bank's provision for loan losses in the second quarter was $647 million, up from $187 million in the previous quarter.

The courts may be a builder's last resort against a bank. The legal disputes are turning heated as banks go after the builders' personal assets and family fortunes to recoup losses from soured housing developments. The banks are enforcing personal guarantees that many builders signed to arrange the loans.

Lender-liability lawsuits were relatively common during the real-estate bust in the 1990s. Back then, before foreclosing, some lenders often would effectively take control of troubled projects and force many developers to follow their management advice. That gave developers an opening to sue the banks -- with success in many cases.

"When the project didn't work, the developer would blame the bank when the bank moved to foreclose," says Leonard Boxer, head of the real-state practice at the New York law firm Stroock & Stroock & Lavan LLP. "The banks learned their lesson in the 1990s. That's why lenders are cautious today." During this downturn, some banks have been more willing to pull out of projects instead of getting involved to fix them.

J.P. Eliopulos Enterprises Inc., a home builder in the hard-hit housing market of California's Antelope Valley, north of Los Angeles, is suing IndyMac Bancorp Inc. which is now under federal control. The suit alleges that the lender failed to act in good faith when it launched an extensive audit of the builder's large housing project and then ordered an appraisal, delaying the development, according to a lawsuit the company filed in Los Angeles County Superior Court in April.

The bank appraisal in December 2007 valued the project, the approximately 900-acre Joshua Ranch Development, at $17 million, down from an appraised value of $82 million in May of that year, says Andrew Eliopulos, the company's president and chief executive. The bank estimated it would take about 18 years to sell 539 houses on the property, Mr. Eliopulos said. "That's insane," he said. "I told them your appraisal is flawed. This bank is in trouble, and it just wants out."

He says the bank had been pursuing personal guarantees that he, his wife and his 81-year-old mother signed when the builder took out the loans. IndyMac had been requiring that the builder pay the difference between the property's $17 million appraised value and the $27 million loan balance, or pay off the loan in full, he says.

David Barr, a spokesman for the Federal Deposit Insurance Corp., which now controls the bank, declined to comment on the Eliopulos lawsuit, but said "the FDIC is currently reviewing all defense of litigation that was pending against IndyMac when it was closed." It isn't clear whether IndyMac will enforce the guarantees against the Eliopulos clan. FDIC Chairwoman Sheila Bair says her agency was conducting a "case-by-case review" of the bank's construction loans.

Mr. Eliopulos has joined about 30 California builders who have been meeting in recent weeks to discuss ways to push back against the banks. They are considering contacting state lawmakers and even Congress for help. "If banks want to get out of residential lending, that's fine; let's sit down and figure it out," says Mick Pattinson, another group member and chief executive of builder Barratt American, based in Carlsbad, Calif. "But that isn't being done. The rug is literally being pulled from under us and games are being played."

Mr. Pattinson says Bank of America Corp. froze his $100 million credit line for seven months, while ordering a new appraisal of his properties. During that time, Mr. Pattinson says, his company paid down its credit line by $30 million, but then stopped making payments in March when Mr. Pattinson says he realized the bank was never going to unfreeze the loan.

Mr. Pattinson says that "after seven months, this country boy figured they weren't going to allow us to use the credit line. I said, 'No functioning line, no interest.'

U.S. Home Market Freezes In June
U.S. housing data released on Thursday showed why the federal government is getting ready to throw money at the market: it is freezing up as potential buyers step to the sidelines, apparently awaiting signs that tumbling prices have reached a bottom.

June existing home sales dropped 2.6% from the May level, to 4.9 million units. This was a 15.5% drop from June 2007, according to the National Association of Realtors. "A recent online survey of Realtors shows nearly a quarter of potential homebuyers are waiting on the sidelines," said Richard F. Gaylord, president of the real estate agents group.

Total housing inventory at the end of June rose 0.2%, to 4.5 million existing homes available for sale. "About four in 10 homes are purchased by first-time buyers, which frees existing owners to trade up," said Lawrence Yun, the Realtors' chief economist. Yun said many first-time buyers are simply holding off. This could be because of the increased economic pressures including record high gas prices, the high cost of food, and a tougher loan environment.

The national median existing-home price was $215,100 in June, down 6.1% from a year ago when the price was $229,000. Yun said the price of homes is distorted because one-third of home sales right now are for foreclosures.

Single-family home sales declined 3.2%, to a seasonally adjusted annual rate of 4.3 million in June, while sales of existing condominiums rose 1.7%, to a rate of 590,000 units. This is likely the outcome of many homeowners being pushed out due to foreclosures and downgrading to smaller, more affordable housing.

Data shows that the median single-family home price is $213,800 and the median condo price is $224,200. The National Association of Realtors said the median price of condos are higher because many are located in metropolitan areas, but in most markets, single-family homes are more expensive.

Cuomo Sues UBS, Alleges Deceptive Auction-Rate Sales
New York Attorney General Andrew Cuomo filed a lawsuit against UBS AG over its role in the sale of auction-rate securities, five months after the market collapsed, stranding investors.

Cuomo alleges the Zurich-based bank committed fraud by misleading investors in its marketing of the long-term securities as money market-like instruments that were easy to buy and sell. UBS continued selling the debt even as the market unraveled and top bank executives unloaded $21 million in personal auction-rate holdings, Cuomo's suit alleges.

"Not only is UBS guilty of committing a flagrant breach of trust between the bank and its customers, its top executives jumped ship as soon the securities market started to collapse, leaving thousands of customers holding the bag," Cuomo said in a statement released at the same time he announced the suit at a New York City press conference.

New York is the third state to bring a complaint against UBS, the second-biggest underwriter of municipal auction-rate debt after Citigroup Inc., over its role in the $330 billion market. UBS and other banks stopped buying the securities in February when there were no other bidders at the auctions they ran to determine interest rates, permitting thousands of failures and leaving investors unable to sell their securities.

Cuomo earlier this year subpoenaed 18 banks that sold auction-rate securities and ran the weekly or monthly bidding. States, cities, hospitals, closed-end funds and student loan organizations sold the taxable and tax-exempt debt, which often matures in 20 or 40 years.

UBS spokeswoman Karina Byrne in e-mailed statement said the bank will "vigorously defend" itself against the allegations in the suit, and "categorically rejects any claim that the firm engaged in a widespread campaign" to shift auction-rate debt off its books and into client accounts.

"While UBS does not believe that there was illegal conduct by any employee, we have found cases of poor judgment by certain individuals and are evaluating appropriate disciplinary measures for these individuals," Byrne said. Massachusetts Secretary of State William Galvin filed a lawsuit last month against UBS, seeking to force the bank to buy back at par, or 100 cents on the dollar, the securities it sold to investors in the state.

The Texas State Securities Board this week filed a notice of hearing to suspend UBS's state license, claiming the bank engaged in fraud by marketing the long-term bonds as "liquid investments."

US June Home Sales Fell Twice As Much As Expected
A Realtors group said Thursday that sales of existing homes fell more sharply than expected in June as the housing industry continued to be bruised by the worst slump in more than two decades.

The National Association of Realtors reported Thursday that sales dropped by 2.6 percent last month to a seasonally adjusted annual rate of 4.86 million units. That was more than double the expected decline. It leaves sales 15.5 percent below where they were a year ago.

The downward slide in sales is depressing prices, too. The median price for a home sold in June has dropped to $215,100, down by 6.1 percent from a year ago. That was the fifth largest year-over-year price drop on record.

In other economic news on Thursday, the number of newly laid off people filing claims for unemployment benefits bolted past 400,000 last week as companies trimmed their work forces to cope with a slowing economy. The Labor Department reported that the number of new applications filed for these benefits rose by a seasonally adjusted 34,000 to 406,000 for the week ending July 19.

That matched the level seen in late March. The last time claims were higher was after the devastation of the Gulf Coast hurricanes in mid-September 2005. Then, they spiked to 425,000. The new snapshot of layoffs was worse than economists were forecasting. They were expecting claims to rise to 375,000 according to the consensus estimate of Wall Street economists surveyed by Thomson/IFR.

A year ago, new claims were much lower — at 308,000. The rise in claims underscores the deterioration in employment conditions. Meanwhile, the number of people continuing to draw unemployment benefits dipped slightly to 3.1 million for the week ending July 12, the most recent period for which that information is available. However, a year ago, that figure stood at 2.54 million.

Fed Says All District Banks Report 'Price Pressures'
The Federal Reserve said all 12 of its regional bank districts reported "elevated or increasing" price pressures during June and July amid slower economic growth.

Five of the districts indicated "a weakening or softening" in their economies, and consumer spending was "sluggish or slowing" in every region, the central bank said today in its economic survey, known as the Beige Book for the color of its cover. The survey reinforced testimony by Fed Chairman Ben S. Bernanke to lawmakers this month indicating that risks to both growth and inflation are increasing. Central bank policy makers differ over whether to increase the benchmark interest rate or leave it unchanged.

"The most changes have come about in prices being paid by consumers and by businesses," Philadelphia Fed President Charles Plosser said today in an interview with Bloomberg Television. While most policy makers believe inflation expectations are constrained, it's important "we act before those expectations become unhinged," he said.

The Beige Book continues the theme of anemic growth from the June report, which noted the economy was "generally weak" in April and May. Household spending "was reported as mixed, weak or slowing in nearly all districts," the Fed said in the current report.

"Everything is working against the consumer," said Mark Zandi, chief economist and co-founder of Moody's Federal tax rebate checks "were the only source of cash and now we have to worry about a weakening job market, falling housing values," and high gas and food prices.

Fed officials cut the benchmark interest rate 2.25 percentage points in the first four months of this year in the fastest reduction in two decades. The rate is now 2 percent. Futures traders project 91 percent odds of no change at the next meeting of policy makers on Aug. 5, according to futures prices, and a 61 percent chance of an increase to 2.25 percent or more at the meeting in September.

The economy expanded at an annual rate of 1 percent in the first quarter, capping the weakest six months of growth in five years. The revised gain in gross domestic product was up from a preliminary estimate of 0.9 percent. U.S. manufacturing "declined or remained weak in most districts," while "demand for exports remained generally high," the Beige Book said. Bank lending "was generally reported to be restrained."

U.S. Initial Jobless Claims Rose to 406,000 Last Week
The number of Americans filing first-time claims for unemployment benefits rose last week to the highest in almost four months, a sign the slowing economy is weakening the labor market.

Initial jobless claims increased by 34,000 to 406,000 in the week ended July 19, from a revised 372,000 the prior week, the Labor Department said today in Washington. The filings exceeded economists' forecast and were the most since 406,000 in the week ended March 29. U.S. employers are reducing workers as surging fuel costs, a three-year housing slump and a crisis in credit markets restrains demand.

Rising joblessness reinforces concern that consumers will pull back on spending, which accounts for more than two-thirds of the economy. "The underlying picture is one of a labor market that is weak," said David Sloan, senior economist at 4Cast Inc. in New York, whose forecast of 410,000 was the closest to the actual number in a Bloomberg News survey of 44 economists. "The economy is growing slowly so you tend to see job losses rising. The weakness could increase further in coming months."

The last time weekly claims exceeded last week's total was in September 2005, just after two hurricanes on the U.S. Gulf Coast threw thousands out of work. Initial claims were estimated to increase to 380,000 from 366,000 initially reported for the prior week, according to the median projection of 44 economists in a Bloomberg News survey.

Estimates ranged from 365,000 to 440,000. Weekly jobless claims figures can be difficult to interpret in July, the month automakers temporarily trim staff to upgrade factories in preparation for new car models. Affected auto workers who are not eligible for vacation pay can apply for jobless benefits.

Ford Has $8.7 Billion Loss on Writedown, Truck Sales
Ford Motor Co. posted a second- quarter loss of $8.7 billion as it reduced the value of truck plants and loans to buyers of pickups and sport-utility vehicles by $8 billion.

Ford said it will convert three factories to produce small cars and double output of fuel-saving smaller engines as record gasoline prices sap U.S. truck sales. The net loss of $3.88 a share compared with a profit of $750 million, or 31 cents, a year earlier, the second-largest U.S. based automaker said in a statement today. The loss excluding the asset writedowns was worse than analysts had estimated, and the shares fell in early New York trading.

"Every number was close, but every number was on the wrong side, on the negative side," said Dan Poole, vice president of equity research at Cleveland-based National City Corp. "The $8 billion charge was quite a bit of a surprise." The results mark the sixth loss in eight quarters under Chief Executive Officer Alan Mulally, recruited from Boeing Co. to restore growth at the Dearborn, Michigan, automaker.

Gasoline on its way to $4 a gallon and plunging sales of F-Series pickups forced Mulally in May to abandon his target of returning to profit in 2009. Excluding costs Ford considers one-time expenses, the loss was $1.38 billion, or 62 cents a share. On that basis, Ford was expected to report a loss of 28 cents, the average estimate of 12 analysts surveyed by Bloomberg.

Ford said it had $26.6 billion in automotive cash at the end of the quarter, down $10.8 billion from a year earlier. The company is "confident" it has enough liquidity, Chief Financial Officer Don LeClair told reporters. Ford hasn't set a new goal for returning to profit, spokesman Mark Truby said. The company also hasn't made an estimate for how much cash it will burn as it restructures. Ford borrowed $23.4 billion in late 2006 to revamp operations.

Ford had pretax writedowns of $5.3 billion for its North American auto operations and $2.1 billion for vehicle leases at Ford Credit. The writedowns stemmed primarily from falling demand for large pickups and sport-utility vehicles, and LeClair said 85 percent of the Ford Credit writedown was tied to falling values for pickup trucks and SUVs. Ford Credit had a loss of $1.4 billion, compared with a year-earlier profit of $62 million.

GM, Ford 'On the Verge of Bankruptcy'
General Motors Corp. and Ford Motor Co., the two biggest U.S. automakers, have about a 46 percent chance of default within five years, according to Edward Altman, a finance professor at New York University's Stern School of Business.

"Both are in very serious shape and the markets reflect that," Altman, the creator of the Z-score mathematical formula that measures bankruptcy risk, said in an interview with Bloomberg Television. The model shows that these companies are "on the verge of bankruptcy," he said.

The Z-scores for GM and Ford give both a bond rating equivalent to a CCC ranking, though GM is in slightly worse condition than Ford, Altman said. GM reported a $38.7 billion loss in 2007, the biggest in its 100-year history, and hasn't posted a profit since 2004. The scores are based on the companies' finances at the end of the first quarter.

Moody's Investors Service said July 15 it may cut GM's Caa1 senior unsecured debt rating because the Detroit-based automaker's plan to raise at least $15 billion by suspending its dividend, cutting management payroll by 20 percent and selling assets may not be enough to offset losses.

Standard & Poor's also said in June it may lower GM's B rating. Altman said the plan to raise $15 billion may improve GM's outlook. Ford, based in Dearborn, Michigan, is rated Caa1 by Moody's and B by S&P, which said in June that Ford's rating may also be cut.

"The thing that triggers a default in almost all cases is running out of cash and not being able to refinance," Altman said in an interview prior to his television appearance. "You're not going to go bankrupt as long as you can refinance short-term liabilities. You will go bankrupt if you can't."

Fannie Mae Unsold $5 Billion Homes Bring Peril to Shareholders
Fannie Mae, the largest U.S. mortgage finance company, couldn't find a buyer who would pay $6,900 for the three-bedroom house at 1916 Prospect St. in Flint, Michigan. So broker Raymond Megie, who is handling the foreclosure sale, advised cutting the price to $5,000.

Megie still couldn't sell it. "There's oversupply," he said. The home sold in 2005 for $110,000. Fannie Mae acquired twice as many homes through foreclosure in the first quarter as it sold, regulatory filings show. Unsold properties may weigh on the company's stock, which lost almost half its value since June 5, said Moshe Orenbuch, managing director of equity research at Credit Suisse Group AG in New York.

Late payments on the company's home loans, a harbinger of foreclosures, almost doubled in the past year. Together, Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, owned a record $6.9 billion of foreclosed homes on March 31, compared with $8.56 billion held by all 8,500 U.S. commercial banks and savings and loans.

Foreclosed houses sell at an average discount of about 20 percent, according to economists Ethan Harris and Michelle Meyer at New York-based Lehman Brothers Holdings Inc. At that rate, the two mortgage companies stand to lose $1.39 billion on the foreclosed houses they currently own.

"Progress on this is probably one of, if not the single most important economic process right now," Orenbuch said. "With prices decreasing, it's better to get rid of houses quickly." Orenbuch, whose Fannie Mae recommendations would have yielded a 65 percent return to investors who followed them over the last year, the highest of any stock analyst tracked by Bloomberg, said the Washington-based company will sink to $10 share.

The value of Fannie Mae's foreclosed property doubled in the first quarter to $4.72 billion from $2.4 billion a year earlier, and the number of homes it owned climbed 64 percent to 43,167, according to a regulatory filing. The amount the company sold was $952 million, compared with $706 million a year earlier.

"It's a no-win for the housing market," said Ron Peltier, chief executive officer of Berkshire Hathaway Inc.'s HomeServices of America Inc., the second-largest U.S. residential real estate brokerage. "Where there are pockets of distressed real estate, it does have an adverse effect on the surrounding properties."

Fannie Mae's goal in selling its properties is to get the highest possible price, even if it means hanging on to them longer, said Gabrielle Harrison, the company's vice president for REO sales. REO stands for "real estate-owned," a designation for properties that have been repossessed by creditors.

Getting the highest price helps preserve neighborhood property values, she said. "We want to treat that home as if it was your own, or as if you were living next door to it," Harrison said. "You wouldn't want that home to bring down your property value."

The typical price Fannie Mae received for foreclosed homes sold in the first quarter fell to 74 percent of the unpaid mortgage principal from 93 percent in 2005, according to Harrison. Harrison declined in an interview to say how long it takes to sell the average foreclosed home or estimate how many more Fannie Mae may acquire through foreclosure in the coming months.

The number of borrowers whose payments were late by 90 days or more rose to 1.15 percent in the first quarter from 0.62 percent a year earlier, according to Fannie Mae regulatory filings.

Ilargi: Paul Gigot, the Wall Street Journal's editorial page editor, has his own, quite revealing, view of Freddie and Fannie:

The Fannie Mae Gang
Angelo Mozilo was in one of his Napoleonic moods. It was October 2003, and the CEO of Countrywide Financial was berating me for The Wall Street Journal's editorials raising doubts about the accounting of Fannie Mae.

I had just been introduced to him by Franklin Raines, then the CEO of Fannie, whom I had run into by chance at a reception hosted by the Business Council, the CEO group that had invited me to moderate a couple of panels. Mr. Mozilo loudly declared that I didn't know what I was talking about, that I didn't understand accounting or the mortgage markets, and that I was in the pocket of Fannie's competitors, among other insults. Mr. Raines, always smoother than Mr. Mozilo, politely intervened to avoid an extended argument, and Countrywide's bantam rooster strutted off.

I've thought about that episode more than once recently amid the meltdown and government rescue of Fannie and its sibling, Freddie Mac. Trying to defend the mortgage giants, Paul Krugman of the New York Times recently wrote, "What you need to know here is that the right -- the WSJ editorial page, Heritage, etc. -- hates, hates, hates Fannie and Freddie. Why? Because they don't want quasi-public entities competing with Angelo Mozilo."

That's a howler even by Mr. Krugman's standards. Fannie Mae and Mr. Mozilo weren't competitors; they were partners. Fannie helped to make Countrywide as profitable as it once was by buying its mortgages in bulk. Mr. Raines -- following predecessor Jim Johnson -- and Mr. Mozilo made each other rich. Which explains why Mr. Johnson could feel so comfortable asking Sen. Kent Conrad (D., N.D.) to discuss a sweetheart mortgage with Mr. Mozilo, and also explains the Mozilo-Raines tag team in 2003.

I recount all this now because it illustrates the perverse nature of Fannie and Freddie that has made them such a relentless and untouchable political force. Their unique clout derives from a combination of liberal ideology and private profit. Fannie has been able to purchase political immunity for decades by disguising its vast profit-making machine in the cloak of "affordable housing." To be more precise, Fan and Fred have been protected by an alliance of Capitol Hill and Wall Street, of Barney Frank and Angelo Mozilo.

I know this because for more than six years I've been one of their antagonists. Any editor worth his expense account makes enemies, and complaints from CEOs, politicians and World Bank presidents are common. But Fannie Mae and Freddie Mac are unique in their thuggery, and their response to critics may help readers appreciate why taxpayers are now explicitly on the hook to rescue companies that some of us have spent years warning about.

My battles with Fan and Fred began with no great expectations. In late 2001, I got a tip that Fannie's derivatives accounting might be suspect. I asked Susan Lee to investigate, and the editorial she wrote in February 2002, "Fannie Mae Enron?", sent Fannie's shares down nearly 4% in a day. In retrospect, my only regret is the question mark.

Mr. Raines reacted with immediate fury, denouncing us in a letter to the editor as "glib, disingenuous, contorted, even irresponsible," and that was the subtle part. He turned up on CNBC to say, in essence, that we had made it all up because we didn't want poor people to own houses, while Freddie issued its own denunciation. The companies also mobilized their Wall Street allies, who benefited both from promoting their shares and from selling their mortgage-backed securities, or MBSs.

The latter is a beautiful racket, thanks to the previously implicit and now explicit government guarantee that the companies are too big to fail. The Street can hawk Fan and Fred MBSs as nearly as safe as Treasurys but with a higher yield. They make a bundle in fees. At the time, Wall Street's Fannie apologists outdid themselves with their counterattack.

One of the most slavish was Jonathan Gray, of Sanford C. Bernstein, who wrote to clients that the editorial was "unfounded and unsubstantiated" and "discredits the paper." My favorite point in his Feb. 20, 2002, Bernstein Research Call was this rebuttal to our point that "Taxpayers Are on The Hook: This is incorrect. The agencies' debt is not guaranteed by the U.S. Treasury or any agency of the Federal Government." Oops.

Mr. Gray's memo made its way to Wall Street Journal management via Michael Ellmann, a research analyst who had covered Dow Jones and was then at Grantham, Mayo, Van Otterloo & Co. "I think Gray is far more accurate than your editorial writer. Your subscribers deserve better," he wrote to one senior executive.

I also received several interventions from friends and even Dow Jones colleagues on behalf of the companies. But I was especially startled one day to find in my mail a personal letter from George Gould, an acquaintance about whom I'd written a favorable column when he was Treasury undersecretary for finance in 1988.

Mr. Gould's letter assailed our editorials and me in nasty personal terms, and I quickly discovered the root of his vitriol: Though his letter didn't say so, he had become a director of Freddie Mac. He was still on the board when Freddie's accounting lapses finally exploded into a scandal some months later.

The companies eased their assaults when they concluded we weren't about to stop, and in any case they soon had bigger problems. Freddie's accounting fiasco became public in 2003, while Fannie's accounting blew up in 2004. Mr. Raines was forced to resign, and a report by regulator James Lockhart discovered that Fannie had rigged its earnings in a way that allowed it to pay huge bonuses to Mr. Raines and other executives.

Such a debacle after so much denial would have sunk any normal financial company, but once again Fan and Fred could fall back on their political protection. In the wake of Freddie's implosion, Republican Rep. Cliff Stearns of Florida held one hearing on its accounting practices and scheduled more in early 2004. He was soon told that not only could he hold no more hearings, but House Speaker Dennis Hastert was stripping his subcommittee of jurisdiction over Fan and Fred's accounting and giving it to Mike Oxley's Financial Services Committee.

"It was because of all their lobbying work," explains Mr. Stearns today, in epic understatement. Mr. Oxley proceeded to let Barney Frank (D., Mass.), then in the minority, roll all over him and protect the companies from stronger regulatory oversight. Mr. Oxley, who has since retired, was the featured guest at no fewer than 19 Fannie-sponsored fund-raisers.

Or consider the experience of Wisconsin Rep. Paul Ryan, one of the GOP's bright young lights who decided in the 1990s that Fan and Fred needed more supervision. As he held town hall meetings in his district, he soon noticed a man in a well-tailored suit hanging out amid the John Deere caps and street clothes. Mr. Ryan was being stalked by a Fannie lobbyist monitoring his every word.

On another occasion, he was invited to a meeting with the Democratic mayor of Racine, which is in his district, though he wasn't sure why. When he arrived, Mr. Ryan discovered that both he and the mayor had been invited separately -- not by each other, but by a Fannie lobbyist who proceeded to tell them about the great things Fannie did for home ownership in Racine.

When none of that deterred Mr. Ryan, Fannie played rougher. It called every mortgage holder in his district, claiming (falsely) that Mr. Ryan wanted to raise the cost of their mortgage and asking if Fannie could tell the congressman to stop on their behalf. He received some 6,000 telegrams. When Mr. Ryan finally left Financial Services for a seat on Ways and Means, which doesn't oversee Fannie, he received a personal note from Mr. Raines congratulating him. "He meant good riddance," says Mr. Ryan.

Fan and Fred also couldn't prosper for as long as they have without the support of the political left, both in Congress and the intellectual class. This includes Mr. Frank and Sen. Chuck Schumer (D., N.Y.) on Capitol Hill, as well as Mr. Krugman and the Washington Post's Steven Pearlstein in the press. Their claim is that the companies are essential for homeownership.

Yet as studies have shown, about half of the implicit taxpayer subsidy for Fan and Fred is pocketed by shareholders and management. According to the Federal Reserve, the half that goes to homeowners adds up to a mere seven basis points on mortgages. In return for this, Fannie was able to pay no fewer than 21 of its executives more than $1 million in 2002, and in 2003 Mr. Raines pocketed more than $20 million. Fannie's left-wing defenders are underwriters of crony capitalism, not affordable housing.

So here we are this week, with the House and Senate preparing to commit taxpayer money to save Fannie and Freddie. The implicit taxpayer guarantee that Messrs. Gray and Raines and so many others said didn't exist has become explicit. Taxpayers may end up having to inject capital into the companies, in addition to guaranteeing their debt.

The abiding lesson here is what happens when you combine private profit with government power. You create political monsters that are protected both by journalists on the left and pseudo-capitalists on Wall Street, by liberal Democrats and country-club Republicans. Even now, after all of their dishonesty and failure, Fannie and Freddie could emerge from this taxpayer rescue more powerful than ever. Campaigning to spare taxpayers from that result would represent genuine "change," not that either presidential candidate seems interested.

Schwarzenegger seeks to slash state workers' pay till budget passes
Gov. Arnold Schwarzenegger has prepared an order to cut the pay of about 200,000 state workers to the federal minimum wage of $6.55 an hour until a budget is signed.

Administration officials said Schwarzenegger was expected to sign the order, a draft of which was obtained Wednesday by The Times, early next week as part of an effort to avert a cash crisis. The deadline for passing a budget was July 1, and without one soon, the officials said, California may be unable to borrow billions of dollars needed to keep the state solvent.

State Controller John Chiang, asserting that the state has enough money on hand, said through a spokesman that he would not implement such an order. Chiang's office handles payroll for government workers.

The Republican governor's controversial plan, likely to be challenged in court by public-employee unions if carried out, would allow the state to defer paying about $1 billion a month, administration officials said. Workers would be repaid their lost earnings once a budget was in place.

As drafted, the order also calls for the state to immediately lay off 21,855 part-time workers, stop overtime payments for almost all employees and cease all hiring until a budget is enacted.

"Because the Legislature has failed to pass a budget and our state does not have a rainy-day fund, this is one of a number of options we are considering to make sure we have sufficient cash to cover our costs," said administration spokesman Matt David.

Until recently, the governor had played a relatively minor role in budget negotiations since offering his revised spending plan in May. As public frustration over Sacramento's handling of the budget has mounted, much of the blame has fallen on him. His approval rating among voters is 40%, according to a Field Poll released this week, down from 60% in December.

The executive order appears intended to show that Schwarzenegger is taking action and to pressure lawmakers to finish work on the budget. Democrats rely on the major public employee unions to help bankroll their political campaigns, and the public-safety unions that Republicans often look to for support could be affected by his order.

Once the order took effect, most state employees, who are paid once a month, would not see another paycheck until the end of August. If the budget was passed late in that month, their full salaries would still be reflected in that paycheck.

The response to Schwarzenegger's plan from unions was immediate and angry. "The governor is turning a budget crisis into a catastrophe," said Yvonne Walker, president of Service Employees International Union Local 1000, which represents 95,000 state workers. "How can you tell people, 'We will just pay you this amount and you can catch up later?'

"We are in the middle of a housing crisis, and people are losing their mortgages," she said. "Are they going to issue a notice to mortgage companies that employees will just catch up later?" Walker said she believed the governor's plan was illegal, and union attorneys are already drafting a lawsuit to file if the order is signed.

More than 40 percent of UK house sales are collapsing
Four in ten house sales are collapsing in some areas as buyers back out or fail to get a mortgage, the Bank of England has disclosed. The new figure is yet another sign of the pain being endured by the housing market as the effects of the credit crunch work their way through.

In the monthly Agents' Summary of Business Conditions report, the Bank said: "In the market for established homes, more transactions were falling through, with some estate agents reporting a cancellation rate of up to 40 per cent recently. That was partly due to the unwillingness of many sellers to accept a lower offer."

It added that large numbers of buyers were also having to retreat from deals after having mortgage offers withdrawn by lenders. Other would-be buyers simply pulled out through fear that house prices could plunge even further than they have done recently, with some analysts predicting a fall of up to 35 per cent in the next two years. Property prices are falling at a rate not seen since the early 1950s, according to the Bank.

The Bank's report said that the problems caused by mortgages being withdrawn and concerns over future price drops were being exacerbated by the disruption throughout the housing market chain - buyers having to cancel a deal because the buyers of their own home have had to back out, for example.

Meanwhile mortgages are less available than at any time since New Labour came to power, new figures from the British Bankers' Association show. They disclosed that the number of applicants now being approved for a mortgage has collapsed, with just 21,118 buyers given a loan last month - a fall of 23pc from May.

However not everyone is suffering. The problems in the buying market have made renting more attractive, according to the Estate agent Your Move. It said that demand for rented accommodation had soared by 38pc in just a year. David Newnes, the Managing director of Your Move, said: "The credit crunch has buried any chances most first-time buyers might have had of getting on the property ladder. But for landlords this is a cloud with a gold-plated lining."

Ilargi: Nice list from Mike Shedlock. It could be 5 times as long, and still leave out a lot.

You Know The Banking System Is Unsound When....
1. Paulson appears on Face The Nation and says "Our banking system is a safe and a sound one." If the banking system was safe and sound, everyone would know it (or at least think it). There would be no need to say it.

2. Paulson says the list of troubled banks "is a very manageable situation". The reality is there are 90 banks on the list of problem banks. Indymac was not one of them until a month before it collapsed. How many other banks will magically appear on the list a month before they collapse?

3. In a Northern Rock moment, depositors at Indymac pull out their cash. Police had to be called in to ensure order.

4. Washington Mutual (WM), another troubled bank, refused to honor Indymac cashier's checks. The irony is it makes no sense for customers to pull insured deposits out of Indymac after it went into receivership. The second irony is the last place one would want to put those funds would be Washington Mutual. Eventually Washington Mutual decided it would take those checks but with an 8 week hold. Will Washington Mutual even be around 8 weeks from now?

5. Paulson asked for "Congressional authority to buy unlimited stakes in and lend to Fannie Mae (FNM) and Freddie Mac (FRE)" just days after he said "Financial Institutions Must Be Allowed To Fail". Obviously Paulson is reporting from the 5th dimension. In some alternate universe, his statements just might make sense.

6. Former Fed Governor William Poole says "Fannie Mae, Freddie Losses Makes Them Insolvent".

7. Paulson says Fannie Mae and Freddie Mac are "essential" because they represent the only "functioning" part of the home loan market. The firms own or guarantee about half of the $12 trillion in U.S. mortgages. Is it possible to have a sound banking system when the only "functioning" part of the mortgage market is insolvent?

8. Bernanke testified before Congress on monetary policy but did not comment on either money supply or interest rates. The word "money" did not appear at all in his testimony. The only time "interest rate" appeared in his testimony was in relation to consumer credit card rates. How can you have any reasonable economic policy when the Fed chairman is scared half to death to discuss interest rates and money supply?

9. The SEC issued a protective order to protect those most responsible for naked short selling. As long as the investment banks and brokers were making money engaging in naked shorting of stocks, there was no problem. However, when the bears began using the tactic against the big financials, it became time to selectively enforce the existing regulation.

10. The Fed takes emergency actions twice during options expirations week in regards to the discount window and rate cuts.

11. The SEC takes emergency action during options expirations week regarding short sales.

12. The Fed has implemented an alphabet soup of pawn shop lending facilities whereby the Fed accepts garbage as collateral in exchange for treasuries. Those new Fed lending facilities are called the Term Auction Facility (TAF), the Term Security Lending Facility (TSLF), and the Primary Dealer Credit Facility (PDCF).

13. Citigroup (C), Lehman (LEH), Morgan Stanley(MS), Goldman Sachs (GS) and Merrill Lynch (MER) all have a huge percentage of level 3 assets. Level 3 assets are commonly known as "marked to fantasy" assets. In other words, the value of those assets is significantly if not ridiculously overvalued in comparison to what those assets would fetch on the open market. It is debatable if any of the above firms survive in their present form. Some may not survive in any form.

14. Bernanke openly solicits private equity firms to invest in banks. Is this even close to a remotely normal action for Fed chairman to take?

15. Bear Stearns was taken over by JPMorgan (JPM) days after insuring investors it had plenty of capital. Fears are high that Lehman will suffer the same fate. Worse yet, the Fed had to guarantee the shotgun marriage between Bear Stearns and JP Morgan by providing as much as $30 billion in capital. JPMorgan is responsible for only the first 1/2 billion. Taxpayers are on the hook for all the rest. Was this a legal action for the Fed to take? Does the Fed care?

16. Citigroup needed a cash injection from Abu Dhabi and a second one elsewhere. Then after announcing it would not need more capital is raising still more. The latest news is Citigroup will sell $500 billion in assets. To who? At what price?

17. Merrill Lynch raised $6.6 billion in capital from Kuwait Mizuho, announced it did not need to raise more capital, then raised more capital a few week later.

18. Morgan Stanley sold a 9.9% equity stake to China International Corp. CEO John Mack compensated by not taking his bonus. How generous. Morgan Stanley fell from $72 to $37. Did CEO John Mack deserve a paycheck at all?

19. Bank of America (BAC) agreed to take over Countywide Financial (CFC) and twice announced Countrywide will add profits to B of A. Inquiring minds were asking "How the hell can Countrywide add to Bank of America earnings?" Here's how. Bank of America just announced it will not guarantee $38.1 billion in Countrywide debt. Questions over "Fraudulent Conveyance" are now surfacing.

20. Washington Mutual agreed to a death spiral cash infusion of $7 billion accepting an offer at $8.75 when the stock was over $13 at the time. Washington Mutual has since fallen in waterfall fashion from $40 and is now trading near $5.00 after a huge rally.

21. Shares of Ambac (ABK) fell from $90 to $2.50. Shares of MBIA (MBI) fell from $70 to $5. Sadly, the top three rating agencies kept their rating on the pair at AAA nearly all the way down. No one can believe anything the government sponsored rating agencies say.

22. In a panic set of moves, the Fed slashed interest rates from 5.25% to 2%. This was the fastest, steepest drop on record. Ironically, the Fed chairman spoke of inflation concerns the entire drop down. Bernanke clearly cannot tell the truth. He does not have to. Actions speak louder than words.

23. FDIC Chairman Sheila Bair said the FDIC is looking for ways to shore up its depleted deposit fund, including charging higher premiums on riskier brokered deposits.

24. There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.

25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.

What cannot be paid back will be defaulted on. If you did not know it before, you do now. The entire US banking system is insolvent.

CIBC faces multi-billion-dollar class-action lawsuit over subprime disclosure
The subprime litigation frenzy in the United States has spilled over the border with the launching of a multi-billion-dollar class-action against CIBC and eight current and former executives over failed investments in U.S. residential mortgages.

Shareholder and proposed lead plaintiff Howard Green, of Thornhill, Ont., alleges that the defendants misrepresented the bank's exposure to subprime investments, engaged in material misrepresentations and failed to make timely disclosures, contrary to securities regulation.

The claim also alleges CIBC failed to conduct proper due diligence or implement appropriate risk-management controls related to billions of dollars in investments in collateralized debt obligations and U.S. subprime mortgages. The period of the alleged misrepresentations covers May 31, 2007 to Dec. 31, 2007.

Named in the suit are: CEO Gerald McCaughey; Tom Woods, at the time the CFO and now chief risk officer, risk management; Brian G. Shaw, a former CEO of CIBC World Markets; Ken Kilgour, at the time chief risk officer, risk management who left CIBC in 2008; Michael Capatides, a lawyer at CIBC; Leslie Rahl, who sits on the board of directors; Phipps Lounsberry who once headed the debt division of World Markets and left in November, 2007; and Steven McGirr, a former chief risk officer who left CIBC in July 2007.

The allegations have yet be proved in a court of law. CIBC spokesman Rob McLeod said in a statement that "CIBC denies these allegations and plans to vigorously defend this action. CIBC is confident that, at all times, its conduct was appropriate and that its disclosure met applicable requirements."

Mr. Green has retained the Toronto law firm Rochon Genova, co-counsel in a shareholder suit against Nortel that settled for US$2.5-billion. "My sense is that CIBC went very, very deep into this market," said lawyer Joel Rochon. "The essence of our claim is that they failed to disclose the magnitude and troubling risk profile of these investments."

The lawsuit seeks the maximum statutory damage of $1.75-billion -- 5% of CIBC's market share at the time of the alleged misrepresentations -- for breaching Section 138 of the Ontario Securities Act, which imposes civil liability for misrepresentations in public statements or documents.

The provisions are relatively new and allow shareholders who acquire or sell shares during the time of any misrepresentation to bring an action even if they didn't rely on the utterance when making their investment decision. It parallels the fraud on the market provisions of U.S. laws and lessens the burden on when bringing such lawsuits.

Alternatively, the claim seeks $10-billion in damages for negligence or $10-billion in damages under shareholder oppression laws. Subprime litigation against banks is all the rage in the United States. Since last year, about 150 shareholder suits have been launched, said John Coffee, a professor at Columbia Law School in New York.

That doesn't include claims by individual investors, which are even greater in number, he said. "We're seeing an awful lot of large institutions [suing banks]," he said, adding they are often "very sophisticated institutions" who were stuck holding collateralized debt obligations when the credit markets collapsed last year.

The CIBC claim alleges that Mr. McCaughey was appointed after the bank was sued in the Enron scandal to "de-risk" CIBC's investments. Instead, the lawsuit alleges that CIBC invested in more than $11-billion worth of hedged and unhedged investments related to risky U.S. subprime residential mortgages, which effectively "bet the bank on a single sector."

The claim alleges that despite rapidly declining credit markets, CIBC continued to publicly state it did not face any material writedowns, which artificially inflated the share price.

The claim alleges that "throughout the class period, CIBC continuously failed to disclose the true materially impaired value of its mark-to-market assessments of [U.S. subprime residential mortgage investments], with the result that it overvalued its assets in the financial statements and failed to issue earnings warnings when they were warranted."

UK retail sales have worst fall since 1986
Shoppers are continuing to cut back on their spending as sales on the high street last month saw their biggest slump for more than 20 years, new figures reveal.

Retail sales volumes fell 3.9pc between May and June, according to The Office for National Statistics. The drop is the largest decrease since records began in January 1986. The figures were revealed as consumers continue to reign in their spending amid rising household bills and mortgage repayments.

Disposable incomes have fallen to their lowest level for five years, leaving the average family with just £155 to spend at the end of each month compared with 2004, according to a study published earlier this month by Ernst & Young.

And the credit crisis and falling house prices mean shoppers can no longer rely on the equity built up in their homes to fuel their insatiable spending habits. Clothing and footwear shops were the worst hit in June, with sales down 6.9 per cent.

Food also suffered, as shoppers saw the price of groceries continuing to rise. Sales in this sector were down 3.6 per cent. The decline in sales followed a sunny-weather inspired sales leap seen the previous month, when sales rose by 3.5pc.

Ilargi: Looking for a new challenge? There is no better job, with more fulfillment for one’s puffed little ego, than gambling with other people’s money, especially when there’s lots of it.

After squandering billions on BCE, the world’s biggest leveraged buy-out, loading up with $40+ billion in fresh debt, Ontario Teachers figured there’s still more left to lose. is dying, it’s a website that grew large on comparing loans and mortgages; which are now on life support in the UK. Good timing!

Sure, Teachers has been successful off late. But you know why that is? They’re the highest risk gamblers out there.'s takeover bid came from Canadian pension fund's surprise takeover approach came from one of Canada's largest pension funds, it emerged today.

Teachers' Private Capital, the investment arm of the C$108.5bn (£53.4bn) Ontario Teachers' Pension Plan, said it made a preliminary approach to founding chief executive Simon Nixon in relation to a possible offer for the financial comparison website.

Teachers is responsible for Ontario's 278,000 active and retired teachers. Its private capital arm, which has assets of about C$17bn, is one of the world's largest private equity investors.'s shares soared 15.25 to 84.25p yesterday, after Mr Nixon - who retains 54pc of the group's shares - revealed that he had rejected the approach. Teachers' said today that it has "no current intention of making an offer for". However, it reserves the right to make another offer within the next six months.

Shares in Moneysupermarket, which have slumped since floating at 170pc last July on concerns the credit crisis will hit demand for its services, held their gains this morning - and were little changed this morning at 84p. Teachers' Private Capital's major international investments include New Zealand Yellow Pages and Kabel Deutschland - a cable operator in Germany.

In its native Canada, the group has invested in Maple Leaf Sports and Entertainment for almost 15 years. It also holds stakes in Shoppers Drug Mart, Canada's largest drug store chain and CTVglobemedia, the country's leading multi-media group.

Earlier this month, the Ontario Teachers' Pension Plan was ranked the first among its peers in North America - providing the 'best class' pension service, according to a report from CEM Benchmarking. Last year its annual rate of return was 4.5pc, compared to the composite benchmarket's 2.3pc return.

Ilargi: The understatement of the day, week, month?!:
"Now, of course, they are facing another kind of problem, which is the cyclical slowdown at home. It is possible that real estate prices could fall in absolute terms and that presents challenges for Santander."

Spain’s slowdown has NOTHING to do with cyclical. It’s highly likely that never before has any country built so many new homes, in relative terms. Rumor has it that in 2005-06, Spain built as many units as England, France and Germany put together, some 800.000 each year. I haven’t double-checked, but I’m not far off.

Building made up about 15-20% of all economic activity. That is now gone, almost completely. But nobody in the building or banking industry volunteers to be the first to admit to it; even though Spain’s own finance minister rang alarm bells recently. And as long as they don’t, of course the banks look flush with cash: but just wait till their "assets" are marked for their real market value. It’s a public secret that Spain’s banks have been propped up by the ECB for the past few years.

"It is possible that real estate prices could fall in absolute terms.. " Actually, it is guaranteed that they will fall right through the floor, and they won’t stop there. Let’s see about the banks then, shall we? Meanwhile, I’m slightly amused by the thought of all the units that are sitting empty or still under construction. Hey, it’ll revive any moment now, it’s nothing but a cyclical slowdown, you just keep on building.

Spanish banks bask in virtual profits, for now
Spain's biggest banks are riding high amid the credit turmoil. Not only has Santander agreed a cut-price deal to buy Alliance & Leicester, but a rumour that Banco Bilbao Vizcaya Argentaria was mulling a bid for HBOS helped to send shares of Britain's biggest mortgage lender up nearly 17 per cent yesterday.

Analysts said a BBVA bid for the parent of Halifax and Bank of Scotland was unlikely. One analyst said the only reason for Spain's second-biggest bank to do such a deal would be to enter a "medieval duel" with Santander, which wants to add A&L to Abbey National, which it bought in 2004.

But the incident was an illustration of the perceived strength of Spanish banks in the midst of the financial turmoil after avoiding the massive writedowns on credit products that have hit their European rivals. Spain's big two banks have won praise for diversifying their businesses into high-growth Latin American markets, which so far have remained buoyant as the US and Europe head into a slowdown.

Santander makes about 35 per cent of its income from its home market, while BBVA gets about 39 per cent of revenue from Spain and Portugal. They also resisted the urge to expand in investment banking as the debt markets boomed, sticking to their roots in retail banking.

Mamoun Tazi, banking analyst at MF Global, said: "They [Santander and BBVA] have some very good franchises in South America and they have a decent business in Spain, though Spanish housebuilders are going through a terrible recession. They seem to have not stepped on landmines both in terms of Spanish real estate and US sub-prime. That is why they are confident."

The Bank of Spain has also helped out by requiring the banks to make old-fashioned general provisions – supposedly outlawed under IFRS accounting – so that they have been building up reserves against future bad debts instead of waiting for loans to turn sour.

The central bank also deterred its banks from running structured investment vehicles and other such exotic funds by saying that they would have to capitalise them on their balance sheets. Santander and BBVA have not been shy about broadcasting their relative success, dishing out lectures on prudent banking and declaring themselves virtually immune from the maelstrom around them.

The night before his bid for A&L, Emilio Botin, Santander's 73-year-old chairman, dispensed words of wisdom at the Euromoney awards. "If you don't fully understand an instrument, don't buy it. If you would not buy a specific product for yourself, don't try to sell it. If you do not know your customers very well, don't lend them any money. If you do these three things, you will be a better banker, my son."

Francisco Gonzalez, BBVA's chairman, has made withering comments about US banks, saying in January that they acted "immorally" by encouraging people to take out loans they couldn't afford. Marco Troiano, a banking analyst at Standard & Poor's Equity Research, says: "Santander take great pride in the way that they have come out of the credit crunch and they are right to feel proud. The main reason for that is their legacy as a retail bank, and the Bank of Spain's rules were more prudent than for other countries.

"Now, of course, they are facing another kind of problem, which is the cyclical slowdown at home. It is possible that real estate prices could fall in absolute terms and that presents challenges for Santander."
Mr Botin's speech to the Euromoney awards was said to have been tongue- in-cheek, but a source at one British bank said the triumphalism of the Spanish bank bosses was "bewildering", given the condition of the Spanish economy and the difficulties the banks could face from the bursting of the country's 10-year housing bubble.

Evidence of the potential troubles ahead came to light earlier this month when Banesto, a domestic lender that is 88 per cent owned by Santander, reported second-quarter results. Defaults surged to 0.79 per cent of total loans from 0.59 per cent in the previous quarter and non-performing loans more than doubled to €693m (£546m).

Net profit at the bank, which is run by Mr Botin's daughter Ana Patricia Botin, rose 14 per cent on higher lending revenue; but, with the economy slowing, loan growth is likely to slow down sharply. Analysts will watch the domestic operator Banco Popular Español's results today for further signs of trouble ahead.

Santander bank has forecast profit for 2008 at more than €10bn, a record, as growth in Brazil and elsewhere in Latin America makes up for the slowdown in Spain. It has doubled its presence in Brazil with the acquisition of ABN's business there, but still makes about half its profit in Spain and the UK, where property bubbles have burst and the economic outlook is bleak.

As well as the slowdown in their home market, Santander and BBVA may not be able to rely on a continuing boom in their Latin American operations. Markets such as Chile and Argentina are suffering from high inflation and their central banks are raising interest rates, while Mexico may suffer from its close economic ties with the US.

Even Brazil, the great success story of Latin America, is having to raise interest rates to combat inflation. A banking analyst who declined to be named says: "Latin America has been one of the positives of these two banks, but this is going to change this year because the macro economy is not as positive as it used to be."

Mr Botin has built a reputation as a shrewd, opportunistic, deal-maker as he has built Santander into one of the world's top 10 banks. That reputation was enhanced last year when he bought ABN Amro's prized Brazilian operation for a bargain price in the three-way break-up bid for the Dutch bank and then immediately sold ABN's Italian business for a profit of £1.7bn.

Abbey's performance was unspectacular in the first three years after Santander's purchase, but the bank has started flexing its muscles this year to take market share from rivals. It is also expanding in business banking, a plan that will be accelerated by the A&L deal.

But question marks still hang over the initial deal. MF Global says the takeover was a mistake by Santander, because investing in the mature UK market diluted the Spanish bank's returns. The A&L deal is a necessary second step to boost returns through cost cuts, MF Global says.

The Spanish economy has basked in a decade-long boom, outperforming its neighbours right up to last year when it grew 3.8 per cent compared with an average of 2.7 per cent across the Eurozone. Yet a sharp decline in the country's property market last year has slowed growth sharply, and caused experts to downgrade their estimates on just how bad the country's economic slowdown will be.

Last quarter, real gross domestic product hit levels not seen since the early 1990s, as it grew just 2 per cent in the three months to the end of June. This was flat compared with the first start of the year, predominantly caused by the fall in property, as housebuilding makes up 10 per cent of the economy. This compares with 7 per cent in the US at the peak of the market.

Fears continued to rise over the sector last week as one of the country's biggest property companies Martinsa-Fadesa filed for creditor protection owing €5bn (£4bn). This has had a knock-on effect on domestic banks where profits have suffered from rising provisions from bad loans.

As the economy has weakened, consumer demand has slowed, manufacturing orders have fallen and employment has soared, rising by 425,000 in the past 12 months to hit 9.9 per cent. Experts are muted over the country's future growth prospects, with economists at Standard & Poor's economists forecasting 1.5 per cent GDP growth this year followed by 1.6 per cent in 2009.

German Optimism Falls as Europe Recession Risks Rise
German business confidence plunged the most since the Sept. 11 terrorist attacks and European manufacturing and services shrank, increasing the risk of a recession across the euro region.

The Ifo institute's German business confidence index dropped 3.7 points from a month earlier to 97.5 in July. That was more than three times the decline forecast by economists in a Bloomberg News survey and the overall reading was the lowest in three years. Manufacturing and services across the euro area contracted for a second month and in the U.K., retail sales dropped by the most since at least 1986.

European executives are struggling to cope with surging oil prices, a stronger euro and a global slowdown sparked by the U.S. housing slump. With companies including Renault SA cutting jobs and the European Central Bank raising interest rates to fight inflation, more pain may be in store for consumers and companies.

"It may be premature to talk about recession in Europe, but the data does raise the risks," said Martin van Vliet, an economist at ING Group in Amsterdam. "There's a toxic mix battering business sentiment." The decline in German confidence was part of a series of data today suggesting ECB President Jean-Claude Trichet may be too optimistic when he says growth will rebound later this year.

Confidence among Italian executives fell to the lowest since 2001 in July; French business sentiment was the weakest since May 2005; Spanish unemployment in the second quarter rose to the highest rate in 3 1/2 years; and Belgian business confidence this month dropped to the lowest since April.

European government bonds climbed after today's reports. The yield on the two-year note dropped 11 basis points to 4.46 percent and the yield on the 10-year bund, Europe's benchmark government security, slipped 6 basis points to 4.59 percent. The euro, which has increased 13 percent against the dollar in the past 12 months, fell as much as 0.4 percent to $1.5638 today.

"The abrupt falls recorded in the national business confidence indicators confirm that no country is immune to the slowdown," said Lavinia Santovetti, an economist at Lehman Brothers Holdings Inc. Heidelberger Druckmaschinen AG, the world's largest printing-press maker, reported a first-quarter loss last week and said full-year sales and operating profit will decline. The company plans to cut 500 jobs.

Beyond the euro area, U.K. retail sales fell 3.9 percent in June after rising 3.6 percent in May, which was the biggest increase since the data series began more than two decades ago. Economists forecast a 2.6 percent drop, the median of 30 estimates in a Bloomberg News survey showed.

Trichet said last week that Europe's economy will rebound after a "trough" in the second and third quarters and is refusing to give up his inflation-fighting rhetoric. At 4 percent, inflation is double the ECB's ceiling and the central bank earlier this month raised its key interest rate to a seven- year high of 4.25 percent. "With just a bit of bad luck, any further monetary tightening could possibly push the euro zone into a brief recession," said Holger Schmieding, chief European economist at Bank of America in London.

While Europe may avoid its first outright recession in 15 years, economists say the ECB will have to revise its outlook for growth after its staff last month said expansion may ease to 1.5 percent in 2009 from an expected 1.8 percent this year.


Anonymous said...

I find this confusing and troubling: 4. Washington Mutual (WM), another troubled bank, refused to honor Indymac cashier's checks. ... Eventually Washington Mutual decided it would take those checks but with an 8 week hold."

The implication - to me - is that WM couldn't "cash" those cashier's checks. Does the FDIC guarantee work differently if a customer demands their cash directly from the bank, or if they get a cashier's check that they then try to deposit in another bank? Something troubling is hidden here, otherwise, you would think WM would be GLAD to have these deposits and depositors.

Or is this some sort of circular delaying tactic? Did the Indymac customers want their cash, but get given instead cashier's checks, which they took to WM to cash [still not trusting the banking industry - silly them], and because the money wasn't already on deposit, the bank didn't HAVE TO cash it out. So is this a way of passing the buck to keep it out of the customer's hands?

Anonymous said...

I and/or S,

Do you see this shift of private to public debt impacting the the Treasury's credit rating? Do the "big three" actually have an official rating for the Treasury? Short of default, would they ever drop it below AAA? Does any other publicly acknowledged entity rate it? How do you think that Grand Theft F&F will effect the USD over the next few months vis-a-vis other major currencies?

Anonymous said...

was trying to find any comments on deflation vs. [hyper]inflation in today's posts.
Your earlier comments pronounce deflation due to evaporating housing 'values' (at least that's what i thought i read)
Any revision of that stance due to this new bail out morass ?
$300B to FHA - are they included in the $800B figure ?
and even if they are the $0.8T is a LARGE amount
I mean, yes - we (the tax payer) will be buying mortgages a some discount, but is that 'loss of fake value' significant compared to the infusions of (just as fake) $ into the economy (er... banks)

Matthew said...

el pollo, I have the same questions. The insinuation has been that as the deflationary death spiral kicks into gear, the dollar will be valuable and precious. And that Americans holding them will be very fortunate indeed.

I'm not so sure though. As far as the USD is concerned, John Williams' scenario sounds plausible, at least in the shorter-term:

Phase 1: [Attempts at] Salvaging the system. Occurring now. The Fed's actions won't make a dent in the overall deflationary picture. However, they may have the effect of destroying the value of the dollar.

Phase 2: The Dumping of the dollar. Over the past year, the dollar is down against the Franc, Yen, Euro, etc. As the U.S. dollar continues to deteriorate, foreign holders of U.S. assets (e.g., treasuries) may dump them. Nobody wants to be left holding a bag of worthless currency. And the 'waterfall effect' can occur overnight.

Ilargi said...


My guess is that WaMu is not too happy with cashier's checks that now come directly from the FDIC, and that may have to do with their own precarious situation.

They certainly won't pay out in cash, but that's not implied by "cashing a check". People just wanted to deposit the checks, likely open a new account to do that. FDIC checks may well be a bit fishy in that it takes longer to clear them. In the meantime, WaMu is strapped for everything, but obliged to pay out what's in the accounts.

I like the comment, I think it was Mish, that WaMu is the last place to go with your just narrowly salvaged savings. You may have to do it all over again next week.

Anonymous said...

Guys, would it be possible to move the comments section to a place which is easier to identify on the page? I like to check for the comments again later in the day - very valuable discussions here - but it is a bit difficult to find them scrolling down.

Ilargi said...


The sums in the bill, even if they potentially reach to infinity and beyond, are not paid out immediately to any party. For now, they're guarantees; eventually, credit lines.

The credit will take a long time to be processed, and serve in the meantime to shore up deeply red books at various banks. The credit will never reach the real economy; the debts at banks and lenders are far too high, and rising every day.

What is real though is the stunning amounts that disappear every day from the share values of the financials. US homes have lost well over $3 trillion now, and banks' values are down by 50-80% over the past year.

We're talking 100's of billions in total, and that directly affects the amount of credit space. Just look at the article on builders' credit lines. For every dollar lost in value, 10 dollars of credit vanishes. In the UK, mortgage approvals are down 66%, simply because credit has gone up in smoke: banks have no reserves, and hence no money to lend.

If the US government would want to create domestic inflation, it would need to pump in a minimum of $6 trillion by now; the total that has gone. They don't, and so there's no inflation. There are merely higher prices for a few items.

Bigelow said...


Did you pen 'Why You Should be Worried About the Rescue of Fannie Mae and Freddie Mac?

Ilargi said...

Guys, would it be possible to move the comments section to a place which is easier to identify on the page?

Click on the title of the day's Debt Rattle, that'll bring you to its own page, where the comments are always at the bottom.

Bigelow said...

"If the US government would want to create domestic inflation, it would need to pump in a minimum of $6 trillion by now; the total that has gone. They don't, and so there's no inflation. There are merely higher prices for a few items."

And the few items are more expensive as a function of dollar exchange rate and demand yes?

Ilargi said...


Did you pen 'Why You Should be Worried About the Rescue of Fannie Mae and Freddie Mac?

No I didn't. Close enough to what I've been saying though. It's from a Fox blog, by Elizabeth McDonald.

What I did do is screw up the link, so thanks for making me look at it. It's fixed.

And the few items are more expensive as a function of dollar exchange rate and demand yes?

That and money moving into commodities.

In the inflation/deflation issue, I think it's good to realize that US houses lose probably about 5% per quarter, or $1 trillion.

Anonymous said...

That and money moving into commodities.

In the inflation/deflation issue, I think it's good to realize that US houses lose probably about 5% per quarter, or $1 trillion.

So at that rate of loss there will be a trend towards lower FF prices despite money moving there, at least until that rate diminishes or peak oil kicks in?

Anonymous said...


2 questions.

first what is the best way to prepare for e the coming defaltionary depression?


There is a huge amount of credit card and personal debt that is a ticking time bomb waiting to go off. I think that within 1 year we will start to see massive defaults on personal debt.
WHat does this actually mean though? with the recent changes to bankruptcy laws, the majority of people cannot walk away from debt ( excepting for the 7 year rule of course).

SO is the government going to bail out eh average joe in the end as well, cancel debt?

I just dont see it being possible for the credit card companies to actually collect of 300 million peoeple. When the SHTF for real who is going to worry about paying a credit card???

Anonymous said...

Re: inflation/deflation

remeber that deflation ( according to the austrian school of thought) is a decrease in the money supply.
SO we can have a reduction in curreny (deflation) while at the same time prices of everyday goods go up. This is because we are in a global economy.

Anonymous said...


"When the SHTF for real who is going to worry about paying a credit card???"

If the U.S. federal government suceeds in essentially abolishing cash as a medium of transaction (only drug dealers/ users and other criminals use cash) all 'money' will be electronic pixels on a screen.

Your credit debt could be called up in a few keystrokes and you might not be eligible for any government (fed, state or local) assistance (food stamps, fuel assistance, unemployment, etc...)

Lot's of people will be out of work, some 'more equal' than others as far as getting help.

Do you really think the PsTB wouldn't try and squeeze people when they;re down and out?

Disaster Capitalism's finest moment is fast approaching. Imagine what the plan is for this coming meltdown.

scandia said...

I admit that I am easily disturbed but what happened to Paul Gigot( The Fannie Mae Gang) is disturbing.
Also disturbing is a Mish article (FDIC Sheila Blair Out of Control).Sheila Blair thinks bloggers are out of control. Are we now in the sights of the same goons that went after Paul Gigot at the WSJ?
I have a question. I'm reading the US deficit just went up by $800 billion. If the banks haven't any money and the US gov't hasn't any money where is that sum going to come from? If the US gov't is broke who is putting up the money for the Iraq/Afganistan wars?
If we know who the lender of the really last resort is we'd know something significant, I think.

Anonymous said...
This comment has been removed by the author.
Anonymous said...


dont forget that in the recent fannie freddie bill, there was a little bit of legislation that requires all credit card /ebay /paypal / etc transaction to be reported to the IRS.

ready for the electronic Amero???

Anonymous said...

you guys still dont seems to see the point to my credit card question.

if the SHTF for real, then no one will have the money to pay the debt? what happens? I am not a financial guru so dont even have a guess.

The credit card and personal loan induisrty is cvery powerful and it is a real question as to whether there is enough public disrest and outcry for the gov to cancel the debt, or do the credit card people have enough money to buy a government enforced payback?

Anonymous said...

The government debt hasn't increased by 800 billion, yet. They 'merely' raised the debt ceiling by that amount. The money spent can be used for anything they want to.
Who will fund that debt? The same suckers they've been pawning it off to for the last 25 years: Japan, China, SA and anyone else with positive trade balances - until they can't anymore.

Anonymous said...


Sorry, misread your item above, but it sounds like you have a bit of credit card debt? If you can get rid of it now I would do so . When they kill off Habeas Corpus who has been hoping about since his birth in 14th century England you can be pretty sure it can't be a long step to debtors prison and work gangs.

Also it will be possibly harder for you to pay off in future with deflation making any debt paying dollar very slippy to get hold of.

Anonymous said...


i have some, not to much i hope to have all debt cleared by spring. My uneducated suspicion is that consumer credit is what will break the camels back. The average amrican ha a negative net worth. The situation is mind boggling when you consider it.
On top of that, the global economy depends on american consumption. If american consumption hits the wall and we see substantial consumer credit default, then that will have very negative effects on banks and economies around the world.

The Lizard said...

I spent the evening listening to podcasts of Jim Puplava and guests. Puplava is disaster-aware, peak-oil aware, and forecasts a depression in the next couple of years. For readers of Automatic Earth it would all sound very familiar.
Except that Puplava is calling for an *inflationary* depression, and casts his clients' portfolios accordingly.

It strikes me as odd that such divergent predictions can come not only from the same data, but from people who are alike in seeing the future as one of deprivation, want, and desperation.

And I think it means we all have to think for ourselves now. Learn all you can, carry cash and a big stick, find out how to grow carrots, find out why birch trees fall in high winds, and decide who we have to support when their pension cheques stop arriving.

Kunstler's "World Made By Hand" is a bad novel with a great message. Sooner or later, inflation or deflation, you are going to be planting carrots and walking to the river for water.

Anonymous said...

hangedman,I think we all know that this is where those of us who survive will end up.I am trying to keep my spirit up with all this knowledge...I keep my net time to a minimum,and focus on the days was the bear.We have a black bear in the neighborhood.$ of my neighbor saw him,but hes not come by my place.yet.I spent most of last night running around w/ a shotgun,worried about my 25 bee hives...sufficient
Unto the day,the troubles therein.
I have but a mortgage,w/600/month bills.A small 3 acre food machine w 144 fruit trees,50 kiwi vines.BIG garden space.What I hope is a fairly stable job,with having 20years at a midsize company.20 miles out of town

I think I am in a good place ,when compared to many folks.The framers I spoke of yesterday,and the steelworkers and the common men I know all bought into the refi and buy the biggest house you can

Now all the bills are here..

I see the tsunami coming.What we all wonder,in our hearts is how we ,each,and ourselves will face this.We will all be tried in ways we can only imagine,and can only pray we will not be found wanting.I have tried to educate myself ,as best as I could to figure out how to keep me and mine safe and fed.I am better prepped than most,and can only hope the goddess smiles on me

With wamu as my bank,its a race every week to get my cash out from direct deposit....I have it set up now to drop the direct deposit with nothing but a phone call..


Bigelow said...

Deflationary depression first (protect the bond market where the big money is) when that cant work anymore or everyone has dumped the Treasuries then an inflationary depression with a captive (exchange controls and labor camps) audience. Right?

The Lizard said...

Joe Bageant has a good article on the topic of class and politics, at:

Relevant to the discussion here.

Anonymous said...

Found this on Market Ticker this morning:

"John Stewart and Michael Chaney’s decision to go straight to 90 per cent provisioning on National Australia Bank’s portfolio of US residential mortgage-backed securities (RMBS) is a shocking event that will reverberate around the world.

The CEO and chairman of NAB will live with the consequences of their decision as it affects their own bank, but so will every other banker on the planet.

NAB’s exposure to the US property market through the CDOs held in its conduits is relatively small – $1.2 billion worth of structured finance assets. The money is in 10 collateralised debt obligations (CDOs) in two conduits (off balance sheet vehicles to which NAB provides “liquidity”).

Leaving aside the dodgy nature of the vehicles, the assets themselves were all rated AAA, which technically means a one in 10,000 chance of default.

Stewart, Chaney and the NAB risk committee have now assessed the prospect of loss at 90 per cent, that is a 9,000 in 10,000 chance of default. In other words, the securities have turned out to be far worse than junk.

To be specific, the 10 CDOs consist of two “super senior” strips and eight AAA senior strips. The NAB brains trust has now determined, on a worst case basis, that it will recover half of the super senior CDOs and none of the AAA senior debt.

To repeat: NAB is now expecting 100 per cent loss on $900 million worth of AAA rated debt securities."

So, is this going to blow the lid off things, or will it just get buried in a new stack of bullshit "feel good" reports on the state of the dead-and-stinking economy?

Anonymous said...

Sorry, that url seems to be a bit too long. Here it is in a tinyurl form.

Anonymous said...

Three part Roubini interview.

Suggests economic recovery by mid 2010 ... if so, that should time it right to step on to the peak oil banana skin, IMO.

Bigelow said...

“Popular culture is the breaker of customs, prejudice, tradition and relevant historical knowledge.
It is a result of this dynamic that the two consistent winners in American politics over the last 30 years have been the cultural left and the economic right. […]
In the post political period the only differences allowed can be in style and modes of consumption.

Nice marketing analysis. Explains things really well taken together with the ‘good cop’/’bad cop’ candidate choice, while the same finance, war, pharmaceutical interests continue to rule. The government has been outsourced to corporations so whoever wins is irrelevant anyway, except for enriching their particular friends.

I find it easy to agree with Carolyn Baker. She says

“If you are planning to vote in the 2008 presidential election, what is your need to engage with that system? How is it that you believe you have a valid, authentic choice between two divergent political and philosophical positions? What keeps you tethered to the charade? It's not important that I know your answer, but very important that you do.” CELEBRATING UN-PRESIDENT'S DAY: WHY I WILL NOT VOTE FOR A PRESIDENT IN 2008

Bigelow said...

Full-text, unedited ASX release from National Australia Bank.
NAB makes provision in response to unprecedented global credit conditions

“The National Australia Bank's decision to write off 90 per cent of its US conduit loans will have dramatic repercussions around the world. Wall Street will be deeply shocked when they understand the repercussions of what NAB has done. It is clear global banks have nowhere near provided for their exposures to US housing loans which in the words of John Stewart are experiencing a “meltdown”. […]

US banks have written down $450 billion in bad housing loans. The revelation from NAB means that they will now certainly need to take provisions to $1,000 billion. But write-downs of $1,300 billion and perhaps even more are on the cards.” NAB will shock Wall Street

“The NAB chief and his team seemed surprised that what they thought was an ultra-cautious stance — effectively valuing their CDO exposures at almost nil — had provoked such criticism. It was, it seemed, the right idea, badly handled.” .” Bank boss takes a beating as analysts delve for answers

Anonymous said...

“Last night ratings agency Standard & Poor's put the NAB on negative credit watch, warning the bank's AA rating was at risk if NAB's credit costs blew out or investors deserted the bank.

Mr Stewart said the global credit crisis was worse than he had thought and had yet to hit bottom. "The worst-case scenario might not be too far away from the most likely scenario," he said.

Mr Stewart took a swipe at ratings agencies, saying they had not done a "thorough" job when giving the securities a AAA rating.

He declared the bank would "make the same investment decision (today)" based on the information it had.

"If you wouldn't invest in AAA assets then you wouldn't invest in any company in Australia," Mr Stewart said.

NAB estimates the global banking sector is less than halfway through the credit crisis.

Figures supplied by NAB show global bank losses are expected to hit between $1 trillion and $1.3 trillion.”

Bad debt bombshell from National Australia Bank

Anonymous said...

Thank you anonymous whoever you are for that 'Bad Debt Bomshell from NAB'.

A nice laugh to set up the day in that article:
After increasing its bad debt provision to 830 billion and in response to a question about buying HBOS's corporate banking arm,
Mr Stewart said: "We have a very low appetite for acquisitions at the moment."

Anonymous said...

opps metal inflation set in there, make that 830 million not billion above :)

Anonymous said...

about NAB - one forum post:

"Thats not a writedown, THIS is a WRITEDOWN"

I was on the floor laughing my shorts (WM,FNM, ...) off :D