Monday, August 4, 2008

Debt Rattle, August 4 2008: The Examining Room

G. G. Bain The Examining Room February 27, 1917
"Examining naval volunteers." New York

Ilargi: Two interviews today paint a clearer picture of the future of US home prices and the finance industry.

Barron’s spoke with Nouriel Roubini, who is extensively portrayed as a perma-bear and a doomer. I think it’s -a bit too- convenient for Barron’s/WSJ to paint Roubini as a doomer, and then quote him with numbers that no longer look doomerish at all; he’s more mainstream than anything else these days.

Roubini even states that "...the global economy is going to grow at a sustained rate once this downturn is over..". And "..There will be transitional costs and the displacement of workers, both blue-collar and white, in the advanced economies. But I'm quite bullish about the state of the global economy, and I'm positive about the medium and long term.."

The media like it that way, it’s as if they have control over the very meaning of words. They can claim that they publish even the most downbeat analysts -and Roubini has been given that label- while these views themselves are quite moderate, and anything but doomerish.

Meredith Whitney is not known as a bear or doomer (except by bankers who don’t like her analysis of their firms). But in her interview in Fortune Magazine her views turn out to be darker than Roubini’s.

In numbers: Roubini says home prices could fall "as much as 30%", while Whitney said last week that 33% is so low as to be "mathematically impossible". Fortune claims that in her view it will be 40%.

In hard numbers: the total value, at the peak, of US residential real estate, was about $21 trillion. Now, I have difficulties with the fact that Roubini, and Barron’s, claim that total "debt-related" losses "may" be as much as $2 trillion. That’s just for banks.

For real Americans, there is more: US home prices are down 15.8% -Case/Shiller-, and that means $3.3 trillion is gone there alone, already.

If we take Roubini’s view, the 30% decline would bite $6.3 trillion out of US wealth. Whitney’s 40% decline would result in a loss of $8.4 trillion.

The perversity in these numbers is that Americans will still be on the hook for mortgage payments linked to the peak number, $21 trillion, while their homes will be worth only $12.6 trillion, if we follow Whitney.

Consumer spending is responsible for some 70% of US GDP. But potential spending power worth more than 50% of the $13.5 trillion in annual GDP is about to disappear.

Moreover, the same consumers are being forced to pay the tab for failing banks, for Fannie and Freddie’s losses, and soon for the FDIC’s deposit guarantees. On top of that, Roubini, for one, sees a 40% drop in share values across the board.

In view of all these numbers, as well as the present negative savings rates and enormous debt levels for individuals, companies and governments alike, plus trillions of dollars in additional losses to be revealed when toxic paper is exposed to daylight, I simply don’t see how the US economy can get out of this in any way, form or shape that even remotely resembles the one it had going into the millenium.

Whitney: Credit crunch far from over
The credit crisis is far from over, star analyst Meredith Whitney tells Fortune magazine in its upcoming issue.

Whitney, who audaciously - and correctly - predicted last October that Citigroup would have to cut its dividend, tells the magazine that banks in general today are still facing much bigger credit losses than what they've reported so far.

The Oppenheimer & Co. analyst warned last year - and continues to warn today - that the "incestuous" relationship between the banks and the credit-rating agencies during the real estate bubble will have a long-lasting impact on banks' ability to recover.

For years the ratings agencies, which are paid by the issuers of bonds, gave high marks to securities backed by subprime mortgages. Many of those bonds, of course, turned out to be anything but safe. With Moody's and Standard & Poor's now trying to make up for past wrongs, the pace of downgrades on mortgage securities is quickening.

This is a problem, because every time their portfolios are hit by significant credit downgrades, banks are forced to improve their capital ratios. Often that means issuing reams of new stock, which leads to serious dilution, as shareholders at Citi, Merrill Lynch, and Washington Mutual now know.

"You're going to have this stealth pressure on bank balance sheets until you start to see the ratio of downgrades to upgrades change," Whitney tells the magazine. Whitney's bearishness has deep roots. In fact, she was the first analyst to sound the alarm loudly about subprime mortgages, predicting back in October 2005 that there would be "unprecedented credit losses" for subprime lenders.

The problem, as she saw it, was that loose lending standards and the proliferation of teaser-rate mortgage products had artificially inflated the U.S. home-ownership rate. A lot of the new homeowners were in over their heads, she believed, and would have trouble making their monthly payments when home prices started to fall and their teaser rates got bumped up.

Whitney's current concern is that banks aren't slashing costs and cutting losses in their loan portfolios fast enough. On the cost side, she says, banks have yet to come to terms with the disappearance of the securitization market, which she believes will stay in hibernation for the next three years.

Why does this matter? From 2001 through 2005, for every dollar of bank capital used to make mortgage loans, 10 were supplied via investors in mortgage securities. All that secondary-market capital is now sidelined, but the staffing levels of bank lending departments don't yet reflect it. By Whitney's reckoning, banks have laid off about 7% of their employees; she thinks the cuts need to reach 25%.

She also argues that banks need to "get real" about how they're valuing their problem mortgage-related debt, much as Merrill Lynch has now done. Merrill recently sold a large package of toxic mortgage debt for just 22 cents on the dollar.

Whitney's idea of "real" is pretty drastic. Whereas most banks are estimating 20% to 25% peak-to-trough declines in housing prices, the Case-Shiller housing futures traded on the Chicago Mercantile Exchange portend a much steeper 33% decline, she points out.

In fact, Whitney thinks the actual declines will be worse - closer to 40% - because of the loss of the securitization market and the paucity of mortgage credit available. And that means more defaults: "The consumer's ability to refinance his way out of trouble has diminished greatly."

Whitney's critics, and there are many among bankers and analysts, contend her bearishness at this point shows she simply doesn't now how to measure the remaining downside risk. Her response: If she has no idea how to properly value bank stocks now, it's because the metrics don't work.

Price-to-earnings ratios are useless when earnings are nonexistent. And valuing banks on price-to-book ratios is just as futile. Those book values - which reflect underlying assets and liabilities - are moving targets. "Citibank has lost 50% of its book value since last year," says Whitney, who is married to pro wrestler John Layfield.

"I do not think we are near the end of write-downs," she tells Fortune, "so I continue to see capital levels going lower, capital raises diluting existing shares further, and stocks going lower."  

“Yes, That's $2 Trillion of Debt-Related Losses”
Unfortunately for the rest of us, you have a pretty good track record. How much more misery lies ahead?We are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. A systemic banking crisis will go on for awhile, with hundreds of banks going belly up.

Which banks will fail?
I don't want to name names, but many, given the housing bust, will become insolvent. Their losses are mounting because they have written down only their subprime loans so far. They haven't started writing down most of their consumer-credit losses, and reserves for losses are much less than they should have been. The banks are playing all sorts of accounting gimmicks not to recognize them. There are hundreds of [billions] of dollars outstanding in home-equity loans that eventually could be worth zero, too.

So far, we have seen no recession in the technical sense: two consecutive quarters of negative growth in real GDP. Why not?
The definition of a recession isn't only two consecutive quarters of negative growth. The NBER (National Bureau of Economic Research) puts a lot of emphasis on things like employment, and employment has already fallen for seven months in a row. It also emphasizes income and retail and wholesale sales. Many of these things are declining.

Maybe the recession started in January; if you look at the data on gross domestic product on a monthly basis between February and April, GDP was falling. Saying this is not a recession is just a joke. Maybe instead of a 'U' recession and recovery, it will be a 'W,' with a rebound in the second quarter. But by the third quarter, the effect of the government's tax rebates is totally gone, because other forces on the consumer are more persistent and negative.

Which forces, for instance?
The U.S. consumer is shopped out and saving less. Debt to disposable income has risen to 140% from 100% in 2000. Hit by falling home prices, the consumer no longer can use his house as an ATM machine. The stock market is falling and (issuance of) home-equity loans (has) collapsed. We have a credit crunch in mortgages, and gas is around $4 a gallon.

Everyone says, 'yeah, that's true, but as long as there is job generation there is going to be income generation and people are going to spend.' But for seven months in a row, employment in the private sector has fallen.The most worrisome thing is that in spite of the rebates, retail sales in June were up only 0.1%. In real terms, they were down. If people were not spending their rebate checks in June, what will happen when there are no more checks?

The Fed's performance has been poor. More than a year ago the Fed said the housing slump would end, but it hasn't. They kept repeating this was a subprime-debt problem only, whereas the problems of excessive credit involve subprime, near-prime, prime, commercial real estate, credit cards, auto loans, student loans, home-equity loans, leveraged loans, muni bonds, corporate loans -- you name it.

The Fed's other mistake was to believe the collapse of the housing market would have no effect on the rest of the economy, when housing accounted for a third of all job creation in the past few years. When the proverbial stuff started to hit the fan last summer, the Fed went into aggressive-easing mode. But it has always been kind of catching up.

What should Bernanke have done a year ago, or even prior to that?
The damage was done earlier, beginning when the Greenspan Fed lowered interest rates in 2001 after the bust of the technology bubble, and kept them too low for too long. They kept cutting the federal funds rate all the way to 1% through 2004, and then raised it gradually instead of quickly. This fed the credit and housing bubble.

Also, the Fed and other regulators took a reckless approach to regulating the financial sector. It was the laissez-faire approach of the Bush administration, and (tantamount to) self-regulation, which really means no regulation and a lack of market discipline. The banks' and brokers' risk-management models didn't make sense because no one listens to the risk managers in good times. As Chuck Prince (the deposed CEO of Citigroup) said, 'when the music plays you have to dance.'

Now the regulators are attempting to make up for lost time. What do you think of their efforts?
The paradox is they're going to the opposite pole. They are overregulating, bailing out troubled participants and intervening in every market. The Securities and Exchange Commission has accused others of trying to manipulate stocks, but the government itself is now the manipulator.

The regulators should investigate themselves for bailing out Fannie Mae and Freddie Mac, the creditors of Bear Stearns and the financial system with new lending facilities. They have swapped U.S. Treasury bonds for toxic securities. It is privatizing the gains and profits, and socializing the losses, as usual. This is socialism for Wall Street and the rich.

So the government should have let Bear Stearns fail, not to mention Fannie and Freddie?
If you let Bear Stearns fail you can have a run on the entire banking system. But there are ways to manage Bear or Fannie and Freddie in a fairer way. If public money is to be put at stake, first all the shareholders of these companies have to be wiped out. Management has to be wiped out, and the creditors of Bear should have taken a hit. Why did the Fed buy $29 billion of the most toxic securities, and essentially bail out JPMorgan Chase, which bought Bear Stearns?

Because JPMorgan was a counter-party?
Exactly. The government bailed out everyone. Even the unsecured creditors of Fannie and Freddie should have taken a hit. Sometimes it is necessary to use public money to rescue institutions, but you do it in a way in which you're not bailing out those who made the mistakes. In each one of these episodes the government bailed out the shareholders, the bondholders and to some degree, management.

At what point does the government run out of money to lend to troubled banks?
Many public institutions are themselves going bankrupt. The FDIC (Federal Deposit Insurance Corporation) has only $53 billion of funds, and has already committed almost 15% of it to bail out depositors of IndyMac. The FDIC's deposit-insurance premiums weren't high enough, and now it is asking Congress to raise them. Plus, the agency claims only [ninety] institutions are on its watch list. IndyMac wasn't on the watch list until June, the month before it collapsed.

Studies done by experts in banking suggest that at least 8% of U.S. banks are in big trouble. Eight percent of the roughly 8,500 that the FDIC essentially is insuring equals about 700 banks. Another 8% to 16% also are shaky, so some 700 potentially are going bust and another 700 eventually could join them. Yet the FDIC is watching only [ninety] institutions. It's a joke.

What recourse will the taxpayer have?
The taxpayer's bill is going to be huge. I estimate this financial crisis will lead to credit losses of at least $1 trillion and most likely closer to $2 trillion. When I made this analysis in February everybody thought I was a lunatic. But a few weeks later the International Monetary Fund came out with an estimate of $945 billion, Goldman Sachs estimated $1.1 trillion and UBS $1 trillion.

Hedge-fund manager John Paulson recently estimated the losses would be $1.3 trillion, and late last month Bridgewater Associates came up with an estimate of $1.6 trillion. So, at this point $1 trillion isn't a ceiling, it's a floor. And the banks, as I've said, have written down only about $300 billion of subprime debt.

How long will it take for the collapse in the banking sector to play out?
It is happening in real time. Many smaller banks are going bust already. More than 200 subprime-mortgage lenders have gone bust in the past year alone. And many community banks will go bankrupt. Community banks usually finance everything: the homes, the stores, the downtown, the commercial real estate, the shopping center.

If you are in a town or a municipality where there is a housing bust, the bank is gone. Of three dozen or so medium-sized regional banks, a good third are in distress. That includes the Wachovias and Washington Mutuals of the world. Half of this group might go bankrupt. Even some of the majors could end up technically insolvent, though they might be deemed too big to fail.

Take Citigroup. In 1991 there was a small real-estate bust, though the quarterly fall in home prices was only 4%, based on the S&P/Case-Shiller indices. Citi was effectively bankrupt and signed a memorandum of understanding with the Fed that allowed the government to give the bank regulatory forbearance.

Citi was allowed to ride it out and try to recapitalize in a few years, and thereby avoid bankruptcy protection. This time around the S&P/Case-Shiller indices indicate home prices already have fallen 18%. The decline could be as much as 30%, because the excess supply is huge.

The economic sick list is lengthening
Deutsche Bank has called the top of the commodity cycle. The uber-bulls of the oil, food and metals boom have advised clients to take profits before the downturn engulfing most of the global economy works its inevitable effects.

Oil will slide back towards its "marginal production cost" of $60 to $80 a barrel; gold will slump to $650 an ounce as the dollar recovers against the euro; copper, lead and tin will slowly halve in price; grains will calm down as harvests in Australia and the Eurasian Steppe return to normal.

The report comes on cue. The CRB commodity index fell 10pc last month, the steepest one-month drop since the onset of the Volcker crunch in 1980. Most raw materials have been slipping for months. Crude was the last to turn after peaking at $147 early last month.

Deutsche Bank says this year's oil surge has been a quirk. Misjudging demand, Saudi Arabia cut output by 400,000 barrels a day (bpd). Several upsets hit the non-Opec bloc of Russia, Norway, the UK, and Mexico. Rebels caused mayhem in Nigeria.

Global supply is now creeping back into surplus. The Saudis are adding 500,000 bpd. Deepwater projects are coming on stream off the US, Mexico, China, and Africa. The Caspian is cranking up a gear. Non-Opec will add 2.2m bpd over this year and next, says the International Energy Agency.

"Demand destruction" has reached tipping point. Americans drove 3.7pc fewer miles in May, year-on-year. Thirteen hybrid car models went on sale in the US last year, exploiting the new lithium ion battery technology.

China, India, and rising Asia - the chief victims of the oil spike, with energy use per unit of GDP four times Western levels - have begun to cut fuel subsidies. The IEA said this alone would trim demand by 100,000 bpd.

Above all, the economic sick list is lengthening. Japan's industrial output fell 2pc in June; petrol sales slumped 8.9pc. China's purchasing managers' index (CLSA) fell below 50 in July. If this turns out to be accurate, manufacturing output is now contracting in China. The closure of Beijing's smokestacks before the Olympics may have contributed, but slumping export orders led the slide.

Mingchun Sun, Lehman Bros' China expert, says the country is at risk of a "vicious circle" as crumbling asset prices combine with tight credit, a strong yuan, and the global downturn. As of May, property prices had fallen by 19pc from their peaks in Guangzhou, 9.5pc in Beijing, and 9.4pc in Shenzen. They are still falling.

Indeed, China's house price upset may soon match the Anglo-Saxon, Baltic, and Club Med debacles. The entire economic system of the North Atlantic is now in or near recession. European Central Bank insiders are saying the eurozone may have contracted in the second quarter. Europe's credit crunch is getting worse, not better.

The benchmark cost of money - Euribor - reached a record 5.4pc last week, if you can get it. Distressed banks are trimming overdraft lines. The delayed effects of the super-euro are starting to hit as currency hedges run out. "Headwinds are combining to deliver a perfect storm," said BNP Paribas.

French confidence is at a 21-year low. Spanish car registrations have fallen for five months, dropping 31pc in June and 27pc in July. Daimler, BMW, Renault and Michelin have issued dire profit warnings. Berlin says Germany's economy is now shrinking.

By raising rates last month, the ECB may have ensured a very hard landing in Europe. Yes, oil and food price rises have pushed headline inflation to 4.1pc, but core inflation has fallen from 1.9pc to 1.8pc over the past year. ECB chief Jean-Claude Trichet warns of a 1970s wage-price spiral.

So does Tim Besley, the ultra-hawk on the UK's Monetary Policy Committee. "As history has shown, perhaps if a little more was done in the 1970s - or even a lot more - we may have avoided many of the issues that we faced for almost 20 years.

Once inflation gets significantly out of control, it's extremely difficult to bring it back," Prof Besley told The Daily Telegraph. Yet, history has shown vividly that, if central banks over-tighten into a downturn in a highly indebted economy, they risk setting off a deflation spiral even harder to "bring back".

The household debt burden is much higher than in the early 1970s. Half the world economy is leveraged to a bursting property bubble. Real wages are falling across the OECD. The biggest single threat to global stability today is that policymakers misread their historic parallels.

For commodity perma-bulls, the slowdown hardly matters. This is a supply story. Oil companies have been unable to raise output for four years. As the oil crunch spills over into food, 30pc of the US corn harvest is being switched to biofuels. Some 26pc of the copper that ever existed in the Earth's crust has been lost, according to a Princeton study. We are exhausting our patrimony of resources.

I have much sympathy for this view. Asia's industrial revolutions are obviously a game-changer. The term "commodity super-cycle" does not do it justice. We are living through a step-change into an era of permanent shortage. Right now, a gently rising supply of commodities is colliding head on with a manufacturing recession and a global building bust of majestic proportions. Bonds beckon.

Coming Soon: A Central Clearing House for Credit Derivatives
As reported at the Financial Times and the WSJ, discussions have progressed to the point that larger banks and dealers should have a central clearing house for credit derivatives by later this fall. The market for credit derivatives is currently near $62 trillion in notional value after being less than $5 trillion as little as five years ago.

The goal of the clearinghouse will be to reduce the systemic risk that results from inefficient trading and uncertain counterparty exposure, both of which have increased as the market expanded. Automated trade-matching and electronic processing in other OTC derivatives market was also discussed.

Credit derivatives in particular have caused concern as their rapid grown has made it more difficult to both track and measure the exact level of exposure being taken.

Recent credit problems have highlighted the need to better understand counterparty exposure. A central clearing house for credit derivatives should help in this area given that the clearing house will take the risk of a market participant's failure.

Any failure would then be absorbed by the clearing house members, reducing the need for the Federal Reserve or Treasury to get involved, and possibly preventing the type of failure that was experienced with Bear Stearns. Like other clearing houses, trades are also likely to be better scrutinized when made, such as making sure that margin requirements are enforced and trades are verified and recorded.

To date, the levels of electronic derivative trading in the various markets has been mixed. Currently, about 90% of credit derivatives are traded electronically. The interest-rate derivatives market, which is larger and potentially more worrisome, has also increased electronic trading and now sits at about half of all trades.

Equity derivatives trading is bringing up the rear with only about one quarter of all trades executed electronically. Depending on the success of the credit derivative clearing house, plans could be expanded to also include the equity and interest rate markets.

One current hitch for the credit derivative clearing house is the need to make sure that the entire CDS market is integrated and electronic. To facilitate the move, dealers have agreed to reduce the total value of outstanding CDS trades, and to help sort out corporate defaults by incorporating a cash settlement mechanism into CDS documentation. Of note is that the market in many cases would still be private, but more centralized.

Although the details of the clearing house are still being worked out, such as what exactly the dealers and exchanges will control, any move is certain to benefit the exchanges as they will now have a direct link to the lucrative CDS market, while the large investment banks that currently control the credit derivative market will need to start sharing some of the billions of dollars of revenue.

For some banks, this line of revenue has been significant. Companies that may be positively impacted include the CME Group and NYSE Euronext. Investment banks that may be negatively impacted, at least with regard to losing some of their current credit derivative revenue stream, include Deutsche Bank, Goldman Sachs, and Morgan Stanley.

Planned US job cuts up 141%
The nation's employers continue to put jobs on the chopping block at a steep rate as the economy struggles, according to a new report.

Challenger, Gray & Christmas, an outplacement consultancy firm, said Monday that planned job cuts announced by employers in July jumped 26% to 103,312 from 81,755 announced in June. That's up 141% from a year ago, when employers announced planned job cuts totaling 42,897.

The July figure marks the second-highest number of planned job cuts this year, rivaling the May reading that showed 103,522. "We have seen job cuts increase in the majority of industries that we track," John Challenger, chief executive of Challenger, Gray & Christmas, said in a statement.

Monday's report indicates that the downturn in the housing and financial sectors, "has spread throughout much of the economy," Challenger said. Indeed, the report showed job cuts in the works increasing from a year ago in 17 of the 25 industries tracked by Challenger.

Employers in the transportation industry announced the largest number job cuts on the horizon, at 17,051 for the month. Planned job cuts in the transportation sector were dominated by airlines, which have struggled with soaring fuel costs and declining ticket sales due to softening consumer confidence, according to Challenger.

Transportation was followed by the financial services sector, where employers announced 15,517 job cuts on the block. Financial firms remained led the year, having already announced 100,775 planned layoffs through July, the report showed. Employers in the retail and automotive industries also ranked high on the list.

The Challenger report follows a Labor Department report Friday that showed the nation's unemployment rate climbing to a four-year high of 5.7%. It was the worst reading since March 2004, and slightly worse than economists' forecast of 5.6%.

But there was a bright spot in the government's report. The economy lost 51,000 jobs lost in July, which was much lower than the 75,000 loss that economists had expected.  

US junk-bond defaults to quadruple
Defaults on American corporate junk bonds could more than quadruple in the next year as the declining economy in the United States severely restricts companies' ability to repay their debts, the Standard & Poor's ratings agency has said.

The rate of default on America's risky junk, or high-yield, corporate bonds jumped from a 25-year low of 0.97 per cent in December to 1.92 per cent at the end of June.

However, S&P said that it expected the figure to rise to 4.9 per cent by mid- 2009 and conceded that defaults could rise as high as 8.5 per cent. By contrast, there have been no defaults on European corporate bonds in the past year, according to S&P's new report.

A default on the debt usually leads to bankruptcy and means that bondholders lose some or all of the money they are owed. Diane Vazza, head of global fixed-income research for S&P, said: “Things are going to get much worse yet. The situation in Europe will follow the US.”

The increase in US corporate bond defaults has been accompanied by a rise in the number of household names whose bonds are slipping from relatively safe investment-grade status to junk. In the past 18 months, these have included BAA, the airports operator, and Emap, the media group.

Meanwhile, other companies that may have already been junk-rated have fallen farther down the ladder. General Motors, Ford and Chrysler have each had their credit ratings lowered a notch by S&P, to B-, putting them six steps below investment grade.
S&P says that 118 corporate bonds, with a combined value of $110.5 billion, face default. This compares with 78 at the end of 2007 and 64 a year ago.

Ilargi: What should have been a routine roll-over of obligations turned into a wrestling match, where the part that was refinanced holds much higher interest rates, and 20% simply failed to be done.

The Wall Street Journal states: "The refinancing was critical..." So that’s bad news for Chrysler, right? Well, not so fast, that’s just in this universe. In the parallel one where Chrysler resides, the view looks like this, in the words of Tom Gilman, executive vice chairman at Chrysler Financial: "We are pleased with the completion of our credit-facilities renewal and the continuing confidence in our company demonstrated by the banking community".

It’s just how you look at it. And from where.

Chrysler Finance Unit Fails to Renew $6 Billion of its Funding
In another blow to Detroit and the auto-finance industry, Chrysler Financial was unable to renew all of $30 billion in short-term debt after a month of high-strung negotiations with 22 banks, coming up $6 billion short.

The refinancing was critical; it amounted to nearly half of the $70 billion in working capital of the finance unit of Chrysler LLC and was used to help fund car leases, retail car loans and loans to dealers called floor-plan loans.

The firm will also be stung by the high cost of funds. When they were raised a year ago the interest rate on different pieces of the $30 billion funding ranged from 0.3 percentage point to half a percentage point above the London interbank offered rate. The $24 billion it raised came in at 1.1 to 2.25 percentage points above Libor, making it harder for Chrysler to offer cars to consumers at attractive terms.

Bankers and credit analysts say that the funds allow the financial unit, owned by Cerberus Capital Management, to fund six to eight months of retail loan originations. It funds loan programs to dealers through next year.

Chrysler, like Ford Motor Co. and General Motors Corp., has been hurt by high gas prices that have driven consumers away from sport-utility vehicles and trucks -- and hurt the resale value of leased cars. Chrysler recently stopped leasing cars to customers; other auto makers have scaled back.

Bankers at J.P. Morgan Chase & Co., Citigroup Inc. and Royal Bank of Scotland PLC worked unsuccessfully over the final days of last week to persuade two holdouts, Bank of America Corp. and Calyon, a unit of Credit Agricole SA of France, to renew $1 billion and $2 billion commitments, respectively. The negotiations drew senior executives at the banks.

"We are pleased with the completion of our credit-facilities renewal and the continuing confidence in our company demonstrated by the banking community," said Tom Gilman, executive vice chairman-Chrysler Financial. Bank of America, which surprised bankers by opting out, is engrossed in other auto-finance issues.

It was one of the lead banks involved in restructuring the financing package for GMAC, the lending arm of General Motors, which is 51% owned by Cerberus. Cerberus said it is "pleased that the capital markets have responded so positively to the opportunity to renew the conduit [credit facility]. Although this annual renewal is an ordinary course event, the unprecedented challenges currently in the capital markets make any such event more difficult." 

Fannie and Freddie own 44 percent of foreclosed homes
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, Mich. So broker Raymond Megie, who is handling the foreclosure sale, advised cutting the price to $5,000. He still couldn't sell it. "There's oversupply," Megie said.

As home prices decline, unsold properties are a problem for creditors like Fannie Mae because taxes, insurance and repairs drain their cash. Fannie Mae acquired twice as many homes through foreclosure as it sold in the first quarter, regulatory filings show, and late payments on its home loans—a harbinger of foreclosures—almost doubled in the past year.

"Progress on this is probably one of, if not the single most important economic process right now," said Moshe Orenbuch, managing director of equity research at Credit Suisse Group AG in New York. "With prices decreasing, it's better to get rid of houses quickly." Fannie Mae's stock lost half its value in seven weeks and the glut of unsold properties may weigh on it further, Orenbuch said. .

Fannie Mae and Freddie Mac, the country's second-biggest mortgage finance company, together 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.

"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, a vice president at the company. "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. 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.

Fannie Mae contracts with up to 5,000 real estate agents to manage and sell the houses, Harrison said. Shares of Fannie Mae and Freddie Mac plunged on July 7, pushing Fannie Mae to its lowest in 16 years, after Lehman Brothers analysts said an accounting change may force them to raise a combined $75 billion.

Both companies were chartered by Congress and bundle home loans into securities to sell to investors and use cash from the sales to fund mortgage lenders. Together, they own or guarantee about half of the $12 trillion of mortgages in the U.S.

The home on Prospect Street in Flint needs a new roof and carpeting and the plumbing has been ripped out, said Megie, a broker with Realty Executive Main Street LLC in Lapeer, Michigan, who sells Fannie Mae-owned homes. The house, which sold in 2005 for $110,000, was originally listed for sale in April, he said.

"Two years ago I didn't have any Fannie Mae properties and now it's probably pushing 50 percent of what I have listed," Megie said.

US Housing Lenders Fear Bigger Wave of Loan Defaults
The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.

Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

The mortgage troubles have been exacerbated by an economy that is still struggling. Reports last week showed another drop in home prices, slower-than-expected economic growth and a huge loss at General Motors. On Friday, the Labor Department reported that the unemployment rate in July climbed to a four-year high.

While it is difficult to draw precise parallels among various segments of the mortgage market, the arc of the crisis in subprime loans suggests that the problems in the broader market may not peak for another year or two, analysts said.

Defaults are likely to accelerate because many homeowners’ monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks tighten their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are “alt-A” loans, many of which were made to people with good credit scores without proof of their income or assets.

“Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”

In a conference call with analysts last month, James Dimon, the chairman and chief executive of JPMorgan Chase, said he expected losses on prime loans at his bank to triple in the coming months and described the outlook for them as “terrible.”

Delinquencies on mortgages tend to peak three to five years after loans are made, said Mark Fleming, the chief economist at First American CoreLogic, a research firm. Not surprisingly, subprime loans from 2005 appear closer to the end of defaults than those made in 2007, for which default rates continue to rise steeply.

“We will hit those points in a few years, and that will help in many ways,” Mr. Fleming said, referring to the loans made later in the housing boom. “We just have to survive through this part of the cycle.”

Data on securities backed by subprime mortgages show that 8.41 percent of loans from 2005 were delinquent by 90 days or more or in foreclosure in June, up from 8.35 percent in May, according to CreditSights, a research firm with offices in New York and London. By contrast, 16.6 percent of 2007 loans were troubled in June, up from 15.8 percent.

Some of that reflects basic math. Over the years, some loans will be paid off as homeowners sell or refinance, and some homes will be foreclosed upon and sold. That reduces the number of loans from those earlier years that could default.

Also, since the credit market seized up last year, lenders have become much more conservative and have stopped making most subprime loans and cut back on many other popular mortgages.

The resetting of rates on adjustable mortgages, which was a big fear of many analysts in 2006 and 2007, has become less problematic because the short-term interest rates to which many of those loans are tied have fallen significantly as the Federal Reserve has lowered rates. The recent federal tax rebates and efforts to modify more loans have also helped somewhat, analysts say.

What will sting borrowers more than rising interest rates, analysts say, is having to pay interest and principal every month after spending several years paying only interest or sometimes even less than that. Such loan terms were popular during the boom with alt-A and prime borrowers and appeared appealing while home prices were rising and interest rates were low.

But now, some borrowers could see their payments jump 50 percent or more, and they may not be able to sell their properties for as much as they owe.

Northern Rock customers are going underwater
Northern Rock, the state-owned bank, will reveal this week that roughly one in five of its mortgage customers faces negative equity next year as it unveils a substantial loss for the six months to June.

The number of customers whose mortgage debt is bigger than the amount they can recover from selling their property raises the deeply uncomfortable prospect of the Government repossessing people's homes. About 140,000 homes could be at risk - many of them in Labour's North-East heartland, where Northern Rock was the dominant player.

About 5pc of the nationalised lender's mortgage book is already thought to be in negative equity, reflecting Northern Rock's aggressive tactics of lending up to 125pc of the value of a home in its last years as a private company.

Another 15pc is expected to have been lent to households with less than 10pc equity in their homes. That equity will be rapidly whittled away next year as house prices tumble. HBOS, the country's biggest mortgage lender, last week predicted that house prices will fall 15pc-20pc by the end of 2009.

On those forecasts, almost £20bn of Northern Rock's £90bn loan book will be in negative equity by the end of next year, making it difficult for those customers to remortgage with another bank. At the end of 2007, Northern Rock had 2,215 homes in possession - just 0.29pc of its 730,000 customers.

Since then, problem loans have risen. By the end of December, 0.57pc of the mortgage book was three months or more in arrears. By the end of April, that was 0.95pc. Chairman Ron Sandler said in May the figure will "move much closer to the industry average... in the coming months".

The Council of Mortgage Lenders' average is 1.34pc. Further raising the prospect of repossession, the bank recently introduced a "policy of rapid movement towards recovery where it is clear the borrower will not maintain payments and where we have higher risk".

Credit rating agency Standard & Poor's last week predicted that as many as 1.7m UK households could be in negative equity if house prices drop a further 17pc by the end of next year. Northern Rock will post a sharp loss as a result of the deteriorating housing market and further writedowns on its structured credit assets when it reports its half-year results early this week, as expected.

Mr Sandler has already warned that Northern Rock this year will be "significantly loss-making ". The bank will have some good news for the taxpayer. Its loan from the Bank of England, which stood at £24.1bn in March, will have been reduced to just over £19bn. The bank is also expected to have reduced its loan portfolio by at least £5bn to about £93bn since the end of December.

Mr Sandler has set a target of paying off the Bank loan by 2010 and releasing the Government from its further £75bn of guarantees the following year, which it plans to achieve by halving the balance sheet to £50bn-£55bn.

HSBC profit falls 28% as bad debt rises $10 billion
HSBC today abandoned offering car loans to poor and credit-impaired Americans as it revealed the credit crisis wiped a further $10.1 billion (£5.1 billion) from its profits. Britain's biggest bank posted a 28 per cent slide in first half pre-tax profits to $10.2 billion and said it planned to put its $13 billion US car finance operation into orderly run-off.

HSBC declined to say whether the losses from its disastrous push into lending to poorer Americans had definitely peaked, but the latest half year provision of $6.8 billion for US consumer finance, up 85 per cent up on the first half of last year, was down 15 per cent from the second half.

The bank said bad debts in the auto finance arm were actually down in the first half, but that the division did not have sufficient critical mass or pricing power, "So we will not be originating further loans." After scaling back mortgage lending and now auto finance, the US consumer finance business is now focused on credit cards and personal loans.

HSBC aggressively pushed into lending to people with impaired credit records in the US with the £9 billion acquisition of Household International in 2003. Today, it wrote down the value of that purchase by a further $527 million. HSBC also wrote down an additional $3.9 billion on credit trading, exposures to monoline insurers and leveraged buy-out debt in the first half, sending profits in its global banking and markets division 35 per cent lower.

Profits in Europe, which includes the core UK high-street bank, were up 51 per cent to $5.2 billion and they also rose in all regions except North America. HSBC chairman, Stephen Green, described financial markets as "the most difficult for several decades" and warned that the global economy could get worse before it got better. "HSBC was not immune from the turmoil," he said, though he rated the overall performance as resilient.

The outlook was challenging, he said, but he expected activity in the bank's emerging markets heartlands to hold up reasonably well. HSBC, because of its strong balance sheet, had the opportunity to deploy capital when rivals were constrained. Traders gave the figures a lukewarm reception, marking the shares 14.5p lower to 822.5p.

A second interim dividend was set at 18 cents. Together with the first interim dividend, the pay-out is up 6 per cent on the first half of 2007. Michael Geoghegan, chief executive at HSBC, said the bank met its targets on cost efficiency, total shareholder return and capital strength.

It missed its total shareholders' equity target of 15-19 per cent, achieving only 12.1 per cent, "but we would expect that in these difficult times," he said. Mr Geoghegan said that 80 per cent of the $13 billion US auto loan portfolio would be run off within three years. The US mortgage book was reduced by 13 per cent to $31 billion during the half year.

Ahead of the figures, analysts had forecast pre-tax profits between $8.9 billion and $11.7 billion, down from $14.2 billion last time. HSBC had already taken $15.4 billion of provisions in the past 15 months. It also emerged today that HSBC is pushing for a cut in the $6.3 billion price it agreed to pay for control of Korean Exchange Bank.

Sources close to the proposed deal confirmed HSBC was attempting to renegotiate the purchase price after a July 31 deal deadline expired with no approval from the South Korean Government. HSBC first struck a deal to buy a 51 per cent stake in KEB last September from Lone Star, the US private equity group, but the transaction has been plagued by regulatory problems.

The passing of last Thursday's deadline with no approval from the Korean Financial Services Commission leaves HSBC and Lone Star each free to walk away. HSBC said it was discussing with Lone Star how the transaction might be taken forward. It said it had not terminated the acquisition agreement and had not received notice of termination from Lone Star.

However, HSBC is understood to want to wrest a significant cut in the purchase price to reflect the deterioration in conditions in the banking sector over the last 11 months. KEB shares have fallen around 13 per cent since last September, including a 3 per cent drop in trading today.

The proposed KEB acquisition would give HSBC a major foothold in Asia's fourth biggest economy and demonstrate its commitment to returning to its emerging markets roots.

UK construction hits new low
Activity in the construction sector slumped to a record low during July as conditions in the housing market continued to deteriorate, raising fears that Britain is edging closer to a recession.

According to the Construction Managers' Index, which measures trends in the housing, commercial and civil engineering sectors, activity in the industry fell for the fifth month in a row to a reading of 36.7 — the lowest figure since the series began in 1997.

The index first fell below 50, which indicates that the sector is contracting, rather than growing, in March. The residential housing sector was the worst affected with the index of activity in this area falling for the eight month to a new low of 18.7 in July, down from 25.6 in June.

The commercial property sector also contined to decline, falling from 41.1 in June to 38.2 in July. Only civil engineering showed any growth, rising to 46.5, up from 40. However, the general outlook for the coming months is set to worsen further, with new orders falling from 43.5 in June to a reading of 41.

The construction sector shrank by 0.7 per cent in the second quarter of the year, according to official data released two weeks ago, and these figures suggest that the sector could fall even more sharply during the rest of the year. Construction accounts for about 6 per cent of the economy, but analyts said that, despite its modest size, the rapid deterioration in the sector does not bode well for the economy, particularly following poor manufacturing figures last week.

Howard Archer, chief UK and European economist at Global Insight: "There can be little doubt that the construction sector is now firmly in recession. "This reinforces our belief that the overall economy is more likely than not to contract in the second half of 2008."

Economists forecast that figures out tomorrow inidicating the health of services companies, which range from banks to cafes and make the biggest contribution of 74.4 per cent to the UK economy, will also show that activity is slowing rapidly. Widescale job cuts in the housing sector were reflected in today's figures, with the employment index falling to 45.6 in July, down from 47.8 the previous month.

Construction companies have been among the hardest hit by the rising cost of materials and the seizure in the mortgage market. The figures were released just three days before the Bank of England's Monetary Policy Committee (MPC) is due to announce its decision on interest rates.

The current cost of borrowing is 5 per cent, and the MPC is widely expected to keep rates unchanged. However, a few commentators have suggested that the MPC may move to stem rising inflation, currently at 3.8 per cent and well above the Government's 2 per cent target, by announcing a quarter-point rise to 5.25 per cent.

Household budgets remain under pressure and last week, Centrica, which owns British Gas, shocked the country by announcing a 35 per cent rise to gas bills, following double-digit price rises by EDF. The battle to control inflation is also being played out in continental Europe where soaring energy costs forced producer prices to rise at a record rate in June.

It is a blow to the European Central Bank (ECB), which is also due to make its monthly interest rate decision this week.
Prices at factory gates in the 15 countries in the eurozone rose by 0.9 per cent in June, pushing the annual increase to 8 per cent, said Eurostat, the European Union statistics office. It is the highest annual increase since the series began in 1991.

Mr Archer said that this gloomy news could force the ECB to increase rates to 4.5 per cent. "Clearly, a further interest rate hike is a real possibility and the ECB is very likely to keep talking tough on inflation following this Thursday's policy meeting."

Manufacturers' gloom stretches across UK
Confidence among manufacturers has fallen in every region of the UK as companies struggle with the soaring cost of raw materials, a CBI survey shows.

The index of business optimism slipped to minus 40 in the three months to July, the weakest figure since 2001, but a regional breakdown out today shows that the gloom is more intense in Yorkshire and the Humber, the North West, the West Midlands and London and the South East.

About 70 per cent more companies in the North West reported a fall rather than a rise in optimism for the coming months, while a balance of 67 per cent of companies in the West Midlands expected conditions to worsen.

The outlook among companies in Yorkshire and the Humber and London and the South East was only marginally less gloomy, with a respective balance of 62 per cent and 53 per cent more companies predicting that conditions would deteriorate. Manufacturers in Northern Ireland were the least pessimistic, with only 6 per cent more reporting a fall in optimism rather than a rise.

Lai Wah Co, the CBI’s head of economic analysis, said: “Manufacturing confidence has tumbled over the past quarter. The climb in oil and other raw material prices over recent months has driven costs up significantly. Although firms are having some success in passing these costs on, profit margins are under pressure.”

All regions felt the impact of spiralling oil prices, reporting increases in input prices. The rise in unit costs across the UK in the three months to July was the steepest since the survey began in 1988, with companies in Yorkshire and the Humber, the North West and Scotland reporting that this increase was the sharpest they had experienced.

The outlook for employment among manufacturers is also gloomy, with companies in most regions expecting significant falls in employment in the coming months. The East Midlands is the only region where staffing is expected to increase.

This came as a new survey showed that fears about the UK jobs market intensified in July. About 57 per cent more people said that employment prospects were worse now than 12 months ago, up from 45 per cent in June, according to the Lloyds TSB Consumer Barometer. This is the lowest figure since the survey began in 2004.

Job security also fell to a record low, with 17 per cent of workers feeling less secure rather than more secure, up from 14 per cent in June. Trevor Williams, the chief economist for Lloyds TSB Corporate Markets, said: “The combination of falling employment confidence and rising inflation expectations is a lethal cocktail for consumer spending.”

Ilargi: First part of a long article on Cayne and Bear Stearns.

The rise and fall of Jimmy Cayne
Last summer he was worth $1.6 billion on paper. Then he nearly died and Bear Stearns collapsed.

In the early morning hours last Sept. 11, a black Town Car pulled up to the entrance of New York-Presbyterian Hospital in Manhattan. Inside the sedan Jimmy Cayne, the CEO of Bear Stearns, was close to death. At dawn Cayne's wife had placed an emergency call to his physician, Dr. Jay Meltzer, and when Meltzer arrived at the couple's Park Avenue apartment, Cayne, then 73, was drowsy and desperately weak and had no appetite.

His blood pressure was dangerously low. He was breathing very rapidly and deeply. Meltzer suspected sepsis. Rather than call an ambulance, Cayne asked for a car, in part because he feared that a public disclosure about his health could further damage the firm - a firm whose stock price had already dropped close to 27% (from $143 to $105 a share) since two of its highly leveraged hedge funds had imploded in June.

Once he arrived at the hospital, doctors discovered that the infection was in the prostate, which meant that his chances of survival were about fifty-fifty. They pumped him with 22 gallons of saline and antibiotics and inserted a Foley catheter. He would try to sleep, wake up refreshed, and discover that he had been out for all of 17 minutes. He was in the hospital for the next ten days and shed some 30 pounds.

Cayne survived, but Bear Stearns would not. Six months later a panic among the firm's trading partners, lenders, and customers prompted the Federal Reserve and the U.S. Treasury to step in and negotiate its emergency sale to J.P. Morgan Chase, which acquired it for the fire-sale price of $10 a share on May 30. The 85-year-old firm's demise cost Cayne $1 billion - trimming his net worth to around $600 million.

It also marked the end of an era on Wall Street, for Cayne is typical of the breed of street-smart salesmen who elbowed their way to the top of brokerage houses back when those institutions were still private partnerships. He had not changed; the world around him had.

During his almost 40 years at the firm (the last 15 as CEO), Bear Stearns went from making its money with bread-and-butter businesses - trading securities and acting as the back office for other Wall Street firms - to a publicly traded financial supermarket that was increasingly inflating its balance sheet with exotic securities.

Once a fiscally conservative brokerage, Bear had become a house of cards. Worse, its leaders did not fully appreciate how vulnerable they had made themselves by using a disproportionate amount of money borrowed cheaply in the overnight-financing markets to fund the firm's day-to-day operations.

Through it all, Cayne remained the same raffish scrap-metal salesman who left behind a broken marriage in Chicago and arrived in Manhattan in 1964 with the sole ambition of becoming a professional bridge player. Once in New York, he was able to finesse relationships he made at the card table to become a power-house on Wall Street.

But by the summer of 2007 this creature of instinct was out of his element. He did not know how to deal with the devaluation of the firm's mortgage-backed securities and other illiquid assets. Nor did he know what to do after the situation worsened when two hedge funds that contained those same toxic assets collapsed and further poisoned the company's balance sheet.

"That was a period of not seeing the light at the end of the tunnel," he told Fortune recently. "It was not knowing what to do. It's not being able to make a definitive decision one way or the other, because I just couldn't tell you what was going to happen."

As a result, his career at Bear Stearns ended with his legacy in tatters. He alone among the very top men at "the Bear" (as insiders called the firm) has not been offered a face-saving senior-level job at J.P. Morgan Chase (although Cayne claims it is because he is retired).

Alan "Ace" Greenberg, 80, who preceded Cayne as CEO, is now vice chairman emeritus at the merged firm and gets to keep 40% of any trading commissions he generates. Alan Schwartz, 57, who took over as CEO when Cayne stepped down in January, was offered a senior investment-banking post there (instead, he is planning to leave the firm at the end of August).

Not Cayne. Perhaps unfairly, he will probably go down in the annals of finance as the Nero of the credit crisis. Instead of fiddling while Bear Stearns burned, his detractors say he was golfing a little too regularly at the Hollywood Golf Club in Deal, N.J., and playing championship-level bridge in Nashville, San Francisco, and Detroit.

Many Bear Stearns employees, who watched their retirement savings and children's college money vaporize last winter, revile Cayne. "It's just incredible to me that this could happen to the fifth-largest securities firm in the United States," says Alex Manos, who started working in the firm's Brooklyn back office not long after emigrating from Haiti in 1970.

He watched his nest egg shrink from $325,693 to $19,000. "The firm always had a good reputation. Ace Greenberg was all about that. He always said he would rather make $2 a day than risk losing more. Then this turkey," he says, referring to Cayne, "chose not to do that and put all his eggs in one basket".

The cases against Bear Stearns
More than 20 separate lawsuits - many since consolidated - have been filed against Bear Stearns, its board of directors and management.

Some of the plaintiffs are ex-employees, like Alex Manos, a 27-year Bear veteran who processed trades at the firm's back-office in Brooklyn. They blame the management and the board for squandering their life savings. Others are from shareholders who believe the same group sold the company too cheaply and under duress.

And several more focus on the managers of the two Bear Stearns-affiliated hedge funds that dissolved in the summer of 2007 and first revealed to the world the extent of the toxicity of the mortgage-backed securities manufactured and sold by Wall Street.

Fortunately for former senior Bear executives like Jimmy Cayne, Alan Greenberg and Alan Schwartz, J.P. Morgan Chase agreed to indemnify Bear's officers and directors for six years against these lawsuits. A rundown of the litigation:

U.S. vs. Ralph Cioffi and Matthew Tannin The feds filed this criminal case - including early morning arrests and the requisite perp walk - on June 18 in Brooklyn. The two Bear Stearns hedge fund managers were charged with securities and wire fraud.

Barclays vs. Cioffi, Tannin and Bear Stearns Barclays Bank lent - and then rapidly lost - $400 million to one of the hedge funds, the awkwardly named Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund. Barclays alleges that "from March 2006 into at least mid-June 2007," the defendants "deceived Barclays through a series of targeted misrepresentations" to obtain the bank's initial loan to the fund and then to secure "a doubling" of its commitment in March 2007.

Bear shareholders vs. Bear The day after the infamous $2-a-share deal between JPMorgan and Bear Stearns, various shareholders filed class action lawsuits against Bear Stearns, its board and executives. The plaintiffs sought to prevent the merger - which closed at the end of May - but they also seek unspecified compensatory damages.

Clients vs. Bear brokers A Beverly Hills billionaire, H. Roger Wang, claimed his Bear broker in Los Angeles encouraged him to buy the company's stock in mid-March - as it was falling - because it must be a great deal. Wang bought 150,000 Bear Stearns shares - at a cost of around $6.5 million. He alleges the firm then improperly sold the stock on March 18 for $6.32 per share, a little less than $950,000.

Former employees vs. Bear A handful of former employees who were investors in the Bear Stearns' Employee Stock Ownership Plan (ESOP) allege that senior Bear executives, among others, breached their fiduciary duties by failing, among other things, to prudently manage the ESOP's investment in Bear stock and inform employees about the risk of that investment.

New York State Of Shock
It has been 33 years since the headline “Ford to City: DROP DEAD” was on the front page of the Daily News, but it has not been forgotten by New Yorkers.

At the time, New York was on the brink of bankruptcy. The city defaulted on some bonds and owed $5 billion. One in five of all city jobs (including police ones) were eventually eliminated. The city closed several firehouses. But Gerald Ford was unhelpful.

Now, because of Wall Street’s ongoing meltdown, another fiscal crisis appears imminent, this time at state level. Costs are rising and revenues are falling fast. In June 2007 the 16 banks that pay the most taxes on their profits remitted $173m to the state treasury.

Last month this dropped to $5m, a 97% decrease. This is a frightening fall given how much the state’s coffers rely on Wall Street taxes: 20% of all state revenues come from financial companies.
David Paterson, New York’s governor, delivered an unprecedented special address on July 29th on his state’s deteriorating fiscal condition.

Pointing out that the economy’s problems are severe and are likely to get worse, he recalled the state legislature for an emergency economic session. He plans to cut state agencies’ spending and to trim the state’s workforce. He is pushing for a cash injection, via new public-private partnerships for state assets.

Mr Paterson’s new budget plan places this year’s state deficit at $6.4 billion, up from an already astronomical $5 billion. In less than 90 days, the projected deficit over the next three years has jumped 22% to $26.2 billion. But Mr Paterson, who promises the government will do more with less, still has to convince the state legislature, which is famously dysfunctional and much too generous with state money.

New York City, however, is in better shape than the state is. It is “as prepared for this downturn as we possibly could be”, according to Mayor Michael Bloomberg, thanks to careful planning, including the creation of a new trust fund to cover health benefits to retirees.

Felix Rohatyn, a banker who helped navigate New York out of its 1970s crisis, thinks that the city should be able to deal with its current problems because of measures put in place then, like the Financial Control Board created to oversee budgets.

But even so the city, which is also heavily reliant on Wall Street for revenue, is facing budget shortfalls. It, too, has seen revenues fall: in its case by a billion dollars since May. The 2009 budget is supposedly balanced, but the city is facing deficits in years to come.

Nicole Gelinas, of the Manhattan Institute, says even a partial defined contribution plan for new city workers would help offset the city’s crippling health costs. A 7% property tax cut could be rescinded to offset some of the angst.

But more stress is likely. The city thinks Wall Street bonuses will decline by more than 20%. Financial firms posted $22.8 billion in losses in the first quarter and the big investment banks are laying off thousands of people. Wall Street lost 4,300 jobs during the month of June alone.

At last Alan Greenspan is saying what he means
Remember when Alan Greenspan was hard to understand? The gnomic — and gnome-like — former Federal Reserve chairman used to be a master of obscurity. Here are some words from his mid-1990s glory years — If you haven’t had breakfast yet, I suggest you skim read this.

“And I think where the confusion arises is the fact that you cannot view monetary policy as a sort of simple issue, if the most probable outcome is coming out of this soft patch into moderate growth with low inflation, which I think is the most probable outcome, that is not the same statement as saying that you therefore, in the process of implementing monetary policy or formulating it, I should say, completely disregard what the upsides and downsides of a potential outcome may be.”

Horrific. Well he’s obscure no more. Now that Alan is a paid pundit and not Master of the Financial Universe, he’s saying what he means. Whether he should or not is another matter. Last week Greenspan was on CNBC and was clear in his views that we were heading in the wrong direction. The housing slump was “nowhere near the bottom”, the economy was “right on the brink” of a recession and the mortgage giants Fannie Mae and Freddie Mac were “a major accident waiting to happen”.

To be fair Greenspan was still showing signs of his talent for smudging the outlines of his arguments. “I think the data at this stage in the United States are not . . . suggesting recession,” Greenspan said. But he added: “We’re right on the brink and I would be more surprised if we didn’t [have a recession] than if we did, given the financial state.”

Greenspan said companies were controlling inventories effectively and that “at this stage, I think they are the major reason why in the very short term we’re fending off inflationary pressures”. But he noted that with jobless claims rising and growth overseas slowing, it would be hard for the US to avoid recession.

Who will history blame for this mess? My money is on Greenspan getting his own chapter. The housing bubble and the overheated credit markets were financed by Greenspan’s easy monetary policy and unwillingness to regulate.This is not the first time that Greenspan has opined on a mess that he created, or that he’s told us, too late, something we already know.

Having done so much to encourage the millennial dotcom/tech fiasco he tried, way too late, to slow that bubble’s impending pop by dismissing it as “irrational exuberance”. When the markets imploded, he sucked up all the hot air and blew it into the housing market with rock bottom interest rates and a pat on the back for the free market excesses that led to the sub-prime disaster.

Ex-presidents, and prime ministers, usually get a second career out of the lecture circuit and autobiographies. But no one pays much attention. The gnome still has a devoted audience.

Greenspan’s words came on top of more gloomy economic figures and helped push the stock markets down again. Now he has dropped the veils of obscurity, it’s easy to see why he spooked the market. The real mystery is why anyone is listening.

China's economic miracle at a crossroads as Olympics start
In the yard of Rise Sun Concrete outside Beijing, the trucks are parked up and the mixers are grinding ever slower. China may be in the middle of the biggest construction boom in history, but Rise Sun is no longer part of the action, a victim of pollution controls introduced in a desperate attempt to clear the city's air before the Olympics.
"We will lose about 1.2 million yuan - about pounds 90,000," says sales manager Xiang Wancheng of his enforced two-month go-slow, and he is not alone: 150 concrete, steel, chemical and other heavy industrial units in Beijing, and hundreds more across northern China, have been forced to close down production for the same reason.

Building sites have downed tools, while many other businesses have shut their doors without being told to as the lorries taken off the roads at the same time no longer provide their necessary supplies. Nor is the rest of China free of the grip of "Olympic restrictions". Bankers trying to visit Shanghai or multinationals looking to buy Chinese products have suddenly found themselves unable to get a visa.

"Lots of my clients used to visit to source their products directly. A letter of recommendation from me was enough," said Richard Turner, vice president of Sino Mark, a consultant to Western buyers. "The trade fairs are empty. Yiwu, the world's biggest wholesale market, has seen sales drop 70 per cent to 80 per cent," he said, adding that it is not just Westerners, but also Russians, Arabs and Africans who are being denied entry.

Long-standing business relationships are being affected by the inability of quality and corporate responsibility inspectors, all-important nowadays to multinational brand names, to get into the country and check suppliers. Importers are finding their raw materials stopped at customs, while exporters have found their goods subject to stringent checks.

These steps come at a difficult time for the Chinese economy. The national export machine, so recently invincible, is shuddering under the weight of America's collapse in consumer confidence, while some look at the massive investment that has accompanied Beijing's ultra-ambitious approach to the Olympic Games - $43bn (£22bn), according to official figures - and assume any such bubble must inevitably burst.

Property prices are already falling, though notoriously unreliable statistics make it hard to say by how much. Even President Hu Jintao felt compelled to admit at a pre-Olympics press conference on Friday that tough times lay ahead.

"Uncertainties and destabilising factors in the international environment are increasing," he said. "China's domestic economy is facing increasing challenges and difficulties." Too much can be made of the Olympics, of course.

Unlike Athens, which saw a post-Olympics slump, Beijing is a small part of a large national economy - estimated at 3 to 4 per cent of overall output. The Olympic construction boom is just one, if the first among equals, of similar building sprees across China. Even if further pollution controls come in, as threatened, the effects will be limited in a national context.

To take just two examples: Shanghai is aping Beijing in its enthusiasm to further redevelop the city in time for the World Expo of 2010, Guangzhou in the south is hosting the Asian Games in 2010 and has taken the opportunity to construct a second central business district.

Total investment in China last year was $1.6 trillion. Beijing's $43bn, over three years, works out at less than 1 per cent of that. "It's a drop in the ocean," says Stephen Green, head of research for Standard Chartered in Shanghai. "As for the shutdown, people knew and saw it coming. The effect of the Olympics on the overall Chinese economy is zero."


Anonymous said...

"Citibank has lost 50% of its book value since last year," says Whitney, who is married to pro wrestler John Layfield.

The sequentiality or connectivity here evades me ... is it a veiled tribute that she can deal with the tough guys?
(Roubini) There will be transitional costs and the displacement of workers, both blue-collar and white, in the advanced economies. But I'm quite bullish about the state of the global economy ...

I doubt that those workers will be quite as bullish.

In his way Roubini is a greater doomer than any here - O brave new world, that has such 'people' in't!

And braver people in it that can stick it!

Anonymous said...

I'm bullish if: I just take an economist's point of view. If there's enough $30 oil. If there's no climate change. If world population stops increasing, etc, etc. I'm extremely bullish if the housing bottom is here, if there are untold trillions of yet to be discovered oil, if we can keep our fantasy economy going, US debt is paid by the tooth fairy, etc, etc. In reality, when I look at the whole picture, being bullish is not in my vocabulary.

Anonymous said...

Those "transitional costs" will include the dreams of many...many more folks homes,and hopes of a better life for there kids..


Anonymous said...

Ilargi: Thank you for the great website.

My husband and I have about $100,000 in a C.D. at B of A. We are planning to buy land in New England soon. Should we buy it now or wait until next spring? You have said that there might be a financial crisis before the summer is out. I fear that FDIC might not have funds to pay depositors immediately if B of A "collapses." A new law might even limit amount of withdrawals, etc. Any thoughts from anyone here would be appreciated.

Thank you.


Bigelow said...

“…discussions have progressed to the point that larger banks and dealers should have a central clearing house for credit derivatives by later this fall. The market for credit derivatives is currently near $62 trillion in notional value…
Any failure would then be absorbed by the clearing house members, reducing the need for the Federal Reserve or Treasury to get involved, and possibly preventing the type of failure that was experienced with Bear Stearns.”

Do you think this will have any positive effect over the immediate to 5 year term?
Then combine derivatives “$62 trillion in notional value” and “failure would then be absorbed by the clearing house members”. Banks which are really insolvent are the backstop? Really?

Anonymous said...

Readers might appreciate this report on Commons Dreams:

"When I began sending my book Plunder investigating this calamity around to publishers there was a similar response even though the market meltdown had begin. My patient and committed agent Victoria Skurnick made a serious professional effort to sell it but the buyers, who all said it is well written, weren’t buying. They wouldn’t accept its analysis.

"I soon found that the denial and distraction I encountered in trying to distribute In Debt We Trust was also in vogue in the book-publishing world. There, “business” books must conform to certain genres/templates and story telling trumps analysis"

Anonymous said...

Bigelow, I have just now finished building a little dam of stones on the very tiny river we live by. I did this to move a bit of water closer to my pump so I can change the water in my duck pond (the pond water goes to water and fertilize my garden). Bear with me there is a point to this.

The point being that every winter the river floods and washes all those rocks away in one fell rush.

Do you think the back end of this (adjustable rate mortgage reset schedule) might make an interesting spring for those insolvent banks?

Bigelow said...

As they say around here

Anonymous said...

Please bigelow, I am trying to wean my wife from that expression, don't encourage her. All I have to do is say something like "looks like a nice day" and out it comes "You-bet-sha"

Bigelow said...

Anonymous bad Common Dreams link, this should work.
‘Da Nile:’ Many Tuning Out the Economic Squeeze

I think El polo commented recently that the current unemployment rate is more like 10% in US. Lots of people can ignore the economy. During the 1930’s the unemployment was more like 1 in 4.

The author Mr. Schechter is reasonably venting about the response to his How Should We Respond To The Imploding Economy?

Guess he gave checking back before he got to mine:
Dear Mr. Schechter,
Thank you for your continuing efforts. A discussion of what we can do about it?
Make what money passes thru your hands reflect your values.
Loath a “compliant media”? Channel your money elsewhere. Drop the cable TV, cancel the magazines and sell the TV.

Anonymous said...

Jon Birger, Fortune senior writing, added that glaring non-sequitur about Meredith Whitney being married to a pro wrestler, because he wanted to headline his article as "Beauty and the Beast," but his editor nixed it.

Anonymous said...

It seems that daily Torygraph articles have found a new drum to blind every thinking-head of the world.

Good job, Ilargi!

Go to Vatican in the research of shit perdue!

Let's be the fan of all shit!

Greetings from Belgium!

bicycle mechanic said...

RASSLIN is FAKE, and the guys that do it are FAKING it. ONLY redrecks and illiterates like RASSLIN. IF you like RASSLERS, then you aren't in contact with REALITY> jesssh.

Now that I know Meredith married a Rassler, then she can't be all that smart. How can a smart lady believe in RASSLIN.

She must be fake too.

Good think I invested in US Dollars, there's nothing fake about them.

Anonymous said...

I just added

to my toolbar in firefox as a news feed.

Saves me a click when I come back to check comments during the day.

team10tim said...

Hey hey Everybody,

I have an economics question that I've never gotten a satisfactory answer to. The Fed creates money and injects it into the economy by monetizing debt. How does a nation running a surplus create money? Or more precisely, how do they inject it into the economy?

Thanks in advance, Tim

Anonymous said...

Why the logo is negative?
Is it because the economy is imploding?

Stoneleigh said...


Money must always be created to cover interest, not just on national debt, but on the debt that permeates the economy. A country like Canada that has seen annual surpluses in recent years still has interest on a very large debt to pay. A surplus of , say, $8 billion in one year doesn't prevent the need to pay interest on the cumulative debt of over $500 billion for instance, and that's just at the federal level. There's also provincial, municipal, corporate, institutional and personal debt.

The (essentially unregulated) engines of credit expansion have increasingly been outside of the banking system in recent years, so that central bankers have far less control over the process than one might think.

The Lizard said...

"Good think I invested in US Dollars, there's nothing fake about them."

Monopoly Money isn't fake either: it is genuine Monopoly Money.

Spend with pleasure.

Anonymous said...

“The (essentially unregulated) engines of credit expansion have increasingly been outside of the banking system in recent years, so that central bankers have far less control over the process than one might think.” --Stoneleigh

“In recent years, off-balance sheet vehicles – ABS CP conduits, SIVs, CDOs and hedge funds (collectively known as the “shadow banking” system – have provided additional leverage.” -- The De-Leveraging Virus Satyajit Das, Minyanville

Anonymous said...

Can anyone recommend a good short film on the current financial crisis that would be suitable for a ill informed audience?
This is a group that deals with social justice issues, but lacks economic literacy.