Friday, August 8, 2008

Debt Rattle, August 8 2008: Game Day: Accounting, Olympics, Oil and War

National Photo Company Collection Minute Service No. 2 1926
Washington, D.C., "Minute Service Station, Georgia Avenue N.W."

Ilargi: The finance news takes a step back today, and it’s not for the Olympics. It’s for all out warfare. And the war is for oil.

The US denies that its troops and trainers are directly involved in Georgia’s attack on the capital of South Ossetia. Whether that’s true or not, the fact remains that, in Washington, Georgia is seen as a vital area in the battle for the resources -oil- in the wider Caucasus and Middle East region. Iran and Iraq are just around the corner.

And the fact remains as well that Russia had warned very clearly about just such an attack. So it could not have been a surprise for either Georgia or its US puppeteers that Russia has invaded South Ossetia as well, in order to chase out the US-trained Georgian troops.

Which raises the question why the US apparently has chosen to be part of this. As much as Georgian president Saakashvili is a loose cannon, he would never start this without US consent.

The people involved, the South Ossetians, a majority of whom have the Russian nationality, don’t want to be part of Georgia, they want to re-unite with North Ossetia, which happens to be a part of Russia.

Meanwhile, the credit crunch spreads to Canada for real (as we’ve always predicted), and to the US consumer credit situation; the last vestige of seemingly cheap money, credit card companies, starts to crumble. After that, there’s really nothing left anymore. Hey, we've been telling you for so long now that credit will disappear. No credit, no mortgages. And no credit, no consumption.

Fannie Mae announces huge losses -now there's a surprise- and says it will stop buying Alt-A mortgages. Say What? Why does it have all that stuff? A report back in May stated that almost half its losses announced then came from Alt-A. Fannie is a very sick little girl.

Oh, and the Chinese stock market is down 50% so far this year: I just saw this moniker: "The Great Leap Floorward".

Russia volunteers poised to join battle for South Ossetia capital Tskhinvali
Hundreds and possibly thousands of volunteer fighters from Russia were mobilising to enter the war in Georgia's breakaway South Ossetia republic tonight. Units of armed Cossacks from across the North Caucasus region that borders Georgia were poised to join the battle for the separatists' capital, Tskhinvali.

In North Ossetia, the region of Russia which shares cultural links and a border with South Ossetia, lists of men willing to cross the border and fight against Georgian forces were drawn up. Vitaly Khubayev, 35, a resident of the capital Vladikavkaz, told the Guardian: "There are already two busloads of fighters leaving for Tskhinvali every day.

"They give you a uniform on the way and then you get issued with weapons once you arrive. If I didn't have three children I'd have gone myself." The two Ossetian republics are historically inseparable and residents of the northern republic were furious at what they described as the "Georgian fascist attack" on their neighbours.

Many said they were willing to take up arms and travel to defend their relatives across the border in South Ossetia. Valentin Tekhti, 67, a teacher, said: "Our Ossetian brothers are dying. If we get the call every man who can stand on two legs will go to fight." Amiran Khubetsov, a doctor, said: "A whole nation is under bombardment in the land it has occupied for hundreds of years. The world must not ignore this aggression."

At a special meeting of the United Nations Security Council this morning, the US called on the Kremlin to prevent irregulars entering South Ossetia via the 4km Roki tunnel, the republic's only link with Russia. But meeting with US president George Bush in Bejing later in the day Russian prime minister Vladimir Putin admitted that "many volunteers" were heading to South Ossetia and it would be "very hard to maintain peace".

Cossack leaders across southern Russia said they were forming volunteer units to join the fight against Georgia. Under Russia law, Cossacks – the descendants of runaway serfs and outlaws who in the past were employed by the Kremlin to protect the country's southern border – are allowed to carry arms and carry out policing functions in cooperation with interior ministry forces.

At the Vladikavkaz headquarters of the Terek Cossacks today a group of men sat under portraits of fierce looking warriors with drooping moustaches watching television coverage of Georgian artillery shelling Tskhinvali. One man said there would be an extraordinary meeting today to discuss forming volunteer units.

In Volgograd the leader of the Don Cossacks, Viktor Vodolatsky called on all Cossacks under 40 years of age to volunteer to fight. Reports said 100 men from the region had already left for South Ossetia. In the centre of Vladikavkaz there were emotional scenes as hundreds of protesters, mostly women, gathered outside the regional government headquarters. They shouted, "Russia, save us!"

Aelita Dzhioyeva, 41, a lawyer who fled Tskhinvali last night, showed text messages on her mobile phone from relatives still sheltering in a basement in the city. One message read: "We are dying. Ask the government for help." Mrs Dzhioyeva said: "Our men will stay and fight until the last drop of blood but our old people and children must be saved. We are calling on the Kremlin to intervene and create a humanitarian corridor for them to escape."

US military trainers not involved in Georgia conflict: military
US military trainers based in Georgia are not involved in the hostilities between Russian and Georgian forces in breakaway South Ossetia, US military officials said Friday.

"They are not involved in any way in this conflict between the Russian military and the Georgian military," said Lieutenant Colonel John Dorrian, a spokesman for the US European Command. "We have upwards of 100 military trainers who are in Georgia now. We've been able to account for all of them," he told AFP.

Pentagon spokesman Bryan Whitman said there were no plans to redeploy the estimated 130 US troops and civilian contractors, who he said were stationed in the area around Tblisi. The US Defense Department has been in contact with Georgian officials over the situation, but the Georgians have made no requests for assistance, Whitman said.

"We have forces in Georgia, so obviously the secretary is interested in the situation there," he said, referring to US Defense Secretary Robert Gates. Georgia is the third largest troop contributor to the US-led coalition in Iraq and the US military has a longstanding program to train their forces. He said the US European Command's plans and operations center has been monitoring the situation in South Ossetia, the flashpoint for the conflict between Russian and Georgian militaries.

"What they do in a situation like this is contact the embassy, contact our troops there, assess the situation, and begin to receive any information or request for support from the embassy, or any reports about US citizens being in danger." "At this point we are early in the hostilities. The situation is sort of dynamic at this point," he said.

The outbreak of fighting also was being closely watched at the Pentagon, said a US military official, who spoke on condition of anonymity. "We're obviously very concerned. We are watching it closely," said the official. "We are looking at the situation, and how it develops. It's still early."

The United States, European Union and NATO have led international calls for an immediate end to violence in South Ossetia amid fears of all-out war between Russia and Georgia.

'Accounting Games' Mask True Financial Pain

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The huge loss announced by AIG and Citigroup's pending settlement over auction-rate securitie show again the credit crunch remains very much alive.

It's likely to get worse before it gets better, says Joshua Rosner, managing director at Graham Fisher & Co., an independent research firm, who predicts national home prices will fall another 13%-15% before bottoming in early 2010, "unless they overshoot."

Rosner, whom Fortune dubbed a "prophet of the credit crisis" for his early warnings about problems in mortgage-backed securities, believes companies are still slow to take losses and are "still playing games" with accounting.

For example, Freddie Mac's dismal results this week would have been even worse if not for $18 billion in deferred tax assets. Rosner says that $18 billion figure is questionable, based on Freddie's own admission in the appendix to its filing:

"The company does not maintain a tax basis balance sheet to support deferred tax accounting under GAAP, which could result in balance sheet misclassifications and potential income statement adjustments."

An earlier version of this story mischaracterized Rosner's view on recent agreements where Ambac paid Citigroup $850 million to cancel insurance on $1.4 billion of CDOs, and SCA paid Merrill $500 million to cancel insurance on $3.7 billion of mortgage-backed securities (MBS).

The deals were a good thing for the monoline insurers, Rosner says, but also revealed that Citi and Merrill had previously been marking the relevant securities at inflated values. In the SCA-Merrill agreement, for example, the company received $500 million for terminating hedges on MBS they were previously carrying on their balance sheet at $1 billion, he said. "That's one aspect of the game." 

Rosner says the slowness of management to really take losses is contributing to the market's "manic-depressive" state (heading back to "depressive" Thursday) because investors keep thinking the "worst is over" and then get hit by the next round of announced losses.

Fannie Mae losses much larger than expected
Mortgage finance giant Fannie Mae reported a much larger-than-expected loss in the second quarter and slashed its dividend Friday, more signs that the problems in housing and financial markets are not over.

The firm reported a net loss of $2.3 billion, or $2.54 a share. Analysts surveyed by Thomson Reuters forecast a loss of 68 cents a share, compared to earnings of $1.86 a share a year earlier. But large increase in reserves for bad debt and a writedown in the value of its holdings hurt the results.

The company warned of billions more in credit losses this year than it had previously forecast, and said the rate of credit losses is likely to get even worse next year. It also gave a gloomier forecast on the battered housing market, saying that the range of price declines is likely to be at the upper end of its previous forecast of a 7% to 9% drop in 2008.

Fannie also slashed its quarterly dividend to 5 cents a share, down 86% from its previous level, as the company tries to maintain the capital reserves it needs to operate. Shares were down nearly 13% in pre-market trading after the report.

The company announced it would pull out of the so-called Alt. A loan business by the end of the year. Those loans, made to borrowers who do not provide full or any verification of their income, have been responsible for most of the company's losses, even though they are a small percentage of their overall business.

The rising loan losses caused Fannie to set aside an additional $3.7 billion for credit losses yet to come. It also saw actual credit losses in the period of $1.3 billion, a jump of more than 400% from a year ago, and up 44% from the first quarter of this year.

Fannie and sibling company Freddie Mac are shareholder-owned companies set up by the government to provide funding to banks and other lenders making home loans. Between them they back or own more than $5 trillion in single family home loans, or roughly half the outstanding U.S. mortgages.

The troubles in the housing and credit markets led to shares of both firms plunging in the last two months. That, in turn, prompted Congress to authorize a rescue plan that would have the Treasury Department loan the firms unlimited amount of money or buy their equity if necessary.

On Wednesday, Freddie reported a much larger-than-expected loss due to the bad loans and slashed its dividend at least 80% in an effort to retain capital it needs to operate. Shares of both companies tumbled further on that report in Wednesday trading and again Thursday, leaving Fannie shares off 61% between June 16 and Thursday's close. Freddie shares are off 75% in the same period. 

Fannie's Paper Problems Drive Loss
Bad paper is still hurting Fannie Mae.

Government-backed mortgage lender Fannie Mae posted its fourth consecutive quarterly loss on Friday. The worse than expected loss of $2.6 billion, or $2.54 per share in the second quarter, compared with earnings of $1.8 billion, or $1.86 a share, a year earlier. Analysts had expected a loss of 97 cents per share. As part of its earnings announcement, the firm said it would sharply cut back on its dividend.

Fannie, which together with its sibling Freddie Mac owns or guarantees $5.3 trillion, or roughly half, of all U.S. mortgage debt, recently got a break when the federal government said it would explicitly back its debts, lend it money or buy up its stock after skittish investors sent the pair's stocks into a tailspin in July.

Investors were still fleeing Friday, despite Fannie and Freddie's cozy government ties. Fannie Mae plunged 17.9%, or $1.80, to $8.13 and Freddie Mac gave back 3.9%, or 23 cents, to $5.66, during morning trading in New York.

The firm said it will cut operating costs by 10.0% this year and will no longer buy Alt-A loans, which were made to borrowers with good credit that did not verify earnings or employment. These loans only account for 11.0% of the firm's books but nearly half of its losses. Fannie also announced that it will be slashing its dividend to 5 cents, from 35 cents.

Fannie loss was deepened by $5.3 billion in credit-related expenses, but it said it expects 2008 will be peak year for credit-related charges. It also reported $883.0 million in net investment losses, including $507 million in securities impairments.

Sales were up year over year by 46.0%, to $4.0 billion, but by only 5.0% from the first quarter. The jump from 2007 reflects the slack demand for mortgage-backed securities amid the current credit crisis. Investors are only interested in paper that is backed by Fannie, Freddie or the Federal Housing Administration in the wake of the subprime mortgage mess. The sluggish increase from the previous quarter is reflective of the year-old slowdown in the U.S. housing market.

JPMorgan analyst calls Ambac business model "broken"
An analyst on Friday downgraded Ambac Financial Group Inc. to "Underweight," calling the bond insurer's business model "broken."

On Wednesday, Ambac posted a loss on an operating basis during the second quarter because of expected losses on insurance contracts. But after accounting for special non-cash gains from the same portfolio, the company posted a net profit.

"In our view, Ambac is a company with a broken business model saddled with substantial liabilities and negative tangible equity," wrote JPMorgan analyst Andrew Wessel in a note to clients Friday. Wessel said he feels the accounting methods Ambac uses "distorts true economics."

He added that Connie Lee - a subsidiary that Ambac is planning to turn into a separate "AAA"-rated bond insurer for only U.S. public finance and global infrastructure - has limited revenue potential. Ambac has been hit in recent quarters by the plunging value of complex financial instruments known as collateralized debt obligations that it insures.

In premarket trading, Ambac shares rose 16 cents, or 3.4 percent, to $4.75. Early Friday, Ambac's competitor MBIA Inc. said that unrealized gains on credit derivatives drove up its second-quarter profit from that a year earlier.

Royal Bank of Scotland slumps to $1.3 billion loss, $11 billion write-down
A chastened Royal Bank of Scotland today posted a loss of £691m - its first in four decades - after writing off almost £6bn because of the credit crunch.

Sir Fred Goodwin, chief executive of RBS, admitted that the performance during the first half of this year was unsatisfactory. He blamed it on the ongoing turmoil in the financial markets .

"No one here thinks that these results are in any shape or form satisfactory. It has been a chastening experience and reporting a pre-tax loss of £691m is something I and my colleagues regret very much. This loss is a consequence of previously signalled writedowns on credit market exposures amounting to £5.9bn," Goodwin said.

The loss is less than some analysts had expected, and is the second-biggest loss ever reported by a UK bank. Lloyds TSB still holds that record after losing £715m in 1989, mainly due to trouble in Latin America. It is the first time that RBS has fallen into the red in its 40 years as a public company.

Some commentators are concerned that RBS, which owns NatWest, may not have sufficiently robust capital reserves to cope with the effects of the credit crunch. The bank reported today that its core tier one capital ratio - the key measure of a bank's strength - is 5.7%.

David Buik of BGC Partners said this was "unacceptable", and predicted that RBS may need to raise another £4bn in fresh capital. Profits on an underlying basis - ignoring the massive credit crunch writedowns, one-off charges and integration costs - fell to £5.1bn from £5.3bn in the first half of 2007.

Goodwin said that RBS recognised that it must now deliver a level of performance that meets its shareholder's expectations, but Andy Lynch of Schroder Investment Management believes there may be worse times ahead. "The question with RBS, and all other UK banks, is the outlook for the UK economy, and that's not good. I think we have a lot more writedowns to come as the UK economy slips towards recession," he predicted.

However, Goodwin seemed more confident about the future path of the business. During a conference call, he said: "It takes a brave person to try to predict the market by the end of the year but I feel a lot more confident about our markdowns than I did back in April. Business is getting done, it doesn't feel like we're heading back to the good old days but there is more movement."

Earlier on the BBC's Today programme, banking analysts said the RBS chairman Sir Tom McKillop could be forced out as a result of the loss. "I do feel there will be some victims," Ralph Silva from the Tower Group said.

"Maybe the chairman, Sir Tom McKillop, probably will be the one that will have to fall on his sword, simply because removing the CEO, Sir Fred Goodwin ... would be too disruptive to the organisation at this time and it's just not responsible to do so. "So if the investors want someone's head they will probably go after the chairman's."

Silva also blamed the wider economic downturn for the RBS results. He said "I think RBS is unique in one area in that they are very dependent on the investment banking industry, whereas the other high street banks don't have that much of a reliance on it."

Goodwin said there was always pressure to deliver good results and this pressure intensified when trading is tough. But he stressed that the current team was best placed to take the group through the turmoil. "We are focused on very difficult market conditions. We are focused here very much on doing what's right for our shareholders and to steer the business through a difficult time," he said.

"We have steered it through good times and we are going to steer it through these times." Shares in RBS rose 2% in early trading to 238.5p, having lost around half their value in the last year.

The figures round off a bleak week for the British banking sector. On Monday HSBC reported a 29% drop in profits, a day before Northern Rock revealed a loss of almost £600m, and yesterday Barclays said its profits were down by a third in the first half of this year. Last week saw Lloyds TSB and HBOS report 70% drops in profits.

Citigroup’s Auction Rate Settlement “No Good”
In a focused effort to put yet another debacle in the rearview mirror fast, Citigroup and Merrill Lynch agreed to repurchase $17 bn in auction-rate securities to settle regulatory probes alleging they potentially defrauded investors by leading them to believe the securities were safe, liquid investments.

But Wall Street’s top bank analyst, Dick Bove of Ladenburg Thalmann, says Citigroup should not have buckled under pressure from New York State Attorney General Andrew Cuomo–and that Cuomo’s office wrongfully pressured the bank. “I believe that Citigroup should not have agreed to this arrangement and New York State should not have pressured the company to do so,” Bove says. “It is time that broader considerations are thought about.”

When the $330 bn market for these securities collapsed in February 2007, investors were estimated to be stuck with $200 bn in auction rate securities they couldn’t sell. Auction rate securities are typically bonds sold by local towns and municipalities and student loan companies.

They bonds are essentially long-term debt with short-term features, as their interest rates are reset at weekly or monthly auctions supported by Wall Street bidding. Cuomo’s office also alleged Citi destroyed tape recordings from its trading desk that would have implicated the bank; Citi says any destruction was inadvertent as the bank recyles the tapes every 90 days, and that it accidentally taped over the conversations.

Citigroup, like many other Wall Street institutions, has taken $40 bn in writedowns stemming from the housing and credit crunch. To date, banks and investment houses worldwide have booked a record $476 bn in writedowns, raising $354 bn in capital to plug these balance sheet holes.

Bove argues that, in reaching an agreement with Cuomo, the Securities and Exchange Commission, and other state regulatory agencies, Citigroup is agreeing to a raw deal. On closer look, the bank gave regulatory authorities whatever they wanted here, including apparently full restitution to investors who bought these securities. Specifically, Bove points out that the settlement deal stipulates that:
  • Citigroup by November 5, 2008 will purchase at par, auction rate securities (ARS) from all Citigroup individual investors, small institutions, as defined, and charities that had purchased these ARS from Citigroup prior to February 11, 2008.;
  • The amount repurchased will be up to $7.3 bn in par value from about 38,000 individuals, charities and small businesses with assets of less than $10 mn. Merrill Lynch said it would buy back an estimated $10 bn of auction-rate securities at full value starting in January.;
  • What’s flown under the media radar is that Citigroup will now have to make loans available to the eligible sellers of these securities in amounts equal to their holdings, at par, up to the time of purchase, Bove says.;
  • The bank also now has to assist about 2,600 institutional investors in ridding themselves of as much as $12 bn securities.;
  • Citigroup agreed to let New York State monitor the bank’s actions in this regard and it reserves the right to take legal action against Citigroup if the State is unhappy with the proceedings, Bove notes.;
  • The bank will pay fines of $100 mn with half going to New York State and the remainder to other state regulatory agencies, without admitting guilt.

Bove notes that Citigroup has disclosed that the potential loss to the company from these actions, in total, will be $500 mn. Presumably, Bove says, this will be spread over the next two quarters as the company puts this plan into effect. He adds that the “impact on earnings will not be meaningful. The need for more capital due to this event non-existent.”

Other investment houses and banks may have to agree to similar deals, paying dearly in the process. Swiss bank UBS will buy back $19.4 bn worth of auction-rate securities to settle charges over misleading investors in the United States, the Boston Globe reported on its website on Friday. UBS also agreed to pay $150 mn in fines, split between Massachusetts and New York, the Globe reported, citing “people briefed on the talks.”

Bank of America Corp., the country’s largest retail bank, has also received subpoenas from state and federal regulators about its auction-rate securities practices, the Charlotte, N.C., bank said in a securities filing Thursday Illinois is leading efforts to investigate Morgan Stanley and Goldman Sachs Group. Wachovia is also under similar regulatory probes.

UBS $25 Billion Auction-Rate Accord Cost Tops Citigroup, Merrill's
UBS AG, Switzerland's biggest bank, may pay more than Citigroup Inc. or Merrill Lynch & Co. to settle state and federal claims that it fraudulently sold auction-rate securities, a person briefed on the negotiations said.

UBS is close to resolving the claims by promising retail and institutional clients it will buy back the securities, valued at $25 billion by regulators, the person said. Merrill Lynch offered yesterday to purchase about $10 billion in auction-rate debt from individual investors.

Citigroup set a framework for settling state and federal regulators' claims yesterday when it agreed to buy $7.3 billion of debt from individual investors, pledged to help 2,600 institutional customers unload $12 billion of securities and said it will pay $100 million in fines. Bank of America Corp. analyst Jeffrey Rosenberg estimates banks that purchase the auction-rate debt may have to write it down by a total of $4 billion.

"We reach settlements that are appropriate for the circumstance," New York State Attorney General Andrew Cuomo said yesterday at a press conference announcing the deal with New York-based Citigroup, the largest U.S. bank by assets. "UBS would be a different circumstance." UBS spokesman Mark Arena, asked to comment on a possible settlement, said: "We have consistently worked with regulators toward a comprehensive solution for all ARS investors."

The Boston Globe reported on its Web site today that UBS has reached an agreement with state and federal regulators to purchase $19.4 billion of the securities and pay $150 million in fines to settle the probes. The newspaper, citing people briefed on the talks, said the deal may be announced today.

The decision by investment banks to abandon the $330 billion auction-rate market in February threatens to compound their losses from the global credit-market contraction. Zurich-based UBS reported a net loss of 25.4 billion Swiss francs ($25.6 billion) in the nine months through March, more than any other bank. UBS shares fell 53% this year.

Citigroup may have to record a pretax loss to reflect a decline in the value of the $7.5 billion in auction-rate debt, the bank said yesterday. Pluris Valuation Advisors LLC in New York said in an Aug. 6 report that 281 publicly traded companies have written down a combined $32.3 billion of the securities they hold by a total of $2.1 billion.

Merrill, the largest U.S. brokerage, extended its offer to individual investors, charities and small businesses starting in January, six hours after the Citigroup accord was announced. New York-based Merrill, which booked almost $19 billion of net losses in the past four quarters, was accused last month by Massachusetts Secretary of State William Galvin of misleading investors about the stability of the auction-rate market.

"It's a start I suppose. I'm glad they did it, but I think for most investors it's not the solution they need," said Galvin, who also filed a complaint against UBS. "It's not satisfactory from our point of view in terms of the timelines of redemption. Therefore, clearly, we'll pursue our complaint." Cuomo said he would review Merrill's plan, which dealt with "one of the goals" he'd established to resolve the matter.

Municipalities, closed-end funds and student loan organizations sold auction-rate securities, long-term bonds with interest rates that are reset every week or month through bidding run by dealers, for about two decades. Wall Street banks, facing declining demand for the bonds and preferred shares, stopped their once-routine support of auctions in February, permitting thousands to fail and leaving investors unable to sell the debt.

UBS and the other banks knew the market was failing in the months prior to abandoning the auctions, according to e-mails and other evidence the state regulators discovered. They ratcheted up their marketing efforts, targeting individual investors with securities that were billed as cash equivalents, the regulators charged.

Galvin is still probing Bank of America Corp. Cuomo sued UBS, and last week announced that he planned to sue Citigroup. The Citigroup settlement included the other state and federal regulators. Texas also filed a complaint against UBS. In addition to buying back some bonds and helping holders find a market for others, Citigroup agreed to reimburse refinancing fees to municipal borrowers that issued auction-rate securities through the bank since Aug. 1, 2007.

James Nix, a senior attorney with the Illinois Securities Department, which is part of a group of 12 state regulators coordinating efforts, said he expects the Citigroup settlement to serve as a framework for deals with other banks. "They're all very critical elements of the settlement and I think the framework of what regulators are looking for the future as well," Nix said. Illinois is leading efforts to investigate Morgan Stanley and Goldman Sachs Group Inc.

UBS has been in talks this week with Massachusetts, Texas, New York and the Securities and Exchange Commission to settle the claims, including negotiations yesterday related to a required buyback of auction-rate debt, another person familiar with the negotiations said.

One of the higher costs the bank faces is liquidating securities sold by student loan organizations, according to Joseph Fichera, chief executive officer of Saber Partners. Less than $3 billion in student loan auction-rate debt has been refinanced, a fraction compared with the municipal and closed-end funds, which often faced higher penalty rates when the market collapsed.

"They were big in the student loans," said Fichera, a financial adviser and former investment banker based in New York. "That's a more problematic issue."

Ex-Countrywide CEO Angelo Mozilo is under formal SEC investigation
Securities regulators have stepped up their investigation of mortgage giant Countrywide Financial Corp. and its former chief executive, Angelo R. Mozilo.

Bank of America Corp., which acquired Calabasas-based Countrywide last month, said in a regulatory filing Thursday that the Securities and Exchange Commission was conducting a formal inquiry of the lender and that it had responded to subpoenas from the federal agency.

The filing doesn't say what the SEC is looking at, but people close to the probe say it represents an escalation of an informal investigation launched last year and is focused on whether Mozilo violated insider-trading law and whether Countrywide's financial disclosures misled investors.

Mozilo, reached at his home in Thousand Oaks, declined to comment, as did Sandor E. Samuels, Countrywide's in-house legal counsel, and Gregory Weingart, its outside counsel at law firm Munger, Tolles & Olsen in Los Angeles. Countrywide also faces probes by the FBI and several states looking primarily into whether the company engaged in improper lending practices, including making loans to people who did not have the ability to repay.

The SEC began investigating Mozilo after a Los Angeles Times report in September detailed his sale of $145 million in Countrywide stock in late 2006 and 2007 via automatic trading plans. Federal law bars a corporate executive from buying or selling the stock of his or her company while in possession of material nonpublic information about the firm, unless the trades are made under automatic plans established in advance.

Mozilo launched such a plan in October 2006. But in the following two months, as problems in the subprime mortgage market mounted, he revised the plan once and launched an additional trading plan. Both moves allowed him to sell more shares. Countrywide said last fall that Mozilo had made the changes without regard to inside information. But legal experts said the modifications raised a red flag.

Bank of America Says SEC Investigating Countrywide
Countrywide Financial Corp., the home lender acquired last month by Bank of America Corp., received subpoenas from the Securities and Exchange Commission as part of a formal investigation.

Countrywide responded to the subpoenas, according to a regulatory filing today. Bank of America bought Countrywide last month to become the largest U.S. mortgage lender. Charlotte, North Carolina-based Bank of America, the nation's second-largest bank, said it also received subpoenas regarding sales of auction- rate securities and municipal derivatives.

The SEC investigation probably relates to whether former Countrywide Chief Executive Officer Angelo Mozilo sold shares before disclosing information about the company's finances, said David Lykken, co-founder of Mortgage Banking Solutions, an Austin, Texas-based consulting firm. "That has been a glaring issue in front of everybody," said Lykken.

Mozilo, who left Countrywide upon Bank of America's purchase, has denied wrongdoing. He exercised stock options that produced $121.5 million in gains in 2007 while Countrywide stock fell almost 80 percent. Mozilo, who co-founded the company, said in April that he was giving up $36.4 million in severance pay he could have received from the Bank of America sale.

Bank of America Chief Executive Officer Kenneth Lewis considered mounting legal costs and likely higher loan losses in pricing his $2.5 billion purchase of Countrywide, which made nearly one of every five U.S. home loans last year. Countrywide had almost $4 billion in loan losses during the second quarter.

Countrywide was sued yesterday by Connecticut Attorney General Richard Blumenthal for allegedly duping borrowers into taking mortgages they couldn't afford. California and Illinois sued Countrywide on June 25, the same day shareholders approved the company's sale to Bank of America. Washington state has announced plans to fine the mortgage lender.

Bank of America is probably seeking a nationwide settlement with the 50 state attorneys general that would cap its legal risks related to Countrywide, said Kathleen Engel, an associate professor of law at Cleveland Marshall College of Law in Ohio. "Bank of America wants this off their back and it's a lot easier to assess mortgage risk than litigation risk," she said.

Bank of America wasn't included in Connecticut's lawsuit because it didn't own Countrywide during the alleged wrongdoing, Blumenthal said in a Bloomberg TV interview this week. Bank of America is "very receptive to conversations about providing some relief and remedies," he said.

The bank also said today it is cooperating with state and federal investigators probing auction-rate securities. Bank of America and other Wall Street banks have been under regulatory scrutiny over their role in the $330 billion auction-rate market, which seized up in February, stranding thousands of investors.

Attorneys general "of a number of states" have subpoenaed the bank as part of an investigation into municipal-derivative transactions, Bank of America said in the filing. The attorneys general derivative probe mirrors a federal investigation of anticompetitive practices in the $2.66 trillion municipal-bond market. Bank of America is cooperating with the U.S. Justice Department in a criminal antitrust probe. The bank still faces civil charges from the SEC.

Investigators are looking into whether advisers hired by municipalities to handle bidding conspired with banks and insurance companies to rig auctions, through so-called "courtesy bids" or rotations where firms take turns being the low bidder.

OECD sees weakening growth in top economies
Growth of the seven biggest economies in the world is set to weaken further, the OECD signalled on Friday, pointing also to a mixed outlook for big emerging economies.

[Canada saw the largest single decrease in its CLI, with June's figure falling by 1.1 points on the month to 95.5 from 96.6.]

The warning fits the picture of sharp slowdown in many advanced countries which has emerged so far this year as the repercussions of the credit crisis, and high oil prices, reached ever deeper into activity and lending. A similar signal for the eurozone from European Central Bank on Thursday, when the bank held its key rate steady, pushed down the euro against the dollar, a movement which continued on Friday.

The Organisation for Economic Cooperation and Development said its composite leading indicators for June "indicate a continued weakening outlook for all the major seven economies." It also said: "The latest data for non-OECD member economies tentatively point to expansion in China and Brazil and a downturn in India and Russia."

The indicator for all 30 countries in the OECD fell by 0.6 points in June and was a full five points lower than in June last year, the OECD said. The figure for the US economy fell by 0.2 points and was 5.4 points down over 12 months. The eurozone indicator fell by 0.8 points in June for a 12-month fall of 5.2 points. The June figure for Japan was unchanged but showed a fall of 4.1 points over 12 months.

The OECD explained that its indicator, which had to be used with caution, "is designed to provide early signals of turning points (peaks and troughs) between upswings and downswings in the growth cycle of economic activity." Other main figures were: Britain down 0.8 in the month and 4.8 points over 12 months, Canada down 1.1 and 3.9 points, France down 0.9 and 5.1 points, Germany down 0.9 and 5.4 points and Italy down 0.7 points and 4.5 points.

The indicator for China was steady in June and rose by 0.8 points on a 12-month basis. The figure for India fell by 1.5 points in May and was 4.4 points down from the May, 2007 level. For Russia, the indicator fell by 1.2 points in May, but showed a rise of 0.9 points over 12 months. The indicator for Brazil fell by 2.2 points in June but rose by 1.4 points from the level in June last year.

On Thursday, the ECB, in holding its key short-term rate at 4.25 percent, acknowledged that in the eurozone "growth figures for mid 2008 will be substantially weaker than for the first quarter of the year." The bank, and its president Jean-Claude Trichet, stressed however, that medium-term inflation would not be allowed to remain high. On balance, the markets interpreted these remarks as indicating an easing of prospects for a rise in eurozone interest rates, and the euro fell.

On Monday, the International Monetary Fund forecast that eurozone growth was expected to fall significantly, but that the zone was likely to be spared a recession. On July 29, the IMF had forecast the Japan seemed on course for a "modest" slowdown.

On July 28, Chinese state media, reporting on a meeting of the Communist Party politburo, said: "Challenges and difficulties are growing for maintaining fast and stable economic growth, due to rising international uncertainties and problems in the domestic economy."
Chinese growth slowed to 10.4 percent in the first half of the year from 11.9 percent for all of 2007.

Here comes the credit crackdown
You don't lose half a trillion dollars and then go merrily on your way as before. When the dust settles – and we are still stumbling blindly through clouds of the stuff at the moment – the investment banking industry is going to emerge from the credit crisis looking very different.

What is difficult is getting an agreement on what it might look like. The era of the independent investment bank might be over, and the voices that suggest they are ultimately unviable businesses are no longer sounding quite so shrill. Even so, only one thing seems absolutely certain. Investment banking will be smaller.

The industry enjoyed an unprecedented boom, creating and trading a myriad of new financial products, shuffling them between themselves and with a whole new kind of investor, hedge funds with their exotic trading strategies and insatiable appetite for complex ways to lay bets on the financial markets.

It was an enterprise that required thousands of new employees on Wall Street and in the City of London, and which generated hundreds of billions of dollars in profits. It was also inherently unstable. As the trading activities of these banks overwhelmed their more mundane businesses such as corporate advisory work on mergers and acquisitions, jokers used to describe the biggest of them all, Goldman Sachs, as the largest hedge fund on the planet.

In a complex web of transactions, each new financial instrument was laid down as collateral for a raft of investments in other, even more complex derivatives, and in this way banks built enormous businesses on very thin underlying assets. Lehman Brothers, for example, had trading positions open that represented 30 times their underlying assets.

By this miracle of leverage, they reported big profits – but only for a while. Exposed in their folly, all are now scrambling to deleverage and to raise capital. (As an illustration, Lehman is down to gross leverage of 24 times and that number is headed south.)

Even if regulators, shocked by the system-wide failure that the collapse of Bear Stearns threatened in March, don't set new limits on the amount of leverage that can be employed by investment banks, shareholders are doing some of that job already. But with deleveraging comes reduced profitability, and less money for reinvestment. On top of that, whole swaths of business have disappeared.

The fat commissions from creating exotic credit instruments, such as those discredited collateralized debt obligations (CDOs) and auction-rate securities, are likely to be in shorter supply in the future, now that the dangers and limitations of those instruments have been exposed for their hapless investors to see. The industry itself is considering curbs on the redevelopment of these markets.

In a discussion paper earlier this week, a panel of Wall Street grandees, led by the Goldman Sachs managing director and former New York Federal Reserve president Gerald Corrigan, proposed large amounts of new paperwork that should be appended to the sales documents for these instruments, and also suggested a test that would bar all but the most sophisticated institutional investors from buying them.

No longer would little municipal pension funds in the US heartland be able to rely on a seal of approval from a credit rating agency, instead they would have to raise an army of risk analysts to examine the instruments they were buying – or, more practically, not buy them at all.

Investment banks will have to "accept changes to market practices, that in the past have generated sizeable revenues but at the cost of weakening the underlying foundation of the markets," Mr Corrigan warned. The 60 recommendations laid out on Wednesday by Mr Corrigan's policy group are aimed at getting investment banks' house in order so as to prevent a regulatory backlash that could have serious adverse consequences for the industry.

The plans also include much stricter oversight of trading desks by risk managers, and a change to the way executives are paid so that much of their compensation is spread over the economic cycle, when the ultimate consequences of their boom-time practices can be judged.

By signing up voluntarily to this industry-wide code of conduct, Mr Corrigan says investment banks can solve their central dilemma: "namely, in a competitive marketplace it is very difficult for one or a few institutions to hold the line on best practices, much less for one or a few institutions to stand on the sidelines in the face of booming markets".

Whistling in the wind, say sceptics. Cutting the size of investment banks is not enough to restore stability, they argue, and these companies are simply too dangerous as standalone entities.

Nouriel Roubini, economics professor at New York University, and one of the most bearish commentators on the credit crisis, says the business model is flawed, since investment banks rely on very short-term funding for their operations, much of it funded in the overnight market, which can dry up.

"The broker dealers that work are those that are part of a bigger conglomerate where there's a commercial bank like JPMorgan or Citigroup and so on, but all the other ones are fundamentally and structurally unstable," Mr Roubini said.
Inevitably, the folk at Goldman Sachs have done more thinking about this than most.

In recent closed-door meetings with analysts, its top brass have been dropping clues as to their thinking, and it is clear they have been examining the option of building the investment bank into a wider bank structure, with access to alternative funding sources.

Guy Moszkowski of Deutsche Bank told clients that he would no longer be surprised if Goldman acquired a retail bank, if it could find a cheap one with a substantial depositor base. "These are strange times, indeed," he reported.

Meredith Whitney of Oppenheimer & Co became one of the most feted analysts on Wall Street thanks to her early call that Citigroup would have to cut its dividend and her persistently bearish – and persistently correct – calls that writedowns would continue and emergency refinancings would become common.

She too has been in to see Goldman Sachs executives, including David Viniar, the chief financial officer, and John Winkelried, co-president, and she came away believing that the chances of such a dramatic change to the business model are "less than slim". There are simply too many limits on what Goldman could do with any retail bank deposits it acquired.

"With a smile on their faces as to acknowledge the improbability of such a scenario, management stated that the company would be interested in purchasing a bank only if it was able to use the acquired deposits as a funding source for any other part of the business and without additional regulatory scrutiny. Obviously, current regulation makes that scenario impossible."

But there was a caveat, which is that buying a retail bank might be sensible response if the investment banks are slapped with a new regulatory regime that is as onerous as the one under which retail banks operate, with strict capital requirements and oversight. Just such a thing is on the agenda.

So far the Federal Reserve is only "evaluating" the capital positions of the investment banks and"co-operating" with the Securities and Exchange Commission which is the industry's regulator, but the US Treasury is pushing for the Fed to be given full oversight, since it is on the hook for bailing them out in a crisis.

U.S. Consumer Credit Increases $14.3 Billion in June
U.S. consumers borrowed more than twice as much as economists forecast in June as a decline in home equity forced Americans to fund purchases with credit cards and other loans.

Consumer credit rose by $14.3 billion, the most since November, to $2.59 trillion, the Federal Reserve said today in Washington. In May, credit rose by $8.1 billion, previously reported as an increase of $7.8 billion. The Fed's report doesn't cover borrowing secured by real estate.

Consumers are using credit cards and loans to cover expenses as falling home values cause banks to restrict access to home- equity lines. The Bush administration sent out tax rebate checks in the past three months to help support spending, which accounts for more than two-thirds of the economy.

"This is definitely showing some level of spending activity on the part of the consumer following the fiscal stimulus bounce," said Maxwell Clarke, chief U.S. economist at IDEAGlobal Inc. in New York. "The impact of the stimulus has put our problems off for tomorrow."

Economists forecast an increase of $6.3 billion in consumer credit, according to the median of 32 estimates in a survey conducted by Bloomberg News. Estimates ranged from gains of $3 billion to $8 billion. According to the Fed, total consumer borrowing accelerated at a 6.7 percent annual rate in June after gaining at a 3.8 percent pace the prior month.

Revolving debt such as credit cards gained $5.5 billion and non-revolving debt, including auto loans, increased $8.8 billion for the month. A Labor Department report today showed claims for jobless benefits jumped last week to a six-year high, signaling the labor market continues to weaken.

U.S. pending sales of previously owned homes unexpectedly rose in June as buyers swept up foreclosed and lower-priced properties, the National Association of Realtors reported today. Recent government reports indicate purchases are softening. Retail sales rose 0.1 percent in June, the smallest increase since February, while purchases excluding gasoline dropped.

The U.S. Treasury sent almost $30 billion in tax rebates in June, part of a $168 billion economic stimulus plan President George W. Bush signed in February. Cars and light trucks sold in June at a 13.6 million annual pace, and weakened further to a 12.5 million rate in July, pushing the industry toward its worst year in more than a decade, according to Bloomberg estimates based on industry data.

Lenders are reluctant to take risks in the aftermath of the collapse of the subprime mortgage market. Morgan Stanley, the second-biggest U.S. securities firm, told thousands of clients this week they won't be allowed to withdraw money on home-equity credit lines, according to a person familiar with the situation.

Consumers fell behind on home-equity credit lines at the fastest pace in two decades in the first quarter, the American Bankers Association reported last month. American Express Co., the biggest U.S. credit-card company by purchases, in July withdrew its 2008 earnings forecast after second-quarter profit fell 37 percent on worse-than-expected consumer defaults.

Yesterday, Chief Executive Officer Kenneth Chenault said the company will probably take a charge in the fourth quarter as it cuts jobs and trims expenses. "Rising fuel prices, rising unemployment, record low consumer confidence and most critically, housing declines have made this economic cycle unlike any other," Chenault told analysts on Aug. 6 at the company's New York headquarters.

Meredith Whitney gloomy on US spending as top American Express clients hurt
Oppenheimer analyst Meredith Whitney saw negative implications for overall U.S. spending over the next 12 to 18 months after credit card company American Express Co indicated credit deterioration among its most affluent customers.

"The wide-ranging effects of the housing downturn are highlighted by the worsening of U.S. cards' credit quality in AXP's affluent cardmember base," Whitney wrote in a note to clients after attending the investor day of American Express.

"Typically, the affluent segment holds up well during downturns, but home price declines have resulted in significant losses in consumer net worth (lower home values)," she added. Whitney said while the company's non-discretionary spending growth held up well through the second quarter of 2008, discretionary spending growth was negative.

American Express noted that slower growth in discretionary spending was visible across all wallet sizes, she said. "The sharp split between nondiscretionary and discretionary spending growth highlights reduced spending among consumers," Whitney said.

Whitney said the company's CEO Ken Chenault noted that the reengineering efforts announced with second-quarter results would likely result in a charge in the fourth quarter, and benefits will be visible in 2009.

"We maintain our view of AXP as the least worst of the group, as the company does not have mortgage exposure, has not lost money, has not raised capital, and we don't believe it needs to raise capital," Whitney added.

However, she said American Express is not immune to a rapidly deteriorating consumer credit environment.
She rates the company "perform." Fox-Pitt, Kelton analyst Howard Shapiro said in a note that there was no near-term catalyst for the company, but views the stock as attractively priced compared with long-term growth prospects.

"AXP credit and spend metrics appear to have been disproportionately hurt by declining home values, geographic concentration and overall consumer stress," Shapiro, who maintained an "outperform" rating on the stock, said.

American Express's Ratings May Be Cut by Moody's
American Express Co., the largest U.S. credit-card company by purchases, may have its credit ratings downgraded by Moody's Investors Service after the lender's second-quarter profit fell 37 percent.

The New York-based company is under review to have its A1 rating lowered by one level because of future losses from soured credit-card loans, Moody's said today in a statement. A downgrade would affect about $89 billion in securities and deposits.

American Express may suffer further loan losses, "particularly within geographic markets in the United States that have experienced sharp home price declines," analyst Blaine Frantz said in the note. The credit-card company has dropped by more than a third in the past year as consumers struggled to repay debt of all types.

Late and unpaid loans were worse than expected in the second quarter and will rise this year, Chief Executive Officer Kenneth Chenault said July 21. Even the lender's wealthier cardholders were affected by the slowing U.S. economy, he said. The company fell $1.59, or 4.2 percent, to $36.40 at 4 p.m. in New York Stock Exchange composite trading.

American Express last month withdrew an earnings-per-share growth forecast of 4 percent to 6 percent this year and said it wouldn't meet longer-term targets until the U.S. economy improves. The firm's second-quarter profit from continuing operations dropped 37 percent to $655 million as it added $600 million to reserves for U.S. loan losses.

The new math of lending
Forget oil and gold. Credit might be the commodity that's in the scarcest supply these days.

Saddled by soaring loan losses, banks have been drastically tightening their lending standards, effectively putting credit out of reach for many consumers in search of mortgages, credit cards or car loans. "Like the tide, credit goes in and out," said Jeff Davis, a bank analyst and managing director at FTN Midwest. "And right now it's headed out."

According to the Federal Reserve's first-quarter survey of senior loan officers at some of the nation's largest financial institutions, banks were turning away an increasing number of consumers because of credit fears. The Fed is likely to report that this trend continued in the second quarter when it releases its latest senior loan officer survey later this month.

Banks endured rising loan losses in the quarter as the housing market deteriorated further and the economy sputtered. Hoping to preserve capital and rid themselves of these troubled loans, financial companies have, as a result, held borrowers to a much higher standard. Auto loan providers, for example, have increasingly favored borrowers with higher income levels and have pushed for shorter lending terms.

Hoping to clear out all the toxic mortgages from their books, banks and other lenders are also raising the bar for potential homebuyers, demanding bigger down payments and additional up-front fees, effectively pricing some shoppers out of the market.

And unlike in years past, fewer consumers are finding they can tap their home for cash via a home equity loan, notes Davis - unless you happen to be a prime borrower with a property where there is no pre-existing lien. But by raising the bar, some would-be borrowers have fallen by the wayside.

"Once you start raising the standards, there will be that group of people that were on the borderline as far as underwriting criteria that may fall out," said Hugh Queener, chief administrative officer of Pinnacle Financial Partners, a Nashville, Tenn.-based bank.

In addition to being tougher to get, credit is also a lot more expensive these days. While the rates on various loans hinge on a variety of factors, such as the 10-year Treasury note and the prime rate, banks tend to have some leeway when it comes to setting lending rates. And some institutions are certainly taking advantage of this fact.

Some banks, for example, are boosting rates sharply on risky loans in order to avoid attracting any new business. "They just don't want them," said Adam Schneider, a principal at Deloitte Consulting who deals with clients in the financial services industry. "They are pricing their way out of the problem." Others are upping rates simply to make a few extra bucks.

"They are finding they are still able to grow their balance sheet and gain market share even with higher pricing," said Jefferson Harralson, an analyst with Keefe Bruyette & Woods. "But my sense is that they are tiptoeing into it since they so unfamiliar with the lack of price competition," Harralson added.

But banks must also walk a fine line when it comes to credit. Some beleaguered lenders, for example, may see the value in turning away new loans in order to preserve capital and to live on for another day. While banks and investors are justifiably concerned about lending, it is also possible that by making credit standards too difficult, institutions are effectively turning away business and ultimately sacrificing earnings growth.

At the same, they run the risk of driving both existing and potential customers into the arms of their competitors - a risky proposition as borrowers can often be a repeat source of business. Loan pricing can also be tricky. Sky-high rates can ultimately scare away would-be borrowers to competitors. But even when a bank is able to get a borrower to take a high-interest loan, it has to be careful not to put themselves at risk.

If a banks sets rates too high and a borrower is unable to keep up with payments, the bank only has itself to blame when defaults happen. "There is no amount of interest you can charge on a bad loan that will make up for it," said Queener.  

Record Foreclosures Shake California in July
Each month I do a foreclosure report for the state of CA.  CA makes up roughly 35% of the total unit count and 40-45% of the total dollar volume of all foreclosures in the nation. ForeclosureRadar supplies the best data available and I add in my mojo each month.

Sean O’toole, CEO of Foreclosure Radar, was interviewed for a CNN Money story released today and spilled the beans early.  Since its now in the public domain I can let out the headline foreclosure data early. [The story] pertains to the new FHA bailout law and the $4 billion waste of money for states to rehab foreclosed houses.

July was another record month for foreclosures in the state of CA with all hell breaking lose and banks taking back roughly 26,500 homes for $12.5 billion.  ’Record-breaking’ is not a good thing in the foreclosure universe.  This 25% increase breaks all records ever posted and all foreclosure estimates. 

If past percentages hold true, next week when the national numbers are released by other data sources, the numbers should also show a similar increase.  However, not everyone gathers data the same way so I can’t guaranty what others will report. 

If their data do mirror this report, I do not know how the markets will react to this but many times in the past, they have not responded very well to ’surging foreclosure rates’. In May we passed $10 billion for the first time with $10.4 billion in loans, or roughly 24k homes, going back to the banks. 

In June, there were $10.2 billion in loans taken back by the banks, a slight drop.  This was an encouraging sign until July’s figures were tallied. To clarify, when I say ‘loans taken back by banks’, these are actual foreclosures. When a home goes to the auction block the bank puts up the opening bid.

If no 3rd party bidder comes in, the bank buys it back.  All year long in CA at least, banks have been buying back roughly 97-98% of all homes that go on the auction block.  That is an astounding figure in and of itself! This $12.5 billion in foreclosures were from Notice-of-Defaults (NOD) from the February time frame. 

It takes roughly 140 days in CA to go from NOD to foreclosure auction currently due to the back log. In Feb we had a drop in NOD’s to about 37k due to Feb being a short month.  But from March though June we saw NOD’s shoot back up to record levels of about 43k per month (see chart below).

This means that the number and dollar amount of foreclosures from Sept through Oct at least should be even greater than July by 10-20% depending on fluctuating cure rates.

Mortgages Made in 2007 Go Bad at Rapid Clip
Mortgages issued in the first part of 2007 are going bad at a pace that far outstrips the 2006 vintage, suggesting that the blow to the financial system from U.S. housing woes will be deeper than many people earlier estimated.

An analysis prepared for The Wall Street Journal by the Federal Deposit Insurance Corp. shows that 0.91% of prime mortgages from 2007 were seriously delinquent after 12 months, meaning they were in foreclosure or at least 90 days past due. The equivalent figure for 2006 prime mortgages was just 0.33% after 12 months.

The data reflect delinquencies as of April 30. Evidence that lax lending standards were leading to higher mortgage delinquencies first emerged in late 2006. The first major casualty of the subprime credit crisis, New Century Financial Corp., imploded in early 2007. Yet the data from the FDIC and others suggest that lenders didn't substantially tighten standards until at least July or August 2007, when credit jitters hit Wall Street and financial stocks began to swoon.

The FDIC's analysis was based on mortgage data provided by LoanPerformance, a unit of FirstAmerican CoreLogic Inc. LoanPerformance says it tracks more than 95% of mortgages that were bundled into securities by financial institutions, not including those securitized by government-sponsored mortgage giants Fannie Mae and Freddie Mac.

Data on other classes of mortgages suggest the same trend. Freddie Mac reported Wednesday that 1.38% of the 2007-vintage loans it purchased were seriously delinquent after 18 months compared with 0.38% of 2006 loans at the same point in their life. Freddie Mac generally purchases loans made to creditworthy borrowers.

Last month, J.P. Morgan Chase & Co. said it expects losses on prime mortgages that weren't securitized and remain on its books to triple from current levels. The increase in bad loans is driven mostly by jumbo mortgages originated in the second half of 2007, a company spokesman said.

Until these bad loans are fully digested, "foreclosures will remain at record highs, the financial system will be under severe stress and the broader economy will sputter," said Mark Zandi, chief economist of Moody's One piece of good news, he said, is that loans originated in the fourth quarter of 2007 and early 2008 appear to be performing better.

Economists and industry officials say several factors may account for the dismal performance of the class of 2007. Home prices were falling sharply in much of the country by 2007, meaning many borrowers who took out loans in that year for nearly the full price of the home now owe more than the home is worth. These borrowers are particularly vulnerable to a weakening economy, and have difficulty selling or refinancing if they lose their job.

Questionable business practices may have played a role, too. Some of the 2007 loans "were knowingly originated as really bad loans," says Chris Mayer, a professor of real estate at Columbia University's business school. Mortgage originators who profited handsomely from the housing boom "realized the game was completely over" and pushed mortgages out the door, says Mr. Mayer.

As credit began to tighten last year, some mortgage brokers and borrowers tried to circumvent tougher restrictions by inflating borrowers' credit scores and appraisal values, says Jay Brinkmann, vice president of research and economics for the Mortgage Bankers Association.

At Washington Mutual Inc., 27.2% of subprime mortgages originated in 2007 were at least 30 days past due at the end of the second quarter, compared with 24.3% of such loans originated in 2006. National City Corp. said recently that 2007 loans are driving delinquencies in its home-equity portfolio.

Some 65% of subprime loans originated in 2007 will end up in default compared with about 45% of those originated in 2006, according to estimates by UBS AG, which looked at loans packaged into securities. To be sure, lenders did take some steps to cut their losses.

The Federal Reserve Board's quarterly survey of bank loan officers indicates that lenders began to tighten underwriting standards in late 2006. And loan volume declined 18.5% last year, according to the trade publication Inside Mortgage Finance. Still, it's now evident they didn't pull back far enough, at least in the first half of the year.

The average credit score of borrowers who took out Alt-A adjustable-rate mortgages edged upwards in 2007, according to UBS, but the portion of such borrowers who fully documented their income and assets dipped. Alt-A is a class between prime and subprime.

The share of borrowers with prime jumbo loans who took out a "piggyback" second mortgage -- which allowed borrowers to finance more than 80% of their home's value without private mortgage insurance -- climbed to a record 33% in 2007, according to the UBS analysis. In other words, many people buying expensive homes were putting little of their own money down.

"The more conservative lenders were scaling back in 2007, but the more aggressive lenders were expanding," says Frederick Cannon, an analyst with Keefe, Bruyette & Woods. The sharpest pullback in lending didn't begin until the second half of the year, when investor demand for mortgage-backed securities waned.

Wells Fargo & Co. reduced the maximum amount borrowers could finance in the fourth quarter of 2007 and again in the first quarter of 2008, according to a recent analyst presentation. J.P. Morgan Chase, meanwhile, tightened lending standards twice by August 2007, but was still making some loans that didn't require full documentation of borrowers' income and assets.

Wachovia Corp. made its most drastic changes in loan standards earlier this year. The changes that lenders did make often took 60 to 90 days to implement because companies need to clean out their pipelines and change their systems, says Michael Zimmerman, senior vice president for investor relations at mortgage insurer MGIC Corp.

New York City Housing Slump May Hit In 2009
New York City apartments, long immune to the national housing slump, could see their first price declines in a decade, quarterly reports scheduled for release today suggest. If the credit crunch does not improve and Wall Street layoffs continue, experts say plummeting sales activity and rising inventory may lead to falling prices in segments of the market.

The Corcoran Group's quarterly report shows a steep 38% drop in sales, to 3,351 properties, in the first quarter of 2008, down from 5,404 in the same period of 2007, while Prudential Douglas Elliman records a decrease of 21.8%, to 3,081 properties, down from 3,939. Meanwhile, inventory grew 31.2% year-on-year and 10.9% versus the prior quarter, Elliman's report shows.

The slowdown spells trouble for next year, though prices are holding strong for now, an appraiser who produced the quarterly report for Prudential Douglas Elliman, Jonathan Miller, said. Unless the credit crunch lessens — which is unlikely in the short term, he said — "it will have the effect of tempering prices," Mr. Miller said. "In some markets, it suggests that prices will be flat; in some, declines."

The slowdown in activity can be attributed largely to fears of Wall Street layoffs, fears of a recession, and especially the credit crunch, which makes it harder for prospective buyers to get home loans, he said. "I'm more worried about 2009 than I am about 2008," Mr. Miller said. "I don't see anything on the horizon that will create an increase in prices or demand."

Data from Prudential Douglas Elliman, the Corcoran Group, Brown Harris Stevens, and Halstead Property show that average home prices grew significantly during the second quarter of 2007, but declined from last quarter. In the reports, the average sales price of condominiums and cooperative apartments fell between 1% and 3% versus last quarter, but jumped between 25% and 36% from a year ago. Median sales prices — a more accurate indicator of overall market health, experts say — increased between 8% and 23%.

Much like last quarter, the closing of sales at two new luxury buildings, in this case 15 Central Park West and the Plaza, drove up average prices versus last year, analysts said. "We've had significant price skew caused by the closing activity at a number of high-end buildings," Mr. Miller said.

Those two buildings don't account for all the price increases. The high prices indicate healthy activity in the luxury market and among sales of new condo developments. "This is a two-tiered market — the luxury market and the rest of the market," the CEO of the Corcoran Group, Pamela Liebman, said. "That's one of the reasons the New York market has remained so strong."

She added that new development in particular is selling at high prices, with Corcoran's report showing a 61% increase in the average sales price, to $2.199 million from $1.367 million a year ago "Years ago, we were all about the co-ops," she said. "That's not what the New York market is about anymore."

Foreign capital also has been credited with driving prices upward. "The foreigners have done a good job of keeping the prices up," the president of Prudential Douglas Elliman, Dottie Herman, said. Still, she said, the increase in inventory and slowing of sales is worrisome, especially for certain segments of the market. "I do think credit, and the amount that people can borrow, will affect the middle market in New York City."

The founder of, Matthew Haines, attributed significant drops in the number of transactions to a particularly high number of sales last year. "2007 was a crazy year — it was a spike upward. 2008 looks like it's going to return to normal." Next year, when more financial sector layoffs are predicted, may be another story.

"The big variable would be layoffs," the director of sales at Brown Harris Stevens, James Gricar, said. "If we start to see massive layoffs, that will start to affect average prices." The Manhattan market has shown peaks and valleys in recent years, including the post-September 11, 2001, period, but the last time New York City experienced significant price declines was in the mid-1990s, he said.

"We'll be watching what happens on Wall Street very carefully," Mr. Haines said. Meanwhile, properties spent 7.5% fewer days on the market than last quarter, but 15% more year-on-year, and the number of listing discounts increased to 3.6% from 3.2% last quarter, up from 2.2% in the second quarter of 2007.

UK house prices back to 2006 and still falling - $43,000 is wiped off average house
Record-breaking falls in house prices have now wiped more than £22,000 off the value of the average home, erasing all the past two years of financial gains for homeowners, figures revealed yesterday.

Average house prices tumbled by another 1.7 per cent last month, equivalent to more than £3,000, adding to a series of plunges in home values since the spring, Halifax, Britain’s biggest mortgage lender, said. This pushed the drop in house prices suffered since the market’s peak to 11 per cent, taking the annual fall into double digits for the first time since the end of the last recession in 1992. Prices have fallen 7.6 per cent since April alone.

Despite calls for a cut in interest rates, the Bank of England held them at 5 per cent for the third consecutive month as it pursued its goal of curbing inflation. The price of an average home is now £177,351, just a couple of hundred pounds less than in July 2006, but £22,249 lower than in August last year when prices peaked at £199,600.

Economists now say that property could lose as much as a fifth of its value before the market begins to recover, a poll by Reuters showed. This would cut the average house price to £160,000. But some economists have an even gloomier outlook, forecasting that prices will tumble by 30 per cent from the market’s peak, taking the average house price to £140,000.

Further falls in house prices will raise the spectre of Eighties-style negative equity” for thousands more homeowners. About 70,000 borrowers already owe more on their property than it is worth, research by Standard & Poor’s, the credit ratings agency, showed. Those in negative equity who want to move house, or who fall behind with their mortgage repayments, will have to sell their home at a loss.

House price falls have been exacerbated by the seizure in mortgage lending due to the credit crisis. Lenders, struggling to secure funding during the credit crunch, have been demanding heftier deposits and much higher interest rates on their loans to protect their margins. First-time buyers who do not have at least a 5 per cent deposit will not secure a deal easily while the best rates are reserved for those with a deposit of 25 per cent or more. The lack of buyers means sellers are being forced to cut their prices to secure a sale.

The financial pain from tumbling house prices comes as families suffer an increasing squeeze from soaring fuel, food and energy prices. The cost of food has risen by nearly 10 per cent over the past year, while the price of a tank of petrol for a midsize car is now nearly £10 more expensive.

The battle to quell rising inflation lay behind the decision to keep interest rates on hold. Inflation hit a ten-year high of 3.8 per cent last month, nearly double the Bank’s 2 per cent target. The Bank has already indicated that it expects inflation to rise to more than 4 per cent this year, but many economists now expect that it will leap to 5 per cent in coming months.

Increasing numbers of borrowers are encountering difficulties with their mortgage payments as bills soar. The number of borrowers who have missed three or more mortgage payments has more than doubled to 300,000 over the past year, Financial Services Authority figures show.

There has been some good news for homeowners in recent weeks as some mortgage lenders have cut their rates. Nationwide will cut the rates on some of its two and three-year deals by up to 0.25 percentage points tomorrow. This week Halifax cut its rates by up to 0.38 percentage points while Abbey trimmed its rates by up to 0.10 percentage points.

But even with these cuts, mortgage rates are still far higher than they were two or three years ago. A borrower with a £200,000 mortgage and 10 per cent equity in their home coming to the end of a two-year deal with Nationwide will still have to find an extra £230 a month if choosing another two-year fixed deal with the lender. About 1.5 million people reach the end of their mortgage deals this year.

Canada sheds 55,000 jobs in July
Canada's labour market shed 55,000 in July to post the worst two-month decline in seventeen years, Statistics Canada reported on Friday. Combined with June's job losses, the two-month period is the steepest fall since the 1991 recession.

"Try as we might to find them, there was no silver lining to this report as all the details were bad," wrote Scotia economist Derek Holt in a morning research note. The majority of losses - 48,000 - came from the part-time sector, the government agency said. The results are well short of economists' estimates, which called for a modest 5,000 uptick in employment.

Unemployment was also expected to remain at June's 6.2%, but the unemployment rate actually shrunk 0.1 percentage points as more people decided to exit the labour market. Twenty of 22 economist surveyed by Scotiabank expected job gains or "flatness," according to Scotia's Mr. Holt, who called the results "remarkably bad."

The news likely means the Bank of Canada will keep its benchmark borrowing rate unchanged, said RBC assistant chief economist, Paul Ferley. "Though the Bank of Canada has recently put greater emphasis on the risk of inflation pressures taking hold in the economy, today's report will re-establish the downside risks to growth as of equal concern," he said in a morning research note. "These offsetting risks will likely result in the central bank holding interest rates steady near term."

Private sector declines came from heavy losses in manufacturing, most acutely felt in central Canada. Commercial and educational services also suffered declines. "The only significant gains were in accommodation and food services," Statscan said. In contrast, the public sector actually posted a modest gain, and has grown 6.1% nationally since last July, compared with 0.5% increase in private sector jobs.

While the majority of the losses stem from part-time work, it seems part-time manufacturing jobs bore the brunt of the losses, mostly within the manufacturing centres in Ontario. In total, manufacturing employment shed 32,000 jobs in July. Net employment in Quebec declined by 30,000 jobs in the month, pushing the unemployment rate up 0.2% to 7.4%. Ontario shed 19,000 jobs - all in full-time.

It was the largest-ever monthly drop in manufacturing jobs in Canada's most populous province, according to BMO economist Jennifer Lee.
"Ontario and Quebec took one for the team," Ms. Lee said. "Canada's economy is clearly downshifting, in response to the downturn in the U.S. and to the run-up in the [Canadian dollar]. Of relief to policymakers, the slackening labour market is taking steam out of wages."

Over the past 12 months, manufacturing employment across Canada is down 88,000, with nearly all the losses in Ontario, Statscan said.
Employment across Canada through the first several months of the year defied any evidence of recession, averaging gains of 10,000 a month. July's result have changed that perception, RBC's Mr. Ferley said.

"Employment in Canada has for most of this year surprised on the upside though this was quickly reversed with this morning's numbers," he said. "Today's report provides strong evidence that labour markets are starting to succumb to weakening GDP growth."

Housing slump stalks Western Canada
As Canada's housing market shows fresh signs it has exited the boom phase, Merrill Lynch economists are cautioning homeowners to expect a “sustained downturn” in prices.

Nearly every major city in the West makes the list of most vulnerable markets, in addition to Montreal and Sudbury, according to a pair of Toronto-based economists at the bank. Soaring prices over much of the past decade have made the country's homeowners substantially richer.

The big question is whether a selloff could echo the wrenching downturn in the United States, where prices in Miami and Los Angeles have fallen as much as 28 per cent from the peak and average national prices are down 18 per cent in the past two years. The Merrill Lynch Canada study, which predicts a retrenchment, but not of the same magnitude as in the U.S., concludes the country's housing market is now the most expensive since 1991.

Markets in Regina, Saskatoon, Vancouver, Victoria, Calgary, Edmonton, Sudbury and Montreal are all more than 10 per cent overvalued, as calculated by economists David Wolf and Carolyn Kwan. Their analysis, which calculates fair value by using variables such as current prices, affordability and long-term average valuations, landed on the same day Statistics Canada said both residential and commercial construction intentions tumbled in June.

In sifting through recent data, the Merrill economists believe the country's housing market will suffer from excess supply and reduced demand as higher prices deter new buyers. They expect house price appreciation will stall, with western markets “most vulnerable to outright declines.” Other markets exposed to downward pressure include urban condos and suburbs where commuters face higher transportation costs due to rising fuel prices.

This retrenchment won't be nearly as severe as in the U.S. though, Mr. Wolf emphasized. “Are prices going to fall 20 per cent the way they did in the U.S.? Probably not,” he said. “But it's pretty clear that things are weakening and they're going to continue weakening for some time.”

Credit is the main difference between the two countries. Looser credit conditions south of the border fuelled easy lending, which in turn created excessive demand. “We never had that kind of credit excess in Canada,” Mr. Wolf said. Plus, much of this country's boom has been making up for lacklustre activity throughout the 1990s. Now, after years of ever-pricier homes and aggressive building, scales may have tipped.

The Merrill economists are most concerned about Saskatchewan, where the doubling of house prices in Regina and Saskatoon over the past two years means, they estimate, these markets are almost 50 per cent overvalued. In B.C., Vancouver's and Victoria's housing markets are now as much as 35 per cent overvalued, they believe. Markets in Alberta, meantime, have become slightly less overvalued in the past year.

The rest of the country looks “better balanced,” they said, with housing in Toronto essentially at fair value. Slowing activity and moderating prices would have broad economic ripples. Mr. Wolf sees cooling residential investment dampening inflation and knocking 0.6 percentage points off real gross domestic product next year.

Builders are already more cautious, with Statscan's report Thursday showing building permits fell 5.3 per cent in June – the steepest drop this year. Last week, a Canadian Real Estate Association report showed sales activity slumped 13.1 per cent in the first half of the year. National house prices, though, have so far held steady.

The head of construction powerhouse EllisDon is “very concerned” about where the Canadian economy is heading, and what it might mean for building activity. “I am worried right across the country that things are tightening up and that a year from now we are going to see a drop-off,” said Geoff Smith, the company's president and CEO.

Nowhere has the market been more wild in the past year than Saskatoon, which has bubbled with stories of bidding wars and frenzied speculators. Yet soaring house prices may finally be deterring buyers. “It's quiet on the buyers' side. Listings are up, sales are down,” said Ken Glauser, associate broker at Henry Moulin Realty Inc. “Surprisingly, the overall average price isn't down though.”

He expects a slight cooling-off in prices, but says a strong local economy means they won't fall much. And he's rather relieved the market is losing some of its fevered pitch. Nowadays, “people can go home and think about their bids overnight,” Mr. Glauser said. “Last year, they could hardly get back to their car to think about it.”

Canadian housing enters a 'sustained downturn'
An outright decline in commodity prices could spell disaster for Canada's housing market, which already appears to have entered a "sustained downturn," David Wolf, an economist at Merrill Lynch, Canada, warned on Thursday.

He said while the risk of a housing market crash was small, an "outright bust" in commodity prices would make the scenario "a rather more serious threat." The recent trickle of data has shown a significant slow down in the country's housing market following its record pace of growth.

Demand has eased, supply continues to creep up, credit conditions remain tight and house-price growth has turned flat with declines in some regions. The value of building permits in June fell a seasonally adjusted 5.3% from the previous month, indicating that construction activity in the coming months would likely be lower, Statistics Canada figures showed yesterday.

The data is notoriously volatile, but the trend rate of growth for residential building has declined since the beginning of the year. "Canada's housing market is entering a sustained downturn, in our view," Mr. Wolf said. "It does look like Canadian houses finally got too expensive, and builders too aggressive, for the underlying demand environment."

He estimated that markets with the strongest price growth in recent years, such as Regina, Saskatoon, Vancouver, Victoria, Calgary, Edmonton, Sudbury and Montreal, were all more than 10% overvalued. On a national basis, Mr. Wolf predicts house price growth to remain flat.

Merrill Lynch expects commodity prices to moderate over the medium term; a scenario that would aid in the housing market downturn, but not cause an outright bust. Others, such as CIBC have a more bullish forecast for commodities, namely oil, expecting prices to continue to rise.

This would continue to support Canada's terms of trade by bringing in higher export revenue relative to the amount spent on imports. But Mr. Wolf said the risk of a housing crash would become "a serious threat" if the recent correction in commodities continued because it could cause the terms of trade to deteriorate.

The price of light crude has fallen about 18% since peaking at a record high of US$147.27 a barrel on July 11 continued. Light crude for September delivery settled at US$120.02 a barrel in New York on Thursday. "The take-off in commodity prices since 2002 has driven an enormous improvement in Canada's terms of trade, accounting for much of the strong growth in Canadian national income that has, in turn, provided the fundamental underpinning for the housing market boom," Mr. Wolf said.

A Bank of Canada working paper by senior analyst Hajime Tomura released earlier this year argued that a decline in the terms of trade would likely cause house prices to fall. "... if households are uncertain about the duration of an improvement in the terms of trade, then house prices will abruptly drop when the terms of trade stop improving," Mr. Tomura said.

ECB hawks take a pounding
Collapsing growth in Germany, Italy and Spain has forced the European Central Bank to abandon its hawkish policy stance, preparing the way for likely rate cuts in coming months.

Jean-Claude Trichet, the ECB's president, said yesterday that the picture had darkened over recent months and growth was now "particularly weak" across the eurozone. "We knew that there were downside risks, and those risks are materialising," he said after a meeting by the governing council that left rates on hold at 4.25pc.

The comments caused the euro to plummet by almost two cents against the dollar to $1.5310 yesterday. Traders scrambled to unwind bets on future rate rises. "The ECB has capitulated on the economic outlook," said Julian Callow, Europe economist at Barclays Capital.

"They have cut out all reference to 'moderate ongoing growth' and no longer seem sure that the economy will recover even in the fourth quarter. I detect meaningful concern," he said. While Mr Trichet issued the usual warnings about inflation - now at a eurozone record of 4.1pc - these were largely ignored by market players convinced that the tightening cycle is at last over.

There is growing speculation that the seven-year surge in the euro against all major currencies may also have peaked. Hans Redeker, currency chief at BNP Paribas, said the ECB had blundered by raising rates a quarter point into the teeth of the storm last month, misjudging the severity of the credit crunch as banks cut overdraft lines to companies in need. "The July rate rise looks like a policy mistake in need of being urgently reversed," he said.

Data across the region has been dire over recent weeks. The great shock has been the precipitous downturn in Germany, viewed as the export locomotive for the whole currency bloc. Officials in Berlin say Germany's economy contracted by 1pc in the second quarter. Industrial orders have fallen for seven months in a row, led by a collapse in orders for machine tools and equipment from Asia.

The whole Pacific region is now slowing hard. Japan's Cabinet Office declared this week that the country was almost certainly in recession after output fell by 2.3pc in the second quarter. New Zealand has declared a recession. Hong Kong and Singapore have both issued growth warnings.

Lehman Bros says there is evidence of a "generalised slowdown" in China, with a risk that tumbling property and equity prices could combine with sharply slowing exports. A third of the clothing factories in Guangdong have closed this year.

Jim O'Neill, chief economist at Goldman Sachs, said the slide in Germany had knocked away the eurozone's key prop. "There's not much left once you take out Germany's staggering export growth. Each time there's a global shock, European policy makers say that they are relatively immune, and each time that turns out not be the case," he said.

The picture is now uniformly grim across Europe. Ireland is in recession. "Italy's economy is comatose," said Prof Nouriel Roubini, from New York University. House prices are falling in France and consumer confidence is at a 21-year low. Spain's manufacturing output fell 9.5pc in June, confirming fears that the crisis is spreading rapidly from the collapse in the construction sector (18pc of GDP) to the rest of the economy.

The Spanish credit association Adicae said yesterday that the issuance of new mortgages had dropped by 40pc in June. The number of households with mortgage "troubles" has reached four million. Unemployment is expected to reach 2.7m or 12.5pc by the end of the year. "The number of people in difficulty has risen intensely," said the group.

Neil Mellor, a currency strategist at the Bank of New York Mellon, said it was still too early to assume that the ECB had finished tightening. "The data has been dreadful, but the ECB has surprised us before. They are monetarists after all," he said.

Mr Trichet fears the start of a 1970s wage spiral as the effects of the oil and food spike feed into inflation expectations. He said it was "absolutely essential" to avoid second-round contagion feeding through the wage system.

Lufthansa staff have just secured a pay deal of 5.1pc, setting the stage for the autumn pay rounds with car workers giant IG Metall. Some degree of pay catch-up in Germany is expected after the ferocious squeeze of recent years. The problem is more serious in Spain and Belgium - and to a lesser extent Italy and France - which still index pay settlements to inflation.

The result is to lock these countries into sliding labour competitiveness, and widen the rift between EMU states. Europe's notoriously "sticky wages" prevents crumbling growth from bringing down inflation rapidly as in Anglo-Saxon states, and helps explain why the ECB is less willing to "look through" the current oil price surge than the US Federal Reserve.

"This indexation is a serious danger," said Jean-Michel Six, Europe economist at Standard & Poor's. "It makes it much harder for the ECB to steer monetary policy in the single currency. It should be stopped altogether."

Insight into hungry US
Vicki Escarra, president and CEO of the nation's largest food bank network, stopped in Sarasota on Wednesday on a weeklong tour of Florida.

Escarra left her job as vice president of customer service at Delta Air Lines and took charge of America's Second Harvest in 2006.
The network feeds 25 million people annually through food banks around the country. It distributes 2.2 billion pounds of food, enough to make it comparable to the largest grocery chains in the nation.

Here is what Escarra said at All Faiths Food Bank in an interview about a coming advertising campaign, who she wants to be the next president, and what the economic slump means for those without enough to eat.

Q:How much has demand at food banks increased nationally, and who is visiting them?
ESCARRA:In January we surveyed our 200 food banks and demand was up 20 percent over last year. We're seeing more and more people visiting food banks for the first time because they've lost their jobs or they're not getting raises. They can't afford vegetables or protein, the essentials of a good diet. Most of the people who come to food banks are on food stamps, but those are only $3 per person a day.

Q:On the network's Web site, there is a lot of talk about "food insecurity." What does that mean?
ESCARRA:There are 35 million Americans living without knowing consistently where their next meal will come from. I think that's pretty stunning. Making the situation all the more critical, food is up year over year 7 or 8 percent, dairy products and meat are up 25 to 30 percent, fuel is up 35 percent year over year.

Q:What do you receive in donations annually and how much do you need?
ESCARRA:We receive $75 million a year and we need about $250 million a year to feed the new demand. Most of our donations are from large manufacturing companies like Kellogg, General Mills. About a quarter of our donations come from the government.

Q:What are you doing to raise awareness?
ESCARRA:This November, we are changing our name to "Feeding America." We've found that "America's Second Harvest" has a lot of strength within the community of people who know what we do, but if you step outside that segment, people don't know that "America's Second Harvest" is a food bank. We're also launching a national advertising campaign through the Ad Council in November.

Q:Do you have a hard time convincing people that there is a hunger problem in this country?
ESCARRA:I think the public in general is not aware that it is so pervasive. Kids don't want to go to school and say, "Last night I had a piece of toast for dinner." Parents don't want to talk about it. Kids don't want to talk about it. Senior citizens really don't want to talk about it because they're proud. Then there is the fact that we've not spoken about it. It's not something America is proud of.

Q:Do you think we're in a recession?
ESCARRA:I think we are definitely in a recession and I haven't seen any indicators that would lead anyone to believe we're going to get out of it anytime soon. We're expecting this to be pretty severe for the next 18 months at least.

Q:Where is the need for food greatest?
ESCARRA:We have a lot of pockets around the country where we're giving people food but we're not giving them enough. Most of these are in rural parts of the country. It's difficult to get trucks in to take food to people. With the price of fuel being at an all-time high you might be able to get the food but then you can't get the money for the transportation.

Q:What do you think it would take to solve the problem of hunger in America?
ESCARRA:I think it will take a lot of very strong leadership by the new president, who makes it a priority to address not only hunger in America, but also the issue of poverty. When you look at what happened in England five years ago, Tony Blair made it a priority and they substantially reduced childhood hunger in three to five years.

Food bank says need keeps rising
Demand for food from the Akron-Canton Regional Foodbank is increasing rapidly. The food bank released statistics Wednesday showing that for the first six months of this year, compared with the same period last year, food distributions increased by 14 percent.

At the same time, agencies that receive food are reporting an increase of 20 percent in the number of people being served. Food distribution at the food bank increased by 7 percent in the second quarter of the year compared with the first quarter, said Dan Flowers, president and CEO of the food bank.

At the current rate of distributing food to area shelters and food cupboards, Flowers said, the agency could distribute 14 million pounds of food this year, compared with 12 million in 2007. As a result, Flowers said this is ''a historic and unprecedented time in the history of the anti-hunger movement.''

The food bank statistics were released as U.S. Sen. Sherrod Brown, D-Ohio, U.S. Rep. Betty Sutton, D-Copley Twp., Akron Mayor Don Plusquellic and other civic leaders toured the food bank's new $6 million facility at 350 Opportunity Parkway in Akron. The food bank is seeking to raise an additional $2 million for an operating endowment for the new building.

Brown, who was instrumental in securing $368,000 in federal funds for fiscal year 2008 for the food bank, said the need for food for Ohioans is apparent from his travels across the state. ''The question of feeding people comes up time and time again,'' he said. In the city of Logan in Hocking County, he said, people lined up at 3 a.m. at a food center, which eventually served 2,000 people out of a county population of about 30,000.

Increasingly, Brown said, customers at food banks are people who are working. ''People who are doing everything right, working hard and playing by the rules,'' he said. Sutton, who has volunteered at the food bank, spoke of the ''newly poor'' who are receiving help from food banks. She said she has heard of people who ''used to be donors to the food bank and now are in need of services.''

Brown and Sutton, along with Reps. Tim Ryan, D-Niles, Ralph Regula, D-Navarre, and Steve LaTourette, R-Concord Township, supported the Farm Bill this year that provides financial support to hunger relief efforts at the food bank through USDA programs like the Emergency Food Assistance Program. ''Almost daily, the number of people seeking food assistance continues to rise,'' Flowers said.

Concern over French nuclear safety
The French state energy giants bidding to take control of Britain's nuclear industry are facing concern over their safety record in France after the fourth radioactive incident of the summer.

The latest safety lapse occurred at a nuclear waste plant run by a subsidiary of Areva, the group which is leading a consortium in line to take over management of Sellafield in the UK. Although the environmental impact of the leaks is limited, according to the French authorities, they have sapped confidence just as Paris is pushing to export its nuclear technology.

Areva, which is also seeking to design the next generation of British nuclear reactors, faced calls to shut down the plant at Tricastin in southern France after it was found to have emitted its annual quota of radioactive gas in just six months.

France's Nuclear Safety Authority ordered the company to stop activities resulting in carbon-14 releases until January after the failing, which involved the treatment of radioactive medical waste. The authority added: “The impact of this discharge on the environment and the population has been judged very weak.”

But it was a further embarrassment to Anne Lauvergeon, Areva's chief executive, who is nicknamed Atomic Anne, following the overflow last month of about 75kg of untreated uranium at the same plant, which is next to the Tricastin reactor. She initially dismissed the leak as an 'anomaly'.

But with locals having to avoid tap water and vineyard owners changing the name of their wine because Coteaux de Tricastin is now associated in Gallic minds with radioactive pollution, she admitted Areva had underestimated public fears.

Questions are also being asked about Areva's nuclear partner, EDF, the French state electricity group which hopes to take control of British Energy, after 115 of its staff were exposed to low level radiation in separate lapses at two of its power stations, including Tricastin.

The incidents have combined to give France's previously weak anti-nuclear lobby a stage from which to contest an industry which supplies 80 per of French electricity, the highest rate in the world. Sortir Du Nucleeaire (Get Out of Nuclear Power) yesterday denounced Areva's radioactive emissions as 'very dangerous' and called for an official safety inspection of its factories.


Anonymous said...

“The housing bill has put forward the most explicit description yet of the true corporate model prevailing in America – Congressionally legislated businesses with central bank determined stock prices.

It is a fascinating combination of friendly fascism and multiple personality disorder. Now that the fundamental nature of the Tapeworm corporation is out of the closet and clear, keeping it afloat will require a mind-numbing combination of global force to maintain financial liquidity and global propaganda and payola to preserve its brand.”
Housing Bill, Part VI

Anonymous said...

Hi Ilargi,

DJIA ends in green more often than before. The dollar rises slightly.
Does it mean, that things are going better finally?

. said...

For those interested in Ossetian troubles I have made a much better map. The blue goober in the middle is the disputed region.

Anonymous said...

In the words of Ilargi himself, the stock market is not a measure of the health of the economy; it is a measure of gullibility. So if you ask "things are going better" , I hope it's a rhetorical question ;)

Anonymous said...


Oil has been falling so I guess one could expect the dollar to rise on that. I wouldn't trust that market though, I think that the only green light here would be in the slightly decreased cost of driving to the poorhouse.

Ilargi said...


You may have to update that map, 1991 is a long time ago. Georgia as a Soviet Socialist Republic got me looking at the date. That's been a while; wonder where the borders are these days.


John is largely right. There's also a central bank plan to support the USD that's taking affect. Question is how much the plan can do, and for how long.

The losses at financial institutions are not going to stop miraculously, just because the US Dollar gains a few percent. These losses have nothing to do with currencies, nor with their exchange rates.

They stem from pure undiluted gambling: financial institutions that have bought 40-50-60 times more in risk-bearing paper than they hold in underlying (*) assets.

The vast majority of the gambles have ended in pretty disastrous losses. Many of these institutions, if they were to come clean today, would owe a lot more than they own.

What keeps them alive is, as I said yesterday, a culture that condones and encourages incest, moral hazard and creative accounting.

That culture is tolerated by the parties that these financial institutions have placed their bets with, i.e. Japan, China, because they have faith that all losses will eventually be paid by the US taxpayer.

(*): I just now figured I maybe need to find a new definition for the term "(under-) lying".

Anonymous said...

Ilargi, you failed to mention the BP (UK sponsored) oil pipeline from Baku to Tblisi to Ceyhan, through which flows the oil from Azerbaijan produced in the Caspian Sea.
That is surely the reason for the US troops in Georgia, this oil pipeline is vital for the crude oil supply to balance the declining countries (like Russia itself, Mexico) and the socially disgraced countries like Nigeria and Venezuela.
Just ask Ms. Condoleezza, she surely can explain to you the facts.

Anonymous said...


Here is an oil graph of HBP NYMEX Crude Oil Bear Plus and here is the graph of the Canadian dollar against the US dollar.

Going over the period from the middle of july to now there has been what looks to me as a lockstep. This synchronicity may have no true value but it could give a reason for that gambling, you mention, to be done.

And she'd been struck by lightning seven or eight times
And she hated the mention of rain
(T. Waits)

Anonymous said...

@ilargi: "That culture is tolerated by the parties that these financial institutions have placed their bets with, i.e. Japan, China, because they have faith that all losses will eventually be paid by the US taxpayer."

Hm, eventually, there will be so few jobs in America where the citizens pay taxes that all losses can never be paid. Then what happens?
How long will China, Japan wait to be paid for their losses?

Anonymous Reader

Ilargi said...

Ilargi, you failed to mention...

No, I just kept it at OIL being the reason for the US to be there. There is so much I could say about the situation, and decided not to for now.

Hey, look at the map between the Black Sea and the Caspian. That's Russia's entry to the Mid East. They'll never give that up.

I'm still surprised they let Saakashvili do his thing till now. And still wondering what the US were thinking last night sending in tanks to Tchinvali. They knew what would happen.

It may stop for now, the killing, since Putin showed what he means is business, but it'll be back soon. It could also get worse fast. This is the most crucial region on the planet when it comes to energy.

Anonymous said...

After reading this blog and comments every day for for several months, I really think it would add a lot (for me) if there were less anonymouses and more tags. One could pick a tag and still be completely anonymous. After all, I have thousands of chickens on my island. Singling me out would be difficult. It would be much easier to follow threads and develop an appreciation of personalities and changing points of view. Anonymous 6:43 PM, for example, is not a real eye catcher.

Anonymous said...

Ilargi -"John is largely right. There's also a central bank plan to support the USD that's taking affect. Question is how much the plan can do, and for how long."

Could you give us some idea how they are putting it into effect other than Trichet starting to make cooing noises? But it's not just the Euro. The USD has firmed hugely against all the major currency during the last two weeks. I assumed it had to do with the commodities plunge and the USD still being the reserve. Though why falling commodity prices should firm up the dollar against other currencies doesn't make all that much sense to me. Especially with crude oil, falling prices and weakening demand means that countries have to buy less dollars to get their petro fix.

Anonymous said...

You're right, Ilargi - "This is the most crucial region on the planet when it comes to energy."

The US empire is behind it all.


Anonymous said...

El pollo,
Though why falling commodity prices should firm up the dollar against other currencies doesn't make all that much sense to me.

Following from that, do you have trouble with the Canadian dollar falling with the drop in commodity prices? To me it just looks like the other end of the same stick.

Anonymous said...

There is a whole hell of a lot going on here below the surface I bet...w/Georgia hostile the land route to the main oil fields of the east is closed...and what kind of sweet nothings have we been saying to the Georgian Pres I wonder.....I am really hoping this settles down as it looks way too much like ww3 to me these days ..


Anonymous said...

See this link:

The hostilies in Georgia are a distraction for Russia while the US fleet takes up positions for a blockade of Iran, to enforce the new sanctions. The timing, during the Olympics, means China will be distracted too.

Stoneleigh said...

Anon (@4:43),

The DJIA is showing a modest counter-trend rally that should soon be over. Bear market rallies can be sharp, but need not represent real buying interest as they are generally fueled by short-covering. Rallies can last a little longer if buying interest develops from the buy-the-dips crowd, but even then they're just an opportunity to fleece a few more suckers.

I'm not at all surprised that the USD is rallying, or that the commodities complex is falling, both of which I have been expecting for some time. The USD should rally on a flight to safety (however implausible that currently sounds) as deflation gathers speed in the next phase of the decline in the markets. I think we're approaching a cascade event (probably the first of several) that should accelerate into the autumn before we see another real rally, and the dollar may well spike over the same timeframe.

Commodities should fall substantially, as a result first of speculation driven in reverse, and then by demand destruction due to the destruction of purchasing power (as credit is withdrawn from the money supply in a general deflation). As they fall, they should become less and less affordable as purchasing power will be falling faster than price.

None of these factors mean that things are getting better. On the contrary, things are getting worse very rapidly.

Anonymous said...

Crystal Radio
"Following from that, do you have trouble with the Canadian dollar falling with the drop in commodity prices? To me it just looks like the other end of the same stick."

Well, I agree with you regarding the Canadian Dollar. But Canada is a special case with its huge reliance on both petro and agricultural exports.

Anonymous said...

Hi el pollo, not to be too argumentative but I would say the US is a bit of a special case as well, looking at the amount of oil it has to import. It's the stuff that has the US machine running and, as I see it, underlies what has been happening as you guys have gone from an oil rich and exporting nation to an importing one. But then I look at things not as an economist but in a very mechanistic way. I don't have the knowledge or training or the abilities in these matters like the guys who got us here, I am sure you will agree with me there.:)

scandia said...

Hi all...I am attending a conference in Alberta and experiencing withdrawal from my daily fix of TAE! Just snuk a few moments to check in...
I spent a night at the Fairmont in Edmonton. wonderful hotel now sitting in a dead downtown core. I was really surprised as I was expecting to see massive prosperity due to the oil boom/tar sands etc. Maybe all the flash/ money is in Calgary?