Monday, February 25, 2008

Paul B. Farrell's American Expose.

11 reasons Bernanke's recession lasts till 2011
Timing the next bull: Kick-start it in 2008? Or is it a long secular bear?
By Paul B. Farrell, MarketWatch
Last update: 7:32 p.m. EST Feb. 25, 2008
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ARROYO GRANDE, Calif. (MarketWatch) -- Remember that hot 1973 Stealer's Wheel song marking the end of the Nixon era? "'Cause I don't think that I can take anymore. Clowns to the left of me, jokers to the right, here I am stuck in the middle with you!"
It's still a perfect metaphor. Testifying before Congress: Fed Chairman Ben Bernanke on the left. Treasury Secretary Henry Paulson on the right. The American public stuck in the middle.
Last summer they assured us the subprime-credit crisis was "contained." We now know that was a big lie. They knew, had the facts, early warnings, lied and are still lying. More proof? They just told Congress: "America will avoid a recession." New data tells a different story.
Clowns to the left ... jokers right ... stuck in the middle ... can't take it anymore.
But we have to, we have to hang on at least 10 months more, praying they won't do too much more damage. But I'm afraid they will: more lies, blunders and incompetence will drag out this bear. Like the song says: "Got a feeling something ain't right."
Read the new InvestmentNews, a professional journal for financial advisers. The lead headline grabs you: "Bad times for stocks could last many years." A long secular bear.
Do you believe it? That's the big question today: When's the next bull? How long will the bear last? And forget Washington's rhetoric about "no recession." The truth is, you can call it a "bear," "slow growth," a "downturn," a "recession" -- call it whatever you want. Timing's the real question. How long will it last? When will it bottom? 2008? 2011?
Test your timing skill. You tell us, what'll drag this out 30 months, like in 2000-2002? Or shorten it? Here are 11 critical factors for your timing equation, things that could make this bear-recession shorter or longer. You tell us. Add a comment. What's your prediction: How long before the next bull?
1. Stagflation: Bernanke's no-win Achilles heel
Reading Fed-watcher William Fleckenstein's new book, "Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve," you get the feeling that for 18 years America's banking system was run like a "new age" hippy commune, by a Ayn Rand free spirit who believed "anything goes."
Now the Fed's run by a college professor and Fleckenstein says he's "in over his head." Except this is the real world, a $13 trillion economy in a $48 trillion world, not a college seminar on economic theory.
In the 1970s Nixon faced a similar problem, convinced then by Fed Chairman Arthur Burns: "No one ever lost an election on account of inflation." Wrong! Low rates generated inflation not growth. That stagflation triggered a bear/recession. Is Professor Ben trapped, repeating history?
2. Housing-credit meltdown: We've got a long way to go!
It's far from over folks and still spreading: Years of inventory, foreclosures, building slowdown, risky bond insurers, weak rating agencies, funds holding bad debt, freezing exits and fuzzy math on values. Yet Bernanke and Paulson still live in a Washington bubble of wishful-thinking fantasies.
Economic realists say what's needed is a massive $1.6 trillion demand-driven program (that's the record cash Corporate America's hoarding) not a dinky $160 billion supply-side "appease the voters" giveaway that ends up increasing the odds of a lengthy Nixon/Burns style bear-recession.
3. Commodities: World's new reserve 'currency,' not dollars
Forget paper money and IOUs. Commodities are the world's new "currency:" Hard stuff like oil, grains, metals, gold. And that means America is financing the growth of our enemies, surrendering our long-term economic power for short-term oil-guzzlers and plastic toys. We are responsible for making Russia and China into threatening world powers. Buffett warned us. We're selling the farm, piece by piece.
4. Toxic derivatives: World's $516 trillion ticking time bomb
Derivatives are great for deal-by-deal risk management in a $48 trillion GDP world. But leverage them 10 times over across the globe and we got a financial "weapon of mass economic destruction."
Bill Gross warns that the world's new unregulated "shadow banking system" is printing new money, now at $516 trillion, out of thin air, with no "central banks of last resort" backing up the "Frankenstein" monsters they've created.
5. Massive debt: Everywhere, trade, federal, states, local
America's Comptroller General David Walker, Congress's head accountant who is leaving his position next month, warns our government is "bankrupting America." Using unethical accounting worse than Enron's. Fiscal responsibility lost. He sees "striking similarities" with Rome. Both parties are gluttons in a spending orgy.
We spend-spend, load debt on future generations, then use accounting gimmicks to hide our greedy excesses: Hidden earmarks. Supplemental war appropriations. Meaningless IOUs after stealing from Social Security.
6. America's new 'pushers:' Banks feeding consumer addicts
Trader's Daily captured it perfectly: "Never underestimate the power of the superpsycho, hyper-spending American consumer. Where there is no cash, they will sell their soul. Or just charge it. Let's just not think about what it all means for credit-card debt down the road."
Meanwhile, the credit meltdown is making banks desperate for money. A recent Chase credit-card commercial fuels consumer addictions: Wife wants bigger television. Husband smiles. They shop to the pounding drumbeat of Queen's hit 80s song: "I want it all, I want it all, I want it all ... and I want it now!" Tag line: "Chase what matters!" Yes, Chase debt, all you addicts. Forget saving, spend like there's no tomorrow.
7. More wars: Pentagon predicts bigger, costlier conflicts
The Pentagon's internal studies see a perfect storm accelerating wars worldwide: Global population growth, limited natural resources and global warming. Our war machine is exploding. The Pentagon gets over 50% in the new federal budget. We're only 21% of the world's GDP, yet spend 47% of the world's total military expenditures.
Our power-hungry mindset is becoming self-destructive, suicidal. Remember Nixon strategist Kevin Phillips' warning: "Most great nations, at the peak of their economic power, become arrogant and wage great world wars at great cost, wasting vast resources, taking on huge debt, and ultimately burning themselves out."
8. Greed: Wall Street and Corporate America's defining 'value'
Values start at the top. But the top won't change for 10 months. Leadership, statesmanship and character are vanishing. Five short years ago Corporate America and the mutual fund industry were consumed by greed. How quickly we forget.
It's worse today. We see greed consuming not just Wall Street's clueless CEOs, but the entire industry: Outrageous bonuses of $38 billion amid mega-billion write-offs. Fire sales of billions more American equity to sovereign nations.
From the top down, greed is driving America from bubble to bubble. Wall Street's already fueling the next bubble, trading on a volatile market.
9. Democracy failing: America now run by 35,000 lobbyists!
Forget government "of the people, by the people, and for the people." Adam Smith's "invisible hand" is now a small group of 35,000 highly paid, greedy lobbyists demanding handouts. They run America from the shadows, for those at the top of the economic food chain and vastly outnumber Washington's 537 elected officials.
Nationally there's an estimated quarter million lobbyists, with hundreds of millions of dollars to buy favors in campaign contributions. Politicians talk "change," but America's lobbyists will still be working for their special interest clients in 2009. And they'll fight all "changes."
10. America's already in a recession, and in denial
This year's elections will be a huge factor in lengthening the recession. Our lame-duck government will delay action on critical issues. It reminds me of my days counseling addicts and alcoholics. Change never happens until they admit they have a problem. Same here.
Paulson and Bernanke cannot admit there's a recession. They'd have to take blame for America's failed policies. And congressional Democrats are weak co-conspirators in this meltdown. Nobody has the guts to take responsibility. They're all like addicts and alcoholics, in denial, giving lip-service to "change," while they blame the other guys and support ineffectual stimulus plans.
Vote for whomever, but this lame-duck mindset plus lingering partisan rancor will push any recovery at least into 2009, probably delay the next bull till 2010 or 2011.
11. Class warfare: Superrich vs. Main Street America
No matter who wins, the presidential campaign is warning us: A major battle's coming between "the rich and the rest;" over taxes, benefits, cuts, power.
For years the media collaborated with Wall Street and Corporate America, hyping "Ownership, the New American Dream," where everyone benefits, shares the wealth, gains a piece-of-the-action, ownership in "The Dream" through the magic of housing, stocks, growth, profits, retirement plans. But the housing-credit contagion killed the dream.
Yes, the superrich did get richer. But "the rest" didn't. And they're waking up to a widening gap. A backlash is brewing and will explode ... delaying a recovery and a new bull.
Clowns to the left, jokers right, we're stuck in the middle. Can't take it anymore? Add a timing comment. Tell us: When's the recovery? Next bull? Late 2008? Not till 2011?

California Dreaming (Wow)

For release:
Monday, Feb. 25, 2008

C.A.R. reports sales decrease 29.8 percent, median home price falls 21.9 percent

LOS ANGELES (Feb. 25) – Home sales decreased 29.8 percent in January in California compared with the same period a year ago, while the median price of an existing home fell 21.9 percent, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today.

“This most recent decrease in the median price is yet another result of the liquidity crunch, which has choked off sales in recent months for nearly half of California’s housing market," said C.A.R. President William E. Brown. "Sales do appear to be edging up, but recent declines in the median price have been due to a lack of sales in the over $500,000 range, where funds are extremely scarce and jumbo loan rates are at near-record margins compared to conforming loan rates.”

Closed escrow sales of existing, single-family detached homes in California totaled 313,580 in January at a seasonally adjusted annualized rate, according to information collected by C.A.R. from more than 90 local REALTOR® associations statewide. Statewide home resale activity decreased 29.8 percent from the 446,820 sales pace recorded in January 2007.

The statewide sales figure represents what the total number of homes sold during 2008 would be if sales maintained the January pace throughout the year. It is adjusted to account for seasonal factors that typically influence home sales.

The median price of an existing, single-family detached home in California during January 2008 was $430,370, a 21.9 percent decrease from the $551,220 median for January 2007, C.A.R. reported. The January 2008 median price fell 9.7 percent compared with December’s revised $476,380 median price.

“The slight increase in sales predates the president's signing of an economic stimulus package including a temporary increase in the conforming loan limit, but that much needed reform could give the market some momentum,” said C.A.R. Vice President and Chief Economist Leslie Appleton-Young. “Let's hope congress and the president see fit to make the higher loan limit permanent.”

Highlights of C.A.R.’s resale housing figures for January 2008:

C.A.R.’s Unsold Inventory Index for existing, single-family detached homes in January 2008 was 16.8 months, compared with 7.6 months for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.
Thirty-year fixed-mortgage interest rates averaged 5.76 percent during January 2008, compared with 6.22 percent in January 2007, according to Freddie Mac. Adjustable-mortgage interest rates averaged 5.23 percent in January 2008, compared with 5.47 percent in January 2007.
The median number of days it took to sell a single-family home was 71.6 days in January 2008, compared with 68.7 for the same period a year ago.
Regional MLS sales and price information is contained in the tables that accompany this press release. Regional sales data are not adjusted to account for seasonal factors that can influence home sales. The MLS median price and sales data for detached homes are generated from a survey of more than 90 associations of REALTORS® throughout the state. MLS median price and sales data for condominiums are based on a survey of more than 60 associations. The median price for both detached homes and condominiums represents closed escrow sales.

In a separate report covering more localized statistics generated by C.A.R. and DataQuick Information Systems, 6.3 percent, or 16 out of 253 cities and communities, showed an increase in their respective median home prices from a year ago. DataQuick statistics are based on county records data rather than MLS information. DataQuick Information Systems is a subsidiary of Vancouver-based MacDonald Dettwiler and Associates. (The top 10 lists are generated for incorporated cities with a minimum of 30 recorded sales in the month.)

Note: Large changes in local median home prices typically indicate both local home price appreciation, and often, large shifts in the composition of housing market activity. Some of the variations in median home prices for January may be exaggerated due to compositional changes in housing demand. The DataQuick tables listing median home prices in California cities and counties are accessible through C.A.R. Online at

Statewide, the 10 cities and communities with the highest median home prices in California during January 2008 were: Newport Beach, $1,250,000; Danville, $1,037,000; San Clemente, $923,500; Santa Barbara, $895,000; Yorba Linda, $807,500; Redondo Beach, $800,100; Redwood City, $757,500; San Ramon, $753,500; San Francisco, $744,500; and Sunnyvale, $708,500.
Statewide, the 10 cities and communities with the greatest median home price increases in January 2008 compared with the same period a year ago were: Redondo Beach, 11.1 percent; Danville, 6.9 percent; San Diego, 5.2 percent; Arcadia, 4.2 percent; San Clemente, 2 percent; Los Angeles, 1.5 percent; Sunnyvale, 1.2 percent; Walnut Creek, 0.8 percent; Thousand Oaks, 0.4 percent; and Redwood City, 0.3 percent.
Leading the way...® in California real estate for more than 100 years, the CALIFORNIA ASSOCIATION OF REALTORS® ( is one of the largest state trade organizations in the United States, with about 200,000 members dedicated to the advancement of professionalism in real estate. C.A.R. is headquartered in Los Angeles.

January 2008 Regional Sales and Price Activity*

Regional and Condo Sales Data Not Seasonally Adjusted

Sunday, February 24, 2008

German Bank sues UBS over CDO losses.

HSH to sue UBS over subprime losses
By Bertrand Benoit in Berlin and Haig Simonian in Zurich
Published: February 24 2008 20:19 | Last updated: February 24 2008 20:19
UBS, the European bank worst hit by the subprime crisis, faced another blow after HSH Nordbank, the German public sector lender, said it would sue to recover subprime losses.

HSH said Sunday it would file a suit this week to seek repayment of “hundreds of millions” of losses on a portfolio of collateralised debt obligations structured and managed by UBS. UBS declined to comment.

The move comes days before an emergency UBS shareholders’ meeting, at which investors will be asked to approve measures to raise SFr19bn (€11.8bn), including SFr13bn from Singapore and Saudi Arabia.

Wednesday’s meeting in Basel will bring severe criticism of Marcel Ospel, the Swiss group’s veteran chairman, for his handling of the subprime affair, which has seen UBS take $18.4bn (€12.4bn) in writedowns. Many analysts expect UBS to post more writedowns in the first quarter on securities linked to US residential mortgages.

HSH said it aimed to recover losses on North Street 2002-04, a $500m portfolio of collateralised debt obligations linked to the US residential mortgage market. The CDOs were structured, sold and managed by UBS.

The portfolio was bought in 2002 by Landesbank Schleswig-Holstein before it merged with Hamburgische Landesbank to create HSH. HSH said UBS did not act in line with obligations under the contract and changes were made in the portfolio.

“Our investment in the North Street programme should have been managed conservatively,” HSH said in a statement. “We will show that UBS acted wholly against our interests in its management of the investment.”

HSH said UBS did not respond to requests last year to settle out of court.

The subprime crisis has taken a heavy toll on German public sector banks. SachsenLB was sold last year after it emerged the Saxon Landesbank and an affiliate held €43bn in risky investments. WestLB and BayernLB (the landesbanks of North Rhine-Westphalia and Bavaria) also recorded steep losses. IKB, a Düsseldorf-based lender, came close to bankruptcy in spite of two injections of funds and had to be bailed out by the federal government last month.

HSH said this month it would postpone a planned initial public offering in the fourth quarter of this year and instead ask shareholders for a €1bn capital increase.

Thursday, February 21, 2008

Northern Rock Top Ten (Loser Edition)

The top 10 Northern Rock losers
By John Gapper
Published: February 20 2008 18:42 | Last updated: February 20 2008 18:42

There are no winners from the British government’s decision this week to nationalise Northern Rock, the mortgage lender. There is, however, an embarrassment of losers.

Northern Rock is only one of many troubled banks. Even Credit Suisse, which seemed to have side-stepped the worst of the credit crisis, turns out to have had a hole in its balance sheet. But Northern Rock is the first British bank to suffer a run on its deposits since 1866. It is still hurting reputations across the financial and political world, right up to Gordon Brown, the prime minister.

So, with apologies to David Letterman, the US chat show host, here, in reverse order, is the list of Top 10 Northern Rock losers.

10. Mervyn King. The Bank of England governor has put on a fine rearguard action since September, when he topped the list of probable victims. He has since worked his way craftily down to the bottom.

He started out by rejecting calls for any intervention in financial markets and then had to do a U-turn. Five months on he has gained a second term as governor and is on firmer ground than the Treasury and the Financial Services Authority. The Treasury used to mutter about him being a head-in-the-clouds academic but now wants to give him extra powers, which suggests that he graduated in infighting.

9. Lloyds TSB. The bank made a bid (actually, three bids) for Northern Rock before things got out of control. That was rebuffed by the Treasury because Lloyds TSB wanted it to guarantee any shortfall in deposits. The Treasury is now taking what it calls “the last resort” of owning the Rock’s entire balance sheet instead. Maybe it should have taken the first one. Just a thought.

8. The investment banks. Well, it has been a long five months and Goldman Sachs, Merrill Lynch, Citigroup, Blackstone and Greenhill & Co, who advised various sides, have worked hard. Maybe that accounts for the £75m ($146m) bill that the advisers to Northern Rock submitted last Saturday, including one bank’s claim that it deserved a “success fee” for getting the Rock nationalised.

These are difficult times for bankers, given the credit crisis and the flow of mergers and acquisitions being reduced to a trickle, and you need chutzpah to get your bonus. Even so, if the Treasury seizing your client’s assets after rejecting your rescue plan counts as success, what would failure look like?

7. Sir Richard Branson. The bearded entrepreneur planned to slap his Virgin brand on the Rock, take a chance that his £1.25bn of new equity would not be wiped out by a housing recession, pay the government a modest fee to rent its AAA balance sheet and make a 20 per cent return on equity. He will have to find other chances to pull a fast one.

6. The shareholders. Hedge funds enjoy taking people to court and they may have to do just that if they are to get much out of the Treasury for their lost equity. I suppose we ought to sympathise with those lured to the City of London on the promise that New Labour had been converted to laisser faire, only to be clobbered by Old Labour-style nationalisation. But equity is known as risk capital for a good reason. My investment advice to them is: get over it.

5. The employees. Up to 3,000 jobs could be lost at Northern Rock as the new management under Ron Sandler shrinks its mortgage book and tries to stabilise it. There is no obvious reason why the staff should have known better than to work there but the lesson is to be wary of working for any institution that claims to have discovered a new form of financial alchemy. The problem is there have been a lot of those.

4. The Financial Services Authority. It was not very long ago that the initials FSA were whispered enviously around the world’s financial centres as the model for “light-touch” regulation. In practice, the FSA proved not so much a light-touch regulator of Northern Rock as an out-of-touch one.

Having vented its frustration on the Bank of England (see above), the Treasury seems now to have settled on the FSA as its official whipping-boy. Those who attended the negotiating sessions over the Rock’s future noted that the seats at the centre of the table went to Treasury officials, with Bank officials at their side. The FSA bods were shuffled to the end of the table and treated like embarrassing relatives.

3. Alistair Darling. You could view the chancellor of the exchequer’s decision to reject the Lloyds TSB offer, then guarantee the Rock’s deposits, then negotiate with private bidders and finally nationalise it as a statesmanlike mulling of less-than-perfect options culminating in decisive action. Or you could see it as pathetic dithering followed by the abandonment of all hope. Unfortunately, some Downing Street officials, while espousing the former view in public, seem privately to favour the latter.

2. Gordon Brown. Talking of Downing Street, there sits the prime minister formerly known as prudent. He has taken the advice of the Treasury and Goldman Sachs and punted on owning the Rock rather than off-loading it to Sir Richard. The good news is that, if anything goes wrong, he can ditch his chancellor for getting him into a mess. The bad news is that Mr Darling is the only equity he has left to burn.

1. Britannia. No, not the building society but the nation. Time was when the UK, with its 9.4 per cent of gross domestic product devoted to financial services, looked like the epitome of post-industrial, creative capital, economies. Less so now. Britannia ruled the waves of the global financial services industry but her Rock has had to be propped up and the waves lap around her.

Wednesday, February 20, 2008

Another Great Idea! As the asset markets are getting negative returns, lets invest pension money there. Perhaps private equity will bail us out!

Equities lure US pension guarantor
By Norma Cohen in London and Anuj Gangahar in New York
Published: February 18 2008 20:31 | Last updated: February 18 2008 20:31
The Pension Benefit Guaranty Corporation, the US government-sponsored guarantor for pensions, plans to step up its investments in riskier assets such as equities as it seeks to plug a $14bn deficit.

The move, quietly announced on the President’s Day public holiday in the US on Monday, will mean the PBGC will double its allocation of equity investments to 45 per cent of its total assets.
The PBGC, which in effect acts as a pensions insurance fund, guarantees the benefits of 44m workers and is currently paying benefits to 700,000 retirees. It holds approximately $55bn (€37.4bn, £28bn) in assets to invest under its new policy.

It has, however, no access to credit from the government. It relies only on insurance premiums paid by the companies whose plans it insures and the investment returns those premiums can earn. If it became insolvent, it would either have to slash benefits paid to retirees or seek a taxpayer bailout.

The PBGC did not have the resources to meet all its future commitments, Charles Millard, director of the corporation, said yesterday.

In view of the current deficit, Mr Millard, said: “We do want to make sure we do our best to avoid the need for a taxpayer bailout. The old strategy locks in the deficit.”

Mr Millard said he believed the long-term nature of its liabilities meant that the PBGC could withstand short-term market volatility.

He also announced that the scheme would make investments in private equity and real estate.

The PBGC altered its investment strategy in 2004 to tilt towards increased investments in low-risk bonds, which move with pension liabilities. The deficit rose and subsequent legislative attempts to increase the scheme’s funds failed.

The PBGC, which also holds pension scheme assets it takes over from insolvent employers, held 28 per cent in equities at the end of last year.

Under the new, higher-risk investment plan it will allocate 45 per cent of its total assets to a diversified set of fixed-income investments, down from about 72 per cent at the end of 2007. It will also invest 10 per cent in alternative investment vehicles, including hedge funds.

The move reflects widespread concerns about fixed-income investments amid the continuing fallout from the US subprime mortgage crisis. Last year the equity portion of the corporation’s investments returned 16.5 per cent while the fixed-income portion returned just 3.4 per cent.

Mr Millard said that the new strategy had a 57 per cent chance of eventually funding the PBGC fully, while the old strategy had only a 19 per cent chance of that.

The new policy was adopted after an extensive review, begun in mid-2007. This showed that the diversified portfolio adopted by the board would have outperformed the current asset mix 98 per cent of the time over rolling 20-year periods.

President George W. Bush announced a legislative proposal earlier this month allowing the PBGC to raise premiums it charges underfunded pension plans.

The proposal, included in the president’s fiscal 2009 federal budget, is aimed at helping the agency close the deficit in its single-employer programme.

Copyright The Financial Times Limited 2008

The 1990's, In Reverse.

February 19, 2008: 02:15 PM EST

Feb. 19, 2008
NEW YORK (AP) - Citigroup (NYSE:C) Inc. has sold another one of its financial centers to raise cash. The bank said Tuesday that a Morgan Stanley (NYSE:MS) real estate fund bought its Japanese headquarters in Tokyo.

Citigroup would not disclose the value of the deal.

The bank has been shedding its real estate holdings for a couple years, even before the tight credit markets saddled the bank with billions of dollars in bad debt. Most recently, it sold the last two Manhattan properties on its books to SL Green Realty Corp. (NYSE:SLG PRD) (NYSE:SLG PRC) (NYSE:SLG) in December for about $1.58 billion.

As with these Manhattan office buildings, Citigroup remains a tenant of the Tokyo center, and leases the building instead of owning it.

'The sale-and-leaseback was intended to improve the efficiency of the usage of the balance sheet of Citibank Japan, as well as mitigate the risks of holding property assets,' Citigroup said in a statement.

Citigroup is considering selling other more significant assets -- both in the United States and abroad -- to build up its capital base and return to profitability. CEO Vikram Pandit is reviewing the banks' various global businesses, a process that Citigroup spokespeople say is still ongoing.

Monday, February 18, 2008

Crap Buyer of Last Resort Rides to the Rescue

US banks borrow $50bn via new Fed facility
By Gillian Tett in London
Published: February 18 2008 20:34 | Last updated: February 18 2008 20:34
US banks have been quietly borrowing massive amounts of money from the Federal Reserve in recent weeks by using a new measure the Fed introduced two months ago to help ease the credit crunch.

The use of the Fed’s Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February.

US officials say the trend shows that financial authorities have become far more adept at channelling liquidity into the banking system to alleviate financial stress, after failing to calm money markets last year.

However, the move has sparked unease among some analysts about the stress developing in opaque corners of the US banking system and the banks’ growing reliance on indirect forms of government support.

“The TAF . . . allows the banks to borrow money against all sort of dodgy collateral,” says Christopher Wood, analyst at CLSA. “The banks are increasingly giving the Fed the garbage collateral nobody else wants to take . . . [this] suggests a perilous condition for America’s banking system.”

The Fed announced the TAF tool on December 12 as part of a co-ordinated package of measures unveiled by leading western central banks to calm money markets.

The measure marks a distinct break from past US policy. Before its introduction, banks either had to raise money in the open market or use the so-called “discount window” for emergencies. However, last year many banks refused to use the discount window, even though they found it hard to raise funds in the market, because it was associated with the stigma of bank failure.

The Fed has not yet indicated how long the TAF will remain in place.

But the popularity of the scheme is prompting speculation the reform will stay in place as long as the financial stresses last.

“Some Fed officials have expressed an interest in keeping and possibly expanding the TAF,” says Michael Feroli, economist at JPMorgan.

Nevertheless, Mr Feroli said banks now appeared to be using the TAF instead of other funding routes, meaning that the overall level of reserves in the system was remaining constant. “The banking system certainly has its problems, however the notion that . . . banks have trouble maintaining reserves stems from a superficial reading of the Fed’s statistical reports,” he said.

No Free Lunch for the Monolines.

Bond Insurer Split May Trigger Lawsuits, Analysts Say (Update1)
By Cecile Gutscher

Feb. 18 (Bloomberg) -- Regulators' plans to break up bond insurers into ``good'' businesses covering municipal debt and ``bad'' businesses liable to subprime-related losses may trigger ``years of litigation,'' Bank of America Corp. analysts said.

New York Insurance Department Superintendent Eric Dinallo and New York Governor Eliot Spitzer said last week that insurers may need to be divided if they can't raise enough capital to compensate for losses on subprime-mortgage guarantees. FGIC Corp., the fourth-largest of the so-called monoline insurers, asked to be split on Feb. 15 after Moody's Investors Service cut the Stamford, Connecticut-based company's top Aaa ranking.

``Despite the regulatory interest in separating the exposures, the essential fact remains that all policy holders, whether municipal or structured finance, entered into contracts backed by the entire entity,'' analysts led by Jeffrey Rosenberg in New York wrote in a note to investors dated Feb. 15. A breakup is ``likely to lead to significant legal challenges holding up the resolution of the monoline issues for years.''

FGIC, owned by Blackstone Group LP and PMI Group Inc., insures about $314 billion of debt, including $220 billion in municipal bonds. The company said last week it applied for a license from New York state insurance regulators to create a standalone municipal company and separate the unit that guarantees subprime-mortgage bonds and related securities that led to rating downgrades.

New York-based Ambac Financial Group Inc., the second- largest bond insurer, may also seek a split, the Wall Street Journal reported today, citing a person familiar with the situation.

Credit-Default Swaps

``The fact that one group of policy holders' exposures has imperiled the policies of the other does not mean they should forfeit the value of their claims altogether,'' the Bank of America analysts said.

Investors in credit-default swaps based on the bond insurers may also seek damages to compensate for losses, according to the research note.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

The cost of credit-default swaps on Armonk, New York-based MBIA Inc., the world's largest bond insurer, has soared to $1.7 million upfront and $500,000 a year to protect $10 million of bonds from default for five years, according to CMA Datavision. Ambac credit-default swaps were at the same level as MBIA at the close of trading in New York on Feb. 15. The contracts, which cost $25,000 a year ago, trade upfront when investors see a risk of imminent default.

Any breakup of the companies may cause ``significant widening'' in the credit-default swaps as the structured finance company is likely to be ``deeply distressed,'' the Bank of America report said.

To contact the reporter on this story: Cecile Gutscher in London at

Sunday, February 17, 2008


U.K. government seeks power to buy companies
By Alistair Barr, MarketWatch
Last update: 5:09 p.m. EST Feb. 17, 2008
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SAN FRANCISCO (MarketWatch) -- The U.K. government will introduce legislation this week that will give it the power to acquire companies as it nationalizes troubled mortgage lender Northern Rock PLC.
U.K. finance minister Alistair Darling said the bill, which will be introduced to the House of Commons on Monday, will allow the government to buy the shares and assets of Northern Rock. (UK:NRK: news, chart, profile)
See full story on U.K. government's move to nationalize Northern Rock.
But the legislation would also give the government general power to acquire shares or assets and liabilities of other institutions too, he added.
"We have deliberately drafted the bill to ensure that a bank can only be acquired in certain tightly defined circumstances. And that power will only last for twelve months," Darling explained. "I've already announced a consultation which will lead to permanent legislation to deal with situations like this in the future."
Darling didn't provide any further information, but said details are in the Bill, which will be published on Monday.
Alistair Barr is a reporter for MarketWatch in San Francisco.

Q and A session with Chancellor Darling on BBC

Q: What does this mean for Northern Rock shareholders?

The general consensus is that it is not good news for shareholders, who have already seen their shares - which were valued at over £12.50 this time last year - slump to be trading at 90 pence at the close of business on Friday.

So the beleaguered firm has gone from being worth £5.3bn to just £375m, and these shares will be suspended on Monday morning.

Shareholders will be compensated, with the amount of money they are to receive set by a government-appointed panel.

If shareholders are unhappy with the offer, there is the prospect of legal action, and Mr Peston says it is "inevitable" that the government will be sued by some of the largest stakeholders which are hedge funds.

They have reportedly written to the Treasury calling for 400p per share in compensation.

Private Profit, Public Losses in Banks (UK Edition).

Northern Rock to be nationalised
By FT reporters
Published: February 17 2008 15:46 | Last updated: February 17 2008 15:46
The UK Treasury is to announce on Sunday that it is to nationalise Northern Rock, the troubled British bank, the Financial Times understands.

The decision ends months of efforts to find a private sector rescuer for the stricken mortgage lender, which ran into trouble as a result of the international credit squeeze.

It means that neither of the two bids for the bank, from Sir Richard Branson’s Virgin consortium and Northern Rock’s management team, have been successful.

Both bidders tendered revised offers on Friday after the government threatened that the bank would be nationalised unless their proposals were improved.

It is understood that the government believes nationalisation is now the best option, even though it is likely to spark a political storm, an angry reaction from some shareholders and big job losses in the north-east of England.

UPDATE: Part of Government Statement on the issue:

under public ownership the Government will secure the entire proceeds from the future sale of the business in return for bearing the risks in this period of market uncertainty.
We could have chosen to pursue either of the two private sector options. But I have always said that I was determined to protect the taxpayers' interest.
It is clear that the private sector alternatives do not meet this test, when compared with public ownership.
Accordingly, and taking all the wider considerations into account, I have concluded that this is the right approach.
Moreover, it is my clear assessment that under the approach we are taking the taxpayer will see its outstanding loans to Northern Rock repaid in full, with interest - and that the business can be returned to the private sector as financial markets stabilise.
Let me set out the next steps. Tomorrow, before the markets open, it is expected that the UK Listing Authorities will announce that the company's shares will be suspended from listing tomorrow prior to the opening of the London Stock Exchange.
Tomorrow, I am also publishing a Bill to bring the bank into a period of temporary public ownership. I will give full details of the legislation to the House of Commons.
The legislation will enable the Government to acquire the bank's shares and its assets. It will provide for compensation to be determined by an independent valuer.
It will allow for the running of the bank and for the eventual transfer back into the private sector as soon as it is right to do so. Because public ownership is a temporary arrangement.
The Bill gives the Government a general power to acquire the shares in, or assets and liabilities, of institutions.
But let me make it clear that this legislation is only being introduced now because there is a need to bring Northern Rock into temporary public ownership.
We have deliberately drafted the Bill to ensure that a bank can only be acquired in certain tightly defined circumstances. And that power will only last for twelve months.
I've already announced a consultation which will lead to permanent legislation to deal with situations like this in the future.
Further details of this arrangement are contained in the Bill which I will publish tomorrow morning when the House returns.
As you can see Ron has joined me today and is ready to answer any questions you may have.
He will want to consider carefully the options and will outline his proposals shortly including in relation to restructuring the business.
Ron expects to be in Newcastle tomorrow to discuss the business and meet staff and their representatives.
His proposals will also cover the Northern Rock Foundation, where he will commit to guaranteeing a minimum income of £15m per year in 2008, 2009 and 2010. This will be paid directly by Northern Rock, and would be a condition of any sale if it were sold in this time.
The new Board will be asked to identify a viable long-term future for the Foundation.
The new Board and the company will operate at arm's length from the Government, with complete commercial autonomy for their decisions.
As agreed in the memorandum of understanding all operational decisions will be made by the Board with no interference from the Government.
It is our expectation that the company can be moved into the private sector at the earliest and most prudent opportunity.
We are clear that this is the most effective way of continuing to support Northern Rock's business, its savers, the wider financial system and safeguard taxpayers' money.
At every stage the stability of the economy and the interests of depositors and taxpayers have been - and remain - our first concern.
This will continue to be the basis on which we will move forward in the coming months.
I will make a full statement to the House of Commons tomorrow afternoon.

Thursday, February 14, 2008

"You've Got to Know When to Fold Them!"

Banks advised to walk away from big deals
By Henny Sender in New York
Published: February 14 2008 22:03 | Last updated: February 14 2008 22:03
Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more high-profile private equity transactions will collapse.

This advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals.

But legal advisers argue that the break-up fees banks would owe in such cases would be far lower than the write-downs they would have to make on their loans, given the current cataclysmic conditions in the capital markets.

“It is the tipping point argument,” said a senior partner at one of the biggest private equity firms, who asked not to be named. “The banks have so many issues with their balance sheets that they are considering a new policy.”

However, such a radical shift could have a dramatic impact on the markets. The presence of private-equity buyers is one factor that has helped boost stock prices.

“If you want to come up with news that could make the Dow drop another 500 or 1,000 points, this would be it,” says one lawyer specialising in private equity issues for a major New York law firm. “But desperate times call for desperate measures.”

So far, leveraged buy-outs have usually collapsed when the private-equity firms involved – including Blackstone and Cerberus – have withdrawn from transactions.

Such moves have occurred as banks have been working behind the scenes to persuade private equity firms to abandon deals. Such indirect approaches are designed to prevent target companies from filing suits seeking to make sure deals close.

However, the chances of banks abandoning buy-out deals – such as those for Clear Channel Communications, the radio station owner and outdoor advertising company, and BCE, the Canada-based telecoms group – are growing as the market prices for the leveraged loans used in such transactions continue to fall.

US regulators are pressing banks to account for these loans at market prices while they keep them on their books.

Already, it is understood that one bank has marked down its share of the loan used in the Clear Channel buy-out to 85 cents on the dollar.

By contrast, lawyers are telling the banks that if they walk away from deals, their biggest liability would be equivalent to the so-called reverse break-up fee that private equity firms pay target companies when deals fail to close. These fees usually amount to about 2 per cent of the total value of a deal, or about $500m in a large buy-out.

Lawyers say there could be other costs for the banks, such as covering the expenses buy-out firms incur while doing their homework on bids.

Further, they do not rule out the possibility that banks could have to pay greater damages in litigation.

What is sure is that banks are giving greater thought to dropping out of deals. “We are already there in terms of the economic pain,” said the head of debt capital markets at one major Wall Street firm. “Banks sitting on $30bn of debt for one deal are looking at $4.5bn of losses. That is enough to play hardball.”

Copyright The Financial Times Limited 2008

Thursday, February 07, 2008

Bill Gross on Monolines

Rescuing monolines is not a long-term solution
By William Gross
Published: February 7 2008 18:14 | Last updated: February 7 2008 18:14
What is good for Ambac, the bond insurer, is good for the country. Well, perhaps in the short run if it prevents a run on the shadow banking system – our over-leveraged system of financial conduits that have provided the spending power to keep the US economy going in recent years. But not in the long run.

The Ambac business model is as faulty now as was chairman Charles Wilson’s forecast for General Motors more than a half century ago. Wilson’s response to a US Senate inquiry in 1955 implied that GM’s near monopolistic control was beneficial to the country. It was, until the domestic motor industry fell asleep at the wheel of innovation and became more concerned with placating its labour unions with outsized pay packages and long-term pension and healthcare benefits. Creative destruction and the incessant march of globalisation changed a GM chairman’s smile to a frown, and the US economy turned from industrialisation to financialisation in order to stay at the top of the global pecking order.

Those who put their faith in the ability of a finance-based economy to remain healthy are being similarly challenged today. A critic can find numerous examples of incredible, bubble-popping asset structures – from subprime mortgages to structured investment vehicles to collateralised debt obligations squared – that are threatening to reverse the expansion of the shadow banks and break our finance-based economy’s back. The most recent one, however, centres around the monoline insurers with Ambac as the most important link in the chain that presumably cannot be allowed to break.

Monoline insurers are so named because they originally covered just one line of business – municipal bonds. Today, however, because they do not insure lives, or automobiles or medical expenses, the name has stuck despite their additional reach into insuring financial assets of all varieties. In a real sense, the monolines have taken on their shoulders a supersized portion of the guaranteed solvency of modern asset structures. In combination with overly generous triple-A ratings on not only these assets but the monoline companies themselves, they have fostered a bubble of immeasurable but clearly significant proportions.

That the monolines could shoulder this modern-day burden like a classical Greek Atlas was dubious from the start. How could Ambac, through the magic of its triple-A rating, with equity capital of less than $5bn, insure the debt of the state of California, the world’s sixth-largest economy? How could an investor in California’s municipal bonds be comforted by a company that during a potential liquidity crisis might find the capital markets closed to it, versus the nation’s largest state with its obvious ongoing taxing authority? Apply the same logic to the gargantuan size of the asset-backed market it has insured in recent years – subprimes and CDOs in the trillions of dollars – and you must come to the same logical conclusion: this is absurd. It is as if Barney Fife, television’s Sheriff of Mayberry in The Andy Griffith Show, promised to bring law and order to the entire country.

As long as the illusion lasted, however, it is clear that monoline guarantees fostered an expansion of our modern shadow banking system and therefore an extension of US and even global economic prosperity. Because US consumers were able to borrow at “guaranteed” triple-A rates with an additional servicing/underwriting spread, their spending power was artificially elevated. In order to maintain those levels and avoid a nasty recession, authorities through both official and backdoor channels now endorse a rescue effort. What is good for Ambac, they reason, is good for the country – and by extension the world.

As stock markets rise on optimistic workout developments, it is clear that it is – in the short run. But like General Motors a half century back, the sense of stability imparted to an oligopolistic industry with visible flaws is not likely to last, nor may the hope for a return to economic growth of recent years. The modern US financed-based economy has a striking resemblance to Barney Fife, guaranteeing global prosperity without the productive industrial-based firepower to back it up. Neither ultra-low interest rates or tax rebates, nor investor-led and authority-based monoline bailouts are likely to change that significantly during the next few years.

The writer is founder and managing director of Pimco

Copyright The Financial Times Limited 2008

Sunday, February 03, 2008

Great Op-Ed from SF Chronicle

Higher loan limits will lead to Fannie Mae, Freddie Mac bailout
Sean Olender
Sunday, February 3, 2008

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Congress is about to sell us the biggest fraud in American history.
It's been highly touted as an economic stimulus bill that will help millions of Americans - and has the backing of both President Bush and House Speaker Nancy Pelosi. In the coming year, individuals would receive rebates of up to $600 and families up to $1,200. There are other goodies, too, including tax write-offs for small businesses and an expansion of the child tax credit.
But, as the old adage goes, nothing comes for free. As part of the bill, Congress is set to rush through an increase in the mortgage loan limits for Fannie Mae and Freddie Mac (and Federal Housing Administration insurance, too) - from $417,000 to $729,750 - the first step toward a massive financial disaster in which taxpayers will end up paying through the nose.
Here's how we got to this point. Domestic and international investors hold hundreds of billions of dollars in bad debt, because U.S. investment houses sold them junk securities based on often fraudulent mortgages. Many of these mortgages were sold to unqualified buyers under terms that made widespread foreclosures a certainty once the housing market began to fall.
Investment banks and bond rating agencies sat down and tried to figure out how to describe Americans with insufficient incomes and little for a down payment as great credit risks on loans too big for their incomes. The new rules focused on credit scores, because it was a good excuse to avoid looking at income and down payment, factors that would have restricted this moneymaking fiasco.
Now, thanks to Congress, junk bond investors will be able to pawn off their bad debt to Fannie and Freddie, instead of suing the big investment houses for ripping them off. This shift will certainly doom Fannie Mae and Freddie Mac, so don't be surprised if we, the taxpayers, have to bail out poor Fannie and Freddie - to the tune of more than $1 trillion.
Why more than $1 trillion? If Goldman Sachs is correct in its recent projections that home prices in California are going to drop 35 to 40 percent, the state's losses alone would top $2 trillion, because California has a disproportionate number of jumbo loans. The irony here is that the collapse in housing prices could make Fannie insolvent even without raising the loan limit. Increasing Fannie's limit is like going on a spending spree with your credit cards because you know you are going to file for bankruptcy in a few months. Only here the taxpayer is left holding the bag. Our children will pay interest on this debt in perpetuity. It is our debt. It is inescapable.
In the coming months, Fannie and Freddie will buy up mortgages based on old, fraudulent appraisals and on loans with bogus inflated incomes. Unfortunately, many of these loans will still default.
But that's just the start. Brace yourself for another wave of faxes, phone calls and junk mail urging you to refinance at only 1 percent. With zero new regulation, the same bad actors that caused this crisis can once again inflate property appraisals and begin a new cycle of fraud.
There are firms that rent assets to people to help them fraudulently qualify for a mortgage - like loaning them money to keep in their bank account for a couple months so they can fool the lender with documented savings that evaporate the day after the mortgage is signed. Another popular ruse: The borrower pays an employer to pay him a lot of money in a fake job for a month or two so he can show a fat paycheck in his loan docs. Some real estate agents and mortgage brokers actually refer buyers to these services.
Contrary to popular myth, Fannie holds a lot of subprime debt, option ARM debt and other dodgy securities. Fannie and Freddie owned or guaranteed almost 45 percent of all mortgages in America last year. BusinessWeek noted in 2007 that Fannie and Freddie have "moved more prominently into low-documentation loans, which require little or no proof of the borrower's income." Expansion of Fannie and Freddie's reckless lending is exactly what Congress wants because it's plausibly deniable. Teary-eyed lawmakers can take to the airwaves a year from now and declare: "We had no idea Fannie could go under, but we can't cut and run now. We have to bail out Fannie and Freddie for the good of America! It's going to be a tough slog, but you're getting used to those, no?"
Those same lawmakers won't mention the fact that they get paid far more by real estate lobbyists than they do from our Treasury.
I've spoken with borrowers who stopped making mortgage payments seven or more months ago. None has received a default notice. Defaults may be much higher than banks are letting on. The data lags are growing suspiciously long. Nobody knows what's going on. Seven months without making a single payment! Will Fannie guarantee those loans because they aren't in formal default yet? Nobody wants to know, because if they know, they might be called to testify next year. That's why lawmakers want to raise the limits now and ask questions later.
This shortsighted plan poses a terrible risk to every American taxpayer, especially retirees, because Social Security money will be needed to bail out Fannie and Freddie. And even if you live in high-priced San Francisco, Los Angeles or New York - and stand to benefit from the increased loan limit - this is a horrible fraud on you, too, because raising the limit to $730,000 risks a systemic crisis that will cost far more than any temporary rebate check.
In support of the economic stimulus bill, Bush will have to face "working American families" and explain that some of their tax money is going to be spent guaranteeing $730,000 mortgages on $1 million homes. It's like some sort of upside-down communism where the poor pay the rich welfare. Why should taxes from families earning $48,000 a year be used to support expensive mortgages in New York, Los Angeles and San Francisco? Welfare for the hungry and homeless is evil, but welfare for million-dollar homeowners facing a tough refi ... well, that's called "helping the economy."
I can imagine the president's radio address playing in the heartland: "We have some families with million-dollar homes on the coasts who are really hurting and so we need you, the working families of America, to stand together with them and help them avoid the kind of home price depreciation that might leave them without a new Lexus for years."
I guess Congress' hope is that median-income families will be too busy using their rebates to buy much-needed groceries to notice that the rich folk are getting way with a new scam.
Several months ago, economist Nouriel Roubini of New York University's Stern School of Business suggested that the housing market has been effectively nationalized. At first it seemed crazy, but now it's fairly obvious. In August alone, Fannie and Freddie increased their loan portfolios by $62 billion, and the Federal Home Loan Bank by $110 billion. That total of $172 billion would come to just over $2 trillion annually - not much less than the entire federal budget.
Everyone seeking a loan, securitizing a mortgage, and buying or selling a mortgage security will now be dealing, in one way or another, with the U.S. government. This type of intervention is very expensive and will eat everything in its path, including Social Security.
If we're going to have a government-financed intervention, it should be to make sure that Social Security benefits go to those who paid for them, that the poor are fed and housed, or that the army of uninsured receive health benefits. If, as they say, we don't have enough money for those important things, then I think we don't have enough money to bail out banks and bond investors.
Don't let me down, my fellow Americans. Let's vote out anyone0 who dares to vote for this scam.
Sean Olender is an attorney in San Mateo. Contact us at