Federal Reserve and Treasury officials are scrambling to prevent the commercial-real-estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat.
Their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds. Similar mortgage-backed securities created out of home loans played a big role in undoing that sector and triggering the global economic recession. Now the $700 billion of commercial-mortgage-backed securities outstanding are being tested for the first time by a massive downturn, and the outcome so far hasn’t been pretty.
The CMBS sector is suffering two kinds of pain, which, according to credit rater Realpoint LLC, sent its delinquency rate to 3.14% in July, more than six times the level a year earlier. One is simply the result of bad underwriting. In the era of looser credit, Wall Street’s CMBS machine lent owners money on the assumption that occupancy and rents of their office buildings, hotels, stores or other commercial property would keep rising. In fact, the opposite has happened. The result is that a growing number of properties aren’t generating enough cash to make principal and interest payments.
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Monday, August 31, 2009
Insider Trading and Investor Sentiment Signaling U.S. Stock Market Top
Insider Selling in August Soars to 30.6 Times Insider Buying, Highest Level Since TrimTabs Began Tracking in 2004. NYSE Short Interest Plunges 10.3%, While Margin Debt Spikes 5.9%
SAUSALITO, Calif., Aug. 28 /PRNewswire/ -- TrimTabs Investment Research reported that selling by corporate insiders in August has surged to $6.1 billion, the highest amount since May 2008. The ratio of insider selling to insider buying hit 30.6, the highest level since TrimTabs began tracking the data in 2004.
"The best-informed market participants are sending a clear signal that the party on Wall Street is going to end soon," said Charles Biderman, CEO of TrimTabs.
TrimTabs' data on insider transactions is based on daily filings of Form 4, which corporate officers, directors, and major holders are required to file with the Securities and Exchange Commission.
In a research note, TrimTabs explained that insider activity is not the only sign the rally is about to end. The TrimTabs Demand Index, which tracks 18 fund flow and sentiment indicators, has turned very bearish for the first time since March.
For example, short interest on NYSE stocks plummeted by 10.3% in the second half of July and margin debt on all US listed stocks spiked 5.9% in July, while 51.6% of advisors surveyed by Investors Intelligence are bullish, the highest level since December 2007.
"When corporate insiders are bailing, the shorts are covering and investors are borrowing to buy, it generally pays to be a seller rather than a buyer of stock," said Biderman.
TrimTabs also reports that the actions of U.S. public companies have been bearish. In the past four months, companies have been net sellers of a record $105.2 billion in shares.
"Investors who think the U.S. economy is recovering are going to get a big shock this fall," said Biderman. "Companies and corporate insiders are signaling that the economy is in much worse shape than conventional wisdom believes."
TrimTabs Investment Research is the only independent research service that publishes detailed daily coverage of U.S. stock market liquidity--including mutual fund flows and exchange-traded fund flows--as well as weekly withheld income and employment tax collections. Founded by Charles Biderman, TrimTabs has provided institutional investors with trading strategies since 1990. For more information, please visit www.TrimTabs.com.
SOURCE TrimTabs Investment Research
Read Entire Article
SAUSALITO, Calif., Aug. 28 /PRNewswire/ -- TrimTabs Investment Research reported that selling by corporate insiders in August has surged to $6.1 billion, the highest amount since May 2008. The ratio of insider selling to insider buying hit 30.6, the highest level since TrimTabs began tracking the data in 2004.
"The best-informed market participants are sending a clear signal that the party on Wall Street is going to end soon," said Charles Biderman, CEO of TrimTabs.
TrimTabs' data on insider transactions is based on daily filings of Form 4, which corporate officers, directors, and major holders are required to file with the Securities and Exchange Commission.
In a research note, TrimTabs explained that insider activity is not the only sign the rally is about to end. The TrimTabs Demand Index, which tracks 18 fund flow and sentiment indicators, has turned very bearish for the first time since March.
For example, short interest on NYSE stocks plummeted by 10.3% in the second half of July and margin debt on all US listed stocks spiked 5.9% in July, while 51.6% of advisors surveyed by Investors Intelligence are bullish, the highest level since December 2007.
"When corporate insiders are bailing, the shorts are covering and investors are borrowing to buy, it generally pays to be a seller rather than a buyer of stock," said Biderman.
TrimTabs also reports that the actions of U.S. public companies have been bearish. In the past four months, companies have been net sellers of a record $105.2 billion in shares.
"Investors who think the U.S. economy is recovering are going to get a big shock this fall," said Biderman. "Companies and corporate insiders are signaling that the economy is in much worse shape than conventional wisdom believes."
TrimTabs Investment Research is the only independent research service that publishes detailed daily coverage of U.S. stock market liquidity--including mutual fund flows and exchange-traded fund flows--as well as weekly withheld income and employment tax collections. Founded by Charles Biderman, TrimTabs has provided institutional investors with trading strategies since 1990. For more information, please visit www.TrimTabs.com.
SOURCE TrimTabs Investment Research
Read Entire Article
Friday, August 28, 2009
Let Me Get This Straight: You Want Me to Pay YOU, While You Hold MY Money
So You Dont Like Gold Because it Pays No Interest?
Bankers Watch as Sweden Goes Negative
For a world first, the announcement came with remarkably little fanfare.
But last month, the Swedish Riksbank entered uncharted territory when it became the world’s first central bank to introduce negative interest rates on bank deposits.
But, as they contemplate their exit strategies after the extraordinary measures of the past two years, central bankers will be monitoring the Swedish experiment closely.
Mervyn King, the Bank of England governor, has hinted he may follow the Swedish example as the danger of a so-called liquidity trap, where cash remains stuck in the banking system and does not filter out to the wider economy, is an increasing concern for the UK.
Hoarding is exactly what happened in Japan earlier this decade when the Bank of Japan implemented quantitative easing between 2001 and 2006.
Japanese banks refused to lend, in spite of central bank stimulus, because of fears over the dire state of the economy.
If this continues to happen in other economies, central bankers may be left with little choice but to follow the Swedish example. John Wraith, head of sterling rates product development at RBC Capital Markets, says: “The success of the UK’s quantitative easing experiment hinges a lot on whether the banks will use the extra money they are getting for lending to individuals and businesses.
“If there is no sign of this over the next few months, then the Bank of England might consider a negative interest rate. In essence, it is a fine on banks that refuse to lend.”
In the UK, for example, nearly £140bn has been injected into the economy through central bank purchases of government bonds and corporate assets, mainly from the commercial banks.
Our interactive feature explains how quantitative easing works and how this policy may stimulate the economy.
However, since the QE project was launched on March 5, a lot of this money, which in theory should be used by the commercial banks for lending to businesses and individuals, has ended up at the Bank of England in reserves.
Commercial bank deposits have risen from £31bn in early March to £152bn at the end of July – the latest figure.
This in itself is not a problem as the banks could be using this big increase in their reserves to step up their lending to the private sector. The more the banks have in reserves, the more they are allowed to lend.
However, there is no sign yet that they are using their much bigger reserves to lend on. The latest money supply figures for lending are still fairly anaemic.
It is why Mr King did not rule the possibility of negative interest rates when asked about the Riksbank model this month following the unveiling of the quarterly inflation report. “It’s an idea we will certainly be looking at, whether the effectiveness of our asset purchases could be increased by reducing the rate at which we remunerate reserves,” he said. His comments are one reason why yields on short-dated UK government bonds have fallen to record lows and why sterling has been under pressure in the currency markets.
Initially, Mr King gave QE six months before it would start taking effect. That time limit is up next week. If there are no signs in the money supply numbers, particularly in the key M4 lending excluding financial institutions, then the policy may start to look a distinct possibility.
In Europe, the European Central Bank is considered less likely to introduce negative interest rates.
This is because it has maintained higher official rates than other banks and used money market operations to act as a stimulant instead. For example, it offered commercial banks unlimited funds for one year at the end of June.
But it does have the same problem as the Bank of England in assessing the success of its policy. Like the UK, commercial bank deposits at the ECB have shot up in the past few months.
Banks pay price for policy
Sweden’s decision to introduce negative interest rates on deposits at the Riksbank means that commercial banks have to pay for the privilege of saving their money at the central bank, writes David Oakley.
The new rate of minus 0.25 per cent forces banks to pay 0.25 per cent to the Riksbank. Normally, banks would be paid interest on these deposits.
It is thought to be the first time that negative rates have been introduced. Central banks usually shy away from such a drastic policy because it is in effect a tax or fine on the commercial banks and could hurt their balance sheets.
However, the Riksbank hopes that by charging banks for saving their money, rather than paying them, it will encourage them to increase their lending to individuals and businesses, boosting the economy. It also hopes that it might encourage them to divert the money into other assets, such as government bonds or even highly rated corporate bonds. This would bring down bond yields and act as an stimulant.
In the UK, there have been signs that banks are switching cash into short- dated government bonds following hints from Mervyn King, Bank of England governor, that the policy could be introduced there.
At this stage, the US also seems unlikely to introduce the policy as there has been little debate on the matter and no hints from policymakers about it being an option.
At the Riksbank, which now has a deposit rate of minus 0.25 per cent, the most vocal advocate of the policy is deputy governor Lars Svensson, a world-renowned expert on monetary policy theory and a close associate of Ben Bernanke, chairman of the US Federal Reserve, since they worked together at Princeton University.
Read Entire Article
Bankers Watch as Sweden Goes Negative
For a world first, the announcement came with remarkably little fanfare.
But last month, the Swedish Riksbank entered uncharted territory when it became the world’s first central bank to introduce negative interest rates on bank deposits.
But, as they contemplate their exit strategies after the extraordinary measures of the past two years, central bankers will be monitoring the Swedish experiment closely.
Mervyn King, the Bank of England governor, has hinted he may follow the Swedish example as the danger of a so-called liquidity trap, where cash remains stuck in the banking system and does not filter out to the wider economy, is an increasing concern for the UK.
Hoarding is exactly what happened in Japan earlier this decade when the Bank of Japan implemented quantitative easing between 2001 and 2006.
Japanese banks refused to lend, in spite of central bank stimulus, because of fears over the dire state of the economy.
If this continues to happen in other economies, central bankers may be left with little choice but to follow the Swedish example. John Wraith, head of sterling rates product development at RBC Capital Markets, says: “The success of the UK’s quantitative easing experiment hinges a lot on whether the banks will use the extra money they are getting for lending to individuals and businesses.
“If there is no sign of this over the next few months, then the Bank of England might consider a negative interest rate. In essence, it is a fine on banks that refuse to lend.”
In the UK, for example, nearly £140bn has been injected into the economy through central bank purchases of government bonds and corporate assets, mainly from the commercial banks.
Our interactive feature explains how quantitative easing works and how this policy may stimulate the economy.
However, since the QE project was launched on March 5, a lot of this money, which in theory should be used by the commercial banks for lending to businesses and individuals, has ended up at the Bank of England in reserves.
Commercial bank deposits have risen from £31bn in early March to £152bn at the end of July – the latest figure.
This in itself is not a problem as the banks could be using this big increase in their reserves to step up their lending to the private sector. The more the banks have in reserves, the more they are allowed to lend.
However, there is no sign yet that they are using their much bigger reserves to lend on. The latest money supply figures for lending are still fairly anaemic.
It is why Mr King did not rule the possibility of negative interest rates when asked about the Riksbank model this month following the unveiling of the quarterly inflation report. “It’s an idea we will certainly be looking at, whether the effectiveness of our asset purchases could be increased by reducing the rate at which we remunerate reserves,” he said. His comments are one reason why yields on short-dated UK government bonds have fallen to record lows and why sterling has been under pressure in the currency markets.
Initially, Mr King gave QE six months before it would start taking effect. That time limit is up next week. If there are no signs in the money supply numbers, particularly in the key M4 lending excluding financial institutions, then the policy may start to look a distinct possibility.
In Europe, the European Central Bank is considered less likely to introduce negative interest rates.
This is because it has maintained higher official rates than other banks and used money market operations to act as a stimulant instead. For example, it offered commercial banks unlimited funds for one year at the end of June.
But it does have the same problem as the Bank of England in assessing the success of its policy. Like the UK, commercial bank deposits at the ECB have shot up in the past few months.
Banks pay price for policy
Sweden’s decision to introduce negative interest rates on deposits at the Riksbank means that commercial banks have to pay for the privilege of saving their money at the central bank, writes David Oakley.
The new rate of minus 0.25 per cent forces banks to pay 0.25 per cent to the Riksbank. Normally, banks would be paid interest on these deposits.
It is thought to be the first time that negative rates have been introduced. Central banks usually shy away from such a drastic policy because it is in effect a tax or fine on the commercial banks and could hurt their balance sheets.
However, the Riksbank hopes that by charging banks for saving their money, rather than paying them, it will encourage them to increase their lending to individuals and businesses, boosting the economy. It also hopes that it might encourage them to divert the money into other assets, such as government bonds or even highly rated corporate bonds. This would bring down bond yields and act as an stimulant.
In the UK, there have been signs that banks are switching cash into short- dated government bonds following hints from Mervyn King, Bank of England governor, that the policy could be introduced there.
At this stage, the US also seems unlikely to introduce the policy as there has been little debate on the matter and no hints from policymakers about it being an option.
At the Riksbank, which now has a deposit rate of minus 0.25 per cent, the most vocal advocate of the policy is deputy governor Lars Svensson, a world-renowned expert on monetary policy theory and a close associate of Ben Bernanke, chairman of the US Federal Reserve, since they worked together at Princeton University.
Read Entire Article
Are Good Deeds Done in The Dark?
Fed Urges Secrecy for Banks in Bailout Programs
NEW YORK, Aug 27 (Reuters) - The U.S. Federal Reserve asked a federal judge not to enforce her order that it reveal the names of the banks that have participated in its emergency lending programs and the sums they received, saying such disclosure would threaten the companies and the economy.
The central bank filed its request on Wednesday, two days after Chief Judge Loretta Preska of the U.S. District Court in Manhattan ruled in favor of Bloomberg News, which had sought information under the federal Freedom of Information Act.
Preska said the Fed failed to show that revealing the names would stigmatize the banks and result in "imminent competitive harm." The Fed asked the judge not to require disclosure while it readies an appeal.
"Immediate release of these documents will cause irreparable harm to these institutions and to the board's ability to effectively manage the current, and any future, financial crisis," the central bank argued.
It added that the public interest favors a delay, citing a potential for "significant harms that could befall not only private companies, but the economy as a whole" if the information were disclosed.
Underlying this case and a similar one involving News Corp's (NWSA.O) Fox News Network LLC is a question of how much the public has a right to know about how the government is bailing out a financial system in a crisis.
The Clearing House Association LLC, which represents banks, in a separate filing supported the Fed's call for a delay. It said speculation that banks' liquidity is drying up could cause runs on deposits, and trading partners to demand collateral.
"Survival can depend on the ephemeral nature of public confidence," Clearing House general counsel Norman Nelson wrote. "Experience in the banking industry has shown that when customers and market participants hear negative rumors about a bank, negative consequences inevitably flow."
Read Entire Article
NEW YORK, Aug 27 (Reuters) - The U.S. Federal Reserve asked a federal judge not to enforce her order that it reveal the names of the banks that have participated in its emergency lending programs and the sums they received, saying such disclosure would threaten the companies and the economy.
The central bank filed its request on Wednesday, two days after Chief Judge Loretta Preska of the U.S. District Court in Manhattan ruled in favor of Bloomberg News, which had sought information under the federal Freedom of Information Act.
Preska said the Fed failed to show that revealing the names would stigmatize the banks and result in "imminent competitive harm." The Fed asked the judge not to require disclosure while it readies an appeal.
"Immediate release of these documents will cause irreparable harm to these institutions and to the board's ability to effectively manage the current, and any future, financial crisis," the central bank argued.
It added that the public interest favors a delay, citing a potential for "significant harms that could befall not only private companies, but the economy as a whole" if the information were disclosed.
Underlying this case and a similar one involving News Corp's (NWSA.O) Fox News Network LLC is a question of how much the public has a right to know about how the government is bailing out a financial system in a crisis.
The Clearing House Association LLC, which represents banks, in a separate filing supported the Fed's call for a delay. It said speculation that banks' liquidity is drying up could cause runs on deposits, and trading partners to demand collateral.
"Survival can depend on the ephemeral nature of public confidence," Clearing House general counsel Norman Nelson wrote. "Experience in the banking industry has shown that when customers and market participants hear negative rumors about a bank, negative consequences inevitably flow."
Read Entire Article
Thursday, August 27, 2009
Swiss Bank: The U.S. Overestimates its Attraction as a Financial Center; Advising its Clients to Get Out of All U.S. Securities
Swiss private bank Wegelin announced on Tuesday that it is to stop doing business in the United States.
The St Gallen-based bank, Switzerland's oldest, said the decision had been taken in response to stricter measures introduced in the US against tax dodgers and planned changes to estate tax, which would make some non-US citizens liable to tax if they inherited US securities.
In a letter to investors it said Swiss banks were likely to find themselves in an untenable position, as they would be expected to know which clients were liable to pay US tax – "an impossible undertaking", given the lack of clear definitions in the matter.
The danger of inadvertently making false declarations to the US tax authorities will be too great, it explained.
It added that it believes the US overestimates its attraction as a financial centre, and is advising its clients to get out of all US securities.
The decision comes a week after US tax authorities reached a deal with the Swiss government which will see bank UBS hand over details of almost 4,500 suspected tax cheats.
Read Entire Article
The St Gallen-based bank, Switzerland's oldest, said the decision had been taken in response to stricter measures introduced in the US against tax dodgers and planned changes to estate tax, which would make some non-US citizens liable to tax if they inherited US securities.
In a letter to investors it said Swiss banks were likely to find themselves in an untenable position, as they would be expected to know which clients were liable to pay US tax – "an impossible undertaking", given the lack of clear definitions in the matter.
The danger of inadvertently making false declarations to the US tax authorities will be too great, it explained.
It added that it believes the US overestimates its attraction as a financial centre, and is advising its clients to get out of all US securities.
The decision comes a week after US tax authorities reached a deal with the Swiss government which will see bank UBS hand over details of almost 4,500 suspected tax cheats.
Read Entire Article
1,000 Banks to Fail In Next Two Years: Bank CEO
The US banking system will lose some 1,000 institutions over the next two years, said John Kanas, whose private equity firm bought BankUnited of Florida in May.
“We’ve already lost 81 this year,” he told CNBC. “The numbers are climbing every day. Many of these institutions nobody’s ever heard of. They’re smaller companies.”
Failed banks tend to be smaller and private, which exacerbates the problem for small business borrowers, said Kanas, who became CEO of BankUnited when his firm bought the bank and is the former chairman and CEO of North Fork bank.
“Government money has propped up the very large institutions as a result of the stimulus package,” he said. “There’s really very little lifeline available for the small institutions that are suffering.”
This comes at a time when the FDIC has established new rules on bank sales. Private equity, for instance, would have to hold double the capital of their competitors in order to buy such an institution, said Kanas.
“This will have somewhat of a chilling effect on our participation,” he said. “As a result of having to keep higher capital levels, we’ll see lower prices coming from that sector.”
Read Entire Article
“We’ve already lost 81 this year,” he told CNBC. “The numbers are climbing every day. Many of these institutions nobody’s ever heard of. They’re smaller companies.”
Failed banks tend to be smaller and private, which exacerbates the problem for small business borrowers, said Kanas, who became CEO of BankUnited when his firm bought the bank and is the former chairman and CEO of North Fork bank.
“Government money has propped up the very large institutions as a result of the stimulus package,” he said. “There’s really very little lifeline available for the small institutions that are suffering.”
This comes at a time when the FDIC has established new rules on bank sales. Private equity, for instance, would have to hold double the capital of their competitors in order to buy such an institution, said Kanas.
“This will have somewhat of a chilling effect on our participation,” he said. “As a result of having to keep higher capital levels, we’ll see lower prices coming from that sector.”
Read Entire Article
Wednesday, August 26, 2009
Charts: Gold to Hit $1,040 ‘Very Quickly’; S&P to Weaken
Gold’s “breaking out” to a higher level as imminent, Chris Locke, managing director at Oystertrade.com Management, told CNBC Wednesday, as other analysts have said the precious metal could shine again as inflation fears resurface.
“We’re on this point of the market making a substantial move to the upside,” Locke said.
"We will see the market move through the bull market highs of $1,040 very, very quickly," he added.
The S&P 500 index has maintained its uptrend from the March lows and the next target for it is 1,050, Locke said. But for the fall period, Locke sees the index weakening.
Locke told CNBC he's been looking for a signal that the U.S. index will peak in August before correcting slightly, but that signal hasn't occurred yet.
Read Entire Article
“We’re on this point of the market making a substantial move to the upside,” Locke said.
"We will see the market move through the bull market highs of $1,040 very, very quickly," he added.
The S&P 500 index has maintained its uptrend from the March lows and the next target for it is 1,050, Locke said. But for the fall period, Locke sees the index weakening.
Locke told CNBC he's been looking for a signal that the U.S. index will peak in August before correcting slightly, but that signal hasn't occurred yet.
Read Entire Article
Tuesday, August 25, 2009
Regulators Prep Defenses to Survive Bank Crisis
WASHINGTON (Reuters) - U.S. regulators are set to buttress their defenses this week against a slew of sick banks still facing closure and the risks to the dwindling fund that protects depositors.
The Federal Deposit Insurance Corp has been looking at expanding the pool of potential bidders for distressed banks, providing some capital relief for troubled assets that will soon be brought back onto banks' books, and charging further industry premiums to replenish the insurance fund.
All of these moves are geared to get the banking industry, and the agency charged with ensuring the industry's safety, through a financial crunch that is coming to a head.
"We're working through this problem. We're not at the beginning, we're not at the end," said James Chessen, chief economist for the American Bankers Association. "We're in the middle and it's painful."
Regulators have shuttered 81 banks so far this year, compared with 25 last year, and three in 2007. Analysts say the wave of failures is far from over. Richard Bove of Rochdale Securities said on Sunday that 150 to 200 more U.S. banks will fail in the current banking crisis, which started with a dramatic fall in housing prices that sent the economy into a recession and caused many borrowers to default on their loans.
Bove said the continuing failures will force the FDIC to turn increasingly to non-U.S. banks and private equity funds to shore up the banking system.
On Wednesday the FDIC will hold a board meeting to vote on guidelines aimed at attracting private investment money to distressed banks while ensuring the investors are serious about nursing these institutions back to health. The agency will likely relax the previously proposed guidelines after critics derided them as overly strict and predicted a chilling effect on investment.
The agency will also vote on a rule that will ask banks if they need some capital relief associated with an accounting change that will bring more than $1 trillion of assets back on their books next year.
On Thursday, the FDIC holds its quarterly briefing that provides critical information about its outlook for bank failures and the state of the deposit insurance fund.
DRIP, DRIP, DRIP
The meetings will come on the heels of two large bank failures that resulted in multibillion-dollar hits to the deposit insurance fund.
The largest bank failure of the year landed on August 14, when the FDIC announced that Alabama-based Colonial Bank had been closed and its assets sold to BB&T Corp. Colonial had total assets of $25 billion and is expected to cost the FDIC insurance fund $2.8 billion.
This past Friday, the FDIC announced Texas-based Guaranty Bank failed, and that Spain's BBVA was buying its assets. Guaranty, which had $13 billion in assets, drained another $3 billion from the insurance fund.
Paul Miller, an analyst at FBR Capital Markets, said there will be a "drip, drip, drip" of bank failures over the next year but he does not see any more failures of the same magnitude as Colonial. "For the number of bank failures, we're in the first couple of innings. For the size, we're in the late innings," Miller said.
The insurance fund has been drained to its lowest level relative to deposits since 1993, largely because the FDIC must pull out money for expected bank failures over the next year. The fund's balance stood at $13 billion as of March 31, compared to $53 billion a year earlier.
By Karey Wutkowski
Read Entire Article
The Federal Deposit Insurance Corp has been looking at expanding the pool of potential bidders for distressed banks, providing some capital relief for troubled assets that will soon be brought back onto banks' books, and charging further industry premiums to replenish the insurance fund.
All of these moves are geared to get the banking industry, and the agency charged with ensuring the industry's safety, through a financial crunch that is coming to a head.
"We're working through this problem. We're not at the beginning, we're not at the end," said James Chessen, chief economist for the American Bankers Association. "We're in the middle and it's painful."
Regulators have shuttered 81 banks so far this year, compared with 25 last year, and three in 2007. Analysts say the wave of failures is far from over. Richard Bove of Rochdale Securities said on Sunday that 150 to 200 more U.S. banks will fail in the current banking crisis, which started with a dramatic fall in housing prices that sent the economy into a recession and caused many borrowers to default on their loans.
Bove said the continuing failures will force the FDIC to turn increasingly to non-U.S. banks and private equity funds to shore up the banking system.
On Wednesday the FDIC will hold a board meeting to vote on guidelines aimed at attracting private investment money to distressed banks while ensuring the investors are serious about nursing these institutions back to health. The agency will likely relax the previously proposed guidelines after critics derided them as overly strict and predicted a chilling effect on investment.
The agency will also vote on a rule that will ask banks if they need some capital relief associated with an accounting change that will bring more than $1 trillion of assets back on their books next year.
On Thursday, the FDIC holds its quarterly briefing that provides critical information about its outlook for bank failures and the state of the deposit insurance fund.
DRIP, DRIP, DRIP
The meetings will come on the heels of two large bank failures that resulted in multibillion-dollar hits to the deposit insurance fund.
The largest bank failure of the year landed on August 14, when the FDIC announced that Alabama-based Colonial Bank had been closed and its assets sold to BB&T Corp. Colonial had total assets of $25 billion and is expected to cost the FDIC insurance fund $2.8 billion.
This past Friday, the FDIC announced Texas-based Guaranty Bank failed, and that Spain's BBVA was buying its assets. Guaranty, which had $13 billion in assets, drained another $3 billion from the insurance fund.
Paul Miller, an analyst at FBR Capital Markets, said there will be a "drip, drip, drip" of bank failures over the next year but he does not see any more failures of the same magnitude as Colonial. "For the number of bank failures, we're in the first couple of innings. For the size, we're in the late innings," Miller said.
The insurance fund has been drained to its lowest level relative to deposits since 1993, largely because the FDIC must pull out money for expected bank failures over the next year. The fund's balance stood at $13 billion as of March 31, compared to $53 billion a year earlier.
By Karey Wutkowski
Read Entire Article
Gold's Fall Has a Silver Lining
(WSJ)Silver has enjoyed greater price gains than gold so far in 2009, and that was the case again Monday as it benefited from hopes an economic recovery will jump-start industrial demand.
Nearby August silver gained 3.1 cents to $14.191 an ounce on the Comex division of the New York Mercantile Exchange, while most-active December gained 3.2 cents to $14.231. By contrast, most-active December gold lost $10.90 to $942.30 an ounce.
Silver often follows gold, although sometimes with greater moves since it is a less-active market and thus more prone to volatile price swings. But so far in 2009, December silver has risen 26%, while December gold is up 6%. "Silver sort of has a dual personality," said Bart Melek, global commodity strategist with BMO Capital Markets.
It has a role as a precious metal and is sometimes referred to as "poor man's gold," often bought with gold as a hedge or safe haven against factors such as dollar weakness, inflation fears and geopolitical disturbances, and conversely selling off with gold when these supportive influences abate.
But silver has a more significant role as an industrial metal because of such uses as in electronics and batteries. Thus, silver also sometimes tracks base metals like copper, which rose Monday, Mr. Melek said. Copper prices have more than doubled since their December lows mainly because of strong Chinese demand but also amid expectations of economic recovery elsewhere.
[Silver Futures]
"It's the risk-appetite theme, based on the expectation that the economy is going to recover," said Tom Pawlicki, analyst with MF Global. "Silver, having more industrial applications, is benefitting from that."
Also, Mr. Melek pointed out, any production cutbacks in base-metals output following last year's declines in commodities prices mean less supply of silver. Most silver is mined as a by-product of other metals, such as lead, zinc and copper.
By Allan Sykora
Read Entire Article
Nearby August silver gained 3.1 cents to $14.191 an ounce on the Comex division of the New York Mercantile Exchange, while most-active December gained 3.2 cents to $14.231. By contrast, most-active December gold lost $10.90 to $942.30 an ounce.
Silver often follows gold, although sometimes with greater moves since it is a less-active market and thus more prone to volatile price swings. But so far in 2009, December silver has risen 26%, while December gold is up 6%. "Silver sort of has a dual personality," said Bart Melek, global commodity strategist with BMO Capital Markets.
It has a role as a precious metal and is sometimes referred to as "poor man's gold," often bought with gold as a hedge or safe haven against factors such as dollar weakness, inflation fears and geopolitical disturbances, and conversely selling off with gold when these supportive influences abate.
But silver has a more significant role as an industrial metal because of such uses as in electronics and batteries. Thus, silver also sometimes tracks base metals like copper, which rose Monday, Mr. Melek said. Copper prices have more than doubled since their December lows mainly because of strong Chinese demand but also amid expectations of economic recovery elsewhere.
[Silver Futures]
"It's the risk-appetite theme, based on the expectation that the economy is going to recover," said Tom Pawlicki, analyst with MF Global. "Silver, having more industrial applications, is benefitting from that."
Also, Mr. Melek pointed out, any production cutbacks in base-metals output following last year's declines in commodities prices mean less supply of silver. Most silver is mined as a by-product of other metals, such as lead, zinc and copper.
By Allan Sykora
Read Entire Article
Monday, August 24, 2009
Fed Proposed To Become Next AIG
(Zero Hedge) You thought the Fed had a lot of freedom? You ain't seen nothing yet. According to two MIT economists, Ricardo Caballero and Pablo Kurlat, the Fed should directly get into the credit default swap business to "prevent the next crisis." Says the WSJ:
Their proposal will be debated today at the Fed’s annual Jackson Hole, Wyo., symposium by the world’s leading central bankers and economists. Harvard’s Kenneth Rogoff, former chief International Monetary Fund economist, will present a critique.
Just in case you missed what destroyed AIG, and what, contrary to the current CEO's desire, will be the reason why AIG will be subsidized by taxpayers for centuries, is selling gluts of CDS on virtually anything that had any risk in it. But the MIT guys think next time around AIG should actually be the Fed:
The two professors say the underlying idea — selling insurance against extreme financial risk — should be in the Fed’s arsenal to manage financial crises.
“Insurance is an effective and cheap tool during a panic,” they say in their Jackson Hole paper. The Fed did provide an ad-hoc form of insurance during the crisis -– guarantees to Citigroup Inc. and Bank of America Corp. on the value of more than $400 billion in assets they held. More broadly, the Fed provided insurance to the whole financial system when officials there vowed to do “whatever it takes” to stabilize markets last fall and extended their safety net beyond banks to AIG. The professors say the bank guarantee program should be formalized in instruments called tradable insurance credits which could be triggered by banks and even hedge funds if another crisis erupts.
Alas, some red light ahead of this proposal are imminent:
There are some practical problems with the idea. The Fed was able to offer these guarantees to Bank of America and Citigroup using legal authority only allowed during “unusual and exigent” emergencies. To make ‘TICs’ a formal part of its toolkit, it would likely need congressional approval. That would likely be a tough sell with Congress now populated by many restive lawmakers who complain the Fed used its power too expansively during the crisis.
This may be a tough nut to crack as lately over 280 members of Congress have been pushing for limited the Fed's powers, not expanding it.
Yet most interesting, is that the Fed may have well already entered the CDS arena. Recent TIC data (not Tradable Insurance Credits, but the Treasury International Capital variety) indicate that beginning in March the Fed started getting involved in derivatives classified as "Other Contracts By Risk Type", to the tune of over $1.3 trillion dollars!
By Tyler Durden
Read Entire Article
Their proposal will be debated today at the Fed’s annual Jackson Hole, Wyo., symposium by the world’s leading central bankers and economists. Harvard’s Kenneth Rogoff, former chief International Monetary Fund economist, will present a critique.
Just in case you missed what destroyed AIG, and what, contrary to the current CEO's desire, will be the reason why AIG will be subsidized by taxpayers for centuries, is selling gluts of CDS on virtually anything that had any risk in it. But the MIT guys think next time around AIG should actually be the Fed:
The two professors say the underlying idea — selling insurance against extreme financial risk — should be in the Fed’s arsenal to manage financial crises.
“Insurance is an effective and cheap tool during a panic,” they say in their Jackson Hole paper. The Fed did provide an ad-hoc form of insurance during the crisis -– guarantees to Citigroup Inc. and Bank of America Corp. on the value of more than $400 billion in assets they held. More broadly, the Fed provided insurance to the whole financial system when officials there vowed to do “whatever it takes” to stabilize markets last fall and extended their safety net beyond banks to AIG. The professors say the bank guarantee program should be formalized in instruments called tradable insurance credits which could be triggered by banks and even hedge funds if another crisis erupts.
Alas, some red light ahead of this proposal are imminent:
There are some practical problems with the idea. The Fed was able to offer these guarantees to Bank of America and Citigroup using legal authority only allowed during “unusual and exigent” emergencies. To make ‘TICs’ a formal part of its toolkit, it would likely need congressional approval. That would likely be a tough sell with Congress now populated by many restive lawmakers who complain the Fed used its power too expansively during the crisis.
This may be a tough nut to crack as lately over 280 members of Congress have been pushing for limited the Fed's powers, not expanding it.
Yet most interesting, is that the Fed may have well already entered the CDS arena. Recent TIC data (not Tradable Insurance Credits, but the Treasury International Capital variety) indicate that beginning in March the Fed started getting involved in derivatives classified as "Other Contracts By Risk Type", to the tune of over $1.3 trillion dollars!
By Tyler Durden
Read Entire Article
"Look Out Below!!" - FDIC
NEW YORK (TheStreet) -- New bank failures last week included two in Georgia and one each in Texas and Alabama, bringing the total number of banks and savings and loans shut down by regulators this year to 81.
Georgia continues to lead all states with 23 bank or thrift failures during 2008 and 2009, followed by Illinois with 14 failures, California with 13, Florida with eight and Nevada with five failures.
The Office of Thrift Supervision took over ebank of Atlanta and appointed the FDIC as receiver. The FDIC then sold the thrift's deposits and sole office to Stearns Bank NA.
Georgia regulators shut down First Coweta Bank of Newnan. The FDIC was appointed receiver and sold the failed bank's retail deposits and branches to United Bank of Zebulon, Ga.
The Alabama State Banking Department closed CapitalSouth Bank of Birmingham and appointed the FDIC receiver. The FDIC sold all of CapitalSouth's retail deposits and branches to Iberiabank of Lafayette, La. Iberiabank is the main subsidiary of Iberiabank(IBKC Quote).
The Office of Thrift Supervision closed Guaranty Bank of Austin, Texas, the main subsidiary of Guaranty Financial Group (GFG Quote). In a deal that was leaked Thursday, the FDIC sold all retail deposits and branches of Guaranty Bank to BBVA Compass of Birmingham, Ala., the main U.S. subsidiary of Banco Bilbao Vizcaya Argentaria SA (BB Quote).
By Phillip Van Dorn
Read Entire Article
Georgia continues to lead all states with 23 bank or thrift failures during 2008 and 2009, followed by Illinois with 14 failures, California with 13, Florida with eight and Nevada with five failures.
The Office of Thrift Supervision took over ebank of Atlanta and appointed the FDIC as receiver. The FDIC then sold the thrift's deposits and sole office to Stearns Bank NA.
Georgia regulators shut down First Coweta Bank of Newnan. The FDIC was appointed receiver and sold the failed bank's retail deposits and branches to United Bank of Zebulon, Ga.
The Alabama State Banking Department closed CapitalSouth Bank of Birmingham and appointed the FDIC receiver. The FDIC sold all of CapitalSouth's retail deposits and branches to Iberiabank of Lafayette, La. Iberiabank is the main subsidiary of Iberiabank(IBKC Quote).
The Office of Thrift Supervision closed Guaranty Bank of Austin, Texas, the main subsidiary of Guaranty Financial Group (GFG Quote). In a deal that was leaked Thursday, the FDIC sold all retail deposits and branches of Guaranty Bank to BBVA Compass of Birmingham, Ala., the main U.S. subsidiary of Banco Bilbao Vizcaya Argentaria SA (BB Quote).
By Phillip Van Dorn
Read Entire Article
Friday, August 21, 2009
Thursday, August 20, 2009
Getting Ready For The Dollar’s Fall
(Reuters) - It just won’t go away, this needling worry about the U.S. dollar losing its coveted top-dog status.
No matter that there are plenty of reasonable arguments to support the dollar as the world reserve currency — namely there’s just no alternative — for perhaps decades to come.
Yet, in a world where once-rock-solid assumptions quickly turn to dust, investors should keep an eye on the dollar since changing perceptions are chipping away at its cherished status as currency to the world.
Much of the debate so far this year has centered on creating an alternative to the U.S. dollar, championed by China and Russia as a way to wean the world off its dependence on the U.S. as well as buffer individual nations against the missteps of those in developed world. Most recognize creating a new currency will take years and the chances of an existing currency, like the yuan, usurping the dollar anytime soon are remote.
But that doesn’t mean big money isn’t starting to prepare for world in which the buck isn’t the currency of choice.
Curtis Mewbourne, a portfolio manager at PIMCO, has suggested that investors diversify away from the dollar and to move into other currencies, especially those in emerging markets.
“And while we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative,” he wrote in an article published on PIMCO’s website.
By Agnes Crane
Read Entire Article
No matter that there are plenty of reasonable arguments to support the dollar as the world reserve currency — namely there’s just no alternative — for perhaps decades to come.
Yet, in a world where once-rock-solid assumptions quickly turn to dust, investors should keep an eye on the dollar since changing perceptions are chipping away at its cherished status as currency to the world.
Much of the debate so far this year has centered on creating an alternative to the U.S. dollar, championed by China and Russia as a way to wean the world off its dependence on the U.S. as well as buffer individual nations against the missteps of those in developed world. Most recognize creating a new currency will take years and the chances of an existing currency, like the yuan, usurping the dollar anytime soon are remote.
But that doesn’t mean big money isn’t starting to prepare for world in which the buck isn’t the currency of choice.
Curtis Mewbourne, a portfolio manager at PIMCO, has suggested that investors diversify away from the dollar and to move into other currencies, especially those in emerging markets.
“And while we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative,” he wrote in an article published on PIMCO’s website.
By Agnes Crane
Read Entire Article
Wednesday, August 19, 2009
Renowned Forecaster - Food Riots, Tax Revolts Imminent
(LewRockwell.com) - The steady drumbeat of good news is getting infectious. The Dow Jones has rallied almost 40 percent from its bottom on March 9. The Federal Reserve expects the economy to pick up in the second half of this year. Home sales rose 11% in June and corporate profits strengthened in the second quarter. Pres. Barack Obama has signaled signs of “green shoots” on the economic landscape. Alan Blinder, the former vice chairman of the Federal Reserve Board, recently pronounced in an op-ed in the Wall Street Journal, “The Economy Has Hit Bottom.” The Aug. 3 cover story in Newsweek went even further, declaring boldly, “The Recession is Over.”
But before you get giddy, several economists caution that we may be witnessing a false lull before the storm, that the temporary economic boost is propelled by the nearly $1 trillion infusion of government bailout money to financial institutions and the economic stimulus package. They fear that we are on the verge of a double dip recession and that the second recession could be longer and deeper.
A handful of prominent investment and trend analysts and scholars are decidedly alarmist, even projecting a depression that will rival the Great Depression of 1929. Gerald Celente, founder of The Trends Research Institute, which the Los Angeles Times once described as the “Standard and Poors of Popular Culture,” forecasts “Food riots, tax protests, farmer rebellions, student revolts, squatter digins, homeless uprisings, tent cities, ghost malls, general strikes, bossnappings, kidnappings, industrial saboteurs, gang warfare, mob rule, terror” by 2012 in the latest edition of The Trends Journal.
Truth is, economic forecasting is a hazardous business even in less rockier times. Federal Reserve Chairman Ben Bernanke recently quipped at a public town hall, “Economic forecasting makes weather forecasting look like physics.” These days many economic indicators are defying both logic and historical patterns. It is the reason why, despite many reassuring economic signals in recent weeks, national anxiety remains palpable.
To gauge the view from the other side, Little India turned to Celente and three other prominent advocates of the counter intuitive perspective: investor advocate Martin Weiss, author of New York Times bestseller, The Ultimate Depression Survival Guide; economic forecaster Harry S. Dent, author of another New York Times bestseller The Great Depression Ahead; and Southern Methodist University economist Ravi Batra, author of The New Golden Age: The Coming Revolution Against Political Corruption and Economic Chaos.
Still Got Two Eyes
Trends analyst Gerald Celente, founder of The Trends Research Institute and publisher of The Trends Journal, built his reputation by accurately predicting the 1987 stock market crash, the 1997 Asian economic crisis and the “Panic of ’08.” He has attracted both attention and ire in recent months with his increasingly dire projections, which he titled as “Obamageddon.”
In the latest The Trends Journal you make very dire predictions of tent cities, food riots and tax rebellion by 2012. Do you still envisage conditions will be as bad as you were projecting?
Economists now predicting recovery are the same people that were saying recession wasn’t here even when we were in recession. Go back to the campaign in 2008, they didn’t start talking about the recession until the Fall of 2008 even though the recession began in December 2007.
These are the same people talking about green shoots a couple of months ago and as you go back to the beginning of the year, they said we would be in recovery by second quarter of 2009. The Obama administration, which began with a stimulus package, had estimated that without the stimulus package, unemployment in 2009 would be at 8%. We had a stimulus package and unemployment is at 9.5%. They had also said that they would create by mid-year 600,000 jobs and we lost 2.5 million. At best, at best, they saved 150,000. All their forecasts are wrong. There is nothing they have forecast economically that has come to pass.
But the improving signs of bank profits and new financial earnings reports, don’t give you hope?
Let’s look at the bank reports. We know that hundreds of billions of dollars of taxpayer money has been given to the banks and they refuse (this is like fiction), to tell the people (the taxpayer) who gave them money, where the money went, how they are spending it.
If you gave me, as they gave Goldman Sachs, $13 billion to cover losses with AIG – 100% coverage of losses – converting Goldman Sachs from a brokerage firm to a bank holding company, giving them access to $10 billion, plus all the loans and benefits they are giving them at discount prices, could you show a profit? These are profits that are pumped up by bailouts, rescue packages and stimulus plans. Yesterday the market went up because Caterpillar showed better earnings than they had thought, or rather losses less severe. They are not better off; their profits are off 66%. Who in the real world wouldn’t call that depression level results? I would consider that atrocious. What you didn’t have a 77% decline? Oh, you only lost one arm and a leg, but you still got your two eyes and the use of one leg!
You have said this bailout bubble can be more lethal than the earlier bubbles. Can you explain?
In The Trends Journal in 2004 we predicted the great recession. We noticed it would happen. It was very easy to see that after the dot com crash in March 2000, rather than letting Wall Street take its $5 trillion worth of speculative losses that were built up by the dot com boom, the Federal Reserve began to lower the interest rates to 46-year lows. They created this borrow-and-spend mentality that was unprecedented in American history.
You want to buy a new house, borrow on your old one; with your new equity loan, you can build that new addition, go on a vacation, buy a new car, send your kids to school, go on a shopping spree. Your house is a piggy bank.
So housing as an asset became artificially inflated by the availability of historically cheap money rather than letting the bubble burst. With the bailout bubble, they have added $13 trillion worth of phantom money. This isn’t real money, it is phantom money printed out of thin air, based on nothing, backed by nothing. So they are creating a bubble, but when this financial/real estate bubble bursts, it is worse than the dot com bubble, because now government has an equity position in these companies, and they have government executive powers and management controls. This is unheard of in American history. This used to be the entrepreneurial empire of the world, that so much of the world respected and revered as the capital of entrepreneurism. No more.
You developed a fair amount of credibility in the media with your previously accurate predictions. But some of the things you are saying sound shrill. Do you really believe it will be as extreme as you are saying or are you trying to pierce through the clutter of the positive blather?
Not at all. We take what they are saying to be extreme. How could people believe these people when everything they said is wrong. If you can show me they are right here, I’ll say fine, we’re only humans, we all make mistakes. But we can say with all certainty, and we say it over and over again, you cannot print phantom money out of thin air based on nothing, backed by nothing without destroying the economy. Look at Brazil, India, China, Russia, the BRIC countries, they all talk now about another reserve currency.
But when you say food riots, tent cities and tax rebellions?
Tax rebellions, let’s take that. Go back to 2007, we wrote about tax revolts when George Bush was president. We saw this coming. Current events inform future trends. They are squeezing the people at every level. Look at what is happening in California. Tax rebellion is already happening. They are trying to downplay them when tea parties and tax protests happen. This hasn’t happened in America before in my lifetime. And now they are commonplace. They happened in April and again on the 4th of July. This is just the beginning. Food riots, oh yes. When people get hungry, when they have nothing to eat, you are going to see a lot of ugly scenes happen in America.
What would you project the unemployment rate to be at end of 2009 and end of 2010?
It will probably be heading towards 11% by end 2009 and by 2010 it could well be into 12–13%.
Where would you project the Dow Jones?
We don’t know. The Dow Jones is a different game. It can go in any kind of direction. When you go to the Great Depression, you saw the Dow Jones improving. It is not an economic indicator, it is a casino.
When do you expect housing prices to bottom out?
It could be many years. It could be a decade. There are two buying seasons in America, Spring and Fall, period, paragraph. Spring buying season was a bust and Fall does not look any better. It is very dismal for the future.
by Achal Mehra
Read Entire Article
But before you get giddy, several economists caution that we may be witnessing a false lull before the storm, that the temporary economic boost is propelled by the nearly $1 trillion infusion of government bailout money to financial institutions and the economic stimulus package. They fear that we are on the verge of a double dip recession and that the second recession could be longer and deeper.
A handful of prominent investment and trend analysts and scholars are decidedly alarmist, even projecting a depression that will rival the Great Depression of 1929. Gerald Celente, founder of The Trends Research Institute, which the Los Angeles Times once described as the “Standard and Poors of Popular Culture,” forecasts “Food riots, tax protests, farmer rebellions, student revolts, squatter digins, homeless uprisings, tent cities, ghost malls, general strikes, bossnappings, kidnappings, industrial saboteurs, gang warfare, mob rule, terror” by 2012 in the latest edition of The Trends Journal.
Truth is, economic forecasting is a hazardous business even in less rockier times. Federal Reserve Chairman Ben Bernanke recently quipped at a public town hall, “Economic forecasting makes weather forecasting look like physics.” These days many economic indicators are defying both logic and historical patterns. It is the reason why, despite many reassuring economic signals in recent weeks, national anxiety remains palpable.
To gauge the view from the other side, Little India turned to Celente and three other prominent advocates of the counter intuitive perspective: investor advocate Martin Weiss, author of New York Times bestseller, The Ultimate Depression Survival Guide; economic forecaster Harry S. Dent, author of another New York Times bestseller The Great Depression Ahead; and Southern Methodist University economist Ravi Batra, author of The New Golden Age: The Coming Revolution Against Political Corruption and Economic Chaos.
Still Got Two Eyes
Trends analyst Gerald Celente, founder of The Trends Research Institute and publisher of The Trends Journal, built his reputation by accurately predicting the 1987 stock market crash, the 1997 Asian economic crisis and the “Panic of ’08.” He has attracted both attention and ire in recent months with his increasingly dire projections, which he titled as “Obamageddon.”
In the latest The Trends Journal you make very dire predictions of tent cities, food riots and tax rebellion by 2012. Do you still envisage conditions will be as bad as you were projecting?
Economists now predicting recovery are the same people that were saying recession wasn’t here even when we were in recession. Go back to the campaign in 2008, they didn’t start talking about the recession until the Fall of 2008 even though the recession began in December 2007.
These are the same people talking about green shoots a couple of months ago and as you go back to the beginning of the year, they said we would be in recovery by second quarter of 2009. The Obama administration, which began with a stimulus package, had estimated that without the stimulus package, unemployment in 2009 would be at 8%. We had a stimulus package and unemployment is at 9.5%. They had also said that they would create by mid-year 600,000 jobs and we lost 2.5 million. At best, at best, they saved 150,000. All their forecasts are wrong. There is nothing they have forecast economically that has come to pass.
But the improving signs of bank profits and new financial earnings reports, don’t give you hope?
Let’s look at the bank reports. We know that hundreds of billions of dollars of taxpayer money has been given to the banks and they refuse (this is like fiction), to tell the people (the taxpayer) who gave them money, where the money went, how they are spending it.
If you gave me, as they gave Goldman Sachs, $13 billion to cover losses with AIG – 100% coverage of losses – converting Goldman Sachs from a brokerage firm to a bank holding company, giving them access to $10 billion, plus all the loans and benefits they are giving them at discount prices, could you show a profit? These are profits that are pumped up by bailouts, rescue packages and stimulus plans. Yesterday the market went up because Caterpillar showed better earnings than they had thought, or rather losses less severe. They are not better off; their profits are off 66%. Who in the real world wouldn’t call that depression level results? I would consider that atrocious. What you didn’t have a 77% decline? Oh, you only lost one arm and a leg, but you still got your two eyes and the use of one leg!
You have said this bailout bubble can be more lethal than the earlier bubbles. Can you explain?
In The Trends Journal in 2004 we predicted the great recession. We noticed it would happen. It was very easy to see that after the dot com crash in March 2000, rather than letting Wall Street take its $5 trillion worth of speculative losses that were built up by the dot com boom, the Federal Reserve began to lower the interest rates to 46-year lows. They created this borrow-and-spend mentality that was unprecedented in American history.
You want to buy a new house, borrow on your old one; with your new equity loan, you can build that new addition, go on a vacation, buy a new car, send your kids to school, go on a shopping spree. Your house is a piggy bank.
So housing as an asset became artificially inflated by the availability of historically cheap money rather than letting the bubble burst. With the bailout bubble, they have added $13 trillion worth of phantom money. This isn’t real money, it is phantom money printed out of thin air, based on nothing, backed by nothing. So they are creating a bubble, but when this financial/real estate bubble bursts, it is worse than the dot com bubble, because now government has an equity position in these companies, and they have government executive powers and management controls. This is unheard of in American history. This used to be the entrepreneurial empire of the world, that so much of the world respected and revered as the capital of entrepreneurism. No more.
You developed a fair amount of credibility in the media with your previously accurate predictions. But some of the things you are saying sound shrill. Do you really believe it will be as extreme as you are saying or are you trying to pierce through the clutter of the positive blather?
Not at all. We take what they are saying to be extreme. How could people believe these people when everything they said is wrong. If you can show me they are right here, I’ll say fine, we’re only humans, we all make mistakes. But we can say with all certainty, and we say it over and over again, you cannot print phantom money out of thin air based on nothing, backed by nothing without destroying the economy. Look at Brazil, India, China, Russia, the BRIC countries, they all talk now about another reserve currency.
But when you say food riots, tent cities and tax rebellions?
Tax rebellions, let’s take that. Go back to 2007, we wrote about tax revolts when George Bush was president. We saw this coming. Current events inform future trends. They are squeezing the people at every level. Look at what is happening in California. Tax rebellion is already happening. They are trying to downplay them when tea parties and tax protests happen. This hasn’t happened in America before in my lifetime. And now they are commonplace. They happened in April and again on the 4th of July. This is just the beginning. Food riots, oh yes. When people get hungry, when they have nothing to eat, you are going to see a lot of ugly scenes happen in America.
What would you project the unemployment rate to be at end of 2009 and end of 2010?
It will probably be heading towards 11% by end 2009 and by 2010 it could well be into 12–13%.
Where would you project the Dow Jones?
We don’t know. The Dow Jones is a different game. It can go in any kind of direction. When you go to the Great Depression, you saw the Dow Jones improving. It is not an economic indicator, it is a casino.
When do you expect housing prices to bottom out?
It could be many years. It could be a decade. There are two buying seasons in America, Spring and Fall, period, paragraph. Spring buying season was a bust and Fall does not look any better. It is very dismal for the future.
by Achal Mehra
Read Entire Article
Tuesday, August 18, 2009
Fed Faces Its Zimbabwe Moment
Is the central bank confident enough about the recovery to take the economy off life support?
WASHINGTON -- (Forbes) When stock markets plumbed new lows in March, the Federal Reserve responded with nearly every tool in its box. It announced it would create new money to buy $1.25 trillion in mortgages and $300 billion in government debt.
That purchase of government debt looked particularly ominous. Creating new money to buy government debt is the sort of strategy that's known to destroy economies--just ask Zimbabwe, which suffered so much hyperinflation that it destroyed its currency. The Zimbabwe central bank printed bills in the denomination of 100 trillion Zimbabwean dollars, then found they had value only as a novelty item on eBay. Eventually, Zimbabwe was forced to abandon its currency altogether.
But the difference between the U.S. Federal Reserve and the Reserve Bank of Zimbabwe (one would hope) is that the Federal Reserve will stop before it wrecks the dollar.
The first major test of the differences between Zimbabwe and the U.S. is rapidly approaching. An indication could come as soon as the Fed releases a policy statement Wednesday afternoon. The Fed is not expected to announce a major change of course (see "All Quiet On The FOMC Front"), but the present course calls for current programs to unwind.
The first program to end is the purchasing of government debt. In its March 18 meeting, the Federal Reserve announced that "to help improve conditions in private credit markets" it would purchase $300 billion of government debt. The Fed wanted markets to believe it was purchasing these Treasuries for the purpose of lowering interest rates. Since much borrowing is ultimately benchmarked against the yield on Treasuries, if the Fed purchases Treasury debt, it should make borrowing easier throughout the economy.
The Fed stated it would make these purchases for six months. As of Aug. 5, according to the Federal Reserve Bank of Atlanta, it has purchased $236 billion of government debt. By the time the Federal Reserve meets again in September, it is likely to have spent all $300 billion, and the six months will be over.
It is a tricky moment for the Fed. If it continues buying government debt, it may help keep interest rates low, but it would raise concerns that the country is inching ever closer to Zimbabwe (and, of course, if enough people believe we're headed down the Zimbabwean road, it would eventually become a self-fulfilling prophecy).
By Joshua Zumbrun, 08.11.09, 05:45 PM EDT
Read Entire Article
WASHINGTON -- (Forbes) When stock markets plumbed new lows in March, the Federal Reserve responded with nearly every tool in its box. It announced it would create new money to buy $1.25 trillion in mortgages and $300 billion in government debt.
That purchase of government debt looked particularly ominous. Creating new money to buy government debt is the sort of strategy that's known to destroy economies--just ask Zimbabwe, which suffered so much hyperinflation that it destroyed its currency. The Zimbabwe central bank printed bills in the denomination of 100 trillion Zimbabwean dollars, then found they had value only as a novelty item on eBay. Eventually, Zimbabwe was forced to abandon its currency altogether.
But the difference between the U.S. Federal Reserve and the Reserve Bank of Zimbabwe (one would hope) is that the Federal Reserve will stop before it wrecks the dollar.
The first major test of the differences between Zimbabwe and the U.S. is rapidly approaching. An indication could come as soon as the Fed releases a policy statement Wednesday afternoon. The Fed is not expected to announce a major change of course (see "All Quiet On The FOMC Front"), but the present course calls for current programs to unwind.
The first program to end is the purchasing of government debt. In its March 18 meeting, the Federal Reserve announced that "to help improve conditions in private credit markets" it would purchase $300 billion of government debt. The Fed wanted markets to believe it was purchasing these Treasuries for the purpose of lowering interest rates. Since much borrowing is ultimately benchmarked against the yield on Treasuries, if the Fed purchases Treasury debt, it should make borrowing easier throughout the economy.
The Fed stated it would make these purchases for six months. As of Aug. 5, according to the Federal Reserve Bank of Atlanta, it has purchased $236 billion of government debt. By the time the Federal Reserve meets again in September, it is likely to have spent all $300 billion, and the six months will be over.
It is a tricky moment for the Fed. If it continues buying government debt, it may help keep interest rates low, but it would raise concerns that the country is inching ever closer to Zimbabwe (and, of course, if enough people believe we're headed down the Zimbabwean road, it would eventually become a self-fulfilling prophecy).
By Joshua Zumbrun, 08.11.09, 05:45 PM EDT
Read Entire Article
Serious Stock Market Correction On The Way?
(CNBC)You can’t move on Wall Street without hearing talk of a serious correction. And after Monday's 2% loss it seems the bears are starting to dominate this market.
Jittery investors are cashing out after new data raised concerns that the economy isn’t recovering at nearly the rate needed to support current valuations.
For your consideration:
On Monday, a weaker-than-expected outlook from Lowe’s [LOW 20.18 -0.29 (-1.42%) ] highlighted the fragile state of the consumer. Also Bank of America [BAC 17.009 0.449 (+2.71%) ] said on Monday credit card defaults inched up in July, as more Americans lost jobs and many continued to struggle to pay their debts.
And that may be just the tip of the iceberg. Earlier in the month, disappointing retail sales and weak consumer sentiment data also suggested the consumer could be floundering.
That’s particularly ominous because in years gone by, consumers have shopped our economy right out of recession. If that's not going to happen and happen soon, then stocks are probably overbought right now -- way overbought.
Dan Deighan, founder of Deighan Financial Advisors, tells CNBC, “There’s no basic foundation for the run-up we’ve had, (it’s) been far too rapid." He predicts we're going to see a 25 to 50 percent drop in the market.
And he’s hardly alone in his outlook. Pimco's Mohamed El-Erian says much the same. In fact, CNBC’s Cindy Perman writes, “There has been a growing chorus of market pros who say the market got way ahead of itself.
You can certainly count perma-bear Peter Schiff, president and chief global strategist at Euro Pacific Capital among their ranks.
He tells Fast Money, “we’ve been in a bear market since 2000. It’s the rallies that are the correction. The primary direction is lower.”
What do you think? We want to know!
Was Monday finally the start of a 10% correction for the market?
Yes, get out
No, resilient tape
Vote to see results
Was Monday finally the start of a 10% correction for the market? * 2462 responses
Yes, get out
65%
No, resilient tape
35%
Not a Scientific Survey. Results may not total 100% due to rounding.
Read Entire Article
Jittery investors are cashing out after new data raised concerns that the economy isn’t recovering at nearly the rate needed to support current valuations.
For your consideration:
On Monday, a weaker-than-expected outlook from Lowe’s [LOW 20.18 -0.29 (-1.42%) ] highlighted the fragile state of the consumer. Also Bank of America [BAC 17.009 0.449 (+2.71%) ] said on Monday credit card defaults inched up in July, as more Americans lost jobs and many continued to struggle to pay their debts.
And that may be just the tip of the iceberg. Earlier in the month, disappointing retail sales and weak consumer sentiment data also suggested the consumer could be floundering.
That’s particularly ominous because in years gone by, consumers have shopped our economy right out of recession. If that's not going to happen and happen soon, then stocks are probably overbought right now -- way overbought.
Dan Deighan, founder of Deighan Financial Advisors, tells CNBC, “There’s no basic foundation for the run-up we’ve had, (it’s) been far too rapid." He predicts we're going to see a 25 to 50 percent drop in the market.
And he’s hardly alone in his outlook. Pimco's Mohamed El-Erian says much the same. In fact, CNBC’s Cindy Perman writes, “There has been a growing chorus of market pros who say the market got way ahead of itself.
You can certainly count perma-bear Peter Schiff, president and chief global strategist at Euro Pacific Capital among their ranks.
He tells Fast Money, “we’ve been in a bear market since 2000. It’s the rallies that are the correction. The primary direction is lower.”
What do you think? We want to know!
Was Monday finally the start of a 10% correction for the market?
Yes, get out
No, resilient tape
Vote to see results
Was Monday finally the start of a 10% correction for the market? * 2462 responses
Yes, get out
65%
No, resilient tape
35%
Not a Scientific Survey. Results may not total 100% due to rounding.
Read Entire Article
Monday, August 17, 2009
Falling Like Dominoes
Colonial BancGroup shut down by federal officials
(AP) WASHINGTON – Real estate lender Colonial BancGroup Inc. has been shut down by federal officials in the biggest U.S. bank failure this year.
The Federal Deposit Insurance Corp., which was appointed receiver of the Montgomery, Ala.-based Colonial and its about $25 billion in assets, said the failed bank's 346 branches in Alabama, Florida, Georgia, Nevada and Texas will reopen at the normal times starting on Saturday as offices of Winston-Salem, N.C.-based BB&T.
The closures boosted to 77 the number of federally insured banks that have failed in 2009.
The agency established a temporary government bank for Community Bank of Nevada to give depositors about 30 days to open accounts at other financial institutions. The failed bank had assets of $1.52 billion and deposits of $1.38 billion as of June 30.
Community Bank of Arizona had assets of $158.5 million and deposits of $143.8 million as of June 30, while Union Bank had assets of $124 million and deposits of $112 million as of June 12. The FDIC said that MidFirst Bank, based in Oklahoma City, has agreed to assume all the deposits and $125.5 million of the assets of Community Bank of Arizona, as well as about $24 million of the deposits and $11 million of the assets of Union Bank. The FDIC will retain the rest for eventual sale.
Dwelling House had $13.4 million in assets and $13.8 million in deposits as of March 31. PNC Bank, part of Pittsburgh-based PNC Financial Services Group Inc., has agreed to assume all of Dwelling House's deposits and about $3 million of its assets; the FDIC will retain the rest for eventual sale.
The failure of Colonial is expected to cost the deposit insurance fund an estimated $2.8 billion and that of Community Bank of Nevada, $781.5 million; Union Bank, $61 million; Community Bank of Arizona, $25.5 million; and Dwelling House, $6.8 million.
The 77 bank failures nationwide this year compare with 25 last year and three in 2007.
As the economy has soured — with unemployment rising, home prices tumbling and loan defaults soaring — bank failures have cascaded and sapped billions out of the deposit insurance fund. It now stands at its lowest level since 1993, $13 billion as of the first quarter.
While losses on home mortgages may be leveling off, delinquencies on commercial real estate loans remain a hot spot of potential trouble, FDIC officials say. If the recession deepens, defaults on the high-risk loans could spike. Many regional banks hold large numbers of them.
The number of banks on the FDIC's list of problem institutions leaped to 305 in the first quarter — the highest number since 1994 during the savings and loan crisis — from 252 in the fourth quarter. The FDIC expects U.S. bank failures to cost the insurance fund around $70 billion through 2013.
By Marcy Gordon
Read Entire Article
(AP) WASHINGTON – Real estate lender Colonial BancGroup Inc. has been shut down by federal officials in the biggest U.S. bank failure this year.
The Federal Deposit Insurance Corp., which was appointed receiver of the Montgomery, Ala.-based Colonial and its about $25 billion in assets, said the failed bank's 346 branches in Alabama, Florida, Georgia, Nevada and Texas will reopen at the normal times starting on Saturday as offices of Winston-Salem, N.C.-based BB&T.
The closures boosted to 77 the number of federally insured banks that have failed in 2009.
The agency established a temporary government bank for Community Bank of Nevada to give depositors about 30 days to open accounts at other financial institutions. The failed bank had assets of $1.52 billion and deposits of $1.38 billion as of June 30.
Community Bank of Arizona had assets of $158.5 million and deposits of $143.8 million as of June 30, while Union Bank had assets of $124 million and deposits of $112 million as of June 12. The FDIC said that MidFirst Bank, based in Oklahoma City, has agreed to assume all the deposits and $125.5 million of the assets of Community Bank of Arizona, as well as about $24 million of the deposits and $11 million of the assets of Union Bank. The FDIC will retain the rest for eventual sale.
Dwelling House had $13.4 million in assets and $13.8 million in deposits as of March 31. PNC Bank, part of Pittsburgh-based PNC Financial Services Group Inc., has agreed to assume all of Dwelling House's deposits and about $3 million of its assets; the FDIC will retain the rest for eventual sale.
The failure of Colonial is expected to cost the deposit insurance fund an estimated $2.8 billion and that of Community Bank of Nevada, $781.5 million; Union Bank, $61 million; Community Bank of Arizona, $25.5 million; and Dwelling House, $6.8 million.
The 77 bank failures nationwide this year compare with 25 last year and three in 2007.
As the economy has soured — with unemployment rising, home prices tumbling and loan defaults soaring — bank failures have cascaded and sapped billions out of the deposit insurance fund. It now stands at its lowest level since 1993, $13 billion as of the first quarter.
While losses on home mortgages may be leveling off, delinquencies on commercial real estate loans remain a hot spot of potential trouble, FDIC officials say. If the recession deepens, defaults on the high-risk loans could spike. Many regional banks hold large numbers of them.
The number of banks on the FDIC's list of problem institutions leaped to 305 in the first quarter — the highest number since 1994 during the savings and loan crisis — from 252 in the fourth quarter. The FDIC expects U.S. bank failures to cost the insurance fund around $70 billion through 2013.
By Marcy Gordon
Read Entire Article
Friday, August 14, 2009
For Whom the Bell Tolls
Toxic Loans May Push 150 Banks to Point of No Return
More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.
The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.
The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound.
Read Entire Article
More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.
The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.
The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound.
Read Entire Article
Wednesday, August 12, 2009
The Truth About Unemployment
Washington’s Blog
Wednesday, August 12, 2009
The mainstream news is citing the decline in unemployment from 9.5% to 9.4% in July as proof that the economy is stabilizing.
But is that true?
Well, as the New York Times pointed out in July:
Include [those who have given up looking for a job and those part-time workers who want to be working full time] — as the Labor Department does when calculating its broadest measure of the job market — and the rate reached 23.5 percent in Oregon this spring, according to a New York Times analysis of state-by-state data. It was 21.5 percent in both Michigan and Rhode Island and 20.3 percent in California. In Tennessee, Nevada and several other states that have relied heavily on manufacturing or housing, the rate was just under 20 percent this spring and may have since surpassed it.
The Times wrote a second article on August 7th pointing out that the unemployment rate had only declined because 400,000 people gave up their search for work and left the labor force.
Indeed, as the Times notes in a third article, Americans are going to China to look for work.
In addition, economists and financial analysts point out that auto workers who would normally be laid off this time of year have been retained because of changes to the auto industry from the auto bailouts.
For example, PhD economist John Williams wrote on August 7th:
July usually sees a regular pattern of planned automobile production line shutdowns to accommodate retooling for the new model year, but recent disruptions to the auto industry have changed pattern this year. Without the usual pattern of shutdowns, the government’s computers nonetheless responded by creating the usual offsetting boost in jobs, not only in the auto industry, but in supporting industries as well. The auto industry itself was alone among durable goods manufacturing industries in showing a reported, seasonally-adjusted monthly gain in July, up by 28,000 jobs.
Williams also said that certain distortions in unemployment figures are being caused by the severity of the financial crisis itself, but that – when these distortions subside in the months ahead – unemployment will increase. He also notes that official unemployment models tend to underestimate unemployment during recessions.
Indeed, if the aforementioned distortions are removed, Williams says that July unemployment figures would have actually increased slightly from June. Indeed, Williams says that accurate unemployment figures rose from 17.5% in December to 20.6% in July.
And Dave Rosenberg of Gluskin Sheff notes that tens of thousands of the new jobs in July were created by the government itself:
There have been large fluctuations in the federal government payroll too. After hiring a slew of Census workers in the spring, there were 57,000 layoffs in May-June and then we saw in today’s report that 12,000 federal workers were “hired” in July. Again, mathematically, this contributed about 20,000 to today’s headline number. In other words, and we have no intent on raining on anyone’s parade, there was about 100,000 non-recurring payrolls in that top-line figure. It may be dangerous to extrapolate today’s report into a view that we are about to fully turn the corner on the job market front.
Financial commentator Max Keiser says that unemployment is actually increasing and wages are falling. Keiser also says that the only sector in the U.S. which is actually strengthening is the military-industrial complex because of wars abroad. And see this.
And many economists point out that the length of time people are remaining unemployed is skyrocketing. As the Washington Post notes:
Another disturbing development was that the number of people out of work for 27 weeks or longer reached a record 5 million, accounting for a third of the unemployed. That suggests to some economists that those job losses were caused by structural changes in the economy and that many of those people won’t be called back to work once the economy picks up. The longer people are out of work, the harder it becomes for them to find jobs and the more likely they are to exhaust savings or lose their homes to foreclosure.
No wonder even Paul Krugman writes:
That slight dip in the measured unemployment rate last month was probably a statistical fluke.
Where Is Unemployment Going From Here?
Unemployment is a “lagging” indicator. In other words, if the economy crashes in one month, unemployment will not peak until several months or years later.
So we have to ask 2 questions:
1) How bad were conditions in 2008 and early 2009?
and
2) What will conditions be in the future?
A look back at how bad conditions were shows that they were probably worse than those at the beginning of the Great Depression.
Says who?
Fed Chairman Bernanke and many other top economists (and see this).
Indeed, former Secretary of Labor Robert Reich wrote in April that the unemployment figures show that we are already in a depression.
And Chris Tilly – director of the Institute for Research on Labor and Employment at UCLA – points out that some populations, such as high school dropouts and African-Americans, are hit much harder than other populations. In other words, regardless of the population at large, these people are already experiencing depression-level unemployment.
Europe’s largest bank – RBS – warns:
Even if the economy starts to turn up the headwinds will be formidable,” [the company's CEO] warned. “The green shoots are short in duration and you need to be cautious about interpreting them. Even if growth returns, unemployment will rise for some time afterwards …
What Will Future Conditions Look Like?
When he was presented with the July unemployment numbers, even President Obama tempered his enthusiasm by saying that the official unemployment numbers will rise to 10% later this year.
And the Federal Reserve predicted in July that high unemployment will cause the eventual economic recovery to be drawn out and weak for years to come. In other words, the Fed is worried that we’re trapped in a vicious cycle, where a poor economy will lead to high unemployment numbers, and unemployment will lead to less consumer spending which will worsen the economy.
And former chief IMF economist Simon Johnson notes that a vicious cycle also exists between unemployment and property foreclosures:
Unemployment is always a lagging indicator, and given the record low number of average hours worked, it will turn around especially slowly this time. Until then, people will continue to lose their jobs and wages will remain flat, and any small rebound in housing prices is unlikely to help more than a few people refinance their way out of unaffordable mortgages. So unless the other part of the equation – monthly payments – changes, the number of foreclosures should just continue to rise.
Moreover, a crash in commercial real estate is now picking up speed. Unlike the subprime mortgage meltdown – which affected mainly the biggest banks – the commercial meltdown will apparently affect a huge number of small to medium-sized banks.
Today, the Congressional Oversight Panel on the bailouts issued a report saying that small and medium sized banks are especially vulnerable, the report will say, in part they hold greater numbers of commercial real estate loans, “which pose a potential threat of high defaults.”
Since those banks make many loans to small businesses, since credit is essential for many small businesses, commercial real estate is crashing even faster than residential, and industry experts forecast that the commercial real estate market won’t bottom out for three more years, that could spell real trouble for employment by small businesses.
Indeed, largely because of the commercial real estate crash, the FDIC expects 500 banks to fail in coming months.
The Congressional Oversight Panel report also says that banks remain threatened by billions of dollars of bad loans on their balance sheets, more could fail if the economy worsens, and that – if unemployment rises sharply or the commercial real estate market collapses – the banking system could again crash:
The financial system [still remains] vulnerable to the crisis conditions that [the bailout] was meant to fix…
Financial stability remains at risk if the underlying problem of toxic assets remains unresolved.
While the panel focuses on toxic loans, this holds true with toxic derivatives as well. As I have written in previous essays, the CDOs, CDS and other derivative side bets on the subprime and alt-a and commercial mortgages still haven’t been reigned in, and they still have a high risk of bringing down the entire financial system unless they are either banned or brought to heel. The derivatives market is many times bigger than the world’s real economy, and if that market crashes again, things could be bad, indeed.
Read Entire Article
Wednesday, August 12, 2009
The mainstream news is citing the decline in unemployment from 9.5% to 9.4% in July as proof that the economy is stabilizing.
But is that true?
Well, as the New York Times pointed out in July:
Include [those who have given up looking for a job and those part-time workers who want to be working full time] — as the Labor Department does when calculating its broadest measure of the job market — and the rate reached 23.5 percent in Oregon this spring, according to a New York Times analysis of state-by-state data. It was 21.5 percent in both Michigan and Rhode Island and 20.3 percent in California. In Tennessee, Nevada and several other states that have relied heavily on manufacturing or housing, the rate was just under 20 percent this spring and may have since surpassed it.
The Times wrote a second article on August 7th pointing out that the unemployment rate had only declined because 400,000 people gave up their search for work and left the labor force.
Indeed, as the Times notes in a third article, Americans are going to China to look for work.
In addition, economists and financial analysts point out that auto workers who would normally be laid off this time of year have been retained because of changes to the auto industry from the auto bailouts.
For example, PhD economist John Williams wrote on August 7th:
July usually sees a regular pattern of planned automobile production line shutdowns to accommodate retooling for the new model year, but recent disruptions to the auto industry have changed pattern this year. Without the usual pattern of shutdowns, the government’s computers nonetheless responded by creating the usual offsetting boost in jobs, not only in the auto industry, but in supporting industries as well. The auto industry itself was alone among durable goods manufacturing industries in showing a reported, seasonally-adjusted monthly gain in July, up by 28,000 jobs.
Williams also said that certain distortions in unemployment figures are being caused by the severity of the financial crisis itself, but that – when these distortions subside in the months ahead – unemployment will increase. He also notes that official unemployment models tend to underestimate unemployment during recessions.
Indeed, if the aforementioned distortions are removed, Williams says that July unemployment figures would have actually increased slightly from June. Indeed, Williams says that accurate unemployment figures rose from 17.5% in December to 20.6% in July.
And Dave Rosenberg of Gluskin Sheff notes that tens of thousands of the new jobs in July were created by the government itself:
There have been large fluctuations in the federal government payroll too. After hiring a slew of Census workers in the spring, there were 57,000 layoffs in May-June and then we saw in today’s report that 12,000 federal workers were “hired” in July. Again, mathematically, this contributed about 20,000 to today’s headline number. In other words, and we have no intent on raining on anyone’s parade, there was about 100,000 non-recurring payrolls in that top-line figure. It may be dangerous to extrapolate today’s report into a view that we are about to fully turn the corner on the job market front.
Financial commentator Max Keiser says that unemployment is actually increasing and wages are falling. Keiser also says that the only sector in the U.S. which is actually strengthening is the military-industrial complex because of wars abroad. And see this.
And many economists point out that the length of time people are remaining unemployed is skyrocketing. As the Washington Post notes:
Another disturbing development was that the number of people out of work for 27 weeks or longer reached a record 5 million, accounting for a third of the unemployed. That suggests to some economists that those job losses were caused by structural changes in the economy and that many of those people won’t be called back to work once the economy picks up. The longer people are out of work, the harder it becomes for them to find jobs and the more likely they are to exhaust savings or lose their homes to foreclosure.
No wonder even Paul Krugman writes:
That slight dip in the measured unemployment rate last month was probably a statistical fluke.
Where Is Unemployment Going From Here?
Unemployment is a “lagging” indicator. In other words, if the economy crashes in one month, unemployment will not peak until several months or years later.
So we have to ask 2 questions:
1) How bad were conditions in 2008 and early 2009?
and
2) What will conditions be in the future?
A look back at how bad conditions were shows that they were probably worse than those at the beginning of the Great Depression.
Says who?
Fed Chairman Bernanke and many other top economists (and see this).
Indeed, former Secretary of Labor Robert Reich wrote in April that the unemployment figures show that we are already in a depression.
And Chris Tilly – director of the Institute for Research on Labor and Employment at UCLA – points out that some populations, such as high school dropouts and African-Americans, are hit much harder than other populations. In other words, regardless of the population at large, these people are already experiencing depression-level unemployment.
Europe’s largest bank – RBS – warns:
Even if the economy starts to turn up the headwinds will be formidable,” [the company's CEO] warned. “The green shoots are short in duration and you need to be cautious about interpreting them. Even if growth returns, unemployment will rise for some time afterwards …
What Will Future Conditions Look Like?
When he was presented with the July unemployment numbers, even President Obama tempered his enthusiasm by saying that the official unemployment numbers will rise to 10% later this year.
And the Federal Reserve predicted in July that high unemployment will cause the eventual economic recovery to be drawn out and weak for years to come. In other words, the Fed is worried that we’re trapped in a vicious cycle, where a poor economy will lead to high unemployment numbers, and unemployment will lead to less consumer spending which will worsen the economy.
And former chief IMF economist Simon Johnson notes that a vicious cycle also exists between unemployment and property foreclosures:
Unemployment is always a lagging indicator, and given the record low number of average hours worked, it will turn around especially slowly this time. Until then, people will continue to lose their jobs and wages will remain flat, and any small rebound in housing prices is unlikely to help more than a few people refinance their way out of unaffordable mortgages. So unless the other part of the equation – monthly payments – changes, the number of foreclosures should just continue to rise.
Moreover, a crash in commercial real estate is now picking up speed. Unlike the subprime mortgage meltdown – which affected mainly the biggest banks – the commercial meltdown will apparently affect a huge number of small to medium-sized banks.
Today, the Congressional Oversight Panel on the bailouts issued a report saying that small and medium sized banks are especially vulnerable, the report will say, in part they hold greater numbers of commercial real estate loans, “which pose a potential threat of high defaults.”
Since those banks make many loans to small businesses, since credit is essential for many small businesses, commercial real estate is crashing even faster than residential, and industry experts forecast that the commercial real estate market won’t bottom out for three more years, that could spell real trouble for employment by small businesses.
Indeed, largely because of the commercial real estate crash, the FDIC expects 500 banks to fail in coming months.
The Congressional Oversight Panel report also says that banks remain threatened by billions of dollars of bad loans on their balance sheets, more could fail if the economy worsens, and that – if unemployment rises sharply or the commercial real estate market collapses – the banking system could again crash:
The financial system [still remains] vulnerable to the crisis conditions that [the bailout] was meant to fix…
Financial stability remains at risk if the underlying problem of toxic assets remains unresolved.
While the panel focuses on toxic loans, this holds true with toxic derivatives as well. As I have written in previous essays, the CDOs, CDS and other derivative side bets on the subprime and alt-a and commercial mortgages still haven’t been reigned in, and they still have a high risk of bringing down the entire financial system unless they are either banned or brought to heel. The derivatives market is many times bigger than the world’s real economy, and if that market crashes again, things could be bad, indeed.
Read Entire Article
Tuesday, August 11, 2009
Fannies' Cousins are Uglier Than Her
The Next Fannie Mae:
Ginnie Mae and FHA are becoming $1 trillion subprime guarantors.
Much to their dismay, Americans learned last year that they “owned” Fannie Mae and Freddie Mac. Well, meet their cousin, Ginnie Mae or the Government National Mortgage Association, which will soon join them as a trillion-dollar packager of subprime mortgages. Taxpayers own Ginnie too.
Only last week, Ginnie announced that it issued a monthly record of $43 billion in mortgage-backed securities in June. Ginnie Mae President Joseph Murin sounded almost giddy as he cheered this “phenomenal growth.” Ginnie Mae’s mortgage exposure is expected to top $1 trillion by the end of next year—or far more than double the dollar amount of 2007. (See the nearby table.) Earlier this summer, Reuters quoted Anthony Medici of the Housing Department’s Inspector General’s office as saying, “Who would have predicted that Ginnie Mae and Fannie Mae would have swapped positions” in loan volume?
Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee.
Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.
On June 18, HUD’s Inspector General issued a scathing report on the FHA’s lax insurance practices. It found that the FHA’s default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days. The FHA’s reserve fund was found to have fallen in half, to 3% from 6.4% in 2007—meaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory. The IG says the FHA may need a “Congressional appropriation intervention to make up the shortfall.”
The IG also fears that the recent “surge in FHA loans is likely to overtax the oversight resources of the FHA, making careful and comprehensive lender monitoring difficult.” And it warned that the growth in FHA mortgage volume could make the program “vulnerable to exploitation by fraud schemes . . . that undercut the integrity of the program.” The 19-page IG report includes a horror show of recent fraud cases.
If housing values continue to slide and 10% of FHA loans end up in default, taxpayers will be on the hook for another $50 to $60 billion of mortgage losses. Only last week, Taylor Bean, the FHA’s third largest mortgage originator in June with $17 billion in loans this year, announced it is terminating operations after the FHA barred the mortgage lender from participating in its insurance program. The feds alleged that Taylor Bean had “misrepresented” its relationship with an auditor and had “irregular transactions that raised concerns of fraud.”
Is anyone on Capitol Hill or the White House paying attention? Evidently not, because on both sides of Pennsylvania Avenue policy makers are busy giving the FHA even more business while easing its already loosy-goosy underwriting standards. A few weeks ago a House committee approved legislation to keep the FHA’s loan limit in high-income states like California at $729,750. We wonder how many first-time home buyers purchase a $725,000 home. The Members must have missed the IG’s warning that higher loan limits may mean “much greater losses by FHA” and will make fraudsters “much more attracted to the product.”
In the wake of the mortgage meltdown, most private lenders have reverted to the traditional down payment rule of 10% or 20%. Housing experts agree that a high down payment is the best protection against default and foreclosure because it means the owner has something to lose by walking away. Meanwhile, at the FHA, the down payment requirement remains a mere 3.5%. Other policies—such as allowing the buyer to finance closing costs and use the homebuyer tax credit to cover costs—can drive the down payment to below 2%.
Then there is the booming refinancing program that Congress has approved to move into the FHA hundreds of thousands of borrowers who can’t pay their mortgage, including many with subprime and other exotic loans. HUD just announced that starting this week the FHA will refinance troubled mortgages by reducing up to 30% of the principal under the Home Affordable Modification Program. This program is intended to reduce foreclosures, but someone has to pick up the multibillion-dollar cost of the 30% loan forgiveness. That will be taxpayers.
Read Entire Article
Ginnie Mae and FHA are becoming $1 trillion subprime guarantors.
Much to their dismay, Americans learned last year that they “owned” Fannie Mae and Freddie Mac. Well, meet their cousin, Ginnie Mae or the Government National Mortgage Association, which will soon join them as a trillion-dollar packager of subprime mortgages. Taxpayers own Ginnie too.
Only last week, Ginnie announced that it issued a monthly record of $43 billion in mortgage-backed securities in June. Ginnie Mae President Joseph Murin sounded almost giddy as he cheered this “phenomenal growth.” Ginnie Mae’s mortgage exposure is expected to top $1 trillion by the end of next year—or far more than double the dollar amount of 2007. (See the nearby table.) Earlier this summer, Reuters quoted Anthony Medici of the Housing Department’s Inspector General’s office as saying, “Who would have predicted that Ginnie Mae and Fannie Mae would have swapped positions” in loan volume?
Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee.
Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.
On June 18, HUD’s Inspector General issued a scathing report on the FHA’s lax insurance practices. It found that the FHA’s default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days. The FHA’s reserve fund was found to have fallen in half, to 3% from 6.4% in 2007—meaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory. The IG says the FHA may need a “Congressional appropriation intervention to make up the shortfall.”
The IG also fears that the recent “surge in FHA loans is likely to overtax the oversight resources of the FHA, making careful and comprehensive lender monitoring difficult.” And it warned that the growth in FHA mortgage volume could make the program “vulnerable to exploitation by fraud schemes . . . that undercut the integrity of the program.” The 19-page IG report includes a horror show of recent fraud cases.
If housing values continue to slide and 10% of FHA loans end up in default, taxpayers will be on the hook for another $50 to $60 billion of mortgage losses. Only last week, Taylor Bean, the FHA’s third largest mortgage originator in June with $17 billion in loans this year, announced it is terminating operations after the FHA barred the mortgage lender from participating in its insurance program. The feds alleged that Taylor Bean had “misrepresented” its relationship with an auditor and had “irregular transactions that raised concerns of fraud.”
Is anyone on Capitol Hill or the White House paying attention? Evidently not, because on both sides of Pennsylvania Avenue policy makers are busy giving the FHA even more business while easing its already loosy-goosy underwriting standards. A few weeks ago a House committee approved legislation to keep the FHA’s loan limit in high-income states like California at $729,750. We wonder how many first-time home buyers purchase a $725,000 home. The Members must have missed the IG’s warning that higher loan limits may mean “much greater losses by FHA” and will make fraudsters “much more attracted to the product.”
In the wake of the mortgage meltdown, most private lenders have reverted to the traditional down payment rule of 10% or 20%. Housing experts agree that a high down payment is the best protection against default and foreclosure because it means the owner has something to lose by walking away. Meanwhile, at the FHA, the down payment requirement remains a mere 3.5%. Other policies—such as allowing the buyer to finance closing costs and use the homebuyer tax credit to cover costs—can drive the down payment to below 2%.
Then there is the booming refinancing program that Congress has approved to move into the FHA hundreds of thousands of borrowers who can’t pay their mortgage, including many with subprime and other exotic loans. HUD just announced that starting this week the FHA will refinance troubled mortgages by reducing up to 30% of the principal under the Home Affordable Modification Program. This program is intended to reduce foreclosures, but someone has to pick up the multibillion-dollar cost of the 30% loan forgiveness. That will be taxpayers.
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Hmmm, Wonder What's Behind the Stock Market Rally?
New York Fed Aggressively Hiring Traders: Report
(CNBC)The Federal Reserve Bank of New York has embarked on a hiring spree, seeking to recruit traders to manage its bulging securities holdings, the Financial Times reported Tuesday.
The New York Fed plans to raise the number of employees in its markets group to 400 by the end of then year, compared with 240 at the end of 2007, the paper said on its Web site.
The Fed is thus becoming one of Wall Street's most active recruiters of financial talent, as most of its new staff come from the private sector. In contrast, many banks, hedge funds, private equity companies and rating agencies are cutting jobs.
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(CNBC)The Federal Reserve Bank of New York has embarked on a hiring spree, seeking to recruit traders to manage its bulging securities holdings, the Financial Times reported Tuesday.
The New York Fed plans to raise the number of employees in its markets group to 400 by the end of then year, compared with 240 at the end of 2007, the paper said on its Web site.
The Fed is thus becoming one of Wall Street's most active recruiters of financial talent, as most of its new staff come from the private sector. In contrast, many banks, hedge funds, private equity companies and rating agencies are cutting jobs.
Read Entire Article
Roubini: Reduced Selling of Gold by Central Banks Should Support Gold Prices
George Washington Blog
Nouriel Roubini writes:
Reduced central-bank gold selling and increased investor buying may have been helping to underpin high prices in 2008 at a time of turmoil in financial markets. The renewal of the central-bank gold selling agreement with a lower threshold suggests that gold sales by central banks will be lower in the next five years, a move the could support gold prices…
In August 2009, the central banks party to the central bank gold agreement (CBGA), which collectively have a gold share of just under 60% in their reserves, agreed to renew the treaty but with a lower maximum sales threshold. Analysts suggest that the marginally lower threshold could provide a “mild support” for gold. (See Javier Blas, Financial Times, August 7 2009)
The annual sales by the central banks party to the treaty will be less than 400 tons. The previous agreement had a cap of 500 tons per years. The IMF’s planned sales of 403 tons are included in the overall cap of 2000 tons from 2009-2014…
(ARTICLE CONTINUES BELOW)
In 2008, European central banks sold the lowest levels of gold in about decade, reversing the practice of recent years whereby official sales helped depress gold prices. Banks bound by the central bank gold agreement (most of the European central banks) sold about 343 tons of gold, the lowest since the first agreement was signed in 1999, and well under the 500 ton annual limit…
The IMF, the third-largest official holder of gold, intends to sell 403 tons (12%) of its 3217 tons of gold, pending approval from 85% of its members which will likely be given in the fall. Any sales are likely be gradual and may be sold to central banks. John Reade, UBS: IMF gold sales are unlikely to be disruptive for the gold market and could be positive if the gold is purchased by other official investors (like central banks). (June 2009)
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Nouriel Roubini writes:
Reduced central-bank gold selling and increased investor buying may have been helping to underpin high prices in 2008 at a time of turmoil in financial markets. The renewal of the central-bank gold selling agreement with a lower threshold suggests that gold sales by central banks will be lower in the next five years, a move the could support gold prices…
In August 2009, the central banks party to the central bank gold agreement (CBGA), which collectively have a gold share of just under 60% in their reserves, agreed to renew the treaty but with a lower maximum sales threshold. Analysts suggest that the marginally lower threshold could provide a “mild support” for gold. (See Javier Blas, Financial Times, August 7 2009)
The annual sales by the central banks party to the treaty will be less than 400 tons. The previous agreement had a cap of 500 tons per years. The IMF’s planned sales of 403 tons are included in the overall cap of 2000 tons from 2009-2014…
(ARTICLE CONTINUES BELOW)
In 2008, European central banks sold the lowest levels of gold in about decade, reversing the practice of recent years whereby official sales helped depress gold prices. Banks bound by the central bank gold agreement (most of the European central banks) sold about 343 tons of gold, the lowest since the first agreement was signed in 1999, and well under the 500 ton annual limit…
The IMF, the third-largest official holder of gold, intends to sell 403 tons (12%) of its 3217 tons of gold, pending approval from 85% of its members which will likely be given in the fall. Any sales are likely be gradual and may be sold to central banks. John Reade, UBS: IMF gold sales are unlikely to be disruptive for the gold market and could be positive if the gold is purchased by other official investors (like central banks). (June 2009)
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Monday, August 10, 2009
The Books are Cooked
Unemployment falls, but only because people are giving up
Friday the Bureau of Labor Statistics released the official unemployment numbers. Most of the initial media reports highlighted the reduction of the unemployment rate from 9.5% to 9.4%.
Enter Remainder of Article Here
Friday the Bureau of Labor Statistics released the official unemployment numbers. Most of the initial media reports highlighted the reduction of the unemployment rate from 9.5% to 9.4%.
It sounds good, but if you check the official chart the BLS put out and is available at their website the drop is not due to people finding jobs. In fact the BLS admits that 155,000 jobs vanished from the economy in July. In fact the only reason that the unemployment figure went down was that 267,000 people who were being counted as unemployed were declared "not in the active laborforce" and the numbers of official unemployed dropped by that amount. The unemployment numbers the BLS produces basically counts the number of people unemployed and looking for work against the total number of people either looking for work or working. 81 million adults are not counted as in the labor force, and it is this group of "not in labor force" that is increasing.
Some publications did note this. The Washington Post had an article titled: In Jobless Rate Dip, a Partial Picture, where they note that the jobless rate does not show the real picture. Even former Clinton Administration Advisor Robert Reich wrote an article for Salon warning that the statistics should not be taken as a sign of recovery. He notes:
So let's be grateful that the economy is getting worse more slowly than it was. But don't be lured into thinking we're ever going back to where we were. Most of the jobs that have been lost are never coming back. New ones will replace some of them, eventually, but hardly all of them.
By Mark Vargus
Read Entire Article
Friday the Bureau of Labor Statistics released the official unemployment numbers. Most of the initial media reports highlighted the reduction of the unemployment rate from 9.5% to 9.4%.
Enter Remainder of Article Here
Friday the Bureau of Labor Statistics released the official unemployment numbers. Most of the initial media reports highlighted the reduction of the unemployment rate from 9.5% to 9.4%.
It sounds good, but if you check the official chart the BLS put out and is available at their website the drop is not due to people finding jobs. In fact the BLS admits that 155,000 jobs vanished from the economy in July. In fact the only reason that the unemployment figure went down was that 267,000 people who were being counted as unemployed were declared "not in the active laborforce" and the numbers of official unemployed dropped by that amount. The unemployment numbers the BLS produces basically counts the number of people unemployed and looking for work against the total number of people either looking for work or working. 81 million adults are not counted as in the labor force, and it is this group of "not in labor force" that is increasing.
Some publications did note this. The Washington Post had an article titled: In Jobless Rate Dip, a Partial Picture, where they note that the jobless rate does not show the real picture. Even former Clinton Administration Advisor Robert Reich wrote an article for Salon warning that the statistics should not be taken as a sign of recovery. He notes:
So let's be grateful that the economy is getting worse more slowly than it was. But don't be lured into thinking we're ever going back to where we were. Most of the jobs that have been lost are never coming back. New ones will replace some of them, eventually, but hardly all of them.
By Mark Vargus
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Friday, August 7, 2009
Fannie Mae Draws on U.S. Support After $14.8 Billion Loss
NEW YORK (Reuters) - Fannie Mae, the largest provider of U.S. home mortgage funding, on Thursday reported a $14.8 billion quarterly net loss that it said would force it to go to the U.S. Treasury trough a third time for money to stay in business.
The company noted a "significant uncertainty" of its long-term financial health in reporting its eighth consecutive quarterly loss, which illustrates its struggle to make money in the face of rising defaults and pressure to do more to stabilize the housing market.
Fannie Mae and rival Freddie Mac have become more crucial to the nation's housing system since 2007 as the financial crisis sealed off other sources of loan funding. The government last September seized the congressionally chartered companies to ensure that they would continue supporting housing while taking stiff losses. The government promised to inject up to $400 billion of capital.
Washington-based Fannie Mae said its regulator requested $10.7 billion from the Treasury to erase a deficit in its net worth, bringing total draws under a senior preferred stock purchase program to $45.9 billion.
The $14.8 billion loss compares with a $2.3 billion loss in the same quarter a year ago and a $23.2 billion loss in the first quarter.
The loss came as lingering defaults kept credit-related expenses at a lofty $18.8 billion, compared with $20.9 billion in the first quarter. As the impact of nearly three years of falling home prices has been compounded by rising U.S. joblessness, defaults are increasing on the less risky loans it guarantees, Fannie Mae said.
Worsening conditions are "a result of the stress on a broader segment of borrowers due to the rise in unemployment and the decline in home prices," the company said.
Non-performing loans guaranteed by Fannie Mae rose to $171 billion in June, from $144.9 billion in March and $119.2 billion in December, it said.
Current trends mean Fannie Mae will likely seek additional funding from the Treasury via senior preferred stock purchases, it said. At the same time, it warned that earnings would likely fall short of what's needed to pay dividends, meaning payments to Treasury would effectively be drawn from Treasury.
Fannie Mae and Freddie Mac are linchpins of President Barack Obama's housing rescue program, which aims to refinance or modify existing loans for up to 9 million Americans. But these commitments come at a cost, in part since the companies must pull the troubled loans from mortgage securities and recognize a loss.
As a result of housing mandates, dividend payments, downbeat expectations on housing and the economy "there is significant uncertainty as to our long-term financial sustainability," Fannie Mae said in a filing with the Securities and Exchange Commission.
By Al Yoon
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The company noted a "significant uncertainty" of its long-term financial health in reporting its eighth consecutive quarterly loss, which illustrates its struggle to make money in the face of rising defaults and pressure to do more to stabilize the housing market.
Fannie Mae and rival Freddie Mac have become more crucial to the nation's housing system since 2007 as the financial crisis sealed off other sources of loan funding. The government last September seized the congressionally chartered companies to ensure that they would continue supporting housing while taking stiff losses. The government promised to inject up to $400 billion of capital.
Washington-based Fannie Mae said its regulator requested $10.7 billion from the Treasury to erase a deficit in its net worth, bringing total draws under a senior preferred stock purchase program to $45.9 billion.
The $14.8 billion loss compares with a $2.3 billion loss in the same quarter a year ago and a $23.2 billion loss in the first quarter.
The loss came as lingering defaults kept credit-related expenses at a lofty $18.8 billion, compared with $20.9 billion in the first quarter. As the impact of nearly three years of falling home prices has been compounded by rising U.S. joblessness, defaults are increasing on the less risky loans it guarantees, Fannie Mae said.
Worsening conditions are "a result of the stress on a broader segment of borrowers due to the rise in unemployment and the decline in home prices," the company said.
Non-performing loans guaranteed by Fannie Mae rose to $171 billion in June, from $144.9 billion in March and $119.2 billion in December, it said.
Current trends mean Fannie Mae will likely seek additional funding from the Treasury via senior preferred stock purchases, it said. At the same time, it warned that earnings would likely fall short of what's needed to pay dividends, meaning payments to Treasury would effectively be drawn from Treasury.
Fannie Mae and Freddie Mac are linchpins of President Barack Obama's housing rescue program, which aims to refinance or modify existing loans for up to 9 million Americans. But these commitments come at a cost, in part since the companies must pull the troubled loans from mortgage securities and recognize a loss.
As a result of housing mandates, dividend payments, downbeat expectations on housing and the economy "there is significant uncertainty as to our long-term financial sustainability," Fannie Mae said in a filing with the Securities and Exchange Commission.
By Al Yoon
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Thursday, August 6, 2009
The Thrill of a Lifetime?
(europac.net) Anyone looking for thrills these days should forget roller coasters and skydiving. Instead, simply buy a few shares of U.S. stock. The past year has reminded us how truly stomach-churning the financial ride can be. And after a white-knuckled drop in 2008, investors who held on are now enjoying a dizzying ascent. In the past five months alone, the S&P has risen by 22 percent and the NASDAQ by 33 percent. Emerging markets are back almost to their pre-recession levels. Even individual American stocks have performed in a stellar manner. Apple, Cisco and Oracle have all risen by over 200 percent. Ford, an aging relic once given up for dead, has risen by 268 percent!
But what we have seen is more than just a lesson in physics. Stocks are not going up only because they previously went down. We are witnessing a return of hope. While the change is heartening, it is sadly based on the flimsiest of evidence.
The current rally has been sparked by some modestly good news: the Purchasing Managers’ Index is up, GDP has retracted by only 1 percent, and the fall in home values appears to be leveling off. Taken together, the appearance of these 'green shoots' has many, such as Larry Summers and Tim Geithner, convinced that the recession is over.
Somewhat more guarded than his colleagues within the Administration, Fed Chairman Ben Bernanke testified to Congress that he foresaw a “jobless recovery.” One is left to wonder how an economy burdened with double-digit unemployment can recover without new jobs. In recent decades, there have been some jobless recoveries from mild recessions, but they were built upon asset booms. Today, we face a very deep recession. The asset boom has collapsed. A jobless recovery in an economy based on 72 percent consumer spending is an oxymoron. Unless our economy can go through a needed and painful reorganization, in which the industrial sector is revitalized, recovery from this recession will have to be based upon consumer demand. With unemployment increasing at over 500,000 workers a month, wages dropping, and hours worked declining, it is hard to see consumer demand rising convincingly enough to provide the engine for a rebound.
Meanwhile, U.S. Treasury debt is exploding, the U.S. dollar falling, and unemployment rising. In such circumstances, how can the stock market rise be trusted? What is the reality?
Added to this conundrum, credit remains tight, despite the injection into the banks of vast amounts of Fed funds at zero percent. And, for the first time, banks are being paid interest on the reserves required to be held at the Fed. Paradoxically, this hidden taxpayer boost to banks’ earnings is one of the prime reasons for tight credit. What bank would lend to corporations or individuals, incurring risk, when it can lend to the Fed – at considerable profit – without risk?
With the consumer still in shock and denied credit, why do some indicators appear positive?
The short answer for this is massive deficit and stimulus spending by the federal government. More than $3 trillion alone this year. That's nearly $10,000 for every citizen of this country. Little wonder that some consumers have ‘handout’ money to spend. And it’s no surprise that after a massive sell-off, certain retailers are refilling their inventories, causing the Purchasing Managers’ Index to rise. Likewise, now the threat of a banking collapse has passed, albeit temporarily, the rate of job cuts can be expected to fall.
Looking ahead, there is a $3.4 trillion commercial mortgage problem due to face the banks in September. This most sobering prospect, combined with the various pressures on consumers, would appear to indicate that the American economy is in the ‘eye’ of an economic hurricane. When jobs fail to materialize and credit remains frozen, look for corporate earnings to remain depressed. This reality can only be ignored for so long.
Any investor in U.S. stocks and bonds should be extremely wary, particularly as autumn may well herald a rise in interest rates and, as a result, another round of collapses. The ride up may have been fun. But remember last year before you dare to hold on for more.
By John Brown - Europac.net
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But what we have seen is more than just a lesson in physics. Stocks are not going up only because they previously went down. We are witnessing a return of hope. While the change is heartening, it is sadly based on the flimsiest of evidence.
The current rally has been sparked by some modestly good news: the Purchasing Managers’ Index is up, GDP has retracted by only 1 percent, and the fall in home values appears to be leveling off. Taken together, the appearance of these 'green shoots' has many, such as Larry Summers and Tim Geithner, convinced that the recession is over.
Somewhat more guarded than his colleagues within the Administration, Fed Chairman Ben Bernanke testified to Congress that he foresaw a “jobless recovery.” One is left to wonder how an economy burdened with double-digit unemployment can recover without new jobs. In recent decades, there have been some jobless recoveries from mild recessions, but they were built upon asset booms. Today, we face a very deep recession. The asset boom has collapsed. A jobless recovery in an economy based on 72 percent consumer spending is an oxymoron. Unless our economy can go through a needed and painful reorganization, in which the industrial sector is revitalized, recovery from this recession will have to be based upon consumer demand. With unemployment increasing at over 500,000 workers a month, wages dropping, and hours worked declining, it is hard to see consumer demand rising convincingly enough to provide the engine for a rebound.
Meanwhile, U.S. Treasury debt is exploding, the U.S. dollar falling, and unemployment rising. In such circumstances, how can the stock market rise be trusted? What is the reality?
Added to this conundrum, credit remains tight, despite the injection into the banks of vast amounts of Fed funds at zero percent. And, for the first time, banks are being paid interest on the reserves required to be held at the Fed. Paradoxically, this hidden taxpayer boost to banks’ earnings is one of the prime reasons for tight credit. What bank would lend to corporations or individuals, incurring risk, when it can lend to the Fed – at considerable profit – without risk?
With the consumer still in shock and denied credit, why do some indicators appear positive?
The short answer for this is massive deficit and stimulus spending by the federal government. More than $3 trillion alone this year. That's nearly $10,000 for every citizen of this country. Little wonder that some consumers have ‘handout’ money to spend. And it’s no surprise that after a massive sell-off, certain retailers are refilling their inventories, causing the Purchasing Managers’ Index to rise. Likewise, now the threat of a banking collapse has passed, albeit temporarily, the rate of job cuts can be expected to fall.
Looking ahead, there is a $3.4 trillion commercial mortgage problem due to face the banks in September. This most sobering prospect, combined with the various pressures on consumers, would appear to indicate that the American economy is in the ‘eye’ of an economic hurricane. When jobs fail to materialize and credit remains frozen, look for corporate earnings to remain depressed. This reality can only be ignored for so long.
Any investor in U.S. stocks and bonds should be extremely wary, particularly as autumn may well herald a rise in interest rates and, as a result, another round of collapses. The ride up may have been fun. But remember last year before you dare to hold on for more.
By John Brown - Europac.net
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US Food Stamp List Tops 34 Million for First Time
WASHINGTON (Reuters) – For the first time, more than 34 million Americans received food stamps, which help poor people buy groceries, government figures said on Thursday, a sign of the longest and one of the deepest recessions since the Great Depression.
Enrollment surged by 2 percent to reach a record 34.4 million people, or one in nine Americans, in May, the latest month for which figures are available.
It was the sixth month in a row that enrollment set a record. Every state recorded a gain in participation from April. Florida had the largest increase at 4.2 percent.
Food stamp enrollment is highest during times of economic stress. The U.S. unemployment rate of 9.5 percent is the highest in 26 years.
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Enrollment surged by 2 percent to reach a record 34.4 million people, or one in nine Americans, in May, the latest month for which figures are available.
It was the sixth month in a row that enrollment set a record. Every state recorded a gain in participation from April. Florida had the largest increase at 4.2 percent.
Food stamp enrollment is highest during times of economic stress. The U.S. unemployment rate of 9.5 percent is the highest in 26 years.
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Wednesday, August 5, 2009
US Prime Borrowers Slip Behind With Payments as Housing Slump Goes On
The number of US prime borrowers behind on home loan payments has risen sharply, signalling further problems for banks and investors.
Standard & Poor's said higher unemployment combined with a prolonged housing market slump had afflicted even the highest quality borrowers.
The dollar volume of prime mortgages in delinquency or default rose 13.8 per cent between March and June, according to a study of private-label prime, subprime and Alt-A home loans conducted by S&P. Borrowers of Alt-A loans have slightly better credit histories than subprime borrowers.
These three categories of mortgages, totalling $1,620bn, are not backed by government-sponsored enterprises Fannie Mae and Freddie Mac, but were originated by banks, packaged into securities sold to investors.
"Today's prime borrower is far more at risk than the prime borrower of any other cycle," said Michael Thompson, managing director of market, credit and risk strategies at S&P. "If unemployment continues to get worse, this is where you will have the greatest vulnerability and it may not yet be factored into the valuation of residential mortgage-backed securities."
Prime loans have less than half the originally securitised loan balance outstanding, after prepayments and losses, and the lowest amount of non-performing loans. But analysts say the growth in problem prime loans could signal trouble for the much larger "conforming" prime loan market. These are loans backed by Fannie Mae and Freddie Mac.
By Nicole Bullock and Saskia Scholtes in New York
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Standard & Poor's said higher unemployment combined with a prolonged housing market slump had afflicted even the highest quality borrowers.
The dollar volume of prime mortgages in delinquency or default rose 13.8 per cent between March and June, according to a study of private-label prime, subprime and Alt-A home loans conducted by S&P. Borrowers of Alt-A loans have slightly better credit histories than subprime borrowers.
These three categories of mortgages, totalling $1,620bn, are not backed by government-sponsored enterprises Fannie Mae and Freddie Mac, but were originated by banks, packaged into securities sold to investors.
"Today's prime borrower is far more at risk than the prime borrower of any other cycle," said Michael Thompson, managing director of market, credit and risk strategies at S&P. "If unemployment continues to get worse, this is where you will have the greatest vulnerability and it may not yet be factored into the valuation of residential mortgage-backed securities."
Prime loans have less than half the originally securitised loan balance outstanding, after prepayments and losses, and the lowest amount of non-performing loans. But analysts say the growth in problem prime loans could signal trouble for the much larger "conforming" prime loan market. These are loans backed by Fannie Mae and Freddie Mac.
By Nicole Bullock and Saskia Scholtes in New York
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1st Half Central Bank Gold Sales Plummett 73%
LONDON -(Dow Jones)- Net sales of gold by central banks in the first half of 2009 plunged by 73% on the year to 39 metric tons, the London-based consultancy GFMS Ltd. said in a report Monday.
Central banks sold 95 tons of gold and bought 56 tons. Gold purchases were nearly double on the year, but were down 39% compared with the second half of 2008.
Most of the sales were by European countries party to the Central Bank Gold Agreement. France was the biggest seller with sales of 44 tons, followed by the European Central Bank at 35.5 tons.
GFMS didn't give a breakdown of purchases by country. The consultancy said it didn't believe China was a substantial buyer in 2008 or in the first few months of this year.
"We see no evidence of large-scale and direct purchases in the open market by this country either in 2008 or during the first few months of 2009."
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Central banks sold 95 tons of gold and bought 56 tons. Gold purchases were nearly double on the year, but were down 39% compared with the second half of 2008.
Most of the sales were by European countries party to the Central Bank Gold Agreement. France was the biggest seller with sales of 44 tons, followed by the European Central Bank at 35.5 tons.
GFMS didn't give a breakdown of purchases by country. The consultancy said it didn't believe China was a substantial buyer in 2008 or in the first few months of this year.
"We see no evidence of large-scale and direct purchases in the open market by this country either in 2008 or during the first few months of 2009."
Read Entire Article
Tuesday, August 4, 2009
U.K. Royal Mint Doubles Gold Output as Demand Swells
Thomas Biesheuvel and Nicholas Larkin
Bloomberg
Tuesday, August 4, 2009
The U.K.’s Royal Mint, established in the 13th century, doubled production of gold coins in the second quarter as demand surged for bullion to diversify investments.
Output climbed to 16,910 ounces from 8,030 ounces a year earlier, according to data obtained by Bloomberg News under a Freedom of Information Act request. First-half production jumped 86 percent to 45,406 ounces, the figures show.
Demand for physical gold as a store of value and hedge against inflation has increased as governments spend trillions of dollars to combat the worst recession since World War II. Bullion holdings in gold-backed exchange-traded products rose to records in the second quarter. Gold is trading about 7 percent lower than the record $1,032.70 an ounce reached in March 2008.
“There’s still interest in gold as a safe-haven asset,” said Stephen Briggs, an analyst at RBS Global Banking and Markets in London. “This whole sector will capture people who don’t have access to the futures market.”
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Bloomberg
Tuesday, August 4, 2009
The U.K.’s Royal Mint, established in the 13th century, doubled production of gold coins in the second quarter as demand surged for bullion to diversify investments.
Output climbed to 16,910 ounces from 8,030 ounces a year earlier, according to data obtained by Bloomberg News under a Freedom of Information Act request. First-half production jumped 86 percent to 45,406 ounces, the figures show.
Demand for physical gold as a store of value and hedge against inflation has increased as governments spend trillions of dollars to combat the worst recession since World War II. Bullion holdings in gold-backed exchange-traded products rose to records in the second quarter. Gold is trading about 7 percent lower than the record $1,032.70 an ounce reached in March 2008.
“There’s still interest in gold as a safe-haven asset,” said Stephen Briggs, an analyst at RBS Global Banking and Markets in London. “This whole sector will capture people who don’t have access to the futures market.”
Read Entire Article
Monday, August 3, 2009
Happy Days Aren’t Here Again
(Europac.net)Have you heard the great news? The recession is over! It’s true; I saw it on TV. Why fret about growing unemployment lines when banks are paying big-time bonuses again?
Proof of the turn was apparently revealed by the 2nd quarter GDP figures that showed that the economy declined by only 1%. After four consecutive quarters of negative GDP, the green shoots now assume that growth will resume over the summer. But before we pop the corks, it may be worthwhile to ask, “what really has changed, and what is responsible for our new lease on life?”
In truth, because of the continued profligacy of the government and Federal Reserve, the imbalances that caused the current recession have actually worsened. We are now in an even deeper hole than when the crisis began. Rather than wrapping up a recession, we are actually sinking into a depression. If things look better now, it’s just because we are in the eye of the storm.
We must remember that recessions inevitably follow periods of artificial growth. During these booms, malinvestments are made which ultimately must be liquidated during the ensuing busts. In short, mistakes made during booms are corrected during busts – and in the recent boom we made some real whoppers. We borrowed and spent too much money, bought goods we couldn’t afford, built houses we couldn’t carry, and developed a service sector economy completely dependent on consumer credit and rising asset prices. All the while, we allowed our industrial base to crumble and our infrastructure to decay.
In order to lay the foundation for real and lasting recovery, market forces must be allowed to repair the damage. However, current policy is counterproductive to this end. Trillions in stimulus dollars have kept the party going, but now what? How does deficit spending by the government address the problems that brought about the crash? It doesn’t; it just delays and worsens the hangover – and we have to hope we don’t die of alcohol poisoning.
By interfering with the unpleasant forces of the recession, we simply trade short-term gain for long-term pain. By propping up inefficient companies that should fail, we deprive more effective companies of the capital they need to grow. By holding up over-valued asset prices, we prevent the prudent or less well-off from snatching them up and, in doing so, creating a new price equilibrium based upon reality. By maintaining artificially low interest rates, we discourage the very savings that are so critical to capital formation and future economic growth. In addition, the false economic signals the Fed sends the market prevent a more efficient re-allocation of resources from taking place and leads to even more bad economic decision being made. By running such huge deficits, we further crowd-out private enterprise by making it harder for businesses to invest or hire.
The recently passed “cash for clunkers” program (currently on-hold, as it ran out of funding in one week) is a perfect example of how government policy can make the economy worse. By incentivizing Americans to destroy fully paid-for cars so they can go deeper into debt buying brand new ones, the government weakens an already crippled economy. The last thing we want to do is subsidize Americans to go deeper into debt by buying more stuff. Don’t they realize that is precisely the behavior that got us into this mess?
Think about it this way. If your friend were in trouble because he had too much debt, would you encourage him to take on even more? Wouldn’t a real sign of progress be a reduction of debt, even if he had to cut back on his everyday expenses? What is true for an individual is also true for a collection of individuals, even if they call themselves a ‘government.’ If, as a country, we are even deeper into debt now than we were before, we are worse off. Period. The fact that the additional debt enabled better short-term GDP numbers is a long-term negative.
Since we have learned nothing from past mistakes, we are condemned to repeat them. As if we have not already suffered enough as a consequence of the Bush/Greenspan stimulus, Obama/Bernanke are giving ever larger doses, which will prove lethal to any recovery. The recession is over; long live the depression!
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Proof of the turn was apparently revealed by the 2nd quarter GDP figures that showed that the economy declined by only 1%. After four consecutive quarters of negative GDP, the green shoots now assume that growth will resume over the summer. But before we pop the corks, it may be worthwhile to ask, “what really has changed, and what is responsible for our new lease on life?”
In truth, because of the continued profligacy of the government and Federal Reserve, the imbalances that caused the current recession have actually worsened. We are now in an even deeper hole than when the crisis began. Rather than wrapping up a recession, we are actually sinking into a depression. If things look better now, it’s just because we are in the eye of the storm.
We must remember that recessions inevitably follow periods of artificial growth. During these booms, malinvestments are made which ultimately must be liquidated during the ensuing busts. In short, mistakes made during booms are corrected during busts – and in the recent boom we made some real whoppers. We borrowed and spent too much money, bought goods we couldn’t afford, built houses we couldn’t carry, and developed a service sector economy completely dependent on consumer credit and rising asset prices. All the while, we allowed our industrial base to crumble and our infrastructure to decay.
In order to lay the foundation for real and lasting recovery, market forces must be allowed to repair the damage. However, current policy is counterproductive to this end. Trillions in stimulus dollars have kept the party going, but now what? How does deficit spending by the government address the problems that brought about the crash? It doesn’t; it just delays and worsens the hangover – and we have to hope we don’t die of alcohol poisoning.
By interfering with the unpleasant forces of the recession, we simply trade short-term gain for long-term pain. By propping up inefficient companies that should fail, we deprive more effective companies of the capital they need to grow. By holding up over-valued asset prices, we prevent the prudent or less well-off from snatching them up and, in doing so, creating a new price equilibrium based upon reality. By maintaining artificially low interest rates, we discourage the very savings that are so critical to capital formation and future economic growth. In addition, the false economic signals the Fed sends the market prevent a more efficient re-allocation of resources from taking place and leads to even more bad economic decision being made. By running such huge deficits, we further crowd-out private enterprise by making it harder for businesses to invest or hire.
The recently passed “cash for clunkers” program (currently on-hold, as it ran out of funding in one week) is a perfect example of how government policy can make the economy worse. By incentivizing Americans to destroy fully paid-for cars so they can go deeper into debt buying brand new ones, the government weakens an already crippled economy. The last thing we want to do is subsidize Americans to go deeper into debt by buying more stuff. Don’t they realize that is precisely the behavior that got us into this mess?
Think about it this way. If your friend were in trouble because he had too much debt, would you encourage him to take on even more? Wouldn’t a real sign of progress be a reduction of debt, even if he had to cut back on his everyday expenses? What is true for an individual is also true for a collection of individuals, even if they call themselves a ‘government.’ If, as a country, we are even deeper into debt now than we were before, we are worse off. Period. The fact that the additional debt enabled better short-term GDP numbers is a long-term negative.
Since we have learned nothing from past mistakes, we are condemned to repeat them. As if we have not already suffered enough as a consequence of the Bush/Greenspan stimulus, Obama/Bernanke are giving ever larger doses, which will prove lethal to any recovery. The recession is over; long live the depression!
Read Entire Article