The US is obviously in the midst of a nasty recession. We were out in the lead for awhile, but the rest of the world is catching up quickly and in many instances is zooming right by us on the train to despair.
In a small but telling move, New Zealand has capitulated to the their own oncoming recession and against their mandate have lowered rates even in the face of very high inflation. You can add them to the following list of countries that have come to the realization they are in trouble:
US
UK
EU
Get ready for Australia and Canada to join the list when the commodities boom collapses in the face of lowering demand from the BRICs. The world is heading for a very rough ride in the coming years.
Friday, July 25, 2008
Thursday, July 24, 2008
WSJ on state budget problems
Main street media is starting to pick up on one of my favorite rants.
States Slammed by Tax Shortfalls
By Conor Dougherty, Amy Merrick and Anton Troianovski
Word Count: 1,247 Companies Featured in This Article: Costco Wholesale
The stumbling U.S. economy is forcing states to slash spending and cut jobs in order to close a projected $40 billion shortfall in the current fiscal year.
That gap -- identified Wednesday in a survey by the National Conference of State Legislatures -- is more than triple the size of the previous year's. It is the result of broad economic weakness at the state and local levels that could cause pain throughout this year and into 2010. Sales-tax collections, for example, have been hurt by the housing slump and high gasoline prices, which are prompting cutbacks in consumer spending. Personal ...
As I've said before, this is just the beginning for states. Across the board, bureacrats are either underestimating or flat out lying about budgets and projections. States will need to do far more than they are currently to avoid disasters.
States Slammed by Tax Shortfalls
By Conor Dougherty, Amy Merrick and Anton Troianovski
Word Count: 1,247 Companies Featured in This Article: Costco Wholesale
The stumbling U.S. economy is forcing states to slash spending and cut jobs in order to close a projected $40 billion shortfall in the current fiscal year.
That gap -- identified Wednesday in a survey by the National Conference of State Legislatures -- is more than triple the size of the previous year's. It is the result of broad economic weakness at the state and local levels that could cause pain throughout this year and into 2010. Sales-tax collections, for example, have been hurt by the housing slump and high gasoline prices, which are prompting cutbacks in consumer spending. Personal ...
As I've said before, this is just the beginning for states. Across the board, bureacrats are either underestimating or flat out lying about budgets and projections. States will need to do far more than they are currently to avoid disasters.
Wednesday, July 23, 2008
Bloomberg article
You really need to read the Bloomberg article I quoted in my previous post.
Fannie Mae Unsold $5 Billion Homes Bring Peril to Shareholders
Once you've read it, please tell me that it doesn't reek of socialist housing already implemented. One of the biggest problems of foreclosed homes is that nobody is paying the property tax and upkeep. When Fannie and Freddie step in and purchase these mortgages that foreclose, they continue to pay the taxes and other expenses.
It costs creditors such as Fannie Mae 2 percent of the value of the property every month in taxes, insurance, utilities, lost revenue, maintenance, management and cleanup after vandalism, Williams estimates.
That money is just flowing through to states and local goverments, probably at the artificially inflated peak home prices. There is no way these companies can continue this without taxpayer support.
This article subtly points out some things about Fannie and Freddie that are just outrageous to me.
Fannie Mae Unsold $5 Billion Homes Bring Peril to Shareholders
Once you've read it, please tell me that it doesn't reek of socialist housing already implemented. One of the biggest problems of foreclosed homes is that nobody is paying the property tax and upkeep. When Fannie and Freddie step in and purchase these mortgages that foreclose, they continue to pay the taxes and other expenses.
It costs creditors such as Fannie Mae 2 percent of the value of the property every month in taxes, insurance, utilities, lost revenue, maintenance, management and cleanup after vandalism, Williams estimates.
That money is just flowing through to states and local goverments, probably at the artificially inflated peak home prices. There is no way these companies can continue this without taxpayer support.
This article subtly points out some things about Fannie and Freddie that are just outrageous to me.
I can just see Ogre from Revenge of the Nerds now...
You may be wondering why there is so much concern regarding Fannie and Freddie. In the immortal words of Ogre..."THIS WHY!"
From an article in Bloomberg today:
Together, Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, owned a record $6.9 billion of foreclosed homes on March 31, compared with $8.56 billion held by all 8,500 U.S. commercial banks and savings and loans. Foreclosed houses sell at an average discount of about 20 percent, according to economists Ethan Harris and Michelle Meyer at New York-based Lehman Brothers Holdings Inc. At that rate, the two mortgage companies stand to lose $1.39 billion on the foreclosed houses they currently own.
I think 20% is extremely optimistic in this environment. One of the homes that Fannie Mae is holding is a home in Flint Michigan that sold for $110,000 in 2005. It's been lowered to $5,000 and still can't be sold. Houses in distressed areas that are populated with low income people have almost zero chance of being sold. The only buyers will be investors who may rent and they will require atleast a 40%-70% haircut on the peak price. The exact market that Fannie and Freddie are supposed to back are the most dangerous. This is a lethal combination.
Foreclosures will continue to mount and the losses will be much greater than 20%. Not a pretty picture for taxpayers if the bailout passes.
From an article in Bloomberg today:
Together, Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, owned a record $6.9 billion of foreclosed homes on March 31, compared with $8.56 billion held by all 8,500 U.S. commercial banks and savings and loans. Foreclosed houses sell at an average discount of about 20 percent, according to economists Ethan Harris and Michelle Meyer at New York-based Lehman Brothers Holdings Inc. At that rate, the two mortgage companies stand to lose $1.39 billion on the foreclosed houses they currently own.
I think 20% is extremely optimistic in this environment. One of the homes that Fannie Mae is holding is a home in Flint Michigan that sold for $110,000 in 2005. It's been lowered to $5,000 and still can't be sold. Houses in distressed areas that are populated with low income people have almost zero chance of being sold. The only buyers will be investors who may rent and they will require atleast a 40%-70% haircut on the peak price. The exact market that Fannie and Freddie are supposed to back are the most dangerous. This is a lethal combination.
Foreclosures will continue to mount and the losses will be much greater than 20%. Not a pretty picture for taxpayers if the bailout passes.
You know the banking system is unsound when...
This is the latest from Mish. Classsic stuff:
http://globaleconomicanalysis.blogspot.com/2008/07/you-know-banking-system-is-unsound-when.html
1. Paulson appears on Face The Nation and says "Our banking system is a safe and a sound one." If the banking system was safe and sound, everyone would know it (or at least think it). There would be no need to say it.
2. Paulson says the list of troubled banks "is a very manageable situation". The reality is there are 90 banks on the list of problem banks. Indymac was not one of them until a month before it collapsed. How many other banks will magically appear on the list a month before they collapse?
3. In a Northern Rock moment, depositors at Indymac pull out their cash. Police had to be called in to ensure order.
4. Washington Mutual (WM), another troubled bank, refused to honor Indymac cashier's checks. The irony is it makes no sense for customers to pull insured deposits out of Indymac after it went into receivership. The second irony is the last place one would want to put those funds would be Washington Mutual. Eventually Washington Mutual decided it would take those checks but with an 8 week hold. Will Washington Mutual even be around 8 weeks from now?
5. Paulson asked for "Congressional authority to buy unlimited stakes in and lend to Fannie Mae (FNM) and Freddie Mac (FRE)" just days after he said "Financial Institutions Must Be Allowed To Fail". Obviously Paulson is reporting from the 5th dimension. In some alternate universe, his statements just might make sense.
6. Former Fed Governor William Poole says "Fannie Mae, Freddie Losses Makes Them Insolvent".
7. Paulson says Fannie Mae and Freddie Mac are "essential" because they represent the only "functioning" part of the home loan market. The firms own or guarantee about half of the $12 trillion in U.S. mortgages. Is it possible to have a sound banking system when the only "functioning" part of the mortgage market is insolvent?
8. Bernanke testified before Congress on monetary policy but did not comment on either money supply or interest rates. The word "money" did not appear at all in his testimony. The only time "interest rate" appeared in his testimony was in relation to consumer credit card rates. How can you have any reasonable economic policy when the Fed chairman is scared half to death to discuss interest rates and money supply?
9. The SEC issued a protective order to protect those most responsible for naked short selling. As long as the investment banks and brokers were making money engaging in naked shorting of stocks, there was no problem. However, when the bears began using the tactic against the big financials, it became time to selectively enforce the existing regulation.
10. The Fed takes emergency actions twice during options expirations week in regards to the discount window and rate cuts.
11. The SEC takes emergency action during options expirations week regarding short sales.
12. The Fed has implemented an alphabet soup of pawn shop lending facilities whereby the Fed accepts garbage as collateral in exchange for treasuries. Those new Fed lending facilities are called the Term Auction Facility (TAF), the Term Security Lending Facility (TSLF), and the Primary Dealer Credit Facility (PDCF).
13. Citigroup (C), Lehman (LEH), Morgan Stanley(MS), Goldman Sachs (GS) and Merrill Lynch (MER) all have a huge percentage of level 3 assets. Level 3 assets are commonly known as "marked to fantasy" assets. In other words, the value of those assets is significantly if not ridiculously overvalued in comparison to what those assets would fetch on the open market. It is debatable if any of the above firms survive in their present firm. Some may not survive in any form.
14. Bernanke openly solicits private equity firms to invest in banks. Is this even close to a remotely normal action for Fed chairman to take?
15. Bear Stearns was taken over by JPMorgan (JPM) days after insuring investors it had plenty of capital. Fears are high that Lehman will suffer the same fate. Worse yet, the Fed had to guarantee the shotgun marriage between Bear Stearns and JP Morgan by providing as much as $30 billion in capital. JPMorgan is responsible for only the first 1/2 billion. Taxpayers are on the hook for all the rest. Was this a legal action for the Fed to take? Does the Fed care?
16. Citigroup needed a cash injection from Abu Dhabi and a second one elsewhere. Then after announcing it would not need more capital is raising still more. The latest news is Citigroup will sell $500 billion in assets. To who? At what price?
17. Merrill Lynch raised $6.6 billion in capital from Kuwait Mizuho, announced it did not need to raise more capital, then raised more capital a few week later.
18. Morgan Stanley sold a 9.9% equity stake to China International Corp. CEO John Mack compensated by not taking his bonus. How generous. Morgan Stanley fell from $72 to $37. Did CEO John Mack deserve a paycheck at all?
19. Bank of America (BAC) agreed to take over Countywide Financial (CFC) and twice announced Countrywide will add profits to B of A. Inquiring minds were asking "How the hell can Countrywide add to Bank of America earnings?" Here's how. Bank of America just announced it will not guarantee $38.1 billion in Countrywide debt. Questions over "Fraudulent Conveyance" are now surfacing.
20. Washington Mutual agreed to a death spiral cash infusion of $7 billion accepting an offer at $7.85 when the stock was over $13 at the time. Washington Mutual has since fallen in waterfall fashion from $40 and is now trading near $5.00 after a huge rally.
21. Shares of Ambac (ABK) fell from $90 to $2.50. Shared of MBIA (MBI) fell from $70 to $5. Sadly, the top three rating agencies kept their rating on the pair at AAA nearly all the way down. No one can believe anything the government sponsored rating agencies say.
22. In a panic set of moves, the Fed slashed interest rates from 5.25% to 2%. This was the fastest, steepest drop on record. Ironically, the Fed chairman spoke of inflation concerns the entire drop down. Bernanke clearly cannot tell the truth. He does not have to. Actions speak louder than words.
23. FDIC Chairman Sheila Bair said the FDIC is looking for ways to shore up its depleted deposit fund, including charging higher premiums on riskier brokered deposits.
24. There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.
25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.What cannot be paid back will be defaulted on.
If you did not know it before, you do now. The entire US banking system is insolvent.
http://globaleconomicanalysis.blogspot.com/2008/07/you-know-banking-system-is-unsound-when.html
1. Paulson appears on Face The Nation and says "Our banking system is a safe and a sound one." If the banking system was safe and sound, everyone would know it (or at least think it). There would be no need to say it.
2. Paulson says the list of troubled banks "is a very manageable situation". The reality is there are 90 banks on the list of problem banks. Indymac was not one of them until a month before it collapsed. How many other banks will magically appear on the list a month before they collapse?
3. In a Northern Rock moment, depositors at Indymac pull out their cash. Police had to be called in to ensure order.
4. Washington Mutual (WM), another troubled bank, refused to honor Indymac cashier's checks. The irony is it makes no sense for customers to pull insured deposits out of Indymac after it went into receivership. The second irony is the last place one would want to put those funds would be Washington Mutual. Eventually Washington Mutual decided it would take those checks but with an 8 week hold. Will Washington Mutual even be around 8 weeks from now?
5. Paulson asked for "Congressional authority to buy unlimited stakes in and lend to Fannie Mae (FNM) and Freddie Mac (FRE)" just days after he said "Financial Institutions Must Be Allowed To Fail". Obviously Paulson is reporting from the 5th dimension. In some alternate universe, his statements just might make sense.
6. Former Fed Governor William Poole says "Fannie Mae, Freddie Losses Makes Them Insolvent".
7. Paulson says Fannie Mae and Freddie Mac are "essential" because they represent the only "functioning" part of the home loan market. The firms own or guarantee about half of the $12 trillion in U.S. mortgages. Is it possible to have a sound banking system when the only "functioning" part of the mortgage market is insolvent?
8. Bernanke testified before Congress on monetary policy but did not comment on either money supply or interest rates. The word "money" did not appear at all in his testimony. The only time "interest rate" appeared in his testimony was in relation to consumer credit card rates. How can you have any reasonable economic policy when the Fed chairman is scared half to death to discuss interest rates and money supply?
9. The SEC issued a protective order to protect those most responsible for naked short selling. As long as the investment banks and brokers were making money engaging in naked shorting of stocks, there was no problem. However, when the bears began using the tactic against the big financials, it became time to selectively enforce the existing regulation.
10. The Fed takes emergency actions twice during options expirations week in regards to the discount window and rate cuts.
11. The SEC takes emergency action during options expirations week regarding short sales.
12. The Fed has implemented an alphabet soup of pawn shop lending facilities whereby the Fed accepts garbage as collateral in exchange for treasuries. Those new Fed lending facilities are called the Term Auction Facility (TAF), the Term Security Lending Facility (TSLF), and the Primary Dealer Credit Facility (PDCF).
13. Citigroup (C), Lehman (LEH), Morgan Stanley(MS), Goldman Sachs (GS) and Merrill Lynch (MER) all have a huge percentage of level 3 assets. Level 3 assets are commonly known as "marked to fantasy" assets. In other words, the value of those assets is significantly if not ridiculously overvalued in comparison to what those assets would fetch on the open market. It is debatable if any of the above firms survive in their present firm. Some may not survive in any form.
14. Bernanke openly solicits private equity firms to invest in banks. Is this even close to a remotely normal action for Fed chairman to take?
15. Bear Stearns was taken over by JPMorgan (JPM) days after insuring investors it had plenty of capital. Fears are high that Lehman will suffer the same fate. Worse yet, the Fed had to guarantee the shotgun marriage between Bear Stearns and JP Morgan by providing as much as $30 billion in capital. JPMorgan is responsible for only the first 1/2 billion. Taxpayers are on the hook for all the rest. Was this a legal action for the Fed to take? Does the Fed care?
16. Citigroup needed a cash injection from Abu Dhabi and a second one elsewhere. Then after announcing it would not need more capital is raising still more. The latest news is Citigroup will sell $500 billion in assets. To who? At what price?
17. Merrill Lynch raised $6.6 billion in capital from Kuwait Mizuho, announced it did not need to raise more capital, then raised more capital a few week later.
18. Morgan Stanley sold a 9.9% equity stake to China International Corp. CEO John Mack compensated by not taking his bonus. How generous. Morgan Stanley fell from $72 to $37. Did CEO John Mack deserve a paycheck at all?
19. Bank of America (BAC) agreed to take over Countywide Financial (CFC) and twice announced Countrywide will add profits to B of A. Inquiring minds were asking "How the hell can Countrywide add to Bank of America earnings?" Here's how. Bank of America just announced it will not guarantee $38.1 billion in Countrywide debt. Questions over "Fraudulent Conveyance" are now surfacing.
20. Washington Mutual agreed to a death spiral cash infusion of $7 billion accepting an offer at $7.85 when the stock was over $13 at the time. Washington Mutual has since fallen in waterfall fashion from $40 and is now trading near $5.00 after a huge rally.
21. Shares of Ambac (ABK) fell from $90 to $2.50. Shared of MBIA (MBI) fell from $70 to $5. Sadly, the top three rating agencies kept their rating on the pair at AAA nearly all the way down. No one can believe anything the government sponsored rating agencies say.
22. In a panic set of moves, the Fed slashed interest rates from 5.25% to 2%. This was the fastest, steepest drop on record. Ironically, the Fed chairman spoke of inflation concerns the entire drop down. Bernanke clearly cannot tell the truth. He does not have to. Actions speak louder than words.
23. FDIC Chairman Sheila Bair said the FDIC is looking for ways to shore up its depleted deposit fund, including charging higher premiums on riskier brokered deposits.
24. There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.
25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.What cannot be paid back will be defaulted on.
If you did not know it before, you do now. The entire US banking system is insolvent.
Wall Street Got Drunk?
If Wall Street got drunk, who served it the drinks? Who let the village idiot get behind the wheel drunk? Who let a recovering alcoholic into the bar?
F'ing pathetic statement from the leader of the "so called" free world.
F'ing pathetic statement from the leader of the "so called" free world.
Tuesday, July 22, 2008
Two Fed myths that need debunking...and an editor who needs an education
Two Fed myths that need debunking
The above is an article in Fortune today. It discusses what the writer (editor at large), considers are two Fed myths.
1) The Fed controls interest rates
2) The Fed will run out of money for bailouts
This article is full of half truths and observations which completely fail to enlighted the reader as to what really is happening.
His main points are that the Fed controls only short-term rates and not long-term rates. In essence this is true, but the fact is the short-term rates often determines the long-term rate UNLESS the market becomes concerned with fundamentals underlying loans (as we are seeing now). The real issue is whether the Fed sets "artificially" low rates which cause market distortions (it does) and whether the Fed should be in the business at all of
"guessing" what the real rate should be. Isn't this a capitalist market? Won't banks ultimately determine what the best rates are best on risk/reward analysis?
On the second question, he comments that the Fed is able to "print" money at will, therefore can't run out of money. He doesn't mention, however, the consequences or repercussions of that action. The Fed in reality has NOT been printing money during this crisis, contrary to popular opinion. It has merely been providing "liquidity" in the form of short-term loans tied to dicey collateral. It has not monetized these loans or losses as of yet. If they had, you would have seen a collapse of the bond markets and US dollar as investors ran for the hills. When the Fed starts monetizing (as this writer alludes to it being able to do) faith in the US dollar will collapse. In essence, the Fed does has a limited amount of funds and it is running low. To print would in essence signal the beginnings of a Banana Republic regime and foreign countries would force the rates on borrowing to skyrocket. This is a checkmate scenario for the Fed.
The above is an article in Fortune today. It discusses what the writer (editor at large), considers are two Fed myths.
1) The Fed controls interest rates
2) The Fed will run out of money for bailouts
This article is full of half truths and observations which completely fail to enlighted the reader as to what really is happening.
His main points are that the Fed controls only short-term rates and not long-term rates. In essence this is true, but the fact is the short-term rates often determines the long-term rate UNLESS the market becomes concerned with fundamentals underlying loans (as we are seeing now). The real issue is whether the Fed sets "artificially" low rates which cause market distortions (it does) and whether the Fed should be in the business at all of
"guessing" what the real rate should be. Isn't this a capitalist market? Won't banks ultimately determine what the best rates are best on risk/reward analysis?
On the second question, he comments that the Fed is able to "print" money at will, therefore can't run out of money. He doesn't mention, however, the consequences or repercussions of that action. The Fed in reality has NOT been printing money during this crisis, contrary to popular opinion. It has merely been providing "liquidity" in the form of short-term loans tied to dicey collateral. It has not monetized these loans or losses as of yet. If they had, you would have seen a collapse of the bond markets and US dollar as investors ran for the hills. When the Fed starts monetizing (as this writer alludes to it being able to do) faith in the US dollar will collapse. In essence, the Fed does has a limited amount of funds and it is running low. To print would in essence signal the beginnings of a Banana Republic regime and foreign countries would force the rates on borrowing to skyrocket. This is a checkmate scenario for the Fed.
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