Global Financial Crisis (Was: Subprime Meltdown)

[ewmayer]

WSJ | Battered Lehman Stock Is No Bargain

Among the more remarkable discoveries of the last nine months is that even the people who are supposed to know what is actually going on in the world of finance – like the directors of the top Wall Street banks, and the governors of the Federal Reserve – are as much in the dark as everyone else.

Let's check out today's price action, via the Yahoo Finance chart below. LEH stock opens shasply lower, but then quickly rises into slightly-green territory on news of the LEH top-mgmt shakeup, which is dutifully pumped by the financial media. [I even read one alleged "analyst" comment to the effect that firing the CFO would somehow magically transform the company's dire fundamentals]. So all morning the paid pumpers sucker retail investors into buying at $24 or above, while the big players [e.g. hedge funds] likely are quietly slipping out the back door. Come early afternoon, the selling volume gets too large, many of the daytraders who got suckered in realize they've been had, and the price starts dropping just like yesterday, in ever-accelerating fashion. Now look at the last half-hour of trading - again like yesterday, it's as if someone had taken a steep downward curve drawn on a sheet of paper, snipped off the really nasty downward spike at the tail end, inverted it to point up and pasted it back in place, upside-down. Again, this might simply be massive short covering rather than manipulation by LEH or the government boyz at the PPT, but no way mere "bargain hunting" can explain the huge closing volume - the chart doesn't do it justice, due to the massive volume-at-open skewing the y-scale - and sharpness of the upward spike. Thus, the 2 most likely scenarios are the aforementioned massive short-covering or outright manipulation, and neither bodes well. Massive short interest is obviously bad sign that either a lot of insiders know the end is near, or sentiment on the company is deeply negative - the latter means big money is likely fleeing out the doors at LEH, just as it was in the final days of Bear Stearns - the classic self-fulfilling prophecy of doom. Manipulation means someone is spending [and losing] huge money to try to prop up the stock price - roughly a million shares per minute were getting traded in the last half-hour.

My prediction: Quite soon there will come a day when the close-of-day LEH selloff is not arrested, and the downward spike will take this stock into the teens or single digits. At that point expect another Fed-orchestrated fire sale to one of the large dealers, which will again avert outright bankruptcy but will still involve massive destruction of shareholder value. And at that point the real fear will take hold of the financial markets, and the Fed won't be able to do a thing about it, shy of cranking up its money-printing press - which would have disastrous consequences for the economy. I hope against hope that I'm wrong, but all the recent news and action in this company's stock tells me they are doomed.

[ewmayer]

Inflation getting 'uglier and uglier': Surging energy prices help drive annual cost-of-living rate rise to 4.2%.

The dramatic increase in energy costs were [sic] largely responsible for the overall inflation. Energy costs rose 4.4% in May, and surged 17.4% over the 12 months ending in May, the Labor Department said.

"These (CPI) numbers are nowhere near to what we're seeing in the real world," said Peter Beutel, energy analyst for Cameron Hanover, who believed the "real" cost of living has increased at a higher rate than the index shows. "But even these diluted numbers are showing that inflation is getting uglier and uglier and uglier."

Foreclosures Up 48% in May

NEW YORK (CNNMoney.com) -- The housing crisis grew worse in May, as more than 73,000 American families lost their homes to bank repossessions, up a staggering 158% from the 28,548 households that were dispossessed in May 2007.

Foreclosure filings of all kinds, including default notices, notices of sheriff's sales and bank repossessions, were up 48% from May 2007, according to the latest release from RealtyTrac, the online marketer of foreclosed properties. Filings increased 7% from April.

"May was the 29th straight month we've seen a year-over-year increase," RealtyTrac's CEO James Saccacio said in a statement.

U.S. Consumer Confidence At Lowest Level Since Carter Years

The Reuters/University of Michigan preliminary index of consumer sentiment fell to 56.7 in June, a reading unseen since 1980, from 59.8 in May.

The slump in confidence may prevent Federal Reserve officials from rushing to raise interest rates to stem the pick- up in inflation. Most economists anticipate Chairman Ben S. Bernanke and his colleagues will wait until next year to boost borrowing costs, according to a monthly Bloomberg News survey.

``The Fed is in a terrible situation here,'' Michael Darda, chief economist at MKM Partners LP in Greenwich, Connecticut, said in an interview with Bloomberg Television. ``We are certainly in a slow period'' and ``the Fed is talking tough on inflation.''

BlackRock Bought Lehman Shares in Offering, Confident in Firm's Leadership: BlackRock Inc., the largest publicly traded fund manager in the U.S., bought Lehman Brothers Holdings Inc. shares this week and remains optimistic about the company's prospects, a BlackRock executive said.

This is what all the stock traders refer to as "the smart money" - will be interesting to see just how smart it proves to be in the long run, but at least for today, the news gave LEH shares a nice pop.


Nouriel Roubini et al's take on the recent ratings-reform agreement between the State of New York and the ratings agencies:

In reviewing the agreement between New York State Attorney General and the NRSROs (credit rating agencies with governmentally outsourced authorities), we are struck by the reality that this agreement does little to advance fundamental changes in rating processes and rewards the rating agencies with the ability to create more revenue streams from issuers. These fees will almost certainly be passed on to issuers and, in turn, borrowers. In fact, given what we know of the rating agencies practices, of ongoing flaws in their models and of cultures that lead us to strongly believe there are smoking gun, “Henry Blodget era like” emails, it seems curious that at his second time at bat in this investigation, Cuomo has settled on rewarding those institutions that were the gatekeepers – who often rated wrongly and therefore enabled the sale of high risk securities to banks, insurance and pension investors. Read Cuomo Rewards the Rating Agencies by Joshua Rosner.

[ewmayer]

Worrisome Manufacturing Data from the NY Fed

NEW YORK (Reuters) - A gauge of manufacturing in New York state contracted in June for the fourth time in five months, the New York Federal Reserve said in a report on Monday that also painted a mixed picture on inflation.

The New York Fed's "Empire State" general business conditions index fell to minus 8.68 from minus 3.23 in May.

Economists polled by Reuters had expected a reading of minus 2.00. Their forecasts ranged from minus 12.0 to plus 7.0.

The survey of manufacturing in the state is one of the earliest monthly guideposts to U.S. factory conditions.

Of course the "eternal optimists" still by and large hold sway - the last 3 paragraphs of the NY Fed report have the following boldfaced titles - time to play the "which of these is not like the others?" game:

Business Activity Continues to Decline

Prices Received Rise Sharply

Outlook Improves Slightly

[FYI, an increase in the Prices Received index indicates manufacturers are having a difficult time passing cost increases on down the food chain - the name is a bit counterintuitive.]


Now, today's special feature is 3 tales from the world of Crony Capitalism:

Fannie Mae Head Gets Nice Pay Raise

NEW YORK, April 4 (Reuters) - The head of Fannie Mae, a company chartered by Congress to help more Americans own homes, reaped a 7 percent rise in pay last year, to $13.4 million, while the company lost money and the country suffered its worst housing crisis in decades.

Want a Cheap Home Loan? Run for the U.S. Senate

Two U.S. senators, two former Cabinet members, and a former ambassador to the United Nations received loans from Countrywide Financial through a little-known program that waived points, lender fees, and company borrowing rules for prominent people.

Senators Christopher Dodd, Democrat from Connecticut and chairman of the Banking Committee, and Kent Conrad, Democrat from North Dakota, chairman of the Budget Committee and a member of the Finance Committee, refinanced properties through Countrywide’s “V.I.P.” program in 2003 and 2004, according to company documents and emails and a former employee familiar with the loans.

Other participants in the V.I.P. program included former Secretary of Housing and Urban Development Alphonso Jackson, former Secretary of Health and Human Services Donna Shalala, and former U.N. ambassador and assistant Secretary of State Richard Holbrooke. Jackson was deputy H.U.D. secretary in the Bush administration when he received the loans in 2003. Shalala, who received two loans in 2002, had by then left the Clinton administration for her current position as president of the University of Miami. She is scheduled to receive a Presidential Medal of Freedom on June 19.

The Washington Post reports that Dodd has denied getting any special treatment, but if you read the actual press release, note the careful wording used in the non-denial denial:

Conde Nast's Portfolio.com Web site reported on Thursday that Sen. Christopher Dodd, a Democrat from Connecticut who is trying to push a housing rescue bill through the Senate, could save $75,000 over the life of the loans he obtained from Countrywide for two homes.

Dodd denied receiving any special favors from Countrywide.

"The Dodds received a competitive rate on their loans," said the senator's spokesman, Bryan DeAngelis. "They did not seek or anticipate any special treatment and they were not aware of any." DeAngelis declined to provide details about the mortgages.

So in other words, it's not that he didn't get any special treatment ... it's that he didn't get any special treatment he was aware of. Yeah, right. And people wonder how sleazy loan outfits like Coutrywide were able to fly under the radar of regulatory scrutiny for so long.


Some interesting snippets from a recent interview Institutional Risk Analytics had with longtime columnist and man-of-many-talents [currently Guest Scholar in economic studies at The Brookings Institution] Martin Mayer [no relation, AFAIK]:

The IRA: Martin, how do you reckon the cost of the subprime debacle so far? Where are we in the adjustment process and where are we going?

Mayer: Gillian Tett has a piece in the Financial Times today saying that banks are unable to resist demands that they tighten up on capital standards, demands which they have been resisting. There was a Basel report after the failure of Long Term Capital Management prepared by a bunch of younger people associated with the Bank for International Settlements. A lady named Susan Krause, who was Deputy Comptroller for International in those days, was the US representative to this effort. And they came up with some very sensible proposals which, if they had been adopted, would have helped avoid much of this mess, but of course Alan Greenspan killed the proposals.

Mayer: What is happening on this LIBOR business? That is a very strange story that the five big banks are cooking their books on reporting LIBOR.

The IRA: Well, with many banks now struggling to fund themselves, the larger banks don`t want to be seen as aggressively bidding in the funds markets for fear of starting a reputational issue a la Bear, Stearns (NYSE:BSC) or Lehman Brothers (NYSE:LEH). LIBOR is a manifestation that global investors don't want to lend to US or even EU banks.

Mayer: That is a very serious statement.

The IRA: Meanwhile, our friend John Dizard reports in the FT that the bond markets are once again back in negative basis territory, meaning that you can buy the bond of a corporate and purchase credit default swaps or CDS insurance for less than the yield on the bond. In theory, a risk free trade, assuming that party providing the protection pays.

Mayer: But the question is: What is that protection really worth? You have a claim on a counterparty. And there is a vast system of counterparties in this OTC market behind which, in theory, the Federal Reserve now stands. It's not a stable situation. People are still hiding losses. The notion that the Fed is taking junk paper from dealers and swapping Treasury debt so that these guys have something to repo is outlandish. This is one reason why I am not sure whether Ben Bernanke knows what he is doing.

The IRA: Agreed. But despite the obvious logic of institutions like DTCC, we've still allowed our OTC markets to fragments and thereby become a source of systemic instability. How did this happen?

Mayer: One of the problems I have with the OTC markets and the arguments that we mustn't cramp innovation is that a lot of what is called innovative is simply a way to find new technology to do what has been forbidden with the old technology.

The IRA: Yes, techno-regulatory arbitrage. What a lovely thought; using new technology as a means for committing financial fraud. It's kind of like the affordable housing and innovative financing games.

Mayer: Yes. Innovation allows you to go back to some scam that was prohibited under the old regime. How can you oppose innovation? The fact that the whole purpose of the innovation is to get around the existing regulation never seems to occur to regulators or members of congress.

Lots more fascinating stuff in there - highly recommended for all regular readers of this thread. I leave off with this great quote [by MM] from the same interview:

"...the notion that people who gamble with their own money are more responsible gamblers than those who gamble with their Uncle Joe's money was always very strange to me. People who are gamblers are gamblers and they will run through anybody's money. The difference between their own money and other people's money usually does not mean much to a gambler."

[ewmayer]

UK Telegraph | Morgan Stanley warns of 'catastrophic event' as ECB fights Federal Reserve

The clash between the European Central Bank and the US Federal Reserve over monetary strategy is causing serious strains in the global financial system and could lead to a replay of Europe's exchange rate crisis in the 1990s, a team of bankers has warned.

More perspective on the potential seriousness of this - and some very curious happenings on the Continent related to "is that our Euro or their Euro" - here.


Bloomberg | Industrial Production in U.S. Decreased 0.2% in May

June 17 (Bloomberg) -- Industrial production in the U.S. unexpectedly fell in May as shrinking output by utilities and consumer-goods makers overshadowed a gain in auto manufacturing.

Again, why "unexpectedly"? Hello? The economy, eet be shreenking bigtime, señor...


Another "The Next Warren Buffett"-proclaimed Wunderkind of the Greenspan EZ-Credit bull market proves utterly clueless in a genuine bear market - buying Citigroup most of last year at around $50 per share [lost his investors a cool billion on that bet] and now buying into the "housing market will rebound in 2nd half of 2008!" pipe dream:

Fortune | Daily Briefing: Lampert gambles on housing revival

Hedge fund manager Ed Lampert is betting on a rebound in some hard-hit sectors, including housing. The billionaire investor, whose ESL Investments funds owns almost half the stock in struggling retailer Sears Holdings (SHLD), has recently made small bets on homebuilders Centex CTX) and KB Home KBH), as well as lender CIT Group CIT) and real estate firm PHH PHH), The Wall Street Journal reports.

Earlier this year, ESL boosted its stake in home improvement retailer Home Depot HD) by some 40%. Lampert has a long record of success, having run up annual returns in the 25% range over the past 20 years, but the last year or two have been tough for his investors, with Sears shares in free fall and a big bet on Citi C) souring quickly. Home building stocks such as Centex got off to a good start earlier this year, but have resumed their swoon lately, trading at multiyear woes amid fears that inflation is on the march. One factor may be working in Lampert’s favor this time, though: His timing can’t be worse than it was with Citi, where he was doing a lot of buying just as the credit crunch was coming into full view.

Bottom Fishing is dangerous enough even when there is very good reason to believe the bottom is in or near - I'm afraid with U.S. housing and retail, we're not even close yet - even the very homebuilders Lampert is so eagerly scooping up have been giving very dismal guidance for the coming year. The worst of subprime proper may be behind us [the bulk of those loans having already been written off], but the worst of Alt-A [an even bigger mortgage category] and pay-option ARM is yet to come. Not to mention the dried-up HELOC [a.k.a. "home as ATM"] funding, consumers still busily maxing out credit cards [huge wave of defaults coming there], and state and local government spending about to turn sharply downward ... Well, at least now we have another Tycoon-turned-Bear-Market-Buffoon besides Bill Miller^* to rag on. :)

===

^*Full name: Bill "If you've got 50,000 fund managers and roughly half of them beat the S&P500 in any given year, what are the odds that one of these no-better-than-random-guess-ers will beat the S&P500 15 years running?" Miller.

[xilman]

Originally Posted by ewmayer

Bloomberg | Industrial Production in U.S. Decreased 0.2% in May
Again, why "unexpectedly"? Hello? The economy, eet be shreenking bigtime, señor...

Perhaps it fell by more than it was expected to fall?


Paul

[garo]

I read that our Euro/their Euro article today and was waiting for a chance to comment on it. I think one has to take what the Telegraph says about Europe with some skepticism. They are extremely Europhobic or shall we say anti-European - which by the way ties in nicely with Mish's prejudices. Yes there are pressures and strains within Europe but the chances of any country wanting to opt out of the Euro are minuscule. It will cause that country far more harm than good. If Italy, Spain or Ireland leave the Euro their new currencies will plummet, interest rates will go sky high and there will be major pain for their economies. Being in the Eurozone means that they benefit from the German and French so-so economies during the downturn, i.e. the contraction gets averaged down.

If there is a mano-a-mano between the ECB and FRB again, this time given the relative states of the economies, it is far more likely that the FRB will come a cropper. Also, I don't understand the logic of Mish's criticism towards Trichet. He criticizes Bernanke for lowering interest rates when that is what fuelled the housing boom. So far, so good. But when Trichet talks about raising rates to curb inflation, he's equally bad?

PS: Did you pick some SKF today. I missed it by this much in the pre-open at 117.

[ewmayer]

Originally Posted by xilman

Perhaps it fell by more than it was expected to fall?

The fact that the "unexpected" decrease was just a few tenths of a % tells me most "experts" weren't expecting any decrease at all. The article confirms: "Economists had forecast industrial production would rise 0.1 percent." Given that the range of "expected" was from -0.4% to +0.4%, perhaps it's just the Bloomberg writer being silly and trying to put a breathtaking spin on an otherwise "ho-hum ... yep, we're in a recession" story. But I keep seeing the word "unexpected" in these financial-media articles about rising inflation, food prices, plummeting home sales, and so forth. These folks must all be reading the official Ministry of Truth script about a brief "mere speedbump in the yellow brick road" economic downturn [mustn't say that naughty "R" word, mind you].

Garo, thanks for the bias adjustment vis-a-vis the Telegraph - I did find it very interesting in Mish's story-on-the-story to read about the German hoarding of "good Northern Euros". Quite possibly an overblown story, but "early warning signs" often look overblown when they first appear.

Re. SKF, I'm staying out of that for now; would've been a nice chance to scoop some up at open today, on the brief burst of enthusiasm resulting from Goldman Sachs' better-than-expected fake earnings. [I say "fake" because until GS, like all the other big-finance playahz, start marking their funny-money Level 3 assets to market, that's precisely what their reported earnings are.] But I'm on CA time so would either have to get up really early or guess right with a limit buy order the previous day in order to catch a big gap-down open like that. The SRS I scooped up late last Friday at 90-91 is back in the black, though, as that had a similar rise as SKF today.

[garo]

Garo, thanks for the bias adjustment vis-a-vis the Telegraph - I did find it very interesting in Mish's story-on-the-story to read about the German hoarding of "good Northern Euros". Quite possibly an overblown story, but "early warning signs" often look overblown when they first appear.

Well I see two possible explanations for that.
1. Those dang Germans are just being their usual pain-in-the-asses but heck I would have expected that more from your Austrians and the Swiss. Hmmm... Perhaps they are Bavarians

2. A more serious explanation is that certain series may be more likely to be counterfeited?

Having lived in two countries with the Euro, I can vouch from personal experience that there is absolutely no difference between the different Euro note series and 99.999999% of the time people don't even look at them. I do notice though more with coins than notes. A cursory examination of my almost empty wallet reveals two series in the five notes and I have coins from Ireland, Italy, Germany and Spain in my pocket.

PS: Ed Lampert, people mistook a bull market for brains.

[ewmayer]

Originally Posted by garo

Well I see two possible explanations for that.
1. Those dang Germans are just being their usual pain-in-the-asses but heck I would have expected that more from your Austrians and the Swiss.

Nah - the Austrians are famous for bitching endlessly about this and that but never really doing anything about it [not at *all* like Americans in that respect, mind you ;)] - effort/risktaking and Gemütlichkeit, those concepts don't play well together in the Austrian mind. I expect the Swiss still have more than enough Nazi gold stashed away to see them through any monetary crisis. [And are not part of the European Monetary Union anyway, so my slander is mooted.] But, now that I've pissed off 8 million fellow Austrians-by-birth and a couple million Schwyzer [I love you guys, I really do - I just can't risk ragging on you now and again - ragging on Americans is far too easy these days]...

Hmmm... Perhaps they are Bavarians

Or maybe monetary "Bohemians"?

On to today's news and commentary - bad earnings from JP Morgan and FedEx, blah, blah - read all about it in the local biznis section. Interestingly, neither bad-earnings report was "unexpected" for once - Morgan getting hit by downturn in investment-banking and brokerage business, FedEx continues to get hammered by high fuel costs. But I'd rather devote the rest of today's post to some interesting commentary from Das Volk [a.k.a. la gente, the common rabble, the hoi polloi, the great unwashed, Joe Sixpack, ...] giving their view on the state of the economy. Followed by a nice piece of doublespeak and topped off with a rather interesting chart.

One of Mish's readers, "Vegasbob", sums up the state of the U.S. economy nicely in the reader-comments sections of a recent blog posting:

vegasbob
Tuesday, June 17, 2008
1:40:30 PM

The so-called "prosperity" in the US over the past few years was a complete and total fraud - a counterfeit economy, if you will.

The banking and finance industry scored hundreds and hundreds of billions in "profits" from fees on cheap money that was borrowed to buy assets whose prices were marked up. Did that process create any new wealth? Of course not. The bankers got the profits, and the formerly middle class in the US got the mortgage liabilities. The problem is that the housing assets are deflating and the mortgage liabilities are not going to be paid, so now the banksters are in trouble.

I think the jig is up for the banks, probably for a decade or more. Some of the formerly rich banksters are going to wind up like their formerly rich dotcom brethren, delivering pizzas or flipping burgers. Oh, I forgot, nobody is going to be able to afford gas to deliver the pizzas or go to burger joints. Well, I guess they can go live in a Bushville somewhere.

The economic situation in this country will not begin to improve until we acknowledge that we have to PRODUCE our way out of our economic problems. This means we have to eliminate our trade deficit and stop borrowing a trillion dollars a year from foreign countries.

In the last year or two the economy has tilted to a position where we effectively borrow even more from foreigners just to pay the interest on our foreign debts.

No amount of leverage or financial smoke and mirrors is going to create prosperity without production.

And fellow "hollow economy" commentator maxed_out adds, using a delightful pugilistic metaphor to drive home his point:

maxed_out
Wednesday, June 18, 2008
1:07:46 AM

There is probably at least 30 million adult Americans with job skills of no use whatsoever anymore. 30 percent of US GDP is based on production, 4.2 trillion dollars. The rest is consumption.

Strip away useless military, that is maybe down to 3.5 trillion. That can support another 3.5 trillion of consumption economy, like it is in another countries (50-50). The worst case scenario is that whopping 50 percent of US GDP (7+ trillion) is going to simply disappear...

The numbers simply are much much worse than it was 1929. It is completely different to take a serious beating when you have been boxing for years (like 1930's workers) and you are in great shape than when you are a fat slob sitting on a sofa.

Another Bizarro Economy news item, featuring a lovely "actions speak louder than words" contrast:

A third of CEOs expect to slash payrolls

WASHINGTON (AP) -- Nearly one-third of the country's top executives expect to cut payrolls in the coming months, reflecting fallout from the housing crisis as well as soaring energy prices.

At the same time, a survey by the Business Roundtable, released Wednesday, showed that most executives expect sales and capital investment to remain at current levels or even improve over the next six months.

That`s right - things will "remain as good or better than currently" - that`s why we`re going to be busily slashing our payrolls. Of course the econo-pundits reach for their handy-dandy "1001 Ways to Explain Away Uncomfortable Facts" reference manual [(c)2008 Federal Reserve Press, 208pp, available at fine booksellers everywhere - make sure to look in the "fiction" section] by using the old "but you see, employment is a lagging indicator" bromide. But note, the fact that payrolls have been dropping steadily for the past 6 months wasn`t a "lagging indicator" of a recession - `twas a mere "patch of temporary softness in the business cycle", or something comforting-sounding like that.


The Wall Street Examiner's Russ Winter has an interesting chart in today's blog posting, which neatly illustrates the dubious nature of the BLS residential construction employment figures - either construction firms are keeping a million more workers than they currently need on their payrolls, or all these guys were working 80-hour weeks during the boom [possible, but unlikely due to the expensive nature of blue-collar-job overtime], or [behind Door #3] the official employment numbers are - how do you say in your language? - "completely bogus":

[ewmayer]

UBS to expose offshore fraud: Swiss bank says it will disclose the names of American clients who used foreign-based holding companies to evade U.S. taxes.

GENEVA (AP) -- Swiss bank UBS AG said Friday that it will disclose any instances in which rich American clients may have broken U.S. tax reporting rules by channeling assets through offshore shell companies.

The disclosure comes after the Zurich-based bank said it was cooperating with a U.S. investigation into whether its employees helped clients evade taxes from 2000 to 2007.

The investigation centers on 20,000 UBS clients in the United States who are required to fill out a supplementary tax form giving foreign banks their American tax identification number if they hold any U.S. securities in their accounts abroad.

"A fraction" of those customers are being investigated for possibly breaching the rules by using offshore companies to hold U.S. assets without filling in the supplementary form, known as W-9, UBS spokesman Serge Steiner said.

Note the UBS Spokesshill didn't say whether the fraction was closer to 1 or to 0. Just "a fraction", with the expectation that the audience will automatically insert the word "mere". I love that rhetorical trick - works every time, assuming you're not speaking to a bunch of mathematicians.

Swiss law prevents banks from divulging the names and details of their clients except in cases of outright tax fraud. Tax evasion or non-reporting is not considered sufficient grounds for the Swiss government to aid another government's investigation.

Don't you just love these crooks? They know full well that bank records are usually required to prove fraud. It's the tax-evasion version of asking Holocaust victims to provide birth certificates and other records known to have been destroyed by the Nazis in order to claim old deposits.


Fortune | Crime and delusion on Wall Street: Prosecutors allege two ex-Bear Stearns hedge fund managers misled investors. Perhaps, but Wall Street has long been kidding itself about the credit crunch.


Bloomberg | Citigroup Says It Will Report `Substantial' Further Writedowns on Its CDOs : Citigroup Inc., the biggest U.S. bank, will have substantial writedowns on its holdings of collateralized debt obligations, Chief Financial Officer Gary Crittenden said.

So much for "the bad news is already priced in" hypothesis - I'm betting these guys all still have huge undisclosed losses-to-come on [or more likely off] their balance sheets.


Toll Bros. CEO Doesn't Buy Government Home Sales Numbers: The CEO of Toll Bros. says there's no way new home sales are running as high as the census bean counters claim because they don't include cancellations which are still running around 30 percent.

There is a similar example of funny-numbering in a front-page article in today's [i]San Jose Mercury News - let's have a look:

Lower prices luring home buyers in Silicon Valley

Far fewer homes sold last month in Santa Clara County than in May last year, and median prices fell 12 percent. But amid the grim figures may be a glimmer of good news.

Sellers and buyers are striking as many deals now as they did in 2005 at the height of the boom, according to data from local brokerages, and the number of homes for sale in the county has been falling steadily - not at all typical for this time of year.

Real estate information firm DataQuick Information Systems reported Wednesday that the sales of 1,040 previously owned single-family houses closed escrow in Santa Clara County last month, up from 924 in April, but down 27 percent from May 2007. And the median price paid for those houses was $696,500, down 12.3 percent from $793,750 a year earlier.

The figures will strike some homeowners - loath to see their property values fall - as somber. The bright side is that the Silicon Valley market has sped up recently. More houses are selling, and the supply of homes on the market is falling.

"We're getting more consumers putting deals together," said Dave Walsh, president of the Santa Clara County Association of Realtors. "It does not mean that the market has bounced back. What it means is we're not in a softening market right now. Prices are fair, the affordability indexes are more in line, and more people can qualify for mortgages now. Buyers are still very choosy about what they pay. They're not willing to overpay."

Sounds pretty hopeful, doesn't it? Buried near the very end of the article, however, we see this:

DataQuick's figures show that 14.3 percent of all home sales in the county last month were properties that had been foreclosed upon sometime in the previous 12 months. That's up from 1.4 percent a year earlier.

Across the nine-county Bay Area, 26 percent of the homes that changed hands in May had been foreclosed upon sometime in the past 12 months. In May 2007, only 3 percent of sales were previously foreclosed properties.

That is a massive spike in the number and percentage of foreclosure sales. Such sales will continue to exert downward pressure on the housing markets because, unlike a private owner/occupant seller, a bank which owns a foreclosed-upon house derives no benefit from living in the home while waiting to sell, and has no vested interest in trying to sell at a price "in line" with that of surrounding homes - they just want to get the property off their books as soon as reasonably possible, for the best price they can get in some relatively short time frame. Every day the house sits unsold the bank owning it is bleeding money due to upkeep expense, and [again unlike owner/occupied] is at significant risk of theft and vandalism on the property. Thus a typical foreclosure sale instantly drags down the valuation of all the houses in the surrounding neighborhood. Lastly, there is still a huge supply of foreclosed-upon properties which are in the legally mandated 90-day "lockup period" before they can be put up for sale. [The FHA has just waived that rule for FHA-financed resales, but most REO resales, including ones by professional property disposition outfits are still subject to it.]

[ewmayer]

I wouldn't even bother inflicting this on y'all if it weren't for my dual purpose of using this thread as a kind of record of the evolution of the current economic crisis. Oh, but at least there's a funny joke at the end! [Unless you work in the Guzzlers-R-Us sector of the U.S. auto industry].

State, city layoffs: 45,000 and counting: A squeeze on tax revenues could force local leaders to cut tens of thousands of more jobs. That could add to the nation`s economic woes.

This is what I alluded to in post #275, when I said the state budget-cutting ball would only really get rolling at beginning of July. Expect bitter fights and gridlocked legislatures in at least a dozen major states, with the resulting budget-cutting being not-even-close-to-enough to closing the budget shortfalls. Even with that, it`s going to be ugly. The states` addiction to spending and easy money from the inflated property taxes caused by inflated housing prices mirrors America`s addiction to cheap oil and cheap credit. Now, given that most states get typically one-third of their revenue from property taxes and another one-third from income taxes, the spike in state layoffs coupled with all the private-sector folks already losing their jobs means a major double-whammy - take my home state, for example:

California unemployment Leaps in May

SACRAMENTO -- California's moribund construction and real estate industries helped push the state unemployment rate to 6.8% in May, its highest level in nearly five years.

The state Employment Development Department reported Friday that joblessness in May rose six-tenths of a percentage point from the previous month and was a dramatic 1.5 percentage points higher than in May 2007.

...

"Although some forecasting groups continue to debate whether or not the economy is heading into a recession, these numbers should make it perfectly clear that the state is already in a recession," Beacon Economics, a Los Angeles-based research firm, said in an analysis of the jobless data. "The only question now is, how long and how bad will it be?"

Note that I consider these state-issued unemployment numbers much more reliable than the "complete fantasy" nationwide numbers regularly published by the BLS, for several reasons, chief among them being that states simply have far less incentive to try to make the numbers look better than they really are. For one, if the numbers are bad, it makes it easier for a state to try to hit up the Federal Government for increased aid, for instance by way of extending jobless benefits. Also, unlike the Feds, states cannot start printing money [whether literally or by inflating the supply of U.S. Treasuries - which the Fed has more power to dump at below-market rates on a reluctant market than any state has] as a method of last resort in order to try to paper over their budget shortfalls. The best they can do is to try to issue State-backed bonds, and given the state of the overall economy, the various dire state balance sheets, and the current state of the muni bond and related markets, that would be surefire path to bankruptcy, and I expect the majority of even the most-blinkered, self-serving state lawmakers knows it.

So the only viable way forward is deep, broad cuts in state spending at all levels - the problem with that is that the entrenched, powerful unions [e.g. teachers, police, firefighters] will fight any proposed cuts to *their* respective slices of the budget pie tooth and nail - every one of these unions takes the stance that [insert job title here] is absolutely necessary to the state`s functioning, and thus every [insert job title here] job is sacred. Heck, in nearby San Jose, the mayor is currently engaged in a nasty fight with influential council members and police union leaders not over how large the cuts in the police force need to be, but - get this - how large the *increase* in the police force needs to be. This refusal to take even modestly prudent measures and try to make everyone sacrifice at least a little is a recipe for disaster. Not willing to cut your [city or state union X] workforce now? OK, just wait until you see the cuts your eventual bankruptcy forces on you.


Washington Post | New Crisis Threatens Banks

Increasing struggles by consumers and businesses to make payments on a variety of loans, not just mortgages, are setting off a new wave of trouble in the financial sector that is battering even institutions that had steered clear of the subprime-home-loan debacle.

Late payments on home-equity loans are at a record high, according to fresh data from the Federal Deposit Insurance Corp. The delinquency rates on loans for cars, small businesses and construction are spiking to levels not seen in a decade or more.

Unlike last year, when soaring mortgage defaults sparked a crisis of confidence in the financial system, the root of these problems is the downturn in the broader economy. Simply put, consumers and businesses are strapped for cash with job losses growing and retail sales falling, economists said.

"We are not finished with the mortgage problem, but you are starting to see increased delinquencies in other forms of consumer debt," said Paul Kasriel, an economist at Northern Trust Securities. "We are in the eye of the hurricane. We had the first wave of the credit crisis, and it was quite damaging. But there`s another wave coming, and it`s likely to be as destructive."

The institutions most at risk in this new phase of the credit crisis are regional and local banks, many of which stayed away from subprime mortgages. These firms are key drivers of economic activity in communities across the country. Without them, consumers would lose a source of personal loans. Small businesses would struggle to stay afloat. Construction companies often can`t finance local projects without these banks.

Because they have fewer options than big Wall Street firms for raising emergency funds, these regional and local banks tend to be more vulnerable in a crisis.

...

For lenders, there is little recourse when a home-equity loan defaults or a homeowner declares bankruptcy. They can seize the collateral for the loan, in this case the house, only after the primary mortgage is paid off.

From October to March, $6.7 billion in home-equity loans became delinquent, increasing the total by 45 percent, according to SNL Financial. The delinquency rate is now 2.24 percent, according to the FDIC, which began tracking the data in 1991.

...

Late payments and defaults in every other major category of consumer debt also rose in the first quarter, the American Bankers Association reported. Auto loans issued through car dealers have a delinquency rate of 3.13 percent, the highest since at least 1990, according the ABA.

"The rise in consumer credit delinquencies is consistent with a rapidly slowing economy," said James Chessen, the ABA`s chief economist. "Stress in the housing market still dominates the story, but it`s a broader tale of an overall weak economy."

Businesses are also feeling the pain of relying too much on credit. Construction and development loans, a specialty of regional and local banks, hit a delinquency rate of 7.18 percent at the end of March, the highest in 14 years, according to the FDIC. In October, the rate was 3.22 percent.

Goldman Reverses Its `Clearly Wrong` Call on U.S. Financials

June 23 (Bloomberg) -- Goldman Sachs Group Inc. reversed its May 5 recommendation for investors to add to U.S. financial and consumer stocks, conceding it was ``clearly wrong`` about the prospects for both groups.

Oh, great - *now* they tell everyone. The Dow Jones U.S. Financials index is down nearly 20% since their bullish call. [Knowing Goldman, they were probably busy shorting the crap out of it the whole time.]


Citigroup to slash more jobs

June 23 (Bloomberg) -- Citigroup Inc. may begin another round of job reductions as soon as this week under a plan drawn up in March to cut the trading and investment-banking workforce by 10 percent, said a person with knowledge of the matter.

The largest U.S. bank has eliminated about half of the 6,000 jobs targeted since then, said the person, who declined to be identified because Citigroup hasn't disclosed the plans publicly. Citigroup employs more than 300,000 people worldwide and has announced about 13,000 job reductions this year.

Chief Executive Officer Vikram Pandit is lowering costs and shedding assets after the New York-based company reported two straight quarterly losses totaling a record $15 billion. The world's largest banks and brokerage firms have slashed more than 80,000 jobs since subprime mortgage defaults infected credit markets and led to almost $400 billion of writedowns and losses.

...

More than two dozen financial companies worldwide have announced plans to eliminate more than 83,000 jobs since last July, or about 3.3 percent of their employees. Following the dot- com bust in 2000, 17 percent of banking and securities in New York were wiped out, according to the Bureau of Labor Statistics.

The "we don`t anticipate it getting any worse ... until it does" theme here is strikingly similar to Citi`s ongoing "raising tens of billions of dollars of capital we don`t really need" efforts:

Citigroup said in January it would eliminate about 4,000 jobs in the securities division, and said two months later that the number had increased by about 2,000. Citigroup then said in April it would slash 7,000 jobs outside the investment-banking group over the next year, and executives have said further reductions are likely.

On a more-humorous [again, in the gallows sense], this little exchange was spotted on the Yahoo Finance message board for General Motors, whose stock price, even in inflation-*unadjusted* terms [adjusting FI would knock it down by a further factor of more than 10x], is approaching Great-Depression-era historic lows:

traftonian:
Hi, I`m long on GM but didn`t graduate high school so my math isn`t so good. If a stock pays a 7% dividend ever year, but loses 7% of its value every day, how long will it take before I can retire?

major_hide:
Good news! You can retire today as long as you do not spend any money during your retirement.