Global Financial Crisis (Was: Subprime Meltdown)

[ewmayer]

WSJ | Europe's Economy Takes a Hit

Just a few weeks ago, Europe thought it could escape the worst of the global slowdown. Now it looks like the euro zone, the world's second-largest economy, is headed for a hard landing and perhaps recession, compounding growth troubles around the world.

On Tuesday, Spain suffered its largest-ever business failure as construction group Martinsa-Fadesa SA, a company with assets of €10.8 billion, or about $17.17 billion, filed for bankruptcy protection, making it the biggest victim so far of Europe's bursting real-estate bubbles.

A related news item from Bloomberg today:

Cortefiel's LBO Loans Signal European Retail Defaults

July 16 (Bloomberg) -- If there is any doubt European shoppers are following their U.S. counterparts into a recession, look no further than retailers' debt.

Chain stores, led by Madrid-based Cortefiel SA and Fat Face Ltd. in London, are the worst performers among the region's 140 billion euros ($220 billion) of leveraged-buyout loans, according to Markit Group Ltd. and Standard & Poor's data. The Spanish company's 1.4 billion euros of loans are trading at less than half of face value, the lowest for a European company that hasn't defaulted, data from Frankfurt-based Dresdner Kleinwort show.

``We're going into a consumer-led slowdown, which is just now starting to show its signs,'' said London-based Pilar Gomez- Bravo, who is in charge of credit funds for Europe at Lehman Brothers Asset Management. ``Retailers have yet to go through the worst part of the economic cycle.''

LBO firm-owned retailers, which have taken on more debt than competitors, are suffering as consumer confidence plunges to a record low in France and to the worst since 1990 in the U.K. Spain may be in a recession and France and the U.K. could follow this year, according to Bank of America Corp. senior economist Gilles Moec in London.

``We've been surprised at the speed at which the indicators have pointed to a downturn,'' Moec said.

Corporate defaults are likely to quadruple to 2.7 percent of high-risk, high-yield debt by year-end and reach 4.8 percent within a year, according to Moody's Investors Service.

But at least Europe - specifically the UK - is taking proactive measures to attract the kind of talent which will be needed to drive the 21st century high-tech economy:

Dropouts Gates, Jobs, Dell Unworthy Under U.K. Plan for Brainy Immigrants: Gordon Brown says he wants the brightest people in the world to come live in Britain. Unless they are Bill Gates, Steve Jobs and Michael Dell, all of whom would be excluded under the government's new immigration rules.


Back on our side of the pond, Goldman "Sacks and Pillages" lives up to its unofficial nickname, and Bernanke caught using the dreaded "N" word:

Goldman Accused of Market Manipulation

Goldman Sachs (GS) has kept its hands clean the credit crisis, but now the firm may have to wallow in the mud with the rest of its peers. The Wall Street Journal reports that some pointed questions are being asked of Goldman chief executive Lloyd Blankfien [sic] by none other than Alan Schwartz, who was at the helm of Bear Stearns when it died in March. Schwartz would like to know whether there is any truth to talk that in the days preceding Bear’s fall, Goldman traders in London were manipulating the struggling firm’s stock.

If this story sounds familiar, it’s probably because this isn’t the first time that Goldman employees have been accused of making money on a dying company. Back in 1998, the firm’s traders were accused of hammering positions taken by hedge fund Long Term Capital Management as it went belly up. According to the Journal, Blankfein was shocked by the inquiry from Schwartz, and that he told the former Bear Stearns chief that he would crack down on any Goldman traders who engaged in manipulative activity. A Goldman spokesman told the paper that Blankfein does not recall this conversation with Schwartz and strongly denies wrongdoing.

"I did not have sexual relations with that short-selling woman ... I have never used performance-enhancing insider-trading substances ..."

Lehman Bros. (LEH) CEO Dick Fuld piled on too. “You’re not going to like this conversation,” Fuld told Blankfein, according to the Journal. Fuld was reportedly hearing “a lot of noise” about Goldman traders allegedly spreading negative rumors about Lehman, whose stock has been dropping like a stone. Fuld has reportedly spent the last few months contacting traders he thinks may have been bad-mouthing Lehman.

According to trading documents reviewed by the Journal, in the weeks before March 16, when Bear Stearns reached its initial agreement to sell itself to JPMorgan Chase (JPM), Goldman Sachs was one of the most active parties in trading securities known as credit default swaps that it had bought from or sold to Bear Stearns — more than most other Bear trading partners. A Goldman spokesman told the newspaper that it would be unwise “to make assumptions about this information without understanding the underlying transactions.”

Translation: "Back off before I sic Hank Paulson on your overly inquisitive asses."

The Securities and Exchange Commission is looking into whether brokers and hedge funds have deliberately spread rumors to manipulate markets — particularly during Bear Stearns’ fall – and vows to take action to limit short-selling in certain stocks, including Fannie Mae (FNM) and Freddie Mac (FRE).

There is no small amount of evidence of suspicious shorting of Bear Stearns stock that occurred just a few days before Bear`s implosion and Fed-backstopped sale to JP Morgan at fire-sale prices. Funny that the SEC is only now getting around to "investigating", and their wording makes me think that anything they end up doing will punish the legal short sellers more than the the crooked insiders.

Now, some of this finger-pointing is surely the result of CEOs of struggling firms trying to find a scapegoat, but given Goldman's track record in this area, I would be utterly unsurprised if it were found to have been engaging in illegal practices of this kind - not that anything will ever stick, mind you. In Goldman`s case, having your ex-CEO running the U.S. Treasury and other ex-employees in all sorts of key government financial-regulatory positions surely can`t hurt - just in case one "rogue employee" at the SEC were to decide to actually do his job in fulfilling the agency`s mission and end up finding a smoking gun in the relevant transaction histories.


Bloomberg | Fannie, Freddie Nationalization May Be an Option, Bernanke Says

July 16 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said nationalizing Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies, is among a number of long-term options lawmakers can consider to reduce taxpayer risk.

``There certainly are a number possibilities ranging from outright nationalization, to privatization to breaking them up,'' Bernanke told members of the U.S. House Financial Services Committee in Washington today. ``In the near-term, thinking about the needs of the housing market, I think the right solution is to keep them in their current form but to provide very strong oversight that will assure adequate capital going forward.''

Fading confidence in Fannie Mae and Freddie Mac has ``real effects'' on their ability to borrow money, and Congress must work to reassure Americans the companies are safe, Bernanke said. Restoring confidence in the two government-sponsored enterprises, which own or guarantee almost half of the $12 trillion in U.S. home loans outstanding, is critical to their solvency and to the mortgage markets, Bernanke said.

``As their stock prices fall, it's difficult for them to raise capital,'' Bernanke said. ``If their debt spreads widen, it will increase their borrowing costs.''

Fannie Mae and Freddie Mac are in ``no danger of failing,'' Bernanke said. He said the Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae and Freddie Mac, assured him that the companies are ``fine and they can continue to operate and there's nothing about to happen,'' he said.

That`s right, they`re in such fine-and-dandy shape that you`re talking about nationalizing them as being a possible option.

Bernanke repeated his concern that the housing market is a ``central element in this whole crisis.'' He said anything to strengthen housing finance would help, and that Congress ``needs to think hard about how to restore confidence in the GSEs.''

Repeat after me, as you stroke your chain of economic rosary beads: Economy is fundamentally sound ... American consumer is resilient ... housing market will begin to recover in 2nd half of this year ... We are adequately capitalized ... We have no liquidity issues ...

[Uncwilly]

FBI looking into IndyMac Bancorp.

WASHINGTON - The FBI is investigating failed bank IndyMac Bancorp Inc. for possible fraud, an official said Wednesday of the government's latest target following the collapse of the nation's subprime mortgage market.

It was not immediately clear how long the FBI's probe of the bank has been ongoing — or whether it was opened before last Friday's takeover of IndyMac by the Federal Deposit Insurance Corp.

The investigation appears to be is focused on the company and not individuals who ran it, a law enforcement official told The Associated Press. The official spoke on the condition of anonymity because he was not authorized to speak publicly about the investigation.

IndyMac Bank's assets were seized by federal regulators after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures.

for more, follow the link.

[Prime95]

http://www.politico.com/news/stories/0708/11781.html

Fannie and Freddie spent $200 Million on lobbying. No wonder they need a loan from the Federal Reserve. Also no wonder that a loan was granted.

[ewmayer]

SEC Bans Naked Short Selling of Wall Street Brokeraqges, Fannie Mae and Freddie Mac

WASHINGTON -- The Securities and Exchange Commission took unprecedented action against short sellers on Tuesday, acting on a widespread concern that negative bets against bank and brokerage stocks might be exacerbating the financial sector's woes.

In a dramatic emergency order, the SEC said it would immediately move to curb improper short selling in the stocks of struggling mortgage giants Fannie Mae and Freddie Mac, as well as those of 17 financial firms, including Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., Morgan Stanley and Merrill Lynch & Co.

The plan, which is expected to go into effect on Monday, will expire in 30 days. But the SEC will also begin considering whether to extend the new requirements to all stocks traded in the U.S. The actions represent one of the most extensive attempts by a government agency in recent years to control short selling.

As Mish Shedlock points out, the list of institutions covered by the order is rather interesting. Back to the WSJ article:

Short selling is a legitimate trading strategy in which traders aim to profit from falling stock prices. Shorting can act as a corrective force at times of rampant bullishness in markets, its defenders say. But it has long been controversial because it pits investors, notably hedge funds, against companies that are eager to see their share prices high.

That's right - musn't allow companies that are run in crappy fashion by idiot execs have their share prices actually punished for it - after all, "free markets" means that like house prices, stocdk prices only ever go up, right?

The regulatory action is of great symbolic importance to Wall Street, which has complained long and hard about what they suspect is manipulative trading in their stocks, which have been pummeled this year. Bear Stearns Cos. imploded in March and now is part of J.P. Morgan Chase & Co.; Lehman's shares have plunged this year. The financial firms placed under the SEC's protective umbrella have been some of the hardest hit in recent trading.

Right ... it's not that you made huge speculative bets which earned you handsome profits during the credit bubble but which are now blowing up in your faces ... it's the evil terrorist short sellers. Who only magically came into existence in the past year, apparently.

The battle between regulators and short sellers has a long history -- dating back at least to the South Sea Bubble of the early 18th century -- and short sellers have usually won. It's hard to prove that short sellers manipulate markets or that they perpetuate false rumors that pummel stocks.

In a short sale, a trader borrows stock and then sells it, in hopes it will later fall in price. If it does, the short seller then buys the stock in the open market at the lower price, returns what was borrowed, and pockets the difference.

The SEC said Tuesday's move aims to stop "unlawful manipulation through 'naked' short selling." Naked shorting refers to the practice of selling stock short without taking steps to borrow it.

Critics say short sellers band together and sell shares of a company all at once, overwhelming the market and driving its stock price down. That can set off a chain reaction, with shareholders getting nervous and selling. Critics say the short sellers then close out their bets at tidy profits. In practice, this is extremely difficult to do with big companies whose stocks are heavily traded, although smaller companies are more vulnerable.

Under current rules, a short seller must first locate shares to borrow, but does not have to enter into a contract with the share lender. Often, more than one trader is able to borrow the same shares, creating a multiplier effect in the size of the total short position.

Under the emergency order, a short seller would be required to have an actual agreement to borrow the shares. The new move would effectively take shares out of the market for borrowing, which could reduce the amount of stock available for selling short.

The SEC has started clamping down on short selling, indicating it is worried about the impact such trades are having on the financial system. It's investigating whether traders used a combination of false rumors and short selling to drive down shares of Bear Stearns earlier this year. Lehman is engaged in a public fight with certain short sellers, which has also prompted an SEC investigation.

On Sunday, the SEC said it would crack down on firms or individuals that illegally spread false rumors. In its various short-selling investigations, the SEC has sent subpoenas to more than 50 hedge funds, some as recently as Monday.

Critics of the SEC's move Tuesday asked why certain financial firms were being protected -- but not the broader market -- especially when many of those firms are also active short sellers.

"For heaven's sakes, they're the very ones we believe have been doing this...to thousands of public companies," said James "Wes" Christian, a lawyer with Texas law firm Christian, Smith & Jewell, who represents companies who have filed lawsuits relating to short selling.

An SEC official said the agency focused on financial firms that were of a significant size. "Drastic falls [in stock prices] can end up destroying confidence in the firm altogether, which is not true for bricks-and-mortar industrial companies," the official said.

Perhaps that`s because bricks and mortar are still useful even if the company that produced them hits hard times, whereas toxic mortage-backed securities with bogus AAA ratings issued by greedy financial firms may very well end up being worth the paper they're written on. Mustn`t allow destruction of confidence in investor firms which have done nothing to deserve any investor confidence, though, must we? That would against the Federal Pollyanna Market Regulations.

Anyway, it's official - the U.S. equity market is now more manipulated by the government which regulates it than the Chinese "Communist" markets are.

Fannie and Freddie bailout: "Fiddling While Rome Burns"

The Big Picture financial Blog's Barry Ritholz on the government bailout of the GSEs and Paulson's asking congress for a blank check to allow unlimited capital injections "if needed - not that they [ahem] will be, or anything..." from the U.S. Treasury:

Idiots Fiddle While Rome Burns

This is financial incompetence writ on a scale far grander than anything seen for centuries.

As a nation, our institutions have failed us: Under Alan Greenspan, the Federal Reserve slept through the most reckless and irresponsible expansion of bank lending in history for reasons of ideological purity. His opposition to the Fed’s regulatory role reached the point of malfeasance long ago. History is unlikely to be kind to the Maestro.

There is a choice to be made: Either we regulate the Banks, or leave it to the vagaries of the free markets to punish those who trade with, or place their assets in the wrong institutions. But for God's sake, do not give us the worst of both worlds -- do not allow banks the freedom to make horrific but preventable mistakes (i.e., only lending money to those who can pay it back), but then expect the taxpayers to foot the trillion dollar bill.

That's not capitalism, its not socialism, its not regulation, and its sure as hell isn't what free markets are. Our language is insufficient to describe this hodge-podge system, other than to call it a random patchwork of quasi-capitalism, quadrennial-socialism, and politics as usual. Ideological idiocy is the only phrase I can muster that has any resonance with the daily insanity.

We have entered into a fit of Orwellian madness: The American Capitalists, long the globe's leading advocates for free markets, have become near Socialists. Halfway around the world, the Chinese Communists have picked up the baton, and are moving rapidly towards a form of Capitalism. Ironically, it is the once largest communist nations -- the Chinese and the Russians -- who holds much of Fannie and Freddie's paper.

Note in particular the last line, and ask yourself, who benefits most from a taxpayer-financed bailout of Fannie and Freddie? Why, the Chinese government, of course. Aren't "the free markets" cool?

Why Wall Street is Fixated on Liquidity: The Lemonade Stand Market Model

In the context of the latest funnified [but still useful in relative terms, and as a "lower bound" style figure] inflation numbers from the Ministry of Truth, the Wall Street Examiner's Lee Adler has a nice rant about the myth of the "forward looking markets", which also gives a clue as to why the folks that live in the Wall Street Bubble [including Fed chair Ben Bernanke] are so fixated on "liquidity", when the fundamental issue facing Wall Street [and the rest of the U.S. economy] is solvency:

Rear View Mirrors and Lemonade - Wall Street Examiner

Wall Street and its media lapdogs foster this notion that the markets discount the future. But neither stock investors nor bond investors individually, and certainly not in the aggregate, have any clue what the future holds. Markets aren’t all knowing. Markets are stupid. They measure liquidity, and liquidity [may] be growing or shrinking. It goes where it gets the love, and runs away from where it doesn’t, especially when it’s shrinking overall.

Investors base buy and sell decisions on whether they have cash or need cash. We call that "liquidity." They’re like little kids. When they have a little money, it burns a hole in their pocket and they want to buy toys and ice cream. When they need money, they set up a lemonade stand on the sidewalk on a hot day and sell it. That’s what Wall Street does.Investors decide on whether to buy or sell based on whether they have or need cash. They decide what to buy or sell based on the recent past, because that’s all they know, and all they are able to project. I call it driving in the rear view mirror. Consequently there are lots of "accidents" when the markets get a "surprise." Investors are forced to lurch in a different direction because they didn’t see the future coming.

[ewmayer]

Single-Family U.S. Home Construction at 17-Year Low; Manufacturing Shrinks: Builders started work in June on the fewest single-family U.S. homes since 1991 and manufacturing in the Philadelphia region contracted for an eighth straight month, signaling the economic slowdown is worsening.

Here in the SF bay area, sales volume of used homes is looking less dire now that prices have come down 20-30%, but new home sales are microscopic, so I expect a similar continuing downtrend in construction here. Maybe George can provide us with a Florida update.


Freddie Mac mulling $10 billion share offer

Mortgage giant Freddie Mac is considering raising capital by selling as much as $10 billion in new shares to investors, The Wall Street Journal reported, citing people familiar with the matter. The report comes after the U.S. Treasury and Federal Reserve announced a plan on Sunday to shore up the balance sheets and borrowing capabilities of Freddie Mac and sister company Fannie Mae.

This would seem to avoid the need for any near-term government bailout, but with a nearly-trillion-dollar mortgage portfolio, $10 Billion is peanuts - a 1% drop in the mortgage holdings wipes that out. If you read the full Reuters article, also note the outrageous yield on FRE preferred shares - not a bad deal for the insiders, is it? That juicy yield is of course gonna hurt them now - though I'm sure they'll find a way to pass the costs on to someone, be it the common stockholders or the U.S. taxpayer - because any share offering will have match or beat it to attract buyers. In other words FRE may be able to raise cash now, but only at the cost of bleeding cash [in the form of dividend payouts] in perpetuity, or until such point as they would be in a position to buy back preferred shares, whichever comes first. ;)

So holders of the common shares are looking at a highly dilutive share offering which will hammer FRE`s bottom line ... which of course explains why the stock was up as much as 20% earlier today. The galloping herd of CNBC-addicted retail investors just never seems to learn - the time to buy FRE [If one had money burning a hole in one's pocket and absolutely *had* to indulge ne's compulsive-gambler tendencies, that is] was last Friday, during the panic phase, then sell on any of this week`s dead-cat-bounces. Just because the government hath decreed "Fannie and Freddie are too big to faileth", doth not imply that "Fannie and Freddie are to big to sucketh bigtime for years to come". Classic "value trap" - see also the "Famous FastMoney Funds get Fried" bit [a.k.a. our regular and wildly popular "Bill Miller Giant Sucking Sound Update" segment] below.

The Fortune.com article ["highly dilutive" link above] does note what might be the most plausible bailout scenario, as it seems outright nationalization won't be politically saleable:

...even if the companies eventually need government aid, there could be a case for letting them keep their stock exchange listings.

Josh Rosner, principal at Graham-Fisher in New York, says he sees a parallel in the Chrysler bailout of the early 1980s, in which the government took warrants in the automaker in exchange for providing an emergency loan guarantee. When Chrysler returned to health later in the decade, the government was able to cash in the warrants, allowing taxpayers to share in the fruits of the company's recovery.

That's not a bad middle way for a bailout - but only gets taxpayers off the hook if there is an eventual recovery, and one of sufficient magnitude to cover the bailout cost.


Consumers Cutting Back

Gas prices have consumers cutting back - study: Survey finds that nearly two-thirds of consumers are slashing spending because of the increase in fuel prices.

EW YORK (AP) -- Consumers are cutting back on spending because of rising gas prices, according to a survey released Thursday by Nielsen Co., which tracks consumer habits.

Nearly two-thirds, or 63%, of consumers are cutting spending because of high gas prices, up 18 percentage points from a year ago, the survey shows.

According to the study, which queried about 50,000 consumers during the first week of June, when regular gas averaged $3.98 per gallon, 78% of consumers are combining shopping trips, 52% are eating out less and 51% are staying at home more.

Consumers are also clipping more coupons, doing more shopping at supercenters and buying less expensive brands, the survey found.

So the next time the Ministry of Truth comes out with some funny numbers indicating "surprisingly resilient consumer spending" or similar bullcrap, it should be fun to compare their numbers to the Nielsen numbers.


Here's Your $100,000 IndyMac Insured-Deposit Check ... Good Luck Cashing It

Banks reportedly not taking IndyMac checks: Finally able to withdraw their money, customers can’t open new accounts

updated 10:41 a.m. ET July 17, 2008

LOS ANGELES - The frustration didn't end for some IndyMac customers when they finally were able to withdraw their funds from the failing Southern California bank seized last week by federal regulators.

Some people have run into more problems when they tried to deposit IndyMac cashier checks at other banks.

Sheryl MacPhee said she waited in line two hours Tuesday at an IndyMac branch in San Marino to liquidate a certificate of deposit. But when she took it to a Washington Mutual branch in South Pasadena to deposit, she said a manager told her their new policy was not to accept IndyMac checks. If the customer insisted, she said she was told, it could take eight weeks or more to access the full amount.

...

William Ruberry, a spokesman for the federal Office of Thrift Supervision, said the agency has received several reports about problems that IndyMac account holders have had transferring their money.

"Our position is that other institutions should honor IndyMac checks," he said, "and we're looking into the situation."

Interesting - that last quote implies that while the FDIC can cut you a check, they have no authority to force still-operating financial institutions to honor it. Like I said in post #346, recall the unofficial FDIC pledge: "We guarantee you`ll get up to $100,000 back in full ... we just don`t guarantee what you`ll be able to buy with it."


Bill Miller Giant Sucking Sound Update

Top fund managers socked by financial bets: The bloodbath in financial stocks has walloped funds run by Legg Mason's Bill Miller and other top money managers.

NEW YORK (Fortune) -- A two-day rally aside, the beating that financial stocks have taken lately have knocked out some top money managers and their brand-name mutual funds.

No champ has endured more pain than Bill Miller of Legg Mason Value Trust (LMVTX). Until 2006, Miller held the distinction of beating the S&P 500 for 15 consecutive calendar years, but lately the fund has struggled. Last year, LMVT fell nearly 7%, while the S&P finished up more than 5%. Even after losing 20% in the first quarter, Miller wrote to shareholders that he thought the worst was over.

If only that were true: as of Wednesday's close, Miller's fund is down 41% year-over-year, according to Morningstar. The S&P 500 is down 18% over the same period.

Other recent highfliers mentioned in the article: Most of thee tried to catch falling knives in financials, or fell into value traps [mistaking "historically low share price" for "bargain"]:

Fidelity Growth and Income fund (FGRIX) down 31% for the year
Oakmark Select (OAKLX) down 31%
John Hancock Classic Value (PZFVX) down 41%
Putnam Investors (PINVX) down 29%


Meredith Whitney's Husband Wrestles with Conscience

On a topic-tangential note, Oppenheimer analyst Meredith Whitney has a quite interesting husband:

The bride and bridegroom met in 2003 when they were panelists on ''Bulls & Bears,'' a Fox News program, and were seated next to each other at dinner afterward. Mr. Layfield had just published ''Have More Money Now: A Common Sense Approach to Financial Management'' (Simon & Schuster).

A natural publishing genre, given Mr. Layfield's profession - it's a short trip from Lucha Libre to Mucha Lucre.

Just days before she had been in a Manhattan taxi, chatting with the driver about relationships. ''He said to me, 'If you really want to meet the right person, you've got to identify all the characteristics you want in a man,''' she recalled.

Ms. Whitney took the cabby's tip and immediately drafted a list of qualities her ideal mate would possess: strong character, kindness, intellectual curiosity, family orientation, friendliness, generosity, good looks and enthusiasm for travel, food and music.

"Food and music ... World Wrasslin Champion..."

A week after their initial meeting, the couple went out. They enjoyed talking so much they lingered over dinner for hours. ''After that I called her about 25 times a day,'' Mr. Layfield said. ''Meredith came along at a time in my life when I really needed somebody badly,'' he added. ''She took a country boy like me and kind of refined me. I know what fork to use now at the dinner table, and I drink my beer from a glass.''

Oh, I'll bet she taught him plenty about proper forking technique.

That refinement process, Mr. Layfield recalled, was set in motion on their first date, when he asked Ms. Whitney if it would be acceptable to wear jeans and a sleeveless shirt to the restaurant.

'''You're joking, right?''' he said she asked. ''Thank goodness I found a shirt with a collar and sleeves.''

"Of course its owner needed a bit of convincing to part with it - you`d think those priest collars would be easier to pull off, what with just the one button in the back - but at least it was jumbo-sized priest, so the stuff fit pretty good ... but, anyway, I did the sleeves and collar and ironed my jeans, but the wrasslin' boots and scary mask stay, okay, babe?"

[ewmayer]

California Jobless Rate Soars to 6.9%, Up from 5.8% 1 year ago | Silicon Valley spared the worst - so far

Silicon Valley posted anemic job growth last month, but in a state that economists say is in a "jobs recession," any growth is good.

More than 1.2 million Californians are unemployed, according to figures released Friday by the state Employment Development Department.

California's seasonally adjusted unemployment rate was 6.9 percent, up from 6.8 percent in May; the valley's rate jumped from a seasonally unadjusted 5.6 percent in May to 6.1 percent in June.

Aside: Just what the heck is a "jobs recession"? You mean as in "I lost my job and can no longer pay the mortgage on the house I bought in 2006 at an outrageously inflated price, whose value has dropped 25% since - but at least my hairline is not receding..."?


Government Funny-Numbers Update:

Commercial bankruptcies soar, reflecting widening economic woes

Commercial filings for the first half of 2008 are up 45 percent from last year, as the national climate for commerce continues to deteriorate amid rising energy and food costs, mounting job losses, tighter credit and a reticence among consumers to part with discretionary income.

From April through June, 15,471 U.S. businesses called it quits, according to data from Automated Access to Court Electronic Records, an Oklahoma City bankruptcy management and data company.

It was the 10th straight quarter that business bankruptcy filings have increased. Nearly 29,000 companies filed in the first half of 2008. Another 60,000 to 90,000 others probably have closed, because roughly two to three businesses fold for every one that files for bankruptcy, said Jack Williams, resident scholar at the American Bankruptcy Institute.

Contrast that to the "official" figures put out by the BLS [which usually start with actual data but then "correct" for "nonmeasurable and unseen" influences - the Hand of God, if you will], according to which there was a net expansion of new businesses in 4 out of the last 5 quarters.

Anatomy of a Short Squeeze

Minyanville's Todd Harrison has a nice piece on last week's government-orchestrated short squeeze in financials - like I said, not even the "communist Chinese" government is engaged in this kind of blatant, highly selective manipulation of their financial markets:

Freaky Friday Potpourri: Anatomy of a Short-Squeeze

The following is offered by someone I have tremendous respect for, someone who has run major trading operations on both sides of the Street. If there's a smarter fellow in finance, I have yet to meet him. You may not agree with his view but as I’ve learned over the last twenty years, it should definitely be respected.

Two Plus Two Equals Four

Financial companies are desperate for capital but their stock prices are so low that any issuance would be dilution death for the companies. The government is desperately trying to keep the financial system together. Add that up and you get the possibility of a great manipulation.

How would the government engineer a rally in financial stocks so that these companies can sell stock to raise capital at a reasonable or at least palatable dilution level?

It might go something like this. Since financial stocks are in such trouble they have heavy short interest; this is natural and well known and can be used to their advantage. A clever “berry” might think to introduce confusing rules that raise the cost of borrowing short stock and temporarily confuse shorts into covering and not shorting more. And this is precisely what the SEC did.

It seems innocuous to most folks, but it put stock loan desks and dealers in complete disarray. New short sellers could find no stock to borrow and many existing short sellers were forced to cover as the technical rules forced allocation of loans at much higher costs.

For example, the rebate rate on Fannie Mae (FNM) the day before the SEC announcement was 1%; the day after it was -5%. Many who were short the stock were forced to cover, thus driving the stock price up.

But this alone would only drive stock prices up so much. The clever berry needs a catalyst, one that would force panic buying into now truncated supply.

It just so happened that the new SEC rules came conveniently the day before many of these financial companies were to report earnings. If just some how these earnings were really good the match would be lit on the kindling.

So far banks have miraculously come through on their end of things. Wells Fargo (WFC) and JPMorgan (JPM) reported better than expected beaten down earnings. Things must be getting better just as the companies need capital.

What a coincidence.

But if you look at how the banks “beat” their earnings the coincidence becomes clear. WFC took the unprecedented step of extending charge-off acknowledgment from 120 days to 160 days. This allowed the bank to move less capital to loan loss reserves and report better than expected horrible earnings. And JPM was even more aggressive. It actually lowered its loan loss reserves quarter to quarter.

The list of financial companies where shorting regulations are being enforced/enhanced is precisely the banks and dealers (and FNM/Freddie Mac (FRE)) that have access to the Fed's balance sheet (dealers through the PDCF and FNM/FRE through the recently-allowed access to the discount window). So we can speculate on the nature of the ''coincidence'': Perhaps the Fed is getting worried about the value of all that collateral these dealers have posted to the Fed balance sheet and must boost the capital of these companies to protect that value.

[cheesehead]

Originally Posted by ewmayer

Aside: Just what the heck is a "jobs recession"?

A recession as measured by jobs rather than GDP.

See "The job market's big slump" at http://www.csmonitor.com/2008/0609/p01s03-usec.html

Originally Posted by Ron Scherer

The United States is now in a jobs recession.

For five consecutive months, there has been a steady loss of jobs

- - - -

Originally Posted by ewmayer

Government Funny-Numbers Update:

Commercial bankruptcies soar, reflecting widening economic woes

Contrast that to the "official" figures put out by the BLS < snipped > , according to which there was a net expansion of new businesses in 4 out of the last 5 quarters.

Both can be true (though I've not checked the figures to verify whether both are true in this particular case).

If "expansion of new businesses" (which I take to mean numbers of new businesses starting up, including unreported ones) exceeds number of bankruptcies (including unreported ones), then there's a net increase in number of businesses, regardless of whether the numbers of bankruptcies has increased.

E.g., if 100,000 new businesses start up each month, and bankruptcies increase from 40,000/month to 60,000/month, then there's still a net increase in business numbers even if the rate of increase has slowed because of the 50% increase in bankruptcy rate.

[ewmayer]

Replies to a couple of earlier posts:

Originally Posted by cheesehead

If "expansion of new businesses" (which I take to mean numbers of new businesses starting up, including unreported ones) exceeds number of bankruptcies (including unreported ones), then there's a net increase in number of businesses, regardless of whether the numbers of bankruptcies has increased.

E.g., if 100,000 new businesses start up each month, and bankruptcies increase from 40,000/month to 60,000/month, then there's still a net increase in business numbers even if the rate of increase has slowed because of the 50% increase in bankruptcy rate.

True, but the relative unavailability of credit for new business creation [part and parcel of the overall "credit crunch"] would seem to make that scenario highly unlikely. I haven't been able to find a suitable set of national data, but various reports from the state level appear to bear this hypothesis out. After all, barring a dramatic shift in the employee headcount of new business ventures, over the long haul, net business creation should track population. So year-over-year declines as large as cited in the "state level" article appear unlikely to be matched by new business startups.

Originally Posted by Prime95

http://www.politico.com/news/stories/0708/11781.html

Fannie and Freddie spent $200 Million on lobbying. No wonder they need a loan from the Federal Reserve. Also no wonder that a loan was granted.

Indeed - And the parallels between the GSEs and the "poster child of subprime", Countrywide Financial, become more striking the closer one looks at the various ways in which these companies bought influence:

Fannie and Freddie's Enablers

"I don't know how in good conscience you come up here and ask me to give unlimited lines of credit" to Treasury for Fannie and Freddie without giving Democrats something in return, Senate Banking Chairman Christopher Dodd (D., Conn.) told the Journal last week. Come again? This is the same Chris Dodd who long resisted tougher regulation while more recently handing Fan and Fred even more room to expand their risk-taking.
[Christopher Dodd]

At a February hearing, he derided critics who he said were "repeatedly raising alarm bells about the risks Fannie and Freddie pose to the financial system." You may also remember Mr. Dodd as the fellow who got a sweetheart mortgage from former Countrywide Financial CEO Angelo Mozilo, who was thick as thieves with Fannie Mae.

In any other business, Mr. Dodd would be begging forgiveness. But in Washington he now wants the Bush Administration to bow to his political wishes in return for protecting the financial system from the risks that Mr. Dodd long claimed Fan and Fred didn't pose. His demands include nearly $4 billion in Community Development Block Grants that are a payoff to liberal interest groups. He also wants an "affordable housing trust fund" for more such largesse that could take as much as a $1 billion a year out of Fan and Fred even as they struggle to stay solvent.

Barney Frank also gets taken to task in the rest of the article - so now we know where at least a good chunk of the $200 million in campaign contributions likely went.

It's the same modus operandi that worked so very well for former Countrywide CEO Angelo "OrangeGLO(TM) TanGelo" Mozilo - he wasn't just busy "it's not a bribe"ing U.S. legislators like the aforementioned esteemed Sen. Dodd with cut-rate mortgages, he was also pocketing judges:

Portfolio.com | Angelo's Many "Friends"

"In January 2004, Richard Aldrich, a California state appeals court judge, decided to refinance his 8,200-square-foot house next to a Jack Nicklaus-designed golf course at the Sherwood Country Club in Westlake Village. He turned to a prominent Sherwood member: Countrywide Financial chief executive Angelo Mozilo.

Aldrich’s application was assigned to a loan officer named Robert Feinberg; the judge was seeking a $1 million loan and a $900,000 line of credit. By email, Feinberg alerted Mozilo that the credit line was “above what guidelines allow.” Mozilo responded, “Go ahead and approve the loan, and close it as soon as possible. Don’t worry about this deal, it’s golden.” Countrywide further waived half a point, or $5,000 on the million-dollar loan. (Homebuyers can reduce their interest rates by paying points, which are equal to 1 percent of the value of a loan.)

That wasn’t Aldrich’s only contact with Countrywide. At the time he refinanced, a class action lawsuit against Countrywide was pending before the appellate court, brought by borrowers contending that the company offered an inadequate payment to settle allegations that it charged excessive fees for credit reports. That August, Aldrich was part of a three-judge panel that unanimously rejected the borrowers’ appeal."

Portfolio.com is maintaining a list of "Friends of Angelo".


Today's News Roundup


Enough with the latest round of fake earnings numbers from the banks [see my post yesterday for examples of how e.g. WFC and JP Morgan cooked the books], said fake-earnings-reporting party alas having been rudely interrupted by Wachovia this morning (note that Wachovia was one of the large banks not covered by the SEC's desperation drop-your-shorts edict of last week, so perhaps it's only the "protected" institutions that get carte blanche to fake their earnings) - what better way to tell how strapped using-credit-of-last-resort Americans are doing these days than an earnings report from one of the big credit card issuers?

American Express 2Q profit tumbles 38 percent

NEW YORK (AP) -- American Express Co. said Monday its second-quarter profit tumbled 38 percent, well below Wall Street's forecast, as consumer spending slowed and credit indicators deteriorated beyond the lender's expectations.

...

CEO Kenneth I. Chenault said in a statement that fallout from the weakening economy accelerated in June with consumer confidence falling, unemployment rates rising and home prices falling at "the fastest rate in decades."

"Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations," Chenault said.

The effects of economic weakness were evident even among the company's established members with excellent credit, Chenault said.

[Wachovia update: after dropping sharply this a.m., WB stock has done a 180 and is now up over 10% ... looks like the "Worst is over! No recession! Economy is fundamentally sound!! Buy, buy, buy!!!" crowd is still going strong ... or perhaps the big money used the bad news to trigger a nice little stop-loss cascade, picked up the stock at a bargain-price-for-the-day level, and is now busy *selling* it to the worst-is-over-crowd (more commonly referred to as the "latest crop of bagholders") as we speak.]


And speaking of bagholders...

Hammerin' Hank Paulson wants YOU to do your patriotic duty and become one, by buying repackaged dubious-mortgage-backed garbage paper, this time "backed by the full faith and fictitious capital of the insolvent U.S. Government". After reading the article, just ask yourself, "what 'assets' might they be using to "cover" these here repackaged-mortgage-filled "covered bonds"? The issuing institutions sure as heck aren't in a position to backstop them:

Bloomberg | WaMu Shows Paulson Mortgage Rescue Plan Is Perilous

July 22 (Bloomberg) -- Treasury Secretary Henry Paulson's plan to revive U.S. mortgage financing depends on investors buying the same kind of bonds they're shunning in Europe.

Paulson wants to create a version of Europe's market for covered bonds in the U.S. just as sales of the debt have fallen to a six-month low and prices have dropped 2.5 percent this year. While the securities are backed by loans and bank assets to get AAA ratings, most are valued, on average, as if they were three levels lower.

Imagine that ... investors refusing to take AAA ratings on SIVs at face value - the nerve of those folks, acting like there's real money on the line, and as if the ratings agencies weren't 100% trustworthy. Oh wait, there is, and they aren't.

Paulson says the $3.3 trillion covered-bond market, which dates back to 18th-century Prussia, is a remedy for the worst housing crash since the Great Depression. It offers ``new sources of mortgage funding'' that will cut costs for homebuyers, he said at a forum in Washington on July 8.

Oh, good grief - decades of "new sources of mortgage funding" which "cut costs for homebuyers" and thus inevitably lead to speculative excesses in the housing market are what got us into this mess in the first place. Repeat after me: The best way to "cut costs for homebuyers" is to simply let the housing bubble unwind itself. As I write this, homebuyers' costs are being cut by fundamental market forces, and have been cut very nicely indeed in the last 12 months. Now Paulson of course knows this, which is why his statement about "cutting costs for homebuyers" is misleading at best. Paulson isn't interested in cutting costs for homebuyers - his main concern is propping up house prices so his bankster pals can offload their toxic mortgage-backed paper at the highest price possible, in this case via repackaged "covered bonds" which contain the same garbage as before, but are now given government imprimatur. In other words, Joe New-Homedebtor would be forced to take on a larger debt load than he would if the bubble were allowed to deflate based on basic supply and demand fundamentals, and JNH's own taxes might well increase down the road in order to help him pay for said privilege. What a wonderful world we live in.

In any event, the government spending money it doesn't have [but which it all-too-gladly puts taxpayers on the hook for] to try to reflate said speculative asset bubble will at best delay the unwinding, and most likely only make things worse. But that's typical crisis management by those who enabled the crisis - in a desperate attempt to give the impression that you actually have a clue or a magic way to put the genie back in the bottle, you throw [borrowed] money at the [borrowed-money] problem and only make things worse, and especially for those who benefited the least from the speculative bubble you helped cause, that is, that vanishing species of human, the fiscally prudent. What a bunch of crooks. I see that Paulson has the FDIC as willing co-conspirator in this scam, and hey, those folks should know mortgage-backed crookery - after all, they actively engaged it:

Wall Street Journal | FDIC Faces Mortgage Mess After Running Failed Bank: Subprime Lender Made Problem Loans On Regulators' Watch

By MARK MAREMONT
July 21, 2008; Page A1

Federal officials heap much of the blame for the subprime mortgage mess on lenders, claiming they recklessly made too many high-cost home loans to borrowers who couldn't afford them.
[Loan Troubles]

It turns out that the U.S. government itself was one of the lenders giving out high-interest, subprime mortgages, some of them predatory, according to government documents filed in federal court.

The unusual situation, which is still bedeviling bank regulators, stems from the 2001 seizure by federal officials of Superior Bank FSB, then a national subprime lender based in Hinsdale, Ill. Rather than immediately shuttering or selling Superior, as it normally does with failed banks, the Federal Deposit Insurance Corp. continued to run the bank's subprime-mortgage business for months as it looked for a buyer. With FDIC people supervising day-to-day operations, Superior funded more than 6,700 new subprime loans worth more than $550 million, according to federal mortgage data.

The FDIC then sold a big chunk of the loans to another bank. That loan pool was afflicted by the same problems for which regulators have faulted the industry: lending to unqualified borrowers, inflated appraisals and poor verification of borrowers' incomes, according to a written report from a government-hired expert. The report said that many of the loans never should have been made in the first place.

[R.D. Silverman]

Originally Posted by ewmayer

.


<snip>
It turns out that the U.S. government itself was one of the lenders giving out high-interest, subprime mortgages, some of them predatory, according to government documents filed in federal court.

....etc.....

The FDIC then sold a big chunk of the loans to another bank.

I believe that I already suggested how to correct this problem.
Once issued, do not allow loans to be SOLD TO SOMEONE ELSE.
No exceptions.

You issued the load? It's yours..... The one who makes the loan
must take the risks associated with it....

[ewmayer]

Freddie Mac, Fannie Mae Advance After Lawmakers Reach Agreement on Measure: Fannie Mae and Freddie Mac rose after U.S. lawmakers reached a deal on legislation that authorizes Treasury Secretary Henry Paulson to bail out the mortgage-finance providers while placing few restrictions on the companies.

Looks like Paulson is going to get his blank check from Congress after all - of all the idiotic, debt-expanding bailout measures our desperate-to-look-like-they=have-a-clue politicians and fiscal policymakers have tried to date, this very well could be the most stupid, and the most likely to blow up in the taxpayers` faces in the biggest way. The fact that housing-bubble-bailout bulls [and Friends of Countrywide founder Mozilo - see yesterday`s post] Chris Dodd and Barney Frank are both lauding the legislation tells me it`s going to end up being a taxpayer-funded boondoggle of epic proportions. Very disappointed that Senate Banking Committee members like Richard Shelby [on record as being very skeptical of giving the Treasury essentially unlimited powers to bail out the GSEs] caved in:

Shelby, saying the country is "in a real crisis," has long advocated for stricter oversight of Fannie and Freddie. "I believe if we`d pushed the GSE legislation four or five years ago, we wouldn`t be here today," he said.

Both critics and supporters of the Paulson plan have expressed concern that loaning or investing money in the companies could leave taxpayers with a fat bill to pay.

In a speech in New York on Tuesday, Paulson stressed again there are no immediate plans to exercise the powers he seeks and characterized the proposal as a way to support Fannie and Freddie and bolster the capital markets and economy.

"Ve haff no immediate plans to occupy any part of Czechoslovakia other zan ze Sudetenland..."

"The best way to protect the taxpayer is to have very flexible powers which are temporary," Paulson said.

Translations:

"Flexible": Paulson can do whatever he wants. Carte blanche on the "It`s easier to beg forgiveness than ask permission" front. Hey, it worked for Bernanke and NY Fed head Tim Geithner in their illegal Bear Stearns rescue ... Paulson is probably jealous and wants a piece of that kind of high-profile action for himself.

"Temporary": See Iraq + War + "Mission Accomplished"

While the bill sets parameters on the Treasury`s authority, it doesn`t necessarily force its hand, Seiberg said. For instance, the measure requires the Treasury to take into consideration the need that it should be given priority over other GSE investors when it comes to being paid back. But "consideration" means "the Treasury has discretion in what it can seek. It doesn`t have to ensure it gets paid back first," Seiberg said.

In other words, Paulson has unlimited license to put the U.S. taxpayer on the hook and then stiff them, if he likes.

And rest assured, those powers *will* be exercised - Here`s a Bloomberg article detailing the most-dodgy "assets" in the GSEs` portfolios - and remember, late payments and defaults have been steadily increasing even in the "prime" mortgage portfolios over the past year, and especially the past 6 months:

Fannie Mae Unsold $5 Billion Homes Bring Peril to Shareholders

July 23 (Bloomberg) -- Fannie Mae, the largest U.S. mortgage finance company, couldn`t find a buyer who would pay $6,900 for the three-bedroom house at 1916 Prospect St. in Flint, Michigan. So broker Raymond Megie, who is handling the foreclosure sale, advised cutting the price to $5,000.

Megie still couldn`t sell it. ``There`s oversupply,`` he said. The home sold in 2005 for $110,000.

Fannie Mae acquired twice as many homes through foreclosure in the first quarter as it sold, regulatory filings show. Unsold properties may weigh on the company`s stock, which lost almost half its value since June 5, said Moshe Orenbuch, managing director of equity research at Credit Suisse Group AG in New York. Late payments on the company`s home loans, a harbinger of foreclosures, almost doubled in the past year.

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.

$25B to bail out Fannie and Freddie? Yeah, right - their collective mortgage portfolio drops 1% and you`ve already more than doubled that.


Reply to something from yesterday's note about the FDIC actively abetting the issuance of subprime loans from one of the mortgage lenders it took over:

Originally Posted by R.D. Silverman

I believe that I already suggested how to correct this problem.
Once issued, do not allow loans to be SOLD TO SOMEONE ELSE.
No exceptions.

You issued the load? It's yours..... The one who makes the loan
must take the risks associated with it....

That makes perfect sense - but given the Wall Street crooks running the U.S.Treasury, Federal Reserve and FDIC show, you don`t honestly believe any such sensible proposal has a snowball's chance in hell of being enacted, do you?

The miniscule of odds of that ever happening remind me of a conversation I had with a coworker last week, the day after the embarrassing news came out that based on more-accurate counting of high school dropout rates, California proved to have a dropout rate of at least 25%, more than double the level where the "official" state statistics [which, interestingly, never made any attempt to actually count the dropouts-disguised-as-transfers - they simply assumed that every student who quit one school and enrolled in another, actually showed up at "the other"] had pegged it previously. Amid all the hue and cry to the effect of "we must do something to keep kids in school - give us billions of dollars to throw at the problem!", I made the following simple proposal:

No HS graduation ==> No driver's license.

My view is that kids under 18 shouldn't be driving anyway - allow them limited driving under a senior-year learner's permit, but only if their GPA and completed coursework puts them on track to graduate the following summer. Chance of such a measure slashing dropout rates? 100%. Chance of such a measure ever getting passed by spineless politicians? 0%.

[ewmayer]

FDIC: Don't worry about bank failures

The housing bust will put more banks out of business, but all but a handful of institutions will weather the crisis, one of the nation's top financial regulators said Tuesday.

Right - the "handful" or ones which will fail includes any not on the list of "most-favored" financial institutions [MFFI]. Note that MFFI members will be free to profit from impending failures of any non-MFFI members by naked-shorting the crap of those losers, while Mafia don Paulson has protected them from falling victim the same fate. You see, this is referred to as "the free markets at work".

"There will be more bank failures, but nothing compared with previous cycles, such as the savings-and-loans days," Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., said in an interview.

...conveniently ignoring that most of the S&L failures were of small banks, and that the wave of bank mergers and consolidations in the ensuing 2 decades means that on average fewer, but far larger, banks will fail. By way of example, the takeover of IndyMac alone will use up $8B of the FDIC's $53B reserve capital. So "a handful" more IndyMac-size busts wipes out the FDIC's capital. But not to worry...

So far this year, five banks have failed and been taken over by the FDIC, a number that Bair said "should not be alarming."

See quick calculation above for why a small number can be misleading.

"Banks went into this with very strong capital and are overwhelmingly safe and sound," said Bair, who was in San Francisco for an event marking the FDIC's 75th anniversary.

Sorry Sheila, but that is a flat-out lie. If that were true, you and Hank Paulson wouldn't be flooding the financial airwaves with soothing "Banks are sound! Really!! Especially the ones that haven't gone belly-up yet!!!" propaganda on a near-daily basis.

The question of bank failures has come to the fore in the last two weeks after the FDIC seized IndyMac Bancorp, a big lender from Pasadena that booked hundreds of millions of dollars in losses on risky mortgages.

The FDIC chairwoman stressed that her agency offers consumers complete protection for deposits up to $100,000. She said she was frustrated by reports of a run on IndyMac, with customers lining up to withdraw money. She said that no one has ever lost anything on deposits under $100,000 at FDIC-guaranteed institutions.

Of course if your life's savings consist of more than $100K, you could lose any or all of the non-insured amount. But hey, what do you need more than $100K for - it's not as if you're buying food or fuel these days, right?

Housing-related losses are putting increasing stress on bank finances. Ninety institutions were on the FDIC's troubled bank list at the end of March, marking them for intensive supervision by regulators.

In order to prevent runs on any of these troubled "overwhelmingly safe and sound" banks, the FDIC is refusing to release the list, but it is known that interestingly, IndyMac was *not* on the "troubled" list until just weeks before it imploded. [Compare that to various independent gauges which use e.g. the Texas Ratio to gauge insolvency risk, which pegged IndyMac as being in deep doo-doo months ago.]

"That number will go up" when the FDIC issues its second-quarter report next month, Bair said. "We're in an increasingly challenging credit environment and banks that made higher-risk mortgages are supervisory concerns."

Bair has been warning about bank problems for months, as the extent of housing losses became known. "We've known this has been coming for a while," she said.

So much for "overwhelmingly safe and sound", it seems.