Global Financial Crisis (Was: Subprime Meltdown)

[cheesehead]

Assuming my Ayn Rand recollections are correct, I predict that she would, as many others have, oppose any government rescue intervention, but instead prefer to just let the world descend into financial lockup and another Great Depression.

In a way, I admire the intellectual purity of such a stand ... but I cannot approve or even tolerate its heartlessness. I've had too much personal experience with sociopathic (i.e., unable to empathize, but not necessarily violent) individuals to refrain from condemning the idea that such an unempathetic philosophy is complete enough for humanity.

I don't know much about Ayn Rand's worldview or political philosophy in detail, but it seems to be at least _partially_ related to the "strict father" worldview I'm fond of quoting (you may have noticed). The "strict father" worldview is not a complete one, but is rather one extreme end of a valid spectrum of human worldviews. The "nurturant parent" worldview at the other end of that spectrum isn't complete either, and is equally extreme, but does also, like the "strict father" view, contain enough truth about human nature to deserve equal consideration instead of the contempt that some conservatives thoughtlessly spew. Folks at each end of that spectrum need to learn, if they haven't already, that their preferred worldview is neither the only valid view nor complete.

Our ideal should be to incorporate the best from each end of that spectrum, while screening out the worst from each.

Overregulation isn't desirable; it may indeed, as conservatives point out, stifle innovation. But I wish that all conservatives would learn from our current troubles that underregulation is just as bad.

- - -

[ewmayer]

It`s really been a rather uneventful year, hasn`t it? I shall endeavor to make things more exciting around here in 2009...


AP: Prices Decline but New-Home Sales Rose Last Month: Sales of new homes recorded an unexpected increase in September as median home prices dropped to the lowest level in four years.

WASHINGTON — Sales of new homes recorded an unexpected increase in September as median home prices dropped to the lowest level in four years.

The Commerce Department reported Monday that sales of new single-family homes rose 2.7 percent last month to a seasonally adjusted annual rate of 464,000 homes. Economists had expected sales would drop from the August level.

The median price of a new home sold in September declined 9.1 percent from a year ago to $218,400, the lowest price level since September 2004, a period when home prices were rising rapidly as the country experienced a five-year housing boom.

The surprising increase in September sales still left them 33.1 percent below the level of a year ago as the country is battered by the worst housing slump in decades.

The report on a rise in new home sales followed news last week that sales of existing homes rose in September by 5.5 percent, the largest monthly gain in more than five years.

Analysts are not convinced that the sales increases are signaling a bottom for the housing market. They note that the September gains came before the latest upheavals in financial markets which have raised new worries about the overall state of the economy.

My Comment: Despite the fact that September`s new-home sales were the worst in over a quarter--century, it is still encouraging that "if you price it affordably, the buyers will come, even though credit is tight" [a.k.a. good old-fashioned supply and demand fundamentals] are not dead and gone. The sheer tightness of mortgage credit means that people [or institutions] buying housing now are in a much better position to service the debt [even if there are further price declines before the bottom is finally reached] than at just about any point in the past decade.


General Motors Said to Ask U.S. Treasury for Aid in Chrysler Merger Talks: General Motors Corp., the largest U.S. automaker, has asked the Treasury Department for financial aid to help complete a merger with Cerberus Capital Management LP's Chrysler LLC, two people with knowledge of the matter said.


Capital One, SunTrust Are Among 14 Banks Getting $31 Billion From Treasury: Fourteen regional U.S. banks, including SunTrust, Capital One, KeyCorp and PNC Financial Services Group Inc., accepted at least $31 billion in government cash as the Treasury rolled out the second half of its $250 billion package to shore up lenders and thaw frozen credit markets.

``This is just unprecedented,'' said BMO Capital Markets analyst Peter Winter. ``What the government has said is that you can't let the financial system fail, and if this doesn't work they'll come up with another plan.''

The U.S. capital infusions come as governments worldwide do all they can to ensure the stability of banks. Kuwait's central bank said it will guarantee deposits at Gulf Bank KSC, which remains solvent after clients defaulted on currency derivatives contracts, the state-run Kuwait News Agency reported. Paulson already gave $125 billion to nine of the biggest U.S. lenders.

Some banks are raising money on their own. Mitsubishi UFJ Financial Group Inc., the Japanese bank investing $9 billion in Morgan Stanley, said it will sell as much as 990 million yen ($10.7 billion) of stock to replenish its capital. Japan's biggest bank may sell as much as 600 billion yen of common shares in the 12 months starting Nov. 4.

Morgan Stanley Kept Money Funds Liquid With $23 Billion Purchase of Assets:Morgan Stanley clients withdrew almost one-third of their cash from money-market accounts last month, forcing the firm to buy $23 billion of securities held by the funds to keep them afloat.

My Comment: Your tax dollars at work...


Emerging-Market Stocks, Currencies Drop; China, India, Hungary Lead Rout: Emerging-market stocks dropped to a four-year low as Ukraine and Hungary became the latest countries to receive help from the International Monetary Fund and concern deepened that the global economy will fall into a recession.


Evil Wall Street Exports Boomed With `Fools' Born to Buy Securitized Debt: Tom Bosh lowered the telephone receiver into its cradle, making a decision on the way down. ``We're not buying any more,'' he told his traders at Bank of New York Co. ``Nothing.''

It was May 2007, and Bosh, who managed $25 billion from the bank's 13th-floor trading room above Times Square, had just hung up on Ralph Cioffi at Bear Stearns Cos. a dozen blocks away. Bosh had invested $50 million in notes from an issuer Cioffi controlled, and he was ready to pull the plug.

``I had a bad feeling,'' Bosh, 45, recalled. ``Cioffi was just bulldogging everyone. He was saying, `These assets are good, the collateral is paying down, and I know more than you.' That type of attitude.''

Bosh's premonition, a month before two of Cioffi's funds blew up, struck a death knell for structured finance, the system Wall Street banks devised to fuel more than two decades of unprecedented borrowing. The system allowed financial companies to lend beyond their capacity and outside the reach of regulators -- until it crashed this year.

While the collapse was most visible in the stock markets, the cause was the loss of confidence in the world's biggest bond market, structured finance. So far, it has led to the worst financial crisis since the Great Depression, the disappearance or takeover of more than a dozen banks, including three storied Wall Street firms, and almost $3 trillion in government expenditures and guarantees to contain the contagion.

Biggest U.S. Export

The bundling of consumer loans and home mortgages into packages of securities -- a process known as securitization -- was the biggest U.S. export business of the 21st century. More than $27 trillion of these securities have been sold since 2001, according to the Securities Industry Financial Markets Association, an industry trade group. That's almost twice last year's U.S. gross domestic product of $13.8 trillion.

The growth over the past decade was made possible by overseas banks, which saw the profits U.S. financial institutions were making and coveted the made-in-America technology, much as consumers around the world craved other emblems of American ingenuity from Coca-Cola to Hollywood movies. Wall Street obliged, with disastrous results: two-thirds of a trillion dollars in bank losses, about 40 percent of them outside the U.S.

``Securitization was based on the premise that a fool was born every minute,'' Joseph Stiglitz, a professor of economics at Columbia University in New York, told a congressional committee on Oct. 21. ``Globalization meant that there was a global landscape on which they could search for those fools -- and they found them everywhere.''

My Comment: What a great economic model we`ve developed here in the U.S. over the past several decades - buying and selling each other ever-more-overpriced equities and real estate masquerade as "economic growth", and the gargantuan Ponzi scheme based on toxic debt known as "securitization" became our largest export industry. But as president Bush and the I`m-not-Bush-I-just-vote-like-him 2008 model "Maverick John McCain" spent much of the past year reminding us, "the fundamentals of the economy are sound". The article details some of the banks [especially in Europe] which binged on the resulting toxic paper ... in particular, the 3 just-nationalized Icelandic banks together bought a colossal $228 Billion worth of the stuff, more than 20 times Iceland`s GDP. Utter madness ... and while researching this story, I found this very interesting 2 April news story which shows that it`s not just Bush and Maverick McCain who are prone to lying about the state of their nation`s economy:

REYKJAVIK: Icelandic officials are seeking to reassure investors that the country's economy and banks are stable, after a sharp decline in the national currency undermined confidence.

"The economy is fundamentally sound," Ingimundur Fridriksson, the deputy governor of the Central Bank of Iceland, said Tuesday . The banks "are affected by the situation in the global financial markets like banks everywhere," though they have "virtually no subprime exposure."

The central bank raised its benchmark interest rate to a record 15 percent last week to shore up confidence after the currency and stocks slumped and the cost of insuring bank debt soared. Standard & Poor's on Tuesday cut its outlook on Iceland's credit rating to negative, citing concern that the global credit crunch will push the government to aid the island's three largest banks; Kaupthing Bank, Landsbanki Islands and Glitnir Banki.

The banks "can ride out the storm," said Richard Portes, president of the Center for Economic Policy Research. "Market funding is assured for the coming year; they have no toxic waste. Unlike virtually every other major bank in the world, the Icelandic banks didn't buy any of that garbage."

The currency, the krona, has tumbled 22 percent against the euro this year. The euro was worth 118 kronur on Wednesday, while the dollar purchased 76 kronur.

David Oddsson, chairman of the central bank's board of governors, said Friday that the slump in the krona was due to speculative attacks from "unscrupulous dealers."

The three biggest banks in Iceland have expanded beyond the borders of the $16 billion economy, financing their growth by selling debt.

Higher credit costs on world markets, which are making that strategy more costly, have raised concern about that strategy. The three lenders account for about 80 percent of Iceland's gross external debt, five times greater than gross domestic product.

Fitch Ratings cut its outlook on the banks to negative from stable Tuesday. It has a long-term debt rating of A on the banks, while the sovereign foreign debt is rated A+, the fifth-highest ranking.

An investor in the credit default swap market wanting to insure against default on €10 million, or $15.6 million, of five-year debt at Kaupthing had to pay €954,000 up front Wednesday, according to CMA Datavision.

That is down from €1.45 million Tuesday, before a successful stock offering by Lehman Brothers stoked a rally in global equities.

The credit default swaps "are completely out of touch with reality," Portes said. "They don't mean anything."

My Comment: What a colossal load of delusional thinking and flat-out lying - Your banks buy over $200 Billion of above-market-yielding securitized debt and you have no clue what that debt might be composed of, or that it might be just a tad less than risk-free? We`ve seen this playbook before though, haven`t we? Lie #1: "The economy is fundamentally sound." Lie #2: "Banks are well-capitalized". Delusion #1: "That stench-emitting steaming pile of securitized debt must belong to someone else, because *ours* doesn`t stink one bit." Delusion #2: "Speculators are to blame". Delusion #3: "Credit markets have no clue what they`re talking about ... we are triple-A all the way, baby!"


Broken Securities Industry Still Has $20 Billion Available to Pay Bonuses: Five straight quarters of losses and a 70 percent slide in its stock this year haven't stopped Merrill Lynch & Co. from allocating about $6.7 billion to pay bonuses.

[rogue]

Originally Posted by ewmayer

Capital One, SunTrust Are Among 14 Banks Getting $31 Billion From Treasury: Fourteen regional U.S. banks, including SunTrust, Capital One, KeyCorp and PNC Financial Services Group Inc., accepted at least $31 billion in government cash as the Treasury rolled out the second half of its $250 billion package to shore up lenders and thaw frozen credit markets.

Gives a whole new meaning to "What's in your wallet?", doesn't it?

[ewmayer]

Europe on the brink of currency crisis: The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.

Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992. “This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.

Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.

The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect. They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.

Europe has already had its first foretaste of what this may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn.

Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.

Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.

Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.

Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.

My Comment: It seems that whenever my birth country Austria becomes more than a bit player on the European stage, it`s time to worry. Ditto for Iceland, Hungary, etc. The wild recent action in the Japanese Yen is a symptom of the underlying problem here - the spectacular unwind of the Yen carry trade is having a ripple effect:

Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global “deleveraging” causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc.

The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July. Nobody warned them what happens when the Japanese carry trade goes into brutal reverse, as it does when the cycle turns.

The IMF’s experts drafted a report two years ago – Asia 1996 and Eastern Europe 2006 – Déjà vu all over again? – warning that the region exhibited the most dangerous excesses in the world.

Inexplicably, the text was never published, though underground copies circulated. Little was done to cool credit growth, or to halt the fatal reliance on foreign capital. Last week, the silent authors had their moment of vindication as Eastern Europe went haywire.

...

Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik.

The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.

...

A grain of comfort for British readers: UK banks have almost no exposure to the ex-Communist bloc, except in Poland – one of the less vulnerable states.

The threat to Britain lies in emerging Asia, where banks have lent $329bn, almost as much as the Americans and Japanese combined. Whether you realise it or not, your pension fund is sunk in Vietnamese bonds and loans to Indian steel magnates. Didn’t they tell you?

My Comment: Maybe the U.S. government can bail out these folks, too.

[ewmayer]

Dow's 2nd best day ever: The Dow rallied as much as 906 points during Tuesday's session, as investors dove back into stocks near the end of one of the worst months in Wall Street history.


Home prices see another record plunge: 10 major markets have seen home values fall 17.7% over the past 12 months, and experts expect the declines to continue.


Iceland central bank raises interest rate to 18%: Finance officials hope to avert a run on the island nation's currency and secure a $2 billion IMF loan.


Pakistan needs IMF loan: Pakistan must secure a loan from the International Monetary Fund within a week, the German foreign minister said Tuesday, as the country scrambles for aid to avert a run on its currency and a default on its international debt.


Consumer Confidence Plunges to Record Low Amid Stock Slump, Credit Freeze: U.S. consumer confidence fell to the lowest level on record in October as stocks plunged and banks shut off credit, raising the risk spending will tumble.

My Comment: "Frugality is the new reality."


Whirlpool Will Cut 5,000 Jobs by 2010 as Housing Slump Hurts Sales, Profit: Whirlpool Corp., the world's largest appliance maker, will cut 5,000 jobs, or 6.8 percent of its workforce, and forecast lower annual profit as the global credit crunch and U.S. housing slump clips appliance sales.


Volkswagen to Send 1,200 Workers Home on 10-Day Leave in Brazil`s South: Volkswagen AG, Europe's largest carmaker, will send 1,200 workers at a plant in southern Brazil on paid leave in November for 10 days.


GM's Wagoner Personally Lobbies for Federal Aid Amid Chrysler Merger Talks: General Motors Corp. Chief Executive Officer Rick Wagoner is personally leading a lobbying push for federal aid as the biggest U.S. automaker seeks to merge with Chrysler LLC, people close to the discussions said.

Oct. 28 (Bloomberg) -- General Motors Corp. Chief Executive Officer Rick Wagoner is personally leading a lobbying push for federal aid as the biggest U.S. automaker seeks to merge with Chrysler LLC, people close to the discussions said.

Wagoner, 55, was in Washington yesterday and also met last week with Treasury Department officials, said the people, who asked not to be identified because the talks are private. GM has asked for government funds to help combine with Cerberus Capital Management LP's Chrysler, people have said.

GM is among automakers eligible for $25 billion in low- interest borrowing to retool plants, while auto lenders may get funding from the $700 billion bailout fund to buy bad home loans and other troubled assets. GM may want $10 billion in government aid, two people familiar with the discussions said.

Treasury Secretary Henry Paulson would prefer any funding for Detroit-based GM come from the low-interest loans, not the $700 billion banking-system rescue, people familiar with the matter have said.

My Comment: As usual, Hank "Son of Sachs" Paulson`s priorities appear crystal-clear: "I extorted this here $700 Billion for Goldman, erm, I mean, 'the distressed financial sector', and you silly goods-producing union-labor rabble can`t have any of it - it`s all mine, mine, MINE!" Not that I shed any hot tears for the horribly-mismanaged, over-priced-labor-afflicted Detroit automakers, but the given the choice between wasting $10 Billion in taxpayer money by throwing it at Wall Street versus Detroit, I`d take the latter any day. By the way, even if the government ends up backstopping a GM-Chrysler merger, thus averting what would surely be an imminent bankruptcy for at least one of the 2 firms, expect a gigantic wave of plant-closing and layoffs to result - I estimate an eventual total of 50,000 - 100,000 jobs lost.


Finally, in a sad story with an unintentionally amusing headline:

Polish Immigrants Flee Slumping Irish Economy, Hurting Beer, Food Sales

Oct. 28 (Bloomberg) -- When the European Union expanded eastward in 2004, Ireland opened its doors to workers entering from former communist states to help maintain record economic growth. Now, immigrants are heading for the exit.

The number of people leaving Ireland next year will outstrip those moving to the country for the first time in 14 years, according to Economic and Social Research Institute in Dublin. The biggest exodus will be among the 170,000 workers who arrived the past four years from Poland and other east European states.

``It's a very hard situation,'' said Artur Kawczynski, 30, who lost his factory job in Galway on Ireland's west coast 10 days ago. ``I rang my friends in Poland to ask what job opportunities there are like.''

Immigrants like Kawczynski fed the manufacturing and building booms that helped double the size of Ireland's economy during the past 10 years and made it the most dynamic in western Europe. Now the seizure in credit markets has plunged the country of 4.4 million people into its first recession in two decades, pushing unemployment to an 11-year high. Economic growth remains above 5 percent in Poland.

My Comment: This lends new meaning to the advice-to-the-soon-to-be-job-hunter phrase, "Time to polish your résumé..."


Bloomberg In-Depth:

Lehman Toxic Debt Advice Led Leipzig's Landesbank to Ruin via Dublin Fund: Teachers at the Clara Zetkin Middle School in Freiberg, Germany, were counting on a budget surplus to ease staff shortages across the state of Saxony.

Those hopes have faded as a result of bets made by state- owned Landesbank Sachsen Girozentrale on structured investments backed by mortgages in the U.S. The German lender loaded up on asset-backed securities and derivatives manufactured and sold by Wall Street amounting to more than 27 times the bank's equity. Now Saxony, which pledged taxpayer money as a guarantee against losses, is on the hook for 2.8 billion euros ($3.5 billion).

``They gambled away money needed for Saxony's teachers,'' said Wolfgang Renner, 55, who teaches math and physics at the 106-year-old yellow-brick school in Freiberg, named for a former Communist Party leader.

It doesn't take a degree in mathematics to calculate the potential damage in nearby Leipzig, where Sachsen is based and where Gottfried Wilhelm von Leibniz, the 17th-century polymath who invented calculus, was born. Plans to replace thousands of retiring teachers and build new roads are now in jeopardy.

``As Saxony politicians, we pray every day that the guarantee won't be used,'' said Mario Pecher, a lawmaker in Dresden, the state capital flattened by Allied bombing in World War II. ``There's a Damocles sword hanging over our heads.''

`Irresponsible' Loans

The bank's near collapse in August 2007 was proof of how far and wide U.S. investment banks had peddled toxic repackaged mortgages. It was also a harbinger of worse to come -- a global credit contagion that led to bailout packages from Germany to Iceland to the U.S. aimed at shoring up bank capital by partially nationalizing firms and guaranteeing lending until the storm passes.

Two days after a 50 billion-euro Oct. 5 rescue of Munich- based Hypo Real Estate Holding AG, Germany's second-largest commercial-property lender, German Chancellor Angela Merkel told an emergency session of parliament that ``irresponsible'' loans in the U.S. had helped destroy faith in the global financial system.

Germany's Landesbanken, whose state ownership, high credit ratings and low borrowing fees whetted their appetite for asset- backed securities earlier this decade, accounted for $22 billion of the more than $650 billion in writedowns and credit losses linked to the U.S. subprime-mortgage market. The Sept. 15 bankruptcy of Lehman Brothers Holdings Inc., the New York-based securities firm that helped set up Sachsen's biggest offshore conduit, may cost the Landesbanken half a billion euros more.

`Gambled Away Billions'

The demise of Sachsen is a story of overreaching and of how Wall Street banks exported financial technology and products whose risks were not fully understood, according to interviews with two dozen bankers, board members, credit analysts and politicians. In the end, the citizens of Saxony will probably be left holding the bag.

``They made huge bets with taxpayers' money, they gambled away billions and nobody has been held responsible,'' said Andreas Schmalfuss, a member of the parliamentary committee probing Sachsen's collapse.

Schmalfuss and local prosecutors are looking at whether former top executives at the bank misrepresented risks in annual reports, improperly used funds and put Sachsen in danger by setting up an off-balance-sheet conduit in Ireland to buy more asset-backed securities than it should have.

My Comment: This same story is being played out in various sizes and guises all over the globe. It always ends the same way: "Taxpayers will be left holding the bag." One paragraph in the denouement portion near the end of the above article is rather ironic:

In July, Saxony and LBBW hired an outside bank to help them clean up the mess. The firm they selected was the asset management arm of Lehman Brothers, the bank that advised Sachsen on setting up [its Irish high-leverage asset-acquisition subsidiary] Ormond Quay in 2004.

[ewmayer]

IMF may need to "print money" as crisis spreads: The International Monetary Fund may soon lack the money to bail out an ever growing list of countries crumbling across Eastern Europe, Latin America, Africa, and parts of Asia, raising concerns that it will have to tap taxpayers in Western countries for a capital infusion or resort to the nuclear option of printing its own money.

The Fund is already close to committing a quarter of its $200bn (£130bn) reserve chest, with a loans to Iceland ($2bn), Ukraine ($16.5bn), and talks underway with Pakistan ($14.5bn), Hungary ($10bn), as well as Belarus and Serbia.

Neil Schering, emerging market strategist at Capital Economics, said the IMF's work in the great arc of countries from the Baltic states to Turkey is only just beginning.

"When you tot up the countries across the region with external funding needs, you get to $500bn or $600bn very quickly, and that blows the IMF out of the water. The Fund may soon have to start calling on the West for additional funds," he said.

Brad Setser, an expert on capital flows at the Council for Foreign Relations, said Russia, Mexico, Brazil and India have together spent $75bn of their reserves defending their currencies this month, and South Korea is grappling with a serious banking crisis.

"Right now the IMF is too small to meet the foreign currency liquidity needs of the larger emerging economies. We're in a dangerous situation and there is the risk of extreme moves in the markets, as we have seen with the Brazilian real. I hope policy-makers understand how serious this is," he said.

The IMF, led by Dominique Strauss-Kahn, has the power to raise money on the capital markets by issuing `AAA' bonds under its own name. It has never resorted to this option, preferring to tap members states for deposits.

The nuclear option is to print money by issuing Special Drawing Rights, in effect acting as if it were the world's central bank. This was done briefly after the fall of the Soviet Union but has never been used as systematic tool of policy to head off a global financial crisis.

"The IMF can in theory create liquidity like a central bank," said an informed source. "There are a lot of ideas kicking around."

For now, Eastern Europe is the epicentre of the crisis. Lars Christensen, a strategist at Danske Bank, said the lighting speed and size of Ukraine's bail-out suggest the IMF is worried about the geo-strategic risk in the Black Sea region, as well as the imminent risk a financial pandemic. "The IMF clearly fears a domino effect in Eastern Europe where a collapse in one country automatically leads to a collapse in another," he said.

My Comment: The speed with which this house of cards is collapsing is simply breathtaking.


Chrysler Will Drop First Hybrids as Plant Shuts Down, Gasoline Prices Fall: Chrysler LLC, the automaker considering a combination with General Motors Corp. to survive, has been forced to kill its only gasoline-electric model because of poor sales of its largest sport-utility vehicle.

The hybrid versions of the Dodge Durango and Chrysler Aspen SUVs, which went on sale this month, are produced at the Newark, Delaware, factory that Chrysler said last week will shut by Dec. 31. The plant also makes gasoline-only versions of those models. Todd Goyer, a Chrysler spokesman, confirmed the hybrid decision today.

``This vehicle would have done a lot better three or four years ago,'' when demand for SUVs was greater, Jim Hall, principal at 2953 Analytics in Birmingham, Michigan, said of the Chrysler gasoline-electric models.

Chrysler's decision leaves it without plans for any new hybrid models for at least a year. No other major automaker is more dependent on pickup trucks, SUVS and minivans, which have lost sales this year because of high gasoline price. Chrysler already is playing catch-up to competitors such as Toyota Motor Corp., which has sold hybrid models for more than a decade.

My Comment: A hybrid version of a moster gas-guzzling SUV like the Durango or Aspen is an idiotic pander-to-the-green-theme idea anyway. Yeah, I know, an SUV that gets better gas mileage is better than no improvement, but improving their SUV fleet mileage from [say] 15mpg to 20mpg doesn`t get us close to ending our dependence on foreign oil. 20mpg is still woefully short of what an efficient hybrid car gets, and the vast majority of SUV drivers don`t really need a large vehicle to haul around anything, except perhaps for their oversized American-fast-food-inflated asses.


Pulte Chairman Sells More Than $7 Million of Shares to Meet Margin Calls: William Pulte, founder and chairman of Pulte Homes Inc., the third-largest U.S. homebuilder by revenue and market value, sold 760,000 shares, worth more than $7 million, to satisfy margin calls, according to a statement distributed by PR Newswire.

My Comment: "Who is this Margin dude and why does he keep calling me?"


Non-Agency Mortgage Bonds Fall Amid Selling Concern: Subprime, Alt-A and prime-jumbo mortgage securities fell this month as bond holders were forced to sell assets, driving some prices to record lows.

The least protected bonds originally rated AAA and backed by Alt-A mortgages with five years of fixed rates slipped to about 15 to 25 cents on the dollar last week, according to a RBS Greenwich Capital report yesterday. The bonds, issued in 2006 and 2007, were at the high-20s to mid-30s in early September. ``Super-senior'' bonds from the same groups of loans were selling in the ``mid-50s to mid-60s,'' down from 60 to 70 cents.

The non-agency U.S. home-loan bonds, an almost $2 trillion market, fell from 100 cents on the dollar last year as foreclosures soared and home values tumbled. Prices have slumped as financial firms sell assets to bolster capital, declining debt values force funds to unload securities and tighter lending prompts bond buyers to seek lower purchase prices.

``Concerns about potential forced liquidations from hedge funds and other institutions weighed negatively on the market'' this month, Desmond Macauley and Joseph Ruszkowski, asset-backed mortgage strategists at Greenwich, Connecticut-based RBS Greenwich, wrote in the report.

Non-agency mortgage bond prices have also fallen along with optimism about the $700 billion U.S. financial-market rescue plan signed into law on Oct. 3, the report said. Enthusiasm dimmed because the program began with capital injections into banks, instead of mortgage-asset purchases, they wrote.

My Comment: This is precisely the kind of toxic MBS debt Paulson and Bernanke - in their first proposal for "how to waste $700 Billion in taxpayer money"- wanted to pay "whatever they deemed a fair price" for. [Bernanke specifically suggested an above-market price, at the same time insisting 'there was no market' for these.]

[ewmayer]

Here`s a story I came across in yesterday`s online edition of Die Welt - translation is mine. Long story short: Porsche stealthily buys up nearly half VW share float and acquires options on another 30%, causing the price to rise handsomely and provoking a large short interest in shares of VW. The remaining "free float" is tiny [only ~6% of the total], so when Porsche then publicly announces it intends to acquire a majority stake in VW, it spurs perhaps the wildest short-covering rally in history, as shorts [especially the naked kind] are caught with their pants down and forced to cover at whatever price they can get shares for. The stock, already 3-4x overpriced according to some analyst estimates, quintuples in less than 48 hours, briefly making VW the most valuable company [in terms of nominal market capitalization] on earth. Meanwhile, the finance minister of Lower Saxony, which is the 2nd-largest shareholder, says he does not intend to sell any of the state`s holdings [at what would surely be a massive profit] because "we are not speculators". Of course a short while after finishing translating the article below, a friend sent me this English-language article, which says more or less the same thing. Sigh...:

Porsche denies accusations of stock price manipulation: Germany`s largest fund management company DWS has accused the automaker of manipulating the price of Volkswagen stock. Now Porsche has launched a counteroffensive. Cause and Effect are being mistaken for each other, according to the luxury-car manufacturer.

Porsche says it is not responsible for the recent price gyrations in common shares of Volkswagen. "We categorically deny the accusations of stock price manipulation," said a Porsche spokesperson Tuesday in Stuttgart. Cause and Effect are being mistaken for each other, according to Porsche. "The responsible parties are those who bet huge sums of money on a falling VW share price", said the spokesperson.

DWS, Germany`s largest fund management company, attacked Porsche over the steep price jump in VW shares. After a 150 percent jump on Monday, shares on Tuesday rose another 100 percent, and topped the 1000-Euro mark in intraday trading. In terms of on-paper market capitalization Volkswagen even topped that of Exxon Mobil and for a few minutes became the World`s most valuable company. "I strongly decry the irresponsible fashion in which Porsche has manipulated the price of VW stock", said DWS CEO Klaus Kaldemorgen in an interview with "Financial Times Deutschland". "For outside investors it is incomprehensible what Porsche is doing."

According to several sources the German stock exchange currently has "no plans for a trading halt of VW shares". A spokesperson said "The exchange must follow its own regulations." The stock would only be halted if the fraction of freely tradable shares dropped below the five percent threshold. Currently the free float stands at roughly six percent.

In the wake of the latest price explosion in VW stock the German Investor Protection Organization (SdK), the second-largest Investor Protection group in Germany, has demanded a suspension of trading of VW shares. In an interview with Deutsche Welle Klaus Schneider, the head of SdK, said "The price action in VW is falsely distorting the Dax and the the Eurostoxx indices. In that respect the requirements for a trading suspension are satisfied." Schneider described the valuation of VW shares as "beyond reason". The fair value, based on comparison with BMW or Mercedes, could be "only in the range of 50 to 70 Euro".

Despite the price rise, the second-largest holder of VW, the state of Lower Saxony, does not intend to sell its stake. "That is a very attractive price", finance minister Hartmut Möllring said to Dow Jones Newswires. "But we are not speculators and daytraders here".

According to reports in "Financial Times", the losses by hedge funds betting on falling prices currently lie in the range of over 40 Billion Euro. As the number of free-floating VW shares has contracted sharply, their purchase has become ever more difficult, driving the price upward. At end of trading on Monday the market capitalization of VW totalled 153 Billion Euro, more than the sum total of all other European and American automakers combined.

According to reports, Porsche currently owns over 42.6 percent of VW shares and has options on a further 31.5 percent. In the coming weeks the Stuttgart firm will try to pass the 50-percent hurdle. For 2009 Porsche plans an agreement of control, at which point it will have a 75 percent stake in VW. According to Porsche the Sunday announcement was intended to give short-sellers "A chance to close out their positions calmly and without greater risk.".

My Comment: If Porsche really had the peace of mind of the short sellers at heart, it could have sold back a small portion of its shares [at a handsome profit, no less] allowing shorts to cover at a lower price than 1000 Euros. Not that we especially pity the shorts - they took a gamble and lost, it happens, although not usually this spectacularly.

The finance minister of Lower Saxony is a fool for not taking some profit at these once-in-a-lifetime windfall prices. Just because you don`t support stock speculation doesn`t mean you should pass up the opportunity to profit at the expense of the speculators. Even selling a small portion of its stake would allow Lower Saxony to handsomely beef up its rainy-day fund, and that money might come in very handy in the next few years, as the global recession really starts to bite.

And here is the 5-day price chart for VW which graphically illustrates the madness:

[ewmayer]

Fed Cuts Key Rate to 1% as Central Banks Race to Avert Worldwide Recession: The Federal Reserve cut its benchmark interest rate by half a percentage point to 1 percent, matching a half-century low, in an effort to avert the worst U.S. economic downturn in the postwar era.

My Comment: The parallels to the late-80s Japanese real estate bubble and the ensuing [and spectacularly misguided policy] of lowering interest rates to near zero - i.e. easing credit in an attempt to fix a problem caused by too much easy credit - grow ever more striking.


Investor Daily: Is buy-and-hold dead and gone?: As volatile and scary as stocks look now, here are three big reasons not to abandon your investing strategy.

(Fortune magazine) -- That's about the craziest thing I've ever heard!" shouts Jeremy Siegel through the phone when I mention the headline of this story. "I mean, what's the rationale for anyone saying that?" I had called up the Wharton professor because he's one of the high priests of buy-and-hold investing. In his classic book, Stocks for the Long Run, Siegel analyzed 200 years' worth of U.S. market returns and concluded that patient, consistent investment in stocks over a long period is the most effective strategy for wealth creation among regular folks.

My Comment: That works great if you have a 200-year time horizon. OK, I`m being somewhat facetious there - but if the "big crises" [e.g. Great Depression, dot-com bubble collapse, 2008 Global Financial Crisis] teach us anything, it`s that while buy & hold is a great long-term strategy for non-cataclysmic times, the really big whoppers of bear markets, the ones where one can easily lose 50% or more of one`s patiently-accumulated buy-and-hold gains, don`t just sneak up on us on stealthy little cat feet. Prior to each of the above trio of examples, there were plenty of warning signs that something was seriously amiss, and that a giant speculative asset bubble of some kind was beginning to unwind. And if you can get yourself to put aside the normal buy-and-hold thinking during those rare-but-foreseeable market periods, you will be far better off than a 100% buy-and-holder.

Also, if the Japanese real estate bubble of the late 80s teaches us anything, it`s that real-estate bubbles are among the worst kind, because the recovery period may require decades. Aside from the mini-stock-bubble in the Nikkei index in the early 200s [coincident with the U.S. stock and RE bubble], the Japanese market has still not recovered, three decades later. That is a time horizon long enough to put a giant red caution flag next to any "buy and hold" advice being offered currently. Sure, if you`ve been doing that and have already lost a lot of money, at this point it`s probably best to try to ride it out, but the point is that any asset manager who didn`t see the plentiful warning signs a year or more ago and failed to advise his clients to park some of their money in cash or bear-market hedging vehicles [e.g. gold and Treasuries] failed in his duties.

The rest of the article gives all the usual bromides about "don`t try to time the markets", "you can`t ever hope to get out at exactly the exact high or get back in at the ensuing low", et cetera, and tries to invoke the mystical "Warren Buffett is buying now" mantra to bolster their claims. But notice - has Warren been indiscriminately buying an index-fund-like portfolio all along? He has not. He only recently bought a stake in e.g. Goldman Sachs, one the price had fallen appreciably from its recent levels, and Warren being Warren, he got what amounts to a roughly 20% discount on his purchase. Also, notice that Warren`s Berkshire Hathaway holding-company stock hasn`t exactly been a market beater this year.


Fannie Mae to take charge on deferred tax asset

WASHINGTON (AP) -- Mortgage giant Fannie Mae, which was taken over by the government in September, said Wednesday it will record a charge related to deferred tax assets against its third-quarter earnings.

Fannie Mae said the amount of the charge, called a valuation allowance, has not been determined, but "it is likely to be substantially all of the value of the deferred tax asset as of Sept. 30." Fannie Mae had $20.6 billion of deferred-tax assets as of June 30, though it was not known if the third quarter write-off was to be more than that.

A deferred tax asset can emerge from operating losses, and can be held and used to reduce future tax expenses. Companies must be able to show they will be profitable if they intend to use the tax asset for earnings in later periods. Fannie Mae is absorbing a blow to its capital this quarter with the valuation charge on the assets, raising questions about its profitability moving forward.

The Washington, D.C.-based company said it will give further information on how the write-off affects earnings when it releases third-quarter results. The company has a Nov. 7 deadline to report.

Fannie Mae and Freddie Mac, which own or guarantee nearly half of U.S. home loans, were taken over by the government in September as their mounting defaults and foreclosures threatened the entire mortgage market.

The mortgage finance agencies now operate in a conservatorship that enables the government to inject up to $100 billion in each company in exchange for ownership stakes of almost 80 percent. They also are facing a federal grand jury investigation into their accounting practices -- including the use of deferred tax assets.

My Comment: This news sounds bad on its face, but the markets appeared to cheer it. The probable reason is that the market isn`t expecting either Fannie of Freddie to return to profitability soon, and in that light this kind of "coming clean" seems better than announcing some kind of truly dreadful off-balance-sheet badness.

[ewmayer]

U.S. Economy Shrank 0.3% in the Third Quarter as Consumer Spending Dropped: The economy suffered its biggest decline since 2001 in the third quarter, ushering in what may be the worst recession in a quarter-century and boosting the chances of Barack Obama and fellow Democrats in next week's elections.

My Comment: Barry Ritholz` take on the GDP numbers is here.

Thank goodness for Federal, State and Local government spending, and for exports:

Real personal consumption expenditures: -3.1%
Durable goods -14.1%
Nondurable goods -6.4%
Services expenditures +0.6%

Bloomberg notes that the 6.4% rate of decline in spending on non-durable goods, like clothing and food, was the biggest since 1950.

Investors shun Greek debt as shipping crisis deepens: ]Freight rates for shipping are crashing at the fastest pace ever recorded as banks shut off credit lines to the industry, precipitating a sudden crunch in world trade.

My Comment: If you`re not familiar with the Baltic Dry Index, the above article provides a nice primer.


GM global sales plunge: No. 1 U.S. automaker sees weakness in U.S. demand spreading to overseas markets where sales had been strong.

NEW YORK (CNNMoney.com) -- General Motors reported sharply lower global sales as weakness in the nation's leading automaker's domestic sales spread to overseas markets.

GM (GM, Fortune 500) said that overall sales were down 11.4% worldwide in the third quarter compared to the same period a year earlier.

That was a much steeper decline than the 2.9% drop seen in first half of the year.

European sales, which had been up 2.8% in the first half of the year, plunged 12% in the quarter, while the Asian Pacific region saw sales slow to a 2.6% growth rate from nearly 10% growth in the first half of the year.

North America, GM's home market, had already been weak, with sales down 15.3% in the first half of the year, but its sales weakened even further in the third quarter, dropping nearly 19% compared to a year earlier.

Exxon Mobil: Biggest profit in U.S. history: Largest U.S. oil company surges past analyst estimates to post net income of $14.83 billion.


Bernanke Signals Door 'Open' for Cutting Rates to Lowest Level on Record: Federal Reserve Chairman Ben S. Bernanke signaled he's ready to cut interest rates to the lowest level on record should the central bank's actions fail to stem the deepening economic slump.

My Comment: Bernanke might first investigate how well the ZIRP [zero-interest-rate policy] worked for Japan in the decades following their real-estate bubble`s collapse. He would probably reply to the effect of "this is not Japan", to which the response would be, "Not yet...".


American Express to Cut 7,000 Jobs, Take $290 Million Charge, Freeze Hires: American Express Co., the largest U.S. credit-card company by purchases, will slash 7,000 jobs, or about 10 percent of its staff, and may take a charge of as much as $290 million in the fourth quarter tied to the cuts.


Emerging-Market Stocks Exit Bear Market With Three-Day Surge of About 20%: Emerging-market stocks climbed out of a bear market after surging more than 20 percent in three days, while bonds and currencies climbed, as the U.S. agreed to pump as much as $90 billion into Brazil, Mexico and South Korea and the International Monetary Fund approved an emergency loan program.

My Comment: The key question is whether this is just a classic bear-market short-tern relief rally or something that will prove to have legs. I suspect the former, especially in light of this action by the Fed. Might be a nice chance to pick up some EEV/FXP/etc shares at a steep discount to their recent levels, though.


Wall Street Firms Won't Surrender Bonuses Amid Outcry, Veteran Bankers Say: Wall Street's chief executives will hunker down and pay bonuses this year in the face of the worst financial crisis since the Great Depression, a taxpayer bailout and mounting political outcry, industry veterans say.


Greenspan Slept as Off-Balance-Sheet Toxic Debt Escaped Regulator Scrutiny: As George Miller welcomed 60 bankers to the chandeliered Charlotte City Club one evening in September, the focus was on more than the recent bankruptcy of Lehman Brothers Holdings Inc. From their 31st-floor perch, members of the American Securitization Forum, which Miller leads, fretted about the future of their $10.7 trillion industry.

The bankers were warned that a Financial Accounting Standards Board plan would force trillions of dollars back onto balance sheets, requiring cash reserves to soar. Their business of pooling and reselling assets had dropped 47 percent in the first six months of the year, and the industry couldn`t afford another setback.

The next day, Miller, 39, the forum`s executive director, took that message from North Carolina to a Senate hearing in Washington examining the buildup of off-balance-sheet assets. ``There are great risks to the financial markets and to the economy of moving forward quickly with bad rules,`` he said of FASB`s proposal.

Miller was trying to preserve an accounting rule for off- the-books assets that helped U.S. banks export toxic debt around the world. It is a loophole that Jack Reed, the Rhode Island Democrat who chairs the Senate securities subcommittee, said had contributed ``to the severity of the current crisis.``

The damage to date: more than $680 billion dollars in losses and writedowns, about one-third of that by European banks.

Unregulated Derivatives

Efforts by lobbyists have delayed FASB decisions and kept key parts of the American financial system beyond the reach of regulators. Their victories included ensuring that over-the- counter derivatives stayed unregulated and persuading the Securities and Exchange Commission to let investment banks reduce capital requirements. That allowed them to increase borrowing and magnify profits. Bank watchdogs also didn`t move to tighten mortgage-industry standards until after the collapse of the subprime market.

Today, a road snakes from the foreclosed homes of California and Ohio to the capital cities of Europe, where politicians and bankers have struggled to contain a widening credit crisis by pumping hundreds of billions of euros into the financial system. The road was paved with decisions like ones by FASB that allowed banks to keep shifting assets into blind spots outside the view of shareholders and industry overseers.

My Comment: Miller to the Senate: "Not so FASB, my dear senators ... remember the Prime Directive of American financial regulation: 'If it might possibly be bad for business, it must be killed'."

That`s ironic to Donald Young, an investor advocate and FASB board member from 2005 until June 30. He testified at the same Senate hearing on Sept. 18 that both the Fed and the SEC joined the banks they oversaw in resisting proposals for more disclosure of off-the-books assets.

``There was an unending lobbying of FASB`` by companies and regulators, Young told the committee.

`Lack of Transparency`

The former FASB board member made a similar point in a June 26 letter to Senator Reed. ``We lacked the ability to overcome the lobbying efforts that effectively argued that if we made substantive changes we would hamper the credit markets and hurt business,`` Young wrote. ``Our inaction did not hamper credit markets -- it helped to destroy them.``

My Comment: "Unending lobbying" ... we`ve heard this story before, e.g. with Fannie and Freddie. This is the part of the story the now-loudly-posturing and self-righteous-sounding Washington lawmakers don`t talk about very much.

The accounting standards board, housed in a corporate office park in Norwalk, Connecticut, an hour northeast of New York City, operates in an unusual position between the public and private sectors. It was set up in 1973 as an independent rulemaking group, though the SEC gets a say in who is named to the board and can override its rules.

My Comment: so much for the "independent" thing.

Ten years ago, Wall Street was enjoying a bull market fed by a booming dot-com industry, a Fed chairman, Alan Greenspan, who trusted the market to correct its own ills, and a Congress amenable to lightening the touch of regulators.

In 1998, the imminent collapse of hedge fund Long-Term Capital Management forced the Fed to organize a bailout by Wall Street. Investment banks had loaned the fund billions and were among counterparties in more than $1 trillion in derivative contracts used to hedge investment risks.

Greenspan, Rubin

That same year Greenspan, Treasury Secretary Robert Rubin and SEC Chairman Arthur Levitt opposed an attempt by Brooksley Born, head of the Commodity Futures Trading Commission, to study regulating over-the-counter derivatives. In 2000, Congress passed a law keeping them unregulated.

Levitt said he went along with concerns by Greenspan and Rubin that Born`s action might throw derivatives contracts into ``legal uncertainty.`` He said he now regrets that he didn`t press a presidential advisory group ``to take a closer look`` at the issue. Rubin said in an interview that ``you could have had chaos`` if Born`s plan found existing derivatives contracts invalid because they weren`t traded on an exchange. Both Born and Greenspan declined to comment.

Outstanding credit-default swaps, derivative contracts used to hedge or speculate on a company`s debt, would grow to $62 trillion from $631 billion in 2001. While the swaps spread risk, as intended, they also helped spread fear. Ninety percent of the trades were concentrated in the hands of 17 banks, according to the Federal Reserve Bank of New York. That left them exposed to losses if one failed, as Lehman Brothers did in September, and contributed to the unwillingness to lend to each other that`s at the center of the recent credit squeeze.

My Comment: That number ,seventeen, is suspiciously close to the number of institutions (18) currently designated as Primary Dealers. Mere coincidence, do you think?

3 Percent Rule

FASB had issued off-balance-sheet accounting standards in June 1996 to deal with the growth in securitizations. They were replaced in 2000 by FAS 140, which required more disclosures and rules for dealing with collateral.

Companies were allowed to push an entity off their books if an outside party put up as little as 3 percent of the capital. Houston-based Enron Corp. declared bankruptcy in late 2001 when it was forced to put trusts back on its balance sheet because it hadn't met the 3 percent rule.

The Enron scandal put pressure on FASB to make it harder for companies to keep assets hidden. In January 2003, it proposed a new rule, known as FIN 46, which increased the outside-party requirement to 10 percent.

Traficanti, deputy controller of Citigroup, wrote that the proposed change would have a ``significant impact,'' forcing the lender to move the entities to the balance sheet and raise more capital.

In December 2003, FASB published FIN 46R, a revision that gave the banks more flexibility to keep off the books investment vehicles they managed for a fee.

My Comment: In the wake of Enron, you give the banks more flexibility to hide their exposurte to risky debt? Madness. But wait - it gets even worse:

In 2004, the SEC allowed the biggest securities firms -- Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman and Bear Stearns Cos. -- to set up a system giving the commission oversight of the investment banks' holding companies, rather than just their brokerage units, as had been the case.

Increased Leverage

With the change, approved in April that year, the Wall Street firms avoided having their operations in Europe regulated by the European Union. They were also able to reduce the amount of cash their broker-dealer units had to set aside as a cushion against unexpected losses by as much as 30 percent, Annette Nazareth, then head of the SEC's market-regulation staff, said in an interview. Nazareth, who later became an SEC commissioner, is now a partner at New York law firm Davis Polk & Wardwell.

That allowed the banks to increase their leverage, the ratio of borrowed funds to each dollar of equity capital held, and to invest even more heavily in subprime-related securities. Bear Stearns increased its leverage to 33.5-to-1 after the rule change from 26.4-to-1.

My Comment: But wait - it gets even worse:

The continued delays and revisions of FASB's off-balance- sheet rules let financial institutions keep the scope of their assets from public view.

In May 2007, after the subprime mortgage crisis began to unfold, the accounting board proposed abolishing QSPEs altogether. It approved the move this April.

`Time Bombs'

Under FAS 140, entities are allowed to be kept off the books only if their activities are beyond the control of the sponsor. The problem, FASB Chairman Robert Herz said in a Sept. 18 speech in New York, was that the QSPE concept was ``stretched'' by the addition of subprime loans, which require ``active management and large-scale restructuring'' by the lender.

``We now know with hindsight that some of these entities, treated as Qs for accounting purposes, were effectively ticking time bombs,'' Herz said, referring to rising subprime defaults. ``And the bombs started to explode.''

Switching metaphors, he added: ``Unfortunately, it seems that some folks used Qs like a punch bowl to get off-balance- sheet treatment while spiking the punch. That has led us to conclude that now it's time to take away the punch bowl.''

In July, FASB decided to keep the bowl on the table a little longer, postponing by a year the effective date of the changes, to Nov. 15, 2009. The decision came after major banks, a member of Congress, Miller's securities association and other trade groups complained that the board was moving too fast and that the results would be confusing for investors.

My Comment: "Hey, confusing investors is *our* job..."

[ewmayer]

http://globaleconomicanalysis.blogsp...ing-falls.html

[italics marks text from the official government report]

The decrease in real GDP in the third quarter primarily reflected negative contributions from personal consumption expenditures (PCE), residential fixed investment, and equipment and software that were largely offset by positive contributions from federal government spending, exports, private inventory investment, nonresidential structures, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

Most of the major components contributed to the downturn in real GDP growth in the third quarter. The largest contributors were a sharp downturn in PCE for nondurable goods, a smaller decrease in imports, a larger decrease in PCE for durable goods, and a deceleration in exports. Notable offsets were an upturn in inventory investment and an acceleration in federal government spending.

Final sales of computers contributed 0.06 percentage point to the third-quarter change in real GDP after contributing 0.17 percentage point to the second-quarter change. Motor vehicle output contributed 0.09 percentage point to the third-quarter change in real GDP after subtracting 1.01 percentage points from the second-quarter change.

Ridiculous Numbers

Notice how an "acceleration in federal government spending" made a positive contribution to GDP. All government spending, no matter how wasteful or unproductive, is assumed to provide a positive contribution to output.

Motor vehicles adding to GDP is absurd, as is final sales of computers. Computers are hedonically adjusted (all finished items are but computers are the worst offenders). For those not familiar with the term here is how it works. Computer are getting more powerful every year and prices are dropping as well. For example a computer today sells for $500 that would have cost $10,000 ten years ago. Even though the computer sells for $500, the government claims it sold for $10,000 (adjusted slowly over time).

This is preposterous and a huge reason why we were really in a recession long ago. The first 2% of GDP (my estimate) represents transactions that never took place at the price government claims.

Unemployment Forecast 8%

I forecast unemployment to hit 8% in 2009 about a year ago. It seems everyone is latching on to that number now. I had 6% forecast for 2008 in December of last year when the rate was 4.7% or so. Unemployment is 6.1% now. Rather than picking a new target now, let's see what happens in the remaining few months of the year. It is clear my 6% figure for 2008 was too optimistic and so 8% in 2009 is likely to be too optimistic as well. Right now I expect unemployment will hit 6.5% or higher by the end of the year, and 6.8-7.0% is not out of the question. Certainly the numbers next Friday will be miserable. Congress will soon be talking jobs programs.

2009 rates to be a miserable time to find a job. Consumer spending is going to crash.

[ewmayer]

International:

Argentina's Credit Rating Cut by S&P as Default, Political Concerns Mount: Argentina's debt ratings were cut by Standard & Poor's for the second time since August amid mounting concern the global financial crisis and a tumble in commodity export prices will lead to default.


`Panic' Strikes Hungary, Poland Borrowers as Banks Cut Dollar, Franc Loans: Imre Apostagi says the hospital upgrade he's overseeing has stalled because his employer in Budapest can't get a foreign-currency loan.


Gulf Citizens Beg for Bailouts as Stock Rout, Oil Slump Spell End for Boom: Abdullah Hajeri led a march on the Emir's palace in Kuwait this week, demanding the oil-rich nation's ruler stop stocks from plunging. Adnan Mohammed Saleh, down the Persian Gulf coast in Dubai, said he wants more government protection from the global financial crisis.


Leaden Hall Girls Tend to Tomatoes as U.K. Schools Confront Credit Famine: Growing food is on the curriculum at Leaden Hall private school for girls in southwest England, and students can thank the credit crisis.

My Comment: Learning to grow one`s own food is auseful [and very healthy] exercise irrespective of one`s level of means - the entire developed world is going to get a painful but much-needed lesson in learning to live with less in the next few years. IMO wartime-style rationaing and do-it-your-self-ishness is something every generation should have to go through at least once in their lifetimes,


U.S.:

U.S. Consumer Spending Falls as Confidence Drops; Purchasing Survey Slumps: U.S. consumer spending tumbled in September and a purchasing managers' survey showed the biggest deterioration since 1968, foreshadowing a deepening economic slump.


Motorola to cut 3,000 jobs: The communications equipment maker posts a hefty loss and postpones the spinoff of its cell phone unit.


"BrokeBuck Mountain": Money-market fund returns first $26B to investors: Reserve Primary Fund 'broke the buck' in September amid a rush of redemption calls.


U.S. Homeowners With `Underwater' Mortgages Climb to 20% as Prices Plunge: Almost 20 percent of U.S. mortgage borrowers owed more on their loans in the third quarter than their house was worth as foreclosures depressed prices and the economy weakened, according to First American CoreLogic.

In a related perspective, Barry Ritholz of The Big Picture comments on the various underwater-mortgage bailouts being proposed:

Moral Hazard of the Coming Mortgage Bailout

Herein lies the simple problem in trying to “save” so many mortgages: A huge swath of them should not be saved. Some of that is due to price, some of it is due to not wanting to reward irresponsible behavior, but the bulk of it is simply because the people living in these homes cannot reasonably afford to pay for them, even after a 20-30% workout.

There are now more than 10 million “home-owers” underwater, with their mortgages greater than the present value of their homes. Since they have little skin in the game — thanks to banks that did away with down payment requirements — there is little incentive for them to tough it out.

Not surprisingly, it is FDIC Chairman Sheila Bair who is leading the push towards a mortgage workout plan. She wants policy makers to take action to help people stay in their homes — thereby taking pressure off of the FDIC, which insures the banks.

Why? More foreclosures = more bank failures = bigger FDIC obligations.

The problem with this current rescue plan is that it is designed to “prevent the continued downward spiral of the housing market.” But that is EXACTLY what the housing market needs — overpriced homes that are not selling need to come down in price. We had a normal price increase from 1996-2001, and then a near vertical set of price gains from 2002-06. Any framework for systematically modifying loans that fails to comprehend that is doomed to failure.

Pension Time Bomb Explodes In US and Canada: The ticking time bomb of overpromised, underfunded public pension plans has finally exploded.

[from a linked article]

The nation's largest public pension fund, the California Public Employees' Retirement System, is warning local and state entities it may need a taxpayer bailout to continue paying retirees.

With stock market losses topping $50 billion since July 1st, CalPERS is on track to needing help in just two years if the nose dive continues on Wall Street.

Local government and state retirees are guaranteed a certain amount, so the money has to be there.

"What this really is, is compensation. It's part of an employee's compensation package," said Macht.

Taxpayer groups are upset that Californians have to foot the bill when many employers have moved away from pension plans.

A huge taxpayer backlash against overly generous public pension plans is brewing. Boomers with destroyed stock funds and IRAs are not going to want to have taxes increased so that public workers can get 90% of their salaries for the rest of their lives during retirement.

Vallejo California went bankrupt over benefits earlier this year. Expect to see more cities and counties take that action if the stock market continues to decline from these levels.

My Comment: The $50 billion lost by CalPERS this year would cover the entire budget shortfall for the state several times over. What a disaster.