Global Financial Crisis (Was: Subprime Meltdown)

[ewmayer]

The New York Times` Thomas Friedman weighs in on the Madoff "scandal" and finds it curious that the Street is scandalized:

The Great Unraveling: Our banking crisis has made it increasingly clear that the U.S. and China are becoming two countries, one system. But they appear to be on very different historical trajectories.

The stranger, a Western businessman, slipped into the chair next to me at an Asia Society lunch here in Hong Kong and asked me a question that I can honestly say I’ve never been asked before: “So, just how corrupt is America?”

His question was occasioned by the arrest of the Wall Street money manager Bernard Madoff on charges of running a Ponzi scheme that bilked investors out of billions of dollars, but it wasn’t only that. It’s the whole bloody mess coming out of Wall Street — the financial center that Hong Kong moneymen had always looked up to. How could it be, they wonder, that such brand names as Bear Stearns, Lehman Brothers and A.I.G. could turn out to have such feet of clay? Where, they wonder, was our Securities and Exchange Commission and the high standards that we had preached to them all these years?

One of Hong Kong’s most-respected bankers, who asked not to be identified, told me that the U.S.-owned investment company where he works made a mint in the last decade cleaning up sick Asian banks. They did so by importing the best U.S. practices, particularly the principles of “know thy customers” and strict risk controls. But now, he asked, who is there to look to for exemplary leadership?

“Previously, there was America,” he said. “American investors were supposed to know better, and now America itself is in trouble. Whom do they sell their banks to? It is hard for America to take its own medicine that it prescribed successfully for others. There is no doctor anymore. The doctor himself is sick.”

I have no sympathy for Madoff. But the fact is, his alleged Ponzi scheme was only slightly more outrageous than the “legal” scheme that Wall Street was running, fueled by cheap credit, low standards and high greed. What do you call giving a worker who makes only $14,000 a year a nothing-down and nothing-to-pay-for-two-years mortgage to buy a $750,000 home, and then bundling that mortgage with 100 others into bonds — which Moody’s or Standard & Poors rate AAA — and then selling them to banks and pension funds the world over? That is what our financial industry was doing. If that isn’t a pyramid scheme, what is?

Far from being built on best practices, this legal Ponzi scheme was built on the mortgage brokers, bond bundlers, rating agencies, bond sellers and homeowners all working on the I.B.G. principle: “I’ll be gone” when the payments come due or the mortgage has to be renegotiated.

SEC Failed to Act on `Credible, Specific' Allegations on Madoff, Cox Says: U.S. Securities and Exchange Commission Chairman Christopher Cox said the agency failed to act for almost a decade on “credible and specific allegations” of wrongdoing by Bernard Madoff, whom authorities say bilked investors of as much as $50 billion.

Dec. 17 (Bloomberg) -- Bernard Madoff’s ability to avoid scrutiny from U.S. regulators for years shows that the monitoring system is “broken and has to be fixed,” former Securities and Exchange Commission Chairman Arthur Levitt said.

Levitt, a senior adviser to Carlyle Group, said today in a Bloomberg Radio interview that the SEC must respond to allegations that it failed to act on tips of wrongdoing by Madoff that it had received since the 1990s.

“The system is obviously flawed and it’s got to be rethought in terms of how investors can be protected,” Levitt said. SEC Chairman Christopher Cox “is doing the right thing” by calling for a probe of the agency’s role, Levitt said.

Madoff was arrested Dec. 11 after telling his two sons and federal investigators that he’d been using money from new investors to pay off old ones in a Ponzi scheme. He said clients of his New York-based investment-advisory firm lost $50 billion.

Levitt said Madoff may have run a conventional business for a while and “shifted gears,” when the market turned against him. Madoff “clearly lied” to avoid registering with the SEC, which has shrunk as the financial industry has grown, Levitt said.

In 2004, the agency had 477 people in its inspection office, overseeing about 8,000 investment advisers, Levitt said. Today, 430 people regulate 11,300 advisers, along with about 16,000 mutual funds, he said.

Cox said yesterday the SEC failed to act for almost a decade on “credible and specific allegations” against Madoff. He announced an internal probe to review the “deeply troubling” revelations.

My Comment: So the SEC had been receiving "credible, specific allegations" of wrongdoing by Madoff for OVER A DECADE and failed to do a single goddamn thing about it. Our feckless, incompetent-on-so-many-levels SEC chief Chris Cox should shut his piehole, resign immediately and leave the "internal investigation" to someone who has a frickin` clue - perhaps former SEC head Levitt, for instance.

[Fusion_power]

The news is out that Morgan Stanley is paying bonuses to employees. They received $10,000,000,000.00 of bailout money. Who deserves a bonus in a company that had to be pulled out of the hole with taxpayer money?

AIG is fudging it. They aren't paying bonuses, they are paying "retention payments". In the hole $150,000,000,000.00 to the U.S. taxpayer and they still use subterfuge to do this?

Care to bet there are others doing similar hyjinks?

DarJones - who wants a bonus too..... guess it won't happen this year, even though I have turned in a spectacular performance.

[Batalov]

Originally Posted by xilman

Tip: I always buy local currency when arriving at my destination using my debit card in an ATM. It invariably gives me a better exchange rate than buying foreign currency at home.

Paul

Seconded. I thought I invented that. The only place where this trick is a bit hard is Japan, but even there, by law, they have one ATM per municipality where you can use a European/US card.

[xilman]

Originally Posted by Batalov

Seconded. I thought I invented that. The only place where this trick is a bit hard is Japan, but even there, by law, they have one ATM per municipality where you can use a European/US card.

Thanks for the advice. I'e not been to Japan yet and will bear it in mind if I should do so.

If it's only a short trip, a few days max, the airport almost always has a suitable ATM with enough local currency in it. It's usually my first stop after clearing immigration and before finding transport to my ultimate destination.


Paul

[ewmayer]

Bernanke Rescue Loans Guided by Raters That Graded Subprime Mortgages AAA: Federal Reserve Chairman Ben S. Bernanke is basing hundreds of billions in emergency lending on credit ratings from companies that gave AAA grades to toxic securities.

The Fed has purchased $308.5 billion in commercial paper and lent $631.8 billion under eight credit programs, most of which require appraisals of short-term debt and loan collateral by “major nationally recognized statistical ratings organizations.” That, in effect, means Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.

It is foolhardy to rely on the three New York-based companies, said Keith Allman, chief executive officer of Enstruct Corp., which trains investors in financial modeling and asset valuation. The major raters issued top marks to $3.2 trillion in subprime mortgage-backed securities at the root of the financial crisis.

My Comment: No wonder the Fed is resisting efforts by the media and other public interests to disclose what it1s holding in the $2 Trillion it`s added to its balance sheet this past year by buying toxic, erm, I mean "hard to value in current market conditions" debt from firms whose private markets for the paper has disappeared.

Lest you think I have a personal beef against Bernanke-Panky & Fils, there is at least one importantgrpup of people who will see some genuine benefit from the Fed`s recent slashing of benchmark rates to near-zero:

ARM Reset Crisis Avoided Due to Fed`s Rate Cuts

Note how existing mortgage rates have barely dropped in spite of a massive decline in yield on the 10-year treasury on which fixed mortgage rates are tied. I called for this disconnect 3 years ago on the basis of rising default risk. We certainly have seen that in spades.

Of far more interest to Bernanke than new mortgages, however, are the masses of people in Pay Option ARMs, interest only mortgages, and regular ARMS about to reset.

Most adjustable rate products including Pay Option ARMs are tied to either 1 year treasury rates or LIBOR. In the following chart I penciled in the current rate for LIBOR and treasuries in the January 2009 column.

Anyone in a 3-1 ARM or 5-1 ARM about to reset is about to get a huge break. ... Mortgage relief is coming to everyone about to reset and enormous mortgage relief is coming for those in 3-1 ARMs about to reset. Those in 3-1 ARMs may see a drop of as much as 4% depending on whether or not they had an initial teaser. Regardless, everyone appears poised to benefit.

...

this finally puts some light at the end of the housing tunnel, even though it is extremely premature to be looking for any kind of fast recovery. Unemployment is poised to soar in 2009 and that will offset a great deal of the benefit of falling yields.

The ARMs reset problem may go away (as long as rates stay low). However, one problem is an exit strategy from this madness, the second is those underwater still have an incentive to walk away, and a third problem is other severe problems (commercial real estate, credit card defaults, etc) are poised to get much worse. In other words this is a short term cure that delays the eventual recovery, just as happened in Japan.

Also bear in mind that given the backdrop of rising unemployment, boomer retirement concerns, and a stock market that has obliterated nearly every IRA and pension plan in the country, this economy rates to be very weak for quite some time, most likely years.

Obama names 3 financial watchdogs: President-elect picks chiefs of the SEC and Commodity Futures Trading Commission, and fills a Federal Reserve Board seat.

President-elect Obama on Thursday kept up his blistering pace of naming top officials by announcing three people he will nominate as financial regulators.

He named Mary Schapiro to head the Securities and Exchange Commission, which regulates companies with publicly traded securities. Schapiro currently is chief executive of the Financial Industry Regulatory Authority, the largest non-government regulator for securities firms that do business with the U.S. public.

Obama's announcement comes on the heels of growing criticism that the SEC failed to act on information it had that could have prevented one of the largest investment fraud cases in history.

"We're going to ensure openness, accountability and transparency in our markets," Obama said at a press conference in Chicago. "I will ensure that our regulatory agencies are led by individuals who are ready and willing to enforce the law."

Schapiro has a long track record as a financial regulator during the Reagan, Bush and Clinton administrations. She headed the Commodity Futures Trading Commission during the Clinton administration and the National Association of Securities Dealers in 2006. She also briefly served as the SEC's acting chair in 1993, and had been a commissioner there for six years before that.

Obama also tapped Gary Gensler to chair the Commodities Futures Trading Commission, which regulates the futures and options markets and ensures fair trading practices.

Gensler, a former partner at Goldman Sachs, was the Treasury's assistant secretary for financial markets during the Clinton administration.

The CFTC was blasted earlier this year by Democratic lawmakers and others for not taking a stronger hand with oil speculators and for brushing aside the theory that oil speculation unduly pushing oil prices to record highs earlier this year.

Finally, Obama named Georgetown law professor Dan Tarullo to fill a vacant seat on the Federal Reserve Board of Governors, which among other things determines monetary policy for the country and is making unprecedented moves to curtail the country's financial crisis.

Tarullo, whose specialty is international economics and banking, held several senior posts in the Clinton administration, ultimately becoming the assistant to the president for international economic policy. He served as an economic adviser during Obama's election campaign

My Comment: Schapiro seems a decent choice for SEC head, although truly it would be difficult to do worse than the rampantly incompetent current holder of the position, Chris Cox.

[ewmayer]

Originally Posted by Fusion_power

The news is out that Morgan Stanley is paying bonuses to employees. They received $10,000,000,000.00 of bailout money. Who deserves a bonus in a company that had to be pulled out of the hole with taxpayer money?

AIG is fudging it. They aren't paying bonuses, they are paying "retention payments". In the hole $150,000,000,000.00 to the U.S. taxpayer and they still use subterfuge to do this?

Care to bet there are others doing similar hyjinks?

DarJones - who wants a bonus too..... guess it won't happen this year, even though I have turned in a spectacular performance.

Today`s New York Times has an article about Wall Street`s distorted bonus practices:

On Wall Street, Bonuses, Not Profits, Were Real

“As a result of the extraordinary growth at Merrill during my tenure as C.E.O., the board saw fit to increase my compensation each year.”
— E. Stanley O’Neal, the former chief executive of Merrill Lynch, March 2008

For Dow Kim, 2006 was a very good year. While his salary at Merrill Lynch was $350,000, his total compensation was 100 times that — $35 million.

The difference between the two amounts was his bonus, a rich reward for the robust earnings made by the traders he oversaw in Merrill’s mortgage business.

Mr. Kim’s colleagues, not only at his level, but far down the ranks, also pocketed large paychecks. In all, Merrill handed out $5 billion to $6 billion in bonuses that year. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million.

But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.

Unlike the earnings, however, the bonuses have not been reversed.

As regulators and shareholders sift through the rubble of the financial crisis, questions are being asked about what role lavish bonuses played in the debacle. Scrutiny over pay is intensifying as banks like Merrill prepare to dole out bonuses even after they have had to be propped up with billions of dollars of taxpayers’ money. While bonuses are expected to be half of what they were a year ago, some bankers could still collect millions of dollars.

Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street’s pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino — and let them collect their winnings while the roulette wheel was still spinning.

“Compensation was flawed top to bottom,” said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. “The whole organization was responding to distorted incentives.”

Even Wall Streeters concede they were dazzled by the money. To earn bigger bonuses, many traders ignored or played down the risks they took until their bonuses were paid. Their bosses often turned a blind eye because it was in their interest as well.

“That’s a call that senior management or risk management should question, but of course their pay was tied to it too,” said Brian Lin, a former mortgage trader at Merrill Lynch.

The highest-ranking executives at four firms have agreed under pressure to go without their bonuses, including John A. Thain, who initially wanted a bonus this year since he joined Merrill Lynch as chief executive after its ill-fated mortgage bets were made. And four former executives at one hard-hit bank, UBS of Switzerland, recently volunteered to return some of the bonuses they were paid before the financial crisis. But few think others on Wall Street will follow that lead.

For now, most banks are looking forward rather than backward. Morgan Stanley and UBS are attaching new strings to bonuses, allowing them to pull back part of workers’ payouts if they turn out to have been based on illusory profits. Those policies, had they been in place in recent years, might have clawed back hundreds of millions of dollars of compensation paid out in 2006 to employees at all levels, including senior executives who are still at those banks.

A Bonus Bonanza

For Wall Street, much of this decade represented a new Gilded Age. Salaries were merely play money — a pittance compared to bonuses. Bonus season became an annual celebration of the riches to be had in the markets. That was especially so in the New York area, where nearly $1 out of every $4 that companies paid employees last year went to someone in the financial industry. Bankers celebrated with five-figure dinners, vied to outspend each other at charity auctions and spent their newfound fortunes on new homes, cars and art.

The bonanza redefined success for an entire generation. Graduates of top universities sought their fortunes in banking, rather than in careers like medicine, engineering or teaching. Wall Street worked its rookies hard, but it held out the promise of rich rewards. In college dorms, tales of 30-year-olds pulling down $5 million a year were legion.

While top executives received the biggest bonuses, what is striking is how many employees throughout the ranks took home large paychecks. On Wall Street, the first goal was to make “a buck” — a million dollars. More than 100 people in Merrill’s bond unit alone broke the million-dollar mark in 2006. Goldman Sachs paid more than $20 million apiece to more than 50 people that year, according to a person familiar with the matter. Goldman declined to comment.

[ewmayer]

Bush announces auto rescue: Government to loan GM and Chrysler $13.4 billion from Wall Street bailout fund so that the embattled auto firms don't run out of cash.

President Bush announced a rescue plan for General Motors and Chrysler LLC Friday morning that will make $13.4 billion in federal loans available almost immediately.

A senior administration official briefing reporters said he expects that GM (GM, Fortune 500) and Chrysler LLC will be signing the loan papers to access the cash later Friday morning.

The money will come from the $700 billion fund set aside to bailout Wall Street firms and banks in October.

With these loans, Treasury will have committed virtually all of the $350 billion of that fund that it can hand out without additional authorization from Congress. Once Congress releases the other $350 billion, the two automakers will be able to borrow an additional $4 billion.

GM will get $9.4 billion from the first allocation of federal loan money, while Chrysler would get the other $4 billion.

The loans are for three years but the money will have to be repaid in full within 30 days if the firms do not show themselves to be viable by March 31. It is expected that the companies will have to negotiate new agreements with unions and creditors in order to do so.

...

The terms of the loan are similar to those set in the auto bailout legislation that was passed by the House last week but was shot down in the Senate. Executives at GM and Chrysler must agree to limits on their compensation and eliminate perks such as corporate jets. The companies also must issue warrants, which convert into non-voting stock, to the government.

The loans do not include the concept of a so-called "car czar" to oversee the automakers, although it does say that a designee of the President would determine if the automakers are making the changes necessary for them to be considered viable.

The Bush administration official said that Treasury Secretary Henry Paulson would fill that role in the remaining days of the current administration.

My Comment: As late as last night there was still much talk of an "orderly bankruptcy" for GM and Chrysler -- that could still happen next year, especially if the UAW and the creditors continue to be balky. But ... no "car czar"? No high-and-mighty "autocrat"? Disappointing that the agreement doesn`t include a nod to Russian royalty.

In a related story, CNN/Money explores What`s Really Killing Detroit.


Chrysler shuts down all production: Close of business Friday will be the start of a monthlong closure of 30 U.S. plants. Company cites `continued lack of consumer credit.`

Chrysler is the third of the Big Three automakers to suspend operations for January. Last week, General Motors announced it was idling 30% of its North American manufacturing capacity during the first quarter of 2009 in response to deteriorating market conditions. That move will take 250,000 vehicles out of production. On Wednesday, a Ford spokeswoman confirmed for CNN that the automaker is adding a week to its normal two-week seasonal shutdown at a number of its plants.

My Comment: "Lack of consumer credit" is being treated as some kind of anomaly here - welcome to the age of "if you can`t afford to pay for it, you don`t get to drive it." (Or live in it, etc). I believe the old-fashioned colloquial term for that is "cash on the barrelhead." What a strange concept, eh? The one truly negative piece of fallout from this "cash and carry" standard, however, is credit for business, especially small business, which is also in dire straits - small business owners, I suggest you watch your credit card statements and notices like a hawk:

Credit cards gone wild: Shocking rate hikes: As credit card companies move to limit their risks, business owners face unpleasant surprises from their credit card providers.

Owen Kusolpaisit, Southhaven, Miss.
I have a very small business and most of our debt is on credit cards. We had a 0% annual percentage rate until January 2009 that would go up to 7.99% thereafter. A few months ago my check got there a day late. The credit card company, Advanta, increased my APR to 7.99%. I just received my current statement and the APR jumped to 25.39%. When I called, a supervisor said it was done for economic reasons. How can they do that? Is it illegal? Can I report them?

By Kathleen Ryan O’Connor, CNNMoney.com contributing writer
Raising your interest rate at any time, for any reason, is perfectly legal - just check the terms and conditions on your card for the proof. But if it makes you feel any better, you have plenty of company.

...

Stories abound of customers waking up to find their cards less flexible and more expensive than ever before. But where a credit squeeze on an overextended shopaholic might be a blessing in disguise, credit cards are a critical source of financing for many small business owners. As bank loans and credit lines become ever-scarcer, entrepreneurs are left with fewer and fewer options.

Experts warn that the pain won’t pass quickly. One prominent banking analyst, Meredith Whitney, predicts that pullback will wipe out a whopping $2 trillion in credit lines over the next 18 months.

Hedge fund graveyard: 693 and counting: A research group says 344 hedge funds were liquidated in the third quarter - a significant increase that represents 7% of all hedge funds.

Hedge Fund Research, a Chicago-based information company, said the number of hedge funds liquidated in the third quarter rose to 344, which is more than three times the 105 liquidations in the third quarter of 2007. It's also 77 more than the previous record of 267 liquidations in the fourth quarter of 2006.

The data also showed that 693 hedge funds were closed in the first nine months of the year versus 409 in the same period last year. That's an increase of 70% and represents nearly 7% of all hedge funds, according to HFR.

"The hedge fund industry is currently experiencing a structural consolidation that mirrors broader trends across the entire financial industry," HFR President Kenneth Heinz said in a statement.

My Comment: Translation of Mr. Heinz` spin-laden blurb: "OMFG, we are getting so absolutely destroyed here ... 2008 simply can`t end soon enough." And the hedge fund industry blowup is having some interesting ripple effects in places you might not immediately think of.


Is it all over for stocks?: After a miserable decade, you have to ask whether some of the most basic assumptions about equities are just plain wrong.

(Money Magazine) -- If you haven`t second-guessed yourself yet, maybe you just aren`t paying attention.

You always knew stocks would be volatile, but you`ve been taught that the market rewards those who stick with it long enough. So you put equities at the heart of your portfolio.

Well.... Over the past decade, which sure did feel like long enough, an S&P 500 index mutual fund has lost investors 15%. Looking to the future, it`s hard to discern much better news. The global financial system appears to be broken, and the so-called smart money is hunkered down for hard times.

One way to tell: Yields on bonds issued by anyone other than the U.S. Treasury have been soaring, which means the market is seriously spooked about companies` financial health.

"Bonds are priced to say that we`re headed for a depression - something as bad as the 1930s," observes money manager Rob Arnott of Research Affiliates in Newport Beach, Calif.

Hryvnia Jumps 11% as Ukraine's Central Bank Raises Benchmark Rate to 22%: Ukraine’s currency jumped 11 percent against the dollar after the second interest-rate increase in two days aimed at halting a plunge that the government says would cause defaults on most foreign-currency loans.

My Comment: I confess that the only reason I included the above article in today`s news roundup is that I simply like the sound of the word "Hryvnia". It sounds like the name of some exotic princess from Ukrainian mythology ... "Oh Hryvnia, lovely, dear, sweet Hryvnia, let down down your long silken tresses and allow me to clamber up them [I presume you have a very strong neck, dearest Hryvnia] to your chamber of blissfulness".

[ewmayer]

Madoff's auditor... doesn't audit?: The three-person firm that apparently certified Madoff's books has been telling a key accounting industry group for years that it doesn't conduct audits.

(Fortune) -- The three-person auditing firm that apparently certified the books of Bernard Madoff Investment Securities, the shuttered home of an alleged multibillion-dollar Ponzi scheme, is drawing new scrutiny.

Already under investigation by local prosecutors for its potential role in the scandal, the firm, Friehling & Horowitz, is now also being investigated by the American Institute of Certified Public Accountants, the prestigious body that sets U.S. auditing standards for private companies.

The problem: The auditing firm has been telling the AICPA for 15 years that it doesn`t conduct audits.

The AICPA, which has more than 350,000 individual members, monitors most firms that audit private companies. (Public-company auditors are overseen, as the name suggests, by the Public Company Accounting Oversight Board, which was created in 2003 in response to accounting scandals involving WorldCom and Enron.)

Some 33,000 firms enroll in the AICPA`s peer review program, in which experienced auditors assess each firm`s audit quality every year. Forty-four states require accountants to undergo reviews to maintain their licenses to practice.

Friehling & Horowitz is enrolled in the program but hasn`t submitted to a review since 1993, says AICPA spokesman Bill Roberts. That`s because the firm has been informing the AICPA -- every year, in writing -- for 15 years that it doesn`t perform audits.

Meanwhile, Friehling & Horowitz has reportedly done just that for Madoff. For example, the firm`s name and signature appears on the "statement of financial condition" for Madoff Securities dated Oct. 31, 2006. "The plain fact is that this group hasn`t submitted for peer review and appears to have done an audit," Roberts says. AICPA has now launched an "ethics investigation," he says.

As it happens, New York is one of only six states that does not require accounting firms to be peer-reviewed.

My Comment: Makes perfect sense, don`t it? New York, being the financial capital of the U.S. (and much of the world, though the latter is likely to change over the coming decades) has a massive glaring loophole in its oversight of the firms on whose imprimatur trust in the financial industry (which - believe it or not - once used to be something less than a laugh-out-loud source of hilarity) rests. Vegas is sounding like a much better bet all the time - the overall rate of return is of course guaranteed to be negative, but the percentages are known up-front (plenty of online sources publish typical winning % for various casino games), and at least Vegas does a halfway-decent job regulating its own casinos, since unlike New York, it appears to understand that such oversight is vital to the prosperity of its major industry.


With gas falling, trucks come back: Pickups and SUVs will outsell cars this month, according to sales trackers at Edmunds.com.

After nearly a year of flagging sales, low gas prices and fat incentives are reigniting America's taste for big vehicles.

Trucks and SUVs will outsell cars in December, according to researchers at the automotive Website Edmunds.com, something that hasn't happened since February.

Meanwhile the forecast finds that sales of hybrid vehicles are expected to be way down.

"Despite all the public discussion of fuel efficiency, SUVs and trucks are the industry's biggest sellers right now as a remarkable number of buyers seem to be compelled by three factors: great deals, low gas prices and winter weather," commented Michelle Krebs, Senior Editor of Edmunds' AutoObserver.com.

My Comment: This is what I was afraid of with respect to plunging oil demand/prices ... one more reason we really need a hefty national gasoline tax. Not that it`ll ever happen in our lifetimes, especially with the "the last thing Americans pinched by the recession need is higher gas prices" argument so easy to make. Perhaps the government can achieve the same aim [much higher average domestic fleet mileage] by using its leverage gotten via the carmaker bailout to force Detroit to go green - we can only hope.


Coming soon: Nightmare on Tech Street

(gigaom.com) -- The technology sector, already rocked by the credit crunch and slowing global economies, is facing a bleak 2009, the impact of which is going to be felt across the entire ecosystem. From PC makers to chipmakers to chip equipment makers, almost everyone is bracing for a stomach-churning ride.

“The problem is three times worse than everybody thinks,” said Terry Gou, chairman of Hon Hai Precision Industry Co., a large Taiwan-based contract manufacturer. According to The Wall Street Journal, he is looking to cut jobs in his factories, most of them in mainland China.

Now here is a man who should know the actual extent of the troubles. His company’s customers include Apple (AAPL), Nintendo and Hewlett Packard (HPQ). Its subsidiary, Foxconn, makes handsets for Motorola (MOT) and Nokia (NOK). Any slowdown in orders from his end customers affects his business. Closer to home in Silicon Valley, companies like Cisco Systems (CSCO), Hewlett-Packard (HWP) and Adobe (ADBE) are shutting down for the holidays to save money.

In other words, the entire technology ecosystem is slowing down to a crawl. Chipmakers Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. have slashed their revenue forecasts and are putting employees on unpaid leave. Last week, the Gartner group issued a report forecasting a 16.3 percent decline in semiconductor sales in 2009. Many feel that they are being optimistic, especially when consumers are holding onto their cash tighter than ever.

PCs and mobile handsets, the twin drivers of technology demand, have seen their sales slump. The impact is being felt by companies like Intel (INTC), Texas Instruments (TXN) and National Semiconductor (NSM), all having indicated that their revenues are going to decline next year. Further down the food chain, even semiconductor equipment makers are cutting jobs and running for the proverbial hills.

Never before have we witnessed such a sharp and sudden fall-off in lithography system demand, triggered by an unprecedented mix of falling end-demand for semiconductors, weak memory prices and restricted access to capital for our customers,” Eric Meurice, ASML’s president and CEO, said in a press statement. ASML, based in Veldhoven, The Netherlands, supplies equipment to Intel, among other chipmakers.

My Comment: Seeing as my company (Synopsys) specializes in software design tools for chipmakers, this does not bode well. So far we have been spared any major layoffs, but our major competitor, Cadence Design Systems, recently began layoffs of 12% of its global full-time workforce.


Fed OKs credit card crackdown: Regulators approve a number of key protections for credit card customers.

Cash-strapped consumers got some welcome news on Thursday when regulators voted to rein in controversial credit card practices. But they'll have to wait another year and a half to get relief - the new rules won't take effect until July 1, 2010.

My Comment: All the new protections are laudable and long-overdue, but as the article notes, the one glaring omission in the overhaul is "timeliness". If my credit card company can unilaterally change its billing policies and interest rates overnight, why not give them a similar amount of time to comply with the new rules as they typically give their customers? Say, 15 days. A year and a half - ridiculous.

[ewmayer]

Madoff Fund Operator Who Had $1.4 Billion Invested Found Dead in New York; Thierry Magon de La Villehuchet, who ran a fund that invested with Bernard Madoff, was found dead at his office today in an apparent suicide, according to a police officer at the scene.


Home sales, prices in deep plunge; Realtors: Sales of existing homes fall 8.6% - much worse than expected - as median prices suffer worst decline since Depression.

The number of existing homes sold during November plummeted 8.6% as prices plunged by record amounts, according to a closely watched housing industry report issued Tuesday.

The National Association of Realtors said that home sales dropped to an annualized rate of 4.49 million units. That was down from 4.98 in October and much less than the 4.93 million units projected by a consensus of industry analysts as reported by Briefing.com.

"The only region where we're seeing more sales are where bargain hunters are taking advantage of distressed sale prices," said Lawrence Yun, the Realtors' chief economist. "About 45% of transactions, nationally, were of distressed properties."

Yun blamed the financial market turmoil for the devastating report. For months, sales had hovered 4.9 million to 5.1 million.

"Today's figure reflects the stock market crash that began in October," he said.

The drop took place despite bargain prices as property values continued their decline. The median existing home sold for $181,300 in November, down 13.2% from a year ago when the median was $208,800.

Yun said that price drop was the largest the Realtors had ever recorded and probably the worst decline since the Great Depression.

Meanwhile, the glut of homes unsold expanded to 4.2 million in November. That represents 11.2 months of supply, at the current rate of sales, up from 10.2 months in October. Bloated inventories have barely budged over the past 12 months; last November there were 4.27 million existing homes on the market.

"At the risk of sounding like a broken record, November was another tough month for the housing market," said Mike Larson, a real estate analyst with Weiss Research. "It's not surprising considering what happened to credit markets this fall."

Existing home sales are now the weakest they have been since July 1997, and price drops have wiped out all the previous gains back to February 2004, Larson said.

My Comment: So, only another 20% or so to go until we`re back to something approaching pre-bubble pricing levels - that gives an idea of the magnitude of the housing-price runup of the past 6-7 years.


Frozen Ports From Long Beach to Singapore Presage Bleak Trade Into 2010; Chris Lytle, chief operating officer of the port of Long Beach, California, took in a panorama of the slumping world economy from his rooftop observation deck one day this month.

Shipping cranes stood still, truck traffic trickled and a cargo vessel sat idle, moored to a pier.

“You never see that,” Lytle said. “It’s quiet. Too quiet.”

Port traffic has slowed from North America to Europe and Asia as a recession erodes consumer demand and the credit crisis chokes off loans to export-dependent companies. International trade is set to fall by more than 2 percent next year, the most since the World Bank began measuring it in 1971. Idle ports around the globe are showing how quickly a collapse in trade can spread, undermining growth in each country it reaches.

September and October are typically Long Beach’s busiest months as U.S. retailers take deliveries for holiday sales. This year, imports fell 15.8 percent from a year earlier in September, 9.5 percent in October and 13.6 percent in November.

“Everybody expects 2009 to be a bleak year,” said Jim McKenna, chief executive officer of the Pacific Maritime Association, a San Francisco-based group representing dock employers at U.S. West Coast ports. “Now, it looks like 2010 is going to be just as bleak.”

Stockpiles

Coal is piling up at the Mozambique port of Maputo. Brazil’s exports of cars, household appliances, machinery and furniture fell in November from a year earlier. The port in Singapore, the world’s busiest for containers, posted its first month-over-month decline in seven years in November, at 1.5 percent.

Shipments to the port of Rotterdam, Europe’s largest, are likely to remain stagnant this year compared with 2007, said Jan Westerhoud, chief executive officer of Europe Container Terminals BV, the largest handler at the facility.

“The problem is that people can’t get financing, no matter what their credit situation,” said Ed Rice, president of the Coalition for Employment through Exports, which represents companies such as Boeing Co., Caterpillar Inc., United Parcel Service Inc. and BNP Paribas SA. “Banks are cancelling credit lines even for creditworthy customers.”

Shipping Rates Fall

The Baltic Dry Index, a measure of shipping costs for commodities, is down 93 percent from a record in May, a sign that traders expect export volumes to stay depressed.

Slowing trade is both a cause and an effect of the first simultaneous contraction in the world’s largest economies since World War II. Throughout this decade, trade grew by 12 percent a year to $13.6 trillion in 2007, propelling growth in nations from Germany to China and Chile. Now the evaporation of financing and collapse in demand threaten an activity that accounts for a quarter of the $54 trillion global economy.

“We are having this dramatic reversal,” said Michael Finger, a trade economist in Geneva since the early 1970s. “I’m a long time in this business, but this is unique.”

Iceland `Like Chernobyl' as Meltdown Shows How Anger Boils Into Protests; It was the week before Christmas in Reykjavik, and all through the town Eva Hauksdottir led a band of 60 whistle-blowing, pan-banging, shouting demonstrators.

“Pay your own debts,” they yelled as they visited one bank office after another in Iceland’s capital. “Don’t make the children pay.”

When she isn’t leading one of the almost daily acts of protest in this land devastated by the global financial meltdown, Hauksdottir sells good luck charms made from the claws of ptarmigans, a local bird, and voodoo dolls in the form of bankers. She says she expects to lose her home, worth less than when she bought it two years ago, after the amount she owes jumped more than 20 percent.

Unrest following the end of a five-year economic boom is overshadowing the holidays in a country of 320,000 near the Arctic Circle, where the folklore is filled with magic, trolls and elves. Expansion ended with the collapse of the U.S. subprime mortgage market. The fallout in Iceland may presage civil disruptions elsewhere, as job losses multiply and credit bills come due. Few nations can count themselves safe, says Ian Bremmer, president of the New York-based Eurasia Group, which analyzes political risk for businesses.

“As people have their expectations changed radically, you can have protests come out of nowhere,” even in developed countries, Bremmer said.

‘Maybe Axes’

Riots in Greece this month, sparked by the police shooting of a teenager, became tinged with economic dissension. A group of Kuwaiti equity traders marched on the emir’s office in October to demand the closing of the stock exchange to stem losses. Even in U.S. cities, civil disorder is “conceivable” if unemployment rises above 10 percent from November’s 6.7 percent, Bremmer says.

Hauksdottir, the owner of a Reykjavik witchcraft shop, says over a cup of thyme and juniper tea that only civil disobedience can force banks to stop collecting debts that people can’t pay.

“We’ll use our voices, and then if we have to we’ll use our hands, and maybe axes,” Hauksdottir says.

At Reykjavik’s half-built concert hall, a symbol of the good times that juts from the harbor toward the North Pole, the visitor center is closed to visitors. The principal owner, Landsbanki Islands hf, failed in October. Marketing director Thorhallur Vilhjalmsson says he’s making ends meet on severance pay.

“Iceland right now is like Chernobyl after the blast,” Vilhjalmsson says. “It looks normal, but there’s radiation.”

Kicking Down Doors

The protests may escalate as bills come due and severance pay runs out for those who lost jobs at the three biggest lenders, including Landsbanki, the second-largest, says Stefan Palsson, a historian. He once led the Campaign Against Militarism, opposing NATO bases in the 1960s.

He said he’s surprised ordinary people are backing activists once considered “hooligans.” There was public outrage three years ago when environmentalists poured yogurt over aluminum representatives to protest a new plant.

“Now you have protesters kicking down doors at police stations, and respectable elderly people saying ‘Well, they’re young and full of enthusiasm, and anyway, they’re right!’” he said.

Inflation rose to 18.1 percent this month, and the International Monetary Fund predicts that Iceland’s economy will shrink 9.6 percent next year. The Washington-based global lender of last resort put together a rescue package for the country worth as much as $5.3 billion last month.

No-Debt Ethics

The decline in the krona and surge in prices are creating a triple whammy for borrowers whose home loans are typically linked to inflation or foreign currencies. Households owed more than double their disposable income at the end of 2006, almost twice the level in the U.S., according to the IMF.

Some Icelanders say the easy money of the past decade eroded the island’s traditions. A sheep farmer in the 1934 novel, “Independent People,” by Iceland’s only Nobel laureate, Halldor Laxness, preferred freedom from debt to any material comforts. His motto was: “I don’t owe anyone a penny.”

That philosophy may return, says Birgir Asgeirsson, 63, the priest at Reykjavik’s Hallgrimskirkja Lutheran church.

“I grew up learning that you work for what you get, but kids today just get what they want,” Asgeirsson says. “Now I can hear parents say ‘No, my little boy, it’s not that easy.’”

...

In midwinter in the world’s northernmost capital the sun appears for just four hours a day, leaving long evenings for Icelanders to figure out how their country got caught up in the global boom-and-bust. Vilhjalmsson has his own version.

“The West is having this great, long cocktail party,” Vilhjalmsson says. “And then, late in the evening, in comes this cute little dwarf, Iceland. And he gets drunk.”

Chart of the Week:

This is actually a pretty good candidate for Chart of the Year, since it nicely embodies how much of the supposedly-tried-and-allegedly-true wisdom about stock market investing has gone right out the window in this historic bear market. Here is the 20-year price chart for Fidelity's flagship Magellan fund, once run by the legendary Peter Lynch, since then (and especially since the bursting of the Dotcom bubble, and most especially this year) fallen on hard times. You can see that as of this writing, the fund is back it where it was 20 YEARS AGO. (Admittedly, the raw price chart ignores dividends paid by the fund over that time, but Magellan was a classic growth fund with typically quite modest divvies). So much for "buy and hold", "you need a long-term horizon", "over time, stock indices beat all aother major asset classes", et cetera, ad nostrum nauseam:

[Xyzzy]

http://www.clickondetroit.com/video/10235271/index.html

(The news article is after the annoying ad.)

[Xyzzy]

http://www.pbs.org/wgbh/pages/frontl...s/credit/view/