Barclays Capital warns of worldwide financial storm, says US Fed’s credibility is “below zero”

“Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall “below zero”.

“We’re in a nasty environment,” said Tim Bond, the bank’s chief equity strategist. “There is an inflation shock underway. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth.”

Pensions in trouble = taxpayers in trouble

What happens when public employee pension plans lose money on the investments they rely on to pay benefits? Well, the government has to make up the shortfall or cut out the benefits. Today we see for example, New York City pension funds are losing money on their investments. The City of New York will have to make up the shortfall. With what? Tax revenues. Unfortunately, at current tax rates, those tax revenues are also falling.
This will affect every state and municipality. This will include pension plans for teachers, firefighters, police, and many more. It’s not just New York. But, for illustrative purposes, here’s the New York example: “In the nine months leading up to March 31, the city’s five pension funds lost a total of nearly $5 billion, or 4.4%, according to data from the city comptroller’s office. This is a far cry from projections published as recently as last month, when budget planners assumed the pension system would post no losses.

Banks follow the money – ready for a new “money center” in the Mideast?

Remember the famous quote attributed to infamous bank robber Willie Sutton? 
“I rob banks because that’s where the money is.”

Where’s the money these days?  Perhaps the Mideast?  It may be that the traditional money centers —  New York, London — aren’t where the money is anymore. 

Concentration of wealth – the “super rich” get even richer

One of the underlying themes of the global financial crisis is the disparity in wealth and income between most of the world’s population and a very small few.  The divide between the amount of money and assets held by the “really rich” and the rest of the world’s people has grown to a chasm compared to what it had been in, for instance, post WWII America. 

No surprise that in the United Arab Emirates, new millionaires are being created at a rapid pace.  According to the Gulf News, Dubai: “The UAE’s millionaire population surged 15.3 per cent from 68,000 in 2006 to 79,000 last year, making it one of the countries that has highest growth personal wealth, according to the latest World Wealth Report by Merrill Lynch and Capgemini.”

And, the latest world-wide figures show that the global credit crunch has so far resulted in a widening of the disparity across the world as a whole: 

“[A]n additional 600,000 people became millionaires or richer even as problems tied to the U.S. credit crisis spread in the second half of the year.  The combined wealth of the millionaires’ club meanwhile grew 9.4 percent to $40.7 trillion. Their average wealth, which didn’t include primary homes, surpassed $4 million for the first time.  The super rich — those with at least $30 million — grew by 8.8 percent in population while their accumulated wealth grew by 14.5 percent. This rarefied group controls about a third of the $40.7 trillion.  For such an elite club, 10.1 million may seem like a lot of members. But the figure represents just 0.15 percent of the world’s population of 6.7 billion. “

http://biz.yahoo.com/ap/080624/world_wealth.html?.v=1

 

The Shape of Bank Earnings To Come: U, V, or L?

The latest from Satyajit Das analyzes the question of where bank earnings will likely go from here.  It’s a thoughtful and well reasoned piece.  His conclusion:

“Glamorous banks reliant on “voodoo banking” may find it difficult to achieve the high performance of the “go-go” years.  Banks with sound traditional franchises that have avoided the worst excesses of the last 10-15 years will do well in the changed market environment. Such old fashioned banking may ironically do well in the “new” environment. Interest rates that they charge customers have increased. Bank deposits have become far more attractive than other investments. Stronger banks have also benefited from a “flight to quality”.

Will the recovery in bank stocks take the form of “V” or “U”? It may be a “L”. With the Northern Rock and Bear Stearns bailouts, central banks and governments have signaled that major banks are “too big to fail”. This is a necessary but not sufficient condition for recovery of bank earnings and stock prices. The recovery might take the form of a “L” (Kirsten ITC font) – note the small upturn at the far right of the flat bottom.”

Read the entire article:  http://www.eurointelligence.com/article.581+M51e05e0377e.0.html

 

 

Bear Stearns Indictments

One could read the media’s “take” on the indictments but it’s better to read it in the original.  Read it here and now → bearindictment

Treasury Secretary says no financial institution is “too big to fail”

Today Paulson gave a very interesting speech in which he stated that it was unclear whether the Fed had the statutory authority to rescue Bear Stearns, and urging reexamination of the scope of the Fed’s authority.  He warned that the markets should not assume that the government will intervene to backstop financial institutions.  He also rejected the “too big to fail” theory:

“Of course, the mere creation of a market stability regulator can increase moral hazard and decrease market discipline. The expectation that a regulator will intervene to protect the system must be limited to the greatest extent possible. In other words, we must limit the perception that some institutions are either too big or too interconnected to fail. If we are to do that credibly, we must address the reality that some are. “

In fact, his entire speech should be required reading.  Here it is:  paulson06192008

Iran legislation now pending in Congress

Keep track of House Resolution 362 here:  http://www.govtrack.us/congress/billtext.xpd?bill=hc110-362

Keep track of Senate Resolution 580 here:  http://www.govtrack.us/congress/bill.xpd?bill=sr110-580

 Currently, there is AIPAC-endorsed legislation pending in Congress which may authorize a naval blockade of  Iran.  The legislation demands that President Bush lead an international effort to prevent Iran from receiving exports of refined petroleum.  Members of the House and Senate have introduced resolutions (H. Con. Res. 362 and S. Res. 580) calling on the administration to focus on the urgency of the Iranian nuclear threat and to impose tougher sanctions on Tehran. The resolutions, introduced in the House by Reps. Gary Ackerman (D-NY) and Mike Pence (R-IN) and in the Senate by Sens. Evan Bayh (D-IN) and John Thune (R-SD), urge the president to sanction Iran’s Central Bank and other international banks and energy companies investing in the country. They also demand that the United States lead an international effort to increase pressure on Iran by curtailing Iran’s ability to import refined petroleum products.

Read AIPAC’s summary of House bill here:  aipachousebillsummary0608

Read AIPAC’s summary of Senate bill here:  aipacbillsummaryiransenate

US Govt Officials, Senators got “special” deals on Countrywide loans

Too bad the rest of us don’t qualify.  Countrywide gave the Chairman of the Senate Banking Committee a special mortgage with, among other things, no points and no fees.   These high profile government officials just happened to be on the “FOA” list at Countrywide, i.e., Friends of Angelo (Mozillo), Countrywide CEO.  Was this corruption?  The Justice Department should open an investigation pronto and prosecute anyone who broke laws.  The problem may be that pesky FOA list – are there sensitive DOJ names on it? 

Here’s what we know – so far – about the favors Dodd took from Countrywide.  The tally:

–Dodd borrowed $506,000 to refinance his Washington townhouse,;

– Dodd borrowed $275,042 to refinance a home in East Haddam, Connecticut;

– Countrywide waived three-eighths of a point, or about $2,000, on the Washington DC loan;

– Countrywide waived one-fourth of a point, about $700, on the CT loan;

–Countrywide gave Dodd a FOA interest rate on the Washington DC loan of 4.25%, which translates to a $58,000 break to Dodd;

– Countrywide gave Dodd a nother FOA interest rate on the CT loan of 4.5% which translates to a $17,000 break to Dodd;

– Countrywide gave Dodd’s campaign at least $21,000 to Dodd’s campaigns.

The story as broken by Portfolio:

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

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

Other participants in the V.I.P. program included former Secretary of Housing and Urban Development Alphonso Jackson, former Secretary of Health and Human Services Donna Shalala, and former U.N. ambassador and assistant Secretary of State Richard Holbrooke. Jackson was deputy H.U.D. secretary in the Bush administration when he received the loans in 2003. ”   http://www.portfolio.com/news-markets/top-5/2008/06/12/Countrywide-Loan-Scandal

Local snapshot: Bankruptcy filings up 77% Phoenix AZ

A weak job market, housing woes and other financial stresses took a toll last month, as 999 Valley residents and firms filed for bankruptcy – a 77 percent jump from 563 in May 2007.

Bankruptcy filings:  The latest bankruptcy-filing statistics for metropolitan Phoenix and Arizona:

Metro Phoenix
May 2008: 999
May 2007: 563
Year to date 2008: 4,593
Year to date 2007: 2,528

Arizona
May 2008: 1,419
May 2007: 853
Year to date 2008: 6,426
Year to date 2007: 3,724

Source: U.S. Bankruptcy Court, Arizona district

A picture can be worth a thousand words

These are important.

Worried about gas prices? Here’s something new to worry about: railroads

Unlike much of Europe, the U.S. has not maintained let alone upgraded its rail system in recent decades.  Those in the industry believe we will face a supply chain calamity as a result. 

“The nation’s 140,000-mile network of rails devoted to carrying everything from cars to grain by freight is already groaning under the strain of congestion, with trains forced to stand aside for hours because of one-track rail lines.  And it’s probably going to get worse, according to an analysis of government and industry projections by the Associated Press and interviews with experts on rail freight. A new U.S. Chamber of Commerce report warns demand for freight trains is expected to double in the next 25 years.  The damage to the U.S. economy could climb to billions of dollars. Higher shipping costs would raise prices for everything from lumber to grain. One analyst said the rail crunch could add thousands of dollars to the price of a car.

“It’s not rocket science to see we have a calamity coming down the road,” said Paul Bingham, a transportation analyst at research firm Global Insight.”  http://www.columbusdispatch.com/live/content/business/stories/2008/06/11/Rail_Congestion.ART_ART_06-11-08_C8_JKAF5Q4.html?sid=101

 

Fed drained week ending 6/6/2008

The figures from Lee Adler:  “The Fed today pulled $8 billion out of the system with a weekend repo of $3.25 billion against expirations of $11.25 billion, bringing the 5 day net drain to $12.35 billion, including the adjustments for reductions in the PDCF and Discount Window borrowings.”

wallstreetexaminer.com 

Mike Morgan says FL on the edge of a depression

One of the most astute commentators on the economy in Florida and real estate particularly is Mike Morgan. His latest piece is fascinating but makes for a none so cheerful read. He thinks as goes FL goes the rest of the U.S. Is Florida a crystal ball we should all be looking into?

Excerpt: “I was going to call this “Banks March Us Into Depression,” or maybe more fitting is . . . “Complete Collapse of US Banking System.” Folks, that is what we are looking at. I don’t see any way around it. What we’re seeing here in Florida, is your crystal ball. And what happens here, is coming to a town near you . . . soon. This past week I didn’t write anything, because what I am seeing unravel is disturbing to the point I had to question what I was seeing and hearing. So I decided to take as much time as I needed to digest it all, and then put something together for you. So here goes . . .

I could prepare volumes of spread sheets with Bernankesque numbers. I could talk about commodity prices and oil and third world politics and a dozen other metrics that all lead to the same conclusion. But let me give you a ground zero look. That’s what I do best. I will leave the manipulation of the numbers to the folks on Wall Street that do it best. The same folks that have created the precipice they will soon push us off.

I spend a great deal of time dealing with Asset Managers hired by banks stuck with REOs. So as not to re-hash the events leading to the housing crisis, I will not discuss the free-money policies of the past, and I will not discuss the absolute lack of accountability in making the bad loans of the past. Let’s just deal with how the banks are attempting to recover.

Unfortunately, banks are not making a realistic effort to address the crisis. That may be because they cannot. As the banks and builders have announced write down after write down, my mantra has been . . . and continues to be . . . NOT ENOUGH – NOT ENOUGH – NOT ENOUGH. I still believe that. The builders and the banks have underestimated the magnitude of the problem, and they continue to do so. Analysts continue to look at the rear-view mirror and attempt to manipulate numbers based misguided historical assumptions.” Full article floridacrystalball

Federal Reserve’s Richmond President speaks out on moral hazard

A very important speech today by Jeffrey Lacker, President of the Federal Reserve Bank of Richmond. Highlights include his views on the moral hazard created by central bank bailing out financial institutions:
“People often think of the moral hazard problem associated with a financial safety net as a “due diligence” problem. That is, investors in protected securities or lenders to protected institutions feel less of a need to assess and monitor the creditworthiness of their counterparties. This is a valid concern, but I think it construes moral hazard too narrowly in this setting. My discussion of the choice of leverage points to broader implications of central bank lending for the contractual structure of financial arrangements, not just on the monitoring of investment portfolios. In particular, the expectation of safety net support can weaken the incentive of counterparties to build provisions in to their financial contracts that reduce their susceptibility to (non-fundamental) runs. More broadly, an intermediary with access to the financial safety net has less incentive to manage their liquidity in a way that suitably minimizes the possibility of disorderly resolution of solvency problems.

Recent work by one of our Richmond Fed economists makes this point very clearly, using the standard model of banking theory. He and his New York Fed coauthor consider a setting in which if there is certainty that no government (or central bank) assistance will be forthcoming, then the banking contracts developed will include provisions that allow for suspensions of payment and these will prevent non-fundamental runs from occurring. On the other hand, if such central bank assistance is possible and a non-fundamental run actually does start, the government will choose to intervene in order to alleviate the ex post inefficiency associated with a run. But, knowing that this intervention is forthcoming, banks do not self-protect, and thus leave themselves more susceptible to runs. So peoples’ expectations regarding central bank policy choices in times of stress can affect the very robustness of the system.

This strikes me as a deeper form of moral hazard than what people usually have in mind. In times of financial crisis, the understandable central bank imperative is to alleviate the stress. But the expectations such actions engender could very well make future crises more likely. The classic time consistency problem is as relevant to central bank credit policy as it is to monetary policy.”
Entire speech: http://www.richmondfed.org/news_and_speeches/presidents_speeches/index.cfm/id=107

Nouriel Roubini: We’re in the eye of the storm

“The complacency that took hold of financial markets (equity and partly credit) – after the bailout of the Bear Stearns’ creditor and the extension of the lender of last resort support of the Fed to systemically important broker dealers (those that are primary dealers) – is rapidly fading away as financial markets and financial institutions are again under severe stress. Let us detail how.”

<snip>

“A contracting economy, falling employment for months now, the worst US housing recession since the Great Depression, collapsing home values, millions of households underwater with an incentive to walk away, a shopped out and saving-less and debt burdened US consumer buffeted by falling home prices, falling HEW, falling stock prices, rising debt servicing ratios, oil at $130 a barrel and gasoline at $4 a gallon, collapsing consumer confidence and falling employment are taking the toll on the economy, on financial markets, on banks, on the shadow financial system and on money markets and credit markets. We were in the eye of the storm rather than past the storm; and the recent events and developments suggest that the worst is ahead of us, for the economy, for equity markets, for credit markets and for money markets.”   http://www.rgemonitor.com/blog/roubini/252731/

Bang?

Banking crisis – money IVs

No, we’re not out of the woods.  B&B in  the UK and now Lehman on Wall Street are showing that when the tide goes out, we see who’s swimming naked.  Simply put, it’s not a good sign when investment banks and banks have to use credit to survive.  As observed so well today, what goes up must come down harder:

“Lehman is in serious trouble on Wall Street. But that’s nothing compared to Bradford & Bingley in the UK, which may be wiped out in a matter of days. As you can see below, they were very close a few days ago. A bank run has been avoided so far because of an alleged government guarantee for every first £35.000 in deposits. What that is truly worth remains to be seen if bank failures come fast and furious in the UK.

That scenario is not that far out in left field; most large UK banks are caught up in rights issues. That over-supply means that to get any new capital, they’ll have to sell themselves dirt cheap. Which in turn will provoke enormous anger among shareholders. It could happen very soon. But yes, it’s still possible that Gordon Brown sells the future of his people to save the banking system.

Not that Lehman is looking good, mind you, they’re going “money intravenous” for the third time in a few months, and they lost over 50% of their values at the same time. If that trend doesn’t stop, there is no way out of failure or a fire-sale. And following tight on the Lehman heels, Wachovia is lined up for the emergency room, and perhaps the last rites. Or, you guessed it, a fire-sale.

People are often asking for “the” moment, and “the” writing on the wall. How about this: “Sales of [US] commercial properties were down 71 per cent in the first quarter compared with a year earlier.[..] Commercial property prices in the US in February saw their sharpest decline since records began nearly 15 years ago.”

http://theautomaticearth.blogspot.com/2008/06/debt-rattle-june-3-2008-what-goes-up.html