Super-Senior Tranches of CDOs are Worth Much Less than 22 Cents on the Dollar: Another Ponzi Scheme of "Selling" Toxic Garbage with More Leverage
Nouriel Roubini | Jul 29, 2008 Merrill Lynch decision to "sell" a good chunk of its remaining CDOs at 22 cents to the dollar has been widely praised as the firm finally recognizing the full extent of its losses on these toxic instruments. This batch of $30.6 billion of CDOs was already marked down to $11.1 billion. Now with the "sale" of it to Lone Star at a price of 6.7 billion Merrill Lynch is taking another $4.4 billion writedown and "selling" it at 22% of the original face value.
But is this a market-based "sale"? No way as calling this transaction a "sale" is a joke.
Full Version: Financial Turmoil
Common Ground Common Sense > National & International News > Op-Ed Articles from the Mainstream Media
Pages: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28
Global Recession Watch: Recoupling rather than Decoupling
Nouriel Roubini | Jul 30, 2008 As already analyzed and discussed in detail in this blog there is now fresh evidence that at least a dozen major economies and some emerging markets are at risk of a recessionary hard landing. The list includes:
the U.S., the U.K., Spain, Ireland, Italy, Portugal, Japan, Canada, New Zealand, Latvia, Estonia and a few other central-south European countries.
Nouriel Roubini | Jul 30, 2008 As already analyzed and discussed in detail in this blog there is now fresh evidence that at least a dozen major economies and some emerging markets are at risk of a recessionary hard landing. The list includes:
the U.S., the U.K., Spain, Ireland, Italy, Portugal, Japan, Canada, New Zealand, Latvia, Estonia and a few other central-south European countries.
Mass. regulators accuse Merrill Lynch of fraud
Mass. regulators accuse Merrill Lynch of fraud
Thursday July 31, 12:40 pm ET
By Denise Lavoie, Associated Press Writer
Mass. regulators file fraud complaint against Merrill Lynch over auction-rate securities BOSTON (AP) -- Massachusetts security regulators accused Merrill Lynch of fraud Thursday for allegedly promoting the sale of auction-rate securities when they knew the investments were becoming increasingly unstable.
ADVERTISEMENT
The administrative complaint filed by Secretary of State William Galvin claims Merrill Lynch, Pierce, Fenner & Smith -- the main subsidiary of Merrill Lynch & Co. -- aggressively sold the securities while downplaying the risks.
Auction-rate securities have their interest rates set at periodic auctions, depending on the submitted bids. The investments were once considered safe, but the market collapsed in February amid turmoil in the credit markets.
The market's failure left many investors with their cash frozen as buyers dried up.
New York-based Merrill Lynch denied it defrauded investors.
"We are disappointed that Massachusetts filed this action because it ignores the only reason our advisers sold auction rate securities: they believed they were good investments for clients willing to trade some liquidity for higher return," the company said in its statement.
"The inarguable fact is the number of auctions that had failed in nearly two decades of (auction-rate securities) sales was small. In 2007 there were no failed auctions of securities sold to retail clients and, in fact, none to these clients until late January 2008."
But Galvin claims in the civil complaint that Merrill Lynch knew several months earlier "that auction markets were not functioning properly and were, in fact, in significant danger of collapsing." He said the company continued to aggressively promote the securities as safe.
The complaint cites a personal e-mail written by one Merrill Lynch executive on Nov. 19. "Market is collapsing. No more $2k dinners at CRU," said the e-mail, referencing a Manhattan restaurant.
The complaint also alleges that Merrill Lynch "co-opted" its research department by allowing its sales and trading managers to push for written research to be published "endorsing the safety and high quality" of auction-rate securities.
Merrill Lynch also denied that allegation.
"Our research reflected the honest belief that ARS offered higher returns in exchange for less liquidity and noted that market changes had begun to occur," the company said.
Galvin said the complaint seeks an order for Merrill Lynch to make restitution to investors and pay an administrative fine.
"Our principal concern is to make people whole, particularly individuals and small businesses who have been completely upended by this," Galvin said.
"We want Merrill Lynch to undo the damage they did by selling these things knowingly to people, telling them they had liquidity ... then leaving them stranded when they knew these auction markets were in trouble."
The complaint will be heard by a hearings officer within the Securities Division of Galvin's office. Merrill Lynch can appeal any finding in court.
It is the second action brought by the Securities Division since the market collapsed. Last month, a similar complaint was brought against UBS Financial Services.
Mass. regulators accuse Merrill Lynch of fraud
Thursday July 31, 12:40 pm ET
By Denise Lavoie, Associated Press Writer
Mass. regulators file fraud complaint against Merrill Lynch over auction-rate securities BOSTON (AP) -- Massachusetts security regulators accused Merrill Lynch of fraud Thursday for allegedly promoting the sale of auction-rate securities when they knew the investments were becoming increasingly unstable.
ADVERTISEMENT
The administrative complaint filed by Secretary of State William Galvin claims Merrill Lynch, Pierce, Fenner & Smith -- the main subsidiary of Merrill Lynch & Co. -- aggressively sold the securities while downplaying the risks.
Auction-rate securities have their interest rates set at periodic auctions, depending on the submitted bids. The investments were once considered safe, but the market collapsed in February amid turmoil in the credit markets.
The market's failure left many investors with their cash frozen as buyers dried up.
New York-based Merrill Lynch denied it defrauded investors.
"We are disappointed that Massachusetts filed this action because it ignores the only reason our advisers sold auction rate securities: they believed they were good investments for clients willing to trade some liquidity for higher return," the company said in its statement.
"The inarguable fact is the number of auctions that had failed in nearly two decades of (auction-rate securities) sales was small. In 2007 there were no failed auctions of securities sold to retail clients and, in fact, none to these clients until late January 2008."
But Galvin claims in the civil complaint that Merrill Lynch knew several months earlier "that auction markets were not functioning properly and were, in fact, in significant danger of collapsing." He said the company continued to aggressively promote the securities as safe.
The complaint cites a personal e-mail written by one Merrill Lynch executive on Nov. 19. "Market is collapsing. No more $2k dinners at CRU," said the e-mail, referencing a Manhattan restaurant.
The complaint also alleges that Merrill Lynch "co-opted" its research department by allowing its sales and trading managers to push for written research to be published "endorsing the safety and high quality" of auction-rate securities.
Merrill Lynch also denied that allegation.
"Our research reflected the honest belief that ARS offered higher returns in exchange for less liquidity and noted that market changes had begun to occur," the company said.
Galvin said the complaint seeks an order for Merrill Lynch to make restitution to investors and pay an administrative fine.
"Our principal concern is to make people whole, particularly individuals and small businesses who have been completely upended by this," Galvin said.
"We want Merrill Lynch to undo the damage they did by selling these things knowingly to people, telling them they had liquidity ... then leaving them stranded when they knew these auction markets were in trouble."
The complaint will be heard by a hearings officer within the Securities Division of Galvin's office. Merrill Lynch can appeal any finding in court.
It is the second action brought by the Securities Division since the market collapsed. Last month, a similar complaint was brought against UBS Financial Services.
MERRILL WOES COULD SPREAD
Writedowns could total $1-trillion
Janet Whitman, Financial Post Published: Wednesday, July 30, 2008
NEW YORK - Merrill Lynch & Co.'s stunning fire sale of US$31-billion worth of risky home-loan assets for US22¢ on the dollar could burn other big banks by forcing them to take similar writedowns.
Beleaguered financial giants in the United States and Europe already have written off more than US$400-billion over the past year in soured bets tied to the mortgage market.
Some market observers believe the write-offs could top US$1-trillion as home prices continue to tumble and foreclosures escalate across the United States.
Sovereign-wealth funds from Asia and the Middle East and private-equity firms swooped in with capital infusions for many big banks during the winter when it appeared the worst of the housing meltdown was behind the market. But with many of those bets now under water, such investors might be reluctant to pour new capital in given the prospect of further troubles with so-called collateralized debt securities, or CDOs, which include bundles and bundles of now near-worthless home loans that were sold off to investors around the globe.
"It's impossible to get a handle on the value of these CDOs," Charles Geisst, a professor of finance at Manhattan College and author of several books on financial market crises, said. "It would seem that sources of new capital are going to rapidly dry up for the banks if the write-offs don't stop. The liquidity crisis is hitting at all levels -- and this could be the next one."
Mr. Geisst said it could take another couple of years before the banks have made enough writedowns.
"It's amazing when you think about the number of people pumping their chests and saying the worst of this is over way back in March and April," he added.
To help offset it's big write-off, Merrill raised US$8.55-billion yesterday by selling new shares for US$22.50 each --a 60% discount to where it's stock was trading at the beginning of the year.
After the ouster of Stan O'Neal over the bank's enormous exposure to the faltering mortgage market, Merrill's newly installed chief executive John Thain announced huge writedowns. Over the past several months, he repeatedly assured investors the bank's troubles were behind it. Then he shocked the market late on Monday by announcing Merrill would sell a huge portfolio of mortgage-related assets for US$7-billion --just months after saying the assets were worth US$31-billion.
The massive markdown could put pressure on CDO prices across the board, giving rival banks less incentive to hang on to impaired assets in hopes prices will recover.
"We see this as a part of the cleansing process," said Kenneth Worthington, an analyst with JPMorgan.
Merrill is believed to be among the banks with the greatest exposure to such securities.
Temasek Holdings Pte., the Singapore-owned sovereign-wealth fund that became Merrill's biggest investor when it acquired a US$5-billion stake in December, was savvy enough to secure some price protection against such troubles.
Merrill had promised that if it sold stock at a lower price within 12 months, the bank would compensate Temasek for the difference. The difference, which Temasek has agreed to plow back into Merrill, was US$2.5-billion.
"One of the reasons that large investment banks have gone to sovereign-wealth funds is because they are classic, long-term, buy-and-hold investors," said Douglas Rediker, a sovereign-fund expert at the New America Foundation, a research and advocacy organization. "That means they don't get spooked by short-term market volatility."
Still, some observers expect sovereign-wealth funds will be a lot more circumspect with further investments in the wake of Merrill's surprise write down.
---------
(See hardcopy for Photo Description)
JB Reed / Bloomberg News
HOW MERRIL'S PROBLEMS ADDED UP:
ANATOMY OF A FIRE SALE
US$30.6B
Value of collateralized debt obligations sold by Merrill Lynch.
US$6.7B
Amount for which Merrill Lynch sold CDOs, which worked out to US22¢ on the dollar.
US$8.5B
Amount Merrill Lynch raised from stock sale.
US$900M
Latest amount sovereign wealth fund Temasek Holdings invested in Merrill Lynch.
US$51.8B
Merrill Lynch's 12-month total subprime losses including yesterday's US$5.7B writedown.
US$472B
Global total of subprime losses for the world's 100 largest financial institutions since the subprime crisis began.
Writedowns could total $1-trillion
Janet Whitman, Financial Post Published: Wednesday, July 30, 2008
NEW YORK - Merrill Lynch & Co.'s stunning fire sale of US$31-billion worth of risky home-loan assets for US22¢ on the dollar could burn other big banks by forcing them to take similar writedowns.
Beleaguered financial giants in the United States and Europe already have written off more than US$400-billion over the past year in soured bets tied to the mortgage market.
Some market observers believe the write-offs could top US$1-trillion as home prices continue to tumble and foreclosures escalate across the United States.
Sovereign-wealth funds from Asia and the Middle East and private-equity firms swooped in with capital infusions for many big banks during the winter when it appeared the worst of the housing meltdown was behind the market. But with many of those bets now under water, such investors might be reluctant to pour new capital in given the prospect of further troubles with so-called collateralized debt securities, or CDOs, which include bundles and bundles of now near-worthless home loans that were sold off to investors around the globe.
"It's impossible to get a handle on the value of these CDOs," Charles Geisst, a professor of finance at Manhattan College and author of several books on financial market crises, said. "It would seem that sources of new capital are going to rapidly dry up for the banks if the write-offs don't stop. The liquidity crisis is hitting at all levels -- and this could be the next one."
Mr. Geisst said it could take another couple of years before the banks have made enough writedowns.
"It's amazing when you think about the number of people pumping their chests and saying the worst of this is over way back in March and April," he added.
To help offset it's big write-off, Merrill raised US$8.55-billion yesterday by selling new shares for US$22.50 each --a 60% discount to where it's stock was trading at the beginning of the year.
After the ouster of Stan O'Neal over the bank's enormous exposure to the faltering mortgage market, Merrill's newly installed chief executive John Thain announced huge writedowns. Over the past several months, he repeatedly assured investors the bank's troubles were behind it. Then he shocked the market late on Monday by announcing Merrill would sell a huge portfolio of mortgage-related assets for US$7-billion --just months after saying the assets were worth US$31-billion.
The massive markdown could put pressure on CDO prices across the board, giving rival banks less incentive to hang on to impaired assets in hopes prices will recover.
"We see this as a part of the cleansing process," said Kenneth Worthington, an analyst with JPMorgan.
Merrill is believed to be among the banks with the greatest exposure to such securities.
Temasek Holdings Pte., the Singapore-owned sovereign-wealth fund that became Merrill's biggest investor when it acquired a US$5-billion stake in December, was savvy enough to secure some price protection against such troubles.
Merrill had promised that if it sold stock at a lower price within 12 months, the bank would compensate Temasek for the difference. The difference, which Temasek has agreed to plow back into Merrill, was US$2.5-billion.
"One of the reasons that large investment banks have gone to sovereign-wealth funds is because they are classic, long-term, buy-and-hold investors," said Douglas Rediker, a sovereign-fund expert at the New America Foundation, a research and advocacy organization. "That means they don't get spooked by short-term market volatility."
Still, some observers expect sovereign-wealth funds will be a lot more circumspect with further investments in the wake of Merrill's surprise write down.
---------
(See hardcopy for Photo Description)
JB Reed / Bloomberg News
HOW MERRIL'S PROBLEMS ADDED UP:
ANATOMY OF A FIRE SALE
US$30.6B
Value of collateralized debt obligations sold by Merrill Lynch.
US$6.7B
Amount for which Merrill Lynch sold CDOs, which worked out to US22¢ on the dollar.
US$8.5B
Amount Merrill Lynch raised from stock sale.
US$900M
Latest amount sovereign wealth fund Temasek Holdings invested in Merrill Lynch.
US$51.8B
Merrill Lynch's 12-month total subprime losses including yesterday's US$5.7B writedown.
US$472B
Global total of subprime losses for the world's 100 largest financial institutions since the subprime crisis began.
MERRILL WOES COULD SPREAD
Writedowns could total $1-trillion
Janet Whitman, Financial Post Published: Wednesday, July 30, 2008
NEW YORK - Merrill Lynch & Co.'s stunning fire sale of US$31-billion worth of risky home-loan assets for US22¢ on the dollar could burn other big banks by forcing them to take similar writedowns.
Beleaguered financial giants in the United States and Europe already have written off more than US$400-billion over the past year in soured bets tied to the mortgage market.
Some market observers believe the write-offs could top US$1-trillion as home prices continue to tumble and foreclosures escalate across the United States.
Sovereign-wealth funds from Asia and the Middle East and private-equity firms swooped in with capital infusions for many big banks during the winter when it appeared the worst of the housing meltdown was behind the market. But with many of those bets now under water, such investors might be reluctant to pour new capital in given the prospect of further troubles with so-called collateralized debt securities, or CDOs, which include bundles and bundles of now near-worthless home loans that were sold off to investors around the globe.
"It's impossible to get a handle on the value of these CDOs," Charles Geisst, a professor of finance at Manhattan College and author of several books on financial market crises, said. "It would seem that sources of new capital are going to rapidly dry up for the banks if the write-offs don't stop. The liquidity crisis is hitting at all levels -- and this could be the next one."
Mr. Geisst said it could take another couple of years before the banks have made enough writedowns.
"It's amazing when you think about the number of people pumping their chests and saying the worst of this is over way back in March and April," he added.
To help offset it's big write-off, Merrill raised US$8.55-billion yesterday by selling new shares for US$22.50 each --a 60% discount to where it's stock was trading at the beginning of the year.
After the ouster of Stan O'Neal over the bank's enormous exposure to the faltering mortgage market, Merrill's newly installed chief executive John Thain announced huge writedowns. Over the past several months, he repeatedly assured investors the bank's troubles were behind it. Then he shocked the market late on Monday by announcing Merrill would sell a huge portfolio of mortgage-related assets for US$7-billion --just months after saying the assets were worth US$31-billion.
The massive markdown could put pressure on CDO prices across the board, giving rival banks less incentive to hang on to impaired assets in hopes prices will recover.
"We see this as a part of the cleansing process," said Kenneth Worthington, an analyst with JPMorgan.
Merrill is believed to be among the banks with the greatest exposure to such securities.
Temasek Holdings Pte., the Singapore-owned sovereign-wealth fund that became Merrill's biggest investor when it acquired a US$5-billion stake in December, was savvy enough to secure some price protection against such troubles.
Merrill had promised that if it sold stock at a lower price within 12 months, the bank would compensate Temasek for the difference. The difference, which Temasek has agreed to plow back into Merrill, was US$2.5-billion.
"One of the reasons that large investment banks have gone to sovereign-wealth funds is because they are classic, long-term, buy-and-hold investors," said Douglas Rediker, a sovereign-fund expert at the New America Foundation, a research and advocacy organization. "That means they don't get spooked by short-term market volatility."
Still, some observers expect sovereign-wealth funds will be a lot more circumspect with further investments in the wake of Merrill's surprise write down.
---------
(See hardcopy for Photo Description)
JB Reed / Bloomberg News
HOW MERRIL'S PROBLEMS ADDED UP:
ANATOMY OF A FIRE SALE
US$30.6B
Value of collateralized debt obligations sold by Merrill Lynch.
US$6.7B
Amount for which Merrill Lynch sold CDOs, which worked out to US22¢ on the dollar.
US$8.5B
Amount Merrill Lynch raised from stock sale.
US$900M
Latest amount sovereign wealth fund Temasek Holdings invested in Merrill Lynch.
US$51.8B
Merrill Lynch's 12-month total subprime losses including yesterday's US$5.7B writedown.
US$472B
Global total of subprime losses for the world's 100 largest financial institutions since the subprime crisis began.
Writedowns could total $1-trillion
Janet Whitman, Financial Post Published: Wednesday, July 30, 2008
NEW YORK - Merrill Lynch & Co.'s stunning fire sale of US$31-billion worth of risky home-loan assets for US22¢ on the dollar could burn other big banks by forcing them to take similar writedowns.
Beleaguered financial giants in the United States and Europe already have written off more than US$400-billion over the past year in soured bets tied to the mortgage market.
Some market observers believe the write-offs could top US$1-trillion as home prices continue to tumble and foreclosures escalate across the United States.
Sovereign-wealth funds from Asia and the Middle East and private-equity firms swooped in with capital infusions for many big banks during the winter when it appeared the worst of the housing meltdown was behind the market. But with many of those bets now under water, such investors might be reluctant to pour new capital in given the prospect of further troubles with so-called collateralized debt securities, or CDOs, which include bundles and bundles of now near-worthless home loans that were sold off to investors around the globe.
"It's impossible to get a handle on the value of these CDOs," Charles Geisst, a professor of finance at Manhattan College and author of several books on financial market crises, said. "It would seem that sources of new capital are going to rapidly dry up for the banks if the write-offs don't stop. The liquidity crisis is hitting at all levels -- and this could be the next one."
Mr. Geisst said it could take another couple of years before the banks have made enough writedowns.
"It's amazing when you think about the number of people pumping their chests and saying the worst of this is over way back in March and April," he added.
To help offset it's big write-off, Merrill raised US$8.55-billion yesterday by selling new shares for US$22.50 each --a 60% discount to where it's stock was trading at the beginning of the year.
After the ouster of Stan O'Neal over the bank's enormous exposure to the faltering mortgage market, Merrill's newly installed chief executive John Thain announced huge writedowns. Over the past several months, he repeatedly assured investors the bank's troubles were behind it. Then he shocked the market late on Monday by announcing Merrill would sell a huge portfolio of mortgage-related assets for US$7-billion --just months after saying the assets were worth US$31-billion.
The massive markdown could put pressure on CDO prices across the board, giving rival banks less incentive to hang on to impaired assets in hopes prices will recover.
"We see this as a part of the cleansing process," said Kenneth Worthington, an analyst with JPMorgan.
Merrill is believed to be among the banks with the greatest exposure to such securities.
Temasek Holdings Pte., the Singapore-owned sovereign-wealth fund that became Merrill's biggest investor when it acquired a US$5-billion stake in December, was savvy enough to secure some price protection against such troubles.
Merrill had promised that if it sold stock at a lower price within 12 months, the bank would compensate Temasek for the difference. The difference, which Temasek has agreed to plow back into Merrill, was US$2.5-billion.
"One of the reasons that large investment banks have gone to sovereign-wealth funds is because they are classic, long-term, buy-and-hold investors," said Douglas Rediker, a sovereign-fund expert at the New America Foundation, a research and advocacy organization. "That means they don't get spooked by short-term market volatility."
Still, some observers expect sovereign-wealth funds will be a lot more circumspect with further investments in the wake of Merrill's surprise write down.
---------
(See hardcopy for Photo Description)
JB Reed / Bloomberg News
HOW MERRIL'S PROBLEMS ADDED UP:
ANATOMY OF A FIRE SALE
US$30.6B
Value of collateralized debt obligations sold by Merrill Lynch.
US$6.7B
Amount for which Merrill Lynch sold CDOs, which worked out to US22¢ on the dollar.
US$8.5B
Amount Merrill Lynch raised from stock sale.
US$900M
Latest amount sovereign wealth fund Temasek Holdings invested in Merrill Lynch.
US$51.8B
Merrill Lynch's 12-month total subprime losses including yesterday's US$5.7B writedown.
US$472B
Global total of subprime losses for the world's 100 largest financial institutions since the subprime crisis began.
Investment Outlook Bill Gross | August 2008 
Mooooooo!
http://www.pimco.com/LeftNav/Featured+Mark...August+2008.htm
Mooooooo!http://www.pimco.com/LeftNav/Featured+Mark...August+2008.htm
Study: China Trade Deficit Cost U.S. Millions Of Jobs: China's soaring trade deficit with the U.S. cost Americans 2.3 million jobs and $19.4 billion in lost wages between 2001 and 2007, according to an Economic Policy Institute study released Wednesday.
U.S. inflation to be 6 % by 2009: CIBC: He said the U.S. Federal Reserve will have to raise interest rates 200 basis points by the end of 2009 as a result.
America's house price time bomb: With the American housing market in its worst crisis since the Great Depression of the 1930s, President Bush is authorising new legislation to pave the way for massive new government intervention designed to slow the slide.
Property economist warns of 25-year slump: Bearish analyst Capital Economics said house prices would fall 35% over the next three years and provided the market was stabile, prices would not reach 2007 levels until 2036.
Consumer confidence plunges near historical low: ABC: American consumers' confidence plummeted in the latest week, with only 10 percent of respondents in a recent poll having a positive view on the economic outlook, a report showed on Tuesday.
U.S. inflation to be 6 % by 2009: CIBC: He said the U.S. Federal Reserve will have to raise interest rates 200 basis points by the end of 2009 as a result.
America's house price time bomb: With the American housing market in its worst crisis since the Great Depression of the 1930s, President Bush is authorising new legislation to pave the way for massive new government intervention designed to slow the slide.
Property economist warns of 25-year slump: Bearish analyst Capital Economics said house prices would fall 35% over the next three years and provided the market was stabile, prices would not reach 2007 levels until 2036.
Consumer confidence plunges near historical low: ABC: American consumers' confidence plummeted in the latest week, with only 10 percent of respondents in a recent poll having a positive view on the economic outlook, a report showed on Tuesday.
America's Economic Free Fall
By William Greider, The Nation
Corporate Accountability and WorkPlace: In their haste to do anything Wall Street wants, Congress and the lame-duck President are sowing far more profound troubles for the country.
[/color]
[color="#800000"]MARKET RAP
Testing times
The Shanghai and Taiwan markets stand out, even in a relatively placid week, for their volatility and scale of declines. Both are approaching critical tests.
R M Cutler runs his eye over the ups and downs in the week's markets.
BOOK REVIEW
Tarnished 'truth'
The New Paradigm for Financial Markets by George Soros
Economists teaching us that we are creatures of the market claim a universal "truth" that limits questions about what life is for. As the US financial crisis deepens and, Soros argues, heralds the end of an economic era, his message should get a hearing in the debate over what system of exchange replaces it. - Nicholas Kiersey
[color="#800000"]MARKET RAP
Testing times
The Shanghai and Taiwan markets stand out, even in a relatively placid week, for their volatility and scale of declines. Both are approaching critical tests.
R M Cutler runs his eye over the ups and downs in the week's markets.
BOOK REVIEW
Tarnished 'truth'
The New Paradigm for Financial Markets by George Soros
Economists teaching us that we are creatures of the market claim a universal "truth" that limits questions about what life is for. As the US financial crisis deepens and, Soros argues, heralds the end of an economic era, his message should get a hearing in the debate over what system of exchange replaces it. - Nicholas Kiersey
THE MOGAMBO GURU 
Inflationary horror movie Even if we take the US inflation figure of 5% at face value, the interest on our hard-won savings should be about 8%, yet it isn't even half that on a five-year certificate of deposit. That means there is nothing to hold back prices and your savings are doomed soon to be worthless.
CREDIT BUBBLE BULLETIN
Just the facts
A week of hyper-volatility ended with mostly slight declines in the major averages, as the markets absorbed the implications of the Fannie Mae and Freddie Mac rescue package. Smaller companies, however, as captured by the Russell 2000, strengthened, even as reports said loans were increasingly difficult to come by.
Doug Nol
Inflationary horror movie Even if we take the US inflation figure of 5% at face value, the interest on our hard-won savings should be about 8%, yet it isn't even half that on a five-year certificate of deposit. That means there is nothing to hold back prices and your savings are doomed soon to be worthless. CREDIT BUBBLE BULLETIN
Just the facts
A week of hyper-volatility ended with mostly slight declines in the major averages, as the markets absorbed the implications of the Fannie Mae and Freddie Mac rescue package. Smaller companies, however, as captured by the Russell 2000, strengthened, even as reports said loans were increasingly difficult to come by.
Doug Nol
Hank Paulson's Fannie Gamble - Lawrence Lindsey, Wall Street Journal
How Long Can the U.S. Economy Continue to Grow? - The Economist
More Arrows Seen Pointing to U.S. Recession - Peter Goodman, NYT
We Must Elevate Benefits of Trade - Editorial, Times of London
Regulators in the U.S. Erect Barriers In the Sky - Editorial, FT
How Long Can the U.S. Economy Continue to Grow? - The Economist
More Arrows Seen Pointing to U.S. Recession - Peter Goodman, NYT
We Must Elevate Benefits of Trade - Editorial, Times of London
Regulators in the U.S. Erect Barriers In the Sky - Editorial, FT
<h4 class="coverline_header">Carnage at General Motors</h4>If what's good for GM is good for the U.S., what does it mean when the company loses $15.5 billion?By Andrew Leonard
How the World Works
US junk bond default rate rises to 2.25 pct in July
Reuters -
IndyMac Bancorp to Liquidate TheStreet.com
IndyMac Plans Chapter 7 Filing Wall Street Journal
Reuters -
IndyMac Bancorp to Liquidate TheStreet.com
IndyMac Plans Chapter 7 Filing Wall Street Journal
The credit squeeze fall-out
How the banks can win back confidence
The world cannot grow its way out of this slowdown
Shrunken Street: Financial groups eye potential predators and prey
False ideology at the heart of the financial crisis
It is time for reflection, not regulation on banking
Act now to stop the markets’ vicious circle
An economy undermined? Experts assess the real costs of a financial crisis
Financial markets need more than a patch-up
Fear fatigue: Financial markets search for signs that the worst is over
A lack of trust spells crisis in every financial language
job market recession persists
For analysis of today's employment report from the Bureau of Labor Statistics, read EPI's Jobs Picture. Even with boost from stimulus, economy just limps along
Read EPI's GDP Picture for analysis of the lstest Commerce Department report on gross domestic product (GDP).
For analysis of today's employment report from the Bureau of Labor Statistics, read EPI's Jobs Picture. Even with boost from stimulus, economy just limps along
Read EPI's GDP Picture for analysis of the lstest Commerce Department report on gross domestic product (GDP).
Pressure grows for action on US economy
Pressure for action to revive the economy grew as a new report showed the unemployment rate rose in July to 5.7 per cent – its highest for four years – and the number of jobs fell for a seventh straight month - Aug 2 2008
Weak US growth adds to gloom
The US economy grew at an annualised rate of 1.9 per cent in the second quarter, faster than earlier in the year but slower than economists were expecting, the commerce department said - Aug 1 2008
Record deficit of $482bn forecast for 2009
Driven by dwindling tax receipts amid the economic slump and the payment of over $100bn in stimulus cheques, the figure was higher than the White House's previous estimate Jul 29 2008
US credit crisis is hitting the wealthy
The US financial crisis is spreading from subprime borrowers to wealthier consumers, with evidence mounting that more affluent people are failing to pay their mortgages and credit card balances - Jul 28 2008
US credit crunch set to last for months
The credit squeeze in the US economy is likely to persist for many months and might even get worse, Gary Stern, president of the Federal Reserve Bank of Minneapolis, has told the Financial Times
Pressure for action to revive the economy grew as a new report showed the unemployment rate rose in July to 5.7 per cent – its highest for four years – and the number of jobs fell for a seventh straight month - Aug 2 2008
Weak US growth adds to gloom
The US economy grew at an annualised rate of 1.9 per cent in the second quarter, faster than earlier in the year but slower than economists were expecting, the commerce department said - Aug 1 2008
Record deficit of $482bn forecast for 2009
Driven by dwindling tax receipts amid the economic slump and the payment of over $100bn in stimulus cheques, the figure was higher than the White House's previous estimate Jul 29 2008
US credit crisis is hitting the wealthy
The US financial crisis is spreading from subprime borrowers to wealthier consumers, with evidence mounting that more affluent people are failing to pay their mortgages and credit card balances - Jul 28 2008
US credit crunch set to last for months
The credit squeeze in the US economy is likely to persist for many months and might even get worse, Gary Stern, president of the Federal Reserve Bank of Minneapolis, has told the Financial Times
The US economy
By the time a US recession is declared official by the National Bureau of Economic Research, it will already be well under way
America must not act rashly over inflation
Below-capacity output growth and softening oil and commodity prices are likely to push core inflation back towards the comfort zone, writes Mark GertlerCherished myths fall victim to economic reality
There is a danger that the macroeconomic models now in use in central banks operate like a Maginot line. They have been constructed in the past as part of the war against inflation. They do not provide banks with the right tools to be successful, writes Paul De Grauwe
America braces itself for a second dip
The US economy performed better than expected in the first half of the year but volatile markets suggest the rest of 2008 might bring a W-shaped downturn
Lessons to be learnt from the financial crisis
The aim of this year’s report by the Bank for International Settlements is clear: it is to reduce the frequency and severity of crises. It is not enough to say that we can clear up afterwards. That is too complacent and too one-sided, writes Martin Wolf
Measures to avoid the worst recession in 30 years
America should learn from its mistakes and act pragmatically to regulate markets as they exist in fact, not theory, write Felix Rohatyn and Everett EhrlichGuarantees for America’s guarantors
Fannie and Freddie’s doom has been foretold countless times – and yet has been regarded as unthinkable. Now the question is, will they survive, writes Clive CrookAmerica’s human capital is tested
The educational quality of US workers is in decline. If the country is unable to mend its school system, and unwilling to open its doors wider to skilled immigrants, then the current gloom about its longer-term economic prospects may be justified, writes Clive Crook
Goodbye capitalism
There is a better way to handle the crisis over Freddie Mac and Fannie Mae, without rewarding failure, writes Joshua Rosner
The Real State of the US Economy
Henry Paulson has lost the control over US finance
by William F. Engdahl
Global Research, August 2, 2008
When Henry Paulson agreed to leave his job as chairman of the powerful Wall Street investment bank, Goldman Sachs to go to Washington as Treasury Secretary in 2006 he demanded extraordinary powers as de facto economic czar. He got it. Paulson is also head of the President’s Working Group on Financial Markets -- the secretary of the treasury and the chairmen of the Federal Reserve Board, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The Working Group is the financial world's equivalent of the Pentagon war room. Paulson, not Fed chairman Bernanke, is the person running the Administration’s crisis management. And his recent actions indicate he has lost control as the snowballing problems from the semi-government mortgage companies Freddie Mac and Fannie Mae to the collapse of the multi-trillion dollar market in Asset Backed Securities (ABS) to the real economy are compounding into the worst crisis since the 1930’s Great Depression.
‘The US banking system is sound…’
In an eerie echo of President Herbert Hoover in 1930, during a Presidential campaign against Roosevelt, following the stock market crash and collapse of numerous smaller banks, Paulson recently appeared on national TV to declare "our banking system is a safe and sound one." He added that the list of "troubled" banks "is a very manageable situation." In fact what he did not say was that the US bank deposit insurance fund, the Federal Deposit Insurance Corporation (FDIC) has a list of problem banks that numbers 90. Not included on that list are banks such as Citigroup, until recently the largest bank in the world.
The statement is hardly reassuring. The California savings bank, IndyMac Bank which was declared insolvent a month ago was not on the FDIC list a week before it collapsed. The reality is the crisis created by "securitizing" millions of home mortgages into new financial instruments and selling the packages to pension funds and investors is unfolding like a snowball rolling down the Swiss Alps.
Indication of the lack of control is the statement just weeks ago by Paulson that "financial institutions must be allowed to fail." That was two weeks before Paulson went to Congress to ask for "Congressional authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac." As I noted in my recent piece, Financial Tsunami: The Next Big Wave is Breaking: Fannie Mae Freddie Mac and US Mortgage Debt , those two private companies insured some $6 trillion worth of home mortgages, half the entire US mortgage debt. Paulson defended the request by calling Freddie Mac and Fannie Mae "the only functioning part of the home loan market."
That comes back to the statement about a "sound banking system". Can we have a sound banking system where the only functioning part is literally insolvent—its debts greater than its assets?
It is well known on Wall Street that some of the largest financial institutions have huge undeclared problems with Asset Backed Securities they have valued far above their worth to make their books look better than they are. The names Citigroup, Lehman Bros., Morgan Stanley, even Paulson’s old firm, Goldman Sachs and of course the inventor of sub-prime mortgage securitization, Merrill Lynch, all hold a huge percentage of what are called Level Three assets, these being assets where no one is willing to buy but the bank declares their worth based on "fantasy." In short the value of those core financial institutions of the US financial system is massively overvalued compared with their value were they forced to sell into the open market today. In a sobering aside, readers should not expect any serious economic remedies for the crisis from a President Barack Obama. Obama’s National Campaign Finance Chairman is Chicago real estate billionaire, Penny Pritzker, who is heir to among other things the Hyatt Hotels. It was Pritzker together with Merrill Lynch ten years ago who first developed the model for securitizing "sub-prime" real estate, the trigger for the current Financial Tsunami crisis.
Already Citigroup has been forced to go to Dubai hat in hand and ask for billions in cash. After it announced it would not need more capital. Now Citigroup just announced plans to sell some $500 billion more assets to raise funds. Is Citigroup really solvent is the question sober investors are asking. Similarly Merrill Lynch raised $6.6 billion from Kuwait Mizuho, stated it was fine and weeks later had to raise still more capital. Morgan Stanley sold a 10% share of the company to China International Corp.
The real economy contracting rapidly
Behind the reassuring statements from Paulson and others that the "worst is over" the reality of the credit collapse since August 2007 is a deepening economic contraction which I have said several times in this space will surpass the Great Depression of the 1929-1938 period. A goof friend who is an unemployed homebuilder in a prosperous part of Arizona just sent me the following list of US department retail store closures. It is worth noting that over 70% of the US GDP is consumer spending and that the entire Federal Reserve strategy of Alan Greenspan after the March 2000 collapse of the stock market bubble, was to bring US interest rates to their lowest levels since the 1930’s in order to stimulate consumer spending on credit, i.e. debt, to avoid "recession." Note the scale of the following store closings across America in recent weeks:
Ann Taylor closing 117 stores nationwide.
Eddie Bauer to close more stores after closing 27 stores in the first quarter.
Cache, a women’s retailer is closing 20 to 23 stores this year.
Lane Bryant, Fashion Bug, Catherines closing 150 stores nationwide
Talbots, J. Jill closing stores. Talbots will close all 78 of its kids and men's stores plus another 22 underperforming stores. The 22 stores will be a mix of Talbots women's and J. Jill.
Gap Inc. closing 85 stores
Foot Locker to close 140 stores
Wickes Furniture is going out of business and closing all of its stores. The 37-year-old retailer that targets middle-income customers, filed for bankruptcy protection last month.
Levitz - the furniture retailer, announced it was going out of business and closing all 76 of its stores in December. The retailer dates back to 1910.
Zales, Piercing Pagoda plans to close 82 stores by July 31 followed by closing another 23 underperforming stores.
Disney Store owner has the right to close 98 stores.
Home Depot store closings 15 of them amid a slumping US economy and housing market. The move will affect 1,300 employees. It is the first time the world's largest home improvement store chain has ever closed a flagship store.
CompUSA (CLOSED).
Macy's - 9 stores closed
Movie Gallery – video rental company plans to close 400 of 3,500 Movie Gallery
and Hollywood Video stores in addition to the 520 locations the video rental
chain closed last fall as part of bankruptcy.
Pacific Sunwear - 153 Demo stores closing
Pep Boys - 33 stores of auto parts supplier closing
Sprint Nextel - 125 retail locations to close with 4,000 employees following 5,000 layoffs last year.
J. C. Penney, Lowe's and Office Depot are all scaling back
Ethan Allen Interiors: plans to close 12 of 300 stores to cut costs.
Wilsons the Leather Experts – closing 158 stores
Bombay Company: to close all 384 U.S.-based Bombay Company stores.
KB Toys closing 356 stores around the United States as part of its bankruptcy reorganization.
Dillard's Inc. will close another six stores this year.
For anyone familiar with American shopping malls and retailing, this represents a staggering part of the daily economic life of the nation, from furniture stores to clothing to video rentals to leather. The process has only begun and neither major party Presidential candidate has dared to mention this on the ground economic reality, because they evidently have no solutions to offer that would not jeopardize their campaign finances. Obama is tied to not only Pritzker but also to Omaha billionaire, Warren Buffett and George Soros. McCain depends on the traditional money contributions of the Republican Party which demand permanent tax reform for highest income earners and a pro-bank laissez faire treatment of millions of homeowners facing home foreclosure and asset seizure by banks.
Banks across the country have severely cut back on loans, fearful of bad debts. That has aggravated the consumer collapse documented above. Hundreds of thousands of real estate brokers, small and large bankers, furniture workers and salespeople, and construction workers are unable to find work. Jobs are being cut wholesale and those working are often on reduced hours. Car sales in June plunged by 28% for Ford, 18% for General Motors and even 21% for Toyota which will mean more layoffs in coming weeks. This will be the next wave of unemployment.
The economic reality is not reflected in official US Commerce Department or Labor Department statistics. There the data is constantly being "revised" to hide the grim reality in an election year.
My good friend, economist John Williams of California, has meticulously tracked such "data revisions" for more than 25 years and found the manipulation of reality so alarming that he founded an independent subscriber service titled "Shadow Government Statistics" (http://www.shadowstats.com/ ), where he makes best estimate calculations of the reality not the official mythology.
By Williams’ calculations the US economy first entered recession, defined as two consecutive quarters of negative GDP growth, at the end of 2006. Ever since, the recession has deepened, dramatically so in the past 12 months. Little known is the fact that the Labor Department also publishes six different unemployment statistics from U1, U2 through to U6 being the most comprehensive. The reported "official unemployment" is the very narrowly defined U3 which stands at 5.5%. However, as Williams notes, U6 is the real measure and that officially shows 9.7% unemployed. His calculations put the figure at 13.7% actually unemployed and seeking work.
A personal account
The unemployed homebuilder from Arizona I mentioned above recently sent me the following personal note on the situation:
"Here is how it looks to people like me: Real estate dealings fuelled the economy in most areas of the country for the past decade or more. We’ve been in a market downturn for three years. We have seen the cost of doing business increase for builders, along with a big drop in buyers as everyone tightens their belts, or can’t sell existing homes. Many employers have gone under ending thousands of jobs. If they have a job people are worried about losing it. Driving long distances to work is not possible with gasoline costs double that of 2006. There has been a 40% drop in most peoples’ home equity worth. Many people are "underwater" on their homes, meaning they owe more than the market price is worth today. So many under-employed don’t show up in government unemployed statistics. Self employed like me never get counted."
The Arizona homebuilder continued, "Today nobody is building. Unsold home inventories are triple that of 2003. Banks no longer give easy credit for home buyers. Many realtors I know have gone two years without selling a home. Empty storefronts are becoming common. In many areas unemployment among construction trades people is 50% or more. Tens of thousands of illegal Mexicans who did most of the manual labor have returned to Mexico to find work. What now? Well, I do handyman projects of all sorts, big or small and make about 70-90% of what it takes to survive with a family of a wife and three young children. My savings make up the rest. That can’t go on for too much longer. We went from affluent and comfortable to nervous and broke with diminished opportunities in just three years. We used to be the middle class."
To be continued…
F. William Engdahl is author of A Century of War: Anglo-American Oil Politics and the New World Order (Pluto Press) and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation (www.globalresearch.ca). He is at work on a new book, from which this has been adapted, Power of Money: The Rise and Decline of the American Century. He may be reached through his website, www.engdahl.oilgeopoitics.net.
William F. Engdahl is a frequent contributor to Global Research. Global Research Articles by William F. Engdahl
http://globalresearch.ca/index.php?context=va&aid=9728
Henry Paulson has lost the control over US finance
by William F. Engdahl
Global Research, August 2, 2008
When Henry Paulson agreed to leave his job as chairman of the powerful Wall Street investment bank, Goldman Sachs to go to Washington as Treasury Secretary in 2006 he demanded extraordinary powers as de facto economic czar. He got it. Paulson is also head of the President’s Working Group on Financial Markets -- the secretary of the treasury and the chairmen of the Federal Reserve Board, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The Working Group is the financial world's equivalent of the Pentagon war room. Paulson, not Fed chairman Bernanke, is the person running the Administration’s crisis management. And his recent actions indicate he has lost control as the snowballing problems from the semi-government mortgage companies Freddie Mac and Fannie Mae to the collapse of the multi-trillion dollar market in Asset Backed Securities (ABS) to the real economy are compounding into the worst crisis since the 1930’s Great Depression.
‘The US banking system is sound…’
In an eerie echo of President Herbert Hoover in 1930, during a Presidential campaign against Roosevelt, following the stock market crash and collapse of numerous smaller banks, Paulson recently appeared on national TV to declare "our banking system is a safe and sound one." He added that the list of "troubled" banks "is a very manageable situation." In fact what he did not say was that the US bank deposit insurance fund, the Federal Deposit Insurance Corporation (FDIC) has a list of problem banks that numbers 90. Not included on that list are banks such as Citigroup, until recently the largest bank in the world.
The statement is hardly reassuring. The California savings bank, IndyMac Bank which was declared insolvent a month ago was not on the FDIC list a week before it collapsed. The reality is the crisis created by "securitizing" millions of home mortgages into new financial instruments and selling the packages to pension funds and investors is unfolding like a snowball rolling down the Swiss Alps.
Indication of the lack of control is the statement just weeks ago by Paulson that "financial institutions must be allowed to fail." That was two weeks before Paulson went to Congress to ask for "Congressional authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac." As I noted in my recent piece, Financial Tsunami: The Next Big Wave is Breaking: Fannie Mae Freddie Mac and US Mortgage Debt , those two private companies insured some $6 trillion worth of home mortgages, half the entire US mortgage debt. Paulson defended the request by calling Freddie Mac and Fannie Mae "the only functioning part of the home loan market."
That comes back to the statement about a "sound banking system". Can we have a sound banking system where the only functioning part is literally insolvent—its debts greater than its assets?
It is well known on Wall Street that some of the largest financial institutions have huge undeclared problems with Asset Backed Securities they have valued far above their worth to make their books look better than they are. The names Citigroup, Lehman Bros., Morgan Stanley, even Paulson’s old firm, Goldman Sachs and of course the inventor of sub-prime mortgage securitization, Merrill Lynch, all hold a huge percentage of what are called Level Three assets, these being assets where no one is willing to buy but the bank declares their worth based on "fantasy." In short the value of those core financial institutions of the US financial system is massively overvalued compared with their value were they forced to sell into the open market today. In a sobering aside, readers should not expect any serious economic remedies for the crisis from a President Barack Obama. Obama’s National Campaign Finance Chairman is Chicago real estate billionaire, Penny Pritzker, who is heir to among other things the Hyatt Hotels. It was Pritzker together with Merrill Lynch ten years ago who first developed the model for securitizing "sub-prime" real estate, the trigger for the current Financial Tsunami crisis.
Already Citigroup has been forced to go to Dubai hat in hand and ask for billions in cash. After it announced it would not need more capital. Now Citigroup just announced plans to sell some $500 billion more assets to raise funds. Is Citigroup really solvent is the question sober investors are asking. Similarly Merrill Lynch raised $6.6 billion from Kuwait Mizuho, stated it was fine and weeks later had to raise still more capital. Morgan Stanley sold a 10% share of the company to China International Corp.
The real economy contracting rapidly
Behind the reassuring statements from Paulson and others that the "worst is over" the reality of the credit collapse since August 2007 is a deepening economic contraction which I have said several times in this space will surpass the Great Depression of the 1929-1938 period. A goof friend who is an unemployed homebuilder in a prosperous part of Arizona just sent me the following list of US department retail store closures. It is worth noting that over 70% of the US GDP is consumer spending and that the entire Federal Reserve strategy of Alan Greenspan after the March 2000 collapse of the stock market bubble, was to bring US interest rates to their lowest levels since the 1930’s in order to stimulate consumer spending on credit, i.e. debt, to avoid "recession." Note the scale of the following store closings across America in recent weeks:
Ann Taylor closing 117 stores nationwide.
Eddie Bauer to close more stores after closing 27 stores in the first quarter.
Cache, a women’s retailer is closing 20 to 23 stores this year.
Lane Bryant, Fashion Bug, Catherines closing 150 stores nationwide
Talbots, J. Jill closing stores. Talbots will close all 78 of its kids and men's stores plus another 22 underperforming stores. The 22 stores will be a mix of Talbots women's and J. Jill.
Gap Inc. closing 85 stores
Foot Locker to close 140 stores
Wickes Furniture is going out of business and closing all of its stores. The 37-year-old retailer that targets middle-income customers, filed for bankruptcy protection last month.
Levitz - the furniture retailer, announced it was going out of business and closing all 76 of its stores in December. The retailer dates back to 1910.
Zales, Piercing Pagoda plans to close 82 stores by July 31 followed by closing another 23 underperforming stores.
Disney Store owner has the right to close 98 stores.
Home Depot store closings 15 of them amid a slumping US economy and housing market. The move will affect 1,300 employees. It is the first time the world's largest home improvement store chain has ever closed a flagship store.
CompUSA (CLOSED).
Macy's - 9 stores closed
Movie Gallery – video rental company plans to close 400 of 3,500 Movie Gallery
and Hollywood Video stores in addition to the 520 locations the video rental
chain closed last fall as part of bankruptcy.
Pacific Sunwear - 153 Demo stores closing
Pep Boys - 33 stores of auto parts supplier closing
Sprint Nextel - 125 retail locations to close with 4,000 employees following 5,000 layoffs last year.
J. C. Penney, Lowe's and Office Depot are all scaling back
Ethan Allen Interiors: plans to close 12 of 300 stores to cut costs.
Wilsons the Leather Experts – closing 158 stores
Bombay Company: to close all 384 U.S.-based Bombay Company stores.
KB Toys closing 356 stores around the United States as part of its bankruptcy reorganization.
Dillard's Inc. will close another six stores this year.
For anyone familiar with American shopping malls and retailing, this represents a staggering part of the daily economic life of the nation, from furniture stores to clothing to video rentals to leather. The process has only begun and neither major party Presidential candidate has dared to mention this on the ground economic reality, because they evidently have no solutions to offer that would not jeopardize their campaign finances. Obama is tied to not only Pritzker but also to Omaha billionaire, Warren Buffett and George Soros. McCain depends on the traditional money contributions of the Republican Party which demand permanent tax reform for highest income earners and a pro-bank laissez faire treatment of millions of homeowners facing home foreclosure and asset seizure by banks.
Banks across the country have severely cut back on loans, fearful of bad debts. That has aggravated the consumer collapse documented above. Hundreds of thousands of real estate brokers, small and large bankers, furniture workers and salespeople, and construction workers are unable to find work. Jobs are being cut wholesale and those working are often on reduced hours. Car sales in June plunged by 28% for Ford, 18% for General Motors and even 21% for Toyota which will mean more layoffs in coming weeks. This will be the next wave of unemployment.
The economic reality is not reflected in official US Commerce Department or Labor Department statistics. There the data is constantly being "revised" to hide the grim reality in an election year.
My good friend, economist John Williams of California, has meticulously tracked such "data revisions" for more than 25 years and found the manipulation of reality so alarming that he founded an independent subscriber service titled "Shadow Government Statistics" (http://www.shadowstats.com/ ), where he makes best estimate calculations of the reality not the official mythology.
By Williams’ calculations the US economy first entered recession, defined as two consecutive quarters of negative GDP growth, at the end of 2006. Ever since, the recession has deepened, dramatically so in the past 12 months. Little known is the fact that the Labor Department also publishes six different unemployment statistics from U1, U2 through to U6 being the most comprehensive. The reported "official unemployment" is the very narrowly defined U3 which stands at 5.5%. However, as Williams notes, U6 is the real measure and that officially shows 9.7% unemployed. His calculations put the figure at 13.7% actually unemployed and seeking work.
A personal account
The unemployed homebuilder from Arizona I mentioned above recently sent me the following personal note on the situation:
"Here is how it looks to people like me: Real estate dealings fuelled the economy in most areas of the country for the past decade or more. We’ve been in a market downturn for three years. We have seen the cost of doing business increase for builders, along with a big drop in buyers as everyone tightens their belts, or can’t sell existing homes. Many employers have gone under ending thousands of jobs. If they have a job people are worried about losing it. Driving long distances to work is not possible with gasoline costs double that of 2006. There has been a 40% drop in most peoples’ home equity worth. Many people are "underwater" on their homes, meaning they owe more than the market price is worth today. So many under-employed don’t show up in government unemployed statistics. Self employed like me never get counted."
The Arizona homebuilder continued, "Today nobody is building. Unsold home inventories are triple that of 2003. Banks no longer give easy credit for home buyers. Many realtors I know have gone two years without selling a home. Empty storefronts are becoming common. In many areas unemployment among construction trades people is 50% or more. Tens of thousands of illegal Mexicans who did most of the manual labor have returned to Mexico to find work. What now? Well, I do handyman projects of all sorts, big or small and make about 70-90% of what it takes to survive with a family of a wife and three young children. My savings make up the rest. That can’t go on for too much longer. We went from affluent and comfortable to nervous and broke with diminished opportunities in just three years. We used to be the middle class."
To be continued…
F. William Engdahl is author of A Century of War: Anglo-American Oil Politics and the New World Order (Pluto Press) and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation (www.globalresearch.ca). He is at work on a new book, from which this has been adapted, Power of Money: The Rise and Decline of the American Century. He may be reached through his website, www.engdahl.oilgeopoitics.net.
William F. Engdahl is a frequent contributor to Global Research. Global Research Articles by William F. Engdahl
http://globalresearch.ca/index.php?context=va&aid=9728
New York to File Charges Against Citigroup Over Securities - NY Times (08/02/2008 06:00 AM) Small Florida bank is 8th U.S. failure this year - Reuters (08/02/2008 06:01 AM)
Highland to Pay in Stages - WSJ ($) (08/02/2008 06:05 AM)
Profit Data May Explain U.S. Gloom - NY Times , Norris (08/01/2008 05:26 AM)
Merrill `Co-Opted' Analysts Backed Auction-Rate Debt to the End - Bloomberg (08/01/2008 05:20 AM)
Lehman in talks to sell $30 bln mortgage assets: report - Reuters (08/01/2008 05:32 AM)
The New Chemistry of Speculation - WSJ ($) (08/01/2008 05:47 AM)
MGM, Dubai Fall Behind on $3.5 Billion Loan for Las Vegas Plan - Bloomberg (08/01/2008 08:52 AM)
Highland to Pay in Stages - WSJ ($) (08/02/2008 06:05 AM)
Profit Data May Explain U.S. Gloom - NY Times , Norris (08/01/2008 05:26 AM)
Merrill `Co-Opted' Analysts Backed Auction-Rate Debt to the End - Bloomberg (08/01/2008 05:20 AM)
Lehman in talks to sell $30 bln mortgage assets: report - Reuters (08/01/2008 05:32 AM)
The New Chemistry of Speculation - WSJ ($) (08/01/2008 05:47 AM)
MGM, Dubai Fall Behind on $3.5 Billion Loan for Las Vegas Plan - Bloomberg (08/01/2008 08:52 AM)
Quotable
"The amount U.S. commercial banks have at risk in derivatives markets jumped 50% during the first quarter as the credit crisis triggered an increase in the value of contracts that protect against borrower defaults and changes in interest rates. The amount of money banks would be owed if all derivatives contracts were liquidated, known as 'net current credit exposure,' rose $156 billion in the first quarter to $465 billion..." Bloomberg, July 2, 2008
"The amount U.S. commercial banks have at risk in derivatives markets jumped 50% during the first quarter as the credit crisis triggered an increase in the value of contracts that protect against borrower defaults and changes in interest rates. The amount of money banks would be owed if all derivatives contracts were liquidated, known as 'net current credit exposure,' rose $156 billion in the first quarter to $465 billion..." Bloomberg, July 2, 2008
Recession fears as America sheds jobs - UK Telegraph , Evans-Pritchard (08/01/2008 07:52 AM)
Manufacturing gloom deepens - FT ($) (08/01/2008 06:36 AM)
Corporate insolvencies jump 15% - FT (08/01/2008 06:03 AM)
BA plunges amid 'worst trading ever' - FT (08/01/2008 05:23 AM)
Manufacturing gloom deepens - FT ($) (08/01/2008 06:36 AM)
Corporate insolvencies jump 15% - FT (08/01/2008 06:03 AM)
BA plunges amid 'worst trading ever' - FT (08/01/2008 05:23 AM)
Another Bad Employment Report: Brad DeLong Calls Recession Aug 1, 2008 If I were on the NBER Business Cycle Dating Committee, I would call this a recession:
The U-6 measure of unemployment--reported unemployed plus part-time for economic reasons plus marginally-attached workers all divided by the labor force plus marginally-attached workers--has risen by 1.1 percentage points in the past three months to its current level of 10.3 percent. It now stands 2.2 percentage points above its mid-2000s low, and is just a hair below the maximum reached in the 2001-2003 episode. As you all know, I have been unhappy with the conventional unemployment rate this decade--it has not been telling the same story as the other labor market indicators. U-6 seems to be a better fit to the overall state of the economy.
And by my book, U-6 is now telling us that we are in a recession.
But I am not on the NBER Business Cycle Dating Committee. There's no reason for them not to wait a couple more months before deciding thumbs-up or thumbs-down. And they may not, by their definition, call it a recession.
On the other hand, when I write my history--Macroeconomic Policy in the Age of Central Bankers (Princeton: Princeton University Press, 2025)--this will count as a recession starting in the last quarter of 2007.
The BLS this morning:
Originally published at Brad DeLong website and reproduced here with the author's permission.
Permalink
The U-6 measure of unemployment--reported unemployed plus part-time for economic reasons plus marginally-attached workers all divided by the labor force plus marginally-attached workers--has risen by 1.1 percentage points in the past three months to its current level of 10.3 percent. It now stands 2.2 percentage points above its mid-2000s low, and is just a hair below the maximum reached in the 2001-2003 episode. As you all know, I have been unhappy with the conventional unemployment rate this decade--it has not been telling the same story as the other labor market indicators. U-6 seems to be a better fit to the overall state of the economy.
And by my book, U-6 is now telling us that we are in a recession.
But I am not on the NBER Business Cycle Dating Committee. There's no reason for them not to wait a couple more months before deciding thumbs-up or thumbs-down. And they may not, by their definition, call it a recession.
On the other hand, when I write my history--Macroeconomic Policy in the Age of Central Bankers (Princeton: Princeton University Press, 2025)--this will count as a recession starting in the last quarter of 2007.
The BLS this morning:
Employment Situation Summary: The unemployment rate rose to 5.7 percent, and nonfarm payroll employment continued to trend down in July (-51,000).... Over the past 12 months, the number of unemployed persons has increased by 1.6 million, and the unemployment rate has risen by 1.0 percentage point.... In July, the number of persons who worked part time for economic reasons rose by 308,000 to 5.7 million and has risen by 1.4 million over the past 12 months. This category includes persons who indicated that they would like to work full time but were working part time because their hours had been cut back or they were unable to find full-time jobs.... About 1.6 million persons (not seasonally adjusted) were marginally attached to the labor force in July, an increase of 197,000 over the past 12 months. These individuals wanted and were available for work and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Among the marginally attached, there were 461,000 discouraged workers in July, 94,000 more than a year earlier. Discouraged workers were not currently looking for work specifically because they believed no jobs were available for them....
Total nonfarm payroll employment continued to trend down (-51,000) in July. Thus far in 2008, payroll employment has fallen by 463,000. Over the month, employment continued to decline in manufacturing, construction, employment services, wholesale trade, and the information industry. Health care and mining continued to add jobs over the month...
Originally published at Brad DeLong website and reproduced here with the author's permission.
Permalink
10 Things to Understand About the Housing Bubble and the Debt Crisis Daniel Alpert | Jul 30, 2008 Highlights
The current state of affairs in our housing and mortgage capital markets should not have come as a shock to regulators, lenders, investment bankers or homeowners. All were, evidently, willing participants in a classic bout of speculative asset inflation, the likes of which have been seen before but have, unfortunately, become a more frequent occurrence in the US-led, global economic system. The hallmarks of asset bubbles and resulting financial crises over the past quarter century have been substantially similar: (a) a failure to observe basic economic and financial fundamentals regarding value, capital and the markets; combined with (
a uniquely American tendency to believe that almost any new economic phenomenon ushers in a new era to be governed by a completely new set of measures of value and economic performance. The results of bubble behavior are invariably the same, and it is certainly debatable as to whether the absolute defense of unfettered and undisciplined markets, that leads to such bubbles, is in our nation's, and our economy's, medium or long-terms interests. The clean-up required in the current case, and in prior bubbles, results in the elimination of huge amounts of wealth and is accordingly destabilizing to our country's interests.
The "Top 10" List
In Westwood's view, the following ten factors most significantly contributed to the housing bubble and mortgage crisis:
What Can be Done to Put this Behind Us
So that's what happened and why. Now the question is what to do about it, both to recover from the present situation and to prevent its possible reoccurrence (the financial markets have very short memories). The catastrophic debt driven bubbles in Japan and the US in the period of 1989 – 1990 provide good direction in this regard. In Japan, assets re-priced just as assets must at the end of any bubble (with real estate falling by an unimaginable 75% from peak to trough). Financial and commercial real estate assets also fell dramatically (although not nearly as much) in the US. The difference between the two cases is that Japan allowed their financial institutions and investors to continue in business without recognizing the massive losses they had incurred. This delayed the re-capitalization of their institutions and continued their post-bubble recession for some 13 years. In the US, however, the Fed, banking regulators and ultimately the then-newly formed Resolution Trust Corporation moved relatively swiftly to force assets and investments to be marked to market, disposed of and recapitalized, which saw the US back on track by the mid-90's. This must happen again, and without waiting for a change in administration.
The recent pressure on the Federal Reserve Bank to lower its Fed Funds target is counter productive in the above context. Encouraging more lending, the creation of more indebtedness and dis-saving, is precisely what got us into trouble in the first place. And in any event, more lax lending is fundamentally impossible in the current situation. Lenders and investors have finally woken up to the fact that more of the same will merely result in their not getting their money back. And the marginal reduction in floating rate mortgage loan interest rates will not prevent the eventual revaluation of homes, and may in fact delay it, resulting in a more sustained recession.
Conclusion
In past debt debacles, and other market crises, the affected assets have been things like commercial real estate, farmland, tech stocks and bank shares. This time around, along with the stock market, it is people's homes, the re-pricing of which literally hits us where we live. The potential for massive social and economic destabilization needs to be taken into account in considering solutions. Every effort must be made to restore lost jobs, production and eventually savings – and that will be nearly impossible by increasing the number of bankrupt and/or homeless citizens. At the same time, we are a nation of laws and contracts and the government should not be stepping in to advocate the abrogation of loan documents and other legally-engaged-in business dealings (consumer fraud is another matter).
It is often said that economic bubbles don't burst, they deflate. We are watching the air gradually leak out of a bubble of our own creation – the underpinnings of which were the massive increase in the indebtedness, and the reduction in savings and net worth, of our fellow citizens. Wall Street, the banking sector and government must cooperate to recognize the magnitude of the crisis, to enable a swift recovery therefrom and to minimize the chances of its reoccurrence.
http://www.rgemonitor.com/us-monitor
- In time, history will provide a fulsome overview of the twin housing and debt crises, perhaps the most challenging debacle since the Great Depression. At this early stage, however, Westwood tallies a "top 10" list of underlying causes and considers what can be done to reverse the situation.
- Ranging from an unprecedeted level of debt creation that fueled massive asset inflation, to insane lending practices and, ultimately, exploring the last 20 years of the American debt-culture, this report outlines just how the economy arrived at this juncture, and how our business and government leaders mistook debt-driven liquidity for real wealth.
- In order to avoid the dismal results experienced by Japan after its bubble burst in 1989-1990, we must rapidly resolve loans, re-capitalize and rehabilitate our financial institutions, and end our dependence on easy money (negative real rates of interest).
- Moreover, Wall Street, the banking sector and government must cooperate to recognize the magnitude of the crisis, to enable a swift recovery and to minimize the chances of its reoccurrence.
The current state of affairs in our housing and mortgage capital markets should not have come as a shock to regulators, lenders, investment bankers or homeowners. All were, evidently, willing participants in a classic bout of speculative asset inflation, the likes of which have been seen before but have, unfortunately, become a more frequent occurrence in the US-led, global economic system. The hallmarks of asset bubbles and resulting financial crises over the past quarter century have been substantially similar: (a) a failure to observe basic economic and financial fundamentals regarding value, capital and the markets; combined with (
a uniquely American tendency to believe that almost any new economic phenomenon ushers in a new era to be governed by a completely new set of measures of value and economic performance. The results of bubble behavior are invariably the same, and it is certainly debatable as to whether the absolute defense of unfettered and undisciplined markets, that leads to such bubbles, is in our nation's, and our economy's, medium or long-terms interests. The clean-up required in the current case, and in prior bubbles, results in the elimination of huge amounts of wealth and is accordingly destabilizing to our country's interests.The "Top 10" List
In Westwood's view, the following ten factors most significantly contributed to the housing bubble and mortgage crisis:
- Residential mortgage and consumer credit more than doubled in the first six years of this decade. From the founding of the nation through 1999, our citizens amassed some $5.1 trillion of home mortgage debt and $1.4 trillion of installment and credit card debt. By the end of 2006, these numbers stood at outstanding amounts of $11.0 trillion and $2.4 trillion, respectively. In total, American individuals became indebted by an additional $6.9 trillion in six short years (the bulk of which was in the three-year period from 2004 through 2006) more than doubling the debt outstanding at the beginning of the decade. Apologists often cite increases in wealth and in home equity value as offsetting this unprecedented and crippling increase in our citizens' indebtedness. But the truth is we live in a nation with one of the lowest savings rates in the world (it was actually negative in 2005 and was likely negative in the year just ended) and, as detailed below, a significant portion of the perceived growth in home values has been specious at best.
- Cheap mortgage loans offered on lax lending terms were responsible for much of the ballooning of home prices. Let's say that in 2000, you had $100,000 to put down on the purchase of a home. In the same year, with residential mortgage rates at 6% for adjustable rate mortgages, you were offered a mortgage for 80% of the purchase price of the home you were seeking to buy. The $100,000 you had available meant that you could afford a $500,000 home (80% of $500,000 = $400,000 in mortgage) and, interest only, your monthly payment would have been approximately $2,000 per month. Now, zoom ahead to 2006. With the same $100,000 in your pocket, and an adjustable teaser interest rate of 3%, mortgage companies nationwide were knocking down your door offering you mortgages at 90% of your purchase price (and more – often over 95% in some cases). With your same $100,000 and for the same $2,000 per month interest payment – voila – you could now afford to pay $1,000,000 for the same house for which you would have been able to pay $500,000 six years before. And of course, that is pretty close to what happened during this period – residential home prices increased by over 74% from 2000 through 2006. Does that mean the homes themselves were actually worth more? Of course not.
- The growth in home prices during the first six years of this decade has been unprecedented and should have had our mortgage bankers, investment bankers, regulators and the Fed raising at least an eyebrow or two. As prices more than doubled in some markets and increased over 74% nationwide from 2000 through their peak in 2006, the stewards of our banking sector and their overseers in government apparently neglected to consider why. Pointing to "global reserves of excess savings" and "more efficient capital markets" as the new paradigms rendering previous market fundamentals obsolete, the best and the brightest ignored the fact that debt driven home prices had totally disconnected from median household income which has increased by a mere 15% during the same period, before adjusting for inflation (median income actually decreased after adjusting for inflation). If there had been a global glut of savings, we would have experienced a boom in the production of all capital goods – not just limited to housing – which would be fully sustainable by those real savings (in contrast to what was actually a debt driven spate of asset inflation in housing). More importantly, the purchase price of homes actually rendered it more expensive, even on an after-tax basis, to own rather than rent a residence – in some markets by more than 30%. This phenomenon is not only historically unprecedented, but any student of finance and economics can tell you that it is as unsustainable as any market that is based on pure speculation. And pure speculation is what ultimately developed in residential real estate market – the notion of ever rising value, so similar to the dot com boom.
- Mortgage lenders, seeking to maximize lending, relied on aggressive appraisals to justify outsized loans – and appraisers cooperated by ignoring their own established methodologies. The Chicago-based Appraisal Institute, the gold standard in real estate appraisals with 22,000 members, maintains guidelines known as the Uniform Standards of Professional Appraisal Practice (USPAP). Among other requirements, the USPAP directs, generally, that appraisers consider multiple indicia of the value of any form of property being appraised, with value defined as the most probable price at which a willing buyer and a willing seller would agree to transact a fair sale, assuming (among other things) that "both parties are well informed, or well advised" and "the price [is] unaffected by special or creative financing…..granted by anyone associated with the sale." In addition to considering recent sales of real estate, generally, Appraisers are regularly required to consider the value of properties based on the income they would produce if rented and based on the cost of replacing any improvements (buildings) to the property. They are then required to reconcile any differences among these three classic valuation methods. As it turns out, however, during the housing bubble, home prices completely disconnected from both rental values and from replacement costs. From 1960 through 1996, the ratio of average home rents to average home prices hovered in a band of 5% to 6% per annum. From 1996 to 2000, it declined to 4.6% and then, in a stunning drop this decade, the ratio fell to 3.5% by the end of 2006. Although common wisdom may have it otherwise, the fact is that construction costs barely moved at all during this decade, on an inflation adjusted basis, while home prices increased by 74%. If construction costs were constant and home prices ballooned, the only explanation – according to established valuation methodologies – could be that land was very suddenly worth dramatically more. But that much more, and that quickly? Appraisers couldn't possibly reconcile these dramatically divergent indications of fair market value, so what did they do? Well, as it turns out – Fannie Mae, Freddie Mac, and pretty much all other mortgage originators, guarantors and investors, don't consider income value as relevant to the appraisal of non-rental, residential real estate. Instead, appraisers merely conclude that recent sales are, for all intents and purposes, the only valid indication of fair market value. In doing so they enabled the entire market to ignore the impact of comparisons to rental properties and "special and creative" financing that – although it didn't come from sellers – was demonstrably, and has now proven to be, uneconomic.
- Incremental home sales are not always a reliable indicator of fair value – a market almost tailor-made for a bubble. While homes are the largest repository of individuals' wealth in the United States and certainly the largest asset of most homeowners, they are extraordinarily inefficient to buy and sell and the number of all homes that change hands in a given year is tiny, in comparison with the stock market, for example. By nature of their unique locations and characteristics, homes are very difficult to trade, relative to other assets of such substantial financial significance to their owners. Sellers typically pay sales costs of 5% to 6%, incur repair and improvement costs to make homes more saleable and, ultimately, have to suffer the cost and inconvenience of moving all their possessions. Contrast that with the pennies it costs to effectuate a stock trade, and the differences become apparent. Consequently, people are not constantly pricing and re-trading their residential real estate and, when they do, the value of their property is very much in the eye of the buyer as no two residences (as opposed to shares of stock) are exactly the same. Depending on where we end up as a result of the present crisis, the value of all homes in America will likely level off somewhere in the range of $15 to $20 trillion (a big chunk of our national assets). At current valuations, some 7.6% of existing homes change hands each year. In comparison, the total current market capitalization of all the stocks listed on the New York Stock Exchange is $18.26 trillion, and the recent annual volume of all trades on the NYSE is $17.14 trillion – a full 94% of the total market value. The old saw on Wall St. that "the tape never lies" may not always be true, but share pricing on the big board is certainly a better indicator of fair value than what Joe down the block sold his house for to some rube at the peak of the bubble. And when what the rube paid causes someone to pay as much or more for a roughly similar house a mile away, that's how bubbles are born – marginal sales volume, relative to the size of the overall market capitalization, translating into false assumptions of value for the entire market.
- The game of musical mortgages undervalued risk and spread the resulting pain across vast sectors of the global capital markets and market participants. It is not reasonable to believe that the housing bubble and the mortgage crisis issues discussed here eluded everyone in the financial community. A vigilant few (Robert Shiller comes to mind) long predicted the current outcome. Many more, in order to profit from the enormous volume of new debt being created, chose to ignore or didn't fully appreciate the situation – and didn't care much either as they were playing a game of musical chairs with limited capital at risk (insufficient capital, as has been demonstrated recently). Mortgage originators (primary lenders) were able to sell off mortgages – often at a profit – to banks, investment banks, Fannie Mae and Freddie Mac, retaining little more than the risk that they might lose ongoing mortgage servicing revenue. Investment banks, Fannie and Freddie, labored mightily to turn mortgages into, and sold to investors, residential mortgage backed securities (RMBS), with the blessing of the rating agencies which assumed that sub-prime, Alt-A and other high loan-to-value mortgages would perform pretty much like more conventional mortgages of yore and, like the appraisers, ignored the real world implications of the housing bubble being created by precisely the same debt they were rating. Buyers of the more risky portions (known as tranches) of the RMBS, swiftly aggregated those tranches into more highly rated collateralized debt obligations (CDOs) which were sold to even more investors. Investors in CDOs then often packaged multiple CDOs they held into what became known as CDO-squared securities in order to wring out more fees and profit. Finally, investors holding the most risky pieces of these securities variants then sought to hedge their risk by trading nifty hedging securities known as credit default swaps, the magnitude of which were virtually unlimited as they amounted to nothing more than bets for or against the performance of a particular security or pool of loans (and, as any bookmaker knows, you can take as much action on one side of a bet as you have on the other). At each stage of this game, there were enormous fees generated – and the more lax lending standards became, the more loan volume there was to generate fees. Until, of course, the music stopped. When it did – losses were scattered all over – vast amounts of investor capital vanished, and continue to disappear. Vast numbers of homeowners will either lose their homes or be "under water" on their mortgage debt. But – as has become customary in the boom and bust cycles of the financial markets, the fees, bonuses and capital gains will be retained by the owners and employees of the lenders and bankers orchestrating the music.
- The amount of mortgage debt outstanding versus the value of homes securing that debt is a risk that is concentrated in middle class income earners. Many professionals, who saw mortgage loan balances ballooning to $11 trillion by the end of 2006, took comfort in the fact that home values had ostensibly ballooned to roughly $20 trillion at the same time. At first glance, that would indicate that – on average – about 55% of the value of all homes was owed to lenders, not a particularly uncomfortable percentage. Looking more closely at these numbers, however, raises some uncomfortable questions. First off, US Census data estimates that 33% of all homes have no mortgage debt on them at all. Homes belonging to our older or retired citizens generally have little or no debt outstanding against them, if only by virtue of the period of time such people have owned their homes. In reality, therefore, the $11 trillion of mortgage debt outstanding may be secured by homes worth only about $14 trillion to $15 trillion when the market peaked in 2006. This would indicate that the average loan-to-value ratio was actually north of 75%. Accordingly, if the value of homes falls 25%, on average, from 2006 values, as some very respectable economists and analysts believe may be the case, such a reduction would set the value of all homes in the US at around $15 trillion and the value of all homes with mortgages at about $11 trillion – a 100% average loan-to-value ratio. If that is not bad enough, consider the fact that mortgage debt is not spread evenly over all mortgaged homes, some homes are mortgaged for well below the average loan-to-value ratio. The unfortunate corollary is that a similar number of other homes, after such a reduction in value, would be mortgaged for amounts in excess of 100% of their value. A large number of these homeowners will find their homes worth far less then the mortgage debt outstanding thereon. Unfortunately, older and retired individuals with low or not mortgage debt do not comprise the heart of our consumer economy. Thus the impact of over-leveraged or "under water" housing will fall squarely on the shoulders of middle class homeowners, those raising families, working and, in better times, the core earners and consumers on which our economy depends.
- Selling homes to 20 year-olds – how the homebuilding industry killed off years of future demand. With inventories of existing homes for sale honing in on nearly a 12-month supply (the highest since the early 1980's) at current absorption rates, and new home sales inventories at roughly nine month's supply, reaching price equilibrium may be a long process. One of the reasons that price firming, to say nothing of recovery, may not occur until at least 2009 is that so many people who would have remained as renters during the first half of this decade were instead encouraged to buy homes with little money down. Sub-prime/Alt-A mortgage lending not only targeted people with bad credit, but also young people – many of them in their early 20's – with no bad credit history, but with nowhere near the equity down-payment required to qualify for a conventional mortgage. In earlier times, this portion of the population would have rented until they saved up enough to acquire a home. Not in this decade. As a result, a significant number of families that would have normally entered the home buying market over the next 5 or more years are already homeowners (albeit burdened by mortgage debt they may not be able to afford). Essentially, the extraordinary demand created by this decade's "special and creative financing" will not reappear until an entirely new cadre of young people can save up enough to truly afford a home.
- The current crisis can be traced back to the advent of home equity and sub-prime lending in the 90's, and in part to the Tax Reform Act of 1986. There are few financial crises in this country that aren't traceable to events occurring long before the crisis. For generations, people in this country have borrowed to afford a home and grew equity in their home through slowly paying off their mortgage loan and being the beneficiaries of normal economic inflation. The vast majority of people had the vast majority of their net worth represented by their home equity, and paying off mortgage debt contributed significantly to the nation's savings rate. The federal and many state governments promoted what is generally regarded as the social good of home ownership by providing a tax deduction for interest paid on mortgage loans. Prior to the Tax Reform Act of 1986, however, governments also permitted taxpayers to deduct almost any other kind of interest they incurred as well and the credit card companies and other consumer lenders naturally benefited, as their "product" (unsecured credit, auto loans, student loans, etc.) was this made cheaper to the consumer. After the non-mortgage interest deduction was phased out in the early 1990's, a new financial product came over the horizon – the Home Equity Line of Credit, or HELOC. At first, the HELOC was designed to solve the problem created by the elimination of interest deductions on consumer loans. Simply grant a lender a second mortgage on your home and suddenly, as long as you had less than $1 million in total home loans, you could deduct all of the interest on what really was a personal line of credit. Better yet, because it was secured, the interest charges were typically lower than on credit card debt. A great solution to the problem from lenders' and consumers' points of view, HELOCs became very popular and – by the end of the 90's – ubiquitous. Homeowners soon realized, however, especially as home values began to rise more rapidly beginning in 1996, that they could qualify for HELOCs far exceeding the amount of credit card lines and other consumer debt they used to have. And why was that? Because they were now borrowing against their home equity – their largest concentration of savings. Suddenly, consumers realized there were all sorts of things that they needed to acquire – available liquidity tends to produce that reaction in the United States – beginning with things like home improvements (a good investment) and better education for their children (also a good idea). But before long, and as the wealth effect of persistently rising home values entered the national psyche, American consumers needed other things too – that great vacation, the newest electronics and technology, or perhaps a nice boat. The mortgage lending industry made such spending almost irresistible, even providing special check books to pay for the things you thought you needed or deserved. It didn't feel as though people were dipping into savings – but they most assuredly were. And all along the government was subsidizing the interest on the debt being created. And if you used a lot of availability under your HELOC, the industry was all too happy to take some fees to refinance your entire mortgage. And when borrowers got in a little over their heads in the 90's, something called a "sub-prime" mortgage loan was created by the lending industry – at a little higher interest cost – to help them still qualify for refinancing, When interest rates started to drop precipitously earlier in this decade, it saved borrowers money to refinance and they could borrow even more against home equity without seeing payments increase.
- The levels of consumer spending over the past several years are being re-evaluated and consumer spending is in jeopardy as the culture of debt is dis-assembled. As noted, from 2000 to 2006, residential real estate and consumer debt more than doubled by a factor of some $6.9 trillion. That money found its way into the pockets of homebuilders (in small part, about $1.3 trillion) on the one hand and, on the other hand, to homeowners, sellers of land and existing homes and others (through home sales at inflated prices, refinancings, home equity lines of credit and credit card/installment sales credit). Other than the portion going towards the creation of new homes, where did all that money go? Depending on the proclivities of the homeowner or home seller, the money went to one of three places:
- Savings and investments in stocks and bonds, causing massive rallies in both markets;
- Consumer spending – all those plasma TVs, boats, home improvements, and Asian imports that have been the life blood of our economy; or
- Inter-generational wealth transfer – spurring consumption and or investment by the lucky recipients.
What Can be Done to Put this Behind Us
So that's what happened and why. Now the question is what to do about it, both to recover from the present situation and to prevent its possible reoccurrence (the financial markets have very short memories). The catastrophic debt driven bubbles in Japan and the US in the period of 1989 – 1990 provide good direction in this regard. In Japan, assets re-priced just as assets must at the end of any bubble (with real estate falling by an unimaginable 75% from peak to trough). Financial and commercial real estate assets also fell dramatically (although not nearly as much) in the US. The difference between the two cases is that Japan allowed their financial institutions and investors to continue in business without recognizing the massive losses they had incurred. This delayed the re-capitalization of their institutions and continued their post-bubble recession for some 13 years. In the US, however, the Fed, banking regulators and ultimately the then-newly formed Resolution Trust Corporation moved relatively swiftly to force assets and investments to be marked to market, disposed of and recapitalized, which saw the US back on track by the mid-90's. This must happen again, and without waiting for a change in administration.
The recent pressure on the Federal Reserve Bank to lower its Fed Funds target is counter productive in the above context. Encouraging more lending, the creation of more indebtedness and dis-saving, is precisely what got us into trouble in the first place. And in any event, more lax lending is fundamentally impossible in the current situation. Lenders and investors have finally woken up to the fact that more of the same will merely result in their not getting their money back. And the marginal reduction in floating rate mortgage loan interest rates will not prevent the eventual revaluation of homes, and may in fact delay it, resulting in a more sustained recession.
Conclusion
In past debt debacles, and other market crises, the affected assets have been things like commercial real estate, farmland, tech stocks and bank shares. This time around, along with the stock market, it is people's homes, the re-pricing of which literally hits us where we live. The potential for massive social and economic destabilization needs to be taken into account in considering solutions. Every effort must be made to restore lost jobs, production and eventually savings – and that will be nearly impossible by increasing the number of bankrupt and/or homeless citizens. At the same time, we are a nation of laws and contracts and the government should not be stepping in to advocate the abrogation of loan documents and other legally-engaged-in business dealings (consumer fraud is another matter).
It is often said that economic bubbles don't burst, they deflate. We are watching the air gradually leak out of a bubble of our own creation – the underpinnings of which were the massive increase in the indebtedness, and the reduction in savings and net worth, of our fellow citizens. Wall Street, the banking sector and government must cooperate to recognize the magnitude of the crisis, to enable a swift recovery therefrom and to minimize the chances of its reoccurrence.
http://www.rgemonitor.com/us-monitor
Did banks collude to freeze the auction rate securities (ARS) market?
BloggingStocks - USA
About three hours later, at 6:29 pm, he sent an e-mail to his financial advisor saying, "I want to get out of arcs [Auction Rate Certificates]. ...
See all stories on this topic
BloggingStocks - USA
About three hours later, at 6:29 pm, he sent an e-mail to his financial advisor saying, "I want to get out of arcs [Auction Rate Certificates]. ...
See all stories on this topic
Citigroup faces fraud charges in US
The Age - Melbourne,Victoria,Australia
NEW York Attorney-General Andrew Cuomo is about to charge Citigroup, accusing it of fraudulently marketing and selling auction-rate securities and ...
See all stories on this topic
The Age - Melbourne,Victoria,Australia
NEW York Attorney-General Andrew Cuomo is about to charge Citigroup, accusing it of fraudulently marketing and selling auction-rate securities and ...
See all stories on this topic
China to ease economic brakes
China's leaders, faced with slowing growth rates and rising prices, are turning their attention to maintaining stable economic expansion rather then holding back what had been seen as an overheating economy. - Olivia Chung
China's leaders, faced with slowing growth rates and rising prices, are turning their attention to maintaining stable economic expansion rather then holding back what had been seen as an overheating economy. - Olivia Chung
CREDIT BUBBLE BULLETIN
The Uppers
Home prices in the Hamptons, the summer haven of New York financiers and socialites, fell almost 12% in the second quarter from a year earlier and sales dropped 26% as Wall Street firms cut jobs. The implosion of the bubble economy is now hitting the places where its greatest excesses occurred.
Doug Noland looks at the previous week's events each Monday.
THE WEEK AHEAD
SPEAKING FREELY
False signs of the end
The US government's bailout of Fannie Mae and Freddie Mac, along with a falling oil price, has helped promote a recovery in parts of the stock market. At face value, this would suggest investors believe the worst is over. Do not believe it. - Ronald Solberg
The Uppers
Home prices in the Hamptons, the summer haven of New York financiers and socialites, fell almost 12% in the second quarter from a year earlier and sales dropped 26% as Wall Street firms cut jobs. The implosion of the bubble economy is now hitting the places where its greatest excesses occurred.
Doug Noland looks at the previous week's events each Monday.
THE WEEK AHEAD SPEAKING FREELY
False signs of the end
The US government's bailout of Fannie Mae and Freddie Mac, along with a falling oil price, has helped promote a recovery in parts of the stock market. At face value, this would suggest investors believe the worst is over. Do not believe it. - Ronald Solberg
THE MOGAMBO GURU
Betrayed by the village idiot
The US House of Representatives has raised the country's debt limit by a further US$800 million, an indication that we have not learnt the obvious lesson that we have been betrayed by Congress again and again as it screws up everything it touches. We, the voters, get what we deserve.
MARKET RAP
Testing times
The Shanghai and Taiwan markets stand out, even in a relatively placid week, for their volatility and scale of declines. Both are approaching critical tests.
Betrayed by the village idiot The US House of Representatives has raised the country's debt limit by a further US$800 million, an indication that we have not learnt the obvious lesson that we have been betrayed by Congress again and again as it screws up everything it touches. We, the voters, get what we deserve.
MARKET RAP
Testing times
The Shanghai and Taiwan markets stand out, even in a relatively placid week, for their volatility and scale of declines. Both are approaching critical tests.
The cost of socialism
The United States is seeking to resolve its present financial crisis by socializing losses. International precedents indicate that this path leads to curbs on individual freedom and enterprise, and economic decline. - John Browne (Jul 31, '08)
The United States is seeking to resolve its present financial crisis by socializing losses. International precedents indicate that this path leads to curbs on individual freedom and enterprise, and economic decline. - John Browne (Jul 31, '08)
Special Report
Credit Market in Turmoil
Bernanke May Sound Tougher on Prices to Avert Fed Bank Presidents' Revolt Federal Reserve Chairman Ben S. Bernanke, likely to leave interest rates unchanged today, may need to sound tougher on inflation to avert the sharpest public disagreement among policy makers in more than a decade.
Fannie Mae, Freddie Mac Losses May Last Into 2009 as Delinquencies Spread Fannie Mae and Freddie Mac, the biggest U.S. mortgage-finance companies, may report net losses through the first quarter of 2009 as home-loan delinquencies rise to the highest on record, analysts' estimates show.
U.S. Service Industries Index Contracts Less Than Economists Had Estimated Service industries in the U.S. shrank in July for a second straight month as a drop in orders offset an improvement in employment.
Mark Mobius Says Fed Should Cut Overnight Bank Rate to 1% to Boost Economy The Federal Reserve should cut its benchmark interest rate to 1 percent to boost the economy as falling oil prices reduce the threat of inflation, investor Mark Mobius said.
Societe Generale Profit Falls 63%; Writedowns Trigger Investment Bank Loss Societe Generale SA posted its biggest gain in four months in Paris trading after the bank reported a smaller decline in second-quarter profit than analysts estimated.
Wall Street Lawyers Ask Barclays Can You Spare $250,000 as Credit Tightens Partners at top-grossing U.S. law firms, once able to draw advances against expected annual profit, have found the credit crunch is limiting the amount they take home.
Credit Market in Turmoil
Bernanke May Sound Tougher on Prices to Avert Fed Bank Presidents' Revolt Federal Reserve Chairman Ben S. Bernanke, likely to leave interest rates unchanged today, may need to sound tougher on inflation to avert the sharpest public disagreement among policy makers in more than a decade.
Fannie Mae, Freddie Mac Losses May Last Into 2009 as Delinquencies Spread Fannie Mae and Freddie Mac, the biggest U.S. mortgage-finance companies, may report net losses through the first quarter of 2009 as home-loan delinquencies rise to the highest on record, analysts' estimates show.
U.S. Service Industries Index Contracts Less Than Economists Had Estimated Service industries in the U.S. shrank in July for a second straight month as a drop in orders offset an improvement in employment.
Mark Mobius Says Fed Should Cut Overnight Bank Rate to 1% to Boost Economy The Federal Reserve should cut its benchmark interest rate to 1 percent to boost the economy as falling oil prices reduce the threat of inflation, investor Mark Mobius said.
Societe Generale Profit Falls 63%; Writedowns Trigger Investment Bank Loss Societe Generale SA posted its biggest gain in four months in Paris trading after the bank reported a smaller decline in second-quarter profit than analysts estimated.
Wall Street Lawyers Ask Barclays Can You Spare $250,000 as Credit Tightens Partners at top-grossing U.S. law firms, once able to draw advances against expected annual profit, have found the credit crunch is limiting the amount they take home.
U.S. Treasuries Are Little Changed Before Fed's Decision on Interest Rates Treasuries were little changed before the end of the U.S. central bank's meeting, when economists expect policy makers to say they're leaving interest rates unchanged.
Bernanke May Sound Tougher on Prices to Avert Fed Bank Presidents' Revolt Federal Reserve Chairman Ben S. Bernanke, likely to leave interest rates unchanged today, may need to sound tougher on inflation to avert the sharpest public disagreement among policy makers in more than a decade.
U.S. Service Industries Shrank for Second Month as Economic Growth Cooled Service industries in the U.S. shrank in July for a second straight month as a drop in orders offset an improvement in employment.
Fannie Mae, Freddie Mac Losses May Last Into 2009 as Delinquencies Spread Fannie Mae and Freddie Mac, the biggest U.S. mortgage-finance companies, may report net losses through the first quarter of 2009 as home-loan delinquencies rise to the highest on record, analysts' estimates show.
Bernanke May Sound Tougher on Prices to Avert Fed Bank Presidents' Revolt Federal Reserve Chairman Ben S. Bernanke, likely to leave interest rates unchanged today, may need to sound tougher on inflation to avert the sharpest public disagreement among policy makers in more than a decade.
U.S. Service Industries Shrank for Second Month as Economic Growth Cooled Service industries in the U.S. shrank in July for a second straight month as a drop in orders offset an improvement in employment.
Fannie Mae, Freddie Mac Losses May Last Into 2009 as Delinquencies Spread Fannie Mae and Freddie Mac, the biggest U.S. mortgage-finance companies, may report net losses through the first quarter of 2009 as home-loan delinquencies rise to the highest on record, analysts' estimates show.
Henry Paulson
has lost control
US Treasury Secretary Henry Paulsons claims that the US's banking system is sound - a remarkable description when the debts of "the only functioning part of the home loan market" are greater than its assets. The country's middle-class and blue-collar workers have a better grasp on reality. - F William Engdahl
has lost control
US Treasury Secretary Henry Paulsons claims that the US's banking system is sound - a remarkable description when the debts of "the only functioning part of the home loan market" are greater than its assets. The country's middle-class and blue-collar workers have a better grasp on reality. - F William Engdahl
THE MOGAMBO GURU
Election time, and then ...
There's so much bad news oozing out of the US economy you might be wondering why things haven't collapsed. The entire US House of Representatives and a third of the senate are up for reelection come November and they need your vote. Until then, they improvise. After that, the bills come in.
CREDIT BUBBLE BULLETIN
The Uppers
Home prices in the Hamptons, the summer haven of New York financiers and socialites, fell almost 12% in the second quarter from a year earlier and sales dropped 26% as Wall Street firms cut jobs. The implosion of the bubble economy is now hitting the places where its greatest excesses occurred. (Aug 4, '08)
Doug Noland looks at the previous week's events each Monday.
THE WEEK AHEAD
MARKET RAP
Testing times
The Shanghai and Taiwan markets stand out, even in a relatively placid week, for their volatility and scale of declines. Both are approaching critical tests.
R M Cutler runs his eye over the ups and downs in the week's markets. (Aug 1, '08)
Election time, and then ... There's so much bad news oozing out of the US economy you might be wondering why things haven't collapsed. The entire US House of Representatives and a third of the senate are up for reelection come November and they need your vote. Until then, they improvise. After that, the bills come in.
CREDIT BUBBLE BULLETIN
The Uppers
Home prices in the Hamptons, the summer haven of New York financiers and socialites, fell almost 12% in the second quarter from a year earlier and sales dropped 26% as Wall Street firms cut jobs. The implosion of the bubble economy is now hitting the places where its greatest excesses occurred. (Aug 4, '08)
Doug Noland looks at the previous week's events each Monday.
THE WEEK AHEAD MARKET RAP
Testing times
The Shanghai and Taiwan markets stand out, even in a relatively placid week, for their volatility and scale of declines. Both are approaching critical tests.
R M Cutler runs his eye over the ups and downs in the week's markets. (Aug 1, '08)
Crude Oil Falls a Third Day as Slowing Economies May Cut Demand
Bloomberg - USA
Tropical storm Edouard was downgraded to a depression after it made landfall on the Texas coast, idling 6 percent of US Gulf of Mexico oil output. ...
See all stories on this topic
Economists Plumb the Depths of the Downturn
New York Times - United States
... liberals to conservatives — disagreed about just how bad this economic slowdown, led by the worst housing slump since the Depression, could be. ...
See all stories on this topic
Economists want rates raised, while borrowers push for cuts
Palm Beach Post - FL, United States
"The problem is that, for the first time since the Great Depression, the banking, housing and consumer sectors are all caught up in an inescapable Catch-22 ...
See all stories on this topic
Shifting down the gears: Big Freeze Part 3 – The economy
Financial Times - London,England,UK
So, a year into the big freeze in financial markets and the world economy bears all the hallmarks of overheating, not another Great Depression. ...
See all stories on this topic
The greatest challenges we face are global ones
TheChronicleHerald.ca - Halifax,Nova Scotia,Canada
This is not to suggest we are headed for a replay of the Great Depression but that we are all in trouble if we fail to support and strengthen the global ...
See all stories on this topic
Bloomberg - USA
Tropical storm Edouard was downgraded to a depression after it made landfall on the Texas coast, idling 6 percent of US Gulf of Mexico oil output. ...
See all stories on this topic
Economists Plumb the Depths of the Downturn
New York Times - United States
... liberals to conservatives — disagreed about just how bad this economic slowdown, led by the worst housing slump since the Depression, could be. ...
See all stories on this topic
Economists want rates raised, while borrowers push for cuts
Palm Beach Post - FL, United States
"The problem is that, for the first time since the Great Depression, the banking, housing and consumer sectors are all caught up in an inescapable Catch-22 ...
See all stories on this topic
Shifting down the gears: Big Freeze Part 3 – The economy
Financial Times - London,England,UK
So, a year into the big freeze in financial markets and the world economy bears all the hallmarks of overheating, not another Great Depression. ...
See all stories on this topic
The greatest challenges we face are global ones
TheChronicleHerald.ca - Halifax,Nova Scotia,Canada
This is not to suggest we are headed for a replay of the Great Depression but that we are all in trouble if we fail to support and strengthen the global ...
See all stories on this topic
The Fragmented Future of World Trade - Alexander Neubacher, Der Spiegel
Anti-Business States Awash in Red Ink - Steve Malanga, RealClearMarkets
Anti-Business States Awash in Red Ink - Steve Malanga, RealClearMarkets