- I’m not married
- I’ll love you Forever
- This won’t hurt a bit
- The check is in the mail
- I was just going to call you
- I swear I won’t cum in your mouth
- Of course I’ll respect you in the morning
- And the top lie,NAR economist says housing has bottomed out.
Category: bubble
Citicorp Melt Down
The New York Times and Forbes have reported that it has over $18 billion in write-offs, resulting in $9.83 billion in losses.
The job cuts, looking to be as high as 10% of the workforce, are normal during a problem, but they have cut the dividend on their stock, which indicates far deeper problems*.
Citibank is in real trouble, and I think that foreign investors will snap up an even bigger portion of the company, assuming that they can be found.
*Of course, the fact that in business cutting jobs and putting people out on the street is normal, and cutting dividends is outrageous and extreme indicates just how f%$#ed up the values are of American business.
Economic Update
Wholesale inflation rose at the highest rate in 26 years, 26%, which would seem to indicate that the Fed won’t cut rates, but they have to, or the market will implode, leaving nothing but a greasy stain.
The Fed auctioned off $30 billion in loans, and this time the interest rates were lower, 3.95% as versus the previous 4.65% and 4.67%.
The banks borrow this money, so that they can lend it out at higher interest, and make money on the spread. The interest rate has dropped because another fed cut is expected, and because the lenders are still retrenching, so they have fewer loans to make.
And Merrill-Lynch is selling another piece of itself in a bit to hold onto solvency, this time to Kuwait Investment Authority, a sovereign wealth fund.
And in real estate, San Diego County house prices are down 13.1% year over year, and the recovery in UK house prices is over, it turned out to be a dead cat bounce, as the UK house price slowdown continues.
Economics Update
First off, the Baltic Dry Shipping Index is falling off a cliff:
It’s the shipping rates on the 24 busiest routes. On January 10, it dropped 4.6%, and it’s dropped 28% from its November 13 peak. It’s basically an index of shipping rates of bulk items, which in turn is a pretty good indicator of where the world economy is going.
It’s going down, and it also indicates that the world economy has not “decoupled” from the US economy.
Then we have Citibank announcing a $24 billion write-down, (doubtless with more to come) , and announcing around 20,000 job cuts. What’s more, the it appears that the government of China has suggested that it will prevent a multi billion dollar investment in Citi by the state-owned China Development Bank.
This indicates that China is getting twitchy about making US investments, which does not bode well for the dollar, which is currently at $1.4877:€1.0000, within about a penny of its all time low.
And then there is the fact that banks are unable to sell Chrysler financing, amounting to about $7 billion. It had originally been $10 billion, but they could not “syndicate” (sell) that debt toward the end of last year.
Wolfgang Münchau has an interesting analysis of the Credit Default Swap (CDS) markets, which go much farther and deeper than subprime, and appear to be in at least as much trouble. (A primer on CDS, which are the most prevalent form of derivative, here).
Münchau makes a point, and I’m not even sure he notices, when he says, “A truly awful scenario would be a long recession. The US did experience some longish recessions in the past, for example from November 1973 until March 1975, but there was no CDS market around at the time.”
That’s the point. This brave new world of complex financial instruments has created a tsunami which is now looming over modern financial markets.
We also have Robert Shiller, co-creater of the S&P/Case-Shiller Home Price index saying that falling house prices have gutted the value of Countrywide Financial, which Bank of America just purchased.
When he says, “I might have a lower valuation of Countrywide than Bank of America does,” he means, “Those idiots just threw money after bad.”
I said the same thing 3 days ago, but obviously, I’m an engineer, I’m not an economist, dammit*!
*I love it when I get to go all Doctor McCoy!!!.
We Are All Paying for Bank of America’s $4.1 B Acquisition of Countrywide
Really, we are, because for this ill-conceived venture, we are giving BofA can deduct $270 million a year for the next 5 years.
That’s $1.35 billion in the first 5 years, and if Countrywide’s losses are bigger (and they are), they can deduct the rest year 6.
Cleveland Sues Banks as “Public Nuisances”
I do not think that this lawsuit against 21 lenders will succeed, but we know what my prediction record is.
I think that the judges will throw it out of court in the early stages, but if they don’t, and it goes before a jury, I think that it will be far more likely that they will prevail.
That being said, the idea that major banks and Wall Street firms are being called public nuisances, “The Cleveland suit, filed Thursday in Cuyahoga County Common Pleas Court under the state’s public nuisance law, asserts that the financial institutions created nuisances across broad swaths of Cleveland because their loans led to widespread abandonment of homes,” does represent an interesting change in attitude.
For the past 25 years, the rule for municipalities and states was to please Wall Street, and now these institutions are being view, accurately IMNSHO, as parasites and near-criminal enterprises.
Well, That Was Quick
Just this morning, I suggested that Bank of America’s purchase of Countrywide was throwing good money after bad.
It appears that Moody’s Investors Service things the same way, they are considering downgrading B of A.
Barry Ritholtz makes the same point, using Dennis Gartman’s #1 rule of trading:
1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position… not ever, not never! Adding to losing positions is trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to ruin
After that initial disastrous buy in at $18-20, BoA is doubling up — at $6 . . .
Maybe I need to change banks.
14%
MBIA, one of the largest bond insurers in the nation, is floating a debt sale. The problem is that no one is buying, so it looks like they will have to pay 14% on the money that they borrow.
This is an AAA rated company, and they need 14%. That’s (low) credit card rates.
Any claims as to the end of the credit crunch are premature.
Lennar Sellls 11,000 Properties at 40¢ on the Dollar
Tell me that Bloomberg.com: the bubble is bottoming out.
Morgan Stanley real estate bought a stake in 11,000 properties at a 60% discount.
Bank of America to Buy Countrywide
Their press release is here.
Bank of America Corporation today announced a definitive agreement to purchase Countrywide Financial Corp. in an all-stock transaction worth approximately $4 billion.
Basically, BoA just bought Countrywide for some magic beans. It’s all funny money, unless, of course, if you are a shareholder, in which case, your stake in BoA is diminished.
Still a losing proposition, I think, particularly since the insolvent Countrywide will place downward pressure on the BoA stock price.
Economics Update
More blood for Citicorp and Merril, it looks like they will be needing additional foreign money, as they are expected to report additional losses amounting to $25 billion. In addition, Capital One is expected to report about a billion dollars more in losses than was previously expected (what’s in your wallet).
And Moody’s is thinking about cutting Freddie Mac’s rating to A-, which could make raising capital much more difficult.
December retail sales figures sucked wet farts from dead pigeons. It was an increase, but less than inflation, which makes a decrease in real $.
Ben Bernanke has pretty much guaranteed a rate cut in a speech he gave today to the Women in Housing and Finance and Exchequer Club in Washington, D.C.
Holy Crap!!! I Got a Prediction Right!!!!
On 17 November, I wrote about Bank of America buying $$2 billion worth of preferred Countrywide stock yielding 7.3%, and that can be converted into common stock at $18 per share (a 21% discount of the then price). It was supposed to be master stroke of vulture capitalism, giving away the gold the golden goose for some magic beans.
At the time, I said, “Honestly, I think that they will end up losing money on this.“
It appears that I was right (happy dance), and we are now seeing the articles wondering how Can Bank of America Can Salvage Its Countrywide Stake. They didn’t buy the golden goose, they bought the intestinal gas from the beans (It’s trading for $8.72), and now everyone is wondering how BoA will minimize its hurt.
These guys are paid millions of dollars to get stuff like this right, and they didn’t, and I did.
It doesn’t take a genius to figure this stuff out.
OH MY GOD
Rich Toscano has a post on December home prices in the San Diego Area, and if this does not scare you, are dead:
For the month of December, the size-adjusted median price was down 4.6% for single family homes, 5.8% for condos and 5.0% overall. That’s right, for the month. The graph below shows the declines from the peak.
FWIW, the housing market is collapsing from the bottom up, so the houses not selling are cheaper, and the already bad figures become even worse when corrected for square footage.
Economic Update
Merrill Lynch saying that a recession in the US “has arrived”, to which I say, “what took you so long”?
Countrywide Financialis hit by rumors of bankruptcy, and they have admitted that they fabricated documents in a foreclosure suit., so their stock is tanking.
Morgan Stanley has downgraded Ambac Financial and MBIA, two of the largest bond insurers because of concerns about mounting losses.
New home contracts fall, the National Association of Realtors’ has upped their estimate for year over year losses, and KB Home’s losses shoot skyward.
Bear Stearns CEO to Step Down
Jimmy Cayne is to resign.
Bear Stearns is circling the drain, and I stand by my prediction, buyout or closure by August 2008.
Commercial Real Estate Tanking Too
At least in San Diego and its environs, arguably one of the epicenters of the housing bubble, we are now seeing a glut of office space too.
Housing has historically tanked about 6-18 months before commercial real estate in the case of local bubbles.
Forclosures Skyrocketing in Boston Suburbs
As the picture shows, it’s not just poor people in poor neighborhoods who are getting hammered, and this pattern is being repeated nation wide.
Economic Update
Job growth was only 17,000 in December. The already anemic prediction had been 80,000 jobs, as opposed to the 115,000 in November.
What’s more, private sector employment fell.
As a result, unemployment hit 5%, a 2 year high, and this number is artificially low, due to things like discouraged workers, and statistical machinations of the Bush DoL.
So the job numbers, along with the markets dropping 2% today, have put more pressure on the Fed to cut rates.
BTW, generally the market rallies on bad jobs reports, because there is an assumption that falling interest rates will drive money to stocks.
In the world of $100/oil, we have the rebels in Nigeria’s delta area threating an escalation, though oil has dropped in response to the poor job numbers.
Do you remember Bankruptcy reform? Well it ain’t working. Bankruptcies have risen 40 percent in 2007.
Just so you know, the Fed is still pumping more money into the collapsing credit markets, so they are increasing the amount of money that they are auctioning on Jan 14 and 28.
You remember these loans…I made a crack about people putting up magic beans as collateral.
Just in case you are wondering how the credit crunch can effect you, the Massachusetts Secretary of State is looking into Merrill Lynch advice for Springfield’s reserve fund. They lost 91.4%, about $10 out of every $11 they invested by listening to their broker
There is, however, a bit of good news, asset backed commercial paper, a sort of short term loan used by businesses, has increased for the first time since August.
Of course, there has been an Augean level of currency pumped into the market by central banks, so I’m calling dead cat bounce.
Is America Following the Decline of the Ottoman Empire?
Niall Ferguson of the Financial Times, and surprisingly enough the reactionary right wing Hoover Institution at Stanford, has some interesting parallels between the present day US and the Decline of the Ottoman empire after about 1870.
The Ottoman empire is in bullet points, the US is indented further.
- After the Crimean war, the Ottoman Empire accumulated huge. Between 1855 and 1875, debt increased by a factor of 28.
- At the end of 1980 the federal debt was $994 billion, at the end of 2007, it was $9,350 Billion a factor of almost 10 (link).
- While some of the spending was for infrastructure, such as theSuez canal, but much was, “squandered on conspicuous consumption, symbolised by Sultan Abdul Mejid’s luxurious Dolmabahçe palace and the spectacular world premiere of Aïda at the Cairo Opera House in 1871.”
- Iraq, tax cuts for the wealthy, pork barrel projects, Star Wars, F-22, JSF, Future Combat System.
- There was a panic (financial crisis) in 1873 making further financing unavailable to the Ottomans
- Sub Prime Mess, 2007.
- In October 1875 the Ottoman government declared bankruptcy.
- Not yet, but it is quite literally the goal of much of the Republican party, like Grover Norquist, who, when not taking terrorist money to lobby, wants to “drown the federal government in a bathtub”.
- This led to the sale of the Suez Canal to the British, and foreign investors getting the right to other Ottoman revenues.
- Sale of significant shares of major financial institutions to foreign investors and foreign government sovereign wealth funds.
- For Egypt, this led to increasing British involvement in governance until eventually Egypt became a de facto colony.
- Not yet here, but you see this with the IMF and World Bank elsewhere in the world.
As Ferguson so succinctly puts it, “Debtor empires sooner or later have to do more than just sell shares to satisfy their creditors.”
Economic Update
The Institute of Supply Management’s manufacturing index had declined for the first time in 11 months. Predictions had placed it at 50.5, rather slow growth, but it came in at 47.7, on drops in orders and production, and we have the same thing happening worldwide, with the Global manufacturing PMI falling to a 4½ year low, which seems to indicate that the rest of the world has not “decoupled” from the US economy.
Singapore’s economy is taking a hit, because Americans are no longer able to buy their stuff.
Then we have the other Mecca of Anglo-Saxon capitalism going through the same real-estate crisis that is hitting in the US
The latest figures indicate that 23 per cent of people – 9.5 million adults – were finding their current level of debt “unmanageable”. Although the Bank of England cut the base rate of interest last month, an estimated 1.4 million people will still have to pay more for their home loans when their fixed-rate deals come to an end this year, costing an extra £150 to £250 a month.
Sounds familiar.
Merrill Lynch has sold itself for some more cash, which seems to indicates taht there are some more losses, probably significant ones, that have not yet found their way to the balance sheets and quarterly reports.
In further banking news, General Electric and the Blackstone Group had to backoff of a buyout of PHH, a mortgage and auto-leasing company, because their financing fell through.
Finally, we have reports that dollar-based assets held by the world’s national banks have fallen to a record low. There is not yet a stampede to the door, but people are definitely standing up and stretching their legs.
The data indicated that of the $3.8 trillion in allocated reserves, about 63.8 percent was held in U.S. dollars, down from 65 percent at the end of the second quarter this year.