Category: Economy

WSJ Saying that this Recession Could Be Nasty

No Comments

Though, of course, the author, Justin Lahart, hedges about whether we will actually have a recession (My take is that we’ve been in one for some time, and that we have been experiencing a recession like living standards, based on percentage of population employed, since 2001)

His Article uses terms like, “on track to be at least as bad as the five most catastrophic financial crises to hit industrialized countries since World War II”, and makes reference to Japan’s “lost decade” in the mid 1990s.

The idea that this is going to be a bad one is hitting the mainstream.

No Good Comes of Treating Insolvency as Illiquidity

No Comments

As the good doctor Roubini says, there is a difference between an illiquidity crisis, and an insolvency crisis.

A corollary is that dealing with insolvency as illiquidity simply throws good money after bad*, and the extensions that are being granted to ACA Bond Holdings to “unwind” its credit swaps, is an attempt to deal with insolvency as illiquidity.

ACA has lost 97% of its market cap over the past year, it’s been downgraded to CCC last month (12 steps all at once), and it’s currently being run by its regulator, the Maryland Insurance Administration, which, “extended an agreement that waives collateral requirements, policy claims and termination rights until Feb. 19, the New York-based company said in a statement on Business Wire late yesterday.”

It’s hit an ice berg, and it’s going down. Delaying this in the hope of finding stupid investors is going to help no one in the long term.

*To quote Roubini on the difference, “But the current market turmoil is much worse than the liquidity crisis experienced by the US and the global economy in the 1998 LTCM episode. Let me explain why. Economists distinguish between liquidity crises and insolvency/debt crises. An agent (household, firm, financial corporation, country) can experience distress either because it is illiquid or because it is insolvent; of course insolvent agents are – in most cases – also illiquid, i.e. they cannot roll over their debts. Illiquidity occurs when the agent is solvent – i.e. it could pay its debts over time as long as such debts can be refinanced or rolled over – but he/she experiences a sudden liquidity crisis, i.e. its creditors are unwilling to roll over or refinance its claims. An insolvent debtor does not only face a liquidity problem (large amounts of debts coming to maturity, little stock of liquid reserves and no ability to refinance). It is also insolvent as it could not pay its claim over time even if there was no liquidity problem; thus, debt crises are more severe than illiquidity crises as they imply that the debtor is insolvent, i.e. bankrupt, and its debt claims will be defaulted and reduced. In emerging market crises of the last decade, we had liquidity crises (i.e. a solvent but illiquid sovereign) in Mexico, Korea, Brazil, Turkey; we had debt/insolvency crises (a sovereign that was both illiquid and insolvent) in Russia, Ecuador, Argentina.”†

†You have to just love this, footnotes almost twice as long as my post.

Economic Update

No Comments

[on edit]
The lead off news is that the head of the IMF. Dominique Strauss-Kahn, is calling the global economic situation “serious”.

As to what he’s considering, Strauss-Kahn, a Frenchman is meeting with French President Nicolas Sarkozy to see what a the French response must be.

It just feels so good to be rescued by the French, huh?

Well, we don’t have US quotes, because it is a holiday, but there was a lot of blood in the foreign markets, with the FTSE-100 fallint 5.5 percent, the CAC-40 6.8%, and the DAX 30 plummeting 7.2 percent in Europe, and in Asia, the Shanghai Composite fell 5.8%, the (Singapore) Straits Times Index fell 6% (15.8% for the year), and India fell 7.4%.

The “markets” don’t think that the stimulus package, which is to say GW Bush’s “no money for the working poor” package, which tanked the US markets on Friday, Sucks.

For what it’s worth, the US meltdown is beginning to hit Europe, where there is increasing pressure for the ECB to lower interest rates. (My guess is not right now. The ECB is charged with keeping inflation down only, no requirement on employment)

European banks are tightening up lending standards in response to the meltdown, so short term liquidity problems may be coming to Europe too.

We also have the Bank of China, the 2nd largest lender in that country, share price dropping by over 6% because of concerns over their subprime exposure. There are rumors that they will show a net loss in 2007 as a result.

Oil, however seems not to be spiking lately. Recession fears have a way of doing that.

Economics Update

No Comments

We’ve just had £2 billion ($4 b) fund in the UK suspend trading because of a panic, but “Aegon UK added that it believes the “underlying fundamentals of the asset class remain healthy”.

Nope, there is an increasing understanding that the last one leaving the room won’t only be without clothes, but that the price of exit will involve selling an organ.

Standard and Poors is now assessing the risk of bond insurer giants MBIA and Ambac in excess of 70% over the next 5 years. If they unwind, a lot more unwinds too.

Sprint is laying off 4000, and closing 125 stores.

Bond insurer ACA is asking for more time to unwind its contracts, basically because it’s out of case. If they go under, “Banks and brokers could suffer billions of dollars of losses from credit protection they bought from ACA.”

Volcker Blames Alan “Bubbles” Greenspan Fed for Bubble

No Comments

This is a big surprise. One of Greenspan’s first acts when he joined the fed was to vote against Volker and to relax, eventually to the point of near meaninglessness, the Glass-Steagall to the point of near meaninglessness.

Now he is saying that the Fed (by which he means Alan “bubbles” Greenspan) is responsible for the bubbles.

Former Federal Reserve Chairman Paul Volcker thinks the U.S. central bank is to blame for allowing bubbles to inflate asset markets, and says that current Fed chief Ben Bernanke is in a tough spot.

“I think Bernanke is in a very difficult situation,” Volcker told the New York Times Magazine for a story it will run on Sunday. The Times made the text available to the media in advance of publication.

“Too many bubbles have been going on for too long … The Fed is not really in control of the situation,” the Times quoted Volcker as saying, in clear criticism of both Bernanke and his predecessor Alan Greenspan.

No, it really means just bubbles.

Alan Greenspan never found an MBA written scam that he would not allow, or a bad stupid investment that he would not bail out.

To Err Is Human, but It Requires an MBA To Create Total Clusterfu$% . . .

No Comments

I probably should include this in my standard economics update, but Barry Ritholtz’s line (my title) is too good not to give top billing.

He is talking about something called “Counter-Party Risk“, which is the risk that an issuer might default on a payment or go into liquidation. Also known as counter party risk.

Basically, he is continuing his ongoing riff on what will happen if monoline insurers go belly up, as increasingly seems likely.

He expects there to be a lot more “down” there, as do I. There is a lot of leverage, out there. For an MBA, it’s called leverage, for the rest of us, it’s called “being in debt up to our eyeballs”.

In describing the monoliners, MR. Ritholtz is right:

That situation was obviously intolerable. So they brought in the financial engineers. Hey, we should be issuing insurance on Credit Default Swaps (CDS) — the premiums are much much bigger than boring old munis!

Any time you hear words to that effect, you know you are dealing with an idiot of the highest magnitude. Those are the equivalent to “Give me a match, I want to see if there is any gas in the tank.”

The monolines are not in trouble because Municipalities are defaulting on bond payments. (That’s waaaay in the future). The problem is they wrote insurance — taking in that fat premiums — without properly understanding the risk.

….

I’ve said it before, and I’ll repeat it again: To err is human, but it requires an MBA to create total clusterfu#@ . . .

My analogy, that like those people on American Idol whose friends have told them that they can sing. Is nowhere near as clear or as lyrical.

Bernanke supports stimulus package – Jan. 17, 2008

No Comments

Bernanke speaks out in favor of a stimulus package, and he is saying that it should help “beleagered consumers” and that it “should be explicitly temporary”.

While he does speak favorably of some temporary tax credits for business investment too, he is not repeating Alan “Bubbles” Greenspans incompetence, and endorsing massive permanent tax cuts.

He’s already put himself well ahead of Ayn Rand’s acolyte in the competence department.

MBIA Ambac Default Risks Soar

No Comments

The risks of default by MBIA and Ambac have gone through the roof, and Ambac is in danger of losing it’s AAA rating, which could hasten a collapse by making capital harder to raise.

As to the significance? Atrios nails it when he says:

Ambac and MBIA are the two Jenga pieces which will pull the whole sh#@pile down. They insure all of the sh#@pile, allowing everyone to pretend that all of the risky stuff they own isn’t risky at all. But that insurance is most likely a complete fantasy as it seems Ambac and MBIA don’t have the cash to pay out claims. I should’ve gotten into the bond insurance business. Lower their ratings, you destroy their businesses. More than that, you wipe out the insurance fantasy, forcing everyone who insured with them to admit they have all this risky stuff on the books. Recognizing, of course, that in this context “risky” is just a euphemism for “sh#@ty.”

Economics Update

No Comments

Philadelphia-area manufacturing activity lowest just after 911.

Lehman Brothers is downsizing its mortgage arm. I believe that there is an expression, involving the words, “barn”, “door”, and “cow” that would be appropriate here.

It looks like the real estate crash is finally starting to effect rents, with rents increacing by only ½% in 2007 in a sampling of 10 metro areas. (In previous years, it was in the 3% range)

Housing starts and permits plunge to multi-decade lows. Housing starts are the lowest in 27 years, permits the lowest in 33 years. The market is still on the way down.

This analysis predicts 5 years to recover. It’s probably wrong.

Local housing crashes have all taken at around 5 years to recover, and the markets were far less inflated. Additionally, the underlying economic situation is very grim, and the home buyers were less leveraged, meaning that foreclosures will be higher this time.

The Dollar has recovered somewhat against the Euro in response to an inflation hawk on the ECB saying that right now recession is the problem, not inflation

Bill Clinton and the Repeal of Glass-Steagall

No Comments

The Nation has a very interesting article, Citigroup: Too Big to Fail?, which goes a long way towards seeing how the deregulatory attitudes of the past 31 years (yes, it started with Carter) have led to our current mess.

Citibank is the poster child for this problem, though the bank has a very long history of being on the wrong side of collapses (they were deep in Mexico and Asia when both needed bailouts).

First, let’s look at the Glass-Steagall act of 1933. It was a New Deal law, which was enacted in response to abuses preceding the Great Depression, where bankers were pushing depositors to invest in dubious stocks that they were also being paid by the company to sell.

Basically, it made it illegal for a commercial bank to operate as an investment bank, and vise verse, because there are too many conflicts of interest created when commercial banks are permitted to underwrite stocks or bonds“.

Bill Clinton delivered his “New Democrat” party, accompanied by lots of happy talk about magic words like “synergy” and how “modernization” would create a more stable (and profitable) financial system. It did the latter, for sure, but not the former.

Actually, the combination of insurance, investment banking and old-line commercial banks multiplied the conflicts of interest within banks, despite so-called “firewalls” supposed to keep these activities separate. Much like Enron, placing some deals in off-balance sheet entities did not insulate Citigroup from the losses in its swollen subprime housing lending. The bank has so far written off something like $15 billion and more to come.

The problem is, of course, that Citi is so large that the consequences of its failure would be disastrous to the markets. It would make the collapse of LTCM, which reaqired a Fed orchestrated (Alan “Bubbles” Greenspan) bailout look like the failure of the corner 7-11.

Over the past few years it has appeared that the every single rollback of Depression Era regulations has been a mistake.

European Central Bank Executive Council Member Says that Currency Strength May Constrain Fed Actions

No Comments

I have been warning for some time that the US dollar, and the US economy is in a bad position because we are increasingly in a position where rate cuts can cause the US dollar to plummet, and while this may be good in the long term, it would move toward restoring the balance of trade, in the short term it leaves US policy makers with the choice between inflation and recession, and that the net result would probably involve both.*

Well, we now have a central banker at the European Central Bank, Lorenzo Bini-Smaghi, saying the same thing, when he, “warned that the tumbling dollar may now start to foreclose the option of US rate cuts and force the Fed to keep monetary policy tighter than it would like.”

The ECB is acknowledging that the Emperor has no clothes. While it seems mild, it’s actually a very strong statement, and it’s not the individual statement of one person. They don’t freelance that way.

*See here, here, here, here, here, here, here, here, here, here, and here, with the last link being just as I started the blog, but I’ve been posting about this on a private BBS for about 6 years.

Economics Update

No Comments

Consumer prices rise by the highest amount since 1990, though it should be noted that the inflation numbers have become far less reflective of reality due to “creative massaging” since then.

H/t to The Big Picture for finding the cartoon.

Bond Insurerer Ambac Cuts Dividend, and declares loss, they are bleeding to death.

[on edit, added the following]
Standard & Poors raises the assumed losses on 2006 subprime bonds from 14% to 19% when it makes ratings on financial instruments, such as CDOs. They are in the process of reviewing their models for all outstanding mortgage backed debt. (The end result won’t be pretty)

Then we have a report from JP Morgan saying that home equity delinquencies are high In fact, they are higher than they would have expected at the bottom of a recession, which implies that the way down is still pretty scary, and their profits fell 34%.

On the good news side, oil prices have fallen below $90/bbl, because traders expect to see a moderation in demand because of an economic slowdown.

Citicorp Melt Down

No Comments

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.

Why It’s Good to Have Democrats Running Congress: Part 867-5309

No Comments

From Nancy Pelosi’s blog“

As part of its ongoing investigation into executive pay, the Oversight Committee has invited three CEOs implicated in the subprime mortgage crisis to testify on February 7, 2008, about their severance and compensation packages.

Read letters to Charles Prince, the former CEO of Citigroup (pdf) and E. Stanley O’Neal, the former CEO of Merrill Lynch (pdf).

Full letter to Angelo R. Mozilo, the CEO of Countrywide Financial (pdf):

January 14, 2008

Mr. Angelo R. Mozilo
Chairman and CEO
Countrywide Financial Corporation
4500 Park Granada
Calabasas, CA 91302

Dear Mr. Mozilo:

I am writing to request your testimony at a hearing on February 7, 2008, before the Committee on Oversight and Govemment Reform. The hearing will address executive compensation and severance arrangements for CEOs involved in the ongoing mortgage crisis.

According to recent press reports, if Bank of America completes its proposed purchase of Countrywide Financial, you stand to collect tens of millions of dollars in severance payments and other compensation. I request that you be prepared to provide your perspective on this reported pay package. You should plan to address how it aligns with the interests of Countrywide’s shareholders and whether this level of compensation is justified in light of your company’s recent performance and its role in the national mortgage crisis.

The Committee on Oversight and Govemment Reform is the principal oversight committee in the House of Representatives and has broad oversight jurisdiction as set forth in House Rule X. An attachment to this letter provides additional information about testifying before the Committee.

If you have any questions regarding this letter, please contact Roger Sherman or David Leviss of the Committee staff at (202) 225-5051.

Sincerely,

Henry A. Waxman
Chairman

Enclosure
cc: Tom Davis
Ranking Minority Member

Countrywide’s Mozilo To Leave In Luxury
Andrew Farrell, Forbes – January 14, 2007

Angelo Mozilo made nearly $150 million selling Countrywide shares before they tanked. The mortgage lender’s chief executive can nearly double that windfall and also earn some luxurious perks if he leaves his post following the struggling company’s acquisition by Back of America.

Mozilo will reportedly receive up to $115 million in severance in cash and stock if he resigns or is fired. Mozilo’s future at the company he founded is in doubt after its sale.

On Friday, Bank of America confirmed it will buy Countrywide Financial for $4.1 billion. Bank of America Chief Executive Ken Lewis has said only that he would like Mozilo to stay at Countrywide until the acquisition closes. Then, “I would guess that he’ll want to go have some fun.”

Mozilo, the son of a Bronx butcher, would be able to have some fun in style thanks to some perks in his severance package. In addition to the huge payout, Mozilo can take free rides on the company jet and have his country-club bills paid for, according to a Friday report in the Los Angeles Times.