Jobless claims hits 339,000, they were expecting about 10,000 less.
Category: Economy
GE Fund Breaks the Buck
The GEAM Trust Enhanced Cash Trust, is shutting down, and investors are getting $0.96/share. While this is a money fund, and not a money market fund, it is generally viewed as only a marginally higher risk, and losing money is nearly unheard of. Typically, it is a guaranteed $1 in, and $1 out, with the risk being that returns would be poor.
There is a possibility that this might happen with Money Market funds too, though it is less likely, as they are more tightly regulated, and they make safer investments, because their investment strategy is not as aggressive.
Fannie Mae Changing Accounting Practices to Conceal Losses
Fannie Mae has changed the way it computes credit loss ratio, a measure of the quality of its loans.
Bigger numbers are bad, and under the new scheme, the number is 4 basis points, but under the old scheme, it would have been 7½ basis points.
I believe that Fannie is the 2nd biggest issuer of debt in the world, and the fact that the quality of their loan portfolio is almost twice as bad as their numbers suggest is scary.
Economic News for the Day
Yes, the stock market is up, but that is peripatetic. Here are some more links to follow:
Countrywide’s mortgage loan origination falls 48%
Existing home sales expected to hit 5-year low in 2007, a 12/7% decline, with 2008 looking even worse.
China’s inflation rate hits 11-year high, they are claiming 6.5%, but how you can have that when food is going up at 17.6%, and pork by 54.9%, I gotta figure that they, like the US tweak their cost of living figures. If forced to raise interest rates, it will put further downward pressure on the dollar.
Black Thursday Coming as New Accounting Rules Cut In
On November 15, FASB 157 comes into effect, which will require that level 3 assets (a brief primer on level 3 assets here) be “marked to market” (priced by market value), or written down as losses.
Previously, they had been priced using complex, and likely inaccurate, models developed by the holders of these instruments.
So now, they have to price these assets according the price that they might fetch in a market which does not exist.
The author of this article, Harry Koza puts it more colloquially:
Right, like the assumption that house prices can only ever go up. Anyway, FASB says that starting Nov. 15, fair value at any given moment is the price you can sell the thing for, period. So now all the banks and dealers have to disclose how much of what’s on their books is crap that there’s no bid for, and write down the value to what it’s really worth, which, in some cases, may be bupkes. Needless to say, the previous valuations of those investments, using management’s presumptuous assumptions, were much closer to par than the new ones will be.
It’s 1929 on crack.
Nearly $15 Billion Goes from AAA to Junk
Calculated Risk: Fitch Downgrades $37.2 Billion of CDOs
Fitch Ratings downgraded Monday the credit ratings of $37.2 billion of global collateralized debt obligations, with more than $14 billion worth of transactions falling from the highest-rated AAA perch to speculative-grade, or junk, status.
…
The rating agency said more than 60 CDO transactions are still on watch for potential downgrade, with a resolution due on or before Nov. 21.On Monday, nearly $20 billion worth of transactions was cut from investment-grade to junk, said Kevin Kendra, managing director at Derivative Fitch.
The problem is that there are many assets that simply have no buyers, at least not at a non-bankruptcy inducing price. As such, they are illiquid, and valuless.
Economic Newws
A Lehman Brothers analyst downgraded Fannie Mae and Freddie Mac. He cut their respective target prices from the mid $60s/share to mid $40s a share as a result of the turmoil in the mortgage markets.
The private equity firm Blackstone reported a net loss of $113.2 million, as compared to a profit of $372.5 million a year ago. Its stock is about $24, as opposed to the $38 when it went public a few months back.
This includes $802.6 million of non-cash compensation charges tied to Blackstone’s initial public offering in June, so my quick read is that the partners in the firm pulled a ¾ billion dollar scam on people who bought into the IPO, but I’m an not wise in the ways of IPOs, so your analysis may vary.
E*Trade Likely to Go Belly Up
It’s been a tough day for them. E*Trade shares are down 57% today, following the announcement Friday that they had significant exposure in mortgage backed securities. (I covered it here)
One analyst says that it is 65% likely that they will go belly up.
E*Trade is claiming that it will remain solvent with “an immediate write-down over $1 billion”. Given that has a “$3 billion portfolio of asset-backed securities”, it would seem unlikely, except for the fact that no one actually knows what they would sell for. There is no functioning market for these vehicles.
Sandler O’Neil analyst Richard Repetto said investors should no longer buy E-Trade stock, but said he doesn’t believe the firm is facing the worst-case scenario others are forecasting. He added the firm isn’t likely to have to take the more than $1 billion in losses needed to hurt its “well capitalized” standing, unless credit issues spread to the portfolio of prime asset backed securities or home equity loan performance “materially worsens.”
And there is the rub. Everyone believes that the credit issues will spread, and that home equity loan performance will tank.
If you have more than $100K in E*trade, I would suggest that you get out. Under that amount, you are federally insured.
More Evidence of Desperation in the Financial Markets, Death Threats
I think that this is an indication of just how precarious the current financial situation really is.
Subprime Contageon Spreads to UK
Banks Creating Shell Game to Convince Gullible Investors That Their Level 3 Assets Not Worthless
Bank of America, Citigroup and JPMorgan Chase have agreed on the rules for their $75 billion fund to stabilize their various structured investment vehicles (SIV).
What this comes down to is an attempt to stick it to a less savvy investor. These SIVs have no marketplace, and cannot be sold at anything near face value, they are essentially illiquid unless you are willing to take something like a dime on the dollar.
What this fund will do, at least until it runs out, is to function as a faux buyer, so as to create a faux market price, which will allow the banks to dump these off on the stupid.
We need to reinstate the Depression era banking regulations, big time.
Stocks Tanking in Asia
It looks like Tuesday (no trading on Monday because of the Memorial Day weekend) will be really ugly.
Major World Indices – Yahoo! Finance
| Symbol | Name | Last Trade | Change | Related Info |
|---|---|---|---|---|
| ^AORD | All Ordinaries | 6,525.70 |
 81.70 (1.24%) |
Components, Chart, More |
| ^SSEC | Shanghai Composite | 5,119.49 |
196.05 (3.69%) |
Chart, More |
| ^HSI | Hang Seng | 27,594.21 |
1,189.20 (4.13%) |
Components, Chart, More |
| ^BSESN | BSE 30 | 19,058.93 |
0.00 (0.00%) | Chart, More |
| ^JKSE | Jakarta Composite | 2,662.22 |
45.45 (1.68%) |
Components, Chart, More |
| ^KLSE | KLSE Composite | 1,402.25 |
11.60 (0.82%) |
Components, Chart, More |
| ^N225 | Nikkei 225 | 15,031.91 |
551.51 (3.54%) |
Chart, More |
| ^NZ50 | NZSE 50 | 4,090.71 |
44.06 (1.07%) |
Components, Chart, More |
| ^STI | Straits Times | 3,492.26 |
107.41 (2.98%) |
Components, Chart, More |
| ^KS11 | Seoul Composite | 1,905.65 |
84.82 (4.26%) |
Components, Chart, More |
| ^TWII | Taiwan Weighted | 8,654.63 |
316.29 (3.53%) |
Chart, More |
Foreign Central Banks Instituting Currency Controls to Prop Up Dollar
Just so you knoow, this is a pretty good indicator that the dollar’s “Wile E. Coyote” moment will be sooner rather than later. So the fact that the central banks of India, Korea, and Columbia have implemented measures to keep the the dollar from tanking is not a good sign.
In Colombia, international investors buying stocks and bonds must leave a 40 percent deposit at Banco de la Republica for six months. The Reserve Bank of India created a bureaucratic thicket to curb speculation by foreign money managers. The Bank of Korea is investigating trading of currency forward contracts to limit gains in the won, now at a 10-year high.
Instead of using currency reserves or interest rates to influence foreign exchange markets, central banks and finance ministries are setting up obstacles to keep the falling dollar from threatening company profits and economic growth. The U.S. currency slumped 10 percent this year against its biggest trading partners, the steepest decline since 2003, while Treasury Secretary Henry Paulson has reiterated that the U.S. supports a “strong” dollar.
This isn’t going to work, and will make the eventual dollar collapse worse.
Consequences of a Falling Dollar
The Center for Economic and Policy Research*, or more accurately Mark Weisbrot, one of its founders has an interesting take on the falling dollar.
His take is that a “strong dollar” policy, which is more accurately described as an “overvalued dollar” policy, is a bad thing. It amounts to a subsidy one imports, and a tariff on imports.
Like most bad policy, there’s a conflict of interest underlying the resistance to having the dollar move to a more competitive level. Robert Rubin is now Chairman of Citigroup. (Both Rubin and Paulson are former CEO’s of Goldman-Sachs). The big bankers and the financial sector generally do not have much interest in promoting growth and high levels of employment in the domestic economy, and certainly not rising wages. For them, inflation is the only real enemy, since it erodes the value of financial assets. (Rising wages are viewed negatively by these people because wage increases are seen as increasing inflationary pressures).
If you read the business press you might have noticed that when unemployment goes up, the bond market generally rallies. That is a reflection of the financial sector’s direct interest in lower inflation and lower wage growth even if it hurts the vast majority of the country. A high, even overvalued, dollar helps hold inflation in check by keeping import prices lower. On the flip side, as the dollar adjusts to a more sustainable level, at least some increase in inflation is inevitable as import prices increase.
Some of our big transnational corporations also like a high dollar because it makes everything they buy overseas – including other companies as well as labor – cheaper for them. And of course for those whose first priority is an affordable vacation in Europe – well they are out of luck when the Euro rises, as it has now, to $1.45.
But for the vast majority of the country, a “strong dollar” is more like a “strong influenza virus” – something to be avoided whenever possible.
I do wish that he had commented on China’s “weak Yuan” policy, because it makes a good counterpoint. Their exports are burgeoning, but inflation is eating them alive right now.
I think that it is clear that a falling dollar will result in more goods and services being produced in the US, but we will also have high inflation, and high interest rates. At the end of the tunnel, the Average American will be better iff, but during the adjustment, when imports costs rise, and there is no domestic capacity to take up the slack, and house prices tank because of higher interest rates, it will be ugly.
*They are a liberal economic think tank. Check out there about us page.
E-Trade and Wachovia See Major Losses
Wachovia is looking at $1.1 billion in losses, much of it tied to it’s 2006 purchase of Golden West Financial Corp. of Oakland, California.
The contageon is spreading.
Consumer Sentiment Tanks
Down to 75.0 vs 80.9 in Ocober.
This is the lowest number since October, 2005.
With the shopping season coming up, this does not bode well.
New Bankruptcy Law Hitting Banks in Mortgage Portfolio
You may recall that the banks got a law passed a few years making it harder for people to discharge credit card debts.
Well now, this is one of the factors behind the explosion in defaults and foreclosures.
Washington Mutual, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. spent $25 million in 2004 and 2005 lobbying for a legislative agenda that included changes in bankruptcy laws to protect credit card profits, according to the Center for Responsive Politics, a non-partisan Washington group that tracks political donations.
The banks are still paying for that decision. The surge in foreclosures has cut the value of securities backed by mortgages and led to more than $40 billion of writedowns for U.S. financial institutions. It also reached to the top echelons of the financial services industry.
House Financial Services Committee Approves Mortgage Reform Bill
Well, despite the best efforts of the craven Bush Dogs to kill it, Barney Frank’s mortgage reform bill was voted out of committee.
It tightens restrictions on issuing mortgages (a barn door cow thing, but still good), and gives people more options in bankruptcy.
This is why Democrats matter.
Morgan Stanley Takes $3.7 Billion Writedown
Another brokerage with massive losses.
The problem is that for the past 30 years, due to deregulation, these entities have become too big for the government to allow them to fail, so we will all pay for it.
Fed Governor Says Small Business Can Still Get Credit
If credit for small business has not dried up because of the ongoning debacle on Wall Street, why has he felt compelled to deny it?
Methinks the lady doth protest too much.