Category: Finance

Moody’s to Rate Muni Bonds Fairly

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The original business for monoliner insurers was to insure government bonds, which were rarely rated at AAA by the agencies, even though they were at least as safe as AAA corporate bonds, so they would buy insurance, because the interest rate savings would more than pay for the insurance.

I’ve always seen this as self dealing by Wall Street. The ratings agencies set about screwing the taxpayers for the benefit of other folks, whether they be the monoliners or the investors who would get more interest.

Because of the increases scrutiny of ratings agency, there has been pressure to change this, and now Moody’s has announced that it will adopt the same ratings for Munis as it uses for corporate bonds.

About bloody time.

MBIA Execs Looting Company

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Or at least that’s what appears to be going on.

MBIA has raised a lot of capital lately, and it’s considering not putting the capital it just raised into its monoline insurance division, but it raised the capital for its insurance division.

As Yves Smith puts it:

So why is MBIA hoarding cash at the parent level? Well, executives (along with other corporate charges) are paid out of the parent company’s books. The subsidiaries can dividend cash up only if the are profitable OR get permission from their regulator.

Earth to SEC, we have a problem.

Arbitration as a Racket

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Businessweek has as damning article on the arbitration industry:

But internal NAF documents and interviews with people familiar with the firm reveal a different reality. Behind closed doors, NAF sells itself to lenders as an effective tool for collecting debts. The point of these pitches is to persuade the companies to use the firm to resolve clashes over delinquent accounts. JPMorgan Chase (JPM) and Bank of America (BAC) are among the large institutions that do so. A September, 2007, NAF PowerPoint presentation aimed at creditors and labeled “confidential” promises “marked increase in recovery rates over existing collection methods.” At times, NAF does this kind of marketing with the aid of law firms representing the very creditors it’s trying to sign up as clients.

The laws that allow for this need to be changed.

The arbitration system is corrupt to the core.

Economics Update

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Well, retail sales increased by 1% last month, about twice as much as expected. When gas if figured out, it drops to 0.8%, and then there is the question of how much food contributed.

Additionally, we have businesses expanding their inventories, though one has to wonder if this because they are hedging against inflation, or if they are expecting an uptick in business?

I tend to go with a bearish, and it appears that the outgoing head of the National Bureau of Economic Research (NBER) thinks so too.

He sees the economy slipping into recession, and possibly stagflation.

Certainly, inflation concerns are rising world wide, with the South African central bank raising rates, ½% to 12%. (Ouch)

Employment is not looking good either, with initial jobless claims rising to 384,000 last week, though one always the caveat that week to week changes can just be noise, as opposed to signal.

Then again, with mortgage rates rising, they are now at an 8 month high, I don’t see construction leading any recovery.

In energy, we had oil down as the dollar strengthened, though retail gasoline hit a new high…again.

Merrill Lynch Chief Executive John Thain Can Kiss My Shiny Metal Ass

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It appears that Thain really wants continued access to the Federal reserve discount window, what I have called the sh%$pile for cash program, to continue in perpetuity, but is aghast at the thought that continued access might be predicated on greater regulation of investment banking as an industry.

You want the taxpayers on the hook for your mistakes, but you want the government out of your hair so that you can make those mistakes.

You sound an awful lot like those farmers who want the government off their back, and in the next breath ask for their subsidy check.

It makes one wonder how much a Harvard MBA is really worth.

Good

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The Economist is wringing its hands because the Democratic controlled Senate is refusing to confirm two Bush nominees to the Federal Reserve Board of Governors. They think that it strikes a blow against the independence of the body.

They have it wrong. This is a good thing.

If the Democrats should have any goal in the next few months, it should be to absolutely prevent any permanent or long term personnel changes to the courts, the Fed, or similar bodies from Bush and His Evil Minions&trade.

They have an obligation to protect the American people from Bush.

Economics Update

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Well, the Federal Reserve’s beige book is reporting that economic growth is generally weak, though better than the last one two months ago, but James Bullard, President of the Federal Reserve Bank of St. Louis is saying that inflation is their primary worry right now, joining Bernanke and Federal Reserve Bank of New York president Timothy Geithner.

Canada is concerned about inflation too, with their central bank holding rates steady instead of lowering rates, as was expected, which pushed the Canadian dollar up.

I think that it’s likely that we will see inflation concerns in Japan driving central bank policy there too, as they just raised their 1Q GDP estimate to 4%, which is high enough to raise inflation concerns.

This would imply interest rates going up in the relatively new future, which would undoubtedly force another dip in house prices.

Of course, the resets coming in option ARMs may do this before rates get raised:

This is a scary picture.

There is some not bad news in real estate, Mortgage applications rose 10.9% last week, though one wonders how much of this is driven by bargain hunters REOs*, which was what drove the recent increase in existing housing sales.

More generally, the lack of confidence is not limited to real estate, as evidenced by the concerns that the LIBOR† is still not trusted, and that the proposed changes to it are largely viewed as inadequate.

In brighter news, rates are falling onauction rate securities, those financial instruments that were supposed to be as good as a cash account, but have locked up investor money.

This implies that some confidence in the auctions is returning to the market, and as a result, governments are redeeming fewer of the bonds, about $2 billion a week, down from over $5 billion/week for the past few months.

Still, we have problems in energy, with oil prices up over $5/bbl, and gasoline hitting a new record, $4.052/gallon.

*Real Estate Owned. Property which is in the possession of a lender as a result of foreclosure or forfeiture.
†London interbank offered rate, a critical measure used to do things like set credit card rates and mortgage rates adjustments.

SEC Proposes Changes in Ratings, Asset Backed Debt

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Bloomberg wrings its hands over this, and calls the proposed regulation that would give asset backed debt a different ratings scale a “scarlet letter” for these instruments.

This letter is well deserved. What is clear is that these byzantine products cannot be rated reliably, and as such people need to be warned off of them.

They are also calling for more transparency in the ratings process, with the ratings companies making public the data that they used.

It’s a good start, but only that, a start.

Economics Update

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China, in response to inflationary pressures, and the fact that a number of their banks are insolvent by western standards, just hiked their reserve requirements, meaning that they have to keep more in reserve, and lend less out of their deposits, which, not surprisingly has tanked Asian markets.

Given that the US trade deficit widened under the pressure of rising oil prices, there may be another purpose: to slow things down before US demand drops off a cliff, particularly when Ben Bernanke is signaling rate hike strongly.

In any case, oil fell a bit, but gasoline is still hitting new records, which implies that a lot of money is still going to petro-economies.

It looks like the British Bankers Association may be taking steps to fix the problems with LIBOR reporting, where this critical rate looks increasingly to have been gamed by member banks, by tightening scrutiny on the transactions, though they are still whining about how it will hurt, “What we do here in the U.K. must match others … maintaining competitiveness is essential to the U.K. industry.”

If you crank out phony numbers, it will hurt your bank more than any other thing that you can do.

Meanwhile, back in the good old USA, Q1 delinquencies rose 62% over a year ago.

SEC Looks to Ban Ratings Agencies from Consulting on How to Get Good Ratings

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It boggles my mind that this is allowed:

The U.S. Securities and Exchange Commission may recommend this week that Moody’s Investors Service, Standard & Poor’s and Fitch Ratings be prohibited from advising investment banks on how to earn top rankings for asset- backed securities, according to people familiar with the matter.

This just buggers the mind. These companies were advising investment banks on how to game themselves.

This is not the only change proposed, the SEC is going more generally for transparency in rating:

SEC staff may also propose at a June 11 meeting in Washington that the companies disclose all the data that goes into a rating so competitors can grade bonds even if they weren’t compensated by the underwriter, said the people, who declined to be identified because the rules aren’t final. Moody’s, S&P and Fitch help design securities backed by a stream of payments, making it impossible for them to be impartial raters, a May 2007 academic study by Joseph Mason and Joshua Rosner concluded.

This is Alan “Bubbles” Greenspan’s Randroid utopia of an unregulated market, inside players conspiring to defraud the average investor.

Economics Update

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The big news, though I’m not sure if it’s significant, is that, “The index of pending home resales rose 6.3 percent to 88.2, the highest level in six months.”

We are starting to see bargain hunters, but prices are still falling, and that is at the core of the housing bubble collapse. People are under water, and can’t sell to get out from under.

Review this article on , the price collapse of exurban McMansions. There is still a lot of pain to go, particularly since many of these homes are poorly built.

I wonder how many will end up multi-residential dwellings.

The dollar is down today, which implies further energy price increases and, eventually, higher interest rates.

Oil fell $4.19 today, which is not surprising after Friday’s spike, but retail gasoline prices rose again, to above $4.00/bbl. I filled up on the weekend at $3.93….I never knew that I lived in a low cost gas area.

Finally, Lehman lost $2.8 billion in Q1 of 2008, so this investment banks have a long way down to go.

The Next Shoe to Drop for Banks

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The loans that they made, which are now turning bad, to developers for the construction of subdivisions.

IndyMac tried to sell a $540 million loan portfolio, and it was ugly, “Winning bids on many of the loans were, on average, about 60 cents on the dollar, according to people familiar with the matter. But some winning bids were only about 20 cents on the dollar,” and there are a lot more loan packages, where the assets held by the developers are dropping in value, and even if the complete their projects no one wants to buy then.

This is why Office of Thrift Supervision noted that the number of S&Ls at “heightened risk of failure” has gone from12 in March to 17 now.

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UBS Under Pressure to Turn Over US Client Data, and Phil Gramm’s Name Pops Up

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It appears that about 20,000 wealthy Americans have accounts at the Swiss Bank UBS, and US regulators are now turning the screws to get this information out of them.

Under pressure from the authorities, UBS is considering whether to divulge the names of 20,000 of its well-heeled U.S. clients, according to people close to the probe, a step that would have once been unthinkable to Swiss bankers, whose practice of secrecy dates back to the Middle Ages.

U.S. investigators believe some of these clients may have used offshore accounts at UBS to illegally hide as much as $20 billion from the Internal Revenue Service. Doing so may have enabled these people to dodge $300 million or more in U.S. taxes, according to a government official connected with the investigation.

….

New revelations are likely to come Monday, when a former UBS banker is expected to testify in a Florida court about how he helped Olenicoff and other clients evade taxes. …..

The case could turn into an embarrassment for Marcel Rohner, the chief executive at UBS and the former head of its private bank, as well as for Phil Gramm, the former Republican senator from Texas who is now the vice chairman of UBS Securities, the Swiss bank’s investment-banking arm. It also comes at a difficult time for UBS, which is reeling from $37 billion in soured investments, many of them linked to risky U.S. subprime mortgages.

…

As the authorities zeroed in on UBS last January, the bank abruptly shut its three Swiss offices that sold undeclared offshore banking services to U.S. clients. Those offices catered to thousands of wealthy Americans, some of whom may now have their tax secrets put on public display.

(emphasis mine)

They are guilty as hell, and 90% of Americans know what it means to have a, “Swiss Bank Account”, and if Obama’s people don’t use this for Phil “Offshore Account” Gramm, John McCain’s economic guru, they are idiots.

Economics Update

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After 5 straight months of non-farm payroll job cuts, we are finally seeing an increase in the unemployment rate, ½% to 5.5%. It’s the biggest rise in 22 years, and it appears that the we’ve run out of discouraged workers, who are not counted as unemployed, to keep the rates low.

Oil, which had been trending down since May 22, reversed itself and hit a new record, peaking at $138.36/bbl. Retail gasoline, however, finally fell a bit (scroll down), down to $3.986 yesterday’s record of $3.989.

That’s the first time that gasoline prices have fallen in nearly a month.

Not surprisingly, all this has pummeled the dollar which has weakened to $1.5751 from $1.5592 yesterday to the Euro.

BTW, it’s not just monoliner insurers that are hurting, Fitch has downgraded mortgage insurers MGIC and PMI ratings, two of the larger mortgage insurers to to BBB+ from A.

If they go under, millions of people will technically be in default on their mortgage until they find another insurer.

Given all this, it’s no surprise that Federal Deposit Insurance Corp Chairman Sheila Bair is saying that we may see some failures of larger banks.

Bush and His Evil Minions™ Attempt to Blackmail Iraq Into Signing Away Sovereignty

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It appears that the US is threatening the Iraqi government with the loss of $50 billion in reserves in US banks in order to make them sign Bush’s “Iraq Forever” deal:

The US is holding hostage some $50bn (£25bn) of Iraq’s money in the Federal Reserve Bank of New York to pressure the Iraqi government into signing an agreement seen by many Iraqis as prolonging the US occupation indefinitely, according to information leaked to The Independent.

US negotiators are using the existence of $20bn in outstanding court judgments against Iraq in the US, to pressure their Iraqi counterparts into accepting the terms of the military deal, details of which were reported for the first time in this newspaper yesterday.

Iraq’s foreign reserves are currently protected by a presidential order giving them immunity from judicial attachment but the US side in the talks has suggested that if the UN mandate, under which the money is held, lapses and is not replaced by the new agreement, then Iraq’s funds would lose this immunity. The cost to Iraq of this happening would be the immediate loss of $20bn. The US is able to threaten Iraq with the loss of 40 per cent of its foreign exchange reserves because Iraq’s independence is still limited by the legacy of UN sanctions and restrictions imposed on Iraq since Saddam Hussein invaded Kuwait in the 1990s. This means that Iraq is still considered a threat to international security and stability under Chapter Seven of the UN charter. The US negotiators say the price of Iraq escaping Chapter Seven is to sign up to a new “strategic alliance” with the United States.

This is why the Iraqis are looking at petitioning the UN Security Council to extend the current mandate, which expires in December.

If they were to extend this by 6 months or a year, it would be to their advantage, and I can’t see the Bush administration vetoing this, it would put them and the US, in an absolutely untenable position diplomatically.

Then again, you can’t go broke overestimating the stupidity and venality of Bush and His Evil Minions.™