Seeing as how the monoliner insurer’s business plan is essentially renting out their triple-A rating, this pretty much puts them out of business.
With the monoliners heading for the rocks, it means that all forms of bonds are going to be more expensive to issue, and more difficult to resell, so I expect the market to slow down a lot, and possibly freeze up.
Weekly initial unemployment claims were less than expected, though the 4 week moving average of people receiving unemployment benefits was up.
If there is a “wealth effect”, then this might be the side effect of the not wealth effect, as household net worth dropped by $1.7 trillion in 2Q of 2008.
A lot of this drop is due to the real estate market, where there were over a million homes in foreclosure in Q1 of 2008, 2.5% (one in 40 for the mathematically challenged) of all loans being serviced by the Mortgage Bankers Association, which explains why Federal Reserve Vice Chairman Donald Kohn expects to see more write-downs and losses for banks.
Another day, another record for retail gasoline, $3.989/gal, and oil rose to $125.05/bbl, largely on the European Central Bank holding its interest rate at 4%, and it’s president publicly worrying about inflation, which implies rate hikes and a weaker dollar, which tends to push oil prices up.
Finally, monoline insurers MBIA and Ambac are delaying attempts to try and raise capital because of the prospect of a rate cut by Moody’s.
The Big Picture dug up this graph of total federal lending to financial instututions:
If that does not scare you, you are already dead.
Gray bars indicate recession.
The qualified special-purpose entities (QSPE) is an off the books accounting structure similar to the ones that Enron used to conceal its losses, and now it looks like the FASB will be instituting a revised rule, FAS 140, to eliminate them.
Basically, this means that billions, and perhaps trillions of dollars of exotic financial instruments would have to move to the balance sheet, which would show many banks to be undercapitalized or even insolvent.
ADP’s private report suggests 40,000 new jobs, though it should be noted that , “U.S. companies’ planned layoffs rose 15 percent in May from April to the highest monthly total since December 2005” it has been noted that, “ADP has been inaccurate of late, overpredicting payrolls,” so I would wait for the government figures.
On the other hand, productivity rose more than predicted in Q1 of 2008, though all indications is that this was not more stuff to do, but simply less stuff doing it, “Aggressive cuts in worker hours will help shield corporate profits and keep wage-related cost pressures under control, helping to reassure the Fed.”
Personally, I’m inclined to take the pessimistic assessment of this, because the Institute for Supply Management’s (ISM) non-manufacturing index fell to 51.7, indicating a softness in the service sector.
Additionally, we have the forecasting a world wide growth rate of only 1.8% this year, and weekly mortgage applications fell to a 6-year low.
Inflation worries are now weighing down the dollar, though oil prices are down a bit more to $122.48/bbl, but retail gas prices rose to a new high again, $3.983/gal.
Lastly, we have a visit from our old friends, the monoline insurers, with Ambac and MBIA getting hammered because Moody’s is finally considering a downgrade on their debt.
Well, retail gas prices set a new record high again, $3.978/gallon, making 26 new records in 27 days, and yesterday was flat, even though oil fell just under $4 to $123.99/bbl, and it’s $11.19 lower than the record on May 22.
Lehman is expected to post a loss of around 1/3 billion, and is making noises about selling more stock to raise about $4 billion in capital, which has driven the dollar down a bit.
The fact that the dollar has fallen today is odd, given that Bernanke has said that he is concerned about the weak dollar and that further rate cuts are unlikely, both of which should serve to strengthen the dollar, at least in the short term.
In the mean time the Fed shoveled another $75 billion to banks as a part of their sh&^pile for cash scheme, so perhaps someone is noticing the sound of printing presses at the Bureau of Engraving and Printing going to warp 9.
Finally, we have Thornburg Mortgage delaying its earnings report to the SEC, which in these times almost always means bad news.
Deutsche Bank asset management devision is looking to, “repackaging their home-loan bonds into new securities without creating collateralized debt obligations, which are being shunned by investors“.
They are called REMICs, are real estate mortgage investment conduits:
REMICs are real estate mortgage investment conduits, the tax-exempt vehicles used to turn mortgages into bonds by passing payments from the loans to different investors in varying orders of priority or at different times. Re-REMICs repackage some of those securities or a single class into new bonds in which payments are also directed in different ways.
I’m not seeing a difference here. It appears to me that they are putting a new wrapper on the big sh$#pile, as Atrios is wont to call it, and calling it George.
This seems to be a day for very stupid ideas.
Kohn is suggesting that the cash for the big sh&^ pile program be continued, “as long as regulators tighten oversight of the companies.”
A better ideal would be to apply anti-trust to make the investment banks small enough to be small enough to fail.
Constant bailouts would be norm under the system proposed, because financial experts have an unlimited capability to delude themselves that, “This time is different“.
We do not want the Fed, and thus the taxpayer, to be supporting the gut instincts of a Harvard MBA whiz kid.
The current estimates for may have payrolls dropping by somewhere around 60,000. This number is rather more indicative than the unemployment rate, since those who have given up are not counted for the latter.
To my mind, the percentage of the population working is probably the best number, at least when compared to the BLS which increasingly appears to employ Tinkerbell as their chief statistician.
It’s been a busy time for real estate. We have The Economist noting that house prices are falling even faster than during the great depression, which is worse than it sounds, because we had deflation during the depression, which means that houses are falling even faster in real terms, see the pretty picture:
We are alsoseeing prices fall for houses above $5 million, the NY Daily News is declaring New York to be a renters’ market, and foreclosures in Boston 45% of all housing transactions are foreclosures.
What’s more, the popping of the real estate bubble is now now hitting property taxes, as counties raise rates to account for falling property values and foreclosures.
It’s no wonder that mortgage defaults are surging.
In energy, oil is still below the record, but oil increased to $128.25/bbl, though, for the first time in 25 days, gas did not hit a new record.
Gas didn’t fall either though, it stayed at Sunday’s level.
The dollar has strengthened somewhat, because the markets are expecting a Fed rate hike, which I doubt, given that the election is 6 months away.
In the real economy, the ISM manufacturing index increased to 49.6, the consensus was that it would fall to 48.0, but this is not good news, just less bad news, since any number under 50 is still a contraction.
In banking, S&P have noticed that some of the major investment banks are using funny accounting on their assets, and so they have cut the ratings or outlooks on Lehman Brothers, Merrill Lynch, Morgan Stanley, Bank of America, Citi, and JPMorgan Chase.
It’s no wonder bank losses are expanding, and you have the Financial Times wondering how much bank failures are likely to increase as more debt goes bad.
On the good news side of the equation, it appears that Wachovia has had a case of temporary sanity, and they fired CEO Kennedy Thompson after hemorrhaging profits and stock price over the last year.
Hopefully, there will be no golden parachute for him.
It’s nice that shareholder activists are foing after undeserved executive compensation:
Almost one in five HSBC shareholders refused yesterday to back a controversial executive pay scheme that could see the bank’s top six executives pocket up to £120m over three years.
Shareholder after shareholder at a lengthy and at times fractious meeting in London brought up the subject of the huge bonuses that could be paid at HSBC despite the drop in the bank’s share price and a multibillion-dollar write-down from the US sub-prime mortgage crisis.
“You have been paid a salary; your bonus is not for losing money, which you have consistently done,” one shareholder told the chairman, Stephen Green. “You and the rest of the board have caused misery to millions of people and yet you are there with your hands out taking everything you can … how much is enough?”
I would hope that this becomes more common, and more effective (the activists got 18% of the vote).
This is crony capitalism at its worst.
Mother Jones has a very good article on how Phil Gramm is at the center of every major financial scandal of the past decade.
Basically, if you see a financial collapse, Phil Gramm changed the law to make it possible.
And this guy is McCain’s economic guru.
It’s a good read.
Basically, he ruled to quote Tanta, “ If you make a “liar loan,” the Judge is saying here, then you cannot claim you were harmed by relying on lies. And if you rely on an inflated appraisal, that’s your lookout, not the borrower’s.”
If this sets a precedent, there will be a whole series of loans that will be up for grabs in bankruptcy proceedings, as it should be.
As a result of concerns about the accuracy of the London Interbank Offered Rate, it appears that a number of financial institutions are casting about for an alternative metrid.
This is big, because it reflects the fact that even the most mundane, and until recently rock solid, standards of the financial industry are no longer reliable, which is why money is not flowing, and is unlikely to flow.
This appears to be a slow motion car wreck that we are watching in the financial markets.
This development is in no way surprising. Evidence of inflation, even if the CPI data has been massaged to meaninglessness, is everywhere, and the seasonal adjustment in July will yield some truly awful numbers.
Something weird is going on. Bank of America just fired David Sambol, Countrywide’s president and chief operating officer (technically, he’s retiring), when they had previously said that he would head their combined mortgage operation.
My guess that someone uncovered some more “chocolaty goodness” at the center of Countrywide…only it wasn’t chocolate.
It might also be some sort of attempt to queer the deal on BoA’s part, because they realize that it’s a really bad idea.
The SEC is looking at how the ratings agencies do business:
The U.S. Securities & Exchange Commission (SEC) is looking into the workings of the three main credit rating agencies, prompted by their handling of the subprime crisis and a report of computer errors at Moody’s
. “We sent letters to Moody’s, Standard & Poor’s and Fitch asking for them to get back to us on aspects of their methodology,” said Erik Sirri, director of the SEC’s trading and markets division.
The basic problem, however, is that they are paid by the people that they rate, creating an inherent conflict of interest.
This is at the core of many of the problems that we are seeing now. The felons are running the prison.
Because they believe that there is a significant risk of arrest should they do so.
These are the people that John McCain’s economics guy, Phil “Mr. Personality” Gramm, lobbied for, and they know that they are crooks.
Goldman Sachs is saying that it will leave the Institute of International Finance because of its calls for relaxed financial standards.
When Goldman f$#@ing Sachs says that the accounting is too dicey for them, you know that something is seriously wrong.
Basically, it all comes down to “level 3 assets”, those for which there is no ready market. This is the stuff that Atrios calls the big sh%$pile.
In any case, the IIF wants to implement rules that, “would enable financial companies to cushion the blow of financial crises by valuing illiquid assets using historical, rather than market, prices“.
Meaning that they want to value this sh^% as it was valued a few years ago, when everyone thought that there had to be a pony somewhere.
Corruption at its finest.
Oil is up again today, to $131.03/bbl, even though demand is falling, and retail gas prices hit a record for 21st straight day, $3.944/gallon.
I think the only question is whether it will break $4/gal before June.
Paradoxically enough, the dollar strengthened, despite the higher oil prices.
Finally, we’re seeing a drop in mortgage applications, because rates are rising.
Rates will go up eventually, and when they do, the housing market will get even more ugly.