So, Hillary Clinton is suggesting that Bush create, “an emergency working group on foreclosures”, staffed by such notables as Robert Rubin, Paul Volker, and ….wait for it….wait for it….wait for it….wait for it….Alan Greenspan.
Alan Greenspan the man who suggested in 2004 that the housing sector was, “in good shape”, we would all be better off if, “lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage”?????
I am completely at a loss for invective.
Arkansas Attorney General Dustin McDaniel is saying that two recent State Supreme Court decisions mean that payday lenders can be prosecuted under the Arkansas Deceptive Trade Practices Act.
No offense to any reader of mine from Arkansas, and a quick look at the statistics reveals that number over the past 8 months to be 27, but this is the one of the last places that I would expect this.
I do understand that Arkansas is less corrupt than Louisiana, more populist than Texas, and less backward than Mississippi, but I find this to be a very surprising development.
While Arkansas does have a a bit of a tradition of populism, I think that this more important than simply short term politics.
There is an increasingly strong view, society wide, that deregulation of financial markets, from the very small (Payday Lenders), to the very large (Wall Street) have failed.
People realize that in the real world, there are situational and informational asymmetries that require that the government take action to prevent predators from preying on the weak.
Took them long enough.
It’s Purim, so let’s lead off with currency.
First, the dollar is a bit stronger vs the yen, but I think that the trend, and the underlying fundamentals, are in the other direction. No secrets here, just the combined federal and balance of payments deficit, along with the rise of the Euro as a reserve currency (brief primer here on what a reserve currency is), will push the dollar down.
There is an article in CNN Money about why there will be no bailout of the greenback by other nations central banks, but it misses an important point, that this bailout has been ongoing for over a decade.
The dollar is now falling in spite of the best efforts of the central bankers.
And in the “economists are always late to the game” news, the Economic Cycle Research Institute (ECRI) says that we are definitely in a recession.
Not to worry though, as majority of Americans think economy will turn around in 2009. I expect that the predictive powers of the American public will not be as good as mine.
We are looking at a deep and long recession, as credit contracts, and the stagnant wages of the past 30 years catches up with us. This will be worse than 1982, when unemployment broke 10% (Ronnie added the military to the count to keep the number below 10%), and real (i.e. subtracting inflation) interest rates in excess of 6%.
I think that it will be worse.
In the short term, the Visa IPO that I erroneously derided seems to have given a lot of banks some breathing room. It’s generated a significant amount of cash, which should help with upcoming liquidity issues….for a while, at least.
Still, banks will be leery of making loans even to exemplary credit risks, for some time to come.
In the world of companies in trouble, S&P is considering downgrades to Goldman and Lehman, and it has downgraded National City’s outlook rating.
However, this is all pretty mild compared to where Thornburg Mortgage which, in order to prevent margin calls (people demanding their loans be paid back now) for the next year, gave its creditors the following:
Jobless claims
378,000, up 22K from the previous week, and the leading economic indicators fell for the 5th straight month by 0.3%.
Oil dropped nearly $4.00/bbl, and the dollar is up versus the Euro.
These are both driven by what is seen as reduced demand for oil, and a rate cut from the Fed which was around 25 basis points (0.25%) less than expected.
Still, it does not appear that the banks are optimistic Citi is looking to cut 2,000 jobs in their securities division (investment banking and trading). This is in addition to the 4k announced in January.
Just to remind you, it’s not just sub-prime, as Alt-A delinquencies and foreclosures are spiking too, and are trashing the related mortgage backed securities.
Finally, the Federal Reserve continues its extended bout of anilingus with the brokerage houses, making $75 billion in treasury securities available to investment banks.
So I’m doing a a google on ERISA and healthcare, and there was a sponsored ad, a link to this:
Quote:
Date Started: March 17, 2008
Hagens Berman Sobol Shapiro LLP is investigating possible ERISA violations by the Bear Stearns Companies Inc. relating to the Employees Stock Ownership Plan (“ESOP”).
The investigation comes after JPMorgan Chase & Co. announced it is purchasing Bear Sterns for $2 per share, 90 percent less than the 85-year-old firm’s market value last week. The investigation is looking into whether fiduciaries of the Company’s ESOP knew or should have known that Bear Stearns concealed its exposure to risky collateralized debt obligations, sub-prime mortgages and other poor-quality securities. If fiduciaries did not exhibit due diligence in protecting the ESOP participant’s investments in Company stock and were aware of the extremely high-risk investments the company made, plan fiduciaries could be found in violation of ERISA laws.
Concerning possible ERISA violations, Hagens Berman Sobol Shapiro is looking at whether or not Bear Stearns continued to offer and hold company stock in the ESOP when it was no longer prudent to do so, and if the company failed to take action to sell Bear Stearns stock or otherwise protect the plan’s assets in light of the company’s risky business strategies and deteriorating financial condition.
In a company press release on March 16, 2008, the company announced that JPMorgan would acquire Bear Stearns and stocks could be transferred from Bear Stearns to JPMorgan based on the closing numbers from March 15, 2008. Bear Stearns stock tumbled from $30.00 per share on March 14 to $4.81 at closing on Monday, March 17, 2008.
If you have information concerning this investigation you can sign up to join the investigation, or contact Hagens Berman at 206/623-7292 or via e-mail at info@xxxxxxxxxxxxx.
Well, that was quick.
First, news of the stupid, Office of Federal Housing Enterprise Oversight has reduced the reserve capital requirements for the GSEs, so Fannie Mae and Freddie Mac will be able to loan another 200 billion out.
The problem is blow back from too much leverage, so you are allowing more leverage?
There are people walking away from their homes now because they realize that it will be 10+ years before they have any equity at all in their homes, and you want more exposure to the 2nd and 3rd largest borrowers in the world?
BTW one of the interesting points about yesterday’s rate cuts was that the dollar strengthened, which really runs counter to the normal motion. The analysts say that this was because it indicated that the Fed was really going to keep the economy out of recession.
Well, that lasted about 24 hours (here and here)
Of course no bit of economic news is complete without the performance art/low humor known as a press release from one of the monoliner insurers, in this case
Ambac claiming that it had “no material exposure” to the Bear Stearns debacle.
Yeah, sure. I may not be an economist, but I know weasel words when I hear them.
BTW, one of the CEOs of the big 3 auto makers are expecting sales to be poor this year. Such insight. That must be why they get paid 7 figures a year plus bonus.
Mortgage application volume fell 2.9% last week. No one is lending, and no one is buying.
Finally, we have Goldman Sachs and Lehman Brothers conducting a fire sale on some of their dicier oinvestments fire sale on debt associated with leveraged buy-outs and private equity deals.
This is considered a good thing, which locally, it is. If you pump radioactive waste out of your basement, into the town reservoir, you are doing better personally.
Any time that the Fed cuts rates, it’s the lead economic story, and today the Federal Reserve huts its discount rate by 75 basis points to 2.25%.
There is not a whole bunch left for the Fed to do. At the rate that they have been cutting this year, they will be at zero some time in July.
We are in a pickle, and Paul Krugman is right when he says that at best we are almost in a liquidity trap, if we aren’t already there. The Fed cutting rates has very little effect on interest rates for the rest of the economy right now.
As a result of the rate cuts, and the inflationary pressures involved, Oil appears to be heading back up.
Additionally, low interest rates tend to push the dollar down. The dollar spent most of today above $1.58:€1.00, though it’s now strengthened to a bit less than $1.57, about 1% below the all time low of $1.5904:€1.0000 reached on Monday.
Our economy in 1000 words.
Of course the real economy, the one that most of not on Wall Street live in, had a few statistics too, with Industrial output dropping 0.5% in February and inflation on the move, with the core producer price index increasing by 0.5% in February.
And it’s not just our economy, it’s both pillars of “Anglo-Saxon Hypercapitalism”, with banks the Bank of England’s emergency 3 day loans totalling £5 billion obeing oversubscribed by almost 500%.
It also looks like Lehman may be the next brokerage to have to deal with a run on its accounts. It’s shares were down 39% in early trading Monday, though it had largely recovered today.
One source of revenue for the various financial houses, private equity buyouts and other forms of leveraged merger and acquistion activity, appear to be drying up. No one wants to lend right now.
It probably does not help that we have it looks like a new star is born in the ppathetic theater that is the monoliner insurance debacle, FGIC, which posted a $1.89 billion loss. If people cannot trust the insurers to pay off if you default, then maybe they don’t want to fund your ill conceived takeover scheme.
This applies to foreigners, who not only are not interested in investing in American businesses, but are avoiding what used to be the safe haven of US Treasuries.
Finally, housing starts hit a 17 year low, though the article optimistically states that it is “above forecast”.
A pox on economic reporters. A little truth a little earlier, and perhaps housing starts would not be the lowest since Poppy Bush was in the White House.
Maybe I’ve grown hard hearted in my middle age, but somehow, the plight of upper management at Bear Stearns does not inspire the empathy in me that it does Landon Thomas Jr. of the New York Times.
Bear Stearns has always been one of the shadier brokerages, with line fuzzing being a part of their investment strategy, so I’m just not upset that James E. Cayne “billionaire just over a year ago when Bear’s stock soared past $160, his 5.8 million shares are now worth about $28 million at Monday’s closing price of $4.8”.
Nor am I distressed that, “Some executives had moved quickly, putting their weekend homes on the market”.
Because of their work there are now people with no home at all.
And then there are the poor investors, “Bear executives were not the only big losers. Joseph Lewis, the Bahamas-based financier, invested $1 billion at prices above $100 last year, and top institutional investors like Morgan Stanley, Legg Mason and Barrow, Hanley, Mewhinney & Strauss, a value investor in Dallas, have been recent buyers of the stock.”
Boo F*&%ing Hoo.
You know, when you sold the cow for those magic beans, no one guaranteed you that the beans were magic. A lawsuit is just sour grapes.
Bear Stearns have been the “Bad Boyz” of Wall Street for years, and you knew what your were buying.
I think that it is likely that a taxpayer funded bailout would be the only viable option, as Paul Krugman says in his NY Times OP/ED. He also notes that while the whether to bail out is settled, the how is not:
The U.S. savings and loan crisis of the 1980s ended up costing taxpayers 3.2 percent of G.D.P., the equivalent of $450 billion today. Some estimates put the fiscal cost of Japan’s post-bubble cleanup at more than 20 percent of G.D.P. — the equivalent of $3 trillion for the United States.
If these numbers shock you, they should. But the big bailout is coming. The only question is how well it will be managed.
As I said, the important thing is to bail out the system, not the people who got us into this mess. That means cleaning out the shareholders in failed institutions, making bondholders take a haircut, and canceling the stock options of executives who got rich playing heads I win, tails you lose.
In his NYT blog, he also notes that when one looks at financial meltdowns, the Swedes handled it best, with the handling of their financial problems in the early 1990s”.
He points us to Justin Fox of Time, who in turn quotes Merrill Lynch Economist David Rosenberg from his “morning call notes” (sorry, can’t find a link, any hints?):
The Japanese credit crisis is usually cited as the benchmark for what not to do. But few cite Sweden’s crisis as a template on what might actually work. … the Swedish authorities realized early on that a banking crisis cannot be resolved until the problem is properly defined. That means assessing who the “bad” and “good” houses of issues are and be willing to allow the “bad houses” to fail (as an aside, “good houses” do not necessarily imply “big” houses).
… Sweden established a Bank Support Authority to undertake “reality testing” on the loan books of Sweden’s largest banks and had a “board of valuation” experts go in and value the assets on the books of all the lenders. Call it invasive if you will, but then again, the government was doing the work that market players could not or would not do – value the collateral and do it quickly. This is similar to what Barney Frank is proposing in the US mortgage sector today. …
It should also be noted that it was Sweden’s equivalent of the US Treasury, and not the central bank, that played the primary role in this crisis management stage (though the Riksbank maintained an accommodative monetary stance and lowered interest rates right through to December 1993, more than a year after the markets had bottomed). And, it obviously required the heavy hand of government intervention; there are solid grounds for this when there is market failure in the private sector, in this case, insufficient information regarding the quality of financial sector balance sheets. …
I would add that my post on Dean Baker’s proposal of a stock transaction tax, along with my suggestion that it more generally cover financial instruments (here) is both a good way to cover the budget hit and a good way to discourage excessive arbitrage.
Dean Baker suggests that we implement a stock transfer tax. He mentions that the UK has a stock transfer tax of 0.25%, and London is second only to New Work as one of the great financial capitols of the world.
He notes that it would generate $150 billion/year in revenue.
While I agree, I do not think that this goes far enough. It should apply to all financial transactions, stocks, bonds, derivatives, hedging, futures, etc.
I would have an exception for initial purchase, but not resale, of government bonds, but that’s it.
In addition to generating a lot of revenue, it also makes increasing level of arbitrage increasingly more expensive, which is also a good thing.
Witnesses were called to testify before the House Financial Services Subcommittee on Consumer Credit regarding changes to the terms of their credit cards for what appear to be completely arbitrary reasons, and the Republicans on the committee demanded that they sign releases allowing the credit card companies to release their complete credit records on any public forum.
My question is why the Republicans were given veto power over witnesses. They are no longer in the majority.
The answer appears to be that they would have:
Their removal, however, was more the result of political gamesmanship than it was a legitimate legal move. That is, the Democrats could have attempted to seat the consumer panel even without the members signing the waivers. But, according to a Democratic staffer familiar with the dance, the Republicans, in that case, would have presented a number of procedural roadblocks that would have stalled the hearing indefinitely. Rather than waste the entire morning fighting endless motions to adjourn, Democratic committee leaders Barney Frank (Mass.) and Carolyn Maloney (N.Y.) decided to scrap the first panel and salvage some of the hearing.
I think that a better understanding of Republicans, that they have no interest in the legislative process, and thus should be accorded no courtesies whatsoever, is needed.
The Waivers read as follows:
I hereby authorize Chase Credit Card Services to publicly discuss my Chase credit card account(s) in connection with the March 13, 2008 and April, 2008 credit card hearings by the U.S. House of Representatives Subcommittee on Financial Institutions and Consumer Credit.
Translated, this means that if they thought it was “in connection with the March 13, 2008 and April, 2008 credit card hearings by the U.S. House of Representatives Subcommittee on Financial Institutions and Consumer Credit, they could release their account numbers, SSNs, mother’s maiden names, and passwords for online access.
It was purchased at $236 million, and the value of its Madison Avenue headquarters is assessed at $1.2 billion.
Yep, it’s the end of the world, I got a prediction right. On August 2, 2007, I predicted that, “Bear Stearns will cease to exist. It will either be forced to liquidate, or it will be bought out in a fire sale”.
I never get my predictions right. I look at my predictions on the HD-DVD/Blu-Ray fight.
So, after the Fed lends Bear Stearns $200 billion, JP Morgan buys Bear for 236 million, and they look to be ditching off the risk on the Federal Reserve:
Shareholders of New York-based Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the two companies said in a statement today. The U.S. Federal Reserve will provide financing for the transaction, including support for as much as $30 billion of Bear Stearns’s “less-liquid assets.”
Normally, when I say the end is nigh, I’m joking. I’m not joking now, and it has nothing to do with whether or not I got a prediction right.
It has to do with the fact that in Asia, where it’s Monday already, markets imploded. The Nikkei the Hang Seng have so far fallen by more than 4%, and the Korea Composite Stock Price Index by more more than 3%.
What’s more, on this side of the international dateline, the Fed cut the discount rate by 25 basis points, from 3.5% to 3.25%:
The central bank approved a cut in its lending rate to financial institutions to 3.25% from 3.50%, effective immediately, and created another lending facility for big investment banks to secure short-term loans. The new lending facility will be available to big Wall Street firms on Monday.
That was done on Sunday. When the last time that you’ve heard of the Fed doing anything on a weekend, much less a Sunday.
People are now talking about this in terms of being 1929 bad, not 1970s bad:
Wall Street fears for next Great Depression
….One UK economist warned that the world is now close to a 1930s-like Great Depression, while New York traders said they had never experienced such fear. The Fed’s emergency funding procedure was first used in the Depression and has rarely been used since.
….
In the UK, Michael Taylor, a senior market strategist at Lombard, the economics consultancy, said on Friday night: “We have all been talking about a 1970s-style crisis but as each day goes by this looks more like the 1930s. No one has any clue as to where this is going to end; it’s a self-feeding disaster.” Mr Taylor, who had been relatively optimistic, has turned bearish: “It really does look as though the UK is now heading for a recession. The credit-crunch means that even if the Bank of England cuts rates again, the banks are in such a bad way they are unlikely to pass cuts on.”
I think that they are very nearly right on this, at least for the US.
Unlike during the great depression, the US is no longer an exporter of oil, nor does it have the most vibrant and advanced manufacturing base in the world.
It may be bad world wide, but it’s going to be hideous here.
On August 2 of last year, I said that within a year, Bear Stearns would cease to function as an independent entity.
I’m not right yet, but I don’t see how I won’t be right in the next 5 months.
Dr. Peter Venkman: This city is headed for a disaster of biblical proportions.
Mayor: What do you mean, “biblical”?
Dr Ray Stantz: What he means is Old Testament, Mr. Mayor, real wrath of God type stuff.
Dr. Peter Venkman: Exactly.
Dr Ray Stantz: Fire and brimstone coming down from the skies! Rivers and seas boiling!
Dr. Egon Spengler: Forty years of darkness! Earthquakes, volcanoes…
Winston Zeddemore: The dead rising from the grave!
Dr. Peter Venkman: Human sacrifice, dogs and cats living together… mass hysteria!
And it would seem, that I actually get a prediction right, which is another sign of the apocalypse.
Just yesterday, the Bear Stearns CEO said that there were no liquidity issues, but today, JPMorgan Chase and the New York Fed have gotten together to bail them out.
Basically, the Fed can’t bail out Bear Stearns, it’s out of its authority, but it can guarantee JP Morgan’s loans to the embattled investment bank, which it did.
Actually, a closer reading makes it even more extraordinary. The Fed directly lent money to Bear Stearns, using an authority last used in the 1960s, which required a vote of the Fed’s Board of Governors.
Typically, the Fed is only supposed to lend to banks, and Bear is not a bank, but an investment house.
As to the statements of the CEO yesterday, I would call them a bald faced lie, but I don’t have a Harvard MBA, so I don’t know the fancy term for blowing smoke up everyone’s ass.
Of interest is some potential insider trading, specifically, someone traded 55,000 Bear Stearns puts Tuesday. (A “Put Option” is basically a bet that the stock will decline in value.)
One of the results of all of this is that money has been fleeing to Treasuries, or fleeing the US entirely, with the dollar down.
One of the things you have to understand is that Bear Stearns is a pretty small player in all this, with a market capitalization of “only” about $15 billion dollars, and we’ve got the markets jumping out windows.
In terms of market stability, Carlyle Capital share prices have tripled after Carlyle Group co-founder David Rubinstein said that it was looking at ways to compensate investors.
I’m not sure how much it means. The collapse of Carlyle Capital, that was so yesterday….hold it….it actually WAS yesterday.
Today, it’s Bear Stearns, which gets its own thread for reasons of personal ego.
Inflation in February was 0%, largely due to some moderation in food and energy, which won’t happen in March, given that oil is still at around $110/bbl, and the dollar is still tanking.
In insurance, it appears that losses are approaching the levels of Katrina, though we are probably less than 1/3 of the way through this.
According to Forbes, it’s “tighter standards”, but by the standards of any thinking human being, it’s a big wet tongue kiss on the mouth of the bad players in this drama.
The only substantive proposal is better licensing of mortgage brokers, the rest is voluntary, and it’s clear that Paulson, and the rest of Bush’s cronies, are not interested in reform when they say, “The objective here is to get the balance right — regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it.”
Let me explain this in very simple terms, the so-called “innovation” that Paulson is looking to preserve, is deception, complexity, fraud, self dealing, and general corruption.
These “innovations” did not make housing less expensive, or easier to get. They caused housing inflation, and threatened the stability of our housing market, banking system, and society.
This so-called innovation is not something we need to protect. We need to put a stake through it’s black heart.
It’s been a busy day today, largely due to the imminent collapse of Carlyle Capital, the investment bank of the Carlyle group.
Lenders are seizing its assets:
By yesterday the fund had defaulted on $16.6 billion of debt and said it expected to default soon on its remaining debt. The fund’s $21.7 billion in assets were exclusively in AAA mortgage-backed securities issued by Fannie Mae and Freddie Mac, traditionally considered secure and conservative investments, which it was using as collateral against its loans.
They could not meet margin calls, and their share price has fallen 90%. See also here.
Paul Krugman has a very amusing comment, that the “Carlyle Group should have stuck to what it knows. It’s great at the merchant of death thing; at investment banking, not so much“.
It’s not entirely accurate, but still really funny, I used to work for the Carlyle Group, but they sold me to buy Dunkin Donuts. Seriously. They sold United Defense, where I worked 2003-2006, to BAE Systems.
In any case, the collapse of the Carlyle Capital has the market worrying about other possible collapses, with the Times of London reporting that, “Several hedge funds with assets of more than $4 billion (£2 billion) were on the brink of collapse last night or had halted withdrawals, despite moves by the US Federal Reserve“.
This has also hit US currency with the dollar falling to a 12 year low vs the yen and an all time low vs. the Euro, see here, and here.
The Yen has fallen below ¥100:$1.00, ant the Euro hit a new record of €1.000:1.5625. We are talking big time ugly, and there is still the Yen carry trade, where people borrow low interest Yen and invest the money at higher interest elsewhere, that takes a hit when the Yen strengthened.
The falling dollar also drove the price of oil up to a new record, over $111/bbl, and is part, if not most of the reason that gold broke $1,000.00/oz as a part of the flight from the dollar and concerns about inflation.
There will be more pain.
Speaking of pain, retail sales fell in February by the largest month to month amount in 5 years, 1.1%. The preliminary numbers showing an increase that I reported a week ago were apparently just that, preliminary.
Note that this does not correct for inflation, so it’s even worse.
In it efforts to restructure, Chrysler is completely shutting down for 2 weeks in July, that’s everyone who is getting the vacation, not just the guys on the line for retooling. They are claiming that it will, “boost productivity and efficiency”, but my guess is that a lot of folks people will have their vacations extended to forever.
Finally, no monoliner insurer bad news today, or perhaps I missed in in everything else going on, but Countrywide Financial continues to see climbing foreclosures, with the Frbruary rate of 1.64% being more than twice that of a year ago of 0.80%.
I really think that the deal for Bank of America to buy them will fall through, because what looked like a decent deal a few months ago is increasingly looking like a significant overpayment.
It seems that banks are having a problem with 2nd mortgages and Home Equity Lines of Credit (HELOC).
Because these loans are 2nd in line after the initial mortgage, an increasing number of consumers are simply not paying. With their home under water, they know that a foreclosure on these loans will recover no money at all, so instead, they are paying the 1st mortgage and credit cards.
It is, for example, hitting JP Morgan, which did not do subprime lending to any large degree.
Well, gasoline prices hit all-time high today, and oil prices hit another record too.
Interesting thing though, at the start of the day, prices were down on increased inventories.
Oil Prices are rising because the dollar is falling now.
In the ever entertaining world of monoliner insurance, MBIA and Fitch Ratings are in a pissing contest. MBIA dropped them as a ratings service, because Fitch thinks that they should be downgraded.
MBIA and AMBAC’s debt is junk in reality, no matter what S&P, Moody’s, or Fitch says.
Speaking of Moody’s, they are forecasting a big drop in earnings, down from $2.17-$2.25/share to $1.90-$2.00, which tanked their stocked.
The GSE’s stock tanked too, with Fannie Mae falling 6% and Freddie Mac falling 3%. It turns out that the relaxed lending limits has the market spooked that this will lead them into more losses, which, of course, it will.
If I had to make a bet between Fannie and Freddie, I’d go with Freddie though. their CEO has a good grasp on reality, he thinks that the housing market is only 1/3 of the way to the bottom.
I’m a bit more of a bear than he is, but I think that Richard Syron is a member of the reality based community.
Despite the rate cuts, and the talk out of the Fed about more rate cuts, mortgage rates are up, and applications are down as a result.
In the more general doom and gloom scenarios, I present the following:
Citigroup is having to pump $1 billion into six of its internal hedge funds. I guess that they have to sell another piece of themselves to some Arab sovereign wealth fund.
Finally, we have ING New Zealand suspending withdrawals from two of their CDOs.
New Zealand???? New F#$@ing Zealand? Whisken Tango Foxtrot.
The meltdown is now fully global.