Category: Finance

Really, Really, Really Bad Ideas, Maryland Edition

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The Legislature is looking at changing the law to allow for profit debt counseling services to operate in MD.

The change is being driven by Columbia based AscendOne Corp.:

AscendOne’s business practices are being reviewed by attorneys general in Maryland and several states, government sources briefed on the investigations said. The sources asked to remain anonymous because the investigations are ongoing.

We have an industry with a reputation for dishonesty and fraud. One where the business is exploding because of the requirement for credit counseling under the new clusterf*** US bankruptcy law, so at the behest of one of the dubious actors in this dishonest industry, the legislature is looking at making things even worse.

Sounds like business as usual in Annapolis.

Economics Update

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Oil has hit another new high, driven largely by the Dollar hitting a new low, though there has been some recovery since the Federal Reserve has agreed to issue at least another $200 billion, this time using mortgage backed securities, aka “Worthless Garbage”, as collateral.

I’m not sure that this will make a difference in the strength of the Dollar. It now appears that the United Arab Emirates is seriously considering dumping their dollar peg, which is clearly a step towards Euro denominated oil.

In today’s episode of really bad policy, it appears that Congress is moving toward privatizing profits and socializing losses in real estate, by expanding the loans that FHA insurance covers. Yep, this will work so well, like it did for MBIA and Ambac.

In more general investment news, Bear Stearns is tanking on concerns that it lacks sufficient liquidity to cover potential margin calls. It probably does not help that Moody’s has downgraded Bear Stearns Alt-A mortgage backed securities, more than half of those issued from 2005 through 2007. Ouch.

Subprime’s favorite whipping boy, Countrywide is going down like Elliot Spitzer’s hooker, the Bank of America offer is now a 32% premium, as versus a 9% premium 2 weeks ago, so people are thinking that BoA will just walk away.

In the world of Real Estate Investment Trusts (REITs), we have had downgraded price targets on three Mortgage REITs.

What took them so long.

Finally, in things that make you say, Whiskey Tango Foxtrot, we have a report that, 20% of Silicon Valley startups cannot get to their working cash, because they invested it in Auction Rate Securities to get better rates of return, and that market is completely frozen.

Maybe, Some Accountability

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As a result of the WaMu board decided that bad mortgages should not get in the way of obscene senior executive bonuses, it looks like some major share holders, and possibly some share holder rights groups are looking at trying to remove the board members.

It probably won’t come to anything, the regulations in place in the US make it very difficult for the owners (share holders) of a company to effect management decisions, but it’s a good start.

Economics Update

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I’m not sure if it even qualifies as news any more, but
oil hit a new record today, topping $107/bbl. Gasoline prices are following this trend, with prices rising $0.09/gallon over the past two weeks.

When this is combined with the fact that houshold wealth fell by $533 billion, (3.6% apr), in q4 of 2007. That’s without considering inflation.

When inflation is taken into account, all of 2007 is down.

In the ever entertaining world of the monoliner insurance, MBIA, is asking Fitch to stop rating its insurance units. They think that Fitch’s model is inaccurate, because Fitch is still considering a downgrade.

MBIA is insolvent, Fitch gets it, and S&P and Moody’s don’t.

As a result of this, we are seeing more of the non-profit and state run college lenders unable to secure financing, and hence unable to make loans.

Remember, these loans cannot be discharged by bankruptcy, and they are federally guaranteed, and no one will buy the paper.

This might explain why Lehman Bros. is cutting 5% of its workforce, about 1400 jobs.

One bit of good news is that China’s trade surplus dropped 63% in February, though one wonders how much of that is currencies readjusting, how much is a slowdown in the world economy, and how much is the winter storm that shut down the country for about a week.

BTW, its official, Malaysia is a Kleptocracy. That’s the only way to explain why, following a defeat that kept the National Front in the majority, but at less than 2/3, that the Kuala Lumpur Composite Index fell so sharply that they had to shut down trading.

This wasn’t even a change in party rule, just a drop below 2/3, and everyone was scrambling to get out because their business positions were predicated on corruption.

O happy day.

For what it’s worth, things are not much better in the US, where hedge funds are seeing margin calls on US treasuries. If treasuries go bad, forget the Honda full of silver, you need ammunition and canned goods.

Did Lack Of Regulation Cause This Mess?

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Mish’s Global Economic Trend Analysis: Did Lack Of Regulation Cause This Mess?

Yes.

This has been another episode of stupid answers to stupid questions.

But Mike “Mish” Shedlock seems to think that it’s the FDIC which has caused all thi, because no one would have put a dime into countrywide in 2004 if not for the FDIC insurance, which created a moral hazard allowing people to place their money at risk, despite the fact that in 2004, Countrywide was golden with soaring stock.

Additionally, most of the money that Countrywide to bury itself was not the sub $100k investments of ordinary account holders. It was many times that from Wall Street investors, who had no guarantee at all, even for the first $100K.

This is mindless Randroid Objectivist claptrap, and it is actually the purveyors of this mindless Randroid Objectivist claptrap, most notably Alan Greenspan, who has never passed up an opportunity to deregulate a market, or to bail out a major capitalist bigwig, who created this mess.

Mr. Shedlock is therefore wanker of the day.

Economics Update

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It looks like people are starting to notice that the cost of groceries are going through the roof. According to the article, Bush’s dumbass corn-ethanol program, increased demand from overseas because the dollar has fallen, and increased energy costs are the primary drivers.

Then we have experts saying that Banks face a “systemic margin call” to the tune of nearly half a trillion dollars, according to analysts at JP Morgan.

“Systemic Margin Call” is a nice way of saying that the credit markets are imploding.

Thornburg Mortgage is teetering on the edge of liquidation as a result of more specific margin calls. They do not have the capital to repay their loans, and this will lead to more of their loans becoming non-conforming, resulting in more capital.

Thornburg is not the first, and it’s nowhere near the last.

The Housing Crisis Just Got Bigger

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Yes, the GSEs limits on the mortgages that they can buy have just been increased from 417,000 to as high as $793,750, and the FHA limits on insurance have gone from $362,790 to $729,750.

The market has responded by increasing the yield spread between debt issued by Fannie Mae and Freddie Mac and 10 year Treasury bonds to 2.38%, the highest spread in 20 years.

Historically, it’s been in the 1.0 to 1.5% range, and this means higher mortgage rates, even if the GSEs can now carry your jumbo paper.

Smaller Bond Insurers Cleaining Up on Muni Business

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With a MBIA and Ambac in death spirals over their involvement in mortgage backed securities and other similar instruments, former bit players like Financial Security Assurance and Assured Guaranty Ltd, which never drank that Koolaid, have seen their market position in the municipal bond insurance market soar.

The consequences I’ve predicted with the ability of municipalities to raise money may be milder than I had anticipated.

Economics Update

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Oil hits another record, breaking $106/bbl, and the Dollar falls again another record against the Euro, and a 3 year low against the Yen.

As I’ve noted before, these are tied together. The expectation of a falling dollar pushes up the dollar denominated cost of oil to maintain the same global purchasing power.

Closer to home, the US lost 63,000 Jobs in February, which was an unexpected 5 year high.

Not surprisingly, this is accompanied by consumer confidence at a six year low.

Luckily for us, the Fed is riding to the rescue, and printing up more money to give to the jerks who screwed this up in the first place. The March money sales have been increased from $60 billion to $100 billion.

Carlyle Capital is being to forced to liquidate securities, one would assume well below purchase price, to meet its margin calls.

That’s what 32:1 leverage gets you.

The lenders are getting skittish, and they are starting to ask for some or all of their money back from hedge funds and other speculative entities.

And why shouldn’t they as the housing crash is chewing up their balance sheets like a great white shark.

So we have money fleeing to the safe haven of US treasuries, because they are expecting another shoe to drop, like, for example, the possibility that, Fitch Ratings might downgrade $160 billion in Alt-A mortgage backed securities, which is rumored to be imminent.

They Sold Me To Buy Dunkin Donuts, and They Have Defaulted

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Not joking. I used to work at United Defense, and the Carlyle Group sold us BAE to buy Dunkin Donuts, at DFA meetings, I’d introduce myself, and say, “I work for the Carlyle Group”, just to see the double takes.

It now appears that the
Carlyle Capital Corp. division has defaulted on about $21 billion in loans.

They invested in “high quality” mortgage backed securities from the GSEs (Fannie and Freddie), but they have not been able to sell them in order to pay some notes coming due.

Not surprising. $21.7 billion backed by $670 million in equity is a 32.3:1 leverage, which means that if things tend down about 3%, you are broke.

Economics Update

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Well, we don’t need to feel so alone any more, U.K. house prices Fell 0.3% in February. What the French call “Anglo-Saxon” capitalism seems to be working wonderfully.

Back in the US, the housing market is not looking up, with Foreclosures hitting an all time high:

Over 900,000 households are in the foreclosure process, up 71% from a year ago, according to a survey by the Mortgage Bankers Association. That figure represents 2.04% of all mortgages, the highest rate in the report’s quarterly, 36-year history.

Even if you are paying your mortgage, you are probably still losing home equity. Total home equity is below 50% for the first time ever. It was 49.7% in Q2 2007, and 47.9% in Q3 2007, and the total equity dropped from $9.65 trillion from $9.93 trillion, or about $1000 for every man woman and child in the united states.

There is not a whole bunch of confidence in real estate now, so the spread on mortgage backed bonds is at its highest level in 22 years, and S&P has downgraded WaMu to BBB from BBB+.

We don’t have a stampede out of mortgages and real estate yet, but there are now rumors that UBS dumped $24 billion in Alt-A residential mortgage backed securities (RMBS). If this is reality, we could very see a stampede for the door, and Alt-A, which is for people with credit ratings above 700, will go the way of subprime.

So it’s no wonder that Fannie has dropped to a 12 year low.

It looks like the world is noticing this because the Dollar hit another record low, and oil hit another high.

This may have been driven by the European Central Bank and Bank of England not lowering rates, when it is expected that the Fed will.

We do have some mildly positive news retail sales were good in February, and new unemployment claims have fallen, though continuing claims are still going up.

It seems that Ambac is going to be a laugh a minute, see here, here,
and here. Basically, they have a plan to raise much needed capital, but no one thinks that it will work, and the markets halted trading at one point due to volatility over rumors.

Finally, in a case of the weak helping the even weaker, GM will provide $3 billion in loans to Delphi in an attempt to help them emerge from bankruptcy.

If that ain’t good money after bad, I don’t know what is.

Foreigners Own Us

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Representatives of Treasury Department, SEC and Fed told Congress that it was crucial to the economic health of the United States to all sovereign wealth funds to have free reign to purchase US companies.

Congress is concerned after Abu Dhabi bought a significant portion of Citi, and other sovereign wealth funds have done so with other financial institutions, as a result of fall out from the credit implosion.

The regulators basically said, without foreigners buying this stuff, we’d be flat broke.

What they neglected to say is that we are flat broke anyway, from years of budget and trade deficits.

Economics Update

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Yawn, another day, another all time low for the Dollar vs. the Euro, breaking the $1.53:€1.00 barrier.

The expectation of a major fall in the dollar is one of the major causes of oil prices rising again today, though the fact that OPEC his telegraphing that there will be no production increase, contributes to this.

The job market is looking increasingly grim, with
nonfarm employment declining by 23,000, and, in a good indication of an incoming recession, productivity growth is declining.

We do have some good news, the appraisal standards for Fannie Mae and Freddie Mac are not officially implemented.

It would have been better news a year, or 5 years, ago.

I have this rule of thumb when looking at the economy, which is when something happens in high finance that is truly bizarre, start by assuming that it is bad news.

That’s the case with yields falling below 0% on Treasury Inflation-Protected Securities (TIPS).

TIPS are government bonds in which the principal appreciates along with the consumer price index. They are sort of inflation proofed as a result.

They are less riskier, because if inflation shoots up, you will get that back in the end, so the interest rate, which are set by auction, is lower.

Only for the past three days, the interest rate has been bid to less than zero, meaning that the bidders expect significant increases in inflation.

Paulson Sees New Capital Markets Proposals in ‘Weeks’

Bush’s Treasury Secretary is, after months of prodding by Democrats, coming up with a plan to close the barn door after the cow is gone, saying that, “We’re looking at the mortgage-origination process, we’re looking at the securitization process, we’re looking at rating agencies, we’re looking at disclosure issues, we’re looking at capital issues and regulatory issues in the weeks ahead.”

If it were done by honest decent and competent people, it would still be too late, but in this case it’s being done by Bush and His Evil Minions™, which means that it’s primary goal will be two fold, preventing meaningful regulation, and benefitting Bush, His Evil Minions™, and his campaign contributors.

The auction bond failure rate is nearly 70%, and appears to be getting worse, which means that at this critical time, with revenues falling, cities and states will find raising money for projects much more difficult.

In real estate, we now have mainstream press using phrases like, “Housing in ‘deepest, most rapid’ decline since Great Depression“, the alt-A crash is well and truly starter (Alt-A are not quite prime, typically credit scores over 700), and we have Ben Bernanke saying that housing woes could persist for years.

Additionally, we are about to see the revenge of the 2005 bankruptcy law, with filings up 18% from January, and 28% from the year before.

We are about to see the negative effects of the law, which were predicted when it was initially proposed.

BTW, all is not quiet in the ever entertaining world of the monoliner bond insurers. Ambac has announced a reorganization, where it will exit the mortgage securities market and raise $1.5 billion in new capital.

What About Ayn Rand’s Buddy Alan Greenspan?

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Members of the Senate Banking committee just grilled regulators and accused them of being, “Asleep at the switch” on the housing debacle.

One wonders why it appears that Alan Greenspan’s name never came up. He was aggressively working towards dismantling financial protections and ignoring basic regulations during his tenure at the Fed, pausing only to bail out fat cat investors when they got into trouble.

SAS Saying Old Fuel Guzzler Auircraft are Cheaper to Operate

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The Scandinavian airline SAS: is saying that its MD-80s would still be cheaper to operate, even if the cost of fuel doubled.

It doesn’t make a whole bunch of sense, given that the cost of oil is at an all time high, until you look at this quote:

n its newly-released annual report SAS Group says the effect of capital costs means the MD-80 is SKr5-10 million ($0.8-1.6 million) more profitable to the carrier than newer aircraft.

Capital costs for the type are SKr20 million lower, more than offsetting the SKr10-15 million in higher fuel and maintenance costs.

…

n its newly-released annual report SAS Group says the effect of capital costs means the MD-80 is SKr5-10 million ($0.8-1.6 million) more profitable to the carrier than newer aircraft.

Capital costs for the type are SKr20 million lower, more than offsetting the SKr10-15 million in higher fuel and maintenance costs.

(emphasis mine)

This is interesting not from an aviation perspective, but from a larger economic one.

It implies one of two things:

  1. That airlines going for the latest and greatest hardware are slitting their own throats, and that capital costs completely blow away operating costs.
  2. That the cost of capital today is high enough that upgradeing even with the historically high fuel prices, simply does not make economic sense.
  3. That they expect these planes to be used for surges in demand for seasonal and other reasons, and won’t the full utilization, and capital costs dominate.

The first reason is simply not credible. If it were, we’d all still be flying DC-3s, or at least upgrades 707s and DC-8s, since they take people to the same places just as fast.

That leaves reasons two or three, or reasons two and three.

From a macroeconomic standpoint, however, it’s reason 2, the cost of capital, that is most interesting.

This may very well be a major capital purchase that is being delayed because the capital markets have frozen up. That the increased risk premium that has resulted from the credit crunch simply make it too expensive to upgrade to better equipment.

That is how a credit crunch creates a recession, which makes the credit crunch worse.

Economics Update

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first, let’s start off by saying that Tom Toles is a bloody genius:

We have Citi on a path to cutting 30,000 jobs, and we have Dubai International Capital LLC, a sovereign wealth fund saying that losses will get worse, and they will need another infusion of capital.

FWIW, it was Abu Dhabi investors who just bailed them out a month or so ago, not Dubai.

In real estate, they’ve just discovered that
the real estate collapse is making first-time buyers less likely to buy.

In related news, water is wet, and the sky is blue.

In truth this is hardly surprising when even people like Ben Bernanke, who has done his best to avoid panicking the markets is saying that foreclosures will increase, and house prices will fall for a while yet.

Ratio of home ownership to rental costs are near a historic high, so why would someone want to buy into a depreciating asset?

Meanwhile, we are finding that the, “extra yields investors demand on bonds backed by assets from commercial mortgages to credit cards rose to records”, recently, despite the fed rate cuts, leading a senior managing director at an investment firm to quip, “People are calling it financial Ebola“.

Translated into language for ordinary people, this means that people are requiring a much higher markup on either the prime rate, or the Fed funds rate, before they make loans.

Yields on three-year, AAA rated credit-card bonds with floating rates rose to 75 basis points over the London interbank offered rate, up from 40 basis points at the start of the year, according to Deutsche Bank AG data. Spreads over three-year swap rates for three-year, AAA rated fixed-rate auto-loan securities rose to 140 basis points, up from 75 basis points. The average spread over U.S. Treasuries on AAA rated commercial-mortgage securities climbed to 364 basis points, from 167 basis points on Dec. 31, according to Lehman Brothers Holdings Inc.

A basis point is 0.01 percentage point.

People are increasingly unwilling to lend money, and demanding higher returns, because they have no faith that it will be paid back.

Speaking of being paid back, Fremont General just defaulted on $3.15 billion in subprime mortgage loans that it sold a year ago.

The creditors are demanding immediate repayment, because Fremont’s “tangible net worth” (assets minus liabilities) have dropped below $250 million, meaning that they have violated the terms of the original sale.

Finally, we have Jon Moulton, the head of private equity firm Alchemy Partners, pretty much guaranteeing that, “There will be large private equity failures this year“. From the context he means both deals and firms.

With Friends Like These…..

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Specifically Penny Pritzker, Obama’s national campaign finance chair.

It turns out that she was chairman of the board, and from all accounts an engaged and active one at that, of the, “borderline shady and failed Superior Bank”, which collapsed in 2002.

It appears that these guys were the folks who created the so-called innovations that have led in large degree to the subprime mess, and it led to their downfall in the middle of the most bullish housing market in history.

See here, here, and here.

If there is one lesson to be had from the Bush administration, it is look at who the candidate keeps around him.

I agree with Earl Ofari Hutchinson’s assessment, “If Obama’s for real on the sub-prime crisis, he’ll dump his campaign finance chair“.

Economics Update

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Let’s lead off with the dollar on it’s way down, it’s at a 3-year low vs. the Yen, and a new record low vs. the Euro, which is one of the things that has oil breaking another all time record, $104/bbl.

The value of the dollar is dropping, so the price of oil, which is sold in dollars, is increasing. One wonders how many countries are considering a Euro oil bourse other than Iran.

In real estate, we have the largest drop in residential and commercial construction in 14 years.

So much for commercial real estate being “immune” from this contagion.

The poster child for the real estate meltdown, Countrywide, is still hemorrhaging on its mortgages, with 90 day delinquencies at 5.6% (up 900% from a year ago), and this is threatening to torpedo the deal with Bank of America to buy them out.

FWIW, there are more foreclosures than sales in a number of the states in the West, and Florida.

On the macro level, we have Warren Buffett saying that the recession is pretty much all ready here, and the president of the Philadelphia Federal Reserve saying that inflation is not important, and that the first priority is keeping the economy on track.

When a central banker says, “Inflation, no big deal”, you know that you are up a certain creek sans paddle.

Further evidence of a slowdown is the fact that Ford and Toyota sales declined in February. Ford having declines is not a shocker, but when Toyota is not selling cars, no one is selling cars.

The happy news is that the FDIC doesn’t see there being a surge in bank failures, though it does make one wonder why they are calling back retirees and generally staffing up.

They expect to be as busy as a one legged man in an ass-kicking contest.

In the world of municipal bonds, which should be safe-havens in a time like this, it appears that the costs are increasing, and the ratings falling, for municipal bonds, because of the collapse of the auction security markets.

In bond insurance, we have a new, or at least new to me, bond insurer bleeding, Security Capital’s to the tune of $1.5 billion on various complex investments.

It’s already been downgraded.

Finally, Buffet is now saying that his offer to buy the muni business of bond insurers is no longer operative.

Berkshire Hathaway is aggressively bidding on municipal bond portfolios, and as other insurers are downgraded, their position can only get stronger.