Category: Finance

Another Shoe to Drop in Real Estate

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The FDIC is planning to auction off some the assets that it has accumulated, and that has the banks worried that this will force many of them into insolvency, because it will set a market price for the sh%$ that is on their books:

A Federal Deposit Insurance Corp. plan to auction more than $1 billion in assets seized from failed banks next month, including a loan to build a W Hotel in Atlanta, may trigger writedowns that weaken lenders nationwide.

Almost half of the loans were originated by Silverton Bank N.A., whose collapse last May was the biggest in Georgia history. Community banks that joined Silverton in providing $80 million for the 237-room hotel and condominium complex, as well as backing for 39 other projects, could be forced to write down their stakes to reflect sale prices.

What is going on here is that because the FDIC will be auctioning off assets, as it is required to do by law, these illiquid assets, and this will assign a fair market value to said assets.

Banks and other institutions who have maintained the illusion of solvency by using some variant of mark to myth model will therefore have to reassess the value of these assets on their books, pushing some, perhaps many, of these institutions into bankruptcy.

Felix Salmon Has A Talk with Treasury Officials

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And determines that they are still the banks bitches, working for them, rather than the citizenry.

In truth, Mr. Salmon did not say that Geithner and His Evil Minions™ see themselves as nothing more than a way to support the banksters, but that is the basic take away that I see here:

Well done to Shahien Nasiripour, who did the best job of anybody, at the Treasury blogger meeting yesterday, at getting Treasury’s officials to commit news. Specifically, he asked about Sheila Bair’s sensible idea that mortgage principal write-downs can help keep homeowners in their homes while also maximizing the value of the mortgage to the issuing bank. And he was told, quite clearly, that Treasury has been talking to Bair about this idea, and that if it makes sense at the bank level, it probably makes sense at the federal level, too, as part of the HAMP program to make mortgages affordable.

Except that once the meeting was over, its main architect, Treasury flack Andrew Williams, emailed Nasiripour to walk that particular idea back, saying that Treasury was NOT (his all caps) going to do anything “major” in terms of principal write-downs, and that any moves in that direction would be no more than “tweaks”.

………

It seems to me that insofar as Treasury has a problem with principal write-downs, that’s clearly a function of the fact that it’s worried about the consequences for banks’ balance sheets. We’re prosecuting a muddle-through strategy right now, where the government artificially props up house prices by providing substantially all of the mortgage finance in the country, in the hope that with economic recovery will come enough of a natural rebound in house prices to let the government slowly remove its support without them falling dramatically again.

(emphasis mine)

Unless the Treasury is banking on 6% inflation a year for the next 8 or 9 years, this is not going to happen.

House prices are still over valued, whether you use price to income, or rent to own (and rents are dropping too), and we are not going to see a recovery until house prices

This is complete regulatory capture, pure and simple.

Europe Moves To Ban the Naked CDS

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Everyone says it’s like insurance, only with insurance, at least since 1746, it has been illegal to take out insurance on anything that you do not have, “an interest in the continued existence of the insured property,” but anyone can take out a Credit Default Swap (CDS) on anything.

All they need to do is find a counter-party.

Well, this may be coming to an end, since European regulators are looking at taking steps to forbid the practice:

José Manuel Barroso, European commission president, said it was “not justified” to buy credit default swaps “by unseen interventions on a risk, on a purely speculative basis”. Photograph: Vincent Kessler/Reuters

The European commission announced moves today to shore up the euro and ward off market pressure on Greece by considering a ban on complex derivatives allegedly being used to undermine the single currency.

The draconian move suggested by José Manuel Barroso, commission president, follows a joint campaign by the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, for a prompt clampdown on credit default swaps (CDS).

I’m sure that Timmy “Naked CDS is Essential for Price Discovery” Geithner hates this, but who cares what he thinks: The only reason he’s still Secretary of the Treasury is because Barack Obama knows that the Republicans would filibuster his successor out of spite.

Icelanders Overwhelmingly Defeat Extortion Deal

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And by overwhelmingly, I mean that the vote against the referendum was 93.2 percent, with about 1% of the votes being spoiled.

As Dean Baker so profoundly notes, the entire bailout is predicated on the idea that bankers can, and should, be allowed to gamble and that the rest of us should be left on the hook:

It should also point out how the Iceland makes a mockery of anyone who claims to support leaving financial activities to the market. In almost all cases, actors in financial markets assume that governments will stand behind banks at the end of the day. Therefore when they say want the government to leave things to the market they are lying. They just want to be able to take risks with taxpayers money, without being fettered by regulations limiting the extent of these risks. In short, the finance boys want a free lunch, not a free market.

In the case of Iceland, this hook is about about €13,000 for every man, woman child on the small island.

We need our bankers, and stockbrokers to be stupid and dull again, because these smart guys are killing us.

Not Enough Bullets: AIG Again

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After bankrupting AIG, and nearly taking the world financial system, employees at AIG’s Financial Products division whined about the possibility that they would not get their lucrative bonuses for nearly destroying civilization:

During the national furor that erupted last year after American International Group paid more than $165 million in bonuses, the voices of those vilified for receiving the payments remained silent, at least in public.

But behind closed doors, employees at AIG’s Financial Products division — the very unit whose trading had hastened the insurance giant’s collapse — were defiant, saying they were merely getting what they were due, recoiling at public accusations that they were behind their capitalizing on the company’s massive taxpayer bailout.

“I will stand behind every action I have taken in this company from Day One,” one employee said, according to a newly obtained transcript of a conference call the division’s head held last March with some of his staff.

But it turns out that, they are getting obscene amounts money now:

Yet they did see that money, at least most of it. Last month, under a deal in which employees agreed to take a cut in their upcoming retention bonuses in return for an accelerated payment, AIG paid out about $100 million to employees at the firm. AIG is scheduled to pay the last of the bonuses this month.

Seriously, these arrested development, self absorbed frat boys will never do the right thing, and they should never, ever be allowed near other people’s money ever again.

Economics Update

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Click for full size

Employment-to-Population Ratio: Men (25-54 Years)

Labour Force Participation Rate: Men (25-54 Years)

And Barry Ritholtz scares the hell out of us

Well, today is Jobless Thursday, and new unemployment claims fell by 29,000 to 469,000, which is better, but not good.

The numbers needs to be below 400K before we see anything near real job growth.

The 4 week moving average fell by 3,500 to 470,750, though that number is still bigger than it was at the start of the year.

Continuing claims fell significantly, to 4,500,000, and next week, I will be a no longer be a part of that number (I file for the prior 2 weeks on Sunday).

Still, the news is an improvement, as is the latest Beige Book from the Federal Reserve, which shows signs of employment.

In any case, the ADP report on private sector jobs shows a loss of 20,000 jobs, which is the best month from them since January 2008.

So, the picture is not good, but appears to be improving, but fragile.

But if you want to be scared, just look at Barry Ritholtz’s analysis of historical employment for adult males, see the graph pr0n.

On a more personal level, personal bankruptcies rose in February.

We are seeing continued growth in manufacturing, at least according to the Institute for Supply Management Manufacturing Index, which fell to 56.5 from 58.4, but since any reading above 50 means expansion, it’s still positive.

The services sector is also showing encouraging growth.

Still, real estate is a mess, with pending home sales index falling 7.6%, though part of this might be the snowpocalypse.

Still, interest rates are not a problem with the 30-year fixed-rate mortgage rate averaging 4.97 %, which is the first time in a while that it has been below 5%.

Finally, the Bank of England left its benchmark rates unchanged, as well as holding off on more quantitative easing. (Printing money)

When Your Sellout to the Banks Offends Chuck Schumer………

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So Chris Dodd has come up with a “bipartisan” proposal for protecting consumers from predatory financial institutions, he wants to make it the Federal Reserve’s job:

The chairman of the Senate banking committee is seeking Democratic support for a Republican proposal to house a new consumer-protection regulator inside the Federal Reserve, a compromise that could clear the way for bipartisan legislation on financial reform, according to sources familiar with the negotiations.

Embracing the proposal marks a turnaround for Sen. Christopher J. Dodd (D-Conn.), who has lambasted the Fed repeatedly over the past year for not protecting borrowers from lender abuse. It is unclear whether other Fed critics, both Democrats and Republicans, will follow suit. The Fed already is responsible for writing consumer-protection rules, but it did not prohibit some of the most abusive mortgage and credit card lending practices during the housing boom.

The proposal by Sen. Bob Corker (R-Tenn.) would place a presidential appointee inside the Fed with an independent budget and a mandate to write rules protecting consumers. Those rules, however, would be enforced by existing banking regulators.

Of course, the Fed is already the consumer protection agency, and they failed, and they don’t provide information to Congress, or to anyone else.

Even Chuck Schumer (D-NY) thinks that this is a bad idea, and Schumer’s career is largely based on raising campaign money from Wall Street fatcats:

Chairman Dodd is to be commended for working so diligently to come up with a bipartisan compromise on financial services reform, which demands urgent attention. But in my 20 years of trying to get the Federal Reserve to properly protect consumers, it has been an uphill, and very often unsuccessful, battle. I am very leery of any consumer regulator being placed inside the Fed.

You know, if you’ve lost Chuck Schumer on this idea, it’s time to tell the Republicans to go Cheney themselves, and jam them up and make them vote against financial reform, over, and over, and over again.

The regional Federal Reserve banks are literally owned by the banks, and the presidents of these regional banks hold a lot of sway, and 5 of these bankers sit on the FOMC, and we are to expect an organization that has already shown itself to be both hostile to consumer protection and unresponsive to consumer complaints to somehow protect consumers?

I know that Mr. Dodd wants to make sure that he has a source of income when he leaves office in 2011, but he has a pension coming to him of something in excess of $120,000/year, so he should be fine.

Stop sucking up to the banks, sir.

From that Communist Rag The Financial Times

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Wolfgang Münchau proposes an outright ban on naked credit default swaps: (CDS)

I generally do not like to propose bans. But I cannot understand why we are still allowing the trade in credit default swaps without ownership of the underlying securities. Especially in the eurozone, currently subject to a series of speculative attacks, a generalised ban on so-called naked CDSs should be a no-brainer.

Naked CDSs are the instrument of choice for those who take large bets against European governments, most recently in Greece. Ben Bernanke, the chairman of the Federal Reserve, said last week that the Fed was investigating “a number of questions relating to Goldman Sachs and other companies in their derivatives arrangements with Greece”. Using CDSs to destabilise a government was “counter-productive”, he said. Unfortunately, it is legal.

As I have noted for some time, the Credit Default Swap is insurance, and there is a very good reason that the British Parliament passed the Marine Insurance Act of 1746, which required, “anyone seeking to collect on an insurance contract to have an interest in the continued existence of the insured property,” as well as, “precluding a buyer from insuring property for more than it’s worth.”

This should not be SEC slap on the wrist stuff. This should be illegal unenforceable contracts, and you go to jail stuff.

Christopher Dodd Continues to Sell Out

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So Senator Dodd, to be former Senator Dodd in January, continues to audition for his next job as a bank lobbyist:

Senate Banking Committee chairman Christopher Dodd, D-Conn., is expected to introduce new financial reform legislation next week that excludes applying a fiduciary standard to brokers offering investment advice.

The provision was circulated two weeks ago by Sen. Tim Johnson, D-S.D., a Banking Committee member. Rather than classifying certain brokers as registered investment advisers, Mr. Johnson’s proposal would require the Securities and Exchange Commission to conduct a study of regulatory standards for brokers and advisers, then propose rules on the issue.

“Fiduciary standard” means that they are required to act in the best interest of their clients, as opposed to the current standard, which is basically that you have to use lube when you anally rape your clients.

Fried in Greece

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So, now it’s time to look at the mess that is Greece.

Greece has been a mess for a very long time, and of the Nato members who joined the Euro, it’s probably the one that should not have joined.

John Mauldin notes, correctly, that the core of the problem is that the terms of joining the Euro block were excessively generous for the less well off nations, basically Germany and France successfully created a mechanism which over valued their national currencies.

This served to both minimize their labor cost advantages with regard to Northern Europe and to provide a market for northern European products:

First, we need to go back to the creation of the euro. Most of the Mediterranean countries that are now in trouble were allowed into the union with an exchange rate that overvalued their currencies relative to the northern countries, but especially to Germany. That meant that Greek consumers could buy products and services that previously may have been out of their reach. Plus, with government debt at low rates, the Greek government could borrow more to finance deficit spending, without the threat of higher interest rates. And Greece began to increase its debt with abandon.

Of course, there was the problem that the debt, and deficits, were exceeding the Euro Zone mandates, but with the use of some clever financial instruments it traded with about 15 banks, most notably that great vampire squid wrapped around the face of humanity,* Goldman Sachs, it concealed this debt from regulators:

The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.

It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.

Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbors vowing to come to its aid, the deals over the last decade are raising questions about Wall Street’s role in the world’s latest financial drama.

Note also that this was a mess that the Panhellenic Socialist Movement inherited from the right wing New Democracy party:

George Alogoskoufis, who became Greece’s finance minister in a political party shift after the Goldman deal, criticized the transaction in the Parliament in 2005. The deal, Mr. Alogoskoufis argued, would saddle the government with big payments to Goldman until 2019.

Mr. Alogoskoufis, who stepped down a year ago, said in an e-mail message last week that Goldman later agreed to reconfigure the deal “to restore its good will with the republic.” He said the new design was better for Greece than the old one.

It sounds a lot like the mess that Bush and His Evil Minions™ left for us.

One of the problems in dealing with this is that the Germans, remembering the hyper-inflation of Wiemar Germany as if it were yesterday, are suggesting that austerity measures are the way to go, and there are rumblings from them that they want Greece expelled from the Euro and losing voting rights in the EU Parliament.

In response, Greece is accusing Germany of not providing compensation for the stuff that they stole from Greece in WWII:

Athens has accused Germany of failing to meet its World War II compensation obligations following the Nazi occupation of Greece in 1941, a claim Berlin has firmly rejected.

In a radio interview on Wednesday (24 February), Greek Deputy Prime Minister Theodoros Pangalos criticised Germany’s attitude towards the ongoing Greek debt crisis, adding that Athens had never received adequate war reparations.

“They took away the Greek gold that was at the Bank of Greece, they took away the Greek money and they never gave it back. This is an issue that has to be faced sometime in the future,” Mr Pangalos told the BBC World Service.

<sarcasm>It’s so nice when you have mature people solving problems.</sarcasm>

One of the problems here is that the prescription by the central bankers is more austerity for Greece, but the reality is that Greece has among the most austere social safety net, and spending in the Euro zone.

The real problem is that because of endemic tax evasion and systemic corruption throughout the bureaucracy, their tax collections are truly pathetic.

One bright side to all this is that a number of people are starting to realize that Goldman Sachs is not simply a banker, but that all roads on most of this corruption lead to the Squid*, most notably those in the European Commission, who are, if Simon Johnson is correct, going to execute a detailed audit of Goldman’s dealings in Europe.

It doesn’t help that Goldman Sachs engaged in similar maneuvers with other European governments:

Greece’s 2001 deal to swap some of its debt using currency derivatives was in line with what other euro-zone countries were doing, Yiannos Papantoniou, the country’s finance and economy minister when the deal was made, told CNBC.com Wednesday.

………

“We took a loan that was to be repaid in 2019,” he said in a telephone interview. “It was public. I know that what we’ve done then was consistent with what was done by many euro zone countries.”

………

Italy, France and Spain were among the euro zone members doing such swaps at the time, he added. Eurostat, the European Union’s statistics office, has asked Greece for explanations on these debt swaps by Feb. 19.

What’s more it appears that these transactions may have been a part of a fraud perpetrated by the banks on these governments, which is why law enforcement officials in Milan have frozen accounts of a number of banks, “UBS AG, Deutsche Bank AG, JPMorgan Chase & Co. and Depfa Bank Plc,” as a part of an investigation.

BTW, while we are at it, it should be noted that Bank of Italy Governor, and dark horse candidate for ECB president, Mario Draghi used to work with the Vampire Squid.*

As it stands right now though, it appears that Greece should be able to do its required borrowing for the next 2-3 weeks.

*Alas, I cannot claim credit for this bon mot, it was coined by the great Matt Taibbi, in his article on the massive criminal conspiracy investment firm, The Great American Bubble Machine.

Another Day, Another Obama Administration Capitulation

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Yep, this time it’s the CFPA:

The Obama administration is no longer insisting on the creation of a stand-alone consumer protection agency as a central element of the plan to remake regulation of the financial system.

In hopes of quick congressional approval of a reform bill, White House officials are opening the door to compromise with lawmakers concerned about creating a new bureaucracy, according to congressional and some administration sources.

President Obama’s economic team is now open to housing the consumer regulator inside another agency, such as the Treasury Department, though they still prefer a stand-alone agency. In either case, they are insisting on a regulator with political autonomy and real teeth so it can effectively enforce rules designed to protect consumers of mortgages, credit cards and other financial products.

(emphasis mine)

Let’s be clear on this: No one has any concern about a new bureaucracy. The banks want impunity to screw consumers, and members of Congress who want campaign donations from Wall Street, and White House officials completely captured by the finance industry, **cough** Geithner and Summers **cough**, are more than willing to do this.

If the CFPA is not independent, which means that they have the ability to craft their own budget, they will be subject to the tender mercies of someone like Timothy “Eddie Haskell” Geithner or Hank “Why the f%$# isn’t he in Jail” Paulson, and so will be largely ineffective.

SEC Adds Restrictions to Short Sales

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It’s pretty weak tea compared to the uptick rule, but it’s better than nothing:

The U.S. Securities and Exchange Commission curbed some bearish stock bets, ending a yearlong debate between individual investors and Wall Street with a solution that fails to satisfy anyone.

SEC commissioners voted 3-2 today to restrict short sales of a company’s stock once it falls 10 percent from the previous day’s closing price. When the 10 percent threshold is triggered, traders could only execute short sales for the stock at a price above the market’s best bid. The curb would be in place through the following day.

General Electric Co., Charles Schwab Corp. and more than 5,600 people who signed a petition sent to the SEC wanted a short-selling restriction that was always in effect, similar to the so-called uptick rule the agency abolished in 2007. Goldman Sachs Group Inc. and hedge funds Citadel Investment Group LLC and D.E. Shaw & Co. lobbied against a limit.

You only need to know who was for it, and who was against it, and go against the Vampire Squid.

Short selling has a role, but there needs to be a balance between what ever “price discovery” function it has, and the ability that it gives for people to create wild swings in prices for speculation.

More Bad News For the Gold Bugs

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China is sending signals that they will not be buying gold that the IMF is selling:

Contrary to much speculation China may not buy the International Monetary Fund’s (IMF) remaining 191.3 tons of gold which is up for sale as it does not want to upset the market, a top industry official told China Daily yesterday.

“It is not feasible for China to buy the IMF bullion, as any purchase or even intent to do so would trigger market speculation and volatility,” said the official from the China Gold Association, on condition of anonymity.

I still think that gold is not a place to be, because everyone is talking about how it is the place to be, which reminds me of dotcoms in 1999 and housing in 2006.