Thursday, July 31, 2008

The Last Era

" Well, I'd better go now, I'm almost at the wall."

With the passage of the Housing Bailout Bill, HR 3221, the emptying of the US Treasury is most likely guaranteed. The debt may last 50 years or longer, and what is worse, the confidence of investing in America is gone. What do you think the breakdown of the recent WTO talks was about? It is the beginning reluctance of the world to bend to the whims of the US over any matter involving trade or finance.

From the NY Times
"Treasury Secretary Henry Paulson now has the go-ahead for his two-part plan to salvage Fannie Mae and Freddie Mac, the government-sponsored mortgage companies — a blueprint that violates fundamental American principles in two worrisome ways.'

"First, the Treasury will be allowed to advance money to Fannie and Freddie (and even to buy their stocks) in unlimited quantities to keep them afloat — in any fashion Mr. Paulson sees fit. Yet the Constitution requires that “no money shall be drawn from the Treasury, but in consequence of appropriations made by law.” Even in wartime, budgets for the military specify how much is to be spent for what purposes.'

"Second, as an alternative to increasing the national debt, Mr. Paulson wants to let the two mortgage lenders become preferred customers of the Fed’s discount window, with the authority to pawn their own securities for cash. But only Congress has the constitutional power to borrow on the credit of the United States.'

"....foreign-government accounts now hold $985 billion worth of Fannie and Freddie paper. It explains why, in mid-July, Secretary Paulson (as well as Senator Chris Dodd, the Connecticut Democrat who heads the Senate Banking Committee) began giving press conferences about how sound the two firms really were, no need to worry. Behind the scenes, Treasury officials overseas made phone calls to the local central banks and finance ministries, stressing that the two mortgage giants would weather the storm.

"But the truth is that nobody knows. Fannie and Freddie have financed several hundred billion dollars of doubtful mortgage paper that may or may not pay off enough to meet their debts, and they cannot predict whether they will have gains or losses from their gigantic exposures in the derivatives markets."

Not to be left out of the "taxpayer money to cover losses on stupid bets we made" party, the banks have strong-armed the FASB:

"The Financial Accounting Standards Board, which sets U.S. accounting rules, voted on Wednesday to delay accounting changes that would affect trillions in off-balance sheet assets at banks and financial companies."

The FASB had voted in April to change accounting rules for level 3 assets held by banks and large financial institutions. The change would have forced multi-trillions of dollars in losses currently being hidden in "off-balance sheet" accounts onto the ledgers of these banks. Now, the FASB has capitulated to the pressure, and rescinded their decision. There is little doubt they will not re-enact the rule until the banks can get congress to also pay for these losses.

The following is just one of the reasons why the issue of level 3 assets is so important, from Karl Denninger:

"Let me see if I have this right - I may have it wrong, but I don't think so.
Two weeks ago Merrill "valued" some securities on their books in their earnings report and conference call at ~$11 billion.
Yesterday, suddenly, they're worth $6.7 billion, and is cited as the reason to sell a whole bunch of stock and massively dilute the firm's stockholders.
I suppose Merrill expects me (and everyone else) to believe that these "assets" decreased in value by nearly half in less than two weeks?
I mean, c'mon guys.
You are kidding, right?
As I see it, one of two things just might be true:
There is no ability to price these "assets" at any point in time and they lose, spontaneously, 20, 40, 50% of their value over two-week periods without warning. This calls into question the solvency of every firm that has similar assets on its books, worldwide.
They lied, blatantly. They made up a value for these securities and/or made up a number they wanted to report for "earnings", then figured out how to fit what they owned into that number, worrying about the truth of the matter two weeks later.
Now as I said, there may be some other explanation for how this happened, as I'm just a lowly blogger who is certainly not "skilled" in the "art" of high finance, but if there is, I sure can't figure it out and would love to see Merrill explain it to me (and everyone else.)
Oh Chris? Christopher Cox? Where are you? I thought you said you were concerned about market manipulation?
What the hell do you think THIS looks like to people like me and where are your investigators?"

Foreign accountants and economists know what this means. Because they know, so do their respective leaders.

Expect over the coming years decreasing foreign investment in our securities, and increasing foreign purchases of US assets (ie Anheuser Busch).

The debt load of the US is already beyond any ability to pay back. Now, with the passage of HR 3221 and the almost guaranteed future bailout bills, we can expect, at a minimum, a doubling of our country's debt.

Is it right for you, the taxpayer, to allow the financial leaders of this country to keep their profits and bonuses and million dollar houses and yachts and vacation homes....etc., while you are expected to keep working to pay the taxes going to cover their bad business decisions?

This is exactly what is happening right now.

And..., the world is watching.

Tuesday, July 8, 2008

Mad Russians

(click on image for better view)

"Russia tonight threatened to retaliate by military means after a deal with the Czech Republic brought the US missile defence system in Europe a step closer."

How's that for the opening line to a news story.

From the London Times.

Not the New York Times.

Not the Washington Post.

Not the L.A. Times.

In the throes of a lame duck Presidency, the Bush Administration presses forward with
The Missile Defense System in Europe. Saber rattling on steroids.

They knew the Russians would be upset.

Last year at the G8 in Germany, the Russians caught Bush by surprise. They offered to host the radar position of the defense system in Azerbaijan. Of course, to not only defend against Islamic intentions of a missile strike, but to share technology as well.

To be fair, the Bush administration, as it should be, is not keen on sharing anything militarily with Russia or any other major power. That technology is meant to protect the US, and it has come with costs.

We should be recognizing a swiftly changing world. 9/11 was only 7 years ago, and look at how the world has changed.
  • The threat from Iran is probably closer than we think.
  • The government in Pakistan is far from stable, and because they already have nuclear weapons, they might be the more immediate threat.
  • Afghanistan is close to being 'out of control'. Additional troops will need to be sent there soon, or we will be forced to withdraw.
  • China bought $1 trillion of 2005 and 2006 MBS derivatives, that may end up with 50% losses. That won't make them happy. Prices on all things "made in China" will go up 20% by Christmas.
  • The BRIC (Brazil, Russia, India and China) have learned to trade with one another. Their economies are just revving up.
  • The US and Europe will soon be embroiled in losses with complex financial instruments. If you thought it was bad now, just wait. Rounds two and three seem imminent.
  • Many gains realized during the surge in Iraq have been given back. Prime Minister Maliki has kindly asked the US to leave Iraq. Now.

The coming economic crisis may allow certain shifts in the geo-political board game. Countries not encumbered by faltering economies may find safe havens together. Countries facing downturns will realize added pressures internally.

New alliances might begin where old alliances weaken.

So here we are, at the end of an administration. with the great cold war adversary telling the world military response against the US may be necessary.

Sounds like front page/lead story kinda stuff to me. I can't find it.

Maybe this is something Americans don't care about? Unless you have a child soon to graduate High School or College. There is no way to take any other military action without a draft.

Shouldn't we be reading about this?

I have yet to see it on television.

Maybe we will hear of it soon. After they talk about what John McCain and Barack Obama wore today.

Michigan Realtor Killed

story is strictly for sensationalistic value only.

This story from Businessweek


"A man upset about a property transaction fatally shot a real estate agent in the head during a meeting Tuesday morning in the victim's office, authorities said. '

"Troy VanderStelt, 34, was pronounced dead at 12:45 p.m. at Mercy Health Partners Hackley Campus in Muskegon, said Muskegon County Prosecutor Tony Tague.'

"A suspect was arrested a short time after the shooting at a home in nearby Norton Shores. Tague identified him as Robert Arnold Johnson, 73, of Roosevelt Park. Johnson was scheduled to be arraigned Wednesday in Muskegon County District Court on charges of first-degree premeditated murder and using a firearm during the commission of a felony, the prosecutor said. '

"Tague said Johnson plotted to kill VanderStelt, took a .22-caliber semiautomatic handgun to the real estate agent's office, got him preoccupied with some paperwork in a conference room, stood next to him, pulled out the gun and shot him once in the temple. '

"We believe this was a planned-out execution-style murder of the real estate agent," the prosecutor said.'

"Tague told WOOD-TV in Grand Rapids that Johnson believed that VanderStelt took advantage of him in a real estate deal. Johnson bought a house through him in 2005, then recently decided to sell it and went to a different real estate agent. The second agent told Johnson that, because of the slumping housing market, the home was not worth what he had paid for it.'

"The shooting happened around 8:45 a.m. at Nexes Realty Inc. in Roosevelt Park, a city of about 3,900 people just south of Muskegon. Police Chief Bill Wiebenga said the suspected gunman was talking with VanderStelt in the conference room when an employee heard a popping sound. "

Monday, July 7, 2008

Bail, Bail, Bail

An article from the WSJ shows us one of the morphing tentacles from the housing bust, the "buy and bail".

"In markets hit hardest by falling home prices and rising foreclosures, lenders and brokers are discovering a new phenomenon: the "buy and bail," in which borrowers with good credit buy a new home -- often at a much lower price -- then bail out of the "upside down" mortgage on their first home.

'Homeowners are able to pull off this gambit -- which some lenders and real-estate agents call mortgage fraud -- by taking advantage of mortgage-lending practices that allow them to buy a new primary residence before their existing residence has been sold. And with the lending industry in disarray as it tries to restructure millions of mortgages, some boast they are able to pull off the strategy with ease."

It is somewhat understandable that many who bought at the top of the market feel slighted when they see the value of their property drop up to 50%. Housing values rose so quickly, and so high, it seems as if some of the professionals should have been screaming in 2005 and 2006 to be careful, a bubble was being created that could pop.

Instead, the professionals are actually clowns. At the top of the bubble they said "Buy, Buy. Buy" because property values never go down. Then, these professionals/clowns offered adjustable rate loans with very low initial rates. These same actors, that were no small part of the run-up in prices, are now doing this:

"In some cases, homeowners are coached through the buy-and-bail process by real-estate agents and brokers who see nothing wrong with it. Some blame the phenomenon in part on lenders' unwillingness to cut deals or restructure loans made when home prices were inflated. "It's just a business decision," says Linda Caoili, a Sacramento real-estate agent who is working with Ms. Augustine and others who are considering walking away from their mortgages. "If you're upside-down $250,000, why would you keep it? It just doesn't make sense."

This will be a part of the larger problem of people just walking away from the insurmountable debt. A lot of folks will simply just rent, and have already done so. The idea that not that many people will 'walk away' is fallacy. They will walk by the thousands, maybe tens of thousands.

How is it the same characters who put people into houses that are now underwater, get to again sell that house, either though REO, short sale or traditional sale? They call themselves professionals. 100 years ago they were selling cure-all tonics with Laudanum.

Sunday, July 6, 2008

Financial Fricassee

From The Financial Times:

Citigroup, Merrill Lynch and UBS, the banks most exposed to Ambac and MBIA, could face further writedowns of up to $10bn after the bond insurers last week lost their fight to retain their triple A credit ratings.'

My comment - I'd guess that further writedown number is a lowball estimate. Maybe they mean in the first week only?

"The prospects of further writedowns related to bond insurers, also known as monolines, could deepen concerns over the financial health of US and European banks.'

My comment - In light of what Kudlow, Cramer and the rest of the guys on CNBS and Faux Business are saying, there aren't any concerns at all. Why, some analysts even say the Financials are a "generational buy" right now. Remember this now infamous rant from Cramer just a few days before the Bear Stearns dive from $62 down to, what did Chase buy them for? Oh yeah, $2.

"UBS, Citigroup and Merrill Lynch declined to comment.'

My comment - I bet! Oh, and I know many people are shorting both Merrill and UBS as I write.

"The value of CDOs and mortgage-backed bonds has plunged amid soaring foreclosure rates in the US. This week, CDOs in default crossed the $200bn mark, according to specialist publication Total Securitization. Many of these bonds had triple A ratings when they were issued and large amounts were retained by banks."

My comment - You may wish to read previous articles Mispricing of Risk, Pitfalls of Derivatives and Insurers in Trouble. Do read them. $200 Billion could be a very low number.

The Telegraph out of London is reporting this:

RBS issues global stock and credit crash alert

By Ambrose Evans-Pritchard, International Business Editor

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks. "A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

"Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah.

Next, this also from the Telegraph:

Barclays warns of a financial storm as Federal Reserve's credibility crumbles

"US central bank accused of unleashing an inflation shock that will rock financial markets.

'Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall "below zero".

My comment - The hens are coming home to roost. This problem, risk of a global financial meltdown, has been building in plain sight, for all to see. For the last few years, every contrarian who spoke on CNBC, or Fox Business about the increasing securitization of debt was stopped. The response was always immediate, "You are so wrong because none of 'our' experts (Kudlow, Cavuto and Cramer) have ever said anything like that."

It is not a "liquidity" problem, it is a "solvency" problem.

Most of the big banks, if they were forced to sell all level 3 assets today, would have losses exceeding their net worth by several times.

They can't sell any of the derivatives because there are no buyers. The buyers would be other banks and large financial institutions. They all know these things are now garbage. This is the heart of the "liquidity" problem.

To add, this 'problem' isn't going away, as a matter of fact, it will get worse.

This from Businessweek "The next wave of foreclosures is expected to gather strength when the million or so option ARMs start resetting in large numbers next spring."

"According to a recent analysis by Lehman Brothers, option ARMs that originated in 2006 performed about as well as fixed-rate Alt-A debt for the first 12 months. But by the time they were 2 years old, about 2.1% of performing loans were going 60-days delinquent each month. Compare that to a 1.2% of current loans going delinquent with other Alt-A loans. The rate of increase in delinquencies is even beginning to approach that of subprime, which is about 2.5%."

"Option ARMs originated in 2006 make up about $140 billion of the $350 billion of outstanding option ARMs and 45% to 50% of them are expected to default. The 2007 option ARMs, which were originated just as home prices began falling, are expected to perform similarly badly."

The Banks and many financial institutions have been hiding, in level 3 accounting, massive losses on financial derivatives all bought with invested or borrowed money. In many cases, the amount paid for these derivatives is lost. Across the board, it is very easy to assume a 40-60% loss on all debt based derivatives over the next few years.

This is no where close to the message we get from mainstream media. To be sure, there are sprinkles of bad news among the leading publications. These sprinkles have increased a little, but it can hardly be called a "rain" of bad news.

I just hope it doesn't become a deluge.

Saturday, July 5, 2008

Sixteen of Thousands

This 4th of July was atypical for me. My wife, gravely ill from cancer, is being treated in St Louis at Washington University Medical Center. My son is there as well, and I will be soon, but am still here arranging for a prolonged stay in St Louis.
I spent Friday with a friend of mine, and his family. My friend is from Norway and is naturalized a citizen here. We have been friends now 11 years, since our sons began playing soccer together.

My friend's in-laws are Palestinian Christians (yes, that's right, Christians) whose native tongue is Arabic. The mother in-law tells the story of being forced from Israel into a refugee camp in Lebanon in 1948. She married, had six children, and raised them in the camp. The oldest boy was twenty when the family emigrated to America in 1972. They had to leave the camp due to the breakout of civil war in Lebanon. Being Christians placed them in a netherworld between the Muslims and Jews, and they were left with few alternatives.

This family's love of their new country cannot be exaggerated.

Everywhere these new Americans look, they see opportunity. One son has a PhD in Mathematics and teaches at Wayne St., two other sons own restaurants, the oldest of the grandkids have successful businesses. These former refugee camp dwellers have truly seized the American dream and made it theirs.

They also see the roadblocks and hurdles which many Americans don't see, and busy their minds on how to go around the roadblocks and jump the hurdles. To listen to this perspective of America seemed refreshing and encouraging, especially in light of the last few years, and what I feel our country will go through over the next few.

Many neighbors and friends, what most of us would describe as average Americans, came and went throughout the day. The discussions and conversations ebbed and flowed from the mundane to bordering on existential, as we all celebrated the birth of our nation.

On my ride home, I replayed the conversations over and over in my mind. The next morning I thought more, and realized a small distinction in the conversations I remember adults having when I was young, and how we have conversations today. Maybe it is selective memory, but it seems adults then posed many more questions to one another, than what I experience now. And, again as my memory serves, the questions then ran deeper.

Among these new Americans, a love of philosophy about life seems to sprinkle their conversations. They have little fear of posing posing deeply philosophical questions to one another. Should a raw nerve be touched, it is quickly healed by their effortless acknowledgement we are all human.

Today, in America, the art of asking questions has gone the way of writing letters. Most Americans now use the abbreviated text lingo, if we write at all. Gone is the eloquence of a seasoned prose, replaced by the whimsical :). Can they convey the same meaning? Of course, but they cannot convey the same emotion. The same has happened to those asking questions. It almost seems a question today is constructed to receive a short and concise reply, and the idea of a larger implication is left entirely to inference, with the listener being left devoid of emotion.

So I write this only as a starting point, with little thought other than to derive questions which I know will raise emotion to create an answer. What a great country we live in. I believe one of the ways we keep it great is by asking the questions which will stir the soup. Here are just a few of mine;

How can it be?

In this great country, founded on the simplest, yet noblest, ideals of fairness, equality and the common man's ability to control his leaders, how can it be?

How can it be we never hear of why interest rates were dropped to create a housing bubble?

How can it be I read nowhere of why Wall Street could only make money by forcing the preceding tech bubble? Then, in rinse and repeat fashion, do it again this decade?

How can it be more than 100 years later, our automobiles still use petroleum, and are only 15-20% more efficient?

How can it be that our once great automakers are all on the brink of extinction? More importantly, how did they allow Honda and Toyota to get such a foothold in the first place?

How can it be most of us have placidly watched the dismantling of small town main streets in exchange for the Walmarts, Sam's Clubs and Costcos?

How can it be our political discord feeds the news cycle far more than the policies put forth by those seeking office?

How can it be we go from "being the great savior of all oppressed peoples" (Ho Chi Minh, 1946) to global accusations of being the oppressor?

How can it be we have missed the golden opportunity to own the alternative energy wave?

How can it be our political and corporate leaders still don't fully see this opportunity, while the rest of the world has begged us to see it for 20 years?

How can it be our Middle East allies are sounding less and less like allies as every day passes?

How can it be at dinner parties the talk is not about steady paying jobs in manufacturing and their stabilizing effect on economies?

How can it be the US has lost more than 60% of these good paying, economy stabilizing jobs over the last 40 years?

How can it be in a 'Christian' nation, we use corn to make gasoline, yet there are children dying in many parts of the world from starvation?

How can it be we build lavish, ornate buildings to pray to and worship the Son of God when he told us to "sell all of your possessions, give the money to the poor, and follow me?"

How can it be in a 'Christian' nation the accumulation of wealth is more important than the genocide of the Tibetan people over the last 50 years?

How can it be our most important trading partner is the perpetrator of that genocide?

Of course I have my ideas of answers to these questions. Though the group of friends is small, these are topics I am fortunate to discuss.

What I find utterly amazing, is the apathy I feel coming from the public at large. The mainstream media sometimes will hit the fringe of one of these questions, but largely ignores the larger implications.

Sixteen questions. None of these questions alone will provide an answer to solve all the problems of the world. But, to answer these sixteen, along with thousands of others, may.

How can it be in the greatest country in the history of the world, are these questions, and thousands more just like them, not at the heart of all of our conversations? Ok, that's a good 17th question.

I trust everyone had a great 4th, and asked themselves 'what makes this country so great?'

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