Daily Digest - Dec 20

Saturday, December 20, 2008, 7:11 AM

A long and detailed look at the housing crisis, Schiff vs. Krugman, mall vacancies grow, unpaid leave for CA workers, congress gets a raise,  state tax revenues (chart), Biden says economy in worse shape than thought, second half of TARP requested, CSFB pays bonuses using illiquid assets, hedge funds gain access to public money, immigration, and municipal property tax financing.


An Overview of the Housing/Credit Crisis And Why There Is More Pain to Come 

Comments From a Federal Senior Bank Examiner "The next problem is with the Option ARM product. Approximately 80-90% are paying the minimum credit card payment and most loans are negatively amortizing. Here the payment shock is two-fold - rate and principal - and the increase in payments can be astronomical: 200% or higher, not the 10 to 100% that subprime has experienced. Also, the dollars exposed in Alt-A are nearly 50% higher than subprime (Alt-A average balance is $299k versus $181k for subprime).

Also, 73% were underwritten with Low or No Doc. The option arm books of many lenders are already showing significant deterioration and they have not even recast yet. This is the next tsunami to hit the housing market. This will hit much higher price points $600k and above as this was the affordability product used by higher income/higher FICO score households to buy that dream home." 

Schiff (Hat tip Heidi) OR  Krugman?

Mall Vacancies Grow as Retailers Pack Up Shop 

Vacancy rates at U.S. malls and shopping centers continued their steep rise in the third quarter as slumping sales forced retailers to close stores. 

Malls are seeing their highest vacancy rate since 2001, according to data released by real-estate-research firm Reis Inc. For shopping centers, the rate is the highest since 1994.

In contrast, the apartment market remained one of the most healthy real-estate markets in the third quarter, benefiting from the struggling home-sales market. Many would-be buyers, unable to get mortgages or worried about the darkening economy, are renting apartments instead. 

Schwarzenegger Orders Unpaid Leave for State Workers (Not Congress Though) 

Dec. 19 (Bloomberg) -- California Governor Arnold Schwarzenegger today ordered all state workers to take two days of unpaid leave each month to conserve money amid a record budget deficit and a legislative impasse over how to fix it. 

The furloughs will begin in February and will last through June 2010, Schwarzenegger said in an executive order. He also ordered all departments to cut 10 percent of their workforce costs, through firings if necessary.

"Every California family and business has been forced to cut back during these difficult economic times, and state government cannot be exempt from similar belt tightening," Schwarzenegger said in a letter to state workers. 

With economy in shambles, Congress gets a raise 

A crumbling economy, more than 2 million constituents who have lost their jobs this year, and congressional demands of CEOs to work for free did not convince lawmakers to freeze their own pay. 

Instead, they will get a $4,700 pay increase, amounting to an additional $2.5 million that taxpayers will spend on congressional salaries, and watchdog groups are not happy about it.

"As lawmakers make a big show of forcing auto executives to accept just $1 a year in salary, they are quietly raiding the vault for their own personal gain," said Daniel O'Connell, chairman of The Senior Citizens League (TSCL), a non-partisan group. "This money would be much better spent helping the millions of seniors who are living below the poverty line and struggling to keep their heat on this winter."

However, at 2.8 percent, the automatic raise that lawmakers receive is only half as large as the 2009 cost of living adjustment of Social Security recipients. 

State Tax Revenues (Chart)

Biden: U.S. Economy in Danger of 'Absolutely Tanking' 

"The economy is in much worse shape than we thought it was in," Biden told me during an exclusive interview -- his first since becoming vice president-elect-- to air this Sunday on "This Week with George Stephanopoulos." 

Treasury Secretary Asks Congress for Second Half of TARP 

With the U.S. government promising a total of $17.4 billion to General Motors and Chrysler, U.S. Treasury Secretary Henry Paulson has officially requested the second half of the $700 billion TARP funds from the U.S. Congress.

The move comes despite a wave of unpopularity for the outgoing Treasury Secretary on Capitol Hill, after Paulson used the funds to inject liquidity into the financial system rather than for the purchase of illiquid assets from the firms.

Paulson had previously said that he planned on leaving the remaining $250 billion TARP funds to his successor, Timothy Geithner, but with the White House promising $17.4 billion in funds to GM and Chrysler, the government needs another $4 billion to fulfill its obligations to the firms.

Bailing Out Santa (With Looted Tax Bucks (Humor Video))

S&P downgrades 11 of world's top banks 

Eleven of the world's biggest banks were downgraded Friday by Standard & Poor's after the ratings agency said the current downturn could be longer and deeper than previously thought. 

Six major US banks were downgraded, including JPMorgan Chase, Bank of America and Wells Fargo, as well as five banks in Europe.

The agency cut its ratings on Citigroup, Morgan Stanley and Goldman Sachs by two notches each. In Europe, S&P shaved one notch off the ratings of Barclays, Credit Suisse, Deutsche Bank, Royal Bank of Scotland and UBS.

While the downgrades were driven in part by the worsening economic climate in the US and abroad, S&P noted specific causes for concern at each institution.

S&P analyst Tanya Azarchs said that, in addition to the economic woes, the banking sector's "lax underwriting standards due to excess competition mean this cycle will be worse than prior cycles". 

Credit Suisse to Use Illiquid Assets to Pay Bonuses 

Dec. 18 (Bloomberg) -- Credit Suisse Group AG's investment bank has found a new way to reduce the risk of losses from about $5 billion of its most illiquid loans and bonds: using them to pay employees' year-end bonuses. 

The bank will use leveraged loans and commercial mortgage- backed debt, some of the securities blamed for generating the worst financial crisis since the Great Depression, to fund executive compensation packages, people familiar with the matter said. The new policy applies only to managing directors and directors, the two most senior ranks at the Zurich-based company, according to a memo sent to employees today. 

Hedge funds gain access to $200bn Fed aid 

Hedge funds will be allowed to borrow from the Federal Reserve for the first time under a landmark $200bn programme intended to support consumer credit. 

The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before, although the Fed may not permit hedge funds to use offshore vehicles to conduct the transactions 


Immigration By The Numbers (Resources?) (9 minute point)

Municipal Property Tax Financing 

In solar, innovations in financing are as important as innovations in technology. The city of Berkeley has pioneered a novel approach to overcome a major hurdle to the residential solar market--high up-front costs.


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joemanc's picture
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Re: Daily Digest - Dec 20

Couple of more links I found today on energy.

Raising U.S. gas taxes now while gas is cheap to fund alternative energy/public transit - I couldn't agree more.


Drill baby drill, off the coast of Virginia:


The next big heist on Wall Street, carbon cap trading and the link to the investment banks:






Prof. Samuel D.Bornstein's picture
Prof. Samuel D....
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Re: Daily Digest - Dec 20
The 2nd Wave of Foreclosures has finally made it to the mainstream Media. CBS's 60 Minutes had a segment on 12/14/08, but they missed a very important point. Here is a post which may have merit for your blog.......
I would like to bring a very important bit of information to your attention that relates to this economic crisis that was overlooked until now.  

On Sunday, 12/14/08, CBS 60 Minutes aired a segment "The Mortgage Meltdown".
Scott Pelley's piece on the 2nd Wave of Foreclosures overlooked a critical fact.
The segment missed the fact that this next wave of Foreclosures in 2009 Will Take Self-Employed and Smaller Businesses who have these TOXIC mortgages. In fact, ALT-A, Option ARMS, Interest-Only, the TOXIC Mortgages that are considered the "Troubled" assets in TARP were specifically  marketed to the self-employed who fell prey to them.
The upcoming defaults on these risky "Toxic Mortgages" will result in an increase in foreclosures. But worse, once these small businesses fail, the resulting loss of jobs will cause millions to add to the ranks of the unemployed. Note that self-employed business owners (16.2 million according to the SBA) employ between 1-10 employees.
An NASE survey at , was the first to provide compelling evidence of small business involvement in the upcoming toxic mortgage crisis. The survey was created by Prof. Samuel D. Bornstein and Jung I. Song, CPA of BornsteinSong Consultants in Oakhurst,NJ,and was conducted by the National Association for the Self-Employed (NASE) which issued a Press Release on November 21, 2008.

According to this survey, it is estimated that 3,709,800 small business owners hold Alt-A and other toxic mortgages, and 1,279,800 are already delinquent as they have missed one to three or more monthly mortgage payments at mid-November, before the expected Resets that are scheduled to begin in 4th Quarter 2008 through 2012.

These small business owners will be at-risk of payment shock and default as their monthly mortgage payments skyrocket. Small business owners were especially targeted for these Alt-A loans which required little or no documentation of income which appealed to many small business owners who previously were unable to qualify.

The resulting defaults will be the cause of the upcoming second tsunami wave of foreclosures that will dwarf the subprime crisis and will take many homeowners, small business owners, and their employees at this critical time when our economy can ill afford it.

Thank you,
Samuel D. Bornstein
Professor of Accounting & Taxation
Kean University, School of Business, Union, NJ
Davos's picture
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Re: Daily Digest - Dec 20

Hello Professor:

Hey, super stuff, thank you! PS If you have more please send it this wayLaughing 


jrf29's picture
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Re: Daily Digest - Dec 20

Dear Prof. Bornstein,

The above is very interesting.  Also, you are the first professor who has, to my knowledge, posted anything on this site.  This gives me an excellent opportunity to pose a question:  why, in your opinion, did the academic community not raise more of an alarm about the potential problems of lowered lending standards and unchecked expansion of credit?  Also, what is your assessment, from an accounting perspective, of the relavent sections of Dr. Martenson's Crash Course? 

You certainly might be in a position to at least make some educated comments on the general topics covered in the material, without committing yourself to publicly taking a position on Dr. Martenson's work.


kemosavvy's picture
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Re: Daily Digest - Dec 20

the schiff vs. krugman faceoff is a great one, i have to believe that schiff takes the win here just from shear enthusaism, also krugman seems to me to be the type who believes in unsustainable trends that will never end. this is the same argument we hear all the time 'this time it's different' and everyone is in the dollar for a good reason and will ride it down along with the modern economy, uh-huh, i disagree, when the tide turns on treasuries it will turn quickly and collapse rapidly. it's a classic bubble diagram. negative yields are unsustainable. sorry paul, the dollar will soon meet gravity.


i also love to see how quickly s&p reacts to the wall street meltdown. i think i've figured out their credit-worthy/risk assessment model- they measure 'payola dollars' and when they aren't flowing in so easily anymore, that indicates weakness in a company, ....'downgrade my boys'!! not exactly forward-looking or helpful to the common investor but very profitable to s&p. 

kiwidave's picture
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World warning from the IMF

Opening paragraphs from A. E.-Pritchard at the Telegraph.

The riots have begun. Civil protest is breaking out in cities across Russia, China, and beyond.

"Greece has been in turmoil for 11 days. The mood seems to have turned "pre-insurrectionary" in parts of Athens - to borrow from the Marxist handbook.

This is a foretaste of what the world may face as the "crisis of capitalism" - another Marxist phase making a comeback - starts to turn two hundred million lives upside down.

We are advancing to the political stage of this global train wreck. Regimes are being tested. Those relying on perma-boom to mask a lack of democratic or ancestral legitimacy may try to gain time by the usual methods: trade barriers, saber-rattling, and barbed wire".

Full column here:

 I'm just glad we're away from the worst problem areas down here in New Zealand.

Cheers to all and best wishes for the New Year.


Davos's picture
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Re: Daily Digest - Dec 20

Hello David:


There is a bit on the Greece meltdown on FSN News Hour that I'm posting today - hope you weather all this well in New Zealand!

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Immigration - a PONZI scheme?

The immigration video was really interesting. It made me think that this is the biggest PONZI scheme in the world! I mean just think about it, if you need immigrants to help you bridge the social security shortfall, help with health care and to maintain the US military, what can this be??

I think immigration harms the originating country WAY more than US. I am an immigrant and I know how for example the Indian tax payers foot the bill for all the IIT students and how a majority of them never stay back and do anything productinve for the country.

Sometimes free markets are at odds with so many things, but I don't think there is a better way to evolve!

gtazman's picture
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Re: Daily Digest - Dec 20

Talking about a PONZI scheme...

I found this post by Bill Anderson.   Link:

Beside Chris's site I always visit

The Greatest Ponzi Scheme of All: Social Security

Posted by Bill Anderson at December 21, 2008 07:37 AM

While Madoff has managed to mangle at least $50 billion, there is
another Ponzi scheme with trillions in unfunded liability: the U.S.
Social Security System. No matter how many times Paul Krugman declares
that SS is safe and sound, it is not.

Most people don't realize that SS actually is a "legal" Ponzi
scheme, made legal because the government has declared it so.
Nonetheless, the principle of SS is that of the chain letter in which
people pay in, other receive the benefits, and it works only as long as
others are there to pay in more money.

At the beginning, the ratio was about 20 payees to one person
receiving benefits, but the numbers have changed to where it now is
about 3 and 1. This is an ominous trend, and I suspect that in the end,
the government will simply print the money, as it has done in other

So, my recommendation is for Obama to appoint Madoff to head the SS
Administration, as he already is experienced in putting together Ponzi


Merry Christmas to all. Smile

Davos's picture
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Re: Daily Digest - Dec 20

Hello cybernytrix

My grandfather immigrated here, so this was and is a tough issue for me to grapple with, but the numbers, just like Bartlett's make sense. Take care 

buckrog's picture
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Re: Immigration - a PONZI scheme?

So I think its a good idea to check out who these sources are as best you can before posting.  The Southern Poverty Law Center has done some research on the groups linked to NumbersUSA:

The Puppeteer

The organized anti-immigration 'movement,' increasingly in bed with racist hate groups, is dominated by one man, John Tanton.

 If true, it appears that this is an organized anti-immigrant movement funded by the likes of Mellon Scaiffe.  Numbers can be misused.

 Check it out : 

kraftwerk's picture
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Re: Immigration - a PONZI scheme?

I don't put much credance in the SPLC. They make their money by sniffing out "racists" everywhere so of course they are going to find them.

capesurvivor's picture
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Re: Immigration - a PONZI scheme?

Good call.


SPLC has put lots of neo-Nazis in jail. Hate groups who defile us all.



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