- Bernanke's Witness Protection Program
- Steve Dore: Tax the Rich (Seen on biiWii.blogspot.com)
- E.D.A.R. Everyone Deserves a Roof (H/T DamTheMatrix)
- 'The Worst I Have Ever Seen'
- U.S. credit card defaults rise to 20 year-high
- Rock, Paper, Scissors
- House of Cards Link (H/T GregRoberts)
- The Maestro Has No Clothes
- Housing Starts: The Fifth Worst or the Fifth Best?
- DataQuick: SoCal Home Sales Up, Foreclosure Resales 56.4% of Market
- January flow of funds "a disaster"
- U.S. Injecting Billions Into Foreign Central Banks (H/T Suzie)
- AIG execs pocket bonuses - then quit (H/T DamTheMatrix)
- Long on Pitchforks and Torches: AIG Retention Bonuses Paid to FORMER Employees
Economy
Bernanke's Witness Protection Program
March 16, 2009 "Information Clearing House" -- Fed chief Ben
Bernanke's new funding facility is a real doozy. In fact, if the Term
Asset-Backed Loan Facility or TALF, which is set to launch on Thursday,
doesn't convince the American people that it's time to take a wrecking
ball to the Central Bank and start over, than nothing will. Bernanke
and his co-conspirator at Treasury, Timothy Geithner, are planning to
revive the shadow banking system by dumping $2 trillion into the same
over-leveraged, derivatives-based garbage that blew up the financial
system in the first place. All the blabbering about a "good bank-bad
bank" remedy appears to have been a diversion. This is how Bloomberg
sums it up:
"Geithner's program has three main elements: Injecting fresh
government capital into some of the country's biggest financial
institutions; establishing a public-private partnership to handle as
much as $1 trillion of banks' bad assets; and starting a credit
facility with the Federal Reserve of as much as $1 trillion to promote
lending to consumers and businesses.
The Treasury hopes to unfreeze credit markets by providing new
incentives to banks and investors to resume trading in mortgage
securities and other troubled assets. U.S. regulators are conducting a
new series of examinations to make sure banks have enough capital to
accept losses when selling these assets, while also planning to provide
government financing to the investors who might buy them." (Bloomberg
News)
That's right; $1 trillion for Bernanke's TALF and another trillion
for Geithner's so called "Public-Private Partnership". That's $2
trillion down a derivatives sinkhole just to preserve the illusion that
the banks are still solvent. Bernanke has decided to shrug off the
advice of nearly every reputable economist in the country, most of whom
are pushing for a government takeover of the failing banks
(nationalization), just to toss his shifty banking buddies a lifeline.
It doesn't seem to bother him that the public till has already been
looted and that his action will leave the next generation of Americans
bobbing in a pool of red ink.
Last week, investors backed away from Bernanke's TALF, even though the
Fed promised to provide up to 95 percent of the funding (through low
interest loans) to investors willing to buy distressed assets backed by
student loans, car loans and credit card debt. The potential investors
"objected to the level of scrutiny that dealers would have over their
books, arguing that the dealers' rules attached too many strings.
Dealers were saying they take plenty of risk to facilitate the program
and need to be protected in situations where the collateral or the
client made mistakes or wound up ineligible." (Wall Street Journal")
This is how crazy it's gotten. Why shouldn't the Fed have the right
to look at the books and see if these financial institutions are
solvent or not? Should they just take their word for it?
But that's only half the story. When the WSJ says that dealers need
to "be protected in situations where the collateral or the client made
mistakes or wound up ineligible", what they mean to say is that they
expect the Fed to make up for any losses on securities which are
explicitly banned from the program. This is no small matter, since the
Fed cannot legally buy any asset that is less than triple A, and yet,
everyone knows the TALF will end up being a dumping ground for all
kinds of toxic waste.
So who will pay when financial institutions sell double A or lower
securities that they KNOW are ineligible for the program? As it stands
now, the taxpayer, because the Fed caved in to industry pressure. In
other words, the interests of the people who put up a measly 5 percent
of the original investment will take precedent over those who put up 95
percent. This is the kind of sleazy dealmaking that is going on behind
the scenes of this bailout fiasco. The Fed is so desperate to launch
its facility and keep these Wall Street scamsters and bank
extortionists in business, they're willing to underwrite the fraudulent
sale of rotten securities. It's outrageous!
But there's even more to this swindle than that--much more. According to the Wall Street Journal:
"Wall Street dealers, including J P Morgan Chase & Co. and
Barclays PLC's Barclays Capital, have created vehicles to participate
in the TALF that would allow investors in the program to circumvent
many of the restrictions laid out by the Fed. The vehicles resemble
collateralized debt obligations, or CDOs, and use some of the financial
engineering that was partially responsible for the collapse of the
credit markets. The Fed, eager to get what it hopes will be a $1
trillion program up and running, has blessed the vehicles because they
open the TALF up to a much larger group of investors." (TALF is
reworked after investors balk, Liz Rappaport, Wall Street Journal)
Great. More CDOs. Just what we need.
Keep in mind that the Fed's funding is in the form of "non recourse
loans" already, which means that if the dealers decide to walk away,
the losses are transferred to the taxpayers balance sheet, no questions
asked. But even that is not good enough for the Wall Street crooksters.
They want to create a whole new security buffer-zone for themselves by
dredging up the Frankenstein of structured debt-instruments--the
notorious CDO--so they can "circumvent" the rules and plead innocent
when B grade garbage is sold through the TALF. This isn't a financial
rescue plan, it's a witness protection program for self acknowledged
con artists and snake oil salesmen.
(More)
Steve Dore: Tax the Rich (Seen on biiWii.blogspot.com)
E.D.A.R. Everyone Deserves a Roof (H/T DamTheMatrix)
About EDAR
EDAR (Everyone Deserves A Roof) is a 501(c)(3) charity that provides unique mobile shelters to those living on the streets all around us. Each EDAR is a four-wheeled mobile unit which carries belongings and facilitates recycling during the day and which unfolds into a special, framed tent-like sleeping enclosure with a bed at night.
Mission
While respecting permanent and temporary housing for the homeless in group settings which use buildings to provide shelter, EDAR addresses the unrepresented hundreds of thousands of homeless people amongst us for whom no beds are available or who are unable or unwilling to participate in those solutions.
Who We Serve
The EDAR units are currently being implemented in three ways:
EDAR works with current philanthropic, governmental and religious initiatives who currently work to house the homeless in temporary and permanent housing programs. EDAR units are being used as a "first step" into the homeless shelters for those that are typically reluctant to enter a traditional shelter system. The shelter creates a relationship with the homeless person who is using the EDAR unit and with time, the homeless person will often transition into the shelter's program.
The EDAR units are being used as additional beds in shelters where there is a lack of portable cots for the homeless each night. EDAR users are mobile with the EDAR units during the day, and are allowed to enter the shelter grounds and sleep in a designated area. This provides the shelter extra sleeping units and gives the homeless person much more privacy than the traditional cot on which they might sleep.
The EDAR units are also given to homeless clients directly, those who are in need of a more comfortable place to sleep that protects them from the elements, for those who cannot or will not go to a shelter.
Los Angeles
There are 73,702 homeless people on any given night in Los Angeles County; over half of them are in the City of Los Angeles.
There are 141,737 homeless people annually in Los Angeles County.
Approximately 83% of the homeless people identified in the point-in-time count were unsheltered, sleeping in the streets, alleys, autos, encampments, overpasses, doorways, tents, unconverted garages, sheds, and the like while only 17% were living in either emergency shelters or transitional housing programs.
(Estimate: LAHSA 2007 Greater Los Angeles Homeless Count)
United States
Each year, more than 3 million people experience homelessness in the United States, including 1.3 million children.
(Estimate: National Law Center on Homelessness and Poverty)
Of 23 major US cities surveyed, an average of 23% of shelter requests by homeless people are estimated to have gone unmet
Of the surveyed cities, 77% of the emergency shelters estimate they will have to turn away homeless people, other than families, because of a lack of resources.
(Estimate: United States Conference of Mayors: Homeless and Hunger Survey December 2006)
'The Worst I Have Ever Seen'
To many people, the unfolding crisis feels like a bad dream. Every day they wake up, hoping things will somehow be back to "normal" (whatever that is). But just like the last great unraveling that took place 80 years ago, a good night's rest does not change the reality of the situation. It doesn't eliminate the imbalances that have built up over the course of many decades. It doesn't alter an unhealthy dependence on debt and fast money. It doesn't take the place of a corrective economic cleansing that was way, way overdue. But what it does do is leave those who are ill prepared scrambling to get by, as the San Francisco Chronicle details in "Lenders of Last Resort See Heartbreak Nowadays."
If you'd like a reading on how the economy is affecting the average San Franciscan, you could call an economist. You could study wages and layoffs. You might even graph the rise of foreclosures.
Or you could stop into the Provident Loan Association on Mission Street behind the Old Mint.
"It's heartbreaking," said manager Ben Shemano. "We have people bringing in their last treasures, filled with unrealistic hopes and expectations."
Shemano and others at Provident don't like to think of it as a pawn shop. There are no handguns, toaster ovens or electric guitars in the window. The store - which deals in jewelry, silver and fine art - was founded by the city's financial bigwigs in 1912 to combat runaway loan sharking. For generations it has been the place to go when a piece of jewelry happened into your hands through inheritance, good luck or a broken heart.
"For years I developed a cozy little business with engagement rings," Shemano said. "The engagement didn't work out, someone wanted to go to Mexico, so they sold it."
Things changed about a year ago. People aren't coming in for spare cash any more. This is financial life and death.
"This is the worst I have ever seen," said managing partner Joseph Chait. He would know: His late father took over the business in 1965; his wife's grandfather started working there in 1952. Chait has been there since 1971.
"We are seeing more people who, if they are not at the end of their rope, they are close to it. They are just trying to stave it off."
Customers come through the door in a sad, daily procession. They are close to default on their mortgage, car payments or their kid's tuition. They have made the wrenching decision to quite literally sell the family jewels.
Shemano said they tell stories about a piece of jewelry or silver, how it has been in the family for generations. With every telling, the imagined value tends to grow.
"You've got to pop bubbles sometimes," Chait said. "They tell you, 'I remember this silver tea set from when I was little.' And you have to say, 'Well, it's worth $40.' "
At times there are tears - "about once a week or twice a month on average," Chait said.
Other times reality is slow to sink in. Chait recalls a woman who wanted cash for her silver and gold Rolex watch. She needed the money, she said, to make her Lexus payment.
"They are looking to get money to solve their problems," Chait said. "We're the lenders of last resort."
(More)
U.S. credit card defaults rise to 20 year-high
NEW YORK (Reuters) - U.S. credit card defaults rose in February to their highest level in at least 20 years, with losses particularly severe at American Express Co (AXP.N) and Citigroup (C.N) amid a deepening recession.
AmEx, the largest U.S. charge card operator by sales volume, said its net charge-off rate -- debts companies believe they will never be able to collect -- rose to 8.70 percent in February from 8.30 percent in January.
The credit card company's shares wiped out early gains and ended down 3.3 percent as loan losses exceeded expectations. Moshe Orenbuch, an analyst at Credit Suisse, said American Express credit card losses were 10 basis points larger than forecast.
In addition, Citigroup Inc (C.N) -- one of the largest issuers of MasterCard cards -- disappointed analysts as its default rate soared to 9.33 percent in February, from 6.95 percent a month earlier, according to a report based on trusts representing a portion of securitized credit card debt.
"There is a continued deterioration. Trends in credit cards will get worse before they start getting better," said Walter Todd, a portfolio manager at Greenwood Capital Associates.
U.S. unemployment -- currently at 8.1 percent -- is seen approach 10 percent as the country endures its worst recession since World War Two, leaving more than 13 million Americans jobless, according to a Reuters poll of economists.
However, not all were bad surprises. JPMorgan Chase & Co (JPM.N) and Capital One reported higher credit card losses, but they were below analysts expectations.
Chase -- a big issuer of Visa cards -- reported its charge-off rate rose to 6.35 percent in February from 5.94 percent in January. The loss rate for the first two months of the quarter is 126 bps from the previous quarterly average compared to an estimate of a 145 bp increase, Orenbuch said.
Capital One Financial Corp's (COF.N) default rate increased to 8.06 percent in February from 7.82 percent in January.
MORE PAIN AHEAD
Analysts estimate credit card chargeoffs could climb to between 9 and 10 percent this year from 6 to 7 percent at the end of 2008. In that scenario, such losses could total $70 billion to $75 billion in 2009.
"People underestimated the severity of the downturn we are experiencing and I wouldn't be surprised to see them north of 10 percent," said Todd, who added American Express was most exposed to higher credit card losses, given its sole reliance on the industry.
Credit card lenders are trying to protect themselves by tightening credit limits, rising standards, and closing accounts. They have also been slashing rewards, raising interest rates and increasing fees to cushion further losses.
Meredith Whitney, one of Wall Street's best known and most bearish bank analysts, estimates that Americans' credit card lines will be cut by $2.7 trillion, or 50 percent, by the end of 2010 -- and fewer Americans will be offered new cards.
"We believe that the US credit card industry will feel additional credit pain over the next 12-18 months. Until lenders like Capital One show stabilization, followed by trend-bucking improvement over a several-month period, we will continue to remain bearish on credit card lenders," said John Williams, an analyst at Macquarie Research.
Rock, Paper, Scissors
Good Evening: After Ben Bernanke's performance during 60 Minutes last night, last week's winning streak in Wall Street looked poised to extend to a fifth day this morning, but it wasn't to be. Though Barclays joined the growing crowd of banks claiming positive "EBITDAW" during the first two months of 2009, stocks came in for some profit taking this afternoon when financial shares turned tail during the middle of the day. By day's end, stocks, bonds, and the dollar were all on the weak side, leaving some to wonder about the potential long term impact of all the sovereign debt issuance that governments hope can somehow paper over the problems of our late credit boom.
Twenty of the aforementioned governments came together over the weekend to share ideas about what to do to help end the credit crisis still so evident around the globe. Promises of coordinated attempts to buy and dispose of toxic assets will likely remain just promises, since details unfortunately were scarce. It would be nice if the world's politicians could find a way to collectively harness their own hot air as an energy source, but environmentalists would probably fret about what to do with the excess carbon dioxide.
With not much to show for all the emissions out of the G-20 meeting, investors turned their gazes to Ben Bernanke's appearance on 60 Minutes last night. Donning his Uncle Ben persona, Chairman Bernanke offered the soothing opinion that our economy was likely to resume growing later this year. Of course, this happy announcement came with the caveat that the U.S. must find a way to stabilize the financial sector first. This embedded "sine qua non" will probably prove a higher hurdle for economic recovery than many currently believe.
Just how difficult it will be for our economy to jump over the obstacles in its path was quite evident in today's economic releases. Not one of them came in above the already low expectations for them. The Empire state manufacturing index, released an hour prior to the commencement of equity trading, represented the first such "miss". Printing -38.2 versus a consensus expectation of -32, this regional survey set a new low (see below). On its heels came the TIC report of international capital flows, which, instead of showing the expected $35 billion of inflows to the U.S. in January, witnessed instead an outflow of $43 billion (for BAC-MER's take, see below). Rounding out the statistical parade prior to the opening bell in New York, both industrial production and capacity utilization, at -1.4% and 70.9% respectively, were each shy of the estimates. Just after lunchtime, the Housing Market Index made it a clean sweep of poor economic news, as this index remained mired a mere tick above its all time low.
Focusing on the seemingly positive words from Mr. Bernanke, equities began Monday on a positive note. Adding to the early smiles was the claim from the management of Barclays that after two months of operation in 2009 it, too, sports a positive EBITDAW (Earnings Before Interest Taxes Depreciation Amortization & Write-offs). The initial 1% pop in both the Dow and S&P was followed by further gains until just after lunchtime in New York. The financial names, which had led the S&P to a gain of 2.5% by then, began to soften. The profit taking in financials grew more urgent when American Express announced this afternoon that charge-offs in its credit card portfolio jumped a full percentage point in the past month alone. The NASDAQ was already heavy for reasons unknown to me, but the rest of the tape joined it by retreating into the closing bell.
The lone gainer among the indexes was the Dow Transportation index (+3.7%), while the NASDAQ remained lead sled dog to the downside (down almost 2%). This first test of the rally off the march lows (e.g. will it now hold above the November lows at 740?) might just give us some clues in the days ahead as to its potential strength and durability. Treasurys, perhaps shaken by the TIC report, never did catch a bid today. Yields rose between 4 and 9 bps across the coupon curve. The dollar declined a modest amount, and commodity prices for once responded as one would expect by rising. Oil rose after an early decline, the grains were firm, and only natural gas and the precious metals sat out the rally. The CRB index finished the day higher by 1.4%.
After I signed off last week, quite a few murmurs of concern were generated in the wake of China's expressed concern over the "safety" of its investments in U.S. fixed income securities. China's leadership is not alone in wondering just how the U.S. will be able to finance wars abroad and an economic war at home while trying to restructure both the energy and healthcare industries. Technically, no holder of U.S. government debt should worry about the safety of the principle or the timely payment of the indicated coupons on them. The U.S. can print as many dollars as it needs to discharge its obligations. Whether those greenbacks will retain their current purchasing power is the more relevant question for investors on both sides of the Pacific ocean. Price risk is the true threat to the safety of wealth tied up in government securities.
Many investors assume that since private credit creation has fallen off Mr. Buffett's proverbial cliff, sovereign governments can simply step in and create public forms of credit to take up the slack. Unfortunately, this process of enlarging the "G" portion of the GDP formula will not be as easy as many economists suggest. Most developed nations came into this crisis with debt-burdened balance sheets; their liabilities will only accelerate from here. Whether developed countries, and especially the United States, has bitten off more than its citizens can digest via increased productivity and taxes is one of the main subjects of the final essay you see below.
Written by Gregor Macdonald, a self-described "oil analyst and energy sector investor", this piece describes how our current financial crisis could one day become what Bill Fleckenstein calls a "financing crisis". As the title hints, Mr. Macdonald cleverly attempts to turn the old game of rock, paper, scissors into a metaphor for our current and future problems. In preview, let's just say that while paper (a fiat currency) covers rock (hard assets like gold) during financially stable periods, the opposite becomes true when the policies of governments and central banks are called into question. None of the issues Mr. Macdonald raises will be a problem this week, and it's still too early to seek out a "double short Treasury ETF", but given the recent warnings out of China, his piece is definitely food for long term thought.
- Jack McHugh
House of Cards Link (H/T GregRoberts)
The Maestro Has No Clothes
Paul Brodsky & Lee Quaintance run QB Partners, a private macro-oriented investment fund based in New York."
March 2009
Alan Greenspan's March 11 opinion piece in the Wall Street Journal ("The Fed Didn't Cause the Housing Bubble") sought to cast doubt on growing suspicions that the Fed shares substantial blame for the current global crisis. We find Mr. Greenspan's denials and assertions unreasonable. Let there be no doubt; the Fed is largely responsible for the current economic crisis and, as the Chairman of the Fed leading up to the crisis, Mr. Greenspan was one of its principal architects.
Mr. Greenspan cited two generally accepted "broad and competing explanations for the origins of the crisis" that he then cast as spurious: 1) easy monetary policies, which he summarily dismissed as in-credible and 2) the "far more credible" (and later denied) notion that interest rates stayed low despite Fed rate hikes, which "spawned speculative euphoria". Mr. Greenspan seemed to try to separate the Fed from blame by asserting the Fed "lost control" of mortgage and longer term rates because of an organically-created "excess savings pool."
We find the construct for Mr. Greenspan's plea lacking. As the body responsible for targeting overnight funding rates in a largely finance-based economy, the Fed is (or should be) concerned only with the interest rate or quantity level of overnight funds relative to available returns that investors may capture from borrowing those funds. The absolute levels of the Fed's target rate or market-based interest rates do not matter.
Consider that the shadow banking system comprised of global leveraged arbitrage investors (on Wall Street and independent of Wall Street) care only about yield spreads, not about yields. A Fed funds target that rises from 1% to 5.25% over two years may not induce a diminution of credit issuance because as long as arbitrageurs may buy credit paper with higher yields than their funding costs, they will continue do so.
Against this more relevant backdrop, Mr. Greenspan's Fed maintained an extraordinarily easy monetary policy throughout his tenure, even at times when overnight funding rates rose. This easy money policy engendered credit expansion; at first among mostly creditworthy borrowers, then among more marginal borrowers and ultimately among dubious borrowers with virtually no hope of repaying their home mortgage and consumer loans.
Nevertheless, we will respectfully address Mr. Greenspan's arguments and then seek to substantiate our claim that the Fed is indeed largely responsible for the current crisis.
* * * * *
Regarding low interest rates, Mr. Greenspan argued that from 2002 to 2005 mortgage rates decoupled from their long history of being tightly correlated to short-term benchmark interest rates that the Fed controlled and/or heavily influenced. He noted that the leading indicator of home prices was the mortgage rate and not the fed-funds rate, which the Fed explicitly targets. Any fact-checker can see this is true, but it is an irrelevant data point taken out of context. As we have already implied, the driver of home prices from 2002 to 2005 was easy credit that ultimately influenced mortgage rates lower than pure economic fundamentals would have dictated.
Indeed, the record is clear that the Fed chose an easy money path that created supplemental demand in US
Treasury and mortgage markets. This artificially-induced demand in turn caused mortgage rates to drop to
artificially low levels (i.e., levels not explicitly tied to true home values or borrower credit risk), and to then be relatively insensitive to rising funding rates later on.
A little background is appropriate. The mechanism the Fed deploys to create credit is time-worn and well known among Wall Street bankers. Simply, the Fed provides daily amounts of credit to Wall Street primary dealers through repurchase agreements. (Fed repurchase agreements or "repos" are overnight or short-term credit facilities between the Fed and the largest Wall Street banks in which eligible collateral is swapped in return for Fed credit in the form of US dollars. The borrowers pay an implicit interest rate - or repo rate - for this credit that finances their balance sheets.)
There was (and remains) no limit to the repo lines the Fed and Wall Street may create (other than the amount of eligible assets that may be offered as collateral), meaning the Fed largely controls the amount of US dollar-based credit provided to the markets. In short, through the repo market the Fed controls/supplies funding for the largest Wall Street banks and, secondarily, the shadow banking system (the securitization process and levered buyers of those securities that borrow from Wall Street).
Through Fed repos, Wall Street was able to grow its collective balance sheet dramatically and then use it to
distribute - through the shadow banking system - credit to homeowners and consumers. Wall Street provided vendor financing to leveraged debt investors through their profitable prime brokerage units. Yet, ultimately, the credit came from the Fed. (The Fed and commercial banks "create, distribute and sometimes even extinguish" credit while Wall Street "intermediates and demands" it. Wall Street does not create it but does "market" and "redistributes" it.)
Ironically, Mr. Greenspan seems to be pointing his finger at banks and borrowers for taking the Fed's credit. (Even more ironic is that, as the Fed Chairman, he was the chief bank regulator and could have stepped in to prevent bank, and ergo, leveraged-investor balance sheet growth by demanding and enforcing more traditionally- stringent lending standards.)
We assert that Mr. Greenspan knew perfectly well what he was doing and, as the graph below indicates, he was quite proficient in meeting his goals. Beginning in 1996, the Fed seemed to have increased the magnitude of its repo program dramatically as indicated by the expanding differential of M3 growth (green line), which includes repurchase agreements, and M2 growth (blue line), a narrower money stock measure, which does not.
M2, M3
Source: St. Louis Fed
We can see from the graph the degree to which the Fed financed Wall Street directly and thus, the shadow banking system, indirectly. Notable is that from 1981 to 1996, the growth rates of M2 and M3 tracked one another quite closely, implying the Fed's manufacturing of credit would be sustainable (a dollar loaned could be paid back with an existing dollar). However, from 1996 to 2006 - during Mr. Greenspan's chairmanship - M3 growth consistently pulled away from M2, implying increasing future hardship for debtors with obligations to repay the credit leant to them. The red line at the bottom of the graph represents the difference in growth rates of M2 and M3.
(Curiously, the Fed ceased publishing M3 in March 2006 to save on "administrative costs." Hmm. Who could blame it? The growth of M3 relative to M2 seems to provide clear evidence of risk-enticing Fed monetary policy.)
From 1996 to 2006, M3 grew from about $4.7 trillion to about $9.6 trillion, an astounding average annual increase of 10.2%. M2, the narrower monetary aggregate that does not include repurchase agreements, rose a more modest 8.2%. This difference was a big deal. In these ten years, M3 growth compounded to a 94% increase over M2 growth. This difference reflects the aggressiveness of Fed-lending to Wall Street, ergo the capital markets, ergo the housing and derivative markets.
We assert that without this Fed-induced financing, the credit, housing and derivative bubbles would not have developed to anywhere near the magnitude they ultimately did. The nexus of these bubbles was a currency bubble initiated and exacerbated by the Greenspan Fed. It appears the Maestro sacrificed the future for the present, which is a sure way to make people on Wall Street, Main Street and in Washington happy...temporarily.
We must ask ourselves why banks and investors would keep buying homeowner and consumer debt even as
interest rates began rising in 2004. The answer is simple: as long as banks could maintain a profitable spread between the rate at which they borrowed overnight from the Fed (the repo rate) and either the rate at which they could lend directly or the rate of return implicit in the fees they generated by effectively re-structuring and distributing their repurchase agreements (and, as long as debt buyers could maintain a positive arbitrage), then the actual level of interest rates - benchmark, mortgage or consumer rates - didn't matter. It was, as all things financial usually are, the "spread" that mattered.
Wall Street and the shadow banking system were fundamentally engaged in a grand carry trade for which the Fed provided funding. This is the business of finance, which is precisely the business that Wall Street and investors practice. After fourteen years at the helm of the Fed (in 2002) Mr. Greenspan should have known this (or, might we dare say, should not have forgotten this).
(More)
DataQuick: SoCal Home Sales Up, Foreclosure Resales 56.4% of Market
Note: I ignore the median price data because it is skewed by the mix of homes sold. A repeat sales index like Case-Shiller is a better indicator of price changes.
From DataQuick: Southland home sales outpace last year again; median price steady
Southland home sales stayed above year-ago levels for the eighth consecutive month in February ... Market activity was dominated by bargain-hunting in affordable neighborhoods while buying and selling in more expensive established areas remained largely on hold ...
A total of 15,231 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was essentially unchanged from 15,227 for January, and up 41.3 percent from 10,777 for February 2008, according to MDA DataQuick of San Diego.
...
Regionwide, foreclosure resales accounted for 56.4 percent of February's resales activity, which was the same as the revised January figure and up from 36.2 percent in February 2008. [enphasis mine]
Sales are up because of foreclosure resales in less expensive neighborhoods. Meanwhile, sales in "more expensive established areas" have slowed to a trickle. This build up in supply will eventually lead to more price declines in the expensive areas ...
Housing Starts: The Fifth Worst or the Fifth Best?
This morning's report on US housing starts came in at an annualized rate of 583K, which was higher than January's level of 477K and better than the consensus expectation of 450K. As shown below, even with last month's increase, the current level of starts is still severely depressed.
(CHART ON PAGE)
Depending on how you look at it, however, this month's report could be called the fifth best or the fifth worst report ever. On a year/year basis, housing starts decreased by 47.3%, which is the fifth lowest level in the indicator's history. On a month/month basis, however, housing starts increased by 22.2%, which is the fifth highest monthly increase in the indicator's history.
January flow of funds "a disaster"
That's Brad Setser's description of the January TIC release.
We are faced with more and more signals that global trade is continuing to deteriorate amid general repatriation of capital.
Indeed, the real legacy of the crisis has been an enormous contraction in long-term flows, with a corresponding increase in the United States reliance on short-term financing. And also a shift away from risk assets.
(CHART ON PAGE)
Setser further highlights the recharacterization of agency debt as risky -- government guarantees be damned, incidentally -- and the near-total shutdown of crossborder equity buying.
The overall result of the crisis hasn't been a rise in demand for US assets so much as a large contraction in all flows. The impact of the collapse in foreign demand for US risk assets (corporate bonds, equities) though has been offset by a collapse in US demand for foreign assets. I stripped out known official purchases from the data, but no doubt the data still is influenced by the increase in the official sector's risk appetite in 2006 and 2007.
It may not be financial deglobalization, but it certainly is a major slowdown in financial globalization.
This is important to note -- dollar strength in January has been not a function of demand for dollar assets but of a repatriation of foreign claims. Indeed, there was in January a serious outflow of capital from the United States. Setser in the comments:
Large capital outflows from a country with a current account deficit are considered something of a potential warning sign among balance of payments geeks.
Jesse further commented.
U.S. Injecting Billions Into Foreign Central Banks (H/T Suzie)
For more than a year, the U.S. Federal Reserve System has been increasingly acting as the world's central bank, injecting hundreds of billions of dollars into foreign government treasuries in an effort to increase liquidity in those countries.
The foreign central banks have used the U.S. currency to bail out financial institutions within their borders. The Fed program links its balance sheet directly to the fates of foreign central banks at a time when they're on the ropes.
The program has so far gone unreported in the mainstream media and is a major expansion of Federal Reserve involvement in the global economy. It represents a stark break from the prior role of the Fed, moving it into territory more traditionally occupied by the International Monetary Fund (IMF).
The program puts both the Fed and the foreign central banks at increased risk. If the bailed-out banks can't repay the loans, the foreign central bank is still on the hook to the Fed. It would have to raise the money by selling debt -- which most Europeans are finding difficult today -- or raise taxes or cut spending, actions that further exacerbate the economic crisis. Or, the foreign central bank could default, leaving the U.S. holding a bag of foreign currency of plummeting value.
The U.S. taxpayer has also bailed out foreign banks indirectly by pumping billions into American Insurance Group, which announced Sunday that it had forwarded that cash to counterparties that include foreign banks such as Societe Generale, Deutsche Bank, Calyon, Credit Suisse, the Royal Bank of Scotland and Barclays.
"I'm concerned about Europe," Paul Krugman wrote in Monday's New York Times. "Actually, I'm concerned about the whole world -- there are no safe havens from the global economic storm. But the situation in Europe worries me even more than the situation in America."
Meanwhile, European countries are still unable to sell joint bonds.
The Fed program adds up to serious money. The most recent balance sheet released by the Fed shows that $314 billion U.S. dollars are currently doled out to foreign central banks under the foreign exchange program. That's down from a December peak of nearly $600 billion, as central banks have repaid some of the loans.
AIG execs pocket bonuses - then quit (H/T DamTheMatrix)
Eleven executives at AIG quit the troubled insurance giant despite being paid bonuses of at least one million dollars each to stay, New York State Attorney General Andrew Cuomo says.
"Eleven of the individuals who received `retention' bonuses of $US1 million or more are no longer working at AIG, including one who received $US4.6 million," Cuomo wrote in a letter to Barney Frank, chairman of the financial services committee in the US House of Representatives.
The news undermined the argument of government-appointed AIG boss Edward Liddy that the bonuses were necessary to retain "the best and brightest talent".
"Given the trillion-dollar portfolio at AIG Financial Products, retaining key traders and risk managers is critical to our goal of repayment," he wrote in a letter on Saturday to Treasury Secretary Timothy Geithner.
Cuomo said that AIG had paid out more than $US160 million in bonuses to employees at AIG's Financial Products Subsidiary, the branch at the heart of the company's near collapse.
A total of 73 employees received $US1 million or more, while the top seven received more than $US4 million each, Cuomo said.
"Thus, last week, AIG made more than 73 millionaires in the unit which lost so much money that it brought the firm to its knees, forcing a taxpayer bailout. Something is deeply wrong with this outcome. I hope the Committee will address it head on," Cuomo wrote to Frank.
Long on Pitchforks and Torches: AIG Retention Bonuses Paid to FORMER Employees
The NYT reports:
Seventy-three employees were paid more than $1 million in the newly minted bonuses at the insurance giant, American International Group, according to the New York attorney general Andrew M. Cuomo.
The attorney general provided some new details on Tuesday about some of the $160 million in bonuses that the insurance giant paid out last week in a letter sent to Representative Barney Frank, the chairman of the House Committee on Financial Services.
Mr. Cuomo did not name the recipients of bonuses, but said one employee received more than $6.4 million. The top seven received more than $4 million each, and the top 10 received a combined $42 million. Eleven of those who received "retention" bonuses of $1 million or more are no longer working at A.I.G., including one who received $4.6 million, he said. (emphasis added)
This story gets more and more interesting. Bloomberg is reporting that:
"American International Group Inc., the insurer under fire for handing out bonuses after its $173 billion government bailout, budgeted $57 million in "retention" pay for employees who will be dismissed."
AIG disclosed the payments, part of a larger $1 billion program meant to retain staff, in a March 2 filing. The insurer was chastised yesterday by President Barack Obama for awarding $165 million to staff of the derivatives unit blamed for the firm's near collapse, and New York Attorney General Andrew Cuomo said he'll subpoena AIG to get details on those payments. (emphasis added)
The latest idea: 100% taxes on bonuses from bailout firms:
Well it looks like the whole American International Group Inc. (NYSE:AIG) bonus hoopla might not blow over after all. With public anger growing, Congress is jumping all over the issue and vowing not to let the troubled insurer's executives walk away with the money, even if it means writing laws specifically to get money back.
While Democrats haven't yet matched Iowa's Republican Sen. Chuck Grassley's suggestion that AIG's brass commit suicide, they are throwing out some radical threats on the $165 million in bonus money. According to The Associated Press, "House and Senate Democrats were crafting separate bills to tax up to 100% of generous bonuses awarded by companies rescued by taxpayer money."
Right now my long pitchforks and torches trade is looking pretty sweet!
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