Mar 21, 2008
How do you know when you’re through the looking glass? A fairly good
indication is when the price of gold, which normally moves up in
response to monetary easing, instead plummets in reaction to one of the
largest rate cuts in Fed history. Apparently, yesterday’s 6% drop in
gold resulted from the "hawkishness" shown by the Fed in only cutting
rates by 75 basis points, rather than the 100 points that many had
expected. It is a testament to how low the bar has been set that the
Fed can slash rates in the face of a collapsing dollar and soaring
commodity prices and still be viewed as hawkish on inflation. Is it
just me, or is Ben Bernanke morphing into the Mad Hatter?
Mortgage Mess Hits Home For Nation’s Small Builders
TWINSBURG, Ohio — In the first wave of the housing
crisis, homeowners across the U.S. lost their properties to
foreclosure. Now, many of the nation’s small and midsize home builders
are on the ropes.
Builders’ problems are now threatening losses for small and
medium-size regional banks. Muscled out of the mortgage business by
large national lenders, many of these banks flocked to construction
lending as the housing market boomed. Though these institutions were
generally less exposed to the subprime-backed securities that have
generated billions of dollars in losses for national banks, they are
the front-line casualties when builders and developers can’t make their
Also this week, the Federal Deposit Insurance Corp. said it had
"increased [its] overall concern" about banks with high concentrations
of construction loans, particularly those for residential developments,
its strongest warning to date about these banks.
This portends the next wave of ‘revelations’
that will hit the financial world. I wrote about this phenomenon about
a year ago when I warned that the FDIC, which oversees banks, had noted
that commercial real estate loans had ‘crept up’ to over 300% of total
bank capital for entire regions of the country, notably the Southeast
and the West. Seems pretty obvious how this will play out. Expect a
solid wave of bank failures. Find out how exposed your bank is to this
by asking them about the ratio of their commercial real estate loans to
total capital. Remember, when a bank loses all its capital, it’s out of
business and goes into FDIC receivership and your accounts become part
of that process.
BoE denies it is to have emergency meeting to discuss UK institution
03.19.08, 7:21 AM ET
LONDON (Thomson Financial) – The Bank of England (BOE) has
vehemently denied that it is about to have an emergency meeting to
discuss the financial wellbeing of a well-known banking institution.
A spokeswoman for the central bank said ‘no meetings have taken
place, or been scheduled to take place’ to discuss any institution in
‘It’s complete fantasy,’ she said.
Uh oh. I guess that makes it official?
Trading suspended in shares of German mid-sized bank IKB
Berlin – Trading was suspended in the shares of the
ailing mid-sized German IKB Industrie Bank Thursday after it announced
losses greater than previously anticipated. Trading was suspended after
the shares had fallen 2.6 per cent to 4.93 euros.
The bank, which primarily offers long-term finance to German companies,
said losses would total 800 million euros (1.2 billion dollars) over
the financial year to March 2008, up from a maximum of 700 million
euros previously made public.
The Dusseldorf-based bank said it had been forced to write down the
value of more of its assets.
Partying Like It’s 1929 (Paul Krugman)
Contrary to popular belief, the stock market crash
of 1929 wasn’t the defining moment of the Great Depression. What turned
an ordinary recession into a civilization-threatening slump was the
wave of bank runs that swept across America in 1930 and 1931.
This banking crisis of the 1930s showed that unregulated, unsupervised
financial markets can all too easily suffer catastrophic failure.
As the decades passed, however, that lesson was forgotten — and now
we’re relearning it, the hard way.
Calls grow for U.S. to bail out homeowners, prevent foreclosures
From Wall Street to Capitol Hill, calls are growing
for the government to get into the mortgage business as the only way
out of the housing crisis roiling the economy and the financial
Proposals to shore up tottering home loans with taxpayer money are
gaining traction in Congress and moving to the forefront of
Federal Reserve Chairman Ben S. Bernanke has also called on the lenders
themselves to reduce the amount of principal that troubled homeowners
owe on their loans.
As I have always said, the pressures to
bailout all the parties that made blunders will be intense both
politically and institutionally. Of course, anybody who was prudent, or
saved, or has the bad luck of being young, will get completely shafted.
Savings will be decimated by the twin threats of inflation and low
interest rates while house prices will be artificially propped at
levels that are, frankly, unaffordable.
The young will get to look forward to higher future taxes to pay for
this largess, diminished future options as all this
good-money-after-bad will do zero to enhance the job opportunities for
them. Is there no blunder that the boomers will not seek to pawn off on
somebody else? Will there ever be a time when they might just admit
they made a mistake and will have to feel some pain? We’ll see…but
the early returns suggest that this is not the time.
Fed’s Rescue Halted a Derivatives Chernobyl
the Fed did not act to save Bear Stearns, there’s a very real chance
that we’d already be living in a very different world. Don’t believe
me? then believe the Wall Street insiders quoted in this well-written
article by Ambrose Evans-Pritchard.
Fed’s Rescue Halted a Derivatives Chernobyl
Please read this entire article (in a UK paper, of course).
(snippet below, emphasis mine).
We may never know for sure whether the Federal
Reserve’s rescue of Bear Stearns averted a seizure of the $516 trillion
derivatives system, the ultimate Chernobyl for global finance.
"If the Fed had not stepped in, we would have had pandemonium,"
said James Melcher, president of the New York hedge fund Balestra
"There was the risk of a total meltdown at the beginning of
last week. I don’t think most people have any idea how bad this chain
could have been, and I am still not sure the Fed can maintain the
solvency of the US banking system."
A little background. The author of this
article, Ambrose Evans-Pritchard, has been writing about the
irrationality and insolvency of the system for a few years. So he’s got
a ‘bearish bent’ as they say.
But he’s also been 100% spot-on the whole way. In this article he
wrote the article I would have written if I had the time, or the
Also, the man he quotes from Balestra Capital, one of the largest
and most respected funds out there, is a serious insider. He does not
use such words lightly.
The reason I want you to read this is because it reveals just how
close we came (and probably still are) to a major systemic banking
crisis. While our fiscal and monetary authorities are working over time
to paint a very different picture, behind the scenes things are still
grim and risks are enormously elevated.
In short, do not let the recent stock market pump-job, or
discordantly upbeat US news reports about how "the worst may already be
behind us" prevent you from taking decisive action to protect what
you’ve got and limit your exposures and risks.