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Monday, June 30, 2008 11:12 PM

Australia Home Lending At Lowest Level Since 1991

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The worldwide housing bust continues to pick up steam. Down under, Home lending growth plunges to lowest level since 1991.

HOME lending growth has suffered its biggest decline since the 1991 recession while inflation continues to soar, confronting the Reserve Bank with the dilemma of a slowing economy and simultaneously rising prices as it meets today to set interest rates.

The slump in home loan growth led a general slowdown in credit, with increases in total borrowing at a three-year low and personal loans growing at their slowest pace in six years.

Soaring petrol prices and rising rents caused by a tight housing market are feeding inflationary expectations.

ABN Amro chief economist Kieran Davies said it was possible the Reserve Bank had come to the end of its interest rate rises. "The news on inflation hasn't been good, particularly with oil prices continuing to climb, but the credit figures show borrowing is responding to higher rates," Mr Davies said.

"It's not a clear-cut case for the Reserve Bank," he said. "The danger is that although growth appears to be slowing in the economy, people may well want to embody higher food and fuel prices in their wage claims. If that happens, you start to get into a wage-price spiral, which would be anathema to the (Reserve) bank.
Big Standoff

We all know how this is going to end, or at least we should, but a big Stand-off between Brisbane house buyers and sellers proves otherwise, at least for the moment.
SELLERS want up to 30 per cent more for their homes than buyers will pay, and the stand-off has caused falling sales volumes in southeast Queensland.

A stagnant market, fuelled by uncertain economic conditions has buyers hungry for bargains. But many sellers are still refusing to budge from their dream prices, in the face of offers tens and in some cases hundreds of thousands below what they are asking.

Johnston Dixon principal John Johnston said that in a usual market there was a disparity of between 10 per cent and 15 per cent from buyer to seller - a gap agents could often negotiate closer.

But he said the difference recently had blown out to 30 per cent. He said right across Brisbane there were instances of people wanting $800,000 for their homes, and buyers wanting to pay around $600,000.

RP Data research shows homes were selling at about 6.1 per cent below the asking price in April.

"There has been some movement in the level of discounting since April and I would estimate the average level of market discount in Brisbane now to be closer to 6.5 per cent to 7 per cent," Mr Lawless said.
The Pattern Repeats
  • It all starts with an attitude change.
  • The pool of greater fools dries up.
  • Sellers refuse to admit the market has turned.
  • Volume of sales plunges.
  • Home prices eventually follow.
  • Sellers chase last month's price all the way down.
  • Eventually the sellers get underwater.
  • Defaults and bankruptcies soar.

This process can go on for years, or even a decade. The process is 3 years old in the US now in many markets, with Florida acting as ground zero. In Japan, property prices fell for 18 consecutive years, rising last year for the first time in 19. History suggests those expecting prices in Oz to recover anytime soon are sadly mistaken.

Mike "Mish" Shedlock
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11:56 AM

Deflationary Hurricanes to Hit U.S. and U.K.

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Congratulations (of sorts) go to the UK as British household debt is highest in history.

British households are now more indebted than those of any other major country in recorded history, it has emerged.

Families in the UK now owe a record 173pc of their incomes in debts, official figures have shown. The ratio of debt to income is higher than any other country in the Group of Seven leading industrialised economies, and is sharply higher than the 129pc of incomes it was five years ago.

Michael Saunders of Citigroup warned that - at 173pc of household incomes - the debt burden is higher even than Japan's when it peaked in 1990, before more than a decade of deflation. Philip Shaw of Investec said: "Although we take the view that the economy will avoid a recession, our confidence is ebbing."
Avoid A Recession?

It will be hard for the US and UK to avoid a depression.

What started as a tropical storm called "Subprime" has intensified in magnitude to engulf Alt-A, HELOCs, credit cards, commercial real estate, municipal bonds, corporate bonds, and the stock market, just as baby boomers are headed for retirement.

If you prefer, you can think of this as Many Hurricanes, Many Eyes.

Barclays Warns Of Financial Storm

Most do not even understand the nature of the storm that is about to hit. Barclays is right at the top of the list. Please consider Barclays warns of a financial storm as Federal Reserve's credibility crumbles.
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".

"We're in a nasty environment," said Tim Bond, the bank's chief equity strategist. "There is an inflation shock underway. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth."

Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. If it hesitates, the bond markets will take matters into their own hands. "This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility," said Mr Bond.
No Wage Price Spiral

Wage price spirals happen when corporations get into bidding wars over employees, not when they are shoving them out the door by the hundreds of thousands. Mr. Bond must be reporting from Bizarro World. The odds of a wage price spiral in the US are essentially zero as credit is drying up and overcapacity is everywhere you look. Massive Government and Private Sector Job Cuts Are Coming.

This is not Bizarro World, nor it is 1970.

If Barclays is betting on six interest rates hikes in the US with its own money it will likely get carted out in a coffin. Property values are crashing, unemployment is rising, wages are falling, global wage arbitrage is king, and most importantly Peak Credit Has Arrived.

It is impossible to get inflation out of that mix. Berananke could cut interest rates to zero tomorrow and it would not cause inflation, at least as properly defined: a net expansion of money and credit. Banks are strapped for cash. They cannot lend. Businesses do not want to borrow. There is overcapacity everywhere. The Shopping Center Economic Model Is History.

I struggle to see how anyone can get inflation out of that mix. Last Thursday when the stock markets were in a freefall, I asked Is The Inflation Scare Over Yet? Well, I guess it's not.

Fed Has Lost Credibility

However, I will grant Mr. Bond one thing. "The Fed has lost all credibility." I discussed that idea in Things That Have Not Yet Happened in response to Bernanke's absurd claim "Danger of downturn appears to have waned."

Bernanke made that statement on June 9th. On June 26, Bernanke was openly soliciting private equity firms to invest in banks. I discussed this in Fed Looking To Bend Rules To Aid Banks.

Crack-Up Boom In Asia

Actually, I see another statement from Mr. Bond that I agree with, and it is an important one: "Inflation is out of control in Asia. Vietnam has already blown up."

Inflation is indeed out of control in Asia, notably China, India, and Vietnam. That inflation stems from Asia central bankers printing local currency to buy US dollars, in an attempt to keep their export machines going.

Bernanke foolishly calls this a savings glut. Printing money to buy dollars does not constitute savings. It is amazing that a Fed governor does not understand this simple truth.

Besides, it is virtually impossible to have "too much savings". The construct does not even exist!

Peak oil, in conjunction with a crack up inflationary boom in China is masking deflation in the US and pending deflation in the UK. Those focused on rising energy and food prices are missing the boat.

However, I suspect China is going to slam on the brakes after the Olympics. The Shanghai Stock Exchange Index sure acts as if something is coming down the pike.

$SSEC Weekly Chart

click on chart for sharper image

Who's In Control?

Ben Bernake at the Fed, Mervyn King at the Bank of England, and Jean-Claude Trichet at the ECB are not in control of what is about to happen. When it comes to commodity prices,peak oil and China's willingness to allow its economy to overheat are going to be the driving forces. Trichet can hike all he wants and it will not matter much to the price of oil. However, it may crush individual economies in the EU.

This does not mean hiking is wrong (although it likely is), it simply means that hiking to rein in gasoline and food prices, two rather inelastic needs, is beyond silly.

Implications of Peak Credit

When it comes to the collapse in credit, the above Central Banks are powerless to do a thing about it. This is to be expected now that we are on the backside of Peak Credit.

The saturation point has been reached. It took decades but we have finally arrived. None of the financial engineering jobs that fueled this credit boom will ever be needed again. SIVs, Conduits, Toggle Bonds, Covenant Lite loans are all dead for years, more likely decades to come. Add to that liar loans, Pay Option Arms, insane leverage, and numerous other ridiculous lending arrangements. And if those things are not coming back, we do not need Wall Street shills to securitize that garbage and pitch it to unsuspecting suckers.

In addition to financial engineering jobs, there was a boom in commercial real estate, home depots, remodeling companies, landscaping, furniture, appliances, plumbing, heating, air conditioning, restaurants, and even things like grass seed.

There is no source of jobs to replace what has been lost and what will be lost. Discretionary spending is dead. Boomers about to retire are about to get religion. Sadly, it's too late. Savings they thought they had in their house, have now vanished into thin air. It was all a mirage in the first place, but mountains of credit has been extended on the basis of that mirage. Trillions of dollars of imagined wealth has gone up in smoke. Trillions of dollars more are about to.

Deflation Has Set In

It is amusing that in the face of this carnage, many are still screaming inflation, stagflation, or even hyperinflation simply because food and energy prices are rising. Deflation is here and now in the US. Deflation is knocking on the door of the UK and Eurozone. And there is nothing that can be done about it.

Can The Fed Print Its Way Out?

Some will insist that I am wrong, that the Fed can print. Well the Fed can print, but the Fed cannot spend. In addition, the Fed cannot give money away, nor would the Fed even if it could. Finally, the Fed cannot force banks to lend or businesses or consumers to borrow.

Bank credit is contracting with the Fed Funds rate at 2%. Bank credit would not be going much of anywhere even at 0% in my estimation. The reason is simple: banks are insolvent!

The Fed is like the powerless man behind the curtain in the Wizard of Oz. Once peak credit sets in, all the Fed can do is bluff. The notion of a helicopter drop is pure nonsense.

What About A Crack-Up Boom?

We had a crack-up-boom. What else can you call the financial engineering that went with SIVs, Conduits, Toggle Bonds, Covenant Lite loans, Pay Option ARMs, etc., etc? That crack-up-boom is over. And just like every credit boom in history, the backside, once the credit boom ends is deflation. Previous examples include Tulip Mania, the South Sea Bubble, John Law Mississippi scheme, the Great Depression, and the property bust in Japan.

Weimar Germany was not a credit boom, but an example of hyperinflation caused by massive printing to pay for war reparations. Zimbabwe is another example of hyperinflation caused by printing.

What About Congress?

Congress, unlike the Fed, can indeed spend money it does not have. They have already done so with an ill-advised stimulus package. There will indeed be more stimulus packages just as there was in Japan. However, nothing can match the sheer number of jobs created in the housing and commercial real estate booms. And nothing can replace the destruction of wealth that is now taking place in housing and the equity markets.

Attitudes Lead The Way

It took nearly 80 years for people to get as reckless as they did in 1929. 80 years! Few are still alive that went through the great depression. That is the nature of the game. People have to forget what a depression is like to bring about the conditions that cause them. And they did. And they made the same mistakes over again, except larger.

The madness of crowds, however, can only go so far. A significant reversal is now underway. The secular peak in consumption has been reached. A reversal in attitudes towards consumption started with houses, but it’s spreading to cars, boats, and even Starbucks coffee. It will take a long time for attitudes to get back to equilibrium. And attitudes, like pendulums, will not stop at equilibrium once they get there.

The odds of a significant bout of inflation now are about the same as they were in 1929. Next to none. History is about to repeat.

Mike "Mish" Shedlock

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Sunday, June 29, 2008 11:05 PM

Shiller's Keynesian Claptrap

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The proposed solutions to the current economic crisis are getting more and more absurd. With that in mind, I am going to be blunt.

Robert J. Shiller's article One Rebate Isn’t Enough is the most ridiculous proposal from an economist I have seen for a long time. And that's saying a lot.

Shiller proposal is based on totally discredited logic developed by John Maynard Keynes, that to fix the economy "we should be putting in place another stimulus package like the current one, and stand ready for another after that, and another."

It would be impossible to be more wrong. We are in this mess because consumers and the government were both spending more money than they have, year in and year out, racking up debts well beyond their ability to finance them. Financing our consumption boom fell on the backs of foreigners. In turn the dollar has been collapsing, sending the price of oil skyrocketing, further adding to consumer woes.

Rather than admit the complete asininity of this arrangement, Shiller proposes we should be ready for three more rounds of it.

  • Nowhere does he address the consequences of the dollar were such a policy to be followed.
  • Nowhere does he address what would happen to interest rates and housing were the Fed to pursue such actions.
  • Nowhere does he bother to consider that the problem was reckless spending so the solution cannot possibly be more reckless spending.
The pool of real savings has been exhausted. It cannot be replenished by spending more. That is a simple statement of fact.

The bust we are in is the price we pay for past foolishness at the personal level, the state level, the corporate level, and the federal level. There is no magic cure, and we desperately need top economists to admit it.

Instead, Shiller is proposing the solution for debt is to go deeper in debt. If printing money was the answer to problems, Zimbabwe would be the most prosperous country in the world.

If one wonders why we are in the mess we are in, one need only look at the economic policies of Greenspan and Bernanke, based largely on failed Keynesian economic models just like the one Shiller is proposing.

Such proposals all depend on the ability of the Fed to perpetually blow bigger and bigger bubbles, each making the problem worse. Eventually the point of Peak Credit is reached where it is impossible to cram more "stimulus" down the throats of businesses, banks, and consumers.

Robert J. Shiller, professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC, would be advised to take another look at Tulip Mania, the South Seas Bubble, the John Law Mississippi Bubble, the Florida Real Estate Craze, and the Great Depression. And if those are too distant, how about a look at the housing bubble that was blown in the wake of the dotcom crash?

Close examination will show the idea of throwing money at collapsing bubbles is precisely the worst thing to do.

Mike "Mish" Shedlock
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12:28 PM

Fire Sales Of Bank Assets Coming Up

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CNNMoney is reporting Credit Card Issuers Face Bigger Losses Than Expected.

"The deterioration in credit cards is accelerating faster than many had expected," said Christopher Wolfe, an analyst at Fitch and one of the authors of the report published Friday. "The message we are trying to deliver is that things are going to get worse before they get better. Thus far, credit card businesses have been profitable but that could change."

Fitch analysts are expecting an increase in prime charge-off rates - or losses from defaults on card payments as a percentage of loans outstanding - to at least 7% by the end of the year from 6.4% in May.

Particularly vulnerable, say analysts, are credit card issuers such as Washington Mutual, or WaMu, and Capital One Financial Corp. (COF) with higher subprime exposure, a category of high-risk borrowers with high delinquency who fueled the mortgage crisis.

WaMu, which bought a subprime credit card issuer in 2005, reported in the first-quarter net charge-offs of 9.32% on $26 billion of credit card loans. This is up from 6.31% a year earlier. It ratcheted up its loss reserves in its credit card unit by more than 60%. A WaMu spokesman declined to comment, citing the so- called quiet period ahead of earnings.

Credit card issuers that are part of bigger banking institutions such as Citi aren't in the clear either. The financial services behemoth had net losses of 5.83% in its U.S. cards portfolio in the first quarter, a 1.2% rise from a year earlier. "While current losses remain below peak levels, they are running above the long-term average," said Fitch analysts in their report. A Citi spokesman declined to comment on upcoming second-quarter results.
Suitors Drop Out Of Auction For GE Card Unit

Suitors are dropping out of auction for GE's $30 billion credit card unit. Had GE tried to sell that card unit 2 years ago there would have been 10 banks chomping at the bit to pick up that portfolio. Now, no one wants it.

It was growth at any cost for as long as I can remember. How quickly things change.

Growth at any cost was one of the ramifications of the Bankruptcy Reform Act of 2005. For more, please see Bankruptcy Reform Act Finally Blows Sky High. Now capital impaired banks cannot afford any more losses, yet card losses are mounting and about to get much worse.

With Massive Government and Private Sector Job Cuts Coming, unemployment is set to soar. Rising unemployment means rising card defaults. It is that simple.

WaMu In Deep Serial Trouble

While some have chanted these banks are selling below breakup value, I disagree. What is the value of a card portfolio that no one will bid on? Take a look at WaMu. It is in deep serial trouble. WaMu is sitting on a massively troubled pay option ARM portfolio and a huge subprime card portfolio.

Both of those pieces have negative value. WaMu would have to pay to get rid of them.

Where's The Breakup Value In Citigroup?

I have repeatedly said that Citigroup would not survive in its current form. It will be broken up. But how much is its card unit worth today in a fire sale if it has to get rid of it? How much is any of its units worth in a fire sale?

Sooner or later we will have our answer. Fire sales will be coming up.

Mike "Mish" Shedlock
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4:21 AM

Four Dozen Georgia Banks On Problem List

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The Atlanta Journal-Constitution is reporting Real estate market threatening Georgia banks.

Georgia's banks top the nation in terms of concentration of loans to real estate developers and builders. Figures are for the mean construction and development loans as a percentage of banks' core capital as of March 2008, the latest numbers available.

1. Georgia 178%
2. Washington 169%
3. Arizona 168%
4. North Carolina 165%
5. Idaho 158%
6. South Carolina 142%
7. Oregon 141%
8. Florida 130%
9. Nevada 110%
10. Virginia 101%
Source: Federal Deposit Insurance Corp.

Nearly $1 out of every $5 on Georgia banks' loan books bankrolled homebuilders and real estate developers — by far the highest proportion in the state in at least 30 years, according to federal regulators' data.

That is putting several banks in the state — and perhaps significantly more if economic conditions deteriorate — at greater risk of failing or being pushed into takeovers by healthier banks, some people in the industry say.

"In Atlanta, this is the worst market we've had, ever," said Walt Moeling, a lawyer with Atlanta firm Powell Goldstein who has been representing local banking firms since 1968. "Everything went splat."

Christopher Marinac, a banking analyst with Atlanta-based FIG Partners, said it's too soon to tell when the industry will hit bottom or how long recovery will take."I think there are going to be a lot of shotgun weddings [to rescue banks] that you're never going to read about," he said.

Another misery measure: Industry insiders say there are now almost four dozen banks on Georgia's watch list for problem banks. Braswell, Georgia's banking commissioner, said the figure is in the "right ballpark," and has been rising.

Still, he and other industry veterans say that while metro Atlanta has become a hot spot for problem banks, they do not expect the wholesale bank failures that swept through Texas and several other states during the savings-and-loan debacle. They say the number of problem banks today pales in comparison, partly because banks are better-capitalized.

During that earlier era, about 200 banks and thrifts were failing across the nation each year, said Mark Schmidt, head of bank supervision at the FDIC's regional office in Atlanta. Nationwide, only four banks have failed this year, and only seven since 2005.

"It doesn't feel to me that it's going to be the same," said Schmidt, who was at the FDIC during the earlier crisis. "It's not national." Within the seven Southeastern states where his office supervises 1,100 banks and thrifts, most problem banks are in Georgia and Florida.

The FDIC currently has 90 banks on its national watch list (which uses narrower criteria than Georgia's) and it will get longer. "The trend is obvious," said Schmidt.

But Schmidt doesn't expect it to come close to matching those earlier days, when 1,500 banks were on the watch list at times.
Not A National Crisis?

I think he means ... Yet. Didn't we just go through the same nonsense with housing? Nearly every state in the union had to be in housing decline before the NAR and the NAHB admitted the housing problem was national.

But yes, we will not see 1500 banks on the problem list, for the simple reason there are far fewer banks today. Please see S&L Crisis vs. Current Crisis for a valid comparison between what's happening today vs. the 1980's.

All things considered, the situation today is far worse. Fewer banks will fail, but those that do will be way larger on average.

Mike "Mish" Shedlock
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3:20 AM

Promising Solar Power Technologies

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New cost effective solar energy products are on the near horizon. Let's take a look at some of the promising ones.

MIT reports prototype solar dish passes first tests.

A team led by MIT students this week successfully tested a prototype of what may be the most cost-efficient solar power system in the world--one team members believe has the potential to revolutionize global energy production.

The system consists of a 12-foot-wide mirrored dish that team members have spent the last several weeks assembling. The dish, made from a lightweight frame of thin, inexpensive aluminum tubing and strips of mirror, concentrates sunlight by a factor of 1,000--creating heat so intense it could melt a bar of steel.

MIT Sloan School of Management lecturer David Pelly, in whose class this project first took shape last fall, says that, "I've looked for years at a variety of solar approaches, and this is the cheapest I've seen. And the key thing in scaling it globally is that all of the materials are inexpensive and accessible anywhere in the world."

Pelly adds that "I've looked all over for solar technology that could scale without subsidies. Almost nothing I've looked at has that potential. This does."
Raw Solar

The website Raw-Solar has this diagram explaining the practical application.
A solar thermal dish reflects the rays of the sun onto a small receiver using specially curved mirrors, concentrating the sunlight 1000 times. The high concentration increases the efficiency of the energy collection by reducing the surface area for thermal losses. A robust tracking system keeps the dish pointed directly at the sun all day, maximizing the available sunlight.

Water is pumped through the receiver where the high intensity sunlight heats it to 212-750F (100-400C), making steam. The steam can then be piped into an existing steam system, such as a district energy system or food processing plant.
What makes this system special vs. its competition is that it can use small flat flexible mirrors that can bend in exactly the right shape to concentrate the reflected sunlight on a precise spot. The materials are all easily produced and the team could put this dish together by hand.

Inquiring minds will want to consider this MIT video demonstration of their solar power dish.
Following is a photographic clip from the demonstration. In the clip below a wooden beam was held where the rays were being concentrated and it immediately caught fire.

Hot Thin Roofs

Let's now turn our attention to Hot Thin Roofs.
A new solar energy product, thin enough to be built into shingles, may finally make the technology competitive.

With energy prices soaring, affordable solar power would be welcomed by any entrepreneur looking to trim the electric bill. Trouble is, power generated by the most widely available technology - panels covered with photovoltaic (PV) systems, which translate sunlight into AC current - still costs two to three times more than electricity generated from coal and other fossil fuels. That may be about to change.

Several startups, including HelioVolt in Austin, Miasolé in Santa Clara, Calif., and Nanosolar in Palo Alto, are working on a new technology called flexible thin film that's on the brink of making solar more competitive. Nanosolar has just begun to ship its thin-film solar systems to a German utility.

Made from pliant sheets of foil, the solar panels can be molded onto roof shingles, which are at once more attractive than clunky, heavy glass panels and less expensive to produce. In fact, the cost of making thin film is so much lower than traditional solar panels that experts say it could produce electricity for about the national average of 10.4 cents a kilowatt hour.
Selling Green

CNN Money is reporting on Selling Green - Making Solar Pay.
Solar energy may be hot these days, but it still costs two or three times more than the power your local utility provides. SunEdison, a Beltsville, Md., startup, has created a new financing model that allows solar to make financial sense for businesses.

The roof of Sea Gull Lighting Products' distribution center in Burlington Township, N.J., is covered with solar panels that the lighting maker did not pay a cent for. They are installed, operated, and maintained by SunEdison. The company acts as a bank, soliciting investors interested in a return on solar energy. SunEdison's investors own the solar panels, and Sea Gull agrees to buy the power.
The problem with the model above is that it requires subsidies to be cost effective. The winning products in this space will need no subsidies.

Algae Power

Another in the series of innovative technologies in the CNN Money report is on Algae Power.
Isaac Berzin, who founded GreenFuel Technologies in 2001, is working with Arizona Public Service to scale his process to commercial levels. He has built a small algae farm next to one of the utility's natural-gas plants. The algae, which grow in racks of plastic bags, feed on the carbon dioxide in the exhaust of the power plant. The system not only reduces the greenhouse gases coming from the power plant by 40% but can also produce biodiesel and animal feedstock as a byproduct without competing with the global food supply.
I find these products exciting and at least two of them seem commercially viable. All of them might be. And the higher oil prices get, the more economically viable some of these and other products become.

Raw-Solar's beauty is a simple design using basic components, without the high cost of custom designed parabolic mirrors. There are plenty of desert areas in the US with huge percentages of cloudless days where such a system could be commercially viable.

Interestingly, the Bush administration halts solar energy projects on federal lands.

The Bush administration has put a two-year stop to solar energy projects on federal lands in Arizona and other Western states while it studies their environmental impact.

The U.S. Bureau of Land Management and U.S. Department of Energy will study the impact of solar energy production and other facilities that could be developed on public lands in Arizona, New Mexico, Utah, Nevada, California, Colorado and Nevada.

There are 125 applications by solar energy companies to build facilities on public lands in those states.

The final analysis will show that the cure for peak oil is high enough energy prices.

Instead, the government sponsored solution was ethanol from corn. That "solution" was a complete disaster. US biofuel plants are going bankrupt as fuel prices rise at the pump and grain and fertilizer costs soar. Producing ethanol from corn makes no sense. To make matters worse, ethanol producers receive a taxpayer subsidy. And finally, tariffs make importing ethanol 3 times as expensive as it should be.

Mike "Mish" Shedlock
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Saturday, June 28, 2008 9:06 PM

Massive Government and Private Sector Job Cuts Coming

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CNN Money is reporting State, city layoffs: 45,000 and counting.

With falling revenue from sales and income taxes, and property-tax declines looming, states, cities and towns have already laid off tens of thousands of government employees. The American Federation of State, County and Municipal Employees, a public employees union, says about 45,000 government layoffs have been announced this year.

There are 29 states, including California, Florida and Ohio, facing a combined budget shortfall of at least $48 billion in the fiscal year that starts July 1, according to the Center on Budget and Policy Priorities (CBPP), a liberal think tank.

There are nearly 20 million state and local government employees in the country. So a 1% decline in employment at cities, towns, schools and states would result in a job loss of almost 200,000 people, a much larger amount than we've seen from battered sectors such as automakers or home builders in the past two years.
The effect of those layoffs will far outweigh any benefit of the economic stimulus package, much of which was already spent. We must use the word benefit loosely because government giving away money it does not have never produces any economic benefit.

Bank of America To Cut 7,500

MarketWatch is reporting Bank of America sees 7,500 job cuts after Countrywide close.
Bank of America Corp. (BAC) said Thursday it expects to make about 7,500 job cuts after acquiring Countrywide Financial Corp. (CFC) . Affected employees will start finding out their fate in the third quarter. "
Citigroup to cut 6,500

The TimesOnline is reporting Citigroup and Goldman Sachs cut more staff.
Citigroup, America’s largest bank, is expected to cut up to 6,500 investment banking jobs – as much as 10 per cent of its roughly 65,000 headcount worldwide. It is believed that entire trading desks in New York, London and other cities will be eliminated. Senior managing directors will not be immune from the layoffs.

In April, Citigroup said that 9,000 jobs would go on top of the 21,000 eliminated in the past year. [This is yet another 6,500 - Mish]
175,000 Financial Cuts Coming

Bloomberg is reporting Financial Firms May Make Deeper Cuts, Eliminate 175,000 Jobs.
The world's biggest financial firms may lose as many as 175,000 jobs by this time next year as Citigroup Inc. and other banks shed workers amid slowing revenue and billions in writedowns, executive recruiters say.

"The worst is yet to come," Russ Gerson, head of New York- based recruiting firm Gerson Group, said yesterday in an interview. "We are going to have a major contraction. This is affecting all areas of the investment banking universe and it's affecting all areas globally."

New York-based Bear Stearns Cos. is cutting more than 9,000 jobs, or 66 percent of its workforce, as it was acquired by JPMorgan Chase & Co. Zurich-based UBS AG has announced 7,000 job cuts, and Lehman Brothers Holdings Inc. has trimmed 6,300 employees.

The Independent Budget Office in Manhattan said in a report issued last month that it expects 33,300 finance jobs in the city, or 7.1 percent of the total, to be cut from the peak in 2007. The industry lost 52,500 jobs in New York during the 2000- to-2003 market drop.

About 17 percent of banking and securities jobs in New York were wiped out from 2000 to 2003, the Bureau of Labor Statistics said. The current round of cuts may claim 35 percent to 40 percent of the industry, said Gary Goldstein, chairman of New York-based financial recruitment firm Whitney Group.

"They just keep chopping heads," Goldstein said. "They'll wake up one day and realize that they've cut too deep and now these businesses have come back and they don't have anybody to do them."
Goldstein Needs To Wake Up

This is the backside of Peak Credit.

None of the financial engineering jobs that fueled this credit boom will ever be needed again. SIVs, Conduits, Toggle Bonds, Covenant Lite loans are all dead for years, more likely decades to come. Add to that liar loans, Pay Option Arms, insane leverage, and numerous other ridiculous lending arrangements. And if those things are not coming back, we do not need Wall Street shills to securitize that garbage and pitch it to unsuspecting suckers.

More Mergers Coming Up

There are undoubtedly more bank mergers coming up. The strong swallow the weak to the point the strong become weak. And with each merger there will be more job cuts, massive job cuts. Bank of America's announced cutback of 7,500 related to its acquiring Countrywide is just a small down payment of what's coming down the pike.

Unemployment is poised to soar. Few are prepared for it.

Mike "Mish" Shedlock
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3:29 PM

Fed's Trojan Horse Offering

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My friend "TC" monitors C.A.R. data, DQNews data, and Case-Shiller Data. Case-Shiller data was out a few days ago and you can read about it in Case Shiller Futures Suggest 2010 Housing Bottom.

What follows is an analysis of data from the California Association of Realtors from "TC" who tracks the data month by month and is looking at things from perspective of percent declines from the peak.

"TC" writes:

I put together the just released May 2008 CAR data. As you can see the CA median home price is now down more than $200K and every region CAR tracks but one is down at least $100K. Additionally, 3 regions are now nearing a $500K median price decline. The declines in these areas is more than twice as much as the national median price!

Source: C.A.R. reports sales increased 18.1 percent; median home price fell 35.3 percent in May

click on chart for sharper image

According to CAR half of the decline is because of "shifts in the types of homes selling" and half due to price depreciation. Their calculation of "shifts in the types of homes selling" however is flawed. This because they base the shift on the % of jumbo loans. The problem with this method is that as prices decline the % of jumbo loans naturally moves lower so one can't automatically assume the "credit crunch" has lead to an equal % of the median price change.

However, CAR is in part correct that the credit crunch is having an effect on CA median home prices. In order to get a more accurate picture of how much I use the Case-Shiller data which using the repeated-sales methodology. This methodology is typically the most accurate representation of home prices (however Case-Shiller only tracks a few CA markets which is why I enjoy the CAR data as well).

Using the Case-Shiller data as a baseline one can see that about 1/4 of the median price decline can be attributed to the credit crunch statewide, with the other 3/4 of the decline being actual home depreciation.
Discussion Of Data Presentation Bias

The percentage declines from the peak is an admittedly biased way of looking at things as it makes each decline as large as possible. However there is an overall number from CAR and DQNews that shows the peak to be in April, May of 2007.

Is there any wonder that late vintage loans are defaulting at such a high rate. Liar loans were still ramping late 2006. Those liar loans found their way into various Alt-A pools. For a recent look at one Alt-A pool and what defaults are doing please take a peek at Is The Inflation Scare Over Yet?

Writeoffs in California have barely begun. However, the market is increasingly aware of what must happen. You can see it in the charts.

Washington Mutual Daily Chart

click on chart for sharper image

click on chart for sharper image

Washington Mutual (WM) crossed the magic threshold of $5. Many mutual funds have a requirement about market cap and price. Those with a threshold of $5 may have to dump it if it does not quickly recover.

On a purely fundamental basis, more writedowns on account of Alt-A liar loans are coming. More people will be walking away from their homes in California and Florida. Approximately 75-80% of those in liar loans only make the minimum payment. Negative amortization increases every month in those loans. On top of that, home prices are falling rapidly. Add the two together and anyone who put down even as much as 20% is now hugely underwater.

At some point escalation clauses will kick in. Escalation clauses vary by contract, but typically vary between 110% of the loan to 125% of the loan. Those clauses should be kicking in now, in mass, based on price depreciation alone.

Have they in practice? Think again. It would be the kiss of death for either WaMu or Wachovia to start enforcing those clauses, homeowners would immediately default. Instead, both banks pretend they are well capitalized when it is increasing apparent they are likely insolvent.

I fail to see how either of those banks survive. The Fed's policy so far is to have the relatively strong take over the pathetically weak. Examples of this are the shotgun wedding between JPMorgan (JPM) and Bear Stearns (BSC), and Bank of America (BAC) and Countrywide Financial (CFC).

Strong Become Weak

Eventually the strong become weak because of these actions. Bernanke's actions suggest there is no bank strong enough to take over the banks are about to fail. And that is why Bernanke is scrambling around like a mad fool (See Fed Looking To Bend Rules To Aid Banks), directly soliciting private equity firms to invest in banks.

The situation is so dire that Turf Wars Between Fed, SEC, Congress, Treasury are being openly fought in public.

If those private equity firms were smart they will treat this Fed offering like a Trojan Horse.

Mike "Mish" Shedlock
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12:28 AM

Turf Wars: Fed, SEC vs. Congress, Treasury

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The infighting between Fed governors as noted in Fed Governors Openly Question Bernanke's Competence, has now become a major turf war involving the Fed, Congress, the treasury department, and the SEC.

Senators Dodd, Shelby Warn Fed, SEC on Rushing Securities Deal.

Federal Reserve Chairman Ben S. Bernanke and Securities and Exchange Commission Chairman Christopher Cox were ordered by two top senators not to proceed with a deal overseeing Wall Street until consulting with Congress.

"We ask that no action" be taken before legislators can decide it's in the economy's "best interests," Connecticut Democrat Christopher Dodd and Alabama Republican Richard Shelby, the Senate Banking Committee's top lawmakers, said in a letter to Bernanke, Cox and Treasury Secretary Henry Paulson.

The senators delivered their warning as Bernanke and Cox met at the Fed today to hammer out final details of a memorandum of understanding.

Cox offered to brief Dodd and Shelby on the SEC's talks with the Fed. The memorandum doesn't "create new legal authorities or responsibilities," he said in a letter responding to the two. "It is intended to facilitate our agencies' ongoing, day-to-day cooperation. It is the role of Congress to decide whether, and if so how, to alter the existing regulatory structure."

"We don't want to encourage dependence upon the Federal Reserve as a backstop," Assistant U.S. Treasury Secretary Anthony Ryan said in a June 24 interview with Bloomberg Television. "As a policy matter, we must be in a place where firms are allowed to fail," he added in a London speech the same day.

No Authority

Dodd and Shelby flagged in their letter that Congress hasn't given the Fed permanent authority to open the so-called discount window to securities dealers.

"We look forward to continuing to work with Congress on these important issues," said Fed spokeswoman Michelle Smith in Washington.

Cox urged his staff June 23 to not "engage in turf wars among federal regulators," according to an e-mail the SEC provided to Bloomberg News. He added that it's "inconceivable to me, in any financial-services regulatory modernization that Congress might in future years undertake, that the role of the SEC will not be strengthened and expanded."

Fed Vice Chairman Donald Kohn told lawmakers June 19 that policy makers are "studying a range of options" for the PDCF. Fed governors and district-bank presidents June 25 heard from the supervisors dispatched to investment banks.

Philadelphia Fed President Charles Plosser and Richmond Fed chief Jeffrey Lacker have urged setting clear ground rules for access to central bank funds. They also warned this month that the lending risks provoking future crises by causing moral hazard, or encouraging firms to take on more risk in the anticipation of Fed aid in case their bets go wrong.
Sign, Sign, Everywhere A Sign

In Things That Have Not Yet Happened I mocked Bernanke for suggesting Danger of downturn appears to have faded. Some wanted signs. I would have thought that Fed infighting alone was enough but those wanting more signs need only consider Fed Looking To Bend Rules To Aid Banks.

Would Bernanke be openly soliciting private equity firms to invest in banks if there was not a serious problem?

Now, open warfare involving the Fed, the SEC, Congress, and the Treasury department should be enough to convince everyone.

Congress is upset about the Primary Dealer Credit Facility (PDCF), and there is even disagreement at the Fed over its use. Philadelphia Fed President Charles Plosser told reporters "we run the risk of sowing the seeds of the next crisis."

Fed Governor Lacker warned on the TAF (Term Auction Facility) with these statements: "It isn't clear what kind of market failure is being addressed" with the TAF. Central bankers should be wary "that they can substitute their own judgment about the fundamental value of financial instruments."

This open warfare lets everyone know just how serious things are. It does one other thing too: As long as everyone is fighting, nothing will get done. That's probably the best we can hope for. Look out if a deal is reached.

The Fed, the Sec, and Congress each had a big role in this mess. The role was not lack of regulation. The role was too much regulation!
  • The Fed: Micromanaging interest rates, holding interest rates too low too long, opening praising ARMs and derivatives.
  • The SEC: Creating government sponsorship of the rating agencies.
  • Congress: Creating government sponsorship of the GSEs, HUD, FHA, countless affordable housing programs everyone one of which failed, etc., etc.
Now, in strict accordance with the Fed Uncertainty Principle Corollary Number Two:

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Since the Fed, Congress, and the SEC are all guilty, it is only fitting they should all be fighting over ways to make the problem worse.

Mike "Mish" Shedlock
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Friday, June 27, 2008 1:11 PM

Condo Association Seeks Foreclosure On Wells Fargo

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In an interesting twist to the massive wave of foreclosures in residential mortgages, a Condo Association Seeks Foreclosure On Wells Fargo.

The Residences at the Bath Club Condominium Association in Miami Beach is pressing a foreclosure action against Wells Fargo as trustee for an investment pool that owns the mortgage on a unit that isn’t paying its maintenance fees.

The lender owes $32,252 in late maintenance fees on the unit it took back more than a year ago.

Determining exactly who is on the hook is itself difficult. The original mortgage was issued by Mortgage Loan Specialists of Irvine, Calif. A spokeswoman for Wells Fargo said it was only the trustee for the bondholders who invested in a securitized mortgage pool. The servicer of the loan is Impac Funding Corp. of Irvine, Calif., which shares the name with the company that issued the mortgage-backed securities and is also named in the foreclosure suit, Impac Secured Assets Corp.

The lender needs to come up with the past due maintenance fees by Friday morning or it could lose the oceanfront condo in a foreclosure auction. The unit sold for $1.45 million during the height of the condo boom, according to Miami-Dade County property records.

“An association foreclosing on a bank?” asked Bill Raphan, who runs the Fort Lauderdale branch of Florida’s Office of the Condominium Ombudsman. “I can’t say I have heard that before. It will create an interesting precedent. Associations often complain lenders don’t pay their dues.”

Attorney Ken Direktor, who leads Becker & Poliakoff’s community association practice, said he encourages his lawyers to aggressively go after lenders who fail to pay association fees.

If Unit 901 sells on Friday, the association will recover the $32,252, including legal fees. Wells Fargo would keep the rest of the sale’s proceeds.

“We increasingly see banks reluctant to take control of a unit,” said Breitner, with The Barthet Firm in Miami. “They would rather keep a unit in limbo and wait until the market comes back.”
I discussed this problem recently in Homeowner Begs Bank To Foreclose.

People are defaulting on units but banks will not foreclose. The association dues (upkeep and insurance on the building itself) must then passed on to fewer and fewer owners. This puts pressure on still more people to abandon their units. Legal costs are mounting everywhere.

In many cases the back association fees are more than the unit is worth. Over time, this problem is going to increase, dramatically.

Just a few years ago people were standing in line and entering lotteries hoping to secure the right to buy these units. Now they cannot give them away. Banks don't want the units, no one does. What a nightmare. Welcome to Condo Hell.

Mike "Mish" Shedlock
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11:37 AM

AIG Absorbs $5 Billion Securities Lending Loss

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Repeating a pattern of larger than previously announced writeoffs prevalent in the entire financial sector, AIG to Absorb $5 Billion Loss on Securities Lending.

American International Group Inc. plans to absorb losses for a dozen insurance units after their securities-lending accounts suffered $13 billion of writedowns tied to the subprime-mortgage collapse during the past year.

The world's largest insurer will assume as much as $5 billion of any losses on sales of the investments, up from a previous commitment of $500 million, said Christopher Swift, vice president for life and retirement services, in an interview. AIG also will inject an undisclosed amount of capital into some of the subsidiaries, he said.

State regulators in Texas said they didn't know AIG was investing cash collateral from the securities-lending business in subprime-linked assets and were concerned the insurance units hadn't put aside enough capital to cover potential losses.

State regulatory filings show that AIG's securities-lending unit used almost two thirds of its $78 billion in cash collateral to buy mortgage-backed securities that plunged in value starting last July as subprime defaults climbed. Most of the securities were rated AAA or AA. The market value of the collateral pool, including cash and securities, fell to $64.3 billion as of March 31.

In addition to the $9 billion in unrealized losses, AIG and its 12 insurance and annuity units that participated in the securities-lending pool incurred $3.9 billion of realized losses, or declines the company no longer classifies as temporary. These losses reduced AIG's earnings, primarily in the fourth quarter of 2007 and the first quarter of 2008.
Bigger writedowns At Merrill Lynch

MarketWatch is reporting Bigger write-downs seen at Merrill.
Merrill Lynch & Co. (MER) could write down as much as $5.4 billion on distressed assets in the second quarter, an analyst for Lehman Brothers Holdings said Friday, the second day banking analysts have taken aim at the firm's estimated second quarter results.

"We did a deeper review of Merrill's (MER) monoline exposures on asset-backed security and collateralized debt obligation assets which had not previously been highlighted," Lehman (LEH) analyst Roger Freeman wrote in a note to investors. "This incremental $1.7 billion of write-downs constitutes the majority of our adjustment."

"We believe that Street estimates will come down as the Street adjusts for the significant impact of these monoline credit valuation adjustments in addition to the more common set of inventory marks," Freeman said.
Pattern Will Continue

This pattern will continue for quite some time. Everyone is underestimating the effect that rapidly rising unemployment will have on credit card defaults, Pay Option ARM (liar loan) defaults, home equity loan defaults, and commercial real estate losses.

Mike "Mish" Shedlock
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4:20 AM

Financial Experts Reassure Nervous Investors

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A group of highly respected, universally loved, financial experts gathered early today in a secret meeting to discuss what can be done to reassure overly nervous investors.

Photographer Keith Taylor managed to capture these stunning images of the session.

click on chart for sharper image

I have in my possession an audio taping of the discussion. Unfortunately I cannot make it available because it is not "family friendly" material. However I can provide this partial transcript:

"You ...... What the ..... Stick your ...... inflation targeting ...... Buy futures until .... How the .... hair raising .... strong dollar policy .... up your ...."

Mike "Mish" Shedlock
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3:45 AM

Australia Banks Hoard Cash, Set Up Swapping Program

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Hoarding cash is catching on. The US, EU, UK, and now Australia banks are all in on the act. In response the Oz central bank .... drum roll please .... institutes a swapping mechanism.

Let's take a look at how Oz Banks prepare for worst.

The RBA's assistant governor of financial markets, Guy Debelle, has revealed eight Australian banks had taken the advice of the central bank and APRA, the prudential agency, to package and securitise residential mortgages which had been held on their balance sheets.

The move would allow the banks to effectively swap the residential mortgage-backed securities (RMBS) with the Reserve to secure funding quickly if it was facing a liquidity shortfall.

The increased demand for funds came after banks became hesitant to lend to each other, preferring instead to hoard cash. "If the Reserve Bank had not increased the supply, the cash rate would have risen above the target set by the Reserve Bank Board as financial institutions bid harder for funds in an attempt to increase their cash balances," Dr Debelle said.

To date, eight institutions have created these "self-securitised" RMBS and several more are in the process of doing so.
This is the problem right here: "If the Reserve Bank had not increased the supply, the cash rate would have risen above the target set by the Reserve Bank Board".

Just like in the US, Oz bankers think they know where interest rates should be. The market tries to take rates one direction, but the central bank defends its "mother knows best" rate.

Well mother does not know best in the land down under anymore than Greenspan knew what was best for the US. These actions of second guessing the market is what creates bubbles in the first place. There is obviously an overpowering force compelling bankers and politicians to do something when the best thing to do is nothing at all.

By the way, the idea that something can be "self-securitised" is absurd as putting an IOU in a piggy bank and claiming you owe yourself money.

Mike "Mish" Shedlock
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Thursday, June 26, 2008 7:51 PM

Is The Inflation Scare Over Yet?

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Treasuries have been on a bit of a rally recently as the Lehman iShares 20+ year duration treasury fund (TLT) chart shows.

click on chart for sharper image

The recent downtrend line has been broken. Is the inflation scare over? That is hard to say. It's much easier to say is that it should be.

Destruction of credit via massive writedowns in banks and financials, accompanied by sharply rising unemployment rates, falling wages, and curtailment in credit lines everywhere is simply not an inflationary environment.

Of course, this all starts with a proper definition of inflation. In Austrian economic terms, inflation is an expansion of money and credit. Money is not expanding and neither is credit. There is an illusion that they are as discussed in Bank Credit Is Contracting.

We have reached Peak Credit, a once in a lifetime event.

Those focused on the CPI, M3, and other such measures are completely missing the boat. Yes, the CPI is understated (at least on the surface). However those using CPI data to short treasuries over the past few years have had their heads handed to them. OK there was a selloff from March to June, but seasonally this is an expected event. April and May are typically the worst months (tax season).

A warning shot was fired at the treasury bears today as circled above. Will they heed the warning?

Credit Deflation

Some choose to call what is happening "credit deflation". In this regard "credit" is an unnecessary label. Deflation is about the contraction in money supply and credit. The conditions now are very similar to what happened in 1929. The primary difference is that prices of many goods and services (notably energy and food) have been rising.

There are several reasons for this.

  • China and India are on a different credit cycle than the US.
  • Inflation in China is indeed rampant. Just so that it is clear, I am talking about monetary inflation. Monetary inflation is really the only kind, but confusion keeps cropping up so I spell it out. China is printing Renminbi to buy US dollars.
  • The US dollar is falling because of budget monstrosities by this administration and both parties in Congress.
Fiscal conservatives are rare. In fact, other than Ron Paul, I cannot name one. So a weak dollar policy by this Administration coupled with inflation elsewhere is masking the actual deflation in the US (for those incorrectly fixated on prices).

Ok, so the price of milk and vegetables have double (or whatever). That is irrelevant in comparison to the mammoth destruction of "perceived wealth" in houses. Home prices in many areas have fallen by a third or even a half. Some condos have no bid at all.

Rapidly rising housing prices were massively understated in the CPI on the way up and are massively overstating CPI inflation now.

Those focused on the CPI failed to see any chance of the Fed Fund's Rate at 2.00 again. On the other hand, those focused on the destruction of credit from an Austrian economic perspective got this correct. That is just one reason why it makes more sense to watch the credit markets than the CPI. The second is the CPI is so distorted it is useless.

In my opinion, it is very likely new all time lows in the 10-year treasury yield and 30-year long bond are coming up.

More Credit Writeoff Coming

The worst in credit writeoffs lies ahead. I was laughing that the pundits on Bloomberg yesterday talking about the breakup value of some of the banks. Value? There is no value in most of them. There is heaps of debt that will be defaulted on.

Banks like Washington Mutual (WM) and Wachovia (WB) are enormously overloaded with Pay Option Arms (i.e. the liar loans). Most of these loans were rated "Alt-A", a step above subprime (at least in theory). Massive problems are surfacing big time in those liar loans.

The Housing Wire is reporting Alt-A Performance Gets Much Worse in May.
A new report released by Clayton Fixed Income Services, Inc. on Wednesday afternoon found that 60+ day delinquency percentages and roll rates increased in every vintage during May among Alt-A loans, while cure rates have declined only for 2003 and 2007 vintages.

The picture being painted for Alt-A is increasingly beginning to look a whole lot like subprime, as a result, even if peaking resets in the loan class aren’t expected until the middle of next year. In particular, loss severity continues to ratchet upward — a trend that portends some likely further reassessment of rating models at each of the major credit rating agencies, as they catch up with the data.

Those numbers make Standard & Poor’s Ratings Services latest assumption of 35 percent loss severity on Alt-A loans, only one month old, already start to look a little too conservative.
Bring On The Alt-A Downgrades

I have been following one Alt-A pool, WMALT 2007-0C1, since January. Every month the defaults rise. Chris Puplava has helped out by providing some of the charts. Thanks Chris! The most recent discussion of WMALT 2007-0C1 was Bring On The Alt-A Downgrades.

I have some new charts today that highlight how far behind the curve Moody's is. The new charts are from "CZ" at a global fixed income management firm.

Admittedly this is just one pool, but it seems to be indicative of what Housing Wire is saying.

First let's start with the most recent snapshot of the pool.

WMALT 2007-0C1

Click on chart for sharper image.

Facts and Figures
  • The original pool size adding up the tranches below is $519.159M
  • 92.6% of this cesspool was rated AAA.
  • 22.89% of the whole pool is in foreclosure or REO status after 1 year.
  • 31.17% of the pool is 60 days delinquent or worse
I now have a tranche list and a breakdown, by tranche of the current ratings.

Tranche List

The tranche breakdown shows total deal size. Total size is 519.159M, "A" Tranches are 476.069M total, "M" Tranches are 30.112M total, "B" tranches 7.788M total and "C" tranche is 5.19M total

Let's look at the rating of tranche A1.

Tranche A1

In the upper right you see the current S&P rating is AAA and Moody's is Aaa. Those are the top ratings. However, every one of the 5 "A" tranches (A1, A2, A3, A4, A5) is still rated AAA and Aaa by the rating agencies. (screens not shown)

The M1 tranche and below (10 tranches in all) have all been downgraded to BBB or below.

Cesspool Math

The top 5 tranches constitute $476.069M out of an original pool size of 519.159M. In other words, 91.7% of this entire mess is still rated AAA.

Look at the first chart again. 31.17% of this cesspool is 60+ days delinquent, 15.12% is in foreclosure, and 7.77% of this pool is in REO status.

The Big Hit Is Coming

Here is the key stat: 15.17% foreclosed and 91.7% is still rated AAA by Moody's and the S&P. If this is indicative of what is happening in other pools, and I suspect it is, the number of tranches downgraded by Moody's is a very misleading indicator. Have Moody's and the S&P have been downgrading the lower rated tranches, (higher in number but way lower in volume), while ignoring the big problem? It sure looks like it.

The big hit is coming when those "A" tranches get downgraded. Expect more credit writedowns. Lots more. What's happening is not inflationary in any way, shape, or form.

Gold Up

Gold was up big today. Some look at gold as a sign of inflation, some as an inflation hedge. The reality is that it is neither, except perhaps in the extreme long term. There was positive inflation from 1980 to 2000 yet gold fell from 800 to 250. As an inflation hedge, it would have been hard to pick a worse one! And if gold is rising because of inflation now, why was it falling for 20 years when there clearly was inflation all the way? Let's look closer.

Historically, there are times gold does well: Hyperinflationary times and Deflationary times. Gold does poorly under more normal conditions, and gets hammered in disinflationary conditions, a falling but positive rate of inflation.

If gold is signaling anything right now, it is the further destruction of fiat credit (deflation) as we move from disinflationary conditions to deflationary ones.

Gold rose in the great depression, and it is poised to do so again. Recent action (the last several years) in gold is very consistent with deflationary theory about the destruction of credit. Gold, unlike fiat, is no one else's liability. Money with that attribute (and gold is money), should rise under these conditions.

Trendline Break On The Dow

click on chart for sharper image

The long term trendline headed all the way back to 1982 is busted. This is not an event to dismiss lightly. Not only did the Dow break it's long term trendline, it broke its yearly low, and shorter term trendlines as well.

click on chart for sharper image

The close today in the markets can only be described as ugly. This is not a crash call, but please remember: Crashes occur in oversold conditions not overbought ones.

Mike "Mish" Shedlock
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6:23 PM

Fed Looking To Bend Rules To Aid Banks

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FCNBC is reporting Fed May Ease Rules on Private Equity Bank Stakes.

The U.S. Federal Reserve is considering steps to make it easier for private-equity firms and others to invest in banks, the Wall Street Journal reported on Thursday, a move that could open the door to more capital for cash-starved banks.

Fed officials recently have met with big buyout firms, including J.C. Flowers, Carlyle Group, Kohlberg Kravis Roberts and Warburg Pincus, and banking lawyers to discuss the obstacles, according to people familiar with the matter.

Under federal law, to own more than 24.9 percent of a bank, an entity must register as a bank holding company, which is subject to heavy regulation and can be forced to serve as a "source of strength" for the bank, the Journal said.

Ownership of more than 9.9 percent of a bank also subjects the entity to regulatory scrutiny to ensure that it isn't controlling—or even influencing—the bank's operations.

The Fed can't change those laws, but it has room to maneuver in how it interprets them.
This announcement today is not unexpected. It is in strict accordance with the Fed Uncertainty Principle.
Uncertainty Principle Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.
When it comes to new rules or bending the rules, if the Fed does not like an interpretation, it will simply make the one it wants. The key point now,however, is the Fed feels a personal need to intervene directly in the markets to help line up sources for capital.

If the worst was over as Bernanke suggested (See Things That Have Not Yet Happened) then why is there a need for these kind of actions?

Have the Sovereign Wealth Funds in Singapore, China, etc. had enough? It's looking more like that every day. Yet the writeoffs continue.

Citigroup Writeoff Hit Parade Continues

The Citigroup (C) writeoff hit parade chalked up another score today. Goldman says, Citigroup May Write Down $8.9 Billion.
Citigroup Inc., the bank that's posted the biggest losses from the collapse of the U.S. mortgage market, may take an additional $8.9 billion in net writedowns in the second quarter, Goldman Sachs Group Inc. said.

"We see multiple headwinds for Citigroup," such as risks of further writedowns, higher consumer provisions, and the potential need for additional capital raisings, dividend cuts or asset sales, Goldman said.

These aren't headwinds, this is a series of hurricanes one after another. There are Many Hurricanes, Many Eyes and most have still not hit shore.

Yahoo!Finance is reporting Citigroup sinks to 10-year low, Goldman urges short sale.
Citigroup Inc (C) shares fell to their lowest level in nearly a decade after a Goldman Sachs & Co analyst said investors should sell the largest U.S. bank's stock short as losses mount from troubled debt.

William Tanona, the Goldman analyst, added Citigroup to Goldman's "Americas conviction sell" list and cut his price target on the stock to $16 from $20.
Where were all these downgrade and sell recommendations when they were needed? These problems were visible $30 ago.

Regardless, someone needs to step up to the plate with a realistic writeoff number that won't be increased every other week. It's time to stop playing these piecemeal games. There is no trust anymore because no one can possibly believe "this is the last one".

There are more hurricanes approaching: credit cards, commercial real estate, Pay Option Arms, home equity loans, etc., etc. I am quite sure that $8.9 billion will not be enough to cover the upcoming hurricane damage.

But don't take my word for it. Bernanke's actions prove it.

Mike "Mish" Shedlock
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11:27 AM

Bank of America's Parking Meter Play

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Bank of America (BAC) must be really cash strapped to pull this stunt: B of A Charges $10 Fee For $2 Parking Meter Tab.

I recently used my bank of America credit card to pay for a multi-space parking meter in Washington DC. The type electronic meter common in urban areas for parking on the street and which accepts credit card payments. The charge for parking was $2. Bank of America treats this charge as a cash advance. They charged me a $10 cash advance fee on top. So now I will be thinking twice before using any bank of America cards. A transaction that should cost $2 can come out costing $12. Also, my card currently has a 0% promotional APR on purchases, but they put the $2 parking purchase in a separate category subject to a much higher interest rate.
Banks Begging For Regulation

Banks are just begging for more regulation. And they will get it. And they will complain. I am not in favor of more regulation, but I will not feel sorry for them one bit when it happens.

I can hear the complaints now. "Where's The Free Market?" Well I said banks were begging for regulation, but I also said I was not in favor of it. Finally, the conditions that fostered these credit excesses had their roots in cheap money from the Fed and lots of help from Congress, such as the Bankruptcy Reform Act of 2005.

In other words, the free market did not create this mess. Congress and the Fed created this mess. I am in favor of scrapping the entire bankruptcy reform act.

Bankruptcy Reform Act To Blame

The bankruptcy reform act of 2005 fostered the attitude from lenders that no credit lending was too risky to consider, that consumers couldn't default.

Armed with the idea that consumers could not default, banks engaged in all kinds of risky lending. Insane levels of risky lending was done in mortgages, credit cards, autos, home equity lines, and commercial real estate.

Yes, this was the very attitude that guaranteed a deflationary bust. And much of the attitude of banks can be traced back to that bill. I called it at the time. It just took a long time to play out.

For a more detailed discussion, please see Bankruptcy Reform Act Finally Blows Sky High.

Cash Advance Warning

Technically I see nothing wrong with charging interest on cash advances except that interest rates involved typically amount to what I consider usury. Besides, no money went directly into the consumer's hands, so this does not seem to be a cash advance in the first place. The big problem however, is charging $10 for a $2 transaction. Furthermore, I do not think there should be fees at all, regardless of the size of the advance. After all, interest starts ticking from day one, and the banks should set that rate to make a reasonable amount of profit.

This is begging for the next Congress to not only rewrite credit card legislation, but to completely rewrite the bankruptcy reform bill as well.

In the meantime, please remember that any cash or pseudo cash transactions might get you whacked for $10 or higher, plus interest.

Cash Transactions
  • Cash back at grocery stores or service stations on credit card purchases.
  • Buying chips at a casino.
  • Parking meters.
  • Cash Advances.
If you are doing any of those things... Stop now. Banks are so greedy, and/or so desperate that not only are they charging ridiculous interest rates, they are willing to ding you with a $10 fee on a $2 transaction.

And if you routinely get cash back at the grocery store, sooner or later you will get hit with a $10 charge. They will notify you of the change, but trust me on this: you will never read it or even understand what they are saying if you do read it. So get out of the habit now.

Overdraft Fees Rise

USA Today is reporting Banks raise penalty fees for customers' overdrafts.
For more than a year, Wachovia has been urging its employees not to refund too many overdraft fees because they "make up a big percentage of our revenue and is (sic) a HOT button among leadership," according to internal memos obtained by USA TODAY.

Bank of America and Washington Mutual, meanwhile, have jacked up their overdraft fees and made it easier for customers to be hit with multiple penalties. The changes come as banks grapple with growing losses from bad mortgage loans. Overdraft fees have increasingly become a source of profits. Banks and credit unions collect about $17.5 billion in overdraft fees per year, the Center for Responsible Lending says.
Fees Keep Going Up

Overdraft Fees, Overlimit Fees, and Credit Card Interest Rates are all going up. Credit limits are contracting. Inflation? Think again. In disinflation credit lines go to the moon. These conditions are what one would expect in deflation where banks and other lenders are worried about being paid back.

Here is another trick banks are playing. As a hypothetical example: you have $500 in your checking account and $550 worth of checks hit, as follows: $500, $25, $10, $15. The bank is apt to generate the highest amount of fees possible by clearing the $500 check and bouncing the other 3 checks. That's $75 of overdraft fees on $50 worth of checks. The payee sometimes charges a returned check fee as well. Double it and you have $150 worth of fees on $50 of bounced checks.

Bear in mind the article stated that Washington Mutual (WM) raised the number of times that fees could be generated from five to seven per day. Yikes!

The moral of the story is simple: Do not overdraft and do not take credit card cash advances. Instead, consider getting a credit line attached to your checking account for genuine emergencies, not for routine use. I have one but have never used it.


A Bank of America representative has made the claim they do not charge parking meter costs as cash advances. However, I believe the incident happened as described. Let's untangle the mess to see if both sides can be right, and to what degree.

Here is an additional snip from the Consumerist Article.

I spoke to their CSR twice and I never really got an adequate explanation. I am attaching a copy of the email explanation they sent me. From what I understood, they now treat payments to government entities as quasi-cash transactions. During my last conversation the CSR explained that parking meters and payments of fines would now be treated as quasi-cash transactions subject to a minimum fee of $10. I think this is something new that they recently introduced and I have requested an updated version of my terms of service to get a better understanding of these fees.

That the incident happened seems entirely believable. I have not seen the email but I am presuming the Consumerist would have insisted on it. With that in mind, the following reader mailbag likely explains what likely happened.


Though I agree with you that the $10 fee is excessive, I do not believe you understand how this process works. I work for a card issuer so let me tell you how we do it. (I do not work for BOA)

Normally when we use our cards, there is a merchant on the other end of the transaction and they pay a fee which is netted against the payment they receive. For cash transactions, there is no merchant which is why there is a cash advance fee. The cash advance fee may be more or less than the merchant fee but the concept is the same as both charges will accumulate interest. Now you or someone else may not like that fee, but what I have explained is the business logic behind it. What must have happened in this case is that the parking meter was coded as a non-merchant.

I am willing to accept the above logic as the most likely explanation. Odds are the meter in question was improperly coded. Perhaps a string of meters was improperly coded.

Regardless of policy, Bank of America most likely charged at least this one person, a $10 cash advance fee for a parking meter payment. In that case, the customer service representative blew the call, and the customer has a valid gripe.

Mike "Mish" Shedlock
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