Economic Potpourri December 14, 2008

The barrage of noteworthy economic news continues unabated. Here are a few headline news reports of interest from the past couple days.

Treasury Benefits From ‘Massive Paranoia’ as Bailout Cost Falls

While the total amount of U.S. government debt outstanding rose to $10.7 trillion in November from $9.15 trillion a year earlier, the amount of interest paid in the last two months fell by $10 billion, according to the Treasury Department.

Even as estimates of Obama’s stimulus package and the budget deficit rise to a record $1 trillion, demand continues to increase as investors flee risky assets around the world and put their cash into U.S. bonds paying, in some cases, nothing in yield just to ensure the return of their principal.

“You still have a massive paranoia in the marketplace and you’ve got that safety-at-any-cost mentality,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “People are not buying Treasury bills because they think the yields are attractive. They are buying them because they are afraid to put money anywhere else.”

Foreign central banks and other institutions are accumulating Treasuries at the fastest pace since 1988, boosting their holdings 12 percent since September, compared with a 7.7 percent increase last quarter, according to the Federal Reserve.

“In some ways it’s ironic,” said Meg Browne, senior currency strategist at Brown Brothers Harriman & Co. in New York. “The U.S. turned down first and the crisis appeared first in the U.S., yet people continue to flock to the U.S. government debt market because it’s the biggest and deepest market in the world and still has a low risk.”

The U.S. will eventually have to commit to balanced budgets, said Alice Rivlin, former Fed vice chairman and founding director of the Congressional Budget office.

“We can’t press our luck,” said Rivlin, now a scholar at the Brookings Institution in Washington. “Eventually, we’ve got to show the world that we are fiscally responsible.”

Deflation benefits the US government as interest on the debt falls. Logically speaking the government should embrace deflation and attempt to refinance as much of debt as possible at long term attractive rates. Instead the government is wasting $trillions fighting deflation.

Banks and consumers brace for new credit card rules

The U.S. credit card industry, harshly criticized for imposing surprise fees and interest rate hikes on consumers, may face a day of reckoning on Thursday..

The Federal Reserve is to vote on credit card reforms that may bring some relief to customers who face a variety of ways for being hit with late fees, universal defaults, shorter payment periods and confusing payment allocations for different balances.

The new rules, which were proposed earlier this year, are expected to total some 1,000 pages.

Mr. Credit On The Credit Card Bill Of Rights, And A New Reward Card Benefit

Everyone has complaints about credit card companies. They seem to operate by rules that would be illegal in any other industry.

Enter The Proposed “Credit Card Bill Of Rights”

Last February a “Credit Card Bill of Rights” was introduced by House Financial Institutions and Consumer Credit Subcommittee Chairwoman Rep. Carolyn Maloney (D-NY) and Financial Services Committee Chairman Barney Frank (D-MA). The bill has several key provisions:

1. A restriction on arbitrary interest rate hikes. This is when people who pay their bills on time still see their APR go up for no apparent reason. This bill would require 45 days notification before a rate hike and allow consumers to pay off their balance at their old interest rate.

2. Prohibits “Double Cycle Billing”, a practice where you are billed on the interest of your balance over the last two payment cycles, including interest on principal that has already been paid.

3. A crack down on payment due date gimmicks. Banks would be required to mail statements out 25 days before they are due, instead of the current 14. They would also prevent credit card companies from charging a late fee when a card holder can provide proof of mailing seven days before the due date.

4. Allow card holders to set mandatory credit limits. Currently, banks approve transactions above your credit limit, and then charge you an “over the limit” fee.

5. A restriction on heavy fee subprime credit cards. This provision requires that some fees be paid up front before the card is issued.

6. Protects card holders from missleading terms such as “fixed rate” and “prime rate”

7. Requires credit card companies to fairly allocate payments. This would prevent them from applying payments to the lowest interest rate debts first.

8. Prevents card companies from charging the “over the limit” fee more than three times. This would prevent the fee from being tacked on over and over again on every purchase made after you reached your limit.

9. Better oversight of the credit card industry. Congress would collect statistics on credit card usage and fees.
....

Discover Card will get hit over the 2-cycle billing ripoff for sure. I talked about 2-cycle billing in Read the Fine Print On Credit Cards.

Banks and card companies have had this coming for a long time. Some of their tactics amounts to pure greed. Some of their tactics are questionably illegal already. The industry will cry "credit will be shut off". Most likely that is a bluff. But perhaps it's a good thing if it happens given the interest rates they are charging.

Municipal Bond Fees Rising at Fastest Pace Since 1981

Wall Street is raising fees it charges municipalities to sell bonds at the fastest pace in more than 20 years as institutional investors abandon the market for state and local government debt.

Borrowers from a New York economic development authority to the state of California paid as much as four times more last month to sell debt than in previous offerings, according to data compiled by Bloomberg. The average fee fell every year but one since 1981 to a record low of $5.27 per $1,000 bond in 2007, Thomson Reuters data show. In November, the charges rose to $5.93 per bond.

The higher expenses are another blow to governments already burdened by the highest interest rates in eight years, declining tax revenue and budget deficits amid the worst economic slump since World War II. Banks say they need to charge more because they have to work harder to sell a greater proportion of the securities to so-called retail investors.

“Sales to individuals used to be the icing on the cake, but are now the cake,” said Freda Johnson, president of Government Finance Associates, a New York-based adviser to municipalities. With banks, insurance companies and hedge funds forced to conserve cash, “you can’t sell a new issue with five or 10 phone calls,” she said.

Municipal bonds lost 8.17 percent this year, including reinvested interest, according to Merrill Lynch & Co.’s Municipal Master Index. That’s the worst showing since the indexes were created in 1989. Sales of the debt have slowed to $51.1 billion in the past three months from $82.9 billion in the same period last year, Bloomberg data show.

Canada B.C. hiding full cost of Olympics: auditor

British Columbia's financial watchdog says the provincial government is fudging its Olympic budget and he's refusing to release an Olympic audit until the Liberals turn over the numbers.

Auditor general John Doyle said the province's $600-million price tag for hosting the 2010 Winter Games doesn't reflect expenses like the B.C. pavilion at the Beijing Olympics, while the province's finance minister said those kind of costs have nothing to do with Vancouver's Games.

The dispute is holding up a scheduled auditor's report on Olympic spending. "Government has resisted reporting on all these matters for some time," said Mr. Doyle. “I am the third auditor general to look at this, and the third auditor general to come to the same conclusion and that is that government should actually provide a wholesome, clear and timely accounting for all the Games-related expenditure.”

Mr. Doyle is holding back his audit, saying until the government gives over all the information, there's no point releasing it.

The Olympics is guaranteed to lose money, and lots of it.

How high-risk mortgages crept north to Canada

In the first half of this year, as the subprime mortgage crisis was exploding in the United States, a contagion of U.S.-style lending practices quietly crossed the border and infected Canada's previously prudent mortgage regime.

New mortgage borrowers signed up for an estimated $56-billion of risky 40-year mortgages, more than half of the total new mortgages approved by banks, trust companies and other lenders during that time, according to banking and insurance sources. Those sources estimated that 10 per cent of the mortgages, worth about $10-billion, were taken out with no money down.

The mushrooming of a Canadian version of subprime mortgages has gone largely unnoticed. The Conservative government finally banned the practice last summer, after repeated warnings from frustrated senior officials and bankers that the country's financial system was being exposed to far too much risk as the housing market weakened.

Just yesterday, Finance Minister Jim Flaherty repeated the mantra that the government acted early to get rid of risky mortgages. What he and Prime Minister Stephen Harper do not explain, however, is that the expansion of zero-down, 40-year mortgages began with measures contained in the first Conservative budget in May of 2006.

So much for the unbelievable hype that Canada was not involved in some of the same nonsense with mortgages that took place in the US. Another myth bites the dust.

Canada yet to do due diligence on autos: minister

Canada is closely watching the fate of the U.S. auto rescue package but will not be able to advance an immediate aid plan of its own because of its desire to study company plans in detail, Industry Minister Tony Clement said on Friday.

"We have some due diligence we've got to do here," Clement told a business audience in Brampton, Ontario, near Toronto.

Unlike in the United States, there is little legislative resistance to a Canadian bailout of the auto industry, even though it goes against the grain of the Conservative government.

However, Ottawa was almost certain to refrain from pouring money into the industry if the United States was going to let the companies go belly up.

"It is difficult to imagine a solution in Canada without a solution in the United States," Clement said.

This sounds suspiciously like a case of "Monkey See, Monkey Do" just as with subprime. Will Canada ever learn?

Auction-Rate Fees ‘Intoxicated’ Dealers, UBS Said

Fees from selling auction-rate securities “intoxicated” Wall Street bankers before the $330 billion market collapsed this year, a UBS AG executive wrote in an e-mail released by the U.S. Securities and Exchange Commission yesterday.

“The fools in this trade are the dealers that perpetuate the structure because they are intoxicated by the fees,” the head of UBS’s municipal securities group, who wasn’t identified in the document, wrote in December.

The e-mails were disclosed by the SEC after it completed settlements with Zurich-based UBS and Citigroup Inc. in New York requiring the firms, which were the largest underwriters of the debt, to redeem about $30 billion of the securities.

About 20 firms in all have agreed to buy back more than $50 billion of the bonds since the first preliminary settlement was unveiled in August. The SEC accords require a judge’s approval. The companies didn’t admit or deny wrongdoing in settling.

The market unraveled when banks that supported auctions of the securities for two decades with their own money as buyers of last resort suddenly pulled back to preserve capital amid the mortgage market collapse that led to $987 billion of credit losses and writedowns worldwide.

UBS brokers “lived off this business for a decade,” before the market imploded in February, one senior manager at the firm said in an e-mail cited by the regulator. Banks produced “substantial” revenue underwriting the securities and running periodic auctions that set interest rates, the SEC said in settlements with UBS and Citigroup.

Citigroup investment bankers wanted to keep selling new auction-rate securities even as demand tumbled last year in order to earn keep earning the fees and maintain their top underwriting spot, according to the SEC complaint. The firm didn’t curtail new issuance until November, the SEC said.

UBS, which closed its municipal underwriting operations in May, said after its preliminary deal with regulators was announced in August that the settlement provides relief to all its clients, including individuals, companies and institutions.

The agreements between the SEC and UBS and Citigroup were the largest in the history of the agency, Christopher Cox, the chairman of the regulator, said yesterday. UBS also agreed to pay fines of $150 million in August and Citigroup agreed to a $100 million penalty.

“Today is an important procedural step in the ongoing process of resolving this matter,” Citigroup spokesman Alexander Samuelson said in a statement yesterday. “We have already purchased substantial amounts of auction-rate securities from our clients.”

Is there any widespread sleazy operation that Citigroup was not involved in?

Correa Defaults on Ecuador Bonds, Seeks Restructuring

Ecuadorean President Rafael Correa halted payment on foreign bonds he calls “illegal” and “illegitimate,” putting the South American country in default for a second time in a decade.

The government won’t make a $30.6 million interest payment by Dec. 15, when a monthlong grace period expires, Correa told reporters in his office in Guayaquil. The $510 million bonds due in 2012 plunged to 23 cents on the dollar from 31 yesterday and 97.5 cents three months ago.

“I have given the order that interest payments not be made,” Correa said. “The country is in default. I couldn’t allow the continued payment of a debt that by all measures is immoral and illegitimate,” Correa said. “It is now time to bring in justice and dignity.”

Irish Government May Lead EU10 Billion Rescue of Nation’s Banks

Ireland’s government may lead a 10 billion-euro ($13.4 billion) bailout of the country’s banks after the collapse of the country’s property boom and the global financial crisis depleted capital.

The government wants existing shareholders and private investors to support a recapitalization and it will use money from the 18.7 billion-euro state pension fund to invest, the finance ministry in Dublin said late yesterday. The state may buy preference shares and ordinary shares or underwrite a share issue.

“It’s very important that our banking system is seen to sustain our economy,” Finance Minister Brian Lenihan told state broadcaster RTE yesterday. “If capital is required to demonstrate that confidence, then capital will be provided, but on strict terms.”

Ireland, the first country in Europe to guarantee the deposits and borrowings of its largest lenders, had resisted injecting public money into the banks, instead pushing them to seek private investment. Bank shares continued to plunge after the guarantee was announced as lenders including Bank of Ireland Plc and Anglo Irish Bank Corp. said they face rising loan losses and the economy entered a recession.

India Industrial Output Falls for 1st Time Since 1993

India’s industrial production unexpectedly fell for the first time in 15 years, putting pressure on policy makers to add to interest rate and tax cuts to shield the weakening economy from a global recession.

Output at factories, utilities and mines dropped 0.4 percent in October from a year earlier after a revised 5.45 percent gain in September, the Central Statistical Organization said in New Delhi today. Economists expected an increase of 2.1 percent. India last recorded a decline in output in April 1993.

China’s industrial production growth is likely to drop to 5 percent in November, the weakest pace since Bloomberg data began in 1999, according to the government. Production in South Korea declined for the first time in 13 months in October.

Japan business sentiment in biggest dive since 70s

Japanese business sentiment has suffered its sharpest fall since the 1970s oil crises, taking the Bank of Japan's tankan survey to its lowest in nearly seven years and adding gloom to an economy facing a lengthy recession.

The dismal data in the closely watched quarterly survey fueled speculation that the Bank of Japan, set to review rates and downgrade its economic assessment this week, will cut its already low interest rates of 0.3 percent.

The financial crisis means shrinking sales for Japanese companies, prompting capital spending cuts and a fearful outlook, amid signs of the longest recession on record for the world's No.2 economy, with companies even more gloomy in their outlook.

The index measuring big manufacturers' outlook for three months ahead fell to minus 36, while that of big non-manufacturers declined to minus 14.

Japan's economy sank deeper into recession in the third quarter, fuelling fears that the world's second-largest economy is facing its longest contraction ever combined with a return to deflation.

Reflecting the gloom, big companies said they were cutting capital spending by 0.2 percent in the fiscal year to next March, the survey showed.

Deflation is now the buzzword in the US, Japan, and even China.

"Medusa" Worms Found in Mud Volcano

These new, undersea worms don't have eyes to turn you into stone.

But their resemblance to snake-haired Medusa (above) wasn't lost on discoverer Ana Hilário, who plans to name at least one after the mythological Greek monster.

Hilário, of Portugal's University of Aveiro, and colleagues recently found 20 species of the tiny worms, called frenulates, in mud volcanoes in the Gulf of Cádiz, an arm of the Atlantic Ocean southwest of Spain.

Mud volcanoes are places where methane-filled fluids seep from the seafloor, providing energy for "exceptionally rich ecosystems," Hilário said in an email.

(Related: "Giant Deep-Sea Volcano With 'Moat of Death' Found" [April 14, 2006].)

The worms absorb chemicals such as methane from sediment and deliver the substances, via their blood, to the bacteria, which in turn produce organic carbon. The carbon nourishes both creatures.

Now if we could just figure out how to easily harvest that methane.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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