Economic Potpourri December 16, 2008

The barrage of noteworthy economic news continues unabated. Here are a few headline news reports of interest from the past couple days. Stories on fraud, writeoffs, deflation, housing, recessions, depressions, and leverage dominate the news, with a brief intermission allowing the Fed to announce ZIRP.

KB Home Ex-Official Pleads Guilty to Obstruction

KB Home's former head of human resources agreed to plead guilty to conspiring to obstruct justice in connection with a backdating scandal that came to light at the home builder in 2006.

Gary A. Ray, 50 years old, could face up to five years in prison for conspiring to impede and obstruct ... Rest by subscription.

Ex-Broadcom Chief Henry Nicholas Must Face Backdating Charges

Ex-Broadcom Corp. Chief Executive Officer Henry Nicholas and the company’s former finance chief must face charges they illegally backdated stock options, causing the chipmaker to restate $2.22 billion in earnings.

Nicholas, who stepped down as CEO of the Irvine, California-based chipmaker in 2003, was indicted June 5. He and Ruehle are charged with securities fraud in an alleged scheme that caused Broadcom to restate earnings from 1998 to 2005 by $2.22 billion, the largest backdating-related restatement. Nicholas was separately charged with narcotics offenses, including spiking the drinks of Broadcom clients with the hallucinogen ecstasy.

Grand Jury Probes Richardson Donor’s New Mexico Financing Fee

A federal grand jury is investigating how a company that advised Jefferson County, Alabama, on bond deals that threaten to cause the biggest municipal bankruptcy in U.S. history, did similar work in New Mexico after making contributions to Governor Bill Richardson’s political action committees.

The grand jury in Albuquerque is looking into Beverly Hills, California-based CDR Financial Products Inc., which received almost $1.5 million in fees from the New Mexico Finance Authority in 2004 after donating $100,000 to Richardson’s efforts to register Hispanic and American Indian voters and pay for expenses at the Democratic National Convention in 2004, people familiar with the matter said.

On Dec. 1, Birmingham, Alabama’s mayor, Larry Langford, was charged by federal prosecutors with soliciting $235,000 in loans, expensive clothes and jewelry from Montgomery, Alabama-based bond underwriter Blount Parrish & Co. Langford, the former president of the Jefferson County Commission, included the firm on bond and derivative deals that netted it about $7.1 million. CDR, which wasn’t named in that indictment, advised Jefferson County on the derivatives.

The New Mexico probe comes two years after the FBI searched CDR’s offices as part of a nationwide investigation into whether banks and advisers conspired to overcharge local governments on financing deals. That probe by the New York office of the U.S. Department of Justice’s Antitrust Division is ongoing, and CDR says it is cooperating.

PartyGaming’s Dikshit Pleads Guilty to Web Gambling

PartyGaming Plc’s founder and former director, Anurag Dikshit, pleaded guilty to illegal Internet gambling and agreed to cooperate with the U.S. Justice Department in an investigation of the Web-based gaming company.

Dikshit, 37, the biggest shareholder of Gibraltar-based PartyGaming, entered the plea to one count of online gambling in violation of the Wire Act today and agreed to forfeit $300 million.

The native of India and resident of Gibralter and the U.K. previously paid $100 million and will pay another $100 million in three months, lawyers for both sides said. The final installment is due next September.

The company probably won’t plead guilty as a result of talks with the Justice Department, it said in a statement earlier today. Federal authorities are examining the company’s past activities in the U.S., where offshore Web gaming is illegal.

Discussions began last year as industry concern spread about the possibility of legal action against companies that took bets from Americans before a crackdown on Web gaming. The Unlawful Internet Gambling Enforcement Act of 2006 bars credit-card companies from collecting payments for bets.

Shares of PartyGaming and its competitors, Sportingbet Plc and 888 Holdings Plc, lost $7 billion of market value after the vote in Congress. PartyGaming, whose Web site says it has games including poker, blackjack, roulette and “virtual dog racing,” stopped taking wagers from its 900,000 American players.

PartyGaming was founded in 1997 by a group including Dikshit, who created its software platform. The company’s 2005 initial public offering made him the 207th richest person the following year, according to Forbes magazine.

Illinois Pays Four Times Average on $1.4 Billion Note

Illinois sold $1.4 billion of short- term notes to catch up on unpaid bills, paying as much as four times higher in yield than top-rated municipal borrowers as the state seeks to close a budget deficit amid political turmoil.

Yields ranged from 3.5 percent on notes due in April 2009 to 4 percent on securities set to mature in June. Top-rated six- month municipal notes are yielding an average 0.96 percent, according to a Bloomberg index. JPMorgan Chase & Co. was the winning bidder for notes of all three maturities.

Illinois confronts a projected $2 billion budget shortfall this fiscal year while Governor Rod Blagojevich faces possible impeachment after federal corruption charges. Investors demanded higher yields after Moody’s Investors Service assigned its second-highest short-term rating of MIG 2 to the notes yesterday, citing the state’s “stressed” cash position and “dramatic” increases in accounts payable.

Bond Risk Rises on Madoff ‘Giant Ponzi’ Fraud, Earnings Concern

The cost of protecting Asia-Pacific bonds from default increased on concern corporate earnings will fall amid global recession and that alleged fraud by investment manager Bernard Madoff may trigger forced selling by hedge funds.

“The credit market has priced in more of the Madoff scandal and bad economic data than the equity market. Equity investors are choosing to ignore that for whatever reason. I just don’t understand it,” said Mark Bayley, a director of credit at ABN Amro Holding NV in Sydney. “U.S. equity analysts are still forecasting good growth for consumer and utilities sectors, but where is that growth going to come from?”

Madoff’s Records ‘Utterly Unreliable,’ Says SIPC Head

Bernard Madoff’s financial records were “utterly unreliable” and will take six months to sort out, said Stephen Harbeck, president of the Securities Investor Protection Corp.

“There are some assets, but I have no idea what the relationships of the assets available are to the claims against them,” Harbeck said on Bloomberg Television. “The records are utterly unreliable on this case.”

The SIPC, which is liquidating Madoff’s firm, found “two sets of books, in complete disarray,” Harbeck said. Clients facing losses range from a Fairfield, Connecticut, pension fund to hedge funds and New York Mets owner Fred Wilpon’s Sterling Equities Inc.

Madoff Scheme Was ‘Impossible’ to Do Alone, Says EIM’s Busson

Bernard Madoff’s alleged Ponzi scheme, which might have cost investors $50 billion, couldn’t have been carried out alone, said Arpad ‘Arki’ Busson, chairman and founder of Swiss investment firm EIM SA.

“For the amount of money and number of accounts, it’s practically impossible that he was doing this alone,” said Busson, whose $11.5 billion fund of hedge funds had about $230 million invested with Madoff. “What’s mind-boggling is the amount of assets and the amount of time he was doing it.”

“I knew the SEC was all over this shop. As a broker-dealer, you file quarterly statements,” he said. “The main reason we got comfort is that it was SEC-regulated, and it was doing 10 percent of the volume on the New York Stock Exchange and Nasdaq.”

SEC sues National Lampoon for stock manipulation

The U.S. Securities and Exchange Commission said Daniel Laikin, National Lampoon's chief executive, and a company consultant paid kickbacks of about $68,000 for the purchase of National Lampoon stock in order to inflate the stock price. The SEC also charged two stock promoters in the case.

The SEC said that from March through June of this year, Laikin and Dennis Barsky, a consultant to National Lampoon and a significant stockholder, paid kickbacks to stock promoters and a witness secretly cooperating with the government.

The alleged purchases were made over a number of days and were designed to give the false impression of a steady demand for the stock, the agency said.

The SEC said Laikin and Barsky were trying to push National Lampoon's stock price from under $2 per share to at least $5 per share, to keep the price above the minimum listing requirements of the AMEX, and to put the company in a better position to enter into "strategic partnerships and acquisitions."

Boeing Protests $1.09 Billion Satellite Award Won by Lockheed

Boeing Co., the second-biggest U.S. defense contractor, is protesting larger rival Lockheed Martin Corp.'s win of a $1.09 billion contract to build weather satellites for the National Aeronautics and Space Administration.

Boeing filed a protest with the Government Accountability Office stating the company offered a "superior proposal" based on the evaluation criteria, spokeswoman Diana Ball said in an e- mailed statement today.

Lockheed Martin beat separate bids by Boeing and Northrop Grumman Corp. on Dec. 2 to build two spacecraft, with options for two additional satellites. First launch of the new satellites, which are used for weather forecasting and environmental, space and solar science, is scheduled for 2015, NASA said at the time of the award.

The new spacecraft will supply about 50 times more weather and climate data than the current fleet, according to NASA.

Hong Kong faces another deflation reckoning

Recent steep price falls in China have made deflation the new economic bogeyman, and another sizeable rate cut could be on the cards. Hong Kong is anxiously watching this unraveling on the mainland as it tries to avoid being tipped into another painful deflationary cycle.

Now, Chief Executive Donald Tsang is up in Beijing again with his hand out for some policy favors to prop up the needy territory. Property prices are following the equity market lower and are now 25% off last year's highs, with some transactions reportedly 40% lower. In the city-state's glitzy shopping malls, New Year sales began in November.

According to Citbank Research, the credit contraction cycle in Hong Kong is already upon us. Outstanding Hong Kong-dollar bank loans fell by HK$1 billion in October to HK$2.395 trillion, while foreign-currency loans dropped more sharply by HK$13.5 billion

Bank of America Needs Capital, Price May Sink to $9

Bank of America Corp., the third- largest U.S. bank, may decline by 36 percent over the next year as it generates capital to offset rising mortgage-related losses, Friedman, Billings, Ramsey Group Inc. analyst Paul Miller said.

“We’re telling our accounts to stay away,” Miller said in an interview yesterday. “They need to fill all of these capital holes.” Miller finished first among bearish analysts in a June ranking of the world’s best stock pickers compiled by Bloomberg.

The bank should cut its quarterly dividend to a penny from 32 cents and conserve as much capital as possible, Miller wrote in a report issued today as the stock closed at $14.11.

Bank of America is likely to post $77 billion in losses on its $942 billion in total loans over the next several years, mostly tied to residential real estate, Miller said. About $32 billion of the losses may come in 2009, offsetting an estimated $55 billion in pretax profits, according to Miller’s report.

House dream crashes in Bangalore

BANGALORE: If you are a code jock or call centre employee, watch out. Your dream home is about to become a nightmare. Worried about your ability to repay, banks are in overdrive to repossess your property if you have not been paying your equated monthly instalments (EMIs) for more than three months.

“The IT sector is one of the main contributing factors for the repossession drive that banks are undertaking in Bangalore. Several IT companies have laid off employees and the bonuses of several others have been cut, which has resulted in defaults in home loans,” admits BR Bhat, general manager, Corporation Bank. The bank has a Rs1,000 crore home loan portfolio in the city and the share of IT staffers is nearly half.

According to banking industry insiders, almost all banks in the city have registered a 20% increase in loan defaults, and thousands of properties are being recovered under a stringent law called Sarfaesi — the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002.

U.K. House Prices Will Decline 10% Next Year, Rightmove Says

U.K. house prices extended declines in December and will drop a further 10 percent next year as the recession batters the British economy, Rightmove Plc said.

The average price advertised by sellers fell 2.3 percent on the month to 217,808 pounds ($325,993), the operator of the U.K.’s biggest residential property Web site said today. Asking prices have dropped more than 10 percent from the peak in May and will fall by the same amount next year, Rightmove said.

On the year, asking prices have fallen 6.3 percent, while sale prices are now typically about 25 percent below the peak, the report said. Rightmove forecast in December 2007 house prices would stagnate this year.

Britain’s economy contracted 0.5 percent in the third quarter, and the Bank of England predicts it will shrink next year. U.K. policy makers cut the key rate by a percentage point to 2 percent on Dec. 4, following a 1.5 percentage-point reduction the previous month.

China Factory-Spending Growth Slows as Exports Fall

China’s spending on factories and real estate rose at a slower pace as property sales fell and export growth collapsed because of the global recession.

Imports and exports fell in November, inflation cooled and industrial production grew by the least since at least 1999. Home sales fel1 20.6 percent in the first 11 months from a year earlier and overall property sales dropped 19.8 percent, the statistics bureau said previously.

Premier Wen Jiabao pledged “fast and heavy-handed” investment when the government last month announced spending through 2010 on airports, power grids, railways, roads, rural infrastructure and low-rent houses.

The government’s 8 percent economic growth target is to generate jobs and avoid social instability in the world’s most populous nation, China Banking Regulatory Commission Chairman Liu Mingkang said in Beijing on Dec. 13.

Central bankers, presidents, prime ministers, and government officials in general are all in favor of the same foolish strategy of spending their way out of recession. It won't work. The simple truth is we spent our way into recession.

Detroit papers set to announce major changes

Newspapers are desperately seeking new business models that will help them survive dwindling readership and a deep advertising slump exacerbated by the recession.

The latest are the Detroit Free Press and The Detroit News, which said Monday they will announce "a sweeping set of strategic and innovative changes" on Tuesday.

The Detroit Media Partnership, which runs the business operations of the papers, said the changes are "designed to better meet advertiser and reader needs in an era in which digital delivery is revolutionizing how people get information."

Detroit would be the largest metro area to undergo a major media makeover.

The Christian Science Monitor next year will become the first national newspaper to drop its daily print edition and focus on publishing online.

The changes at the Detroit papers include "a focus on more robust and more engaging digital delivery methods, and support the continued publication of two daily newspapers in Detroit," the partnership said in a statement Monday evening.

Bassett said the Free Press is the 20th-largest daily in the country, with a circulation of 298,243; double on Sunday. The News, which does not publish on Sunday, had circulation of 178,280 at the end of September.

Nakagawa Says Japan Not Considering Intervention Now

Japanese Finance Minister Shoichi Nakagawa said the government isn’t considering intervening in the currency market after the yen rose close to a 13-year high against the dollar.

“We’re not considering intervention at all at this time,” Nakagawa told reporters in Tokyo today. “I’m not that concerned about today’s yen moves.”

The first nine links in this post involve fraud, corruption, obstruction of justice, backdating, ponzi schemes, stock manipulations, and other illegal activities. None of this mattered, today anyway. Today, the stock market is happy about about the Arrival of ZIRP, with the Fed slashing rates to 0%. Party on dudes.

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