Pension Time Bomb Explodes In US and Canada

The ticking time bomb of overpromised, underfunded public pension plans has finally exploded. Here are a few headlines to consider. My comments appear at the end starting with the bold heading “Future Expectations Too High”

Pension Fund of San Diego

Pension's loss may add to San Diego's money woes

SAN DIEGO, Oct 29 (Reuters) - The pension fund of San Diego, California, may have lost as much as $1 billion of its $5 billion in assets recently, potentially adding to the financial challenges weighing on the state's second-largest city.

According to San Diego City Attorney Michael Aguirre, San Diego's city pension fund for nearly 20,000 active and retired employees has lost at least $700 million between Dec. 30, 2007, and Sept. 30 -- before the worst of the stock market's recent crash.

Colorado PERA Fund

PERA shares stocks' pain

The largest pension fund for state and local public employees lost $10 billion in market value through mid-October, raising the specter of higher contribution rates or lower benefits in coming years if markets don't improve rapidly.

Colorado PERA, which covers 413,000 employees and retirees, saw its assets plummet from $41 billion at the beginning of the year to $31 billion on Oct. 15.

Illinois Municipal Retirement Fund

Economic crisis hits IMRF, tax increases might be needed

Illinois taxpayers may soon be called on to bail out what is arguably the best-funded public pension plan in the state thanks to $3.6 billion in fund losses caused by the spiraling economy.

IMRF began 2008 with one dollar in the fund for every dollar promised to present and future retirees in the system. By the end of September, it only had 79 cents for every dollar promised. IMRF has no rainy day fund to recoup losses. Thus, more tax dollars are needed. The questions are how much and when.

Pension Crisis Looming In Canada

Pension Crisis Looming In Canada

The end of December represents a massive, looming crisis for some Canadian companies this year. Companies due to have new valuations at the end of this year are at risk of having to fund their pension plans based on severely deflated stock prices, triggering large cash contributions at a time of tight credit, even if markets recover in 2009, industry analysts say.

In the current economic climate, there is a need for governments to look at pension funding rules – a move Finance Minister Jim Flaherty said yesterday Ottawa is considering.

One option would be to give companies more time to fund pension shortfalls. Under current rules, they generally have five years. Some companies want that to be increased to 10 or 15 years. This solution assumes stock markets will recover over that longer time frame. [My comment: This is the LTBH and pray approach. Ask Japan how well that option worked.]

Los Angeles County public-employee pensions

Double whammy: Bill for public pensions seems unfair

At a time when most workers are watching their retirement savings get swallowed up by falling stock prices, it feels like a cruel trick to learn that taxpayers may have to spend $1 billion in 2010 to prop up Los Angeles County public-employee pensions.

Government watchdogs have been warning for years that generous public-employee pension packages would consume more and more taxpayer dollars. Now, with the nation's stock market in the tank and investments worth significantly less than a few months ago, taxpayers are going to have to foot the bill to keep public-employee pensions fully funded in the coming years. And it could be a very big bill.

Fresno County California

Fresno County calls pensions secure

Wall Street's volatility has cost Fresno County's retirement system nearly a third of its value over the past year. In the past year, the county's $3 billion pension system has lost $865 million in market value. The plan has declined in value 29% over the past year and now has about $2.13 billion in assets, Retirement Administrator Roberto Pena said.

On Tuesday, Pena told county supervisors that while the county's retirement plan has lost money as a result of stock market declines, it should recover. "We are obviously concerned about it, but we are here for the long term, and we fully expect the market to come back," he said.

New York State Pension Fund

NY state pension fund down 20 pct since April

NEW YORK, Oct 28 (Reuters) - New York state's pension fund has tumbled 20 percent in value since April, a steep fall though not as big as the 30 percent decline suffered at the end of the dot-com era.

Like many other states, New York and lots of municipalities are suffering from lower tax revenues due to the economic slowdown, meaning higher contribution rates could hit them hard.

California CalPERS may need bailout

CalPERS may need bailout

With stock market losses topping $50 billion since July 1st, CalPERS is on track to needing help in just two years if the nose dive continues on Wall Street. Taxpayer groups are upset that Californians have to foot the bill when many employers have moved away from pension plans.

"This is adding insult to injury. At the same time we're seeing our own 401k's get hit, we're on the hook to make up the shortfalls for public employees who are guaranteed their full pensions without any risk," said Jon Coupal, from the Howard Jarvis Taxpayers Association.

Cities and counties also use CalPERS. Many can barely afford to keep services going, let alone contribute more to retiree benefits. Pension costs can hurt a public agency's budget. They led to a big scandal in San Diego and helped push the city of Vallejo into bankruptcy.

US pension funds face big losses

US public pension funds face big losses

In the nine months to the end of September, the average state pension fund lost 14.8 per cent, according to Northern Trust, a fund company. The loss has grown since, as financial markets slumped further in October. The previous highest loss for state funds was 7.9 per cent for the full year in 2002.

State and local pension funds comprise a patchwork of 2,700 funds that manage $1,400bn on behalf of 21m employees, including teachers, firefighters and other municipal workers. About 40 per cent are underfunded, meaning that they would not be able to pay the future pensions that employees have been promised.

Critics say the underfunding is worse than official data show. The calculation is based on an assumption of annual returns of 8 per cent, but few funds will reach that in the next few years.

Future Expectations Too High

My Comments:

The above is just a random sampling of hundreds of articles about pension plan woes. 40% of pension plans are underfunded and that assumes future returns of 8% annually. Good luck with that.

Now think how bad things will be if the S&P drops to 600. Go one step further and think about what might happen if the US heads into an economic slump similar to Japan. For a quick review please see S&P 500 Crash Count Compared To Nikkei Index.

Nikkei Monthly Chart



click on chart for sharper image

If that chart seems far fetched for US equities, I assure you it's not. Click on the above link for a fundamental and technical explanation of why something like that might happen.

Taxpayer Backlash Brewing

A huge taxpayer backlash against overly generous public pension plans is brewing. Boomers with destroyed stock funds and IRAs are not going to want to have taxes increased so that public workers can get 90% of their salaries for the rest of their lives during retirement.

Vallejo California went bankrupt over benefits earlier this year. Expect to see more cities and counties take that action if the stock market continues to decline from these levels.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Volvo Truck Orders Decline 99.63 percent; Auto Industry Faces Crash in US

Mark Gilbert writing for Bloomberg says The Shipping News Suggests World Economy Is Toast.

In the third quarter of 2007, Volvo AB booked 41,970 European orders for new trucks. Guess how many prospective purchases Volvo, the world's second-biggest maker of heavy rigs, received in the third quarter of this year?

Here's a clue. Picture a highway gridlocked by 41,815 abandoned trucks -- because Volvo's order book got destroyed to the tune of 99.63 percent, with customers signing up for just 155 vehicles in the three-month period, the Gothenburg, Sweden-based company said last week.

The pathogen that has fatally infected swathes of the banking industry is now contaminating non-financial companies. "We're heading toward the sharpest downturn I've ever seen in Europe," said Chief Executive Officer Leif Johansson.

If nobody is buying your trucks, you don't need to rent a vessel to carry that shiny new 18-wheeler to its new owner. Hence the Baltic Dry Index, which tracks the cost of shipping goods and commodities, fell below 1,000 this week for the first time in six years.

Put another way, it is now almost 90 percent cheaper to ship goods over the oceans than it was at the beginning of the year. And because the huge vessels known as capesize ships can't currently charge much more than their daily operating cost of about $6,000 per day, their captains have slowed down to economize on fuel and save money, to about 8.68 knots from 10.33 knots in July, according to data compiled by Bloomberg.

It isn't just the oceans that are emptying. Air freight traffic dropped 7.7 percent in September, according to the latest figures from the International Air Transport Association. That's the steepest decline since the trade group began compiling the data in January 2003.

Obama Promises Help For US Auto Industry

In the US, Fed, Paulson Pressured to Assist Auto Industry or Face 'Crash'

General Motors Corp.'s pursuit of federal aid ahead of a merger with Chrysler LLC gathered momentum as six governors and presidential candidate Barack Obama prodded the government to help the auto industry.

Obama said that should he win next week's election, he would meet with the chiefs of GM, Chrysler, Ford Motor Co. and the United Auto Workers union to develop a plan for an industry overhaul, according to a transcript released by NBC.

Paulson would prefer any funding for Detroit-based GM come from the low-interest loans that will be distributed by the Energy Department, not the banking-system rescue, people familiar with the matter have said. The Energy Department said yesterday it is still writing rules for the loans.

The government needs to take action, said Kim Rodriguez, who leads accounting firm Grant Thornton's automotive restructuring group in Southfield, Michigan. "Chrysler as we know it will cease to exist very soon," she told reporters at a briefing yesterday.

A GM victory in its quest for federal funds probably would assure a tentative merger agreement before the Nov. 4 election, Rodriguez said. Yet even with a merger, the industrywide disruptions would include the loss of 74,000 jobs at Chrysler and its suppliers and the closure of half of the company's plants, Grant Thornton estimated.

With automakers struggling to revive sales and profits, the vise on the industry was underscored by auto lender GMAC LLC, which has begun telling some dealers it will no longer provide the financing they need to buy vehicles.

"GMAC is going to zap them of their existing capital," Peter Welch, CEO of the California New Car Dealers Association, said in an interview. "You could see a lot dealers going out of business," he said.

The grim statistics pile up every day. Yet some of it has to be shocking even to the biggest of bears. A 99.63 percent drop in truck orders at Volvo certainly qualifies as a shocking statistic.

Addendum

It seems there were 20K new orders come in and 20K cancellations from the AB Volvo Q3 2008 Earnings Call Transcript

Leif Johansson - President and CEO

"Yes, obviously you have seen the order in take on greater Europe there up 20,000 orders. Gross orders then offset by cancellations, but I think that the 20,000 number is a better number to look at, which means that the market is in debt. It means that it's slower than last year but its great difficulty to make any forecast there as we said. We won't make forecast for 2009, the forecast for 2008 has come down which of course with three quarters already gone that's a sign that the end market is heading south."

Here are the official numbers: Volvo Orders Down 55%

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Construction Grinds to a Halt in Vancouver

The housing slump is hitting Canada big time, starting as it often does with Cracks appearing in condo land.

The Ritz-Carlton hotel and condos is among the richest development to begin construction in Vancouver, a $2,500-per-square foot, 58-storey ultra-luxury tower with an eye-catching 45-degree twist designed by Arthur Erickson.

But that $500-million design is currently little more than a half-completed hole in the ground - the most glittering symbol of the troubled times that have humbled real estate development in Vancouver, a city that spent the last half-decade treating new condos like an evergreen money tree.

Credit turmoil, construction costs and the threat of a recession have left several towers stranded, unfinished and searching for either new designs or new money, while some developers are now threatening to sue buyers who are walking away from huge cash deposits, unwilling to commit to condos they pre-bought.

Signs of weakness are becoming increasingly obvious. As recently as August, Merril Lynch calculated that Vancouver - as has Toronto - had more multi-unit buildings under construction "than in all other Canadian cities combined a decade ago."

In the Vancouver suburb of Surrey, workers have abandoned a set of unfinished towers that stand at 21 and 25 storeys tall after the developer, who had secured some of his funding through Lehman Brothers, ran out of cash. (Work will resume if a new developer can be found to pay the $100-million in remaining costs; 560 of the towers' 690 units have been pre-sold.) In North Vancouver, work has stopped on two high-rises - one with seven storeys built, one still at the foundation stage - as the developer waits for a finalized subdivision plan. That work is expected to resume. One developer said a half-dozen other towers are vulnerable.

In the first nine months of 2007, the city of Vancouver issued building permits for 3,842 dwelling units. This year, it is down to 1,476. The Real Estate Board of Vancouver reported September sales were down 42.9% from last year, while listings were up 28.8%.

"I've never seen anything so deep, so fast," said Eric Carlson, the CEO of Anthem Properties Corp. "I used to be a know-it-all. Now, I'm pretty humble."

It's Different Here

I remain amazed at how many people in Canada watched the bubble bust in city after city after city in the US, yet remain steadfast "It's different in Vancouver." Hank Jasper, general manager of Millennium thinks pre-sales will become sales, and that "long waiting lists are already in place".

I don't believe it. If there were long waiting lists of genuine buyers, Jasper would have to be crazy to not close deals now at whatever prices he could get. I am willing to bet right now those Millennium pre-sales and waiting list numbers are wishful thinking at best and a complete fabrication of the facts at worst.

Fantasy Land B.C.

Denial runs deep in Fantasy Land. Compare the following realistic headline with the body of the article: B.C. housing sales will plunge 28 per cent.

Expect British Columbia real estate sales to have fallen substantially by the end of this year, but stage a modest recovery in 2009, according to the latest forecast of the B.C. Real Estate Association (BCREA).

Helmut Pastrick, chief economist for Central 1 Credit Union, said that while his own forecast does not agree with the BCREA on the exact numbers, he does agree that B.C.'s economy won't go into recession, and consumers will get a bit of their wind back at some point in 2009.

Quick Recovery Nonsense

Once again we are hearing the same kind of nonsense from BC real estate agents that we heard in the US: This is just a short temporary blip and a modest recovery is coming soon.

US Comparison

In California, the C.A.R. is reporting Median Home Prices Down 47% From Peak and the Case-Shiller 10-City Composite is down 22% from the peak. Given that the bubble in Vancouver is at least as big as the ones in Phoenix, Las Vegas, Miami, or San Diego one should expect a correction at least as big.

Those cities are down a minimum of 32.8% from the peak and still falling. The bottom is likely another 4 years away given we are just now entering the teeth of a consumer led recession with unemployment poised to soar from 6.1% to 8% or higher in 2009 and higher still in 2010.

The US housing bubble burst in the summer of 2005 and we are headed into the 4th year of slump with no end in sight. Fundamentally, there is every reason for Vancouver to follow suit. Condo prices in Vancouver are going to crash just as they did in Florida, Nevada, and California. Home prices will fare better than condos but home prices too will crash.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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ZIRP Coming To Fed?

The Fed did not want to cut the Fed Funds Rate below 2%. And because Congress recently granted authority for the Fed to pay interest on reserves, Bernanke thought incorrectly that he could keep rates above 2%. So much for that academic theory. Now many are wondering if ZIRP (Zero Interest Rate Policy) is coming to the Fed.

The LA Times addressed the question today in The Fed's rate at zero? It's no longer a far-fetched idea.

Just a day after the Federal Reserve dropped its key short-term interest rate to 1% -- matching the generational low reached in 2003-04 -- the betting is intensifying on another cut.

Trading in futures contracts on the federal funds rate, the Fed’s benchmark, implies a 51.4% probability that the central bank will slash the rate to 0.50% on or before its next meeting on Dec. 16, according to Bloomberg News data.

Rate expectations may be cueing off the government’s report today that the economy shrank at an annualized rate of 0.3% in the third quarter. Although analysts figured the economy had contracted in the period, the details were ugly -- particularly the 3.1% decline in real consumer spending, the biggest drop since the vicious recession that began in 1980.

The Bank of Japan had to maintain its benchmark interest rate at or near zero for most of the 1999-2006 period, before policymakers finally felt comfortable that the economy was in a sustainable recovery.

December FOMC Meeting Implied Probability



Chart courtesy of Cleveland Fed.

Rate Cuts Counterproductive

There was an interesting discussion on Minyanville today about rate cuts. Minyan Peter offered the following thoughts.

"With Fed Funds already trading at 1.00% prior to the announcement, it will be critical to watch whether other short term indices drop by 50 bps, particularly LIBOR and, probably most importantly consumer deposit rates.

If short term bank liabilities do not reprice down by at least the 50 bps cut in the prime, contrary to public perception, banks will now be worse off than they were before yesterday's announcement. … If yesterday's rate cut in any way squeezes margins, further cuts will only compound the problem. … I would offer that future Fed Funds cuts are off the table."

It seems that those rate cuts are squeezing margin and will continue to do so, especially on those taxpayer funded capital injections. The terms on the preferred shares were 5% escalating to 9%! (See Compelling Banks To Lend At Bazooka Point for more details on the capital injections)

The prime lending rate is now 4%. Banks are guaranteed to lose money on that $250 billion Paulson forced down their throats if they lend it out to their least risky clients at prime.

Is it any wonder banks are reluctant to lend it? Instead banks are opting for mergers where they can cut employees to reduce costs. The NY Times made this sound like a conspiracy (See NY Times Lending Conspiracy Madness) To me it sounds like unintended consequences of the bailout plan.

Key Interest Rates



Chart courtesy of Bloomberg.

So banks are paying 3.65% on one year CDs. Prime rate is 4.0%. Where is the profit? Take overhead into account and there isn't any. So why the high rates on deposits? The answer is banks are all competing with each other for capital. They need it to cover future losses on credit cards, foreclosures, REOs (bank owned real estate), commercial loans, etc.

ZIRP did not help Japan and it will not help US banks either. In fact, the rate cuts appear to be counterproductive. However, one cannot rule out the Fed cutting rates to 0% anyway. Bernanke is in academic wonderland and appears to be hell bent on sticking with his models regardless of how poorly those models perform in actual practice.

Mike "Mish" Shedlock
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GDP Negative as Consumer Spending Falls 3.1%

The US economy is sinking fast. We did no need to see the GDP numbers to know that but the figures are out. Here are the Third Quarter 2008 Advance GDP Numbers.

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.3 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.8 percent.

The decrease in real GDP in the third quarter primarily reflected negative contributions from personal consumption expenditures (PCE), residential fixed investment, and equipment and software that were largely offset by positive contributions from federal government spending, exports, private inventory investment, nonresidential structures, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

Most of the major components contributed to the downturn in real GDP growth in the third quarter. The largest contributors were a sharp downturn in PCE for nondurable goods, a smaller decrease in imports, a larger decrease in PCE for durable goods, and a deceleration in exports. Notable offsets were an upturn in inventory investment and an acceleration in federal government spending.

Final sales of computers contributed 0.06 percentage point to the third-quarter change in real GDP after contributing 0.17 percentage point to the second-quarter change. Motor vehicle output contributed 0.09 percentage point to the third-quarter change in real GDP after subtracting 1.01 percentage points from the second-quarter change.

Ridiculous Numbers

Notice how an "acceleration in federal government spending" made a positive contribution to GDP. All government spending, no matter how wasteful or unproductive, is assumed to provide a positive contribution to output.

Motor vehicles adding to GDP is absurd, as is final sales of computers. Computers are hedonically adjusted (all finished items are but computers are the worst offenders). For those not familiar with the term here is how it works. Computer are getting more powerful every year and prices are dropping as well. For example a computer today sells for $500 that would have cost $10,000 ten years ago. Even though the computer sells for $500, the government claims it sold for $10,000 (adjusted slowly over time).

This is preposterous and a huge reason why we were really in a recession long ago. The first 2% of GDP (my estimate) represents transactions that never took place at the price government claims.

GDP Shrinks at Fastest Pace Since 2001

Bloomberg is reporting
U.S. Economy: GDP Shrinks at Fastest Pace Since 2001

Gross domestic product contracted at a 0.3 percent pace from July to September, according to a Commerce Department report today in Washington.

"The crisis really kicked up in late September," Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York, said in a Bloomberg Television interview. "We're going to be looking at a very unfriendly GDP number in the fourth quarter, with a drop of 2 to 4 percent."

Consumer spending dropped at a 3.1 percent annual pace, the first decline since 1991 and the biggest since 1980, after President Jimmy Carter imposed credit controls. The median forecast was for a 2.4 percent drop.

Unemployment is at a five-year high of 6.1 percent and may rise to 8 percent by end of 2009, according to Jan Hatzius, chief U.S. economist at Goldman, Sachs & Co. in New York. Consumer borrowing fell in August by the most on record as banks tightened credit. And the steep drop in the stock market so far this quarter has wiped about $2.8 trillion from investors' portfolios.

The report also showed what may be the last burst of inflation before the economic slowdown forces companies to limit price increases. The price gauge rose at a 4.2 percent pace last quarter, the biggest gain in 17 years. Costs tied to consumer spending and excluding food and energy, increased 2.9 percent, the most in two years.

The report also showed what may be the last burst of inflation before the economic slowdown forces companies to limit price increases. The price gauge rose at a 4.2 percent pace last quarter, the biggest gain in 17 years. Costs tied to consumer spending and excluding food and energy, increased 2.9 percent, the most in two years.

Unemployment Forecast 8%

I forecast unemployment to hit 8% in 2009 about a year ago. It seems everyone is latching on to that number now. I had 6% forecast for 2008 in December of last year when the rate was 4.7% or so. Unemployment is 6.1% now. Rather than picking a new target now, let's see what happens in the remaining few months of the year. It is clear my 6% figure for 2008 was too optimistic and so 8% in 2009 is likely to be too optimistic as well. Right now I expect unemployment will hit 6.5% or higher by the end of the year, and 6.8-7.0% is not out of the question. Certainly the numbers next Friday will be miserable. Congress will soon be talking jobs programs.

2009 rates to be a miserable time to find a job. Consumer spending is going to crash.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Fed Expands Swap-O-Rama to Brazil, Mexico, South Korea, Singapore

In an effort to unfreeze money markets the Fed Expands Swap-O-Rama to Brazil, Mexico, South Korea, Singapore.

The Federal Reserve agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations for the first time.

The Fed set up "liquidity swap facilities with the central banks of these four large systemically important economies" effective until April 30, the central bank said yesterday in a statement. The arrangements aim "to mitigate the spread of difficulties in obtaining U.S. dollar funding."

"The swap lines will help unclog the liquidity pipeline and that action is boosting markets even more than" the Fed's rate cut, said Venkatraman Anantha-Nageswaran, head of research at Bank Julius Baer & Co. in Singapore. "It's a step in the right direction and prevents things from getting worse."

Step Towards The Cliff

The idea that currency swaps are a step in the right direction is complete silliness. The Fed's swap-o-rama meet does not unclog anything. It just seems like it. The illusion will vanish as soon as the Fed stops the swap meet. Note the similarity between the Fed's actions and a drug dealer and his client. A shot of heroin will relieve the withdrawal symptoms, but only if the next dose is stronger.

Korean Stock Market Surges On Fed Supplied Drugs

For now the market is happy as South Korea Stocks Surge by Record.

South Korea's stock index rose by a record and the won surged after the central bank signed a $30 billion currency swap with the Federal Reserve and President Lee Myung Bak said he's ready to take more steps to aid the economy.

The swap line is part of the Federal Reserve's efforts to alleviate a credit freeze in emerging nations, with the U.S. also providing dollars to Singapore, Brazil and Mexico. Korean lawmakers today approved the government's $100 billion guarantee of bank debts to help lenders struggling to access foreign funds.

Korea's currency jumped 14 percent, the most in a decade, as policy makers' actions allayed concern the nation was headed for a repeat of 1997, when it needed an International Monetary Fund bailout to help repay offshore debt. The Fed's dollar provisions are part of increased global endeavors to thaw money markets, with Hong Kong and Taiwan lowering interest rates today following cuts yesterday by the U.S. and China.

Exit Strategy

The list of participants dependent on the Fed increases every day. The Fed is now the lender of only resort, not just to the US but to Brazil, Mexico, South Korea, and Singapore. When those loans are used up, what's next? More loans? Bigger loans?

I have a simple question:
Pray tell what is the exit strategy for this mess?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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House Oversight Committee Requests Bonus Info of Major Banks

Henry A. Waxman, Committee Chairman on Oversight and Government Reform, Requests Compensation and Bonus Information for Employees of Major Banks.

In letters to nine major banks that will receive $125 billion of taxpayer funds, Chairman Waxman requested information on their compensation and bonus plans in 2008.

List of Banks

• Letter to Citigroup (121 KB)
• Letter to Bank of America (122 KB)
• Letter to Bank of New York Mellon (123 KB)
• Letter to Goldman Sachs (122 KB)
• Letter to JPMorgan Chase & Co. (121 KB)
• Letter to Merrill Lynch (121 KB)
• Letter to Morgan Stanley (124 KB)
• Letter to State Street Corporation (121 KB)
• Letter to Wells Fargo (123 KB)

The letters are all essentially the same. Congress is upset at the level of bonuses being handed out and is asking for compensation data for 2006-2008 for all personnel broken down by salaries, bonuses (cash and equity), and benefits. It is asking for additional information of the highest paid employees. The banks have until November 10th to comply.

A huge public backlash is likely over this bailout and one can not blame them.

Mike "Mish" Shedlock
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Citigroup, Credit Suisse Link Loans to Credit Default Swaps

Corporate borrowing costs have been going up. They are about to rise even more as Citigroup, Credit Suisse Link Loans to Swaps.

Citigroup Inc. and Credit Suisse Group AG are among banks tying corporate loan rates to credit- default swaps, raising borrowing costs and exposing companies to derivatives accused of crippling the financial system.

Banks are toughening terms following $678 billion in writedowns and losses, rising funding costs and a jump in companies drawing on lines they'd already negotiated. Before markets seized up this year, most rates on $6 trillion of revolving loans were based on a borrower's debt rating and priced at an amount over the London interbank offered rate.

The inclusion of the swaps shows that banks are shifting away from setting loan pricing by relying on debt ratings and Libor, a benchmark rate that is set each day in London by tallying the cost of 16 banks to borrow from each other.

"That's crazy," said Lynn Tilton, chief executive officer of $6 billion private-equity firm Patriarch Partners in New York, which loans or lends money to more than 70 companies. "This will accelerate the downward spiral of market prices and raise borrowing costs to unsustainable levels."

The default swaps were created so bondholders and banks could buy protection against a borrower's inability to repay debts. The market ballooned to more than $60 trillion in the last decade as investors used the instruments to bet on companies. The Securities and Exchange Commission is probing allegations trading helped create a panic that caused the collapse of Lehman Brothers Holdings Inc.

FirstEnergy, with utilities in Ohio, Pennsylvania and New Jersey, agreed this month to link interest rates on a $300 million credit line to the cost of Libor as well as the sum of the spread on its default swaps and those of Credit Suisse, according to a regulatory filing.

Loans from the Zurich-based bank would require total interest payments of about 6 percentage points over Libor if the power company draws on the bank line, according to regulatory filings and Bloomberg data. That's almost 14 times the spread on a $2.75 billion credit line the company negotiated in 2006.

Credit lines were once seen mainly as emergency funds to be tapped as a last resort. Since markets tightened last year, at least 36 companies hurt by the slowing economy and an inability to tap commercial paper or bond markets have borrowed $30 billion on previously negotiated lines, according to Pacific Investment Management Co. in Newport Beach, California.

"Historically there's been an illogical flaw in the price of revolving credit facilities and backstop loans in particular, they were priced very cheaply as they were never meant to be drawn down," said David Slade, head of European leveraged finance at Credit Suisse in London. "But now, in the current environment, these lines are being used and banks need to be properly recompensed."

Illogical Flaw In Rates

Scores of corporations have credit lines at prices based on the idea those credit lines would never be tapped, clearly a ridiculous idea. Indeed, corporations tapping those lines is one of the reasons for the last spike up in M3.

So if and when corporations want access to those credit lines(as they do now) the risk on those lines was hugely underpriced. This situation is being rectified, and it is going to further pressure corporations that have not secured enough long term financing.

Expect corporate bonds rates to keep rising on account of rising default risk, even as the Fed tries to provide liquidity by cutting the Fed Funds Rate. Rising corporate bond default risk, is not a favorable environment for equities.

Mike "Mish" Shedlock
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Fed Cuts 50 Basis Points, Another Bernanke Theory Blows Up

As expected the Fed cut the Fed Funds Rate 50 basis points to 1.0% Here is the FOMC Press Release.

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, and San Francisco.

When the Fed follows up with any additional cuts, a new low in Fed Funds Rate will be set. Remember that Bernanke wanted to put a floor in rates at 2%.

Part of the bailout package passed by Congress was to allow the Fed to pay interest on reserves. Paying interest on reserves was supposed to put a floor in on rates. It did no such thing. The effective Fed Funds Rate heading into the meeting was substantially under 1%. Thus another Bernanke academic theory bites the dust. It is not the first and it won't be the last.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Case Shiller Analysis October 2008 Release

Inquiring minds are considering the S&P/Case-Shiller Home Price Release for October 2008.

New York, October 28, 2008 – Data through August 2008, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, shows continued broad based declines in the prices of existing single family homes across the United States, a trend that prevailed throughout the first half of 2008 and has continued into the second half.

Once again, the indices have set new records, with annual declines of 17.7% and 16.6%, respectively. However, the acceleration in decline was only moderate in August. The July data reported annual declines of 17.5% and 16.3%, respectively.
“The downturn in residential real estate prices continued, with very few bright spots in the data,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “The 10-City Composite and the 20-City Composite reported record 12-month declines. Furthermore, for the fifth (5th) straight month, every region reported negative annual returns.

Nine of the 20 regions have record annual declines. Phoenix and Las Vegas are now returning -30.7% and -30.6% versus August 2007, respectively. Each of the California markets- Los Angeles, San Francisco, and San Diego- are down more than 25% from their values 12 months ago. Miami and Tampa, the two Florida markets, are down 28.1% and 18.1%, respectively.

click on chart for sharper image

Case-Shiller Declines Since Peak

The following charts were produced by my friend "TC" who has been monitoring Case-Shiller Data. Although individual cities topped at varying times, the top-10 and top-20 city composites peaked in a June-July 2006 timeframe.

Case-Shiller Declines Since Peak Current Data



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Case-Shiller Declines Since Peak Futures Data



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"TC" writes: I've included data available from the CME Futures market so your viewers can see when people are betting the downturn will end and how much lower it will go. The CME Futures market only trades the top 10 cities. The Futures Data shows projected price declines and the projected trough.

Housing data continues to weaken around the country and the futures market continues to point towards 2010-2012 prices as a market bottom. Those declines would represent a 30% - 50% drop in the top 10 metro cities tracked by Case-Shiller.

"TC" also monitors the California Association of Realtors (C.A.R.) data, and DQNews data. Inquiring minds may wish to take a look at C.A.R. Median Home Prices Down 47% From Peak for a detailed look at home prices in California.

Housing Declines Understated

"TC" offers these final thoughts:

All measures of home prices (NAR, Case-Shiller, OFHEO, etc.) overstate price increases and understate price decreases. The reason is prices are not "maintenance" or "improvement" adjusted. What does this mean? Well take my neighbor on my cul-de-sac for example. According to the official sales logs he bought the house in July 2005 for $395,000 and sold in August 2008 for $305,000. This was a smaller than usual decline for this area (-22.8%).

What isn't seen is that during the 3 years he owned the home he replaced the AC unit, the entire roof, added a swimming pool and added 300 square feet to the dwelling. These types of improvements are never captured by NAR, Case-Shiller and OFHEO. And consequently, it appears the price decline was only 22.8% rather than the "typical" 40% - 45% we are experiencing throughout town.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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C.A.R. Median Home Prices Down 47% From Peak

The following chart is from "TC" who has been monitoring California Association of Realtors (C.A.R.) and DQNews data. C.A.R. data contains resale single family residences and new homes. DQNews data contains resale single family residences and new homes.



click on chart for sharper image

"TC" Writes

The speed and depth of this decline in CA housing amazing! Even for a housing bear like myself, I'm astonished each month. While I fully expected nominal price declines at the 40% level (check my old site TheBubbleBuster.com for details), I thought the nominal price decline would play out over a matter of a 1/2 decade followed by another 1/2 decade of stagnant prices leading to a real price decline around 60%.

Instead median nominal prices in CA are now down 47% according to CAR and 42% according to DQNews - and those declines are in less than 18 months! Additionally, these are September 2008 closings, which indicate that these homes were sold in July/August 2008. By the time October sales (December closings) numbers come through we will likely be down more than 50% nominally and 60% in real prices - in LESS than 2 years. Amazing!

Lastly, it is now easy to see that the CA home price decline is hitting all neighborhoods - even the wealthy. In fact, the price declines in many of these areas are now becoming some of the steepest and are all the shortest duration. Monterey is a perfect example of where price declines have only been reported for 13 months, yet percentage declines are around 60% or $500k!

Remember that Case-Shiller is a more accurate way of looking at home prices than median prices. I will have a post from TC on Case-Shiller soon. Thanks TC!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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S&P 500 Crash Count - Wave 3 Update

If you are just tuning in, this post will not make a lot of sense unless you first read S&P 500 Crash Count. Inquiring minds (especially long term buy and hold types) will also want to check out S&P 500 Crash Count Compared To Nikkei Index.

Here is an update of the S&P 500 Elliott Wave Count.

Wave 3 May Be Complete



click on chart for sharper image

The crash wave (wave 3) may be complete. Technically today's massive rally could still be a part of wave 4 of 3 up, but judging from the action in other indices, the most likely count is that wave 3 is complete.

However, we have seen several massive one day wonder type rallies fail during wave 3. So this count, while likely, is by no means certain. The weekly chart may make things more clear.

$SPX - Weekly Chart


click on chart for sharper image

IF wave 3 is complete (Red Numbers) then by definition wave 4 up has started. Then IF wave 4 retraces 50% of the wave 3 of 3 down, see the Fibonacci lines in the first chart, there may be quite a bit of rally still ahead.

Putting this all into place, the action would look like this.

$SPX Monthly Chart



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A healthy pullback followed by a close above Tuesday's high will make it more likely this count is indeed the correct one.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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White House: "Banks Need To Stop Hoarding Money"

Here is an important announcement from the President Bush "Banks Need To Stop Hoarding Money"

The transcript below contains several important clarifications from the original message from press secretary Dana Perino. Please read carefully.

Tuesday October 28, 3:27 pm ET
White House tells banks getting federal aid to quit hoarding money and start lending it.

An impatient White House served notice Tuesday on banks and other financial companies receiving billions of dollars in federal help to quit hoarding the money and start making more loans.

Lend For America Plan

"We're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money," White House press secretary Dana Perino said.

We have given banks every incentive to move forward and start lending money. In fact we demand it." Perino said.

Under the authority of the $700 billion financial bailout plan approved by Congress and signed by President Bush earlier this month, the Bush administration plans to dole out $250 billion to banks in return for partial ownership.

"Taxpayers will make billions when this plan succeeds. It's a 'win-win can't fail' situation. The more money banks lend the more money banks will make. It never fails. And the beauty of the plan is taxpayers benefit. If it looks like the plan is not working it's only because banks are not lending enough."

If You Build It Customers Will Shop!

"Banks are not lending money fast enough to suit us" Perino added. "We will not be satisfied until every penny is lent out. Lord knows we need more nail salons, Home Depots, Lowes, Pizza Huts, strip malls and appliance stores. This is simple supply side economics"

Treasury Secretary Henry Paulson has said the money would be used by banks to rebuild their reserves but President Bush will have none of that.

Who Needs Reserves When You Have Printing Presses?

Federal Reserve chairman Ben Bernanke chimed in with "Who needs reserves when you have printing presses?"

"The Whitehouse fully endorses the statements of chairman Bernanke," said Dana Perino while rushing off the mall to show Americans what they seem to have forgotten in this minor economic blip.

"Shopping made America great, and credit cards keep it that way. It is the patriotic duty for Americas to shop in these trying times. We are in the mess only because consumers are not shopping and banks are not lending."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Non-Agency Mortgage Bonds Collapse

Bloomberg is reporting Non-Agency Mortgage Bonds Fall Amid Selling Concern.

Subprime, Alt-A and prime-jumbo mortgage securities reached or approached record lows this month as forced asset sales contributed to the decline in values.

Prices dropped to the "hi-teens to mid-20" cents on the dollar last week on the least protected types of originally AAA rated 2006 and 2007 bonds backed by Alt-A loans with five years of fixed rates, according to a RBS Greenwich Capital report yesterday. The bonds were at the high-20s to mid-30s in early September. "Super-senior" bonds fetched in the "mid-50s to mid-60s," down from 60 to 70 cents, according to the report.

Non-agency mortgage bond prices have also fallen along with optimism about the $700 billion U.S. financial-market rescue plan signed into law on Oct. 3, the report said. Enthusiasm dimmed because the program began with capital injections into banks, instead of mortgage-asset purchases, they wrote.

Super senior securities from 2006 and 2007 created out of pools of "option" adjustable-rate mortgages dropped to 53 to 55 cents on the dollar last week, RBS said, as other types of initially AAA rated debt created from loans with growing balances were in the "low" or "very low" 20s.

The securities fell from 58 to 60 and the "mid-20s," respectively, in early September, according to an RBS report then. Super senior bonds are the types offering investors the most protection against defaults among the underlying loan pools.

Less protected top-rated securities from the past two years of prime-jumbo loans with five years of fixed rates traded in "hi-40s to low 50s," up from the "hi 30s/low 40s," while super-senior AAAs fetched in the "low to mid-80s," down from the mid-80s, the report said.

"It's actually underreported how bad" demand for loans that can't be packaged into those securities has become, he said. Issuance of subprime, Alt-A, and prime-jumbo mortgage bonds fell to $11 billion in the first nine months of this year, from $605 billion a year earlier, according to newsletter Inside MBS & ABS.

Paulson Plan Under Review

Remember the original Paulson plan before it morphed into plan B, then plan C? The original plan was going to waste $700 billion in taxpayer money buying "Top Rated" mortgage garbage at whatever price Paulson wanted to pay.

We were told that taxpayers would make a profit on this. Of course anyone in their right mind knew that was nonsense but it did not stop every lout on CNBC from touting the fine benefits of the plan.

Now most of the first $350 of the $700 bailout has been spent and we see what those "Top Rated" securities are worth: 18 to 30 cents on the dollar.

Supposedly the original Paulson plan was needed because otherwise the stock market would crash. Well it crashed anyway, along with the global economy. So Paulson went with plan B (a hodgepodge of disjointed ideas) to fully embracing plan C, recapitalizing banks so they would have more money to lend.

But a funny thing happened to plan C. Instead of buying mortgage backed securities, or lending, taxpayers are funding bank dividends and bank mergers. With that, the New York Times floated the ridiculous idea that bank mergers were Paulson's plan all along.

The idea that Paulson and Bernanke are doing anything other than grasping at straws in a tornado is silly. I said so in NY Times Lending Conspiracy Madness.

New York Times Theory

• Paulson asked for taxpayer bailout money explicitly to get banks to merge.
• To cover up his tracks, Paulson changed his mind three times on how to spend that money.
• To guarantee the merger outcome, Paulson called all the big banks in a room, forced them to take loans at a rate that would ensure they would not want to lend it, but instead would want to use it in mergers.
• Prior to the above three points, the Fed embarked on a series of lending facilities cleverly disguised to make it undesirable for banks to lend to each other or for anything else, while purporting to do the opposite.

My Theory

The economic constraints and poor policy decisions by the Fed and Treasury make mergers a better alternative than lending money or sitting in cash.

Fed Becomes Lender Of Only Resort

Each of Bernanke's vast array of lending facilities is causing an unwanted side effect somewhere else. And by competing against the banks it wants to lend, the Fed is guaranteeing it will be the lender of only resort.

That is just one reason not to lend. Here are more:

• Rising unemployment
• Rising credit card defaults
• Rising foreclosures
• Rising bankruptcies
• Massive overcapacity
  
• The TAF, PDCF, TSLF, CPFF, MMIFF, ABCPMMMFLF

Banks are supposed to compete against those facilities? In a backdrop of rising unemployment, rising credit card defaults, rising bankruptcies, rising foreclosures, and massive overcapacity? When the Fed keeps driving interest rates lower and lower?

Also note that Congress is pressuring Fannie Mae and Freddie Mac to lend more, and at terms that are going to cause defaults to rise at Fannie and Freddie. Banks don't want to compete against Fannie and Freddie either.

And so non-agency mortgage bonds are collapsing. Agency mortgage bonds would be collapsing too if the Treasury had not guaranteed them.

Pigs at the Trough

And now insurance companies, homebuilders, auto manufactures, banks, brokerages, state governments, and everyone else is lining up like pigs at a tough asking for a handout.

One big irony in this mess is that some of the banks receiving taxpayer money do not even want it because the terms are too high. See Compelling Banks To Lend At Bazooka Point and Treasury Crams More Money Down Bank's Throats for more details on who was forced to take what money and on what terms.

So $350 billion has been wasted and it did not accomplish a thing. Now Congress wants to throw another $300 billion "stimulus" down the gutter. It will be a waste of another $300 billion if they do.

Money is being diverted from productive uses to non-productive one and the number of wasteful ideas grows by leaps and bounds. Every day someone sends me an idea to get the economy humming. The latest one yesterday was to give everyone a tax credit but only if they spent it before year end. The idea is so ridiculous that Congress will probably consider it.

No one bothers to figure out that aggregate spending will collapse once again as soon as the money is wasted or that such ridiculous proposals will divert money from productive uses or paying down debt to frivolous spending.

Frivolous spending was the problem, so promoting more frivolous spending to stimulate the economy cannot be the solution.

The sad story is no one in power has learned a damn thing from the Great Depression, and that includes many highly respected economic professors. In the final analysis, the more money Congress, Paulson, and Bernanke waste attempting to stimulate demand, the lower the stock market will fall.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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IMF Nuclear Option: "Print Money"

Eastern Europe, Latin America, and parts of Asia are in a massive currency contagion. Talk has surfaced that the IMF may need to "print money" as crisis spreads.

The International Monetary Fund may soon lack the money to bail out an ever growing list of countries crumbling across Eastern Europe, Latin America, Africa, and parts of Asia, raising concerns that it will have to tap taxpayers in Western countries for a capital infusion or resort to the nuclear option of printing its own money.

The Fund is already close to committing a quarter of its $200bn (£130bn) reserve chest, with a loans to Iceland ($2bn), Ukraine ($16.5bn), and talks underway with Pakistan ($14.5bn), Hungary ($10bn), as well as Belarus and Serbia.

Neil Schering, emerging market strategist at Capital Economics, said the IMF's work in the great arc of countries from the Baltic states to Turkey is only just beginning. "When you tot up the countries across the region with external funding needs, you get to $500bn or $600bn very quickly, and that blows the IMF out of the water.

The IMF, led by Dominique Strauss-Kahn, has the power to raise money on the capital markets by issuing `AAA' bonds under its own name. It has never resorted to this option, preferring to tap members states for deposits.

The nuclear option is to print money by issuing Special Drawing Rights, in effect acting as if it were the world's central bank. This was done briefly after the fall of the Soviet Union but has never been used as systematic tool of policy to head off a global financial crisis.

Hungary was forced to raise interest rates last week by 3 percentage points to 11.5pc to defend its currency peg in Europe's Exchange Rate Mechanism. Even Denmark has had to tighten by a half point, raising fears that every country on the fringes of the eurozone will have resort to a deflationary squeeze.

The root problem is that Eastern Europe and Russia have together borrowed $1,600bn from foreign banks in euros and dollars to fund their catch-up growth spurt over the last five years, according to data from the Bank for International Settlements. These loans are now coming due at an alarming pace. Even rock-solid companies are having trouble rolling over debts.

Turkey's prime minister Recep Tayyip Erdogan said over the weekend that his country would not "darken its future by bowing to the wishes of the IMF", but it is unclear how long Ankara can maintain its defiant stand as capital flight drains reserves.

Pakistan - now facing imminent bankruptcy - has also raised political hackles, balking at IMF demands for deep cuts in military spending as a condition for a standby loan. Diplomats say it is unlikely that the West will let the nuclear-armed Islamic state slip into chaos.

AAA rated IMF nuclear printing. Now there's a joke. Who gets to make that rating call? What printing presses are backing up the IMF printing press?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Equity trading losses at Deutsche Bank, Citigroup, Credit Suisse

Bloomberg is reporting Deutsche Bank Derivatives Loss May Top $400 Million.

Deutsche Bank AG, Germany's biggest bank, lost more than $400 million on equity derivatives trades as stock markets headed for their biggest rout since the 1930s, two people with direct knowledge of the matter said.

The loss, equal to almost half of the Frankfurt-based company's second-quarter revenue from equity sales and trading, is a black eye for Richard Carson, global head of equity derivatives, and may signal more job losses at the bank.

"Everybody assumed most of the job cuts would be in fixed income, but when you incur a loss of more than $400 million in equity derivatives that might warrant cuts across asset classes as well as fixed income," said Bahadour Moussa, who specializes in derivatives recruitment at London-based Pelham International.

The stumble in derivatives is one of the biggest in sales and trading since Jain and Michael Cohrs, 50, took over the investment bank in 2004. Two years later, the bank's sales and trading were dragged down by losses from trading stocks for its own account.

New York-based Citigroup Inc. said on Oct. 16 revenue from equity trading fell 54 percent in the third quarter on losses in convertibles, holdings of government sponsored enterprises and proprietary trading.

Credit Suisse Group AG said last week 1.7 billion Swiss francs ($1.5 billion) of trading losses contributed to its second unprofitable quarter this year.

Deutsche Bank said in July second-quarter revenue from equity sales and trading dropped to 830 million euros from 1.4 billion euros in the same period a year earlier as demand for equity derivatives waned.

"The dislocations on capital markets in September must have had a catastrophic impact on the business" at Deutsche Bank, Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets, said in a note to investors.

Raise your hand if you think banks ought to lend money, hold loans to term, and not get involved in derivative trading, equity trading, commodities trading, currency speculation, holding assets in SIVs off their balance sheets, sponsoring hedge funds, and scores of other things the average Joe on the street would not think that banks do.

The real killer in the above is excessive leverage. Leveraged bets and a run on the bank is what sank Bear Stearns and Lehman. The leverage enabler is an unsound currency coupled with fractional reserve lending and micro-mismanagement of interest rates by the Fed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Treasury Crams More Money Down Bank's Throats

Bloomberg is reporting Capital One, Key Among 14 Banks Getting $31 Billion.

Fourteen regional U.S. banks, including SunTrust Banks Inc. and Capital One Financial Corp., accepted at least $31 billion in government cash as the Treasury rolled out the second half of its $250 billion package to shore up lenders and thaw frozen credit markets.

Participation

FIRST ROUND
Citgroup............$25 billion
Wells Fargo.........$25 billion
JPMorgan Chase......$25 billion
Bank of America.....$15 billion
Merrill Lynch.......$10 billion
Goldman Sachs.......$10 billion
Morgan Stanley......$10 billion
Bank of New York....$3.0 billion
State Street........$2.0 billion

TOTAL...............$125 billion

SECOND ROUND

PNC.................$7.7 billion
Capital One.........$3.6 billion
SunTrust............$3.5 billion
Regions Financial...$3.5 billion
Fifth Third.........$3.4 billion
Key.................$2.5 billion
Comerica............$2.25 billion
Northern Trust......$1.5 billion
Huntington..........$1.4 billion
First Horizon.......$866 million
City National.......$395 million
Valley National.....$330 million
Washington Federal..$230 million
First Niagara.......$186 million

TOTAL...............$31.36 billion

Massive Interventions Continue

This new round of forced funding is bound to fail. The problem is excessive risky lending and the Treasury is attempting to force more lending. Please see NY Times Lending Conspiracy Madness for more on the foolish, counterproductive policies of the Fed and Treasury.

Meanwhile a Currency Crisis Meltdown in Europe, Japan, Australia is brewing. At least we are no longer hearing silly talk of containment.

Every day the crisis grows and every day the market's reaction to the interventionist measures by the central banks is diminished. Up next is another coordinated rate cut by the Fed and central banks. Those cuts cannot possibly solve a thing.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Currency Crisis Meltdown in Europe, Japan, Australia

Currency interventions don't work but that does not stop countries from wasting money trying. A massive unwinding of the Yen carry trade is in progress and in response the G7 says it's prepared to act on excessive yen swings.

The Group of Seven warned on Monday the yen's wild swings threatened financial stability, fanning speculation central banks may intervene to halt a rally in the currency driven by a Japanese exodus from emerging markets.

G7 finance ministers and central bank governors said they were prepared to act, if necessary, but market reaction was muted, reflecting doubts over the will for co-ordinated action and whether Tokyo could succeed acting on its own.

"We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," the brief statement said.

On Monday, the yen traded near an all-time high against the Australian dollar and near a 13-year peak against the U.S. dollar, as a 6 percent slump in Tokyo shares spurred a renewed wave of selling of higher-yielding currencies.

The yen climbed nearly 19 percent so far this year against the U.S. currency, which itself has gained substantially against many emerging markets currencies and the euro, despite the grim outlook for the U.S. economy.

Europe on the brink of currency crisis meltdown

The Telegraph is reporting Europe on the brink of currency crisis meltdown.

The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.

Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992. “This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.

Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.

The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect. They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.

Europe has already had its first foretaste of what this may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn.

Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.

Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.

Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.

Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.

Here is the key paragraph:

Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.

Indeed the emerging market loan exposure of Austria, Spain, Switzerland, the UK, Germany, and Sweden is staggering.

RBA Props Up Australian Dollar.

The Sydney Morning Herald is reporting RBA steps in again to prop up Australian dollar.

The Reserve Bank of Australia (RBA) has confirmed it bought more Australian dollars today in the second intervention after it entered the foreign exchange market during Friday night's offshore session. The RBA intervened on Friday night, buying Australian dollars overseas because the market was illiquid.

The Australian dollar fell to 60.55 US cents on Friday night for the first time since April 2003. The currency also fell to 55.10 Japanese yen during offshore trade, its lowest point since the end of World War II.

Australian Dollar Monthly Chart



British Pound Monthly Chart



New Zealand Dollar Monthly Chart



Euro Monthly



Yen Monthly



Currency charts courtesy of Barchart

A funny thing happened to that US dollar crash nearly everyone told me was coming. It looks like everything but the Yen crashed instead, just as some deflationists thought.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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NY Times Lending Conspiracy Madness

At least a dozen people asked me to comment on the New York Times article So When Will Banks Give Loans? Most seem to believe the bank bailout package is part of some complicated scheme by the treasury and Fed to give banks taxpayer money explicitly for takeovers.

Indeed that is the very essence of the tale the New York Times is spreading.

The Times article is a bit disjointed, so I rearranged paragraphs slightly for ease in understanding. My insertions are in braces. From the New York Times ....

It was Oct. 17, just four days after JPMorgan Chase’s chief executive, Jamie Dimon, agreed to take a $25 billion capital injection courtesy of the United States government, when a JPMorgan employee asked [on a conference call] “Chase recently received $25 billion in federal funding. What effect will that have on the business side and will it change our strategic lending policy?”

[Dimon Responded] “What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”

Read that answer as many times as you want — you are not going to find a single word in there about making loans to help the American economy. On the contrary: at another point in the conference call, the same executive explained that “loan dollars are down significantly.” He added, “We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side.” In other words JPMorgan has no intention of turning on the lending spigot.

It is starting to appear as if one of Treasury’s key rationales for the recapitalization program — namely, that it will cause banks to start lending again — is a fig leaf, Treasury’s version of the weapons of mass destruction.

In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation. As Mark Landler reported in The New York Times earlier this week, “the government wants not only to stabilize the industry, but also to reshape it.” Now they tell us.

Indeed, Mr. Landler’s story noted that Treasury would even funnel some of the bailout money to help banks buy other banks. And, in an almost unnoticed move, it recently put in place a new tax break, worth billions to the banking industry, that has only one purpose: to encourage bank mergers. As a tax expert, Robert Willens, put it: “It couldn’t be clearer if they had taken out an ad.”

There Is No Lending Conspiracy

Stop the nonsense. There is no conspiracy between Paulson and the Banks. Paulson and Bernanke want banks to lend, but the ridiculous policies of the Fed and the Treasury make it difficult for banks to do so, especially in the current economic backdrop.

I mentioned one aspect of the problem in GE Needs Fed Bailout To Finance Operations; Dividend At Risk.

The government stepping in to provide cheap financing to GE is not doing anyone any good. Paulson wants banks to lend, and by doing so is artificially driving down short term rates. Why should GE get short term financing from banks, when it can get a better deal (at taxpayer expense) from the government?

Fed Becomes Lender Of Only Resort

Indeed, each of Bernanke's vast array of lending facilities is causing an unwanted side effect somewhere else.

Perhaps banks would have been willing to lend to GE, but not at the same rate as the Fed's Commercial Paper Funding Facility. And by competing against the banks it wants to lend, the Fed is guaranteeing it will be the lender of only resort.

That is just one reason not to lend. Here are more:

• Rising unemployment
• Rising credit card defaults
• Rising foreclosures
• Rising bankruptcies
• Massive overcapacity
  
• The TAF, PDCF, TSLF, CPFF, MMIFF, ABCPMMMFLF

That last acronym is not a typo or a joke. It stands for Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. Indeed, there are 6 different facilities by which the Fed can lend to damn near anyone it wants, while accepting whatever collateral it wants.

Banks are supposed to compete against those facilities? In a backdrop of rising unemployment, rising credit card defaults, rising bankruptcies, rising foreclosures, and massive overcapacity? When the Fed keeps driving interest rates lower and lower?

Also note that Congress is pressuring Fannie Mae and Freddie Mac to lend more, and at terms that are going to cause defaults to rise at Fannie and Freddie. Banks don't want to compete against Fannie and Freddie either.

Terms of the Bailout

Now let's review the terms of the bailout. I talked about terms of the bailout in Compelling Banks To Lend At Bazooka Point.

Here is a brief synopsis: Paulson gathered the nine largest banks in a room, told them they were splitting $125 billion, and in return the Treasury will receive preferred shares that pay a 5 percent dividend, rising to 9 percent after five years.

Had it not been for those dividends, banks might just have parked the money in treasuries as a provision against future losses or perhaps lent to someone like GE at some sort of reasonable rate.

However, at 5% rising to 9%, banks would be losing money doing either of those. Other lending in the current economic environment of overcapacity and rising unemployment would be reckless. Given that set of constraints, banks are coming to conclusion that only sensible use for that taxpayer money is mergers.

In mergers, operations can be consolidated, people fired, and perhaps the banks can make enough to come out ahead.

Could That Be The Treasury Game Plan All Along?

Of course not. At this point the Fed could likely force any mergers it wants. There was no reason to go through these gyrations if all the Fed or Treasury wanted was mergers. Look at the complicated way we arrived at this situation. Bernanke has six lending facilities, and Paulson changed his mind 3 times on how he was going to use taxpayer money.

Bernanke really is attempting to spur lending. It's just that he does not have any clues about how counterproductive his facilities are. Bernanke is not the only one who is clueless. I awarded The blue ribbon for complete economic silliness to Paul McCulley at PIMCO for his Paradox of Deleveraging. See Keynesian Claptrap From PIMCO and Something For Nothing vs. Paradox of Deleveraging for an analysis.

New York Times Theory

• Paulson asked for taxpayer bailout money explicitly to get banks to merge.
• To cover up his tracks, Paulson changed his mind three times on how to spend that money.
• To guarantee the merger outcome, Paulson called all the big banks in a room, forced them to take loans at a rate that would ensure they would not want to lend it, but instead would want to use it in mergers.
• Prior to the above three points, the Fed embarked on a series of lending facilities cleverly disguised to make it undesirable for banks to lend to each other or for anything else, while purporting to do the opposite.

My Theory

The economic constraints and poor policy decisions by the Fed and Treasury make mergers a better alternative than lending money or sitting in cash.

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