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Friday, January 23, 2009 10:45 PM

Unprecedented Crisis In US, UK, Australia, Europe

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Today was like most any day in recent memory: Another day, Another day of grim news.

In the US, President Obama is struggling to cope with an "unprecedented crisis", regulators closed Centennial Bank in California, Freddie Mac is asking for more cash, and 30 year bonds are getting shellacked.

Overseas, French and Flemish governments are intervening in the markets, the UK is shrinking at the fastest pace since 1980, and Australia needs action to save jobs. Rounding up the grim news, 1.2 million corporate networks have become infected with worms that attack Microsoft Corp.’s Windows operating system.

Here are the grim details.

Obama Seeks $825 Billion For "Unprecedented Crisis"

Citing an unprecedented crisis Obama Presses Congress on Stimulus.

President Barack Obama said his administration and Congress will reach agreement within weeks on an $825 billion stimulus plan to cope with what may be an “unprecedented” economic crisis.

“We are experiencing an unprecedented, perhaps, economic crisis that has to be dealt with,” Obama said today as he began a meeting with nine Democratic and Republican leaders at the White House, his first such session with lawmakers since taking office on Jan. 20. He also called for greater oversight of spending by financial institutions that get bailout money.

Obama is confronting a weakening economy and eroding investment values. Average home prices in November dropped 8.7 percent from a year earlier, the most in at least 18 years, the government said yesterday. Housing starts fell 16 percent last month, the number of Americans filing first-time claims for jobless benefits climbed to a 26-year high, and the Standard & Poor’s 500 Index has lost 7.9 percent since the start of the year.
Undeniably Grim News In The UK

There is "undeniably grim news" in the UK, as the Economy Shrinks Most Since 1980, in Recession.
The U.K. economy shrank more than economists forecast during the fourth quarter in the biggest contraction since 1980 as the financial crisis crippled the banking industry and mired Britain deeper in the recession.

Gross domestic product fell 1.5 percent from the previous quarter, the Office for National Statistics said in London today. Economists had predicted a 1.2 percent drop, according to a Bloomberg News survey. The economy has now shrunk in two quarters, the conventional definition of a recession.

The pound dropped against the dollar and U.K. stocks fell after the report. Prime Minister Gordon Brown said that the government is using “every weapon at our disposal” to fight the crisis. Bank of England Governor Mervyn King says officials may start buying up securities soon as interest rates lose their potency to aid the economy.

“This is undeniably grim,” said Stewart Robertson, an economist at Aviva Investors in London, which manages about $230 billion in assets. “Two or three quarters more like this and you’re talking about depression, not recession. This should hasten activity to address the credit and money market issues.”

Service industries shrank by 1 percent on the quarter, manufacturing dropped 4.6 percent and construction fell 1.1 percent, the statistics office said. Business services and finance, accounting for 30 percent of the economy, contracted 0.5 percent and also slipped into a recession.
Regulators Close 1st Centennial Bank

A quick check of my calender shows this is Friday. And as often happens on Fridays, Regulators close 1st Centennial Bank in California
Regulators have shut down 1st Centennial Bank in California, the third U.S. bank to fail this year. California regulators closed the Redlands-based bank on Friday and appointed the Federal Deposit Insurance Corp. as receiver. 1st Centennial had assets of $803.3 million and deposits of $676.9 million as of Jan. 9.

The FDIC says 1st Centennial's insured deposits will be assumed by First California Bank, based in Westlake Village, Calif. Its six branches will reopen Monday as offices of First California.
Major Financial Institutions Collapse

Australia's treasurer Wayne Swan says Australia Won’t ‘Hesitate’ to Boost Economy.
Australia’s government won’t hesitate to stimulate the economy further should the need arise amid the global recession, Treasurer Wayne Swan said. Swan, speaking to the New York investment community, said the government could add to some A$45 billion ($29 billion) in stimulus already announced should economic conditions worsen.

“We will not hesitate to take whatever further action is necessary to support growth and jobs,” Swan, 54, said in speech notes received via e-mail. “Major financial institutions, some of which have withstood world wars and the Great Depression, have either collapsed or been bailed out.”
Freddie Mac Asks For $35 Billion More Taxpayer Funds

The GSEs are running out of cash as expected (at least as readers of this blog expected), so it id no surprise that Freddie Mac asks the government for more help
Freddie Mac plans to ask the government for up to $35 billion in extra support as the housing slump continues to hammer the mortgage giant.

The Federal Housing Finance Agency, Freddie Mac's conservator, will ask the Treasury Department for additional funds of between $30 billion and $35 billion, the mortgage giant said in a regulatory filing Friday.

Based on a preliminary evaluation of its fourth-quarter operations, Freddie Mac's management believes that it will need the extra support to offset the impact of operating losses as well as other items that could affect the company's net worth.

Freddie Mac (FRE) has already drawn $13.8 billion under the $100 billion agreement. That happened in November, after Freddie reported very weak third-quarter results.
Let's do the math: $35 billion + $13.8 billion = $48.8 billion. Freddie Mac is nearly halfway towards burning up $100 billion in taxpayer money. I predict Freddie will be out of money by the end of the year.

Tough Year Ahead For Credit Card Industry

Capital One massive $1.4 billion writeoff yesterday suggests the Credit card industry faces tough 2009
Capital One (COF) , one of the largest card issuers, reported a $1.4 billion fourth-quarter net loss late Thursday as it set aside another $1 billion to cover higher charge-offs this year.

The fourth-quarter charge-off rate in the U.S. card business was 7.08%, up from 6.13% during the third quarter. That's expected to jump to roughly 8.1% in the first quarter of 2009, up from the mid-7% range Capital One previously forecast.
Credit-card companies are being hit as falling house prices, the financial crisis and surging unemployment limit the ability of some customers to pay back debt racked up on their cards.

Capital One said it expects the U.S. unemployment rate to reach 8.7% by the end of 2009 from 7.2% currently and that, on average, home prices will fall another 10% this year.

"From a credit perspective, 2009 is literally and figuratively a write-off," Richard Shane, an analyst at Jefferies & Co., wrote in a note to investors on Friday. "We view the entire industry embarking on a path of permanently lower equity returns."
Richard Shane is thinking clearly, a rare happenstance these days.

Citigroup Raises $12 Billion

Struggling to save the bank, Citigroup Raises $12 Billion in FDIC-Backed Bond Sale
Citigroup Inc. sold $12 billion of notes guaranteed by the Federal Deposit Insurance Corp. as Chief Executive Officer Vikram Pandit tries to bolster capital and save the bank from insolvency.

The sale is the biggest offering of debt backed by the FDIC since banks began using the government’s Temporary Liquidity Guarantee Program on Nov. 25, according to data compiled by Bloomberg. The offering by Citigroup and its Citigroup Funding unit surpasses GE Capital Corp.’s $10 billion sale on Jan. 5.

Dwindling capital and a sinking stock price have already forced Pandit to take $45 billion in cash from the U.S. government and abandon the bank’s decade-old strategy of selling multiple financial services under one roof.
Citigroup cannot be saved from insolvency, Citigroup was insolvent a year or more ago. The effort now is to save Citibank, as every other part of the "group" is for sale. Of course Citibank itself is insolvent, but no one wants to come out and say it.

Manhattan’s Largest Apartment Complex Facing Eventual Default

The party is nearly over for the owners of Manhattan’s largest apartment complex. Tishman’s Stuyvesant Town Fund May Run Dry This Year
Tishman Speyer Properties LP and BlackRock Realty, owner of Manhattan’s largest apartment complex, are relying on a reserve fund to pay debt on the property and have only six months of money left before it runs out, Fitch Ratings said in a report.

The fund for the Stuyvesant Town and Peter Cooper Village apartments has declined to $127.7 million as of Jan. 15, from $400 million when it was established. Property cash flow is not expected to improve from 2008 based on the borrower’s restated budget for 2009, the ratings company said.

‘Although the property’s performance remains consistent, the cash flow generated from the property continues to require significant reserves to cover debt service obligations,” Fitch analysts Sue Ann Butera and Adam Fox in New York said.

Tishman Speyer and BlackRock paid $5.4 billion for the properties in 2006 with plans to convert rent-regulated units to market rates. A $3 billion loan to finance the acquisition was bundled with commercial mortgages and sold as bonds.

A general reserve fund for the property has also been “completely depleted,” the Fitch analysts said today.
Kiss this baby goodbye. There is no hope of survival. Some bank is going to become the proud owner of Stuyvesant Town and Peter Cooper Village.

Treasury Bonds Routed

On fears of massive supply, U.S. Treasury 30-Year Bonds Post Biggest Weekly Loss Since 1987
Treasuries fell, with 30-year bonds posting the biggest weekly loss in almost 22 years, on concern that debt sales will increase as the government boosts spending to ease the deepening economic slump.

Ten-year yields touched a six-week high amid speculation President Barack Obama’s administration will join governments around the world in selling record amounts of bonds to rescue banking systems and battle a global recession. Goldman Sachs Group Inc. yesterday raised its 2009 Treasury borrowing estimate to $2.5 trillion.

“Supply is a concern for this year,” said Michael Pond, interest-rate strategist in New York at Barclays Capital Inc., one of 17 primary dealers required to bid at U.S. debt auctions. “We are approaching the refunding period where we will get long-dated issuance, so it’s not surprising that it is weighing on investors’ minds.”

Thirty-year yields increased six basis points, or 0.06 percentage point, to 3.32 percent at 4:04 p.m. in New York, according to BGCantor Market Data. For the week, the bond’s yields were up 43 basis points, the most since the five days ended April 24, 1987.
It is possible bond bears are finally right and the low in yields is in. But even if it is, a retest is likely.

French And Flemish Government Aid Banks

In Europe, French and Flemish government capital infusions failed to stop the markets from falling. European stocks fall to near six-year low
European shares hit their lowest level for almost six years on Friday after a dismal week that saw heavy selling of bank and insurance shares. Any hopes that bank stocks might rally during the week, after a rout the previous Friday, were swiftly crushed on Monday when sentiment was soured by a record loss from Royal Bank of Scotland.

The FTSE Eurofirst 300 index of blue-chip shares Friday fell 0.3 per cent to 760.54, its lowest level since April 2003, after touching a low of 741.37. The pan-European index has fallen in 12 of the past 13 sessions. Over the week it fell 5.4 per cent and it is down 43 per cent over the past year.

Intervention from the French and Flemish governments provided some relief. France’s three largest banks, BNP Paribas, Société Générale and Credit Agricole, all gained after the government said it would provide a further €10.5bn to its banks in return for their executives’ forgoing bonuses. SocGen added cheer by announcing that it expected to break even for the fourth quarter of 2008 and earn a net profit of €2bn for the year.

The bounce, however, was brief. BNP Paribas ended the week 26 per cent lower at €21.38 and SocGen fell 14 per cent to €27.25. Credit Agricole was a relative success, posting a weekly fall of just 8.5 per cent to close Friday at €7.58.

Shares in Belgium’s KBC were crushed in the first three days of trading. They lost losing 55 per cent as investors panicked over the banking and insurance group’s exposure to toxic structured credit products.

By Thursday the savageness of the sell-off forced the Flemish government to act. It injected €2bn of extra capital into KBC as the bank seized the opportunity to announce a provisional 2008 loss of €2.5bn. Its shares rallied 50 per cent, as traders who had sold the shares short were forced to buy them back to limit their losses. KBC closed 40 per cent lower for the week at €12.24.
Computer Virus Spreads Through Microsoft Networks

Microsoft is back in the news as the Downadup Computer Worm Infects 1.2 Million Networks
A computer worm called Downadup, the most severe outbreak in years, continues to spread after infecting millions of corporate computers and servers.

About 1.2 million networks were contaminated as of yesterday, Mikko Hyppoenen, chief research officer at Helsinki- based Internet security software maker F-Secure Oyj, said in an interview. That’s up from less than a million on Jan. 20.

The virus, also know as Conficker, infects computers and servers running on Microsoft Corp.’s Windows operating system, according to F-Secure. The worm, which can block users from accessing their accounts, also spreads through portable storage devices. F-Secure posted a warning about the virus on its Web site on Jan. 7.

The strain is different from other outbreaks because it mainly affects corporations and not home computers.

“A few minutes after the virus has intruded a company network, all laptops, desktops and servers have become infected,” Hyppoenen said. “We have had cases where hospital networks with computers in operating rooms have become contaminated. You can’t just unplug them, making the cleanup more difficult.”
Another day, Another day of grim news

Mike "Mish" Shedlock
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