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Thursday, April 30, 2009 8:40 PM

Extreme Home Makeover Depression Edition II

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This post is an update of Extreme Home Makeover Depression Edition where banks acquired brand new homes in foreclosure processes, the homes were not quite finished and the banks razed these homes rather than fix code violations.

Extreme Home Makeover Depression Edition Part 3
A peek inside the homes before they were demolished

Extreme Home Makeover Depression Edition Part 5
Part 4 is not yet available
Home Demolition

There you have it. Brand new nearly completed homes have a negative value because of regulations and are therefore destroyed.

From "Vision Victory" ...

The homes were once owned by developer Mathews Homes and picked up by Guaranty Bank in Irvine via foreclosure. Guaranty Bank in Irvine is paying for the destruction of them. 4 model homes and 12 almost finished homes are being demolished. The person running the machine in the video says there are another 20 homes in Temecula California to demolish, about an hour away.

By Patrick Thatcher, staff writer for, Daily Press

Victorville- The housing collapse is taking a literal form for one bankrupt housing development. Four model homes and 12 nearly finished spec homes at Bear Valley Road and Highway 395 are being demolished.

The developer filed bankruptcy about 18 months ago and the foreclosed property went to Guaranty Bank in Irvine.

A Guaranty Bank official, Real Estate Officer Dean Smith, said they were facing daily fines from the city of Victorville if they didnt do something with the homes and property that not up to code. He said it was a choice of pumping their own money into property site improvements and additional money to bring the home up to code or tear down the 16 homes.

Smith said the bank is not in the building or land development business and because of the current housing market does not see anything happening with the property for at least five years.

Our only option is to either proceed with putting more than a million bucks into the land, which we've already taken a huge hit on and lost a lot of money, or, we tear down the houses, Smith said.

He said the builder put up the homes before completing the site improvements and failed to have enough money to finish roads, walls, and other improvements that bring the community into code. Everything just fell apart at that point and we cant sell homes that are not up to code, Smith said.

He said the city of Victorville fined the bank once because the home are out of code and would have faced daily fines if Guaranty didn't do something with the vacant houses.

There are still substantial dollars that need to be put into the land before the city of Victorville will give certificates of occupancy on the houses and the bank isn't willing to put forward that amount of money, Smith said.

He said the homes are a liability to Guaranty and that all of them are heavily vandalized inside and out with broken glass everywhere. Our projections are that those houses would sit the way they are for at least five years, what would they be worth then? Smith said. He said once the homes are demolished the property will be put on the market again. Calls to the developer were not returned.

Patrick Thatcher may be reached at 760-951-6227 or at pthatcher@VVDailyPress.com
Mike "Mish" Shedlock
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12:32 PM

New Lease On Life For Chrysler

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It's the end of the line as well as a new beginning for Chrysler. Please consider Chrysler to Enter Chapter 11, Form Alliance With Fiat.

Chrysler LLC will file for Chapter 11 bankruptcy protection Thursday, President Barack Obama said, kicking off what the administration predicts will be a 30- to 60-day restructuring of the third-largest U.S. auto maker.

At the same time, Chrysler entered into a partnership with Italian auto maker Fiat SpA, Mr. Obama said in a noon address. Mr. Obama said the partnership would not only let Chrysler survive "but to thrive."

The U.S. government will provide up to an additional $8 billion in aid, including up to $3.5 billion in so-called debtor-in-possession financing, to ensure Chrysler survives the historic reorganization process.

In exchange for the aid, the U.S. government will take a "small equity" stake in the new company, which will be partly owned by Fiat. According to a White House fact sheet, the U.S. Treasury will hold 8% of the reorganized company, while Fiat would hold 20% and the governments of Canada and Ontario would receive 2%.

Also as part of the deal, Chrysler's lending arm, Chrysler Financial, will be folded into GMAC LLC, which will become the main financing source for all Chrysler vehicles.

Bank holdouts may get blamed for pushing Chrysler into court. But there are other reasons behind the move.

One reason Chrysler needs to file for bankruptcy protection is so that Fiat can clear out hundreds of auto dealers from its sales network, which is easier to do in bankruptcy, where dealer franchisee agreements can quickly be rejected or amended. The auto maker also has asbestos and environmental liabilities that Fiat doesn't want and are more easily shed in bankruptcy court.
Chrysler Getting ‘New Lease on Life’ in Bankruptcy

President Obama declares Chrysler Getting ‘New Lease on Life’ in Bankruptcy
“The necessary steps have been taken to give one of America’s storied automakers, Chrysler, a new lease on life,” Obama said in remarks at the White House. “This process will be quick, it will be efficient.”

The president faulted some of Chrysler’s smaller lenders, including hedge funds that he didn’t name -- “a small group of speculators” -- who refused to make the concessions agreed to by the company’s major debt holders and workers.

Chrysler will be in bankruptcy for one to two months and GMAC LLC will become its new finance arm with a fresh infusion of capital from the government, according to an administration official who briefed reporters before Obama spoke. The Auburn Hills, Michigan-based automaker will receive $4.5 billion in exit financing, the official said.

Chrysler’s bankruptcy filing will be made imminently and the court process will be used to extinguish some contracts and to thin the company’s dealership body, the official said. Payments to auto-parts makers and other contractors will continue to be made.

There will be no immediate plant closures or job cuts as a result of the bankruptcy filing. Chrysler will be sold to a new company created by the government using a provision of Chapter 11 of the U.S. bankruptcy code. The Canadian government will contribute a portion of the funding for Chrysler’s so-called debtor-in-possession financing.
Irrational Blame Placed On Hedge Funds For Bankruptcy

Note the attitude of President Obama, in blaming hedge funds and “a small group of speculators” for causing Chapter 11. Instead, Obama should be praising whoever forced this decision.

Chrysler can dump asbestos issues, close dealerships, and shed other debts in a bankruptcy process far easier than in an agreement outside of bankruptcy court.

The same applies to GM. And for that matter, the same applies to banks. Indeed, attempts to prevent bankruptcies are irrational. Trillions of dollars of taxpayer money were wasted on numerous bailouts, for no good reason. Chrysler just proved life goes on, and indeed goes on better after bankruptcy than workarounds that leave debt and other inefficiencies on the books.

Mike "Mish" Shedlock
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12:14 AM

Volcker Says Economy is ‘Leveling Off’ even though GDP Shrinks Most in 50 Years

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GDP shrank at an annual rate of 6.1% according to the First Quarter 2009 Advance GDP Report.

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 6.1 percent in the first quarter of 2009, (that is, from the fourth quarter to the first quarter), according to advance estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP decreased 6.3 percent.

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

Real personal consumption expenditures increased 2.2 percent in the first quarter, in contrast to a decrease of 4.3 percent in the fourth. Durable goods increased 9.4 percent, in contrast to a decrease of 22.1 percent. Nondurable goods increased 1.3 percent, in contrast to a decrease of 9.4 percent. Services increased 1.5 percent, the same increase as in the fourth.

Real nonresidential fixed investment decreased 37.9 percent in the first quarter, compared with a decrease of 21.7 percent in the fourth. Nonresidential structures decreased 44.2 percent, compared with a decrease of 9.4 percent. Equipment and software decreased 33.8 percent, compared with a decrease of 28.1 percent. Real residential fixed investment decreased 38.0 percent, compared with a decrease of 22.8 percent.

The real change in private inventories subtracted 2.79 percentage points from the first-quarter change in real GDP after subtracting 0.11 percentage point from the fourth-quarter change. Private businesses decreased inventories $103.7 billion in the first quarter, following decreases of $25.8 billion in the fourth quarter and $29.6 billion in the third.

Real final sales of domestic product -- GDP less change in private inventories -- decreased 3.4 percent in the first quarter, compared with a decrease of 6.2 percent in the fourth.

Real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- decreased 7.8 percent in the first quarter, compared with a decrease of 5.9 percent in the fourth.

Current-dollar personal income decreased $59.9 billion (2.0 percent) in the first quarter, compared with a decrease of $42.9 billion (1.4 percent) in the fourth.

Personal current taxes decreased $193.5 billion in the first quarter, in contrast to an increase of $19.7 billion in the fourth.

Disposable personal income increased $133.6 billion (5.1 percent) in the first quarter, in contrast to a decrease of $62.6 billion (2.3 percent) in the fourth. Real disposable personal income increased 6.2 percent, compared with an increase of 2.7 percent.

Personal outlays increased $18.1 billion (0.7 percent) in the first quarter, in contrast to a decrease of $260.2 billion (9.5 percent) in the fourth. Personal saving -- disposable personal income less personal outlays -- was $453.0 billion in the first quarter, compared with $337.4 billion in the fourth. The personal saving rate -- saving as a percentage of disposable personal income -- was 4.2 percent in the first quarter, compared with 3.2 percent in the fourth.
Key Changes From Last Quarter

The biggest negative factor in GDP was the change in private inventories which subtracted 2.79 percentage points GDP compared with a subtraction of 0.11 percentage points last quarter. Meanwhile personal consumption added 1.5% to GDP after subtracting 4.3% last quarter.

The good news is personal consumption expenditures is a leading indicator while the change in private inventories is a lagging indicator. Calculated Risk has a great set of charts on this theme in GDP Report: The Good News.

Key Question:

Are personal consumption expenditures
1) an outlier
2) a resumption of the prior trend in strong consumer spending
3) on a "leveling off" course
4) a short term phenomenon to be followed by a double dip recession or series of recessions

Table of GDP Components

The following GDP Table helps show how some of the numbers mentioned above relate to each other.

click on table for sharper image

Volcker Says the U.S. Economy Is ‘Leveling Off’

Bloomberg is reporting Volcker Says the U.S. Economy Is ‘Leveling Off’.
The U.S. economy is “leveling off at a low level” and doesn’t need a second fiscal stimulus package, said former Federal Reserve Chairman Paul Volcker, one of President Barack Obama’s top economic advisers.

Volcker, head of Obama’s Economic Recovery Advisory Board, said the 6.1 percent decline in first-quarter gross domestic product reported by the government today was “expected.” More recent data show the contraction in housing, business spending and inventories has slowed, and stimulus spending is only just beginning to hit the economy, he said.

Still, with the financial system functioning only by “the grace of government intervention,” the economy is “in for a long slog” before a recovery takes hold, Volcker said. “I’m not here to tell you the economy is going to recover very strongly in the short run,” Volcker said. “There is reason to believe that it should be leveling off, at a low level.”

“I do not think there are grounds for great optimism,” Volcker said. “It is going to take a while, I think, to have a strong recovery.”

“The Federal Reserve is going beyond the traditional role of central banks here or abroad,” Volcker said. “At some point it’s reasonable to ask should this particular institution, with its independence very well protected, be allocating so much of what is essentially government money.”

Volcker said Fed Chairman Ben S. Bernanke is “doing a great job” and he declined to speculate on whether Obama will reappoint Bernanke when his term as chairman ends in 2010. “It’s not a situation where any of this problem reflects shortcomings on Mr. Bernanke’s part.”

Volcker agreed with economists who say the expansion of the Fed’s balance sheet, to more than $2.2 trillion as of last week, might pose an inflation danger at some point.

“The inflation problem, which should be a real threat for the future, is not right on the doorstep,” he said. “But two or three years from now that may be the critical problem, how that’s handled. Because, given what the Federal Reserve has been doing, it’s going to be harder to retrace their steps, so to speak, than it ordinarily would be.”

Volcker said he wouldn’t favor bringing back the Glass-Steagall Act, repealed in 1999 with the support of then-Treasury Secretary Summers. He would, however, separate commercial-bank functions from what he calls “traders,” venture capital funds, private equity funds and hedge funds.
Anyone claiming "Fed Chairman Ben S. Bernanke is doing a great job" is going to lose credibility with a lot of people. Still others (but not me) will be moaning about Volcker's position on Glass-Steagall, a position that is quite similar to mine.

For further discussion of Glass-Steagall and regulation in general, please see Anti-Libertarian Nonsense From Henry Kaufman & Company.

Returning To The Key Question:

Are personal consumption expenditures
1) an outlier
2) a resumption of the prior trend in strong consumer spending
3) on a "leveling off" course
4) a short term phenomenon to be followed by a double dip recession or series of recessions

Volcker is suggesting door number 3.

I vote for what's behind door number 1 or door number 4 on the grounds there is too much debt overhang, too few jobs, and no sustainable driver for jobs looking ahead. In addition, there is little support for more stimulus in Congress and whatever lift the economy gets out of inventory replenishment and the Congressional stimulus will eventually fade.

If the recession ends later this year, plan on a revisit in 2010-2011 and anemic growth at best for a long time thereafter. The Case for an "L" Shaped Recession (or series of recessions) is still very much alive.

Mike "Mish" Shedlock
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Wednesday, April 29, 2009 11:38 AM

Anti-Libertarian Nonsense From Henry Kaufman & Company

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In How libertarian dogma led the Fed astray Henry Kaufman launches into tirade against the "Libertarian Fed" and the "prevailing economic libertarianism". I have a question for Kaufman:

Since When is Constant Meddling in the Markets a Sign of Libertarianism?

The idea that Greenspan or the Fed is Libertarian is absurd.

Greenspan never left the markets alone. At every crisis (real or imaginary) Greenspan slashed interest rates. Here are two prime examples: In 1999 the Fed threw money at non-existent problems such as the Y2K scare. That policy decision helped fuel the Dot-Com bubble. When the Dot-Com bubble burst Greenspan stepped on the gas in 2001-2002 to bail out banks at risk because of poor loans to both Latin America and the internet companies. That policy decision fueled a massive housing bubble not just in the US but worldwide.

Every step of the way, the Greenspan and Bernanke Fed micro-mismanaged interest rates as if they knew better than the free market where rates should be. The reality is the Fed does not know where interest rates should be only the free market knows.

Fed Uncertainty Principle

When it comes to interest rate policy, some think the Fed simply follows the markets. If that is the case, why do we need the Fed?

In actual practice, the Fed neither leads nor follows the market. However, the Fed does massively distort the market, a perfectly valid reason we do not need the Fed. For a complete discussion of this idea, please read the Fed Uncertainty Principle.

Bully Pulpit Silliness

Kaufman goes on with numerous anti-Libertarian rants including a discussion of how "adherence to economic libertarianism inhibited the Fed from using the bully pulpit or moral suasion to constrain market excesses."

Please! Kaufman wants the Fed to get on the bully pulpit (as if that does a damn thing) when 18 months ago the Bernanke Fed did not think the housing crisis would spillover into the real economy. Hells bells, slashing interest rates to 0% and throwing trillions of dollars at problems did not do a thing to contain the crisis yet we are somehow supposed to believe that better use of a bully pulpit could have prevented this crisis?

Fannie Mae and Freddie Mac

Many right now are arguing for regulation of Fannie Mae and Freddie Mac. The idea is preposterous. There is virtually no need to regulate Fannie and Freddie for the simple reason that Fannie Mae and Freddie Mac should not even exist.

The first thing any regulator in his right mind would do to Fannie and Freddie is to shut them down on account of systemic risk. Instead, in order to get "credit flowing" Congress is throwing $trillions of taxpayer dollars down a black hole and upping the amount of dollars that Fannie and Freddie can lend. So much for regulators acting responsibly even when we know Fannie and Freddie are excessively leveraged and making risky loans.

Rating Agency Madness

Please consider the rating agency problem where the agencies rated the most ridiculous garbage AAA. Was this due to lack of regulation? Of course not.

The rating problem stems from regulation by the SEC that mandated all debt be rated. Prior to that regulatory change by the SEC, corporations buying debt paid rating agencies for their ratings. The rating agencies had a vested interest to rate well or they went out of business.

The SEC turned this model upside down, sponsored Moody's, Fitch, and the S&P, and the big three started getting paid not on how well they rated debt but on how much debt they rated. Is it any wonder everything got rated AAA?

The cure is not more regulation of rating agencies, the cure is to return to a model where rating agencies get paid by the quality of their work, not the quantity of it. In addition, the SEC sponsorship of Moody's, Fitch, and the S&P has to go. For more on this issue, please see Time To Break Up The Credit Rating Cartel.

Glass-Steagall Scapegoat

Like many others, Kaufman rails against the removal of Glass-Steagall. On this point, there is merit to the idea that conflicts of interest arise when the granting of credit -- lending -- and the use of credit -- investing -- by the same entity, can lead to abuses.

However, it's also important to note that the Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC), and all of the moral hazards along with it.

Because of FDIC, money flowed to the worst banks offering the highest rates on CDs and savings accounts. This in turn provided funding for the worst projects such as building numerous condo towers in Florida, Las Vegas, and San Diego, along with off balance sheet financing of SIVs, and various mall projects that should never have been funded.

In simple terms, FDIC traded small more frequent bank failures that could quickly and easily be absorbed by the system into the massive mess of bank failures we see today. Moreover, the correct response would have been to let failed banks go bankrupt. Instead, regulators are compounding the problem by keeping zombie banks alive. This is the same failed regulatory response Japan took and it is unquestionably delaying the recovery while adding to the national debt.

Fractional Reserve Lending The Main Problem

Finally, it is extremely important to point out that it is fractional reserve lending, not the repeal of Glass-Steagall that is the root cause the massive credit expansion that has now blown up.

Fractional reserve lending is nothing more than a fraudulent Ponzi scheme that allows money (credit really) to be borrowed into existence when it is mathematically impossible for that credit to be paid back.

All Ponzi schemes eventually blow up as this credit bubble just did.

Excessive Regulation

Every economic problem we face can be traced back to excessive regulation, not the lack of regulation.

  • The Fed
  • Fractional Reserve Lending
  • Fannie Mae and Freddie Mac
  • The Rating Agencies
  • Congressional Sponsorship of Unfunded Pet Projects

Kaufman concludes with ....
We should, therefore, fundamentally re-examine the role of the Fed and the supervision of our financial institutions. Are the current arrangements within the Fed structure adequate – from its regional representation to its compensation for chairman and governors to its terms of office for governors? How can the Fed’s decision-making process be improved? If we were to create a new central bank from the ground up, how would it differ? At a minimum, the Fed’s sensitivity to financial excesses must be improved.
Missing The Boat

The Fed is a failed institution. Fannie Mae is a failed institution. Freddie Mac is a failed institution. Fractional reserve lending is a fraud.

The correct policy decision is to abolish all of them, not to add layer after layer after layer of regulators watching over other regulators, who in turn watch over still other regulators, where some "god-like" super-regulator at the top supposedly has infinite wisdom and knows exactly how to regulate.

Thus, the correct question is not "If we were to create a new central bank from the ground up, how would it differ? "

The correct question is "How do we get rid of the Fed and phase out fractional reserve lending?"

The ultimate irony is that Kaufman blames Libertarianism when the very existence of the Fed is 180 degrees removed from Libertarianism. There is not a true Libertarian in existence who thinks the Fed is a good idea.

The problem with regulation is easy to describe: Regulation typically fails, often spectacularly. And every time it fails, people come out of the woodwork begging for more of it.

When does the madness stop?

Mike "Mish" Shedlock
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3:02 AM

Foreclosure Prevention Bill Shields Servicers From Fraud

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Inquiring minds are investigating provisions of a foreclosure prevention plan working its way through Congress. The plan throws away more taxpayer money while shielding servicers from misconduct. In other words, the bill does exactly what one might expect from this Congress and this administration.

Please consider the Washington Post article Foreclosure Prevention Plan Expanded to 2nd Mortgages.

The Obama administration unveiled an expansion of its $75 billion foreclosure prevention plan yesterday, providing new subsidies to mortgage lenders and investors. Under the expanded plan, some homeowners could see their payments fall significantly and the interest rate on their second mortgage pushed down to 1 percent.

The administration's housing plan pays lenders to help borrowers stay in their homes by modifying their mortgages to an affordable level. But, the plan as first announced in February applied only to primary mortgages. Now, lenders will be eligible for payments when they modify the terms of a second mortgage, including a home-equity line.

Under the new plan, lenders would receive $500 for modifying the second mortgage, plus $250 a year for three years if the loan remains current. The borrower would be eligible for $250 a year for five years to lower their principal balance. The borrower could have the interest rate lowered to 1 percent, depending on the type of loan, with the government sharing the cost of the rate reduction.

Senior administration officials said they expect the second-mortgage program to help 1 million to 1.5 million of the up to 4 million households expected to be covered by the wider loan-modification program. The program, which will take several weeks to get running, will be paid for through bailout funds already allocated to the program, officials said.

The Treasury Department also is attempting to breathe new life into another government foreclosure prevention program, called Hope for Homeowners. That program, launched last year, refinances homeowners into more affordable mortgages. But lenders have balked at requirements that they cut some of the principal that borrowers owe. Only one homeowner has received a government-backed loan under the program so far.
My Comment: Hope for Homeowners is the best housing bill in history. It did absolutely nothing. If only all legislation could be so good.
Now, lenders will receive $2,500 to refinance a borrower into Hope for Homeowners and $1,000 a year for up to three years as long as the borrower stays current.
My Comment: This just goes to show you: On the extremely rare occasions when Congress produces perfectly fine legislation, they always end up tinkering with it, undoubtedly making it worse.
Meanwhile, a coalition of mortgage investors is fighting a provision in a housing bill that would shield lenders from lawsuits. Lenders have said they are unable to change some mortgages because they fear being sued for breaking their contracts with investors who own pools of mortgages.

The safe harbor provision was included in the House version of the housing bill without much controversy. But in recent weeks, investors have begun organizing against it, including a coalition that hired lobbying firm Patton Boggs.

"The safe harbor provision protects mortgage servicers from lawsuits alleging misconduct in the past and future," said Micah Green, a Patton Boggs lobbyist.
Green declined to name the coalition's members, saying the group is still being formed, but that so far it represents about 10 firms that manage more than $100 billion in mortgage investments.

The Senate is expected to vote on the provision as part of a larger housing bill tomorrow.
The bill hugely rewards servicers for every loan they modify. This creates an incentive for servicers such as Countrywide (Bank of America) to modify loans whether or not that is in best interest of the mortgage holders. Worse yet, the Safe Harbor Provision goes one step further and shields servicers if they do commit such fraud.

I am not a lawyer, but I believe both the servicer incentives and the safe harbor provision are unconstitutional. President Obama, like president Bush before him, appears to have no concern for the constitution.

Mike "Mish" Shedlock
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Tuesday, April 28, 2009 12:11 PM

Bank of America $70 Billion Short of Capital After Stress Test

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The group that performed the stress tests state that Bank of America May Need $70 Billion.

Bank of America Corp. needs $60 billion to $70 billion of capital, according to Freidman, Billings, Ramsey Group Inc. analyst Paul Miller, who cited stress tests performed by his firm.

Bank of America should consider converting its preferred shares to common stock, including $27 billion of privately held preferred “as soon as possible,” Miller wrote in a note to clients dated today. Miller said his firm’s versions of the stress tests were “somewhat tougher” than those by U.S. regulators.
Fed Pushes Citi, BofA to Increase Capital

The Wall Street Journal is reporting Fed Pushes Citi, BofA to Increase Capital
Regulators have told Bank of America Corp. and Citigroup Inc. that the banks may need to raise more capital based on early results of the government's so-called stress tests of lenders, according to people familiar with the situation.

Executives at both banks are objecting to the preliminary findings, which emerged from the government's scrutiny of 19 large financial institutions. The two banks are planning to respond with detailed rebuttals, these people said, with Bank of America's appeal expected by Tuesday.

The findings suggest that government officials are using the stress tests to send a tough message to struggling banks. Industry analysts and investors predict that some regional banks, especially those with big portfolios of commercial real-estate loans, likely fared poorly on the stress tests. Analysts consider Regions Financial Corp., Fifth Third Bancorp and Wells Fargo & Co. to be among the leading contenders for more capital. Wells Fargo declined to comment.

If [Bank of America] is forced to bolster its capital, it could do so in one of several ways, including selling assets, selling more shares to the public or converting the government's preferred shares into common stock. That would boost the company's capital on paper but could also leave the U.S. government as Bank of America's largest shareholder while diluting the value of the stock held by existing shareholders.

Some bank executives have said that even after meeting with Fed examiners on Friday, they still don't understand details of the government's methodology for conducting the tests.
Taxpayers To Take Yet Another Hit

Bank of America, Citigroup, Wells Fargo, and Fifth Third Bancorp all need more taxpayer handouts.

Meanwhile Geithner proclaims the vast majority of banks are "well capitalized" as if the State Banks of Podunk, Nodunk, Bodunk, Modunk, and Hodunk counterbalance the shortfalls at Bank of America, Citigroup, Wells Fargo, and Fifth Third. They don't and it is disingenuous of Geithner to suggest so.

The most likely ways for the banks to raise capital are via dilution of Treasury owned preferred stock at taxpayer expense and via the Public Private Investment Plan (PPIP). The latter is a scam to heist taxpayers to the tune of hundreds of billions of dollars.

See Geithner's Plan Can Succeed, Geithner's Gift To Pimco, and Geithner's Galling (and Dangerous) Plan For Bad Bank Assets for details on Geithner's Heist America Plan.

Government officials stated today "that banks directed to raise more capital shouldn't be viewed as insolvent."

What else can it possibly mean when taxpayers have to pony up hundreds of billions of dollars every other month just to keep the banks running?

Mike "Mish" Shedlock
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1:34 AM

Extreme Home Makeover Depression Edition

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Inquiring minds are watching a pair of videos from Southern California. Allegedly, banks acquired brand new homes in foreclosure processes, the homes were not quite finished and the banks razed these homes rather than fix code violations.

Extreme Home Makeover Depression Edition Part 1

Extreme Home Makeover Depression Edition Part 2

There you have it. Brand new nearly completed homes have a negative value because of regulations and are therefore destroyed.


From "Vision Victory" ...

THANK YOU so much for posting my videos about the homes being destroyed in Victorville CA. The exact location for your records is in the city of Victorville off Bear Valley Road and the 395.

It was in the local paper, but they chose not to put it on their website, which is NOT normal. So right now the videos are the only story out there.

Mike "Mish" Shedlock
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Monday, April 27, 2009 11:21 PM

GM to Become "Government Motors"

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The clock is ticking for GM. If an agreement with the bondholders and the unions is not reached by June 1, GM is headed for bankruptcy court. If the deal is approved as currently on the table, the Treasury department would become GM's largest shareholder.

Bankruptcy looks increasingly likely as GM Bondholder Group Says Offer Isn’t ‘Reasonable’.

General Motors Corp. bondholders find the automaker’s offer to exchange their $27 billion in debt for equity unreasonable and said they should be treated more equitably with labor unions.

“We believe the offer to be a blatant disregard of fairness for the bondholders who have funded this company and amounts to using taxpayer money to show political favoritism of one creditor over another,” the ad hoc committee of GM bondholders said today in a statement.

Bondholders are being asked to swap all their claims for 10 percent of the equity in the reorganized company. The offer is contingent on cutting at least half of GM’s $20.4 billion of obligations to a United Auto Workers retiree-medical fund, known as a Voluntary Employee Beneficiary Association, through a debt- for-equity exchange that would give the VEBA as much as 39 percent of common stock in the Detroit-based carmaker.

Without an accord, bondholders face the uncertainty of bankruptcy, GM Chief Financial Officer Ray Young said today. At least 90 percent in principal amount of the notes must be exchanged by June 1 to satisfy the U.S. Treasury, GM said today in a statement.

“This is an offer that’s designed to fail,” said Kip Penniman, an analyst at fixed-income research firm KDP Investment Advisors in Montpelier, Vermont. “To get 90 percent of them to agree to such a deal where there’s no cash, no other debt and pure equity while leaving the union VEBA arrangement unchanged from previous considerations is absurd.”
Bondholder Math

The Market Cap of GM is $1.25 billion. The administration wants bondholders to forfeit $27 billion in debt obligations in return for equity shares worth a mere $125 million (10% of $1.25 billion).

Can anyone blame bondholders for walking away?

Conflicts for Government

The Wall Street Journal is reporting Control Would Create Conflicts for Government.
The government could be exposed to a host of conflicts and potential unintended consequences if it ends up -- as now appears likely -- with a controlling stake in General Motors Corp.

Under GM's latest restructuring plan, the U.S. would get at least a 50% stake in the largest Detroit auto maker. Even without a majority stake, the government was able to use its muscle in March to oust GM Chief Executive Rick Wagoner. But such a major holding would turn GM into a sort of Government Motors, making the federal government the company's de facto boss and bank lender.

A direct stake could create other uncomfortable conflicts: The Obama administration would be setting emissions and mileage standards for cars in Washington while having to implement them in Detroit. It also would make the government a direct partner of the United Auto Workers, which would get a 39% stake in the company under GM's latest blueprint for survival.

A final GM plan is still many months away, and early reaction from bondholders suggests that the plan won't come together in its current form. But even if it flops, the proposal reveals that the government, in close consultation with GM, is prepared to become more deeply immersed in the operations and rehabilitation of the auto maker.

Both the Bush and Obama administrations have grappled with how to shore up the economy without getting directly involved in running companies. They were unable to avoid an entanglement with insurer American International Group Inc., in which the government now owns an 80% stake after committing more than $170 billion in emergency relief. It will soon own more than a third of banking giant Citigroup Inc., with which it has had a sometimes-fraught relationship.

But in contrast with those cases, the GM proposal comes as part of an all-out administration effort to restructure the U.S. auto industry, including the country's third-largest car company, Chrysler LLC.

"The big question is whether the government, as a shareholder, will be focused on GM making money, or it making clean and green cars, or whatever other political agenda they have for the auto space," says Peter Kaufman, president and head of restructuring at investment bank Gordian Group LLC.

The Treasury's current plan is to hold its GM ownership stake in some form of trust, say people briefed on the situation. The administration's auto team is now drafting documents that lay out how that trust and its government-appointed trustees will manage the government's majority stake.

Still unclear is how long the government would maintain its ownership, these people say. There are differing views in the administration, with some advocating a quick sale of the stake while others argue the government needs to take a long-term view and hold GM for a long time to get a better price. One administration official said the government would likely sell its shares gradually, but only after GM had regained its financial moorings and rebuilt its reputation.
GM to Eliminate 21,000 Jobs

The New York Times is reporting G.M.’s Latest Plan Envisions a Much Smaller Automaker.
For all the uncertainty swirling around General Motors, the troubled automaker said Monday that one thing was clear: it must become drastically smaller if it hopes to remain a viable company, regardless of whether it has to file for bankruptcy.

G.M. said it would eliminate another 21,000 factory jobs, close 13 plants, cut its vast network of 6,500 dealers almost in half and shutter its Pontiac division.

By the time it is finished, G.M. expects to have only 38,000 union workers and 34 factories left in the United States, compared with 395,000 workers in more than 150 plants at its peak employment in 1970.

Where once G.M. had a 50 percent share of the market for new vehicles in the United States, the company hopes to at least hang on to its current 18 percent share.

Analysts warned that even those projections could be optimistic. “There is still a huge risk for market share losses beyond what the company is forecasting,” said John Casesa, an industry consultant.

G.M., however, still faces difficult odds of restructuring outside of bankruptcy court.

The company is still negotiating with the United Automobile Workers union. The government wants the union to accept company stock to finance half of G.M.’s $20 billion obligation for retiree health care.

If bondholders approve the debt-for-equity exchange, they would own about 10 percent of G.M., making them a minority shareholder in a company controlled by the Treasury and the U.A.W.’s retiree trust.

According to the offer, the Treasury would own at least 50 percent of G.M. in exchange for forgiving about $10 billion in federal loans. The union trust, in turn, would receive a stake of about 39 percent.

A committee of big G.M. bondholders on Monday called the offer a “a blatant disregard for fairness for the bondholders” and an example of “political favoritism” toward the U.A.W. “The current offer is neither reasonable nor adequate,” the committee said.

Representative Thaddeus McCotter, a Michigan Republican, is concerned that some bondholders want the company to go bankrupt because they also hold credit-default swaps insuring them against losses.

He is urging the Treasury secretary, Timothy F. Geithner, to disclose which G.M. bondholders have default swaps from the American International Group, the insurance company that was bailed out by the government.

“It would be unconscionable to use taxpayer money to help people benefit from the bankruptcy of General Motors,” Mr. McCotter said.
Deal Recap

If the deal goes through as currently proposed....

  • The Treasury (taxpayers) would be stuck with 50% of GM's equity (currently worth $625 million) in exchange for forgiving about $10 billion in federal loans.
  • The UAW would get 39% of GM's equity (currently worth $488 million) in exchange for giving up $10 billion in health care benefits
  • Corporate bondholders would get 10% equity (currently worth $125 million) in exchange for giving up $27 billion in bonds.

Under the above agreement there is still a missing $10 billion piece of the puzzle: "The government wants the union to accept company stock to finance half of G.M.’s $20 billion obligation for retiree health care as noted above."

What happens to the other $10 billion? Does it vanish into thin air? My guess is this would be dumped on taxpayers via the Pension Benefit Guarantee Corporation (PBGC)

Everybody loses but the credit default swap holders. Now who might that be? JPMorgan, Goldman Sachs, and/or Citigroup by any chance?

Mike "Mish" Shedlock
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10:44 AM

Technical Indicators Scream Caution

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A huge array of charts I am following are signaling caution. Let's take a look at various Bullish Percent charts, High-Low charts, and McClellan Oscillator charts, starting with a review of the theory behind each.

Bullish Percent Index (BPI)

The Bullish Percent Index (BPI) is a popular market breadth indicator that is calculated by dividing the number of stocks in a given group (an exchange, an industry, etc.) that are currently trading with Point and Figure buy signals, by the total number of stocks in that group. Bullish Percent levels that are above 70% are considered overbought, whereas levels below 30% are considered oversold. Strong buy signals occur when the Bullish Percent Index falls below 30% and then reverses up by at least 6%. Conversely, promising sell signals occur when it goes above 70%, and then reverses down by at least 6%.
McClellan Oscillator
Developed by Sherman and Marian McClellan, the McClellan Oscillator is a breadth indicator derived from each day's net advances, the number of advancing issues less the number of declining issues. Subtracting the 39-day exponential moving average from the 19-day exponential moving average of net advances forms the oscillator.

Buy and sell signals are generated as well as overbought and oversold readings. Usually, readings above +100 are considered overbought and below -100 oversold. Overbought and oversold readings may vary among indices and historical precedent. Buy signals are generated when the oscillator advances from oversold levels to positive territory. Sell signals are generated on declines from overbought to negative territory. Traders may also look for positive or negative divergences to time their trades. A series of rising troughs would denote strength, while a series of declining peaks weakness.
Record High Percent Index
The Record High Percent Index is a market breadth indicator created by dividing the number of 52-week highs for a given market by the sum of the number of new highs and the number of new lows.

Record High Percent = New Highs / (New Highs + New Lows)

The values range between 0.0 and 1.0. A value of 0.0 means that there were no new highs on that day. A value of 1.0 means that there were no new lows on that day. A value of 0.5 means that the number of new highs and new lows were equal.
Click On Any Chart In This Series For a Sharper Image

$BPSPX - S&P 500 Bullish Percent Index

$BPCOMPQ - Nasdaq Bullish Percent Index

$BPNYA - NYSE Bullish Percent Index

$BPTRAN - Dow Jones Transports Bullish Percent Index

$BPFINA- S&P Financial Sector Bullish Percent Index

$NAMO - Nasdaq McClellan Oscillator

$NYMO - NYSE McClellan Oscillator

$RHSPX - S&P 500 Record High Percent Index

$RHNYA - NYSE Record High Percent Index

$RHCOMPQ - Nasdaq Record High Percent Index

Please remember these indicators are not a precise timing device. Nor do they indicate magnitude of a move. They do however indicate direction, and in this case, a potential change in direction.

The key point to note is these and many other similar indicators are flashing warning signs that this rally is getting very long in the tooth. With that in mind, bulls may wish to consider reviewing their risk reward setups and stop loss positions.

Bears who have not been blown out of the water may have an opportunity at hand.

Mike "Mish" Shedlock
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12:43 AM

Money Multipliers, Velocity, and Excess Reserves

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Inquiring minds are reading the Quarterly Review and Outlook by Van Hoisington and Dr. Lacy Hunt. It's an excellent report so let's take a look at some commentary and charts.

Record Expansion of the Fed's Balance Sheet and M2

In the past year, the Fed's balance sheet, as measured by the monetary base, has nearly doubled from $826 billion last March to $1.64 trillion, and potentially larger increases are indicated for the future. The increases already posted are far above the range of historical experience. Many observers believe that this is the equivalent to printing money, and that it is only a matter of time until significant inflation erupts. They recall Milton Friedman's famous quote that "inflation is always and everywhere a monetary phenomenon."

These gigantic increases in the monetary base (or the Fed's balance sheet) and M2, however, have not led to the creation of fresh credit or economic growth. The reason is that M2 is not determined by the monetary base alone, and GDP is not solely determined by M2. M2 is also determined by factors the Fed does not control. These include the public's preference for checking accounts versus their preference for holding currency or time and saving deposits and the bank's needs for excess reserves. These factors, beyond the Fed's control, determine what is known as the money multiplier. M2 is equal to the base times the money multiplier. Over the past year total reserves, now 50% of the monetary base, increased by about $736 billion, but excess reserves went up by nearly as much, or about $722 billion, causing the money multiplier to fall (Chart 3). Thus, only $14 billion, or a paltry 1.9% of the massive increase of total reserves, was available to make loans and investments. Not surprisingly, from December to March, bank loans fell 5.4% annualized. Moreover, in the three months ended March, bank credit plus commercial paper posted a record decline.

click on chart for sharper image
Hoisington is correct that the Fed is not in control. However, the statement "Thus, only $14 billion, or a paltry 1.9% of the massive increase of total reserves, was available to make loans and investments" places the cart in front of the horse.

The money is available to lend in theory (It's not really for reasons we will get to in a moment) but banks simply do not want to lend as the pool of credit worthy borrowers is shrinking. Moreover consumers and corporate borrowers are showing a huge demand for dollars (a reluctance to borrow and spend).

Excess reserves are rising because of the increased demand for money and because banks are preparing in advance for future writeoffs, not because the increased demand for money means there is less money to lend. It's important to place the horse in front of the cart.

Nonetheless, it's important to note that "from December to March, bank loans fell 5.4% annualized. Moreover, in the three months ended March, bank credit plus commercial paper posted a record decline."

Total Bank Credit

click on chart for sharper image

While not yet negative, total bank credit is plunging. Now conceptualize what that chart would look like if banks marked that credit to market (my preferred way of looking at things). No doubt that chart would be deep into negative territory.

We do not know the full extent of what that chart would look like with credit marked to market because banks are playing games with level 3 assets, hiding bad debts in off balance sheet SIVs, and otherwise pretending that many loans that will never be paid, will be paid back.

Factors Affecting Banks Unwillingness To Lend

  • Rising unemployment will cause ...
  • Rising credit card defaults
  • Rising home equity loan defaults
  • Rising mortgage loan defaults
  • Rising commercial loan defaults

On top of that there is an increased demand for money by cash starved boomers headed into retirement who finally realize they do not have enough savings.

Excess Reserve Mirage

Factor all of upcoming defaults and much of those so called Excess Reserves are pure fantasy!

Is it any wonder banks are reluctant to lend? The irony in this situation is that bank lending is the most responsible it has been in a decade, and neither the Fed nor Congress is happy about it.

With that let's return to the article with and discussion about M2 and Velocity.

What about the M2 Surge?
M2 has increased by over a 14% annual rate over the past six months, which is in the vicinity of past record growth rates. Liquidity creation or destruction, in the broadest sense, has two components. The first is influenced by the Fed and its allies in the banking system, and the second is outside the banking system in what is often referred to as the shadow banking system. The equation of exchange (GDP equals M2 multiplied by the velocity of money or V) captures this relationship. The statement that all the Fed has to do is print money in order to restore prosperity is not substantiated by history or theory. An increase in the stock of money will only lead to a higher GDP if V, or velocity, is stable. V should be thought of conceptually rather than mechanically. If the stock of money is $1 trillion and total spending is $2 trillion, then V is 2. If spending rises to $3 trillion and M2 is unchanged, velocity then jumps to 3. While V cannot be observed without utilizing GDP and M, this does not mean that the properties of V cannot be understood and analyzed.

Click on chart for sharper image

The highly ingenious monetary policy devices developed by the Bernanke Fed may prevent the calamitous events associated with the debt deflation of the Great Depression, but they do not restore the economy to health quickly or easily. The problem for the Fed is that it does not control velocity or the money created outside the banking system.
In regards to velocity it is important to understand that falling velocity does not cause anything to happen. Falling velocity is a result of two phenomena.

1. Increased demand for money
2. Undertaking projects that make no economic sense (i.e. there is negative cost benefit payback).

Most government sponsored work efforts have a negative payback as do the various "ingenious monetary policy devices developed by the Bernanke Fed", as did the lending practices of Fannie Mae, etc.

Moreover those "highly ingenious monetary policy devices" are guaranteed to prolong the recovery process if not make the ultimate calamity worse. This is what happened when Japan tried the same measures.

Let's return once again to Hoisington.

Japan Government Debt vs. Economic Recovery
By weakening the private economy, government borrowing is not an inflationary threat. Much light on this matter can be shed by examining Japan from 1988 to the 2008 and the U.S. from 1929 to 1941. In the case of Japan government debt to GDP ratio surged from 50% to almost 170%. So, if large increases in government debt were the key to economic prosperity, Japan would be in the greatest boom of all time. Instead, their economy is in shambles. After two decades of repeated disappointments, Japan is in the midst of its worst recession since the end of World War II. In the fourth quarter, their GDP declined almost twice as fast as that of the U.S. or the EU. The huge increase in Japanese government debt was created when it provided funds to salvage failing banks, insurance and other companies, plus transitory tax relief and make-work projects.

In 2008, after two decades of massive debt increases, the Nikkei 225 average was 77% lower than in 1989, and the yield on long Japanese Government Bonds was less than 1.5% (Chart 6). As the Government Debt to GDP ratio surged, interest rates and stock prices fell, reflecting the negative consequences of the transfer of financial resources from the private to the public sector (Chart 7). Thus, the fiscal largesse did not restore Japan to prosperity. The deprivation of private sector funds suggested that these policy actions served to impede, rather than facilitate, economic activity.

click on chart for sharper image
Other than an occasional putting the cart in front of the horse syndrome, this was an excellent read by Van Hoisington and Dr. Lacy Hunt. It's well worth a complete review.

Mike "Mish" Shedlock
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Sunday, April 26, 2009 2:07 PM

Homeland Security Declares Public Health Emergency Over Swine Flu Outbreak

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Swine Flu outbreaks have been reported in New York, Texas, California, Kansas and Ohio. In Mexico, the health minister has requested (voluntarily at this point) suspension of public events (movie theaters, church gatherings, bars).

In addition Russian has suspended meat imports from Mexico and the US over swine flu concerns. Here are the headline items.

Mexico Seeks to Contain Swine Flu, Economic Impact

Mexican President Felipe Calderon, operating under emergency powers declared yesterday, stopped short today of shutting down work places in the Mexico City area, the most populated and productive of the country, amid a deadly swine flu outbreak to ease the economic impact.

Calderon is holding powers to order quarantines and suspend public events. So far, the government has closed schools in Mexico City and the states of Mexico and San Luis Potosi and has canceled government activities that draw crowds.

Health Minister Jose Cordoba requested, but didn’t order, the closure of bars, movie theaters and churches to help contain the outbreak.

At least 20 deaths are confirmed in Mexico and 1,324 patients are hospitalized with flu-like symptoms, Cordova said yesterday at a Mexico City news conference. The strain is a variant of the H1N1 swine influenza that has infected 11 people in Kansas, California and Texas and may have sickened at least eight students in New York.

Museums, theaters and other venues in the Mexico City area, where large crowds gather, have shut down voluntarily and concerts and other events have been canceled to help contain the disease. Two professional soccer games will be played today in different Mexico City stadiums without any fans.

“We request the collaboration to reduce the sources of contact by suspending events in closed or open spaces of any type,” Cordoba said.

The emergency decree lets Calderon regulate transportation, send inspectors into any home or building, order quarantines and assign any task to all federal, state and local authorities as well as health professionals to combat the disease.
Swine Flu Confirmed in US

The Center for Disease Control says Swine Flu Confirmed in 20 People in the U.S.
Twenty people in the U.S. have confirmed cases of swine flu linked to the virus that has spread in Mexico, and the acting head of the Centers for Disease Control and Prevention said officials expect more severe infections to begin showing up.

Richard Besser, the CDC’s acting director, said the virus has been identified in New York, Texas, California, Kansas and Ohio. So far, the cases have been relatively mild and only one person has reported being hospitalized.

“It looks to be the same virus that is causing the situation in Mexico,” Besser said at a briefing at the White House. Scientists are trying to determine why the virus, normally transmitted among pigs, has been more severe in Mexico, where as many as 81 deaths have been linked to the infection.

There is no vaccine for the virus, he said.

Homeland Security Secretary Janet Napolitano said stockpiles of drugs to treat patients will be made available. The government is issuing a health emergency declaration to free up more resources to combat the spread of the virus.
Swine Flu Outbreak at Private New York School

Swine Flu Virus Outbreak Confirmed at New York School

Health officials have confirmed an outbreak at a New York private school of swine flu that may have come from Mexico where the virus is suspected of killing 81 people.

The virus may have been brought back by students who were vacationing in Mexico during a recent spring break, though that couldn’t be confirmed, Bloomberg said. The virus has sickened more than 1,000 in Mexico. There have been 20 confirmed cases in five U.S. states requiring one hospitalization, the Centers for Disease Control and Prevention said today. New York health officials have been urging people not to go to the hospital unless they are severely ill.

About 200 students at St. Francis were ill last week with flu-like symptoms, the New York Department for Public Health and Mental Hygiene said yesterday.
Public Health Emergency Declared

In the US, the Department of Homeland Security Declares Public Health Emergency.
A public health emergency has been declared in the U.S. to free up resources to deal with the swine flu, Janet Napolitano, secretary of the Department of Homeland Security, said at a White House briefing today.

No official travel advisories have been issued by the U.S. State Department in relation to the disease, Napolitano said. A follow-on flu outbreak is possible in several months, she said.
Russia Suspends Meat Imports

Russia Suspends Mexican, Some U.S. Meat Imports on Swine Flu

Russia suspended imports of all meat from Mexico and the U.S. states of Texas, California and Kansas shipped after April 21 on concern about the spread of swine flu, the country’s veterinary watchdog said.

The suspension also affects pork from Guatemala, Honduras, the Dominican Republic, Columbia, Costa Rica, Cuba, Nicaragua, Panama, Salvador, and the U.S. states of Alabama, Arizona, Arkansas, Georgia, Kansas, Louisiana, New Mexico, Oklahoma and Florida, the watchdog added in a statement on its Web site today.
Mike "Mish" Shedlock
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12:32 AM

ECB's Lord Voldemort Policy

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Inquiring minds are reading ECB Likely to Make Moderate Rate Cut.

European Central Bank governing council member Guy Quaden said the bank will probably cut its benchmark interest rate by a “moderate” amount next month.

“A new cut for our main interest rate is surely not excluded,” Quaden told reporters in Washington today. “It will probably be moderate, but it would bring our main rate to a new historically low level. We will also discuss and probably decide other non-conventional measures.”

Bank of Italy Governor Mario Draghi said today that there is now a “long list of indicators that are less ugly.” Bank of France Governor Christian Noyer said confidence was improving and consumption was holding up “quite well,” while colleague Ewald Nowotny of Austria said he sees positive signs and high uncertainty in the economy.

Both Draghi and Quaden said deflation was a risk to the economy. Nowotny said while the ECB expected prices to shrink for some months, they will rise over this year and next.

We, as the ECB, don’t speak of deflation but disinflation,” Nowotny said in Washington. “At the moment, we have certainly the need for an expansionary policy.”
Like the wizards in Harry Potter afraid to say "Voldemort" the dark lord's name, the ECB is afraid to speak of deflation. Whether they are willing to speak of deflation or not, it has arrived.

ECB Options to Fight Recession Include Rate Floor

ECB Governor Nout Wellink says ECB Options to Fight Recession Include Rate Floor.
The European Central Bank is considering several options including a floor for its benchmark interest rate to fight the recession, said Nout Wellink, a member of its governing council.

The ECB’s 22 council members appear split over how to counter the worst economic slump since World War II, at a time when the bank’s main rate is already at a record low of 1.25 percent. Germany’s Axel Weber has said the bank shouldn’t cut the rate below 1 percent. Others, including Athanasios Orphanides of Greece, want to keep open the option of deeper rate reductions and have argued in favor of asset purchases.

The Federal Reserve and Bank of England have already cut lending rates close to zero and are buying government and corporate debt to bolster their economies. The Bank of Canada this week cut its key rate to 0.25 percent and said it plans to leave it there for more than a year.

Trichet Signals

While ECB President Jean-Claude Trichet has signaled another quarter point reduction in the main lending rate is likely next month, he has declined to comment on what new tools the bank will adopt. He said in Washington on April 24 that growth was unlikely to return “rapidly.”

A negative inflation rate by itself is not a problem, on the contrary it increases real disposable income,” Wellink said. “The lower and the longer the disinflationary process is, the greater of course the chance that in a certain moment people are going to react in a way we don’t want them to react. That is at this very moment not an issue.
Inflation hawk Trichet signals things are much worse than anyone suspects by suggesting growth is unlikely to return “rapidly.” Moreover, Wellink, like Nowotny just cannot bring himself to say the dreaded D word, confirming the ECB's Lord Voldemort policy on deflation.

Mike "Mish" Shedlock
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Saturday, April 25, 2009 11:52 AM

GM Employee Stock Fund Dumps All GM Shares

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Yahoo Finance is reporting GM employee stock fund dumps all company shares.

The manager of General Motors' employee stock fund has sold off all remaining shares of the troubled auto maker, which is closing plants and slashing costs in a bid to avoid bankruptcy.

General Motors revealed in a regulatory filing late Friday that its employee stock-purchase plan has unloaded all shares of the company in favor of short-term and money market investments. The plan's financial manager, State Street Bank and Trust Co., said it began selling off shares of the Detroit automaker in late March "due to the economic climate and the circumstances surrounding GM's business."
GM Weekly Chart

click on chart for sharper image

GM started dumping in March, the first blue circle in the above chart, and just now finished. Congratulations of sorts go to GM and State Street Bank and Trust Co., the plan's financial manager, for one final display of ineptitude.

Is this a case of better late than never, or a case of why even bother?

What it does show is why company plans, especially plans for struggling companies ought not be in their own shares. GM employees will be out of a job and any shares owned are essentially worthless.

Now, in all likelihood, GM's pension plan will be dumped to the Pension Benefit Guaranty Corporation (PBGC) which is another way of saying US taxpayers.

Mike "Mish" Shedlock
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Friday, April 24, 2009 12:46 PM

Gold Continues To Act Well

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Here is a chart of gold that I have been following.

click on chart for sharper image

The traditional seasonal strong period for gold is August through January. The chart shows that for quite some time it's a case of "seasonals be damned".

Earlier this year gold was moving lock step with the dollar as noted in You Can't Fool Gold. That pattern too has ended.

Gold Inflows into ETFs up by more than 300 Percent

Inquiring minds are reading Gold: Inflows into ETFs up by more than 300pc.

Figures from the World Gold Council show that investors appetite for gold showed no sign of abating with record inflows in to gold exchange traded funds.

Inflows into gold ETFs continued to grow throughout the quarter, with investors buying a record 469 tonnes of gold, dwarfing the previous quarterly record of 145 tonnes, set in the third quarter of last year. This took the total amount of gold in ETFs to 1,658 tonnes, worth US$48.6 billion, the World Gold Council said.

Ongoing risk aversion, growing uncertainty over where consumer prices are headed and a renewed vigour in the search for effective portfolio diversifiers all supported gold investment demand throughout the first quarter of 2009, the Council’s latest Gold Investment Digest.

Regarding the broader economic backdrop, commentators expressed two distinct views with respect to where consumer prices are headed. One sees inflation coming, as a consequence of the staggering increase in public spending and the quantitative easing measures being put in place by central banks around the globe.

The other view argues that deflation is the more likely prospect, pointing to recent inflation figures - US consumer prices were unchanged on an annual basis in January for the first time since 1954 - and the continued deterioration in consumer confidence and spending. Both scenarios have possible positive implications for gold:

“Gold is not just effective during a financial crisis. The unique and diverse drivers of gold demand and supply mean that changes in the gold price do not correlate with changes in the prices of other financial assets, regardless of the health of the financial sector or broader economy,” Dempster said. “Gold is an effective portfolio diversifier regardless of the stage of the economic cycle.”
The idea that gold does well in periods of inflation and deflation is easily disproved. Gold fell from over $800 to $250 over the course of 20 years with inflation all the way. The reality is gold does well in periods of high economic stress (deflation, stagflation, hyperinflation, and periods of prolonged credit stress).

When it comes to trading, it's frequently a mistake to look for reasons, because they are often not known until it's far too late. In this case, there is no doubt we are in a period of extreme credit stress. Moreover, nearly every country on the planet is attempting to debase their currency simultaneously.

By those measures, gold should be acting well, and it is. Seasonals be damned.

Mike "Mish" Shedlock
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12:48 AM

Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis

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New York State Attorney General Andrew Cuomo's letter to the SEC and Senate Banking Committee on the Bank of America, Merrill Lynch Merger provides strong evidence of coercion to commit securities fraud by former Treasury Secretary Paulson and Fed Chairman Ben Bernanke, and actual securities fraud by Bank of America CEO Kenneth D. Lewis.

At issue is Lewis's decision to back away from the merger deal with Merrill Lynch on a MAC (material adverse change) clause because of rapidly deteriorating conditions at Merrill Lynch. Here are a few pertinent snips from Cuomo's letter.

Immediately after learning on December 14, 2008 of what Lewis described as the "staggering amount of deterioration" at Merrill Lynch, Lewis conferred with counsel to determine if Bank of America had grounds to rescind the merger agreement by using a clause that allowed Bank of America to exit the deal if a material adverse event ("MAC") occurred. After a series of internal consultations and consultations with counsel, on December 17, 2008, Lewis informed then-Treasury Secretary Henry Paulson that Bank of America was seriously considering invoking the MAC clause. Paulson asked Lewis to come to Washington that evening to discuss the matter.

At a meeting that evening Secretary Paulson, Federal Reserve Chairman Ben Bernanke, Lewis, Bank of America's CFO, and other officials discussed the issues surrounding invocation of the MAC clause by Bank of America. The Federal officials asked Bank of America not to invoke the MAC until there was further consultation. There were follow-up calls with various Treasury and Federal Reserve officials, including with Treasury Secretary Paulson and Chairman Bernanke. During those meetings, the federal government officials pressured Bank of America not to seek to rescind the merger agreement. We do not yet have a complete picture of the Federal Reserve's role in these matters because the Federal Reserve has invoked the bank examination privilege.

Bank of America's attempt to exit the merger came to a halt on December 21, 2008. That day, Lewis informed Secretary Paulson that Bank of America still wanted to exit the merger agreement. According to Lewis, Secretary Paulson then advised Lewis that, if Bank of America invoked the MAC, its management and Board would be replaced.

In an interview with this Office, Secretary Paulson largely corroborated Lewis's account. On the issue of terminating management and the Board, Secretary Paulson indicated that he told Lewis that if Bank of America were to back out of the Merrill Lynch deal, the government either could or would remove the Board and management.

Secretary Paulson's threat swayed Lewis. According to Secretary Paulson, after he stated that the management and the Board could be removed, Lewis replied, "that makes it simple. Let's deescalate." Lewis admits that Secretary Paulson's threat changed his mind about invoking that MAC clause and terminating the deal.
Coercion To Commit Securities Fraud

It's crystal clear from the letter that a strong case can be made that Paulson and Bernanke coerced Lewis to carry out a merger agreement that was not in Bank of America's shareholders best interest. Lewis arguably did so only to save his own job and the board.

Flashback Monday, September 15, 2008

I called this correctly at the time. Please consider Market Votes "No Confidence" In Merrill, Bank of America Merger.
“There was no pressure from regulators, absolutely no pressure,” said Mr Lewis, who described the deal as “the strategic opportunity of a lifetime”. He said: “The first contact came on Saturday morning and we put the transaction together in 48 hours. The instant we talked it made sense.”

My Translation: "The pressure from the Fed was enormous. Anyone in their right mind knows this deal makes no sense to Bank of America".

The moral of this story is: The strong swallow the weak until the strong become weak.
And so it was, the relatively strong was coerced to buy the pathetically weak.

I suspect Lewis he will be forced out as CEO whether he is indicted or not. Certainly he deserves to go. The more serious issue is the appearance of coercion by Paulson and Bernanke.

Please note that Cuomo's letter states "In an interview with this Office, Secretary Paulson largely corroborated Lewis's account. "

As far as I am concerned, Paulson just pleaded guilty. I do not care what Paulson's reasons were, no one is above the law.

Let the criminal indictments begin: Paulson, Bernanke, and Lewis.

Mike "Mish" Shedlock
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Thursday, April 23, 2009 11:09 PM

Twilight Zone Treasuries

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In accordance with its "print to buy" program, today the Fed bought another $7 billion of Treasuries.

The Federal Reserve bought $7 billion of Treasuries maturing between May 2012 and August 2013 on Thursday, the New York Fed said on its Website.

Dealers submitted $15.99 billion for consideration in the purchase. The Fed made its heaviest purchases in Treasuries maturing in May 2013 and June 2012, respectively.

The Fed said at its last meeting it intends to buy $300 billion in Treasury securities over six months in a bid to lower long-term borrowing costs and revive economic growth.
Inquiring minds are looking at a chart to see what the market thinks of this manipulation.

$TYX - 30 Year Long Bond Yield

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$TNX - 10 Year Treasury Note Yield

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The Fed also purchased $7 billion on Tuesday. Professor Fil Zucchi on Minyanville had this succinct comment:

"Today the Federal Reserve printed $7 billion dollars and used it to buy an equivalent amount of 7 and 10 year Treasury bonds. As I publicly asked before, if Mr. Fed can't rig the price of an asset by buying it with printed money, why should anyone else buy it?"

Those wishing to keep an eye on these price rigging attempts can follow the Federal Reserve Bank Permanent OMOs: Treasury link.

Bernanke's Hubris

It is ridiculous for the Fed to think it can control the vast $trillion treasury market with pea shooting efforts at $7 billion a pea. However, as the charts above show, the Fed announcement hugely distorted the market in smaller timeframes.

As Prof. Zucchi says "If Mr. Fed can't rig the price of an asset by buying it with printed money, why else should anyone else buy it?"

Other than the initial pop, the Fed's silly attempt to game the system may have caused so much mistrust that it is putting upward pressure on yields.

What we do know for sure is that Bernanke's efforts to prevent deflation have failed spectacularly as documented in Bernanke's Deflation Preventing Scorecard.

That 10 year treasury wedge is likely to break sharp in one direction or the other. The competing arguments are substantial:

Case For and Against Treasuries

1. The idea of a sustainable economic recovery starting in the second half is a farce. A collapsing recovery effort will renew a flight to safety in treasuries.
2. The Fed is printing massive amounts of dollars to bailout the banks in an effort that is also doomed to fail. The Fed's printing is putting upward pressure on yields.
3. Seasonality on treasuries is negative from January through May. Seasonality turns positive in June. How much more selloff is left?
4. The Fed's blatant attempt to force yields lower is arguably counterproductive.

Regardless of what happens, this seems to be a poor place to initiate shorts. The time to short treasuries was December or the subsequent retest of the yield low in January. There is little reason to enter a trade in the Twilight Zone with all these competing factors.

Mike "Mish" Shedlock
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11:41 AM

Fannie Freddie Delinquencies Soar (and they are going to get much worse)

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On Tuesday, Fannie Mae and Freddie Mac reported Mortgage Delinquencies Rose 50% in a Month.

Fannie Mae and Freddie Mac mortgage delinquencies among the most creditworthy homeowners rose 50 percent in a month as borrowers said drops in income or too much debt caused them to fall behind, according to data from federal regulators.

The number of so-called prime borrowers at least 60 days behind on mortgages owned or guaranteed by the companies rose to 743,686 in January, from 497,131 in December, and is almost double the total for October, the Federal Housing Finance Agency said in a report to Congress today.

Of all borrowers who ended up in default, 34 percent told Fannie and Freddie they were earning less money, about 20 percent cited excessive debt as a reason for missing mortgage payments, and 8.1 percent blamed unemployment, FHFA said.
Those are pretty nasty numbers.

Mark Hanson (aka Mr. Mortgage) at The Field Check Group said "We saw this coming well in advance by watching notices of default (NODs)."

GSE Notices Of Default Rate of Change

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Fannie and Freddie data is woefully late. The GSEs are just now reporting January delinquencies.

In the meantime, Mark is tracking actual notice of default data (90-120 days late) for March. If defaults are soaring, it stands to reason that delinquencies will be soaring as well. In this way, someone watching Notices of Default (NODs) is able to know in advance whether or not an upcoming GSE report is going to be bad.

Mark is also tracking California specifically. Please consider the following chart.

Notices Of Default Rate of Change Total Universe (Not just GSEs)

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A key point for the above charts is that Fannie and Freddie loans are now blowing up at a faster rate than the entire universe of loans!

Mark's data is for the west coast, primarily California. However, his assumption is that if his west coast data is bad, the overall numbers for the GSEs will be bad as well.

SB1137 Effect

Note the effect of SB1137, a ridiculous foreclosure prevention act that gave give delinquent payers 30 days grace period before the actual foreclosure process begins. All that bill did was add red tape and delay the inevitable.

CA Foreclosure Prevention Act Coming Up

A new CA law dubbed the CA Foreclosure Prevention Act comes into effect in July that will essentially do the same thing. It's primary purpose is to delay the time between the Notice-of-Default (foreclosure stage 1) to the Notice-of-Trustee Sale (stage 2) by 90-days further delaying the foreclosure process and ultimate end of the foreclosure and housing crisis.

Hanson says, "It is likely we are already seeing unintended consequences of the new law. A certain percentage of the last few month's surge of new loan notice-of-defaults was likely servicers gaming the calendar in order to get borrowers into the foreclosure process prior to the July enactment of the new law."

FHFA Expands Reporting On Homeowner Assistance

Inquiring minds are digging into news that FHFA Expands Reporting On Homeowner Assistance
Since late November, the Enterprises had suspended foreclosure sales and evictions on owner-occupied properties. The suspensions, which ended on March 31, 2009, allowed servicers additional time to work with borrowers in foreclosure who were eligible for the Streamlined Modification Program (SMP). The impact of the suspensions caused completed foreclosure sales and third-party sales to decline 77 percent from the prior three-month average of 16,342 to 3,711 in December, and 79 percent to 3,391 in January. At the same time, loans that were 60+ and 90+ days delinquent increased. All loans 60+ days delinquent increased from 834,831 as of November 30 to 1,229,051 as of January 31, representing an increase of 47 percent over the period. However, prime loans 60+ days delinquent increased by 69.6 percent while nonprime loans increased by 23 percent.
Total Delinquencies

The reported 743,686 in the first widely read article was only Prime loans. The total 60-day and worse delinquent/defaulted loans stood at 1.229 million as of Jan 31st from 834k in November, up 47%. This represents 4.1% of their entire portfolio. This was led by prime that was up 70% while Subprime was up 23%.

Successful loss mitigation is increasing BUT in January only 9k loans were successfully modified. That would have to increase 10 fold to make a dent in the upcoming foreclosure wave.

The multi-month foreclosure suspension that ended on March 31st came at the same time as the new GSE loss mitigation initiative -- but with a 400k increase in distressed loans over the past 2 months and a recent record of 9k mods per month, the broken dam has a lot of water coming over it.

It's no wonder why the Fed is buying Agency MBS. Foreigners are likely a tad worried about now about this trash they were peddled by the trillions carries no explicit guaranty.

Fannie Mae Certificate

click on image for sharper view

MBS Purchase Program

Please consider the MBS Purchase Program.
On Wednesday, March 18, the FOMC announced the expansion of the Federal Reserve's program to purchase agency MBS to a total of $1.25 trillion by the end of the year.


Does the agency MBS program expose the Federal Reserve to increased risk of losses?

Assets purchased under this program are fully guaranteed as to principal and interest by Fannie Mae, Freddie Mac, and Ginnie Mae, so the Federal Reserve's exposure to the credit risk of the underlying mortgages is minimal. The market valuation of agency MBS can fluctuate over time based on the interest rate environment; however, the Federal Reserve's exposure to interest rate risk is mitigated by the conservative, buy and hold investment strategy of the agency MBS purchase program.

When did the purchases begin?
Purchases began in early January, 2009 and will continue until the end of 2009.
Defaults and delinquencies are soaring an the Fed has the gall to say there is no risk because the principle is guaranteed by Fannie Mae and Freddie Mac.

Pardon me for asking, but I have two questions:

1. Exactly who is guaranteeing Fannie and Freddie?

2. How the hell does the Fed think it can get away with such a blatant lie about the risks?

Those who think that lie would be hard to top need to think again. Please consider the GSE MORTGAGE BACKED SECURITIES PURCHASE PROGRAM FACT SHEET
Risk. Treasury is committed to protecting taxpayers and will ensure that measures are in place to reduce the potential for investment loss.

Under most likely scenarios, taxpayers will benefit from this program - both indirectly through the increased availability and lower cost of mortgage financing, and directly through potential returns on Treasury’s portfolio of MBS.
Any idea that taxpayers will benefit from gains on the MBS portfolio is complete nonsense and the Fed and Treasury both know it.

Mike "Mish" Shedlock
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