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Sunday, October 21, 2007 11:23 PM

Destined To Fail

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Paulson is twisting arms around the globe attempting to drum up support for his Super-SIV bailout plan.

Fund giants PIMCO and Fidelity have joined the so-called super SIV fund set up by three big U.S. banks, boosting confidence in the plan, Bank of Italy Governor Mario Draghi said at the close of a meeting of finance officials from the Group of Seven rich industrialized nations.

Draghi said U.S. Treasury Secretary Henry Paulson had discussed the fund with officials attending the meeting of central bankers and finance ministers from the United States, Canada, Italy, France, Germany, Britain and Japan.

"Paulson has done a short briefing on the SIV fund," Draghi told journalists. "PIMCO and Fidelity have joined."
Pimco first said no, then it said yes (or so it was reported). However, MarketWatch is reporting "PIMCO is not participating".

It's early yet and anything can happen, but futures are decidedly negative at 1:00AM central.

Last week yield curve watchers noticed that bad news was sold for the first time in a long time. What happened to the "Fed is going to cut again party?"

Are we now in an environment where all, news is bad news?

Given that for the longest time all news was greeted positively by the market, there is every reason to believe that all news can indeed be bad news for the market at some point. It's far too early to say if that transition has been made or not, but the timing is perfect if it has.

Perhaps the Fed does pull out all the stops. But what if no one shows up at the party?

Nothing Can Stop A Recession

Hedge funds and big banks buying commercial paper for each other inflated prices cannot stop a recession. Given government manipulation of GDP and CPI, it can easily be argued we are already in a recession as Housing Holds Back the Economy.
"We are in a housing recession in Northern California," said Scott Anderson, a senior economist with San Francisco-based Wells Fargo Bank. "I see the fingerprints of the housing slowdown in a number of industries."

Perhaps the most worrisome trend in the East Bay is the possibility that the housing malady has begun to infect the rest of the region's economy, Anderson warned. "We are seeing secondary effects on retail trade, there is some weakness in restaurants, clothing stores, home furnishing stores," Anderson said. "Some durable goods manufacturing that is related to housing is getting hit."

Some economists believe California and the East Bay won't soon escape the housing nose dive. "We don't think this will be over any time soon," Haveman said. "We expect home price declines in California to continue through 2009. Employment declines will continue into 2008. The real estate bubble has a long way to go before it completely bursts."
A Rolling Recession

The recession will roll from state to state to sate, just as the busting of the housing bubble did. Please see Grim Forecast for State Budgets for how various states are affected by the economic slowdown.

It's Not Just Housing

The Financial Times is reporting US loan default problems widen
US banks have raised reserves for loan losses by at least $6bn over the second quarter and by even larger amounts from last year, indicating financial executives believe consumers will be increasingly unable to make payments on a variety of loans.

Banks are adding to reserves not just for defaults on mortgages, but also on home equity loans, car loans and credit cards.

“What started out merely as a subprime problem has expanded more broadly in the mortgage space and problems are getting worse at a faster pace than many had expected,” said Michael Mayo, Deutsche Bank analyst.

“On top of this, there is an uptick in auto loan problems, which may or may not be seasonal, and there is more body language from the banks that the state of the consumer was somewhat less strong [than thought].”
Problem Banks
  • Wachovia (WB) - credit loss provisions more than doubled from the second quarter to $408m.
  • KeyCorp (Key) - non-performing assets rose $241m from last year and loan-loss provisions doubled.
  • Comerica (CMA) - Loan loss provisions tripled from last year to $45m.
  • Wells Fargo (WFC) - Net credit losses jumped from $663m last year to $892m due to home equity and car loan losses. Loans more than 90 days past due and still accruing increased to $5.53bn from $3.66bn last year.
  • Citigroup (C)- Is seeking a bailout over SIVs.
Living paycheck to paycheck gets harder

The reason the SIV bailout must fail is simple: Living paycheck to paycheck gets harder.
The calculus of living paycheck to paycheck in America is getting harder. Across the nation, Americans are increasingly unable to stretch their dollars to the next payday as they juggle higher rent, food and energy bills. It's starting to affect middle-income working families as well as the poor, and has reached the point of affecting day-to-day calculations of merchants like Wal-Mart Stores Inc., 7-Eleven Inc. and Family Dollar Stores Inc.

While economists debate whether the country is headed for a recession, some say the financial stress is already the worst since the last downturn at the start of this decade.

To economize, shoppers are going for less expensive food.

"They're buying more peanut butter and pasta. And they're going for hamburger meat," Flickinger, the retail consultant, said. "They're trying to outsmart the store by looking for deep discounts at the end of the month." He said the last time he saw this was 2000-2001, when the dot-com bubble burst and the economy went into a recession after massive layoffs.
Fraudulent buying of asset backed commercial paper at inflated prices in attempts to hide losses is simply not going to do a thing for the average Joe struggling to make his house payment. Nor is it going to do anything for those recently laid off, nor is it going to do a thing for waiters receiving smaller tips because of declining numbers of people eating out, nor is it going to do anything for Wal-Mart, Home Depot (HD), Lowes (LOW), or Target (TGT) all who aggressively expanded in an attempt to steal business from each other.

The real economy is suffering and has been for some time. It's going to get worse too as retail stores, once a huge driver of employment, start laying off. No amount of fraud by Paulson can hide those simple economic facts.

Mike Shedlock / Mish

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