WSJ: LIBOR is a lie

Voltron says: This has BIG implications for borrows, lenders and speculators since everything is based on LIBOR.



LIBOR FOG

Bankers Cast Doubt On Key Rate Amid Crisis

By CARRICK MOLLENKAMP

LONDON -- One of the most important barometers of the world's financial health could be sending false signals.

In a development that has implications for borrowers everywhere, from Russian oil producers to homeowners in Detroit, bankers and traders are expressing concerns that the London inter-bank offered rate, known as Libor, is becoming unreliable.

Libor plays a crucial role in the global financial system. Calculated every morning in London from information supplied by banks all over the world, it's a measure of the average interest rate at which banks make short-term loans to one another. Libor provides a key indicator of their health, rising when banks are in trouble. Its influence extends far beyond banking: The interest rates on trillions of dollars in corporate debt, home mortgages and financial contracts reset according to Libor.

In recent months, the financial crisis sparked by subprime-mortgage problems has jolted banks and sent Libor sharply upward. The growing suspicions about Libor's veracity suggest that banks' troubles could be worse than they're willing to admit.

The concern: Some banks don't want to report the high rates they're paying for short-term loans because they don't want to tip off the market that they're desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates. Fibbing by banks could mean that millions of borrowers around the world are paying artificially low rates on their loans. That's good for borrowers, but could be very bad for the banks and other financial institutions that lend to them.

True Borrowing Costs

No specific evidence has emerged that banks have provided false information about borrowing rates, and it's possible that declines in lending volumes are making some Libor averages less reliable. But bankers and other market participants have quietly expressed concerns to the British Bankers' Association, which oversees Libor, about whether banks are reporting rates that reflect their true borrowing costs, according to a person familiar with the matter and to government documents. The BBA is now investigating to identify potential problems, the person says.

Questions about Libor were raised as far back as November, at a Bank of England meeting in which United Kingdom banks, the firms that process bank trades and central bank officials discussed the recent financial turmoil. According to minutes of the meeting, "several group members thought that Libor fixings had been lower than actual traded interbank rates through the period of stress." In a recent report, two economists at the Bank for International Settlements, a sort of central bank for central bankers, also expressed concerns that banks might report inaccurate rate quotes.

On the Agenda

A spokesman for the BBA, John Ewan, said the trade group is monitoring the situation. "We want to ensure that our rates are as accurate as possible, so we are closely watching the rates banks contribute," Mr. Ewan said. "If it is deemed necessary, we will take action to preserve the reputation and standing in the market of our rates." Libor is expected to be on the agenda of a bankers' association board meeting on Wednesday.

In a recent research report on potential problems with Libor, Scott Peng, an interest-rate strategist at Citigroup Inc. in New York, wrote that "the long-term psychological and economic impacts this could have on the financial market are incalculable." Mr. Peng estimates that if banks provided accurate data about their borrowing costs, three-month Libor would be higher by as much as 0.3 percentage points.

A small increase in Libor can make a big difference for borrowers. For example, an extra 0.3 percentage points would add about $100 to the monthly payment on a $500,000 adjustable-rate mortgage, or $300,000 in annual interest costs for a company with $100 million in floating-rate debt. On Tuesday, the Libor rate for three-month dollar loans stood at 2.716%.

Libor has become such a fixture in credit markets that many people trust it implicitly. Concerns about its reliability are "actually kind of frightening if you really sit and think about it," says Chris Freemott, a Naperville, Ill., mortgage banker who depends on Libor to tell him how much his firm, All America Mortgage Corp., owes First Tennessee bank for a credit line that he uses to make loans.

The Libor system was developed in the 1980s. Banks were looking for a benchmark that would allow them to set rates on syndicated debt -- corporate loans that typically carry interest rates that adjust according to prevailing short-term rates. By pegging lending rates to Libor, which is supposed to represent the rate banks charge each other for loans, banks sought to guarantee that the interest rates their clients pay never fall too far below their own cost of borrowing.

Banks typically set their lending rates at a certain "spread" above Libor: A company with decent credit, for example, might pay an interest rate of Libor plus one-half percentage point. A risky "subprime" mortgage loan might carry an interest rate of Libor plus more than six percentage points.

Today, Libor rates are set for 15 different loan durations -- from overnight to one year -- and in 10 currencies, including the pound, the dollar, the euro and the Swedish krona. They serve as the basis for payments on trillions of dollars in corporate loans, mortgages and student loans. Libor rates are also used to set the terms of more than $500 trillion in "derivatives" contracts such as interest-rate swaps, which companies all over the world, including U.S. mortgage guarantors Fannie Mae and Freddie Mac, use to protect themselves against sudden shifts in the difference between long-term and short-term interest rates.

When banks want to borrow money, they contact banks directly or phone a loan broker, such as ICAP PLC in London. Much of the interbank lending takes place between 7 a.m. and 11 a.m. London time. In broker speak, a bank might ask for a "yard" -- one billion in a designated currency. Brokers communicate with bank clients by phone or through desktop voice boxes, which are faster. At ICAP, brokers track bids and offers by looking up at a big whiteboard above the trading floor, where a "board boy" posts information. The actual rates at which banks borrow from each other are known only to the lenders and borrowers, and possibly to their brokers.

Every morning by 11:10 London time, "panels" of banks send data to Reuters Group PLC, a London-based business-data and news company, on what it would cost them to borrow a "reasonable amount" in a designated currency. The dollar Libor panel, for example, consists of 16 banks, including U.S. banks Bank of America Corp. and J.P. Morgan Chase & Co. and U.K. banks HBOS PLC and HSBC Holdings PLC. Reuters uses the reported borrowing rates to calculate Libor "fixings." To reduce the possibility that any bank could manipulate an average by reporting a false number, Reuters throws out the highest and lowest groups of quotes before calculating averages.

Justin Abel, global head of data operations for Reuters, said in a statement that his company's role is solely to calculate fixings based on the information provided by banks. "It is their data alone we distribute. Reuters is purely the facilitator," he said.

Wary of Lending

The global financial crisis that began last summer has made it more difficult for banks to package and sell all kinds of loans as securities, as well as to issue bonds and short-term IOUs to investors. Increasingly, banks have turned to the interbank market to borrow cash. But their mounting losses on mortgage securities and other investments have raised fears that a major institution could go bust. That's made banks increasingly wary of lending to one another.

Such jitters have made many banks unwilling to extend loans to each other for more than one week. As a result, the rates they quote for loans of three months or more are often speculative, because there's little to no actual lending for that time period, brokers say. "It amounts to an average best guess," says Don Smith, an economist at ICAP, the London broker of interbank loans and derivatives.

These bank problems are proving costly to other kinds of borrowers around the world. One way to measure the rough cost is by comparing the three-month Libor rate with an interest rate that doesn't reflect worries about banks' financial health -- such as the yield on a three-month Treasury bill, which is backed by the U.S. government. The gap between the two stood at 1.58 percentage points Tuesday, and has averaged 1.39 percentage points since the crisis began in August. In the five years before the financial crisis started, it averaged only 0.28 percentage points.

Citigroup's Mr. Peng believes banks could be understating even those abnormally high Libor rates. He notes that the Federal Reserve recently auctioned off $50 billion in one-month loans to banks for an average annualized interest rate of 2.82% -- 0.1 percentage point higher than the comparable Libor rate. Because banks put up securities as collateral for the Fed loans, they should get them for a lower rate than Libor, which is riskier because it involves no collateral. By comparing Libor with that indicator and others -- such as the rate on three-month bank deposits known as the Eurodollar rate -- Mr. Peng estimates Libor may be understated by 0.2 to 0.3 percentage points.

Other Benchmarks

In one sign of increasing concern about Libor, traders and banks are considering using other benchmarks to calculate interest rates, according to several traders. Among the candidates: rates set by central banks for loans, and rates on so-called repurchase agreements, under which borrowers provide banks with securities as collateral for short-term loans.

In a report published in March by the Bank for International Settlements, economists Jacob Gyntelberg and Philip Wooldridge raised concerns that banks might report incorrect rate information. The report said that banks might have an incentive to provide false rates to profit from derivatives transactions. The report said that although the practice of throwing out the lowest and highest groups of quotes is likely to curb manipulation, Libor rates can still "be manipulated if contributor banks collude or if a sufficient number change their behaviour."

The Madness of Ben Bernanke

Voltron says: Greenspan and Bernanke compared to Siegfried & Roy! I couldn't make this stuff up.

By Gabor Steingart in Washington

The dollar is in a tailspin, the trade deficit is growing and a recession is on the horizon. The American way of life is in serious danger. But the head of the Federal Reserve keeps on pumping easy credit into the system -- a crazy policy that will worsen the crisis.

Alan Greenspan and Ben Bernanke have more in common with the big cat entertainers Siegfried & Roy than any of us can be comfortable with.

The Las Vegas magicians call themselves "Masters of the Impossible" and have been fascinating audiences for decades by getting snow-white tigers to leap through burning rings.

The legendary Federal Reserve Chairman and his successor were equally adept at fascinating their audiences -- with a policy of miraculous monetary growth that gave America one of the longest periods of economic expansion in modern times. Many saw them as "Masters of the Universe." It seemed as if the central bankers had tamed predatory capitalism with their constant interest rate cuts.

Siegfried & Roy at times seemed at one with their cats, until the day everything went out of control. A tiger bit Roy in the neck during a show and looked as though it were about to devour him alive.

Greenspan and Bernanke too have lost their magic touch, and their image has been shredded by the real estate crisis and the dollar slide. The ravages of the financial markets aren't doing them any personal harm. But devalued stocks, bad mortgage loans and the diving dollar are damaging millions of small investors and savers.

It's as if the tiger has leapt of the stage and is mauling the audience. We can't blame wild cats or financial markets for being ruthless. It's in their nature to be brutal. Their unmistakeable message is: you can take things this far and no further.

In the case of the real estate crisis which reached the banks and is now unsettling the stock markets, the markets are now showing what G7 finance ministers and central bank governors meeting last weekend in Washington for their annual spring get-together declined yet again to admit publicly: Americans must change their lives -- or it will be changed for them by force.

American Way of Life Under Threat

The credit-financed consumer boom of recent years is coming to a painful end. Today's American Way of Life has no chance of surviving the coming years undamaged. The virus will continue to ravage its way through the financial system.

The property crisis is likely to spread to credit card providers soon and will then probably infect car manufacturers, furniture makers and all the other firms that owe their sales increases to the growth in credit finance. "The virus will keep on infecting the system," one management board member from a large bank said, requesting anonymity in return for the candour of his analysis.

His argument is that banks that grant mortgages to home buyers virtually unable to pay their bills are unlikely to be especially scrutinizing when it comes to lending cash to the buyers of fridges, cars and furniture. Indeed, a furniture store in Miami recently tried to lure consumers with the following offer: buy now, pay your first credit installment in three years, and no need for a down-payment.

The credit-financed way of life is typical of the US these days. Many people resort to credit to plug the gap between the lifestyle they have become accustomed to and their declining wages.

Dulling the Pain With Credit

The borrowed cash is like an anaesthetic against the painful impact of globalisation. Private household debt has been growing by $4 billion each business day for years.

All this wouldn't be so bad if the US economy were at least doing well in foreign markets. But it isn't, and hasn't been for a long time. Despite the depreciation of the dollar, which makes imports into the US far more expensive while making US exports cheaper in foreign markets, US manufacturers are finding it hard to sell their products.

Contrary to forecasts by both the Federal Reserve and the Treasury, the trade deficit has continued to grow, by 6 percent in February alone. America imported $62 billion worth of goods more than they exported in February, including a disturbingly large number of cars, computers and pharmaceutical products. Try as they might, most private households in America can't keep up this consumer miracle. The savings behavior of many Americans means that many of them now live from hand to mouth.

But Bernanke is doing nothing to dampen this hunger for credit. The former advisor to President George W. Bush is even trying to whip up credit-financed consumption by lowering interest rates. This is helping to fuel inflation because the monetary growth isn't being matched by growth in real economic output. Inflation in the US currently stands at 4 percent.

It's a paradox. The private commercial banks which have just had to make billions of dollars in write downs have become more cautious. They're scared of further risks. The management resignations at Citigroup and Bear Stearns have had a sobering impact.

Patriotic Madness

Meanwhile the Federal Reserve is urging the banks to go on taking risks. It has been injecting cash into the banking system for the past half-year while urging bank CEOs in confidential chats to offer more credit. The aim is to keep on financing consumer spending and even to stimulate it further -- for reasons of patriotism.

There's a word for this policy -- madness.

But because there is method in this madness, the meeting of mighty central bank governors and finance ministers in Washington over the weekend remained silent about it, at least officially. Outside the meeting rooms, though, there were murmurings about the poisoned legacy of Alan Greenspan and Bernanke's irresponsible behavior.

One participant told me: "There's an unwritten code of honor that says central bank governors should refrain from criticizing each other." Not least out of respect for the independence of central banks.

But the US is unlikely to realize the error of its ways on its own. "The Americans will always do the right thing," British Prime Minister Winston Churchill once said, "after they've exhausted all the alternatives."

Central bankers and tiger tamers have something else in common -- obstinacy. Roy has recovered from his wounds and wants to return to the stage in Las Vegas. "The magic is back," came the defiant announcement.

Alan Greenspan cut a similarly indestructible figure at the weekend. Even though criticism of his cheap money policy was only murmured privately, the 82-year-old legend of central banking said: "I was praised for things I didn't do. I am now being blamed for things I didn't do."

Not that he ever complained about getting false praise.

Max Pain Website

Voltron says: Great website computes the max pain level where options will tend force the stock price to go.

http://www.optionpain.com

Lehman Max Pain

Voltron says: If option hedging activity pushes LEH near $50, it'll be a golden opportunity to short more.

From Seeking Alpha:

The month of April has been quite intense for Lehman Brothers (LEH). The flood of bad news both from the financial and housing sectors has caused Lehman stock to fluctuate wildly - sometimes as much as 10% or more per day. With April options expiring on Friday, it is my belief that we will see the stock approach its max pain price - which is between $45 and $50 per share.

If you aren’t familiar with max pain, it is the theory that the price of a stock always settles around the point where the majority of the option buyers lose the most - hence max pain. At $50, the large majority of both put and call options will expire worthless.

In March, the month when Bear Stearns agreed to be sold to JP Morgan for a pittance, both Lehman and Merrill were widely believed to be the next targets for either bankruptcy or a take-under. Both stocks, however, ended within 5% of their max pain price targets, even though they faced serious issues. Now that the credit markets have eased a bit - with the intervention of the Fed allowing investment banks to use the discount window - I would not bet against the max pain price of $50 by Friday.

It’s possible, of course, that the price doesn’t quite approach $50 by Friday, as bad news is still coming out in droves. This is why I believe $45-$50 is a reasonable estimate. The only way this will not happen for Lehman is if they announce bankruptcy or a take-under before that time. Otherwise it April puts with a strike price at or below $45, and April calls with a strike price above $50, are going to expire worthless.

I still believe both Lehman and Merrill have a lot going against them, as I stated in an earlier investing blog post, and highly suggest shorting (either through puts or regular shorting) as soon as max pain is reached.

Funny

GSEs too big to fail or too big to save?

Stresses on Fannie, Freddie pose wider risks

A recession could trigger a large rescue of Fannie Mae and Freddie Mac and result in a downgrade of U.S. debt, says rating agency.

WASHINGTON (AP) -- A deep recession could force mortgage-finance titans Fannie Mae and Freddie Mac to require a federal bailout large enough to hurt the U.S. government's top-grade credit rating, Standard & Poor's warned Monday.

A lower credit rating would mean higher borrowing costs for the U.S. government and could lead to a flight from Treasury securities, which investors - including foreign governments - consider to be virtually risk-free.

The financial stress Fannie (FNM) and Freddie (FRE, Fortune 500) face poses a far larger risk to the government than the $29 billion in mortgage assets taken on by the Federal Reserve to avoid the bankruptcy of investment bank Bear Stearns Cos, the credit rating agency said.

Still, S&P analysts see a bailout of Fannie and Freddie as unlikely and point out that U.S. officials "are focused on avoiding a deep and prolonged recession."

'Too big to fail'

While the government isn't obligated to assist Fannie or Freddie in a financial emergency, many on Wall Street believe it would bail them out if there is a collapse. The idea that they are "too big to fail" enables the two companies to borrow relatively cheaply by issuing top-rated securities backed by mortgages.

Aiding Fannie and Freddie, plus the government agencies that back home loans and student loans could add up to 10% of gross domestic product, the total value of all goods and services produced within the United States, S&P said.

John B. Chambers, chairman of Standard & Poor's sovereign rating committee, said in a statement that in a worst-case scenario the size of Fannie and Freddie "could create a material fiscal burden to the government that would lead to downward pressure on its rating."
Encouraged by regulators and politicians intent on keeping more homeowners from defaulting, Fannie Mae and its smaller government-sponsored sibling Freddie Mac have expanded their roles in the stricken housing market. The companies together must provide as much as $200 billion in new funding for home loans in exchange for getting their risk cash cushions reduced.

The government requires them to keep a certain amount on reserve to guard against risk.
Over the past year, Fannie and Freddie's share of new mortgages has been soaring, as Wall Street investors have backed away from all but the safest mortgage-related securities. Their market share of new mortgages rose from 46% in the second quarter of 2007 to 80% in January, S&P said.

Fannie and Freddie "face heightened demand to provide mortgage financing, which comes at a time when their need to raise capital and improve earnings has placed them under extreme pressure against the backdrop of historically weak housing markets and seized [mortgage-investment] markets," S&P credit analyst Victoria Wagner said in a statement.

INVESTMENT BANKS LIES IN BLACK & WHITE

From Mr. Mortgage:

this is a killer. Below are write-down covering all categories including subprime. We know full well these are a SMALL FRACTION of what lies ahead. Wells Fargo is not even on the list despite owning $84 BILLION in Home Equity lines/loans that are presently worth pennies on the dollar. Look at Lehman! Haha. Look at Chase...they have more Home Equity Lines/Loans than Wells Fargo. So does Bank of America. Funny, the CNBC crowd was pushing that it was the 'kitchen sink quarter' just like they tried to do in Q3. -Best, Mr Mortgage

UBS (UBS): $37.4 billion
Citigroup (C): $21.2 billion (expected further loss of $18 billion in Q1, 2008)
Merrill Lynch (MER): $19.4 billion
Morgan Stanley (MS): $12.9 billion
Deutsche Bank (DB): $7.1 billion
Bank of America (BAC): $5.7 billion
Royal Bank of Scotland (RBS): $5.6 billion
Credit Suisse (CS): $4.7 billion
Goldman Sachs (GS): $3.7 billion
Lehman Brothers (LEH): $3.3 billion
Barclays PLC: $3.3 billion
JP Morgan (JPM): $2.9 billion
Bear Stearns (BSC): $2.75 billion
HSBC Holdings: $2.1 billion

UltraShort Real Estate ETF: The Only Safe Haven for Commercial REITs

From Seeking Alpha:

"Your premium brand had better be delivering something special, or it's not going to get the business." - Warren Buffett

Lehman dumps it's crap on the Fed with Moody's help

Voltron says: The Fed has officially gone from the "lender of last resort" to "pawnbroker of last resort"

How Lehman Opened the Fed's Spigot Deal Takes Advantage Of New Lending Facility By SERENA NG and SUSANNE CRAIG Financial engineering helped get Wall Street into its current credit-market problems. Now, Wall Street's Lehman Brothers Holdings Inc. is using a little engineering -- and some help from the U.S. Federal Reserve -- to bolster its finances. In recent weeks, Lehman moved $2.8 billion in loans, including some risky leveraged-buyout debt that has been difficult to sell, into a newly created investment vehicle it named "Freedom," which in turn issued debt securities backed by the loans. • The News: Lehman Brothers repackaged some of its unsold buyout loans into a new security that it used as collateral to obtain cash loans from the Federal Reserve. • Background: Last month, the Fed broadened its lending facilities to extend short-term loans to securities dealers that bring it a range of securities with "investment grade" ratings. • What It Means: Other Wall Street investment banks, known for their ingenuity, are expected to follow suit. About $2.26 billion of the securities received investment-grade credit ratings from Moody's Investors Service and Standard & Poor's. Lehman then pledged some of the securities as collateral for a low-interest, short-term cash loan from the Federal Reserve, according to people familiar with the matter. The result for Lehman: By repackaging unsold debt and turning to the Fed's new borrowing facility, it was able to turn loans that had been mostly shunned by investors for months into cash it could use to finance its business. Fed officials had worried in the early stages of the credit crisis that banks would be worried about the stigma of borrowing directly from the central bank. But use of the Fed borrowing facility has been robust. The Lehman deal shows how some of the issues brought to light by the credit crunch -- such as the market's dependence on credit-rating firms and Wall Street's affection for complex investment structures -- are still very much a part of market activity. "The loss of confidence in structured-finance ratings is at the heart of the current market crisis," said Ed Grebeck, chief executive of Tempus Advisors, a debt-strategy firm. "For investment banks to go back to the ratings firms and say, 'Here's a new structure for you to rate investment grade' -- that's shocking to me." A spokesman for the Federal Reserve Bank of New York said it doesn't comment on the collateral it takes on individual loans. Bundled Up Last month, after a liquidity crisis nearly caused the collapse of Bear Stearns Cos., the Fed introduced a new lending facility for investment banks that would give them more ways to borrow against their holdings. Called the Primary Dealer Credit Facility, it accepts a range of securities as collateral for cash loans that can be rolled over daily. Among other things, the securities pledged by dealers must have market prices and "investment grade" credit ratings. As of the end of February, Lehman held $17.8 billion in leveraged loans. These are typically issued to companies that have below-investment-grade, or junk, credit ratings and were commonly used to finance leveraged buyouts. The market prices of such loans have dropped significantly from levels nine months ago. Unlike commercial banks, which can use loans as collateral for borrowing from a different Fed borrowing facility, called the discount window, securities dealers and investment banks can pledge only securities, not individual loans. Lehman's Freedom vehicle is commonly called a collateralized loan obligation, or CLO, on Wall Street. CLOs are securities backed by a pool of loans. Freedom bundled together more than 60 of Lehman's loans and divided up the risk by issuing two groups of securities, which Lehman kept. One group of securities, valued at $565 million, wasn't rated and was structured to bear the first 20% of losses among the $2.83 billion in loans in the pool. The other group, comprising $2.26 billion in securities, was assigned an "A" rating by credit-rating services because the debt pool would need to lose more than 20% before these securities suffered losses. Was It 'Brilliant'? One person familiar with the matter said the vehicle was named Freedom because it was designed to give Lehman freedom to tap as much cash as possible if needed. The size of the borrowing from the Fed wasn't known, but the person said it wasn't "material" and was meant as a test of what the Fed would accept. The loans in the pool included debt that was issued to finance last year's leveraged buyouts of First Data Corp. and TXU Corp., a person familiar with the matter said. A number of Wall Street executives called Lehman's move "brilliant" and said they may follow suit. One senior finance executive at a rival of Lehman's said his main reservation with Lehman's move was that it might lead to criticism that Wall Street is taking its junk to the Fed for cash. Still, he noted that unlike many troubled mortgage securities, there is a discernible market for leveraged loans. "It's a very creative way for investment banks to get liquidity from assets that they don't want to sell at fire-sale prices," said Todd Kesselman, managing director of Precision Capital, an investment-advisory firm that specializes in structured credit and private equity. Firms are finding other ways to unload corporate loans that have piled up on them. Citigroup Inc., for example, is close to selling $12 billion of its leveraged loans to a group of private-equity firms for about 90 cents on the dollar. Since the summer, when many parts of the credit market seized up, banks and Wall Street firms have been stuck holding hundreds of billions of dollars of loans, bonds, and complex securities backed by mortgages and other assets. The banks created the debt with the intention of selling it to investors for handsome fees. When many investors backed away from riskier debt last year, banks were forced to keep the debt, which has strained their ability to trade or to make new loans. Liquidity in the market dried up as a result. To encourage firms to trade more freely with each other, the Fed has taken a series of unprecedented steps to boost liquidity in the markets, including expanding its direct lending to securities dealers. So far, the Fed's measures have helped alleviate some of the strains in the credit markets.

Lehman Liquidates 3 Struggling Funds

Company Takes $1 Billion in Assets Onto Balance Sheet By PETER EAVIS and SUSANNE CRAIG Lehman Brothers Holdings Inc. liquidated three investment funds after stressed markets caused the funds' assets to decline in value, according to a quarterly financial filing Lehman made Wednesday with the Securities and Exchange Commission. The New York investment bank ended up taking onto its balance sheet $1 billion of assets as part of the three funds' liquidation and purchased an additional $800 million of assets from other funds, according to the filing. In an interview, a Lehman executive said the assets were from two money-market funds and one enhanced-cash fund, a type of vehicle designed to give investors more yield than simple money-market funds. Lehman's shares took a beating after the filing was released. Its stock tumbled 7.2% to close at $40.54 in 4 p.m. New York Stock Exchange composite trading. Morgan Stanley and Goldman Sachs Group Inc. saw their stock drop 2.6% and 2.7%, respectively. Lehman, which raised $4 billion in capital to bolster its balance sheet this month, said in the filing the three funds were "liquidated" and the assets of those funds were bought by the bank and put on its balance sheet. The estimated value of those assets was $1 billion at the end of February, according to Lehman's filing. Other banks, including Credit Suisse Group, have bailed out similar cash funds and have taken assets on the balance sheet and booked losses. Lehman has taken write-downs totaling $300 million on the $1.8 billion in assets it has taken on, according to a person familiar with the matter. Lehman also said assets held by the three funds had fallen in value amid credit-market disruptions and ratings downgrades since the middle of last year. "Due to market disruptions that occurred in the second half of the 2007 fiscal year and further deterioration in the 2008 quarter, certain investments held by the funds were either downgraded by rating agencies and/or experienced a decline in fair value," Lehman's filing said. Lehman also took onto its balance sheet an additional $800 million in assets from other funds. Lehman describes these assets as "deteriorated" and said the cash paid to the funds for the assets was used to redeem investors and for new investments. The disclosure about the troubled funds comes at a time when Lehman's stock has been under pressure because of investors' concern about the strength of its balance sheet. It is unclear whether Lehman originally had any of its own money in the three funds it closed. The investment bank also didn't say how much the assets in the funds declined in value or what the funds' original size was.

Peak Oil

Voltron says: I'm starting to research the oil markets. Yet another thing to worry about . . . peak oil production. A picture says a thousand words.



I don't think I could say it any better than "oily" cassandra (VIDEO NOT SAFE FOR WORK, ETC.)

Fed Chairman says prices will decline 9.9% per year.

“Well, one of the prevailing theories at the time of the Depression was the so-called liquidationist thesis which said basically, let’s let the system return to normal; let’s liquidate the banks; let’s liquidate labor.”

“This was Andrew Mellon, the Treasury secretary. It was partly on that basis of that theory that the Federal Reserve stood by and let a third of the banks in the country fail, which created the money supply to drop sharply and caused prices to fall very sharply and led ultimately to the severity of the financial crisis. I think financial instability, which was not addressed by government or anyone else, was a major contributor both to the Depression in the U.S. and abroad. ”

“I believe the difference today is that, you know, that we will address financial issues and try to maintain the integrity and stability of our financial system. We will not let prices fall at 10% a year. We will act as needed to keep the economy growing and stable.”

- Federal Reserve Chairman, Ben Bernanke, April 2nd 2008 to the congressional joint economic committee.

Lehman is down after hours

No one seems to know why.

New Blog

I've added Mr Mortgage's blog to my links at the bottom right. He's a mortgage broker who is blowing the lid off the lies being told by wall street and main street bankers.

Strip-Mall Vacancy Rate Is Highest in 12 Years

voltron says: good for SRS.

MALL, STORE, SHOPPING, CONSUMER, CONSUMER SPENDING, ECONOMY, SLUMP, SLOWDOWN

By Reuters

The vacancy rate at U.S. strip malls rose to the highest level since 1996 in the first quarter of 2008, while that for big malls reached levels unseen since 2002, research firm Reis said on Friday.

The amount of space occupied by retailers fell for the first time since Reis began tracking the sector in 1980.

"Retailers are grappling with the implications of the housing and job market downturns for consumer activity, with the result that retail sector fundamentals -- occupancy and rent levels -- are being strained by anemic demand for space," Reis Chief Economist Sam Chandan said in statement.

Strip-mall vacancies rose 0.2 percentage points from the preceding quarter to 7.7 percent.

By the end of the year, the rate likely will reach or surpass 8 percent, Reis said.

The vacancy rate for big regional malls was the highest since the fourth quarter of 2002, the report said.

Asking rent ticked up 0.4 percentage points after falling 0.4 percentage points in the fourth quarter of 2007.

Chandan said community shopping centers have some protection against economic downturns through long-term leases and tenants that supply necessities, such as groceries and drugs, but he noted that "increasingly value-conscious shoppers have alternatives in discount retailers such as Wal-Mart and Costco ."

Less-frequent shoppers spending fewer dollars affects the demand for space and the time needed to lease available space.

Space occupied by retailers in the first quarter fell by 1.36 million square feet from the prior quarter.

Asking rent growth was the most anemic since the fourth quarter of 2001, inching up just 0.4 percentage points to an average rent of $19.57 per square foot.

Factoring in months of free rent and other concessions, effective rent growth was a mere 0.1 percentage point, rising two cents to $17.62 from the previous quarter.

Of the 76 markets that Reis tracks, rents effectively fell in 31. "Not only have concessions widened further, conditions have softened to a degree that landlords are unable to raise rents," Chandan said.

Publicly traded real estate investment trusts (REITs), such as Equity One and Kimco Realty , often have properties that are in better locations and are operated more efficiently.

Their vacancy numbers are often lower and rents higher, said Nicholas Vedder, senior associate analyst at Green Street Advisors.

"The Reis numbers are generally a little bit more negative," Vedder said.

"That said, they're not entirely insulated from what's going on in the general economy, so we do anticipate further occupancy decline going forward."

Because of their long leases and differences in the mix of tenants, regional mall fundamentals typically don't reflect economic changes as quickly strip malls.

"Indications of stress are becoming visible in regional mall performance," Chandan said. "A growing list of national chains are adjusting expansion plans."

In January, women's clothing retailer AnnTaylor Stores said it would close 117 stores and Pacific Sunwear said it would close 154 of its urban-inspired clothing stores called demo.

Home-furnishing retailer Bombay Co., which filed for bankruptcy in September, said it would close 384 U.S. stores.

For the past few years, higher-end malls, such as those owned by Simon Property Group , have been outperforming lower-end malls owned by companies such as CBL & Associates Properties.

Wells Fargo in trouble?

Voltron says: Wells Fargo raises ATM fee 50 cents. A desperate sign of trouble?

Bankruptcies Jump 30% in March, Led by Housing-Bust States

By Bill Rochelle and Bob Willis April 5 (Bloomberg) -- The jump in March bankruptcy filings is another indication the U.S. economy is in recession, led by states where the housing boom turned to bust. The more than 90,000 bankruptcy filings in March were the highest since insolvency laws became more restrictive in October 2005, according to statistics compiled from court records by Jupiter eSources LLC. At a daily rate, filings in March were 30 percent above the pace in 2007. Rising bankruptcies, together with mounting foreclosures and fewer jobs, are further signs the biggest housing slump in a generation is hurting consumers and businesses. Federal Reserve Chairman Ben S. Bernanke this week for the first time acknowledged the economy may be facing a recession and vowed to act to cushion the slowdown. ``We're seeing fairly high readings in these measures of distress like bankruptcies, foreclosures and mortgage defaults,'' said Chris Low, chief U.S. economist at FTN Financial in New York. The most affected states are ``also where the most housing-related business growth was,'' said Low. The states most affected by the housing recession, including California, Nevada and Florida, were among those with the largest increases in bankruptcies. They are also among states where unemployment rates exceed the national average. The jobless rate in California is 5.7 percent and Nevada's is 5.5 percent in February. Nationally, 5.1 percent of workers were unemployed in March, the highest level since September 2005, the Labor Department reported yesterday. California, Florida California led the nation with a 42 percent increase in bankruptcy filings at an annual pace in the first quarter, according to Jupiter eSources LLC. Florida had a 35 percent increase and Nevada saw a 32 percent rise, according to the Oklahoma City-based Jupiter's service known as AACER, or Automated Access to Court Electronic Records. Nevada led the nation with the highest foreclosure rate in February, with filings up 68 percent from a year before, and with one in every 165 households in default or foreclosure, according to RealtyTrac Inc., a seller of foreclosure data. California had the second-highest rate, with one in every 242 households in default or foreclosure, followed by Florida, with one in every 254, RealtyTrac said March 13. The housing recession, coupled with weakening consumer spending and mounting credit losses at financial firms, is dragging the economy toward its first recession since 2001. Payrolls Drop The economy lost 80,000 jobs in February, the biggest loss since March 2003, following larger than previously reported declines of 76,000 in each of the two prior months, the Labor Department also said yesterday. Economists surveyed by Bloomberg in the first week of March forecast growth would slow to a 0.1 percent pace in the first quarter, from a 0.6 percent rate in the last three months of 2007. The odds of a recession were even. Since then, most of the data has indicated deterioration. Retail sales fell 0.6 percent in February, for a second decline in three months. Cars and light trucks sold at an average 15.2 million annual pace in the first three months of the year, the fewest since the third quarter of 1998. Consumer spending has faltered as record energy prices and falling home values leave Americans feeling less wealthy and with less cash to spend. Spending rose in February at the slowest pace in more than a year, the government said last week. Business bankruptcies and reorganizations posted gains too. First-quarter filings to liquidate or reorganize in Chapter 11 grew at an annual pace of 16 percent. If that rate were to continue for the rest of the year, 8,100 businesses would be in Chapter 11 compared with 6,240 in 2007. The jump in filings over the first three months of 2008 reversed a trend from late 2007, when filings shrank. The number of Americans seeking bankruptcy fell in late 2005 and early 2006 after jumping ahead of the October 2005 law making it harder for people to erase debt. In the two weeks before the new law, 630,000 Americans sought bankruptcy protection, bringing total filings in 2005 to a record 2.1 million. There were 590,500 filings in 2006 and 827,000 in 2007.

Housing Crisis Hits Its Own

Voltron says: oh the irony!

Mortgage Bankers Group Faced With Tougher Terms

By Jeffrey H. Birnbaum
Washington Post Staff Writer

A year ago, the Mortgage Bankers Association was thrilled to sign a contract to buy a fancy new headquarters building in downtown Washington. Interest rates were low, the group's revenues were steady and the prospects for quickly renting out part of the structure were strong.

But since then, the association has fallen on tough times as many of the subprime mortgages dispensed by some of its members proved dicey. Borrowers discovered the loans were more costly than they had anticipated. Foreclosures soared, and cheap, inexpensive credit dried up, slowing the economy.

The result: The trade group is about to find it harder than it imagined to pay its own mortgage.

Scheduled to close on the building in the coming weeks, the association will have to pay millions of dollars more than it would have a year ago when it contracted to buy the 160,000-square-foot structure -- millions of dollars it is now less able to afford.

The group's leaders defend the transaction as prudent and, in the long run, wise. "Anytime is the best time to buy," said Kieran P. Quinn, chairman of the association. "Over a 10-year horizon, [the purchase] looks great."

But the short run looks a little bumpy. "The association's timing is not good, to say the least," said John E. "Chip" Akridge, a local developer. "I'm sure a year ago they would have rethought their decision if they knew what was going to happen."

Critics also see irony -- and some justice -- in this predicament. "They are certainly getting what they deserve," said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal research group. "Mortgage bankers encouraged people to take out mortgages that were very risky, and the result of that was a large number of the mortgages went bad and caused mortgage interest rates to soar. Now they are the victims of high mortgage rates and chaos in the market more generally."

The lobbying group is about to sign the final papers to buy the 12-story building on L Street NW for about $100 million. Like many of the companies it represents, the organization is facing a triple whammy of woes: Its financing costs are up, its income is down, and the leasing market is slow, leaving it, so far, without a single tenant.

In recent months, the money available for mortgage lending has dried up dramatically. In 2003, $3.9 trillion was loaned to help finance single-family homes. This year, the industry estimates that home mortgage lending will reach barely half that amount.

The pullback has played havoc with the association's membership and budget. A year ago, it had more than 3,000 member companies. Now, it has about 2,500, a 17 percent decline, Quinn said.

As a result, the group's income has been squeezed. Quinn predicted that the association's revenue will fall 10 to 15 percent this year from last year. Its annual budget in 2006, the last full year on record, was $47 million.

The association laid off some employees this year, but won't say how many. It also recently lost two senior vice presidents to other jobs in the real estate industry.

The financing for the new building has become more costly. The meltdown in the credit markets has made lenders more risk-averse and less eager to loan out their capital, said Paul J. Collins, senior managing director of developer Cassidy & Pinkard Colliers. As a consequence, they are demanding higher interest rates on commercial loans -- by a percentage point or two -- than they did a year ago.

Lenders are also trying to reduce their exposure by asking borrowers to put more money down. Quinn said the association will have to put down about 10 percent more that it had planned.

The lack of tenants has also been an expensive burden. The fact that the association does not have any income-producing lessees has compelled its lender to increase the financing costs slightly, Quinn said.

Quinn said the association is not worried about the pace of leasing. He said it may take until next year to fill the building. But developers said Washington's rental market is weak and that the association will likely take longer than usual to lease the two-thirds of the building that it is not using itself.

"By this time, I would think they would have had another tenant or two," Collins said. "But with the overall negative feeling about the economy out there, leasing has been slower."

Quinn said the association's financial condition remains strong, and the purchase of the new building will benefit the mortgage bankers for a long time. "It was an important employee morale issue" to acquire new space, he said.

To make ends meet in the meantime, the association is doing what any strapped mortgage holder would do.

"We're looking at [cutting] expenses across the board," said Cheryl Crispen, the association's senior vice president for communications. Among the options: hosting fewer in-person seminars and eliminating Teleprompters at the annual meeting.

Wall St banks 'hooked on emergency funds scheme'

James Doran in New York
The Observer

Fears are mounting that Wall Street banks are relying too heavily on tens of billions of dollars in loans made available by the US Federal Reserve. Their borrowing levels have rocketed by almost 200 per cent to $38bn (£19bn) a day in just three weeks.

The latest loan data released by the Fed shows that Wall Street banks and investment firms borrowed an average of $38.4bn every day last week, a big jump from the $32.9bn borrowed the week before, but almost three times the $13.4bn borrowed when the emergency scheme was launched on 17 March.

The loan programme was part of a wider Wall Street rescue package ushered in to stave off the imminent collapse of Bear Stearns, the troubled investment bank being bought by JP Morgan.

The scheme, called the Primary Dealer Credit Facility, is made available through the Federal Reserve Bank of New York and is designed to help big investment banks oil the wheels of the credit market so they can continue with business as usual, even though the credit crunch shows no signs of abating.

The Fed has capped the amount available to all banks at $50bn, although insiders said it never imagined the banks would take advantage of the entire facility. Analysts and economists now fear it is being too heavily exploited, and that banks may be using it to delay facing up to liquidity problems.

David Wyss, the chief economist at Standard & Poor's, thinks the Fed loan programme is a good idea, and perhaps the only way that government can keep the credit markets churning. Even so, he believes taking out such large short-term loans could cause problems.

'My fear is that the banks could become too dependent on this money. At some point, the Fed will have to wean them off these loans, but how it does that I do not know,' he said.

Real Inflation

Voltron says: the government often changes the way inflation is computed to make the numbers lower. They currently exclude food and energy prices from "core" inflation. Here is a graph of inflation courtesy of shadowstats.com which also has graphs of real unemployment and M3 (the money supply figure the Fed stopped producing last year because it was "too hard")



This is why inflation linked treasuries are not a perfect hedge against inflation.

HELOCs

Voltron says: Click here for a fitch report on home equity lines of credit (HELOC). They are second liens (meaning they only get paid after the first mortgage in foreclosure). I'm looking to buy long dated put options in Wells Fargo and JP Morgan.

Mr Mortgage Exposes Lehman ALT-A

Voltron says: who are you going to believe? The guy in this video with 20 years of mortgage experience, or the cheerleaders on CNBC?

Peter Schiff on CNN

San Diego commercial vacancy rate skyrockets

Construction, housing bust, slowing economy blamed Voltron says: more good news for SRS By Mike Freeman San Diego's office vacancy rate spiked to its highest level since 1996 in the first quarter thanks to a combination of weak demand and new buildings coming to market. Direct vacancy – landlord-controlled office space that's empty – was 15.1 percent countywide, according to a CB Richard Ellis report issued yesterday. That's up from 11.5 percent a year earlier. The availability rate, which includes sublease space, buildings under construction and offices on the market but not yet vacant, came in at 21.3 percent for the quarter. Last year, availability was 18.2 percent. Brokers say new construction is a big contributor to the spike – particularly in business districts with much speculative office building, such as Rancho Bernardo and Carlsbad. But they also point to a slowing economy and the fallout from the housing bust as contributing to the vacancy boost. Many mortgage companies, title firms and home builders have closed or downsized over the past year. Net absorption – a real estate term that measures the amount of space leased versus the amount vacated – was negative 190,000 square feet for the quarter. The three-year quarterly average is positive 224,000 square feet, according to CB Richard Ellis. “The residential real estate industry ripple effect is a blood bath,” said David Marino of Irving Hughes, which specializes in representing tenants. “When we got hit hard in 2001 through 2003 in the tech side, the residential real estate guys took a lot of that space. Today, there's no recovering industry sector to offset” the decline from housing-related companies. Not all brokers take such a harsh view. They point out that the amount of space shed by residential real estate companies isn't close to the avalanche of offices that technology companies abandoned during the dot-com implosion. “This is not like the 'dot-bomb' era where you saw all these companies closing up,” said Brian Driscoll of Grubb & Ellis/BRE Commercial. Although residential real estate firms are letting space go, technology, biotech and other nonresidential companies are holding steady, Driscoll said. “We have a much more diverse and seasoned tenant base than we did 10 or 15 years ago,” he said. Office demand is directly linked to job growth. The county is projected to create 6,400 jobs in 2008, according to CB Richard Ellis. That's down from 9,200 jobs in 2007 and 14,000 jobs in 2006. The slumping demand comes after a wave of office construction over the past couple of years. Carlsbad and Rancho Bernardo have been particularly hard hit. The direct vacancy rate for office buildings in both business districts eclipsed 20 percent for the quarter. In business districts where there has been less construction and demand remains relatively healthy, such as Carmel Valley and University City, vacancies haven't spiked as severely, brokers said. In Carmel Valley, vacancy was 7.5 percent, while in University City it stood at 10.9 percent. “Well-located landlords will continue to do well in spite of the current conditions, whereas landlords with properties in secondary markets will have to structure creative deals to stay competitive,” said Jeb Bakke, a senior vice president with CB Richard Ellis. Marino, the Irving Hughes broker, said landlords have been adopting this theme, which he calls NIMS: not in my submarket. “Everybody has problems but me,” Marino said. “That's nonsense. This market is being affected in every way by this recession and this residential real estate collapse.” Scot Ginsburg, a principal with broker The Staubach Co., said landlords are offering concessions to lure tenants. But so far, they're not lowering rents. “The one consistent thing I see around town, no matter how eager the landlord is to lease the space, is they're not dropping their (asking) rents,” he said. “What they're doing is buying it down with free rent.” Ginsburg noted that some landlords are offering free rent for six months or longer to get deals signed. “The newly constructed buildings are getting very aggressive, especially in Carlsbad,” he said. Tom van Betten, a broker with Cushman & Wakefield who focuses on the Interstate 15 corridor, said it could take some time for current space to lease up, particularly with all the new construction. But the news isn't all bad, he said. Sony Electronics has committed to the area by starting construction on a $150 million campus in Rancho Bernardo, and Bridgepoint Education agreed to lease 289,750 square feet in the three-building Kilroy Sabre Springs campus during the quarter. “Rancho Bernardo has a lot of big chunks of space that are really set up for corporate headquarters-type projects,” van Betten said. “We're just all kind of holding our breath that the existing darlings in the market – the Sonys and General Atomics and Northrop Grummans – continue to grow organically, or somebody comes in from outside the area.”

MBIA Loses AAA Insurer Rating From Fitch Over Capital

By Christine Richard April 4 (Bloomberg) -- Fitch Ratings cut MBIA Inc.'s insurance unit to AA from AAA, saying the bond insurer no longer has enough capital to warrant the top ranking. MBIA, the world's largest financial guarantor, would need as much as $3.8 billion more in capital to deserve an AAA, New York-based Fitch said today in a report. The outlook is negative, Fitch said. Fitch issued the new, lower rating even though Armonk, New York-based MBIA asked the ratings company last month to stop assessing its credit worthiness. The two companies disagree over how much capital MBIA needs to absorb losses on the bonds it insures. Moody's Investors Service and Standard & Poor's both affirmed their AAA ratings earlier this year. ``It will be difficult for MBIA to stabilize its credit trend until the company can more effectively limit the downside risk'' from collateralized debt obligations, Fitch said. The long-term rating of MBIA Inc. was cut to A from AA, Fitch said. ``We respectfully disagree with Fitch's conclusions,'' MBIA Chief Financial Officer Chuck Chaplin said today in a statement. ``MBIA has a balance sheet that is among the strongest in the industry with over $17 billion in claims-paying resources, and has a high quality insured portfolio.'' MBIA shares closed down 68 cents, or 4.8 percent, to $13.61 in New York Stock Exchange Composite trading. The stock has declined 27 percent this year. Capital Raising MBIA raised $2.6 billion in capital through a bond offering and the sale of a stake to Warburg Pincus LLC, eliminated its dividend and stopped guaranteeing asset-backed securities for six months. Those decisions prompted Moody's and S&P to keep their top ratings for MBIA. Fitch continued its review. Fitch has rated MBIA's insurance unit since at least 2000, according to data compiled by Bloomberg. S&P and Moody's have rated the company since at least 1987, the data show. MBIA last month asked Fitch to stop rating the company because it disagreed with the ratings company's requirement that MBIA hold more capital. MBIA, which started as the Municipal Bond Insurance Association in 1974, and the rest of the bond insurers stumbled after expanding into CDOs that caused losses of more than $7 billion. CDOs repackage pools of assets into securities with varying degrees of risk. The company previously recorded at least 15 years of consecutive profits insuring bonds sold by schools, hospitals and municipalities. ``It's tough for a rating agency to downgrade a bond insurer, to take away the AAA rating,'' said Mark Adelson, founding member of Adelson & Jacob Consulting in Long Island City, New York. Holding Company The capital MBIA raised has yet to be contributed to its insurance company and could be diverted to meet obligations at the holding company, Fitch said in its report. MBIA's holding company engages in transactions that may require it to post collateral, creating a rising demand for cash, Fitch said. MBIA's suspension of its structured finance business, which includes CDOs and asset-backed securities, may help to boost the company's rating back to AAA in the future, Fitch said today. MBIA will have losses on CDOs backed by subprime mortgages of as much as $4.9 billion after taking into account that they will be paid over time, Fitch said. The analysis assumes that subprime mortgages backing securities sold in 2006 will experience losses of 21 percent and those originated in 2007 will lose 26 percent, Fitch said. Subprime mortgages are given to borrowers with poor credit.

Economy Shed Jobs in March, Fueling Fears of Recession

Voltron says: bad news for 80,000 people. Good news for SRS.



By BRIAN BLACKSTONE

WASHINGTON -- A third-straight sharp drop in U.S. payrolls confirmed Federal Reserve Chairman Ben Bernanke's recent warning that the U.S. economy may be in recession, as the unemployment rate moved sharply higher.

The data suggest additional interest rate cuts by the Fed are likely, even though the already-aggressive response by officials doesn't leave them too much room for additional easing.

Nonfarm payrolls fell 80,000 in March, the Labor Department said Friday, its biggest decline in five years, after falling by 76,000 in both January and February. Both were revised to show even bigger losses.

Had it not been for a rise in government jobs last month, payrolls would have fallen by around 100,000.

The unemployment rate, which is calculated using a separate survey of households, jumped 0.3 percentage point to 5.1%, the highest since September 2005, when it was also 5.1%.

ECONMISTS REACT

The softness in March payroll employment was relatively broad based across industry classifications with the biggest losses coming from sectors such as construction, manufacturing, and temporary help. Within construction, the bulk of the job loss continues to be tied to the fall-off in homebuilding but we are also beginning to see some significant weakness in nonresidential workers. –David Greenlaw, Morgan Stanley

Interestingly, job losses in the construction sector were nearly evenly split between residential and commercial and suggest that issues in the real estate sector are spreading beyond housing… One noticeable trend is that while the pattern of large job cuts is unchanged, the diffusion index of industries creating jobs continues to fall… The spread of labor market weakness bolsters the case for a recession this year and is among the most troubling aspects of the report. –Drew Matus, Lehman Brothers

Moody's, S&P Defer Cuts on AAA Subprime, Hiding Loss

By Mark Pittman March 11 (Bloomberg) -- Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor's and Moody's Investors Service haven't cut the ones that matter most: AAA securities that are the mainstays of bank and insurance company investments. None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February, according to data compiled by Bloomberg. A bond sold by Deutsche Bank AG in May 2006 is AAA at both companies even though 43 percent of the underlying mortgages are delinquent. Sticking to the rules would strip at least $120 billion in bonds of their AAA status, extending the pain of a mortgage crisis that's triggered $188 billion in writedowns for the world's largest financial firms. AAA debt fell as low as 61 cents on the dollar after record home foreclosures and a decline to AA may push the value of the debt to 26 cents, according to Credit Suisse Group. ``The fact that they've kept those ratings where they are is laughable,'' said Kyle Bass, chief executive officer of Hayman Capital Partners, a Dallas-based hedge fund that made $500 million last year betting lower-rated subprime-mortgage bonds would decline in value. ``Downgrades of AAA and AA bonds are imminent, and they're going to be significant.'' Holding Capital Bass estimates most of AAA subprime bonds in the ABX indexes will be cut by an average of six or seven levels within six weeks. The 20 ABX indexes are the only public source of prices on debt tied to home loans that were made to subprime borrowers with poor credit histories. About $650 billion of subprime bonds are still outstanding, according to Deutsche Bank. About 75 percent were rated AAA at issuance. Regulators require banks to hold more capital against lower- rated securities to protect against losses; a downgrade would force them either to sell the securities or bolster reserves. While most banks haven't disclosed the ratings of their subprime holdings, S&P estimated in January that losses on the debt may exceed $265 billion. American International Group Inc., the world's largest insurer, has $20.8 billion invested in AAA rated subprime-mortgage debt, not including asset-backed securities that caused the company's biggest-ever quarterly loss last period, according to the New York-based company's disclosures. Credit Support S&P and Moody's, the two biggest rating companies, are lagging behind Fitch Ratings, their smaller competitor. S&P, owned by McGraw-Hill Cos., and Moody's, a unit of Moody's Corp., have cut a combined 112 AAA ratings since July, about a quarter of Fitch's 390, according to Bloomberg data. S&P lowered one AAA bond in an ABX index, Moody's refrained altogether, and Fitch cut 19. ``We have built in 20 percent more home price declines from the end of '07,'' said Glenn Costello, managing director for residential mortgage-backed securities at Fitch. ``When you build in that much home price decline, I feel good when I pick up the paper and I see that home prices are only down another 3 percent. My ratings are still good.'' The ratings methods balance estimated losses against so- called credit support, a measure of how likely it is that owners of each piece of the bond will incur losses. For AAA rated debt, credit support needs to be five times the expected losses, according to Sylvain Raynes, author of The Analysis of Structured Securities, a college textbook. Performance Testing All but six of the 80 AAA ABX bonds failed an S&P test for investment-grade status, which requires credit support to be twice the percentage of troubled collateral. The guideline was one of four tests used by S&P used until last year, and a failure to meet the standard wouldn't have automatically resulted in a downgrade. The other companies used similar metrics to grade bonds, Raynes said. Investment grade refers to all bonds rated BBB- and above by S&P and Baa3 by Moody's. S&P and Moody's, both based in New York, failed to anticipate the record foreclosures on home loans and slumping house prices. New foreclosures jumped to 0.83 percent of all home loans in the fourth quarter, up from 0.54 percent a year earlier, the Mortgage Bankers Association said March 6. Home prices fell 9 percent, the biggest decline in 20 years of record-keeping, according to the S&P/Case-Shiller home-price index. Increasing Losses As defaults on subprime loans increased, the three ratings companies increased their assumptions in the past six months for losses on the mortgages within the bonds and changed the computer models that predict declines in credit quality. S&P has twice increased its prediction for losses and is now forecasting as much as 19 percent for subprime bonds, compared with as little as 5 percent less than a year ago. The companies began cutting in July and have since either downgraded or put on review a total of 38,000 subprime bonds, according to Bloomberg data. Moody's and S&P combined have downgraded more than 9,513 of the securities dating from 2005. ``We continue to monitor these securities, have placed many of them on CreditWatch negative, and will take additional action when, in our judgment, a rating action is warranted,'' said S&P spokesman Chris Atkins. ``We do not forbear or refrain from taking action for anyone else.'' Moody's, S&P and Fitch were all criticized by New York Attorney General Andrew Cuomo and lawmakers such as U.S. Senator Richard Shelby, who said they granted excessively high ratings on subprime-mortgage debt, then reacted too slowly when defaults reached record rates. Reputation Damaged ``We said we would be taking more ratings action, and we will,'' said Claire Robinson, a senior managing director at Moody's in New York. ``We have to dig into the peculiarities of each deal because they're all different.'' Moody's cut its 2008 forecast for revenue and profit today, saying the slump in credit markets will go on longer than previously anticipated. ``I think our reputation has been hurt by what's been going on and it would be disingenuous of me to say it hadn't,'' Chief Executive Officer Raymond McDaniel told the Bear Stearns Cos. investor conference in Palm Springs, Florida. ``We are in a business where reputational capital is more important and this is of particular concern to me. That restoration of confidence is under way, not through marketing but through action.'' Rising Losses The AAA securities included in the ABX are the most junior because they get repaid after other AAA securities from the same mortgage pools. The ABX is used by investors to place bets by buying credit-default swaps linked to the indexes. Credit-default swaps are financial instruments based on bonds and loans and used to speculate on a borrower's ability to repay debt. Contracts on asset-backed securities cover losses if the securities aren't repaid as expected, in return for regular insurance-like premiums. Within one AAA index, the $79 million Deutsche Bank bond, known as ACE 2005-HE-7 A2D, is rated AAA by S&P and Moody's even though 18 percent of its loans are in foreclosure, 15 percent of the properties have been seized by lenders and about 10 percent have been delinquent for more than 90 days. When the bonds were created, Moody's and S&P required capital support to cover a loss rate of no more than 7 percent for all three loss categories combined. Fitch doesn't rate the debt. On a $118 million Washington Mutual bond issued in 2007, WMHE 2007-HE2 2A4, 5.6 percent of its loans are in foreclosure and its safety margin, or the debt available to absorb losses, is less than the combined total of its loans at risk. Both S&P and Moody's rate it AAA. Fitch rates that bond B, five levels below investment grade and 15 levels less than its rivals. Years to Fix? ``It will take years for the ratings agencies to fix their problems,'' said Janet Tavakoli, president of Chicago-based Tavakoli Structured Finance. The firms are in a ``crisis of confidence,'' she said. A $242 million Morgan Stanley Capital Inc. issue, the 2006- WMC2 A2D, has credit support of 64 percent relative to its delinquent mortgages, the lowest of any in the AAA index. The credit should be at least twice the delinquent mortgages. Moody's and S&P both give it the top rating. S&P is reviewing it for a downgrade and calculates that the pool will lose 24 percent of its collateral loan values. Fitch rates it BBB and said it may cut further. The problem extends past the mortgage bonds. Financial firms own high-grade collateralized debt obligations, which package securities such as mortgage bonds and slice them into pieces with varying risk. As the underlying mortgage bonds are downgraded, those securities will also lose their ratings and tumble in value. A bank would have to increase its capital against $100 million of bonds to $16 million from $1.6 million if a bond was downgraded to below investment grade from AAA, under global accounting rules. `800-Pound Gorilla' The bank would either have to sell the bonds at a loss or make up the difference in cash. Citigroup Inc., the largest U.S. bank, have already written down $19.9 billion of subprime mortgages and CDOs. Merrill Lynch & Co. cut its investments' value by $24.5 billion. Bond insurers such as MBIA Inc. and Ambac Financial Group Inc. also have to hold more capital against insurance they write if the securities' credit quality declines. The prospect of losses may be holding the ratings companies back, said Frank Partnoy, a University of San Diego law professor and former Morgan Stanley banker who has been writing about the impact of credit ratings companies since 1997. ``If the 800-pound gorilla moves, it's going to crush someone, so it's not going to want to move,'' Partnoy said. ``They know they will trigger a price collapse. They are understandably reluctant.''

Home prices may not rebound until 2010

By KEVIN G. HALL

McClatchy Newspapers

WASHINGTON --

U.S. home prices are unlikely to recover until at least 2010, one of the nation's top housing economists said Thursday, adding that homebuilding this year is likely to post its worst year in five decades.

Speaking to the National Economists Club, Frank Nothaft, the chief economist for government-sponsored mortgage buyer Freddie Mac, painted a grim picture of today's housing market.

Through the final three months of 2007, he said, sales of existing homes were down 29 percent from the same period two years earlier. Forty-six states had falling home prices in the fourth quarter, and prices nationwide were down 9.3 percent. In the Pacific region, which saw the steepest drop, prices fell an average of 17.2 percent, followed by mountain states, whose home prices fell an average of 12.9 percent.

"I don't think we're going to see any improvement in the national house-price matrix until 2010," said Nothaft, a respected government economist who's followed the national housing market for more than two decades.

He projected a 16 percent drop in mortgage originations this year, for new home loans and refinancing. He expects foreclosures, which rose by about 1.5 million in 2007, to increase even more this year

If there was any good news in the stark snapshot of the housing crisis, it came from a bit of really bad news. The Freddie Mac economist thinks that new single-family home starts this year will be the lowest in 50 years, back when Dwight D. Eisenhower was president.

What's good about that? The plunge in new-home construction means that fewer homes will come onto the market in an environment with few buyers. A fall in home starts helps reduce the supply of unsold new and existing homes. By late this year or early next year, life should be returning to the national housing market, but prices won't see significant recovery until 2010, Nothaft said.

Across the nation, he said, most markets are seeing homes for sale sitting for longer periods. Miami leads all markets, with homes remaining on the market 65 days longer in September 2007 than they did in September 2005. Boston was close behind at 61 days more, followed by the Washington-Baltimore area at 40 additional days.

North Carolina was the exception. Homes in Raleigh were on the market four fewer days than they were in September 2005, and in Charlotte one day fewer than two years earlier.