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.