Growth Industry 2009: Criminal and Constitutional Law

It’s going to be all lawsuits all the time, as filings and indictments come fast and furious after January 20. In fact, a number are in the works already.

From the perspective of Wall St. crime, it will be interesting to see what Elliot Spitzer and Rudy Giuliani do. Keeping his hand in by writing for Slate, Spitzer’s wounded and has nothing to lose. Giuliani has got to smell blood and a loyal-to-the-point-of-absurdity Republican he is not.

Let’s start with . . .

Criminal Law

There’s a big one pending of the type that made the reputations of Spitzer and Giuliani in their US Attorney days—Insider Trading! As you remember, Giuliani’s high-profile conviction was Ivan Boesky and Spitzer’s was Martha Stewart. (No disrespect intended. What comes to mind when you think of Spitzer . . . let me qualify that, during his days as a US Attorney?)

Conveniently domiciled in their former district, Robert Rubin—former co-Chairman of Goldman Sachs, former Treasury Secretary under Clinton and on the board of, counsel to and briefly Chairman of Citigroup— was on the short list to be Treasury Secretary again. What happened?
When you want the low down, the New York Post is the paper of record. On December 4 it reported: "A new Citigroup scandal is engulfing Robert Rubin and his former disciple Chuck Prince for their roles in an alleged [CDO-related] Ponzi-style scheme that's now choking world banking. [The two] are named in a federal lawsuit for an alleged complex cover-up of toxic securities that spread across the globe, wiping out trillions of dollars in their destructive paths.” However—and here’s the indictable offense—before Citi's stock collapsed, Rubin and other top insiders cashed out of more than $150 million in "suspicious stock sales" according to the lawsuit filed on behalf of investors. They never know when to stop, do they.

An Astounding Conflict of Interest

The disposition of this case is going to set quite a precedent. Apparently, stealing investors’ money is a crime.

Bernard Madoff, former head of the NASDAQ, surrendered to the FBI on December 11, after having been turned in by his sons Mark and Andrew for running a several-decades-long Ponzi scheme. Investors have been wiped out to the tune of $50 billion. What makes this case interesting is not only Madoff’s insider status, but that Mary Schapiro, nominee for SEC Chairman, has recently announced the appointment of Mark Madoff to a prominent role with the security-industry oversight agency. And there’s more.

According to the FBI, the SEC and other regulatory bodies received several written complaints about Madoff over the years, which were never pursued. It now has been learned that “Ms Schapiro, currently chief executive of the Financial Industry Regulatory Authority (Finra), employed (son) Mark Madoff to serve on the board of the National Adjudicatory Council — the division that reviews disciplinary decisions made by Finra,” according to the UK TimesOnline on December 18.

Madoff père is currently confined to his Park Avenue apartment awaiting trial.

Strange Treatment of Small Fry
This next case is small in terms of money—what’s a few hundred mil these days—but has an interesting twist. In another action by federal prosecutors of the Southern District of New York, they have arrested attorney Marc Dreir for stealing at least $380 million in “a brazen swindle of some of New York’s savviest investors by one of New York’s more accomplished lawyers,” as reported in the New York Times on December 14. Another $35 million is missing from escrow accounts at his 250-member law firm.

Why this case stands out is that the accused is actually in jail being held without bail. Can you believe it. He must be really dangerous. Or he lives in New Jersey.

Constitutional Law
This should be getting more ink, imo.

On December 10, the WSJ reported that the Fed “is considering issuing its own debt for the first time . . . which . . . would provide the central bank with more flexibility to tackle the financial crisis.”

Ordinarily, when short of cash the Fed turns to the Treasury. The Treasury can no longer fund the Fed because of its own massive borrowings set for 2009 and debt limits imposed by congress.

Issuing debt is not in the Fed’s charter. According to the Constitution as it is currently written, only congress through the Treasury has the power to borrow against the credit of the United States. What’s proposed by the Fed would give it extra-legal authority to exceed the debt ceiling set by congress. It also would usurp powers of congress and the Treasury and transfer them to the Fed, which is a private entity owned by member banks.

Paul Volker would be turning in his grave if he were dead.

mg

Five Useful Websites in these Hard Times

Today's article isn't about the Fed, unless you think it's responsible for all our problems, as many do.

We’re in for some really tough times. Prepare as though a major hurricane, a war even, is coming your way. It is.

Here are a few practical websites to help you prepare:

This site has a List of 100 Things that will Disappear. What makes it better than some of the others with the same list is that it also has forum comments suggesting other items that should be included. http://goldismoney.info/forums/showthread.php?t=2738

What if my bank fails? Both the Chairman of the Federal Reserve, Ben Bernanke, and the Chairwoman of the FDIC, Sheila Bail have warned that there will be more bank failures. This site, http://www.bankingquestions.com/bankfailures/bankfailures.html provides answers to questions about your various bank accounts. This information will change from time to time depending on who or what is being bailed out.

Why beat around the bush: we're in a severe recession and will soon be in a depression. Here’s a great blog by a young father and husband in Argentina. He’s been living through economic collapse and hyperinflation for several years and has great day-to-day living advice. http://ferfal.blogspot.com/

So far this year more than 1.5 million people have lost their jobs. This site addresses your emotional and physical health, as well as answering questions related to searching for a job. http://www.careerplanner.com

If you have lost your health insurance or expect to, this site, www.insure.com answers questions about all sorts of insurance in addition to health.

Startling News from the Fed and Economic Wrecks from Around the World

The derivatives time bomb that Warren Buffet warned about several years ago has exploded. Here’s how it’s playing out around the world.

From the US:
The Fed:
“Federal Reserve chairman Ben Bernanke acknowledges he was wrong in believing that there would be limited fallout to financial markets from risky mortgages that soured after the housing market's collapse.” ***Is this possible? Not his admission of having been wrong, but that he really didn’t know? I knew. Since you’re reading BlownMortgage you knew too*** ''I and others were mistaken early on in saying that the subprime crisis would be contained,'' Bernanke says in an article in the December 1 issue of The New Yorker magazine. The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict,'' he said in the piece titled ''Anatomy of a Meltdown.''

***Actually no, it wasn’t hard to predict at all. One thing has followed the other in—guess what—predictable fashion. The blogosphere has been plotting the course of the meltdown with stunning precision for a few years***

Almost as an aside, as of early this week, the Fed has now spent, guaranteed or promised about $8.5 trillion. This is up from $4.3 trillion on November 19, which was up from $3.8 trillion on October 31. And now we know that this spending is based on the judgment of someone who thought subprime could be contained.

Car dealers stage a protest using this year’s unsold vehicles.

The Auto Industry:

The WSJ reports: “Though it’s under pressure to trim costs and update its business plan to get federal bailout funds, Ford doesn’t like the idea of cutting its CEO’s salary. CEO Alan Mulally made $21 million last year; was asked in testimony last week on Capitol Hill if he’d accept a $1 salary, he replied, “I think I’m OK where I am.”

Via Bloomberg: General Motors doesn’t want the public tracking a private jet used by its executives, and has asked the Federal Aviation Administration to block it from its public service. “We availed ourselves of the option, as others do, to have the aircraft removed,” said a GM spokesman, though he didn’t say why the automaker, blasted on Capitol Hill for using private planes, took the step.

***The auto industry is a long way from sanity let alone solvency***

If your house fell off this cliff you might be eligible for a bailout.

Real Estate:

The latest S&P/Case-Shiller Indices are out. What could I possibly add except to say that the chart will have to be redrawn since the Y axis does not go far enough into negative territory to plot next month’s decline.

Banks:
There have been 73 mergers and 10 bank failures so far this year plus bailouts for Citigroup (2x), a little help from friends for JPMorgan and Bank of America, and a little something under the table for Goldman Sachs and Morgan Stanley. The FDIC has just added 54 more banks to its watch list, which now stands at 171.

Car of local bank manager in France who does not know which end is up.

From Europe:
Things are no better in the EU countries. The Baltic Dry Index, the most reliable measure of international trade, is down significantly. Deutsche Bahn AG, the German railway company, is planning on 40% fewer cargo trains for next year, another leading indicator.

Christmas spirit in China: Rioting over toy factory layoffs.

From Asia:
On November 26, China cut interest rates by 1.08 percentage points to 5.58%, the lowest level in 11 years and the largest one-off cut since the Asian Financial Crisis in 1997. The economy is crumbling and millions of jobs will be lost before Christmas.

It is also the fourth interest rate cut by the Chinese central bank in the last ten weeks. "China is out to save itself," said Patrick Bennett, an analyst with Societe Generale in Hong Kong.

In recent weeks, laid-off factory workers have rioted across central and southern China. Government officials in Beijing have warned that dissent and threats to social stability will be crushed.
***Some things never change***

From the Middle East:

According to the UKTimesOnline, Gulf sovereign wealth funds (SWF) are now investing in their own struggling economies with several Gulf-based banks getting American-style bailouts. Local stock markets have collapsed and some sovereign wealth funds are supporting markets by buying shares of local companies. Investment in the West is being reduced, in particular in the UK and US where the SWFs have lost billions of dollars this year. *** I thought these people had a lot of money—our money, in fact—I guess not***

Fires in the UAE have spread from the oil fields to the highway. Accident on road between Abu Dhabi and Dubai.

Sovereign wealth funds are among the few sources of liquid capital available in the world and many companies have sought cash injections from the Middle East. Fund managers feel they were lured into investing before the full extent of the crisis was known. One fund, the KIA, said two months ago that it had lost $270 million on a $3 billion investment in Citigroup, which was made at the beginning of 2008. Citigroup's stock has fallen by two thirds since then, and it the bank is now being supported by the US government. *** This sounds like another wrong-headed judgment call by Bernanke. If this was the reason Citi was bailed, it would have been cheaper, way cheaper, to give KIA their money back ***

The Ship of State

There are only four more weeks left in 2008. We’re headed into a new year, with a new President, but with a number of the same people who laid the groundwork for the world we’re living in today. What else can go wrong? We’ll see, won’t we.

The Depression 2008 vs. the Depression 1929

The first Great Depression started with the October crash of 1929, but the market didn’t hit bottom until 1932. So far in 2008, the market hasn’t crashed; however, this year, similarly, will mark the end of an economic up-cycle, and that’s putting it mildly. The Dow is down 46%, falling unrelentingly from the peak of 14,165 in October 2007 to Friday’s close of 8,046 (and that was up 494 from the previous session). This is a greater percentage loss than on October 24, 1929. In addition, the rate of decline of the Dow 2008 has accelerated (see chart below).

Last week, Nouriel Roubini, professor of economics at NYU’s business school and advisor to central banks and governments, in making a case for stag-deflation said, “. . . we are in a severe recession. . .” Early to point out the housing crash, he is in good company with George Soros and Paul Volker, both of whom predict that this depression will be worse than the previous one (see G20 Meeting a Non-Event Depression Full Speed Ahead, November 16, 2008).

The 2008 Dow looks a lot worse than the Dow during any of the previous major correction. Its fall-off is far more precipitous then even the crash of 1929.

Here’s a time-compressed picture courtesy of dshort.com comparing the four worst corrections.


According to this chart, we’ve got several years and another 40% drop to go before reaching bottom.

Here’s some more perspective. Last Friday, the market was up 494 points. I think CNBC was calling the bottom in … again. Here’s a chart of the day’s performance.


No wonder they were so excited; and it happened so fast. We’ve been getting last-hour-of-the-trading-day action the way we had been getting financial-Armageddon news over weekends. Friday was a good day, but how does it fit into the overall trend? Let’s put Friday’s move into trailing-12-month perspective.

(2)

I’m Convinced You Say; Now What?

We are already in hard times and it’s going to get tougher. Start preparing as you would for a natural disaster or war. Dispassionately, make a list of priorities based on what you need—not what you want or what the neighbors have—those things you can’t do without.
You need food and shelter. Unless you live and work in a city or town you probably need a car, but maybe not. If you lost your current residence, where would you go? The answer is not “I don’t know.” The answer is I will move in with my family, with friends, live in an RV, my car, whatever. Explore what’s available in your community. Have a plan.

A lot of people have already lost jobs, more than a million, as a matter of fact. If you lose your job, how long can you stay in your current home . . . make your car payment . . . pay your credit cards? Will you be able to make COBRA payments? Start figuring out what you would do if you lost your livelihood.

If you still have savings, how much will you spend before enough is enough? The answer is not “until my savings are depleted.” It’s the same with credit cards. If you don’t have much cash, make sure you have some credit available.

Frugal is in.

mg dungan

Fed Implode-o-Meter Update

At the end of October (see Fed Implode-o-Meter October 31), it looked like the Fed had spent about $3.8 trillion in the year to date. Not even three weeks later, that figure is now up to $4.28 trillion. According to CNBC, “To put it in perspective that’s . . . more than what was spent on WW II.” Funny choice of comparison; the Iraq war, the longest-running conflict in the history of the US, has also cost more and the final tab won’t be in for years. Anyway . . .

So, where’s all the money going? Here’s a list (hat tip to CNBC) of what has been made public:

Federal Reserve
(TAF) Term Auction Facility.................................................................$900.0bn
Discount Window Lending
Commercial Banks.................................................................................... $99.2bn
Investment Banks.......................................................................................$56.7bn
Loans to buy ABCP.....................................................................................$76.5bn
AIG .............................................................................................................$112.5bn
Bear Stearns .................................................................................................$29.5bn
(TSLF) Term Securities Lending Facility...............................................$225.0bn
Swap Lines..................................................................................................$613.0bn
(MMIFF) Money Market Investor Funding Facility...........................$540.0bn
Commercial Paper Funding Facility.......................................................$257.0bn
(TARP) Treasury Asset Relief Program...............................................$700.0bn
Other:
Automakers.................................................................................................$25.0bn
(FHA) Federal Housing Administration 300.0bn
Fannie Mae/Freddie Mac........................................................................$350.0bn
Total.................................................................................$4,284.5bn


The Telegraph UK quotes Paul Volcker, former chairman of the US Federal Reserve and short-list candidate for Treasury Secretary, as saying, “. . . it is already too late to avoid a severe downturn even if the credit markets stabilize over coming months. I don't think anybody thinks we're going to get through this recession in a hurry. The economic slump has begun to metastasize after a shocking collapse in output over the past two months . . . normal monetary policy is not able to get money flowing. The trouble is that even with all this [government] protection, the market is not moving.” Further, "What this crisis reveals is a broken financial system like no other in my lifetime," the 81 year old Volker told a conference at Lombard Street Research in London. Normal monetary policy can't restart economic activity because credit is contracting at a faster pace than new money is coming into the system. Fractional reserve lending can’t work unless banks lend.

Through all of this, the Fed is still taking as collateral illiquid, mark-to-model assets, presumably at notional value, from the banks. In return, the banks receive brand-new treasuries that, in principle, could be lent out. At this point, most, or probably all, of the Fed’s general collateral is comprised of toxic waste. Currently, the Fed does not even have enough reserves to cover dollars in circulation.

Good thing we’re only talking about Monopoly money. If it were real money we’d be in big trouble.

There are a number of grass-roots efforts trying to put an end to the Fed’s out-of-control borrowing. One of them, End the Fed.us is having a meet-up on November 22 in 39 cities. Mish of Global Economic Trend Analysis is putting together another email, fax, and phone-call campaign to stop further auto company bailouts. Chances are slim that the brakes will be put on before the end of the year. However, with a new administration coming in, 2009 could be another story.

mg

G20 Meeting a Non-Event, Depression Full Speed Ahead (1)

I’m afraid many of the New World Order conspiracy theories will have to be laid to rest after this weekend’s G20 meeting. Worldwide coordination of anything other than a rate cut here and there will never fly. Not even the power of the dark side is sufficient to get substantive agreement among the G20. So, what came out of this weekend’s meeting? Pretty much nothing. But, you ask, no new world currency, no new North American currency, no revaluation of the price of gold, no renegotiation of trade agreements, no dropping the US$ as the world’s reserve currency? Nope, nothing. However, based on their recent track record, this was probably the best outcome.

(2)

Telling It Like It Is
Last week I said the economy was going through a period of deflation. That was just a trial balloon and an attempt at being PC. We’re entering into a depression. Things are a lot worse than underwater mortgages and SUVs losing trade-in value.

“The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself,” former Goldman Sachs chairman John Whitehead, 86, said at the Reuters Global Finance Summit on Wednesday. "I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system." When you’re 86 years old and Social Security and Medicare’s got your back, why mince words.

Here’s what another senior citizen, George Soros, has to say, “Our greatest economic depression is ahead of us.”

One more retiree, Warren Buffet, in September said, "This is an economic Pearl Harbor. There's no plan B for this . . . we were at the brink of something that would have made anything that happened in financial history pale.” (Pale by comparison . . . finish your sentences Warren). Former Fed chairman Paul Volker, a downright New Age positive thinker by the standards of this group, says, “There’s a 75% chance of financial collapse within the next five years.”

From academia: “The United States is bankrupt. Our economic situation is worse than Brazil, worse than Argentina, worse than any nation in the world,” according to Professor Laurence Kotlikoff of Boston University. I never heard of this guy before, but he’s got a way with words. And from government service: "When we look back 10 years from now, we will see 2008 as a fundamental financial rupture,” says Peer Steinbruck, Financial Minister of Germany.

Associated Press on Friday reported that the mayors of Philadelphia, Atlanta, San Jose, and Phoenix are requesting bailouts. They'll have to get in line behind the entire state of California, NYC, Chicago, Detroit, and LA.

There are a few bright spots, though; gun sales are one of them. The FBI reports that gun sales increased 13% in October and had a huge 49% spike in the first six days following the election. Hurry and get yours before supplies run out.

It’s time to prepare for hard times. There are a number of lists of “100 Things that Disappear First.” Google one that addresses your lifestyle and climate. Many of these items, like manual can openers, make good stocking stuffers. By the way, no Gift Cards this year. Gift cards are not yet guaranteed by the FDIC. If the store goes out of business, that’s the end of the gift card. Same thing with product maintenance contracts.

mg

Everything is Deflating, Not Just House Prices

There is considerable discussion as to whether we are in, or entering into, a period of inflation or deflation. It’s important to know which one it is and why, to be able to plan effectively.

It’s deflation, and we’re already in it.

The simplest working definition of inflation and deflation is an expansion of the supply of money and credit in the case of inflation. Deflation is the opposite, a contraction of money and credit. Despite recent price surges in food and oil, prices are declining across the board, and even those two headline-inflation items are down from recent highs. An interesting explanation of how this happens is on Mises.org: If the price of a good goes up (in the absence of an increase in the money supply), consumption must be reduced on some other good. This sounds more like common sense than economic theory, especially after the recent run up in gasoline prices.

The rule of thumb in deflationary environments is cash is king. This is no time for major purchases or unnecessary expenditures. Why buy today when the price will be lower tomorrow?


Stock Markets
Here’s what’s been happening in the Dow for the trailing 12 months.

(Picture on http://blownmortgage.com/ scroll down to 11 13 08)

This performance has had dire consequences throughout the economy. As one example, at the beginning of October, retirement plans had lost as much as $2 trillion — or about 20% — over a15 month period, according to Congress's top budget analyst .“The upheaval that has engulfed the financial industry and sent the stock market plummeting is devastating workers' savings, forcing people to hold off on major purchases and consider delaying their retirement,” said Peter Orszag, the head of the Congressional Budget Office. Savings across the board, even Harvard’s endowment, have taken a hit.

The US markets haven’t been the worst performers. “World equity markets lost an estimated $5.79 trillion during October, the biggest monthly loss ever,” according to Standard & Poor's Index Services. “The October loss eclipsed the previous record, which was set just one month earlier, when 52 global equity markets lost a combined $4 trillion. Through the first 10 months of 2008, world markets have lost about $16.22 trillion.”

Commercial Real Estate
Due to store closings and company bankruptcies, losses in commercial real estate are mounting. On Tuesday, General Growth Properties, one of the largest mall operators in the country, announced that it is near bankruptcy. Its stock closed at 35¢ today. Its only hope now is to become a bank holding company.

(Picture http://blownmortgage.com/ on scroll down to 11 13 08)

Residential Real Estate
Residential real estate losses are unrelenting and the magnitude of losses is staggering.
Here’s the latest from Case-Shiller.

(Picture on http://blownmortgage.com/ scroll down to 11 13 08)

The Deficit
OK, here’s something that’s up, the national debt, which reached $10.6 trillion the other day. The increase year over year since 2005 isn’t all that much.

(Picture on http://blownmortgage.com/ scroll down to 11 13 08)

However, if you look at the increase over a several-decade period, it looks like this.

(Picture on http://blownmortgage.com/ scroll down to 11 13 08)

Unemployment
CNNMoney.com reports that “The government reported more grim news about the economy, saying employers cut 240,000 jobs in October, bringing the year's total job losses to nearly 1.2 million. According to the Labor Department's monthly jobs report, the unemployment rate rose to 6.5% from 6.1% in September and higher than economists' forecast of 6.3%. It was the highest unemployment rate since March 1994.

These figures notoriously underreport unemployment, but the trend is clear.

I hope everyone has a few bucks in the house, at the very least enough for groceries and gas.

mg

Confiscation of Your Retirement Account

This meme—government confiscation of retirement accounts— is rapidly gaining credence. On November 4, Carolina Journal Online reported that Democrats have been meeting to discuss transferring currently-voluntary private retirement accounts to eventually-mandatory government administered retirement accounts that would produce a guaranteed rate of return. Further, the now tax-advantaged plans would lose tax incentives and deductibility.

On the surface, this doesn’t look very appealing. However, there are two ways to look at this plan: 1) protection of retirement accounts to the tune of a guaranteed 3% per annum; or 2) confiscation of retirement accounts to the tune of loss of control and, effectively, loss of ownership.

As currently being discussed, the plan would entail transferring private retirement plans, such as IRAs and 401ks that are invested in stocks and bonds, into government retirement accounts (GRAs). These new accounts would be invested in newly-created government bonds yielding 3%, adjusted for inflation.

Further, the current tax-advantaged, voluntary plan would become a mandatory savings of 5% of wages with no tax deduction for either the employee or employer. These accounts would be administered by the Social Security Administration. Actually, the money would not be invested in government bonds, per se, but would earn “pension credits.” The wage earner would continue to pay into Social Security and Medicare. To make this more palatable, the transfer price might be calculated at market prices pre the recent cliff dive, assuming that it would be put into effect this year.

But wait a minute, there’s another way to look at this proposal. In her report, Ghilarducci said that “GRAs would guarantee a fixed 3% annual rate of return (vs. the volatility of returns in the capital markets, which have devastated savings this year). In place of tax breaks workers now receive for contributions and thus, effectively, a lower tax rate, workers would receive a $600 annual contribution from the government, inflation-adjusted. For low-income workers whose annual contributions are less than $600, the government would deposit whatever amount it would take to equal the minimum $600 for all participants. Lauding GRAs as a way to effectively increase retirement savings, Ghilarducci wrote that “savings incentives are unequal for rich and poor families because tax deferrals provide a much larger carrot to wealthy families than to middle-class families — and none whatsoever for families too poor to owe taxes.”

For more information, see: US Congress Committee on Education and Labor hearing on October 7, 2008 “Saving Retirement in the Face of America’s Credit Crises: Short Term and Long Term Solutions” testimony of Economics Professor Teresa Ghilarducci on “The Impact of the Financial Crisis on Workers’ Retirement Security.”

This proposal is similar to Argentina’s recently announced plan and we don’t hear any crying down there. Rock throwing and other expressions of civil unrest, but not crying; and a stock market crash; and money escaping the country; and, what else, oh yeah, increased likelihood of sovereign default.

Buck up, Americans, this is what you can do for your country.

mg

Election Fun is over, Back to Economic Reality

Economies worldwide are in recession and it’s getting worse. The momentum on the downside is too strong and the losses too pervasive to expect bailouts or interest-rate cuts to have more than a temporary effect. At best, government can slow down the rate of decline or perhaps delay a crash, but at great future cost.

In the US, what started out as a housing problem in a few states has now become a full-fledged recession, with a majority of states (30) now in or dangerously close (19) to recession. The single exception is Alaska, according to Moody’s Economy.com.

Just in case you thought there might be a way out by moving to a state where prospects are better, it won’t work this time. Mark Zandi, chief economist at Economy.com told ABC News recently. "One of the unique features of this downturn is how broad-based it is regionally."

Jobs
According to ADP’s National Employment Report released November 5, “Nonfarm private employment decreased by 157,000 jobs from September to October 2008, on a seasonally adjusted basis.” Keep in mind that the economy must create 150,000 jobs per month to absorb new entrants in the workforce. Friday’s official figures are expected to show unemployment at 6.1%.
October’s employment loss was driven by the goods-producing sector, which lost 126,000 jobs, declining for the 23rd consecutive month. The manufacturing sector was down another 85,000 jobs. These losses were compounded by a loss of service-related jobs, which fell by 31,000, the first loss in the service-providing sector since November 2002, according to ADP.
The estimated change in employment from August to September 2008 was revised down to a decrease of 26,000 from a decrease of 8,000. Not only is that quite the revision, but it’s an indication of what to expect when October’s figures are revised.

Service Sector
The Institute for Supply Management, a trade group of purchasing executives, said today its service-sector index suffered a sharper-than-expected drop to 44.4 in October from 50.2 in September. Consensus was 47.5; a reading below 50 signals contraction.

Auto Industry
GM, Chrysler and Ford—near bankruptcy due to a combination of poor management, slowing global growth and problems in credit markets—are looking for a government bailout.

However, problems aren’t confined to the US. Toyota sharply cut its profit forecast today, warning the global auto industry faces an "unprecedented" crisis. Other auto companies that have issued recent profit warnings are BMW, Nissan and Honda.

Construction
In October, construction employment dropped 45,000 jobs. This was its 23rd consecutive monthly decline, and brings the total loss of construction jobs to 455,000, off the peak in August 2006.

Consumer Sentiment
Rising unemployment, increases on food and fuel prices and falling property values have brought an end to the longest expansion in spending on record. In October, the Index of Consumer Sentiment was 57.6, a record 12.7 points below September’s 70.3 and 23.3 points below last October’s 80.9.

This month’s result was the largest monthly decline in consumer confidence in the history of the surveys. By mid-2008, consumer confidence had already declined more than in any prior recession and the steep October loss indicates that accelerated cutbacks in spending can be expected during the months ahead, according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers.

Start formulating Plan B, if you haven’t already.
mg

It's Official: The Crisis is Worldwide

Where is the last place on earth you’d expect a bailout would be needed . . . due to a real--estate bubble bursting . . . and banks failing . . . and stock markets crashing . . . and that has derivatives counterparty losses? It’s the Gulf countries (GCC) in the Middle East and, in particular Kuwait. **ya coulda knocked me over with a feather**

Bloomberg reports that “Abdullah Hajeri led a march on the Emir's palace in Kuwait last week, demanding that the oil-rich nation's ruler stop stocks from plunging. Adnan Mohammed Saleh said he wants more government protection from the global financial crisis.” “Every day the market is crashing,'' said Saleh, a 42-year- old trader, staring dumbfounded at the Dubai Stock Exchange's ticker. “ **the government is responsible for stock market prices . . . where did we hear that one before?**

Things a little better at the pump lately? Well, one man’s gain is another man’s cliff dive. The region's rulers are under pressure as crude prices have fallen 50% from a record $147.27 in July. Stock indexes in Dubai and Saudi Arabia have fallen a similar amount. **you mean they didn’t save those windfall profits for a rainy day? Oh, that’s right, it doesn’t rain there**

Bernanke-Style Bailout
Last week Kuwait became the third Gulf state to “prop up” its banks. Its central bank created a $19 billion facility to help banks make loans. Saudi Arabia, the world's largest oil exporter, put $2.7 billion into a government-run bank in Riyadh to provide no-fee loans to low-income citizens.
And a Bank Run
The bank bailout came after losses on currency derivatives at Gulf Bank KSC, Kuwait’s second-largest lender by assets. This resulted in a surge in customer withdrawals from the bank. In response, the UAE announced a FDIC-style guarantee of deposits of all local lenders and large foreign banks. **moral hazard anyone?**

More Derivatives’ Losses
Citibank’s Middle East economist Mushtaq Khan explains that Gulf Bank took a bet that the euro would continue to strengthen against the dollar. When the dollar unexpectedly and rapidly rose against the euro, the bank faced a problem with its counterparty commitments that ultimately required central bank intervention. ** this is the sort of thing should be swept under the rug; that’s what we do**

More Evidence that Decoupling is a Myth
All capital markets in the Gulf Cooperation Council (GCC), which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, have declined and interest rates have increased since Lehman Brothers’ bankruptcy on Sept. 15.

Of the Gulf States, Dubai likely will be hardest hit by a global economic slowdown. Dubai has borrowed heavily to finance its transformation from a Persian Gulf trading post to a financial and tourist hub. Foreign investors are gone and there has been a sharp decline in tourism, both of which this land-of-the-most-expensive-hotel-rooms-in-the-world relies on.

According to Moody’s, “government-controlled companies owe at least $47 billion, more than Dubai's GNP. They will continue to accumulate debt faster than the economy grows.” **as the economy grows? . . . what if it doesn’t grow?**

Real Estate Bust
“Dubai property prices will likely remain unchanged through 2010 after quadrupling in the past five years”, Colliers CRE Plc said. According to Nouriel Roubini, “There is a liquidity and credit crunch and now oil prices have fallen to $70 from $140. I see the risk of a real-estate bust throughout the Gulf, but specifically in Dubai. There's a huge amount of excess capacity being built.''

The Middle East's largest publicly-traded real-estate developer Dubai-based Emaar Properties PJSC is down more than 26% just since Sept. 15. Investors have lost confidence in Emaar’s ability to finance projects by borrowing through local and international banks.

Will Dubai turn into an Inland Empire-style ghost town? We’ll see.

mg

They're at it again!

Just how much money has the Fed, aided and abetted by the Treasury, spent this year? Numbers are all over the place, but it could be around $3.8 trillion. They spent $650 billion in the last six weeks alone. And it’s all money they don’t have, by the way. And it has yet to be financed; that’s ahead of us.

The $700 billion authorized by Congress—to buy illiquid securities from banks—has been spent. Not on illiquid assets, though. It’s been spent on: capital infusions to large US banks, whether they want it or not; regional banks, they’ve all wanted it and they say thanks, BTW; US insurance companies, whether they “need” it or not; and on short-term funding including commercial paper for US industrial GE. This week’s brand-new recipients of the Fed’s largesse are the central banks of emerging market countries, plus the central banks of New Zealand, Australia and the EU. Yes, that’s right, further direct lending by the Fed to foreign central banks. The only thing this group has in common is credit risk so high that only the Fed will lend to them.

This bill, the Emergency Economic Stabilization Act of 2008, was passed by Congress less than a month ago and they are about to go back to the well for another $600 billion.

On Oct. 30 Bloomberg reported that the Fed “agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations. The Fed also created a $15 billion swap line with its New Zealand counterpart and removed limits this month on four existing swap lines, including one with the European Central Bank. The Fed set up a $10 billion arrangement with Australia's central bank last month and then tripled it to $30 billion.

“The swap lines will help unclog the liquidity pipeline and that action is boosting markets even more than'' the Fed's rate cut, said Venkatraman Anantha-Nageswaran, head of research at Bank Julius Baer & Co. in Singapore. “It's a step in the right direction and prevents things from getting worse.”

Worse than what; these actions reveal a previously unthinkable level of desperation.
Last week banks borrowed $368 billion per day, up from $188 billion per day the week before (source: Federal Reserve Bank of St. Louis via http://www.itulip.com/forums/showthread.php?p=52281#post52281).

Ordinarily, an increase in the money supply of this magnitude would be highly inflationary. However, the magic of the multiplier effect doesn’t happen until the money is lent out. So far, there’s little evidence that this has happened. Banks continue to hoard cash to cover anticipated losses and writedowns. Take a look at the Baltic Dry Index, which is a proxy for international shipping and manufacturing. Its recent cliff dive is partially due to shippers’ inability to get banks to accept letters of credit from other banks. Individuals have stopped out-of-control consumption. Take a look at this month’s Consumer Confidence Index. It’s at 38, the lowest level on record.

Try as the Fed might, deflationary forces remain stronger than the inflationary kind.

mg

Just how much money has the Fed, aided and abetted by the Treasury, spent this year? Numbers are all over the place, but it could be around $3.8 trillion. They spent $650 billion in the last six weeks alone. And it’s all money they don’t have, by the way. And it has yet to be financed; that’s ahead of us.

The $700 billion authorized by Congress—to buy illiquid securities from banks—has been spent. Not on illiquid assets, though. It’s been spent on: capital infusions to large US banks, whether they want it or not; regional banks, they’ve all want it; US insurance companies, whether they “need” it or not; and on short-term funding including commercial paper for US industrial GE. This week’s brand-new recipients of the Fed’s largesse are the central banks of emerging market countries, plus the central banks of New Zealand, Australia and the EU. Yes, that’s right, further direct lending from the Fed to foreign central banks. The only thing this group has in common is credit risk so high that only the Fed will lend to them.

This bill, the Emergency Economic Stabilization Act of 2008, was passed by Congress less than a month ago and they are about to go back to the well for another $600 billion.
On Oct. 30 Bloomberg reported that the Fed “agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations. The Fed also created a $15 billion swap line with its New Zealand counterpart and removed limits this month on four existing swap lines, including one with the European Central Bank. The Fed set up a $10 billion arrangement with Australia's central bank last month and then tripled it to $30 billion.

“The swap lines will help unclog the liquidity pipeline and that action is boosting markets even more than'' the Fed's rate cut, said Venkatraman Anantha-Nageswaran, head of research at Bank Julius Baer & Co. in Singapore. “It's a step in the right direction and prevents things from getting worse.”

Worse than what; these actions reveal a previously unthinkable level of desperation.
Last week banks borrowed $368 billion per day, up from $188 billion per day the week before (source: Federal Reserve Bank of St. Louis via http://www.itulip.com/forums/showthread.php?p=52281#post52281).

The Stock Market Crash: Ahead of Us or Behind Us?

Today’s reverse crash resulted in the Dow up $889.35 to close at $9,065.12. From peak to recent trough, the Dow has moved from its all-time high of $14,164 on October 9, 2007 to a low of $8,176 on October 27, 2008. That’s a decline of $5,988 or 42%. It earned back about 10% of that today.

So, let’s try to figure out what caused all this exuberance and determine if it’ll hold.
Over the weekend it was reported that emerging markets’ debt, currencies, and stocks are crashing, a series of events that the US will be relatively unscathed by, for a change. **not much bearing on the Dow unless there’s more to this story, but go on**

Then there was the Washington Mutual CDS auction, which settled at 57 cents with less than a billion of net open interest. One way or the other, the counterparties are good for it; the Fed will give them the money. **under the radar, next**

OK, this is a biggie: the commercial paper market unfroze. The Fed has invoked Depression era power to buy short-term debt directly from issuers. Yesterday, companies sold a record of $232 billion in commercial paper, of which a record $67.1 billion was out 80 days or more, compared with a daily average of $6.7 billion last week, according to Fed data. This is good news since it’s frequently the inability to obtain short-term funding that pushes companies into bankruptcy. **now you’re talking, two thumbs up**

However, there’s a little catch. **uh oh** According to Adolfo Laurenti, a senior economist at Mesirow Financial Inc. “The central bank probably absorbed about $60 billion out of the $67.1 billion of total 80+ day paper.” Also of interest is that General Electric, the largest issuer of commercial paper and the parent company of CNBC, sold commercial paper as “a test” and a “show of support” for the Fed’s program. Another first, The Korea Development Bank, borrowed directly; however, it did not beat around the bush making lame excuses, it just needed the money. It now has a line with the Fed for $830 million. **this casts a different light on the term “unfreezing” but go on**

No, none of these are big enough to turn around the crisis. Au contraire, upon second glance, the commercial paper thing could be a negative. The root cause of this crisis, from the standpoint of the US, is derivatives counterparty risk and that’s where there could be big change. **now you’re talkin’**

From Bloomberg, ever at the ready: “The Federal Reserve has given US futures exchanges until Oct. 31 to present written plans on how they'll make the $55 trillion credit swaps market less risky . . . The Fed is pressing the industry to set up a central counterparty that would absorb losses should a market maker fail, a step that might have avoided last month's bankruptcy of Lehman Brothers Holdings Inc.” **they should have thought of this sooner** But wait, who will absorb the losses when a counterparty fails? No one has said, so I guess it will be the Fed then, who else.

And now, for those still with me who are dying to learn the answer to the question, is the stock market crash ahead of us or behind us—the answer is . . . ahead of us.

mg

What if Insurance Companies Don't Pay?

Let’s hope your policy is with an insurance company that has ruinous trading losses and heavy exposure to derivatives. That’s what it took for AIG to be rewarded with a direct government bailout.

In something of a creative interpretation of the mandate given by Congress to continue funding the so-far-failed bailouts of banks, Bloomberg reports on Oct 24: “The Treasury is considering taking stakes in insurers . . .” which “would widen the scope of Secretary Paulson’s Troubled Asset Relief Program (TARP) as the credit crisis deepens. “Capital adequacy has been a major concern among investors” in insurance companies, said Morgan Stanley analyst Nigel Dally. “If the Treasury were to purchase preferred equity stakes in some insurers, it would help calm these concerns.''

Purportedly, insurance companies, primarily life so far, have approached the Treasury for direct investment, or in the vernacular, a bailout. As would be expected in their line of work where the welfare of others is a hallmark of their business model, they want all life insurers to be on the receiving end of the government’s largesse. The reason, the companies state, is to lessen the embarrassment, or to cover up*, or to fool the public, if you will, for the few that actually need an investment, or bailout, and have been turned down, or laughed at, or shunned by private investors. (*The actual term used was cover up. I’m not making this up, just ask Jeff Matthews.)
Insurance Company Watch List

Insurance company third-quarter results are starting to come out. One company that had been rumored to be on shaky ground, The Hartford, announced a $2.5bn capital investment by Allianz SE, the reduction of its dividend and pre-announced a third-quarter loss. Prudential also pre-announced third-quarter losses, as did a number of other life insurers.

MetLife, in a bit of a departure from the others, pre-announced third-quarter results in the Tehran Times. The Tehran Times also reported that “the insurer . . . plans to offer 75 million common shares to supplement the company's capital position. “ We’ll let you know how that goes; however, the Tehran stock market is doing quite well this year. http://www.tehrantimes.com/index_View.asp?code=179624

MetLife and The Hartford were put on negative watch by Standard & Poor’s earlier this month. The CDSs of both companies “were trading upfront, a sign of distress and heightened worry of a potential default.” By way of explanation, Chairman, President and CEO Mr. C. Robert Henrikson said, “MetLife continues to be a strong, stable leader in the financial services industry during a challenging environment.”

In agreement with Mr. Henrikson about the challenging part, Standard & Poor's said it is revising its outlook on the US life insurance sector to "negative" from "stable." It expects higher-than-usual credit losses and lower fee-based revenues as a result of the current turmoil in financial markets.

Now’s the time to amend living wills and revoke those do-not-resuscitate clauses if you, or an insured loved one, anticipate death anytime soon. And by all means, don’t jump, at least not until this matter is resolved.

mg

Just the Facts, no Tinfoil Hats

Some of my best friends wear tinfoil hats. These days, though, no sooner has a good conspiracy theory made the rounds, but it’s proven to be fact. This past weekend there were outrageous rumors that Argentina would confiscate citizens’ pension money. By Wednesday afternoon it was a done deal. There’s little point in providing a link; it’s old news now.

However, and borrowing heavily from a comment on Global Economic Trend Analysis, let this be a warning to us all. The Argentine state is taking control of its citizens’ privately-managed pension funds in a drastic move to raise cash. This could be a harbinger of what will happen across the world as governments discover that tax revenues are insufficient and bond markets unwilling to cover their obligations and deficit spending.

Then there was the one about war-hardened troops coming home from Iraq being stationed in cities across America. To fight terrorism, of course. Isn’t it illegal to use the armed forces for domestic law enforcement you ask? Sort of. Excluding Katrina, it happened before. That’s what the Civil War was about and, in particular, the aftermath. Regardless, they’re home and at their new battle stations throughout the country. Here’s a link to a link with the original story from Army Times plus insightful commentary: http://tinyurl.com/6dtgmn Having combat-ready troops on domestic soil will come in handy at some point, I’m sure.

So, howz about the Lehman CDS payout on Tuesday. Seamless. Nothing untoward picked up by the mainstream news or the blogosphere, nothing on Bank Implode-O-Meter and nothing on Hedge Fund Implode-o-Meter. Bit of a worldwide stock market crash, but probably unrelated. Unlimited lending from the Fed covered the banks, but what about the hedge funds? Well, hedge funds have a prime broker and the largest prime brokers are now subsidiaries of the largest banks and, to complete the loop, the banks have unlimited borrowing power. This story may not be over. For a few erudite observations, scroll down on Jim Willie’s new site: http://globaltinfoilanalysis.blogspot.com/

The Dow is back to bungee jumping, closing down almost 6% Wednesday and taking world stock markets with it on Thursday. Bloomberg reports that “Asian stocks slumped, driving the region's benchmark index to the lowest level in four years, as Japanese exports missed estimates, commodities prices tumbled and South Korea's worst financial crisis in a decade deepened.” Japan was down 2.46%, the Hang Seng 3.55% and Singapore 4.14%.

One of these days the markets are going to go down and stay down. That day could even be today.
mg

Could it Happen Here?

Despite hard times, what possibly could happen here in the land of the free and home of the brave? Hasn’t the US always stood for and protected the civil rights of the individual. No, it hasn’t .

In fact, the United States has a long tradition of violating civil rights and even the constitution itself. Going back to the first depression, which our current condition is likened to, FDR, at the beginning of his first of four terms, declared a national emergency and closed the banks. Spooked by the economy, people had been turning in their gold certificates for physical gold. With some exceptions, all gold was confiscated and all gold certificates had to be turned in for paper currency backed by trust in the US. When the banks reopened, all safe deposit boxes were sealed. Boxes could be opened only in the presence of an IRS agent. **oh, I didn’t know that**
Ok, but that was a long time ago you say.

In April 1971, in response to demands for gold from foreign powers, Nixon, unilaterally, without consulting foreign governments, broke the Bretton Woods agreement. He took the US off the gold standard and replaced “redeemable in gold” with the “full faith and credit of the USA.” **clears throat**

From Reuters on October 7: “The Group of Seven is no longer effective and should be replaced by a steering group that includes new emerging economic powers like China, India and Brazil, World Bank President Robert Zoellick said.” Further evidence of the US’s decline in international influence and prestige, the Treasury has bowed to pressure and will allow the IMF to examine its accounts. **gulps**

Just yesterday, October 21 on the Fed’s website: “The Federal Reserve Board on Tuesday announced the creation of the Money Market Investor Funding Facility (MMIFF), which will . . . provide liquidity to U.S. money-market investors. The MMIFF complements the previously-announced Commercial Paper Funding Facility . . . as well as the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. The Federal Reserve will provide up to $540 billion in loans to help relieve pressure on money-market mutual funds beset by redemptions. ” On the surface, this sounds great; no more breaking the buck and suspending withdrawals from money-market funds. Finally, a bailout for average folks. **sigh of relief**
However, the motive was not to protect citizens. More likely it was to protect China, which has about $5bn stuck in US money-market accounts, other governmental agencies and institutional investors.

And then there’s Argentina, which, at its peak, was among the wealthiest countries in the world. Bloomberg reported yesterday that “Argentine bond yields soared above 24% and stocks sank the most in a decade on speculation the government will seize private pension funds and use the assets to stave off the second default this decade.” Among the reasons for merging US commercial banks and investment banks is to collect deposits, which can now be lent out with no reserve requirements.** starts sweating**

How about the privatizing of Fannie Mae and Freddie Mac, effectively nationalizing the US mortgage market, and the propping up of and bailing out some of the largest banks, and subsidizing the largest US insurance company? And we’ve just gotten started; there is so much more to come. States and municipalities have barely begun with the multi-billion dollar bailout of California. The industrials are next and have started with bailout money for General Motors and Ford. **mops brow**

At what point do we acknowledge that the US is no longer a democracy with free markets, but has embraced socialism? Could it happen here? It has happened here.

mg

The Banking Crisis is Over (?) Long Live the Economic Crisis

If you believe in the United States of America then you will believe in: JPMorgan Chase (which includes Bear Stearns and Washington Mutual); Bank of America (which includes Merrill Lynch); Wells Fargo (which includes Wachovia); Citigroup; Bank of New York Mellon; and the two brand-new banks, Goldman Sachs and Morgan Stanley. Each will be receiving multi-billion-dollar injections of cash from the Treasury. And, to help retain deposits, there’s the FDIC’s new deposit guarantee limit, which was raised to $250,000 per depositor from $100,000, at these and other fine banking institutions.

An early and harsh critic in this crisis and of just about everything else to do with the US, Ambrose Evans-Pritchard of the UK Telegraph said yesterday, “If the history of financial crises is any guide, the violent credit shock of 2007-2008 has largely run its course. The sovereign states of the US, Britain, France, Germany, Italy, Spain, and Holland have broad enough shoulders to carry their load of fresh liabilities – even if Iceland does not.”

So, PM Berlusconi and other rumor mongers, it looks like there won’t be a worldwide bank moratorium. And there’s no need to continue the run on your local branch, as long as it’s one of the above-mentioned nationalized survivors. Personally, I’m skeptical and I’m not keeping more than transaction-necessary amounts in my bank.

But then there’s this from Reuters: “The US government's broadly expanded guarantee program (via the FDIC) is expected to cover about $1.9 trillion in US banks' new debt and additional deposits . . . Bair called the temporary liquidity guarantee program a "profound and unprecedented action" to boost confidence in credit markets. The guarantees cover a pool of about $1.4 trillion in senior unsecured debt and about $400 billion to $500 billion in transaction deposit accounts, which businesses typically use to meet payroll and pay vendors.” Sounds good, but it was just in August that Bair said the FDIC: “might have to borrow money from the Treasury Department to see it through an expected wave of bank failures.” At that time there were only about 100 banks on the problem list and there weren’t enough funds to cover the then $100,000 guarantees.

Is the world now safe for derivatives . . . for mortgage debt . . . auto loans . . . credit-card debt . . . your checking account? Probably your checking account, at least temporarily.
British economist John Maynard Keynes once said, "When the facts change, I change my mind." I think it’s too soon to change your mind.

mg

Derivatives: The Great Unwind

The market was up strong yesterday. Other than the shares of bank stocks, you have to wonder why. The worldwide central bank bailout is not intended for the equity investor, or general public, or business, or you, or me. It’s intended for banks, ostensibly to spur lending, but more likely to keep them afloat through next week’s Great Derivatives Unwind connected with Lehman’s bankruptcy. This has got to be a big part of the motivation of the CBs to provide unlimited lending to banks.

Distracted by worldwide stock market crashes, attention shifted away from Lehman’s derivatives’ payout scheduled for October 21. Recovery value has been set at 8.625 cents per $1.00, which means that sellers of credit protection must pay 91.375 cents to the buyers (according to Creditex, www.creditfixings.com, the company that holds auctions).

More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. The list of participants in the auction includes Newport Beach, California-based PIMCO (Pacific Investment Management Co.), manager of the world's largest bond fund; Chicago-based hedge fund manager Citadel Investment Group LLC; and AIG, the New York-based insurer taken over by the government, according to the International Swaps and Derivatives Association in New York.

According to JPMorgan, the largest foreign bank holders of Lehman’s derivatives are Deutsche Bank, Barclays, Societe Generale, UBS, Credit Suisse and Credit Agricole. Overall, as of June 30, 2008, the top ten US banks in terms of derivatives exposure were: JPMorgan Chase, Bank of America, Citibank, Wachovia, HSBC USA, Wells Fargo, Bank of New York, State Street Bank, SunTrust Bank, and PNC Bank, according to the Comptroller of the Currency Administrator of National Banks' Quarterly Report on Bank Trading and Derivatives Activities for the second quarter of 2008. http://www.occ.treas.gov/ftp/release/2008-115a.pdf Lots of other good information too, if you like this sort of thing, as I do.

And this is just the beginning. Few losses are expected from the failed GSEs. Fannie Mae’s senior debt settled at 91.51 and subordinated debt at 99.9 cents on the dollar; Freddie Mac senior debt was 94.00 and subordinated debt was 98 cents on the dollar. Washington Mutual could be another story. Its Credit Event Auction will settle, meaning prices will be determined, on October 23. Just last week there were credit events at the largest three Iceland banks, all of which have large quantities of derivatives outstanding. These are all financial institutions; industrials haven't started yet.

Nonetheless, the market’s up. For technical types, Mish Shedlock has a good and almost-understandable-by-laymen explanation of where the market is in terms of Elliott Wave theory. He says, “In terms of price, given the magnitude of today's move on top of the huge move up from Friday's low, the rally may be 65% over already. In terms of time, the rally likely has several weeks to a couple of months to play out.” See S&P 500 Crash Count at www.globaleconomictrendanalysis.com

In my opinion, the markets are still very fragile. Charts or no charts, it wouldn’t take much to trigger another cliff dive. We’ll see what happens next.

mg

A Look at this Morning's News

Not all that much seems to have come from the G7+ meeting this past weekend. We somehow expected more than: “The Federal Reserve led an unprecedented push by central banks to flood the financial system with dollars, backing up government efforts to restore confidence and helping to drive down money-market rates.

In its statement the Fed said: “In order to provide broad access to liquidity and funding to financial institutions, the Bank of England, the European Central Bank, the Federal Reserve, the Bank of Japan, and the Swiss National Bank are jointly announcing further measures to improve liquidity in short-term U.S. dollar funding markets.

To assist in the expansion of these operations, the Federal Open Market Committee has authorized increases in the sizes of its temporary swap facilities with the BoE, the ECB, and the SNB, so that these central banks can provide U.S. dollar funding in quantities sufficient to meet demand.”

And just in the nick of time, we observe, options expirations aren’t far off.

Sunday night Bloomberg reported that the “Royal Bank of Scotland, HBOS Set to be Taken Over by Government. U.K. Prime Minister Gordon Brown's government is set to buy majority stakes in Royal Bank of Scotland Group Plc and HBOS Plc to contain the worst financial crisis since the 1930s, two people familiar with the matter said.The government will also name representatives to the boards of RBS, Britain's fourth-biggest bank, and HBOS, its largest mortgage lender, and will work closely with the management on issues including executive pay, the people said. They spoke on condition of anonymity because the information is confidential.

This comes on the heels of Saturday’s announcement, “Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.

In addition, “Adding underperforming assets to Fannie and Freddie's combined $1.52 trillion mortgage portfolios would come at a time when the two mortgage-finance companies already hold as much as $210 billion of bad debt that may be eligible itself for the Treasury's relief program, their regulator said on Oct. 5.”

We can’t help but notice that so far, not one of these increased-debt-related schemes has had any positive effect on the markets or the worldwide economy; just the opposite, in fact. Since the beginning of the year, the Federal Reserve has added more than $2.7 trillion, yes trillion, to its balance sheet, some of it in the form of guarantees and some of it against swaps of worthless mortgage-related securities.

The engine that drives the US economy and, therefore, the world economy, is the US consumer. The US consumer is tapped out due to maxed out credit cards, maxed out or withdrawn HELOCs reflecting underwater mortgages, no savings and, the last nail in the coffin, increasing unemployment.

The economy is in serious decline and there are few credit-worthy borrowers left. More debt couldn’t possibly remedy this situation.

mg

Wachovia, Citi and the FDIC or Wachovia, Wells Fargo and the Fed

Whilst all eyes were upon the Bailout negotiations, there was a little changeroo in the Wachovia rescue package.

According to Reuters on October 3, “Wells Fargo & Co agreed to buy Wachovia Corp. for more than $16 billion, besting a U.S government-backed Citigroup Inc. bid for some of its assets, in a deal that would catapult Wells Fargo to the top ranks of national consumer banks.

For each share of Wachovia, investors will receive 0.1991 Wells Fargo share, which is equal to $7 a share based on Wells Fargo's closing price on Thursday of $35.16.

A Wachovia spokeswoman said neither Citigroup nor the Federal Deposit Insurance Corp is involved in the transaction.

Wachovia closed at $3.91 on Thursday, meaning that Wells is paying a 79 percent premium.”
That’s an extraordinary premium even for a bank in good shape, and Wachovia wasn’t. The bank was seized last weekend the FDIC due to a “silent run.” Depositors, both institutional and retail, had pulled out money above the FDIC guaranteed amount of $100,000.

It was only on the 2nd that home-town Charlotte Observer reported, “With Wachovia already looking for a merger partner, the FDIC, in consultation with other regulators, required the bank to reach a sale to Citigroup on Monday morning.

The FDIC, for the first time, used legislative authority created in 1991 to help it deal with a “very large complex bank failure” on short notice. It requires approval from heavy hitters – two-thirds of FDIC board members, two-thirds of Federal Reserve board members, as well as the Treasury secretary, who must consult with the president (emphasis added).

In the resulting agreement, Citigroup agreed to buy Wachovia's banking operations and most of its assets, with assistance from the FDIC. The agency will pick up losses above $42 billion on a $312 billion loan book in exchange for $12 billion in Citi securities.

Money flowed out of Wachovia throughout the weekend, said Evans who heard anecdotes and received memos and BlackBerry messages from bank employees in the field. “What happened last week, and it literally happened that fast …You could go from being OK, hurt, weakened, there's no question the company was weakened… but you go from being weakened to in trouble in a matter of days,” he said. “I don't think people understand how quickly events unfolded.”
This is important to make note of. Anecdotal information on the reputable blogs and forums (see links in the sidebar for a few) are frequently reliable forward indicators of economic events. There isn’t a solvent bank out there and rumors quickly can become self-fulfilling. The takeover of Wachovia was inevitable, just like those to come will be.

The FDIC is broke; Sheila Bair said so herself. When out of funds, as what happened during the S&L bailout, the FDIC borrows from the Treasury. Presumably, that means it must be paid back through fees from member banks. The Fed has more autonomy than the FDIC, especially these days. Since the Fed began the special funding vehicles in 2007, all available pools have been increased.

So, where did Wells Fargo get so much money all of a sudden? It’s a stock deal, but there are significant expenses incurred for the merger and there will continue to be significant writedowns in mortgage portfolios by both banks.

Sept. 29 (Bloomberg)--The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.

The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.
“European governments have rescued four banks in two days and the Federal Deposit Insurance Corp. said today it helped Citigroup Inc. buy the banking operations of Wachovia Corp. after its shares collapsed.”

However, Citigroup and the FDIC are no longer part of the takeover; but, read on.
“The Fed is also increasing the size of its three 84-day TAF sales to $75 billion apiece, from $25 billion. That means the Fed will make a total of $225 billion available in 84-day loans. The central bank will keep the sales of 28-day credit at $75 billion.

Special Sales: In addition, the Fed will hold two special TAF sales in November totaling $150 billion so banks can have funding available for one or two weeks over year end. The exact timing and terms will be determined later, the Fed said. The TAF program began in December, totaling $40 billion.”

Just sayin’, that’s all.
mg

The Bailout: Fed and Treasury Won't Give Up

The Emergency Economic Stabilization Act of 2008 failed in the House—225 to 228— on September 29. In an unprecedented and unconstitutional move, the bill was sent to the Senate, loaded up with pork and overwhelmingly passed—75 to 24— with no substantive change to the provisions that caused it to be rejected by the House.

So, we want to know, where’s the stimulation?

What the Bill won’t do:

1. Stimulate employment:
The plan has no direct affect on employment. Buying old bad debt from banks in exchange for brand-new, at-least-temporarily-good new debt does not decrease leverage, does not increase the money supply, and does not motivate banks to start lending. Really, who are they going to lend to in a rapidly deteriorating economy?

Further, it has little direct affect on employment other than on the Wall Streeters who will manage the pools of money.

It does not lighten the burden on Americans who are already in deep financial trouble; in fact, it increases the burden. The Treasury and Fed do not have an extra $700bn; they will have to borrow it. This bailout, the first tranche—not the whole thing, the first tranche— of which is $700bn, will be the largest tax increase in history.

2. Increase monies for mortgages:
Banks are not going to make mortgages on real estate that is rapidly decreasing in value, not should they. They are not going to give or refinance mortgages for people who do not have jobs. Anymore, that is. On the contrary, larger downpayments are being demanded and terms are tightening. There is even some anecdotal evidence of redlining, ironically in both low-priced areas and the highest-priced areas where real estate values are expected to erode fastest.

3. Increase, or even stabilize, sources of consumer debt:
Sources of consumer debt have been steadily drying up. HELOC lines are being frozen and cancelled, credit-card lines are being withdrawn, and other direct lines of credit, such as auto loans, are being cut off.

4. Free up other traditional sources of lending, like the bond market:
As an example, the front-page headline this morning in the LA Times: “The state of California is the biggest of several governments nationwide that are being locked out of the bond market by the global credit crunch.

Plans by several state and local governments to borrow in recent days have been upended by the credit freeze. New Mexico was forced to put off a $500 million bond sale, Massachusetts had to pull the plug halfway into a $400 million offering, and Maine is considering canceling road projects that were to be funded with bonds.”

Municipalities have been coming to the bond market since the collapse of the ARS (Auction Rate Securities) market at the beginning of this year. Now that source of money has dried up.

The House is expected to vote on the revised plan today. As Drudge would say, developing . . .

mg

Wachovia: Time to Bail?

After last week, and last weekend in particular, we can’t help but wonder who’s next.
Although possibly a ploy to gain passage of the Paulson Bailout Plan, Saturday, September 27, CBS News reported that “Senator Robert Bennett (R-Utah), a key member of the Senate Banking Committee, warned that another major US bank was "teetering" on the edge of failure.”

Although we rarely take anything from a senator at face value, and I’m being kind, this time we’re believers, at least of the teetering part. However, passage of a bailout plan will have little impact at this point on whether any US financial company remains independent.

The bank Bennett is referring to likely is Wachovia. Cleveland-based National City is also on its last legs and then there’s elephant-in-the-corner Citibank, but we’re going with Wachovia.
Wachovia’s shares closed down 27% on Friday due, in part, to JPMorgan’s announcement that it will acquire the deposits, but not the debts, of Washington Mutual. This is setting a new precedent and is a major bummer for both the stock and bond holders, potentially to the tune of $28.4bn for the bondholders alone. The equity holders will be wiped out. The clincher, though, is that JPM immediately marked down the value of WAMU's mortgage-related securities by $31 billion. This creates a mark-to-market value of similar assets at other banks, which are being held at unrealistically inflated values.

Wachovia is deeply under water with the same kind of mortgages that did in WAMU. The declining value of the mortgages held by its subsidiary, Golden West Financial, was the largest contributor to the $8.9bn second-quarter loss of the parent company.

Talks to be acquired by Morgan Stanley ended on Thursday, according to Reuters. Wachovia purportedly is now in talks with other potential buyers including Wells Fargo, Banco Santander, and Citigroup. According to the Washington Post, “Wachovia chief executive Robert Steel sent an e-mail to employees on Friday saying that the company was "aggressively addressing our challenges" and expressed hope that Congress would approve some version of a plan to buy mortgage-related securities from Wachovia and other banks.” As reported by the WSJ on Saturday, “Wachovia officials don't believe they need to rush into a deal and the bank isn't feeling immediate pressure on its financial condition, people familiar with the company said.”

Sure, if they say so.

Bailout Friday has been morphing into Bailout Saturday and Bailout Sunday and the number of bailouts per weekend is increasing. Last weekend, September 19-22, the Fed and Treasury were able to squeeze in Lehman’s bankruptcy, AIG’s conservatorship, the sale of Merrill Lynch to Bank of America and, in the words of the WSJ, they took “the extraordinary measure of converting Goldman Sachs and Morgan Stanley into bank holding companies”, which will make it easier for both to acquire other banks. It looks like Wachovia will be next.”

Banks remain reluctant to lend to each other and bailout or no bailout, this will continue. How could it not.

mg