Consumers shied away from big-ticket items in September, as wages remained basically stagnant and people began to tuck more money into savings -- further evidence of a pullback by American households.

Let's see, AIG had to ask to be included in the Fed's new commercial paper program. AIG was reported to have said it needed a wee bit more money, but no more than $10 billion. No reasons were given in any news stories. Now we find out the intended use. From (hat tip reader Steve A): American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) reduced the amount it owes under a U.S. Federal Reserve credit line by $6.8 billion, but only by borrowing from a different government lending program. AIG currently owes $83.5 billion under two emergency facilities from the Fed, which were necessary to prevent the company from filing for bankruptcy. That figure was $90.3 billion a week ago. An AIG spokesman said neither the company nor the Fed plan to disclose the exact amount the Fed was repaid. The company was able to repay part of the amount already borrowed by voluntarily participating in a program that the Fed started on Monday to buy short-term debt known as commercial paper from companies. Surprisingly, a on the same snookering gamesmanship was entirely approving and indicates the amount borrowed through the CP program to repay the other credit lines was even larger: American International Group Inc., the insurer bailed out by the U.S., reduced its debt under two credit lines to $83.5 billion by using cash from the Federal Reserve's commercial paper program. The insurer got as much as $20.9 billion from the program, which swaps commercial paper for cash, AIG spokesman Nicholas Ashooh said yesterday in an interview. The terms of the commercial paper funding are better than the U.S. loan made last month to save New York-based AIG from collapse, he said. ``They're paying off a Fed loan with another kind of government subsidy -- it's like using one credit card to pay off another credit card,'' said Robert Haines, an analyst at CreditSights Inc. ``If they make progress paying off debts over time, I don't think it'll be viewed...

Former U.S. Securities and Exchange Commission Chairman Arthur Levitt talks about the importance of credit derivatives to the financial markets and the need for regulation and transparency, and the outlook for executive compensation at financial firms. Levitt is a senior adviser to the Carlyle Group and a board member of Bloomberg LP, the parent company of Bloomberg News. click for Video: http://www.bloomberg.com/avp/avp.htm?N=av&T=Levitt%20Says%20Derivatives%20Necessary%2C%20Should%20Be%20Regulated&clipSRC=mms://media2.bloomberg.com/cache/vhbslNoBG_nI.asf 00:00 Credit derivatives' importance, transparency 01:26 Growth of derivatives market, new regulation 02:11 "Some moderation" in executive compensation Running time 03:48 Source: Bloomberg, Last Updated: October 29, 2008 09:23 EDT http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azMrpQyorJFs

Before we debate the merits (more accurately, the lack thereof) of the latest trial balloon of a plan being floated to rescue overextended mortgage borrowers, we need to consider a few not sufficiently discussed facts: 1. The problem is that banks are not making loan modifications as they did in the past. That is turn is due to securitization In the old days, including in the nasty (in the Southwest and Texas) housing bear market of the early 1990s, it was standard practice for banks to modify mortgages. That was not charity on the part of the bank but a cold-blooded economic calculation, that in the majority of cases, it would take a lower loss by changing mortgage terms than by foreclosing. 80% of mortgages are now securitized, however, and the servicers do not do mods in the vast majority of cases, despite over a year of tough talk, pressure, and various half-baked programs (Hope Now Alliance as the poster child).Why? Our belief is the big reason is the most obvious: servicers get pretty well compensated for foreclosing, but cannot charge (much if any) for the work of doing a mod. Servicers are also set up like factories, with highly standardized procedures. They are not set up to do anything on a one-to-one basis, lack knowledge of the borrower (no doc and low doc mortgages mean the initial files are skimpy, and I am told they are often a mess) and have no experience in assessing borrower ability to pay (ie, they never were in the credit-extension business). To top that off, many servicers have lousy relationships with their borrowers, and so borrowers would probably not be as forthcoming as they would need to be to work out a fair and viable deal (the borrower would assume anything could and would be used against them). 2. A foreclosure lowers the value of all other homes in the neighborhood. Readers have said that recent studies have found 5% is a typical level; anyone with better data or links is encouraged to speak up. 3. I am amazed that the banking industry...

Donald Trump will go kicking and screaming into the new American "culture of austerity" that was thrust upon us all last month. Throughout the two-decade long credit bubble, the New York real estate developer has been a symbol of American success and excess, rebounding from near-bankruptcy during the 1990s housing bust, then returning bigger and better than ever with a reality TV show that has since become something of a bad parody of itself. Apparently exhausting viewers with the original format of The Apprentice, the show has resorted to celebrity editions, apparently a necessary prerequisite for NBC signing on for another season that begins in January. The "new frugality" sweeping the nation runs counter to everything the Trump name stands for - borrow big, build big, spend big, and make a lot of noise in the process. Can the Trump brand survive during an era when "layaway" payment plans are making a comeback (seriously, I heard an ad for this morning where they touted layaway plans as an exciting new payment option). Anyway, it looks like the Donald may be in for a rough patch according to this WSJ : Donald Trump's tallest construction project ever is facing some tall challenges. Many real-estate developers are under pressure these days as lenders and investors rush to cut their exposure to the market. But Mr. Trump's 92-story Trump International Hotel & Tower in Chicago, which will be the tallest building constructed in the U.S. since the Sears Tower opened in 1973, may be especially vulnerable because it's getting hit by a triple whammy of colliding forces: the credit crunch, the reversal in the housing market and weak retail sales. The shiny glass skyscraper is one of the few that the brash Mr. Trump developed without partners. The situation also puts pressure on one of the project's major lenders, Fortress Investment Group LLC. So far, Mr. Trump has lined up buyers for a bit less than $600 million of condo units...

In an effort to unfreeze money markets the . The Federal Reserve 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 for the first time. The Fed set up "liquidity swap facilities with the central banks of these four large systemically important economies" effective until April 30, the central bank said yesterday in a statement. The arrangements aim "to mitigate the spread of difficulties in obtaining U.S. dollar funding." "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." Step Towards The Cliff The idea that currency swaps are a step in the right direction is complete silliness. The Fed's swap-o-rama meet does not unclog anything. It just seem s like it. The illusion will vanish as soon as the Fed stops the swap meet. Note the similarity between the Fed's actions and a drug dealer and his client. A shot of heroin will relieve the withdrawal symptoms, but only if the next dose is stronger. Korean Stock Market Surges On Fed Supplied Drugs For now the market is happy as . South Korea's stock index rose by a record and the won surged after the central bank signed a $30 billion currency swap with the Federal Reserve and President Lee Myung Bak said he's ready to take more steps to aid the economy. The swap line is part of the Federal Reserve's efforts to alleviate a credit freeze in emerging nations, with the U.S. also providing dollars to Singapore, Brazil and Mexico. Korean lawmakers today approved the government's $100 billion guarantee of bank debts to help lenders struggling to access foreign funds. Korea's currency jumped 14 percent...

Banks have proven to be remarkably immune to condemnation over senior level pay. CEOs and top level producers seem to have an undimmed sense of entitlement, even though the nine banks receiving the first Treasury handouts equity purchases earned a collective $305 billion from 2004 to mid 2007, followed by $323 billion in writedowns. But the powers that be are keeping up scrutiny and pressure. The latest salvo comes from New York attorney general Andrew Cuomo. At this stage, Cuomo appears merely to have made a request to the nine recipients of Federal largess to cough up fairly extensive information about bonuses. If the firms fail to respond, he may try to force them to comply. The New York AG would then resort to a legal theory that is a bit of a stretch. Even if Cuomo is unlikely to win a case based on this theory, it may have enough substance to survive a motion for summary judgment from the opponents. If it does, Cuomo can then proceed to discovery, which means he can gather a great deal of potentially embarrassing information. From the : Under pressure from members of Congress to curtail compensation, banks now face a new threat from Andrew M. Cuomo, the New York attorney general, who sent a letter on Wednesday to nine big financial institutions receiving government aid. Mr. Cuomo gave the companies a week to provide a “detailed accounting regarding your expected payments to top management in the upcoming bonus season.” That could prove difficult for the banks, which typically do not complete bonus pools until later this month at the earliest. Mr. Cuomo’s letter also warned that payments worth more than the services provided by executives might violate New York law. The letter follows one sent earlier this week to the same banks by Henry A. Waxman, the California Democrat who is chairman of the House Committee on Oversight and Government Reform, urging them not to use any government money for bonuses or other payments and asking for data on pay going back to 2006...

The agonies of Jefferson County, Alabama, which got itself into a too-clever-by-half funding arrangement that put the county on the verge of bankruptcy, have faded from the public eye. However, the type of transaction that caused so much woe, a swaption to supposedly lower financing costs, has been the subject of SEC and Justice Department investigations for some time. The focus has moved to JP Morgan based on its role n the ill-fated Jefferson County deal and other municipal transactions. The Bloomberg story provides some detail on the swaption itself, and if the reporting is accurate, this looks like an a deal almost certain to have turned out badly for the county. This is not at all uncommon for OTC derivatives, where even if the transaction in theory has merit, the fees charged are so high as to make the deal uneconomical to the client. But clients almost universally lack the skills to properly model the deal to figure this out. Most deals don't blow up as spectacularly as this one did, so most clients never figure out they were had. From : The U.S. Justice Department is investigating a derivative trade between the state of Alabama and JPMorgan Chase & Co. as part of a nationwide criminal probe. The Justice Department subpoenaed documents about a so- called swaption, or an option on an interest-rate swap, between JPMorgan and the state's school construction authority, according to a federal lawsuit filed by the state, which is trying to void the 2002 deal. The agency is investigating whether banks and advisers conspired to overcharge governments on the contracts. ``Although the authority does not seek by this action to avoid payment of any legitimate obligation, the pendency of at least two separate governmental inquiries implicating the validity of the transaction heightens the necessity for a judicial determination of the parties' rights,'' the complaint, filed yesterday in federal court in Montgomery, Alabama, said. U.S. prosecutors and...

There's a new up at the Zillow blog where homeowners all across the U.S. were asked what they think happened to the value of their home over the last year and what the year ahead might bring. As expected, many homeowners remain blissfully unaware of the carnage that has recently occurred in the nation's housing market and are far too optimistic about what the future holds. But, some of this is quite understandable - after all, we don't all obsess over this stuff. If you've been in a place for years with no plans to move, haven't had the need to "tap" your home equity only to find less of it there, and don't see the need to keep track of what nearby houses sell for, you're probably not really qualified to offer an opinion on this anyway. It's like asking someone who doesn't know or care about the S&P500 where stocks have come and where they're going. Despite what the National Association of Realtors might tell you, housing hasn't always been viewed as an investment by everybody - many people still look at their house as an asset that depreciates in real terms when upkeep, taxes, and insurance are factored in. For those who do view their home as an investment, it's easier than ever to get some kind of an idea what real estate is worth with the rise of websites like Zillow. I became painfully aware of Zestimates after we sold our Southern California house a few years back, only to watch the Zestimate rise to $805,000 during the 2006 peak - it's now at $535,000. Anyway, the survey data for how homeowners think home prices have moved over the last year is interesting, but, in my view, not all that surprisingly. Here are the results by region: And, a short excerpt: There’s no doubt we’ve been deluged with depressing economic and housing news over the past few months. Every day is a new headline, every channel has a new pundit and the recession debate has shifted from “if” to “how long.” Given this, when fielding...

ZURICH (Reuters) - Credit Suisse Group AG aims to benefit from rival UBS AG's weakness in the United States, its chief executive said in an interview published on Thursday.

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Asian share markets rallied, European stocks were higher and the euro surged on Thursday on initial signs that investors are rediscovering an appetite for risk.

From the WaPo: Treasury, FDIC Crafting Plan to Rework Millions of Mortgages Officials with the Treasury and the Federal Deposit Insurance Corp. are crafting a plan under which the government would guarantee the mortgages of as many as 3 million homeowners now struggling to avoid foreclosure ... Under the program being discussed, the lender would agree to reduce borrowers’ monthly payments, for

``New York Attorney General Andrew Cuomo, who negotiated executive payment clawbacks by American International Group Inc (NYSE:AIG - News) as it received a taxpayer bailout, warned nine banks receiving government money on Wednesday that using the funds for bonus payments may be illegal under state law.''

The Wall St Journal ran a very thorough yet backward looking story on the state of CA real estate. They focus on Los Banos, a small farming community about 80 miles South of Silicon valley, which is another ’subprime central’. One important thing they leave out is the fact this is beginning to happen everywhere not just Los Banos and the Subprime epicenters. In all areas Notices-of-Default, the first stage to foreclosure are surging. This will lead to similar foreclosure epidemics in higher priced areas. Values in the state have plummeted everywhere and you can use the ‘Subprime Implosion’ road map as a guide to what will happen to higher paper grades such as Pay Option ARMs, broader Alt-A, Jumbo Prime and finally Prime conventional sue to the negative equity effect and/or the exotic nature of said loans. Remember, what happened to Subprime borrowers with respect to payment adjustments is not unique to Subprime. Its just that Subprime ARM were mostly structured with 2-year teaser rate periods. The higher paper grades were structured longer such as 5-years. As a matter of fact the most popular Alt-A, Jumbo Prime and Prime loan program type in CA from 2003 through 2005 was the 5/1 interest only that allows an interest only period for 5-years then adjusts to a fully amortized loan in most cases according to LIBOR, CMT or 1-yr Treasury yield plus a margin. Do the math…2003 to 2005 + 5-years = heavy adjustments coming from 2008 - 2010. Even though the payments won’t double on these loans like on Subprime, any payment increase when the value of your home is down 50%, you are underwater 30% and paying 60% of your gross income on debt is rubbing salt on the wound and grounds for many to walk. Another very popular 5-year program was the now infamous Pay Option ARM, which has destroyed nearly every bank holding them. Below is their adjustment time. We can still get ahead of the major Pay Option implosion with proactive loan modifications but the banks just don’t want to play that...

There are plenty of things to worry about in the current economic situation. But deflation isn't one of them. Greg Mankiw had a last weekend in which he challenged the view that macroeconomists have learned enough to prevent a repeat of the Great Depression. Greg notes some disturbing similarities between our current difficulties and the problems of the 1930s: From 1930 to 1933, more than 9,000 banks were shuttered, imposing losses on depositors and shareholders of about $2.5 billion. As a share of the economy, that would be the equivalent of $340 billion today. The banking panics put downward pressure on economic activity in two ways. First, they put fear into the hearts of depositors. Many people concluded that cash in their mattresses was wiser than accounts at local banks. As they withdrew their funds, the banking system's normal lending and money creation went into reverse. The money supply collapsed, resulting in a 24 percent drop in the consumer price index from 1929 to 1933. This deflation pushed up the real burden of households' debts.... Deflation across the economy is not a problem (yet), but deflation in the housing market is the source of many of our present difficulties. With so many homeowners owing more on their mortgages than their houses are worth, default is an unfortunate but often rational choice. Widespread foreclosures, however, only perpetuate the downward spiral of housing prices, further defaults and additional losses at financial institutions. Greg is certainly correct that house price declines have a potential to cause similar problems today as we saw in the 1930s. But I believe it is more than an academic distinction whether we are talking about a relative price change (house prices go down but the dollar price of most other items goes up) or a true deflation (the dollar price of almost everything you buy goes down). The reason is that the latter problem is absolutely one that the Federal Reserve could fix, whereas the former...

Millions of American homeowners are now underwater on their home mortgages and they are looking for a way out. In some areas like the Inland Empire of California, local homeowners have seen values drop 30-50% and many are making a “business” decision to walk away without ever exploring ways to save their home. If you have [...]

Its an understatement to say these are difficult times for banks. Between the mortgage collapse, the Treasury recapitalization, and the recession, they are trying to do business -- and that that involves some risk. But doing so without losing too much money involves doing less business. They have become utterly schizophrenic. Whether its the TARP or the credit crisis or deleveraging or something else entirely, I cannot tell you. But damn, these guys have gotten weird. Back in August, we that numerous banks and brokers were sending nastygrams to their HELOC clients telling them "Too Late!" Unused portions of equity lines were being withdrawn. Our own Citibank HELOC, which was about half unused, was withdrawn 2 months ago. Yesterday, we received a letter offering us a new HELOC from Citi -- for the same amount that was withdrawn in August. Our Visa via JPM/Chase went through the same process. A short while ago, I had a month of extensive business travel expenses. Before we even got the bill (which was paid off in full) came a sort-of-odd, borderline rude letter about our (high) credit use. It was "Thanks for the business, but please use credit responsibly, ya deadbeat." It was a strange letter. Any review of the charges could see it wasn't frivolous, but were all business T&E. My solution was to switch to an Amex card, and not use the Visa for business expenses. That was September, and last week, we got a JPM letter -- We want your business! We are raising our credit limit on the Visa. WTF? I understand the fear that firms have when they are lending these days. As the NYTimes writes this morning (), another credit crisis is on the horizon. But you guys better get a more coordinated message. You are confusing and self contradictory -- and its easy to see how you could alienate some, less understanding clients. NY Times Ubiq-cerpt:™ "First came the mortgage crisis. Now comes the credit card crisis. After years of flooding Americans with credit...

Christopher Bryan submits: Under the U.S. Treasury's Capital Purchase Program ("TARP"), the federal government is investing at least $250 billion dollars in preferred shares of select financial institutions. The terms of TARP investments are mild for these harsh economic times: The preferred shares issued to the government under the program will rank on par with existing preferred shares, and dividends will be set to yield five percent on the investment for three years, nine percent thereafter. The five percent yield is at the low-end for preferreds generally, and about half the rate in recent private market deals, notably those involving Berkshire Hathaway (BRK.A), Goldman Sachs (GS) and General Electric (GE).