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  • Sat, Oct 11 2008
  • 10:16 PM » World's Financial Leaders Vow to Unite
    Published Sat, Oct 11 2008 10:16 PM by WSJ
    Bush and the world's financial leaders staged repeated displays of unity to combat an unfolding credit crisis, hoping to calm investors.
  • 10:16 PM » IMF warns of financial meltdown
    Published Sat, Oct 11 2008 10:16 PM by Reuters
    WASHINGTON/ COLOMBEY-LES-DEUX-EGLISES, France (Reuters) - The IMF warned on Saturday that the global financial system was on the brink of meltdown, while France and Germany pushed ahead with a pan-European crisis response to try to prevent the worst global downturn in decades.
  • Fri, Oct 10 2008
  • 5:15 PM » Hank Paulson and Neel Kashkari star in "Mortages are Forever"
    Published Fri, Oct 10 2008 5:15 PM by ml-implode.com
    Coming soon to a bank near you, Hank Paulson and mini-Kash bring you: (click the thumbnail above or to see the full version)
    Click Here to Read the Full Article

    Source: ml-implode.com
  • 5:15 PM » Credit Spreads: Still Getting Worse
    Published Fri, Oct 10 2008 5:15 PM by Calculated Risk Blog
    The TED spread (the difference between the LIBOR interest rate and the three month T-bill) has increased to a record 4.65 today. Completely off the recent charts! Here is the TED Spread from Bloomberg. Here is a graph via Macroblog that shows a long term view of the TED spread (doesn't include the recent spike to 4.65). There are a few earlier periods when the TED spread was higher than today
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • 2:34 PM » "Temporary full state ownership is only solution:
    Published Fri, Oct 10 2008 2:34 PM by feeds.feedburner.com
    Economist Paul De Grauwe, who has been an astute and harsh critic of central bank's models and priorities, makes a very simple point and draw a conclusion. Banks are not lending to each other out of mistrust. Various measures to increase liquidity and backstop banks have not made them look any more favorably upon their brethren, A modern economy needs a banking system. De Grauwe argues in particular that trying to recapitalize banks while the liquidity crisis is on merely throws money into a black hole. The new equity goes poof when the liquidity worries resurface (as they have, each time in more virulent form). The only way to break the cycle is for governments to take over banks, or a least most of the big ones. From the : The essence of what banks do in normal times is to borrow short and lend long. In doing so, they transform short-term assets into long ones, thereby creating credit and liquidity. Put differently, by borrowing short and lending long, banks become less liquid, thereby making it possible for the non-banking sector to become more liquid; that is, have assets that are shorter than their liabilities. This is essential for the non-banking sector to run smoothly. This credit transformation model performed by banks only works if there is confidence in the banks and, more importantly, if banks trust each other. This confidence has now evaporated and, as a result, the model fails. The generalised distrust within the banking system has led to a situation where banks do not want to lend any more. That means that they continue to borrow short but lend equally short; that is, acquire the most liquid assets. The result is a massive destruction of credit and liquidity in the economy. The non-banking sector cannot borrow long so as to acquire liquid assets that they need to run their business, because banks do not lend long anymore. This risks bringing the economy to a standstill. A depression is looming. It is important to realise that this liquidity crisis...
    Click Here to Read the Full Article

    Source: feeds.feedburner.com
  • 2:34 PM » Initial Lehman CDS Auction: 90 Cents on the Dollar, Worse Than Forecast
    Published Fri, Oct 10 2008 2:34 PM by feeds.feedburner.com
    Those who wrote $400 billion plus of protection on Lehman's credit default swaps had been expected to make a substantial payout in the 80% to 85% of face value range, but the preliminary auction showed even worse results. How the SEC and Treasury had so little clue that Lehman was in such bad shape is beyond me. The vagaries of permitting Level 3 accounting. From : -Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. would be forced to pay holders 90.25 cents on the dollar under initial results of an auction today, setting up the biggest-ever payout in the $55 trillion market. Preliminary results of the auction to determine the size of the settlement on Lehman credit-default swaps set an initial value of 9.75 cents on the dollar for the debt, according to Creditfixings.com, a Web site run by auction administrators Creditex Group Inc. and Markit Group Ltd. A final price is scheduled to be announced at 2 p.m. New York time. The payment would be higher than indicated by trading in Lehman's $128 billion of bonds yesterday. The debt was trading at an average of 13 cents on the dollar, indicating credit swap sellers would have to pay 87 cents. More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. No one knows exactly how much is at stake because there's no central exchange or system for reporting trades. It's that lack of transparency that has increased the reluctance of financial institutions to do business with each other, exacerbating the global credit crisis and prompting calls for regulation of the market. The list of participants includes Newport Beach, California-based Pacific Investment Management Co., manager of the world's largest bond fund, Chicago-based hedge fund manager Citadel Investment Group LLC, and American International Group Inc., the New York-based insurer taken over by the government, according to the International Swaps and Derivatives Association in New York..... BNP...
    Click Here to Read the Full Article

    Source: feeds.feedburner.com
  • 12:30 PM » Report: Germany Considering Bank Recapitalization Plan
    Published Fri, Oct 10 2008 12:30 PM by Calculated Risk Blog
    From the WSJ: Germany Considers Plan to Recapitalize Its Banks Germany is working on a plan to prop up its major banks that could include taking government stakes and measures to guarantee banks' access to liquidity ... No final decision had been taken on Friday, but Chancellor Angela Merkel's government could take a decision on the plan and announce it as early as this weekend ... The German
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • 12:29 PM » Roubini Discusses the Double D's, Deflation and Depression
    Published Fri, Oct 10 2008 12:29 PM by feeds.feedburner.com
    YahooFinance has an interesting article on Roubini called .... The financial market crisis has unfolded even quicker than Roubini expected (which is saying something), and the economist now thinks the Dow and S&P will suffer 50% declines from last October's peak vs. 40% previously. In other words, the Dow is going to 7,000, but over the course of months vs. days if Roubini is right, as -- unfortunately for bulls -- he mostly has been for the past two years. Because of growing slack in the global economy, Roubini says deflation is going to become a much bigger threat in the next six months vs. inflation. In such an environment, cash, Treasuries and gold are the only safe bets he says -- provided your holdings are within the FDIC's new $250,000 insurance cap. Given that deflation is here right now, I concur that deflation is the bigger threat, except that "threat" is the wrong word. Necessity is more like it, because the malinvestments and excesses of the previous cycle must be purged and the pool of real savings replenished before there can be a sustainable recovery. My views on treasuries and gold are as noted in , written on September 5th. Deflation Models I had several models for how deflation might play out. Here they are. Everything but treasuries sink Everything but treasuries and gold sink Gold sells off initially then rallies with treasuries Yes, this treasury bull is extremely long in the tooth. And yes there will be a time to short treasuries. But there has not been a bull market in history, in anything, that ended with that asset class being nearly universally despised. And make no mistake about it, treasuries are despised. Foreign central banks do not count because they are not buying treasuries to make a profit, and they are relatively unconcerned about losses. See the above link for the case for deflation right here right now. Risk Of Severe Global Depression The YahooFinance article quoting Roubini was written on October 8th. A second...
    Click Here to Read the Full Article

    Source: feeds.feedburner.com
  • 12:28 PM » Japan Nikkei & Australia ASX Plunge Biggest In History
    Published Fri, Oct 10 2008 12:28 PM by feeds.feedburner.com
    Australian Stocks Worst Week Since 1987 Crash In the land down under, . Australian stocks plunged, set for their worst week since the 1987 stock market crash, as a credit freeze deepened, worsening the outlook for the global economy. Australia's S&P/ASX 200 Index slumped 226.30 points, or 5.2 percent, to 4,094.60 at 10:15 a.m., set for a 13 percent decline this week, the biggest rout in the index's history dating back to 1992. The All Ordinaries Index, which dates to 1979, is headed for its biggest weekly drop since the October 1987 market crash. Australian Dollar Collapses click on chart for sharper image In less than a year the Australian dollar has given back all of its gains since 2003. So much for the idea that commodity exports would keep the Australian dollar strong forever. Japan Nikkei has biggest weekly decline in 50-year history Bloomberg is reporting . Japan stocks plunged, capping the Nikkei 225 Average's biggest weekly decline in its more than 50-year history, as the deepening credit crisis stoked concern that company failures will increase. The tumble triggered a suspension in futures trading. "It's certainly capitulation and panic mode," said John Vail, who helps oversee about $106 billion as head of global strategy at Nikko Asset Management Co. "It's dark in the U.S. much like it was dark in Japan in the late 90s. The U.S. is having a taste of that bitter chalice." Bitter Chalice It is far too early to be claiming capitulation. That may come tomorrow (unlikely) or 3,000 points from now. However, "bitter chalice" certainly rings true. For years the US lorded over Japan about unwillingness to write down debts. Now, the US is in the same boat, unwilling to let banks go under, suspending mark to market rules, and taking amazing actions to prop up the banking system. Nikkei Monthly click on chart for sharper image The Nikkei sliced through two levels of strong support like a knife through butter. Last...
    Click Here to Read the Full Article

    Source: feeds.feedburner.com
  • 12:28 PM » G-7 Weighs Loan Guarantee Plan
    Published Fri, Oct 10 2008 12:28 PM by feeds.feedburner.com
    Bloomberg is reporting . Threatened by the worst economic outlook in a quarter century, officials arrived in Washington still without the broad- based strategy that investors were seeking, raising the risk of further turmoil if their remedies disappoint. Among the options being considered: a proposal by U.K. Chancellor Alistair Darling for nations to guarantee lending between banks, a suggestion that U.S. Treasury Secretary Henry Paulson hasn't ruled out. Unprecedented interest-rate cuts and bank bailouts failed to quell panic in markets, leaving policy makers under pressure to pull even more policy levers. "Global policy makers have their backs against the wall -- they have nowhere to run, nowhere to hide," said Marco Annunziata, chief economist at Unicredit MIB in London. "Do not underestimate how hard they are going to fight back now." While the Treasury still aims to buy troubled mortgage- backed securities from financial institutions, a direct capital injection would offer more immediate relief by giving banks quick access to funds they could then lend out. The U.K. is already engineering a 50 billion pound ($87 billion) strategy to partly nationalize at least eight British banks. Japanese lawmakers are also considering reviving a law that expired in March that would allow them to inject public money into regional financial companies. "The financial system doesn't need more liquidity it needs more capital," said Jim Bianco, president of Bianco Research LLC in Chicago. Liquidity vs. Capital "The financial system doesn't need more liquidity it needs more capital." Ding ding ding. We have a winner. Unfortunately the only plan in the US is to rob taxpayers of $700 billion to provide liquidity. That plan is changing into one that may provide capital, but taxpayers are still on the hook. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike Shedlock / Mish is a registered investment advisor representative...
    Click Here to Read the Full Article

    Source: feeds.feedburner.com
  • 12:28 PM » Fix the Credit Problem, Not its Symptoms
    Published Fri, Oct 10 2008 12:28 PM by The Big Picture
    Two weeks ago Monday, markets traded down 300 points at the open. The sell-off seemed to be in anticipation of what was widely considered to be a poorly thought-out bailout plan. As it became clear that the $700 billion package was not going to be approved by the House, the Dow Jones Industrial Average plummeted another 500 points. Stock jockeys had apparently decided that a bad bailout would have been better than none. Fast-forward to the end of last week: During Friday’s House vote, the Dow rallied 300 points . . . but once the bill passed, they promptly reversed and sold off. It’s been more or less straight down ever since. Since the highs of October 2007 one year ago, the Dow has lost 39%, or about 5,500 points. How did this happen? Why are markets reacting so negatively to a near $1 trillion bailout? The short answer is that the Federal Reserve and the Treasury Department have been focusing on the wrong issues. They have been treating falling asset prices—houses, stocks, bonds—as well as the lack of confidence between banks, as the actual issue. This is the wrong approach. Falling asset prices and a lack of confidence are a result of the underlying problem . You don’t cure alcoholism by getting rid of a hangover; you cannot resolve confidence issues by merely cutting rates. The primary problem is that banks are refusing to extend credit to each other. Why? Because they do not understand the liabilities of their counterparties. Translated into English, that means they don’t know if the other bank whom they are dealing with will still to be standing tomorrow. The thing roiling markets today is not the lack of confidence; It is capital, or more accurately, the lack thereof. Thanks to a series of very poor trades—excessively leveraged and absurdly risky to boot—banks are now dramatically undercapitalized. As we have seen in just about every historical financial crisis, the shortage of capital is the underlying cause of monetary mayhem. Too much debt, too little equity...
    Click Here to Read the Full Article

    Source: The Big Picture
  • 9:36 AM » Roubini Warns of Possible Systemic Meltdown, "Severe Global Depression"
    Published Fri, Oct 10 2008 9:36 AM by feeds.feedburner.com
    Nouriel Roubini has been almost freakishly accurate in calling the progression of the credit crisis, with his only major failings being predicting its onset on the early side and his fondness for an apocalyptic writing style, which now seems fully justified. Even by the standards of his alarming missives, his latest is truly troubling. Roubini effectively says the wheels are coming off the global financial system, and if corrective action is not taken immediately, the damage to the real economy will be extensive. Note that Roubini's most recent forecast was that hedge funds would start folding due to redemptions and poor performance. This can lead to cascading destruction of value. Funds who have lost value and need to sell assets to cash out investors who want to exit sell positions into this lousy market. The selling pressure leads to price declines, which affects the value of holding of other hedge funds. At a minimum, they report losses to investors, some of whom will want out, feeding into the selling pressure. And some who have used leverage will face margin calls due to the decline in asset value, again leading to liquidation of positions. Apparently a bit of that was behind the end-of-day fall in the Dow on Thursday. A hedge fund manager told me that apparently a West Coast hedge fund had to dump major positions, a portion of which were real estate debt related (no detail here, they might have been late entrant bottom fishers) and the prices they were getting were simply dreadful. The concern was that other banks and hedge funds would be required to use these prices for valuation of their assets, leading to further markdowns and selling pressure. The objective of the Paulson plan, to allow banks and investors to mark their books at above what would be market prices due to the Treasury's above market bids appears to have been trumped by events. From : The U.S. and advanced economies’ financial systems are now headed towards a near-term systemic financial...
    Click Here to Read the Full Article

    Source: feeds.feedburner.com
  • 9:20 AM » The Heart of the Matter: Why Banking is Broken
    Published Fri, Oct 10 2008 9:20 AM by Seeking Alpha
    submits: If not the decade, depending on how all this plays out. In any case, Carl Weinberg, chief economist at cuts through the fog and goes right to the heart of the challenge, The core problem is that the smart people are realizing that the banking system is broken. Nobody knows who is holding the tainted assets, how much they have and how it affects their balance sheets. So nobody is willing to believe that anybody else isn’t insolvent, until it’s proven otherwise.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 9:20 AM » BofA: No More 'Typical' Wall Street Pay at Merrill
    Published Fri, Oct 10 2008 9:20 AM by Seeking Alpha
    Fortune relates one part of BofA's (BAC) Ken Lewis’s plan at Merrill Lynch (MER): Lewis is especially anxious to attack Merrill's pay scales. "Merrill was paying typical Wall Street pay," he says. "Their staff people were making a lot more than our staff people. That won't last. We intend to pay market instead."
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 9:20 AM » The Wonderful World of Self-Insurance
    Published Fri, Oct 10 2008 9:20 AM by Seeking Alpha
    I came across this gem, written by Oussama A. Nasr way back in 2003 (oh the good ol' times), on self-referencing derivatives, and . Be sure to read both. Thank me later. You're welcome. I assume by now everybody in the trade knows about the trick of shorting the stock while buying CDS. Much more effevtive and capital-efficient than just shorting the stock. But that's child's play. Any self-respecting player would short the stock, buy the bond to hedge himself, and buy CDS -- not from anybody, but from the reference entity itself. This way, if the company goes down, you come out ahead with your shorts and CDS while your bond gets 100% recovery (or more); if it doesn't go down, you unwind short and CDS, and make your money on the bond (not nearly as fun as when the company goes down, for sure).
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • Thu, Oct 9 2008
  • 4:55 PM » Banking on Profits: National City in Buyout Talks
    Published Thu, Oct 09 2008 4:55 PM by Seeking Alpha
    submits: National City Corp. (NCC) is making headlines once again. If you think its shares were volatile last week, wait until you see what happens when a bidding war erupts. There was some not-so-surprising news hitting the wires this morning. For nearly two weeks now, shares of National City Corp. have seen tremendous trading volume. Share price has been extremely volatile as speculative investors buy and unload shares of the company.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 4:54 PM » Study: Rising Housing Costs Greatly Outpaced Income
    Published Thu, Oct 09 2008 4:54 PM by www.thetruthaboutmortgage.com
    If you’re curious why so many Americans fell behind on their mortgage payments, you need to look beyond the mortgage itself. Between 1996 and 2006, all major categories of homeowner expenses increased faster than related incomes, according to a new report from the Center for Housing Policy. In the new study titled, “Stretched Thin: The Impact of [...]
    Click Here to Read the Full Article

    Source: www.thetruthaboutmortgage.com
  • 4:54 PM » America’s Mark-to-Model (Level 2) Banking System
    Published Thu, Oct 09 2008 4:54 PM by mrmortgage.ml-implode.com
    Is $700bb really enough? How insolvent are the nation’s leading banks? Level 1, 2, and 3 assets are ways of classifying a company’s assets based on the degree of certainty around the assets’ underlying value. For example, Level 1 assets can be valued with certainty because they are liquid and have clear market prices. At the other end of the spectrum, Level 3 assets are illiquid and estimating their value requires inputs that are unobservable and reflect management assumptions. Think of it like Prime, Alt-A and subprime mortgage loans for example. Somehow we have skipped right over Level 2 and are judging bank risk by looking at Level 3. Maybe in a robust credit market full of securitizations and leverage like 2006 this would have been just fine, but not now. Perhaps this is unfolding in a linear way just like the mortgage crisis beginning with subprime (level 3), now onto Alt-A (level 2), then to Prime (Level 1). Walls Street did a similar thing last year when it went right to focusing on CDO’s and forgot about all of the toxic whole loans and MBS on the balance sheet. In the past several months, banks have been very focused on ’selling assets and bringing down leverage’ with the primary focus being on their mostly toxic Level 3 ’assets’. That would be fine and dandy if their Level 2 ‘assets, which in this market may be equally as hard to value as Level 3, were not up to 20 times greater in Bank of America’s case for example. The chart below show total Level 1, 2 and 3 ‘assets’. I have been keeping this for many quarters but shown is only Q2. However, if you look at level 2 assets/equity percentages it has been a road map to troubled banks with the exception of a few…but are those really exceptions. **Note: This chart is a couple of months old numbers may have changed. Level 2 ‘assets’ are by definition “Assets that aren’t actively traded, but have quoted market prices for similar instruments - otherwise known as ‘mark to model.’” Could this be more mortgage debt? We...
    Click Here to Read the Full Article

    Source: mrmortgage.ml-implode.com
  • 4:54 PM » US has dwindling number of tools in econ crisis
    Published Thu, Oct 09 2008 4:54 PM by Washington Post
    WASHINGTON -- What's left in Uncle Sam's economic tool kit?
    Click Here to Read the Full Article

    Source: Washington Post
  • 4:36 PM » Sheriff: I will stop enforcing foreclosure evictions
    Published Thu, Oct 09 2008 4:36 PM by www.chicagotribune.com
    As the nationwide mortgage crisis puts the squeeze on homeowners, the Cook County sheriff's office announced he wouldn't do foreclosure evictions anymore.
    Click Here to Read the Full Article

    Source: www.chicagotribune.com
  • 4:32 PM » The Zero Dollar Bill
    Published Thu, Oct 09 2008 4:32 PM by news.yahoo.com
    Artist Laura Gilberts' print 'The Zero Dollar' protesting the breakdown of the American economy.
    Click Here to Read the Full Article

    Source: news.yahoo.com
  • 11:55 AM » Iceland seizes Kaupthing, Closes Stock Exchange
    Published Thu, Oct 09 2008 11:55 AM by Calculated Risk Blog
    “What we have learned from this whole exercise over the last few years is that it is not wise for a small country to try to take a leading role in international banking.” Geir Haarde, Prime Minister of IcelandFrom The Times: Iceland seizes Kaupthing as meltdown continues Crisis-hit Iceland has taken control of Kaupthing, its biggest bank, and suspended trading on its stock exchange for two days.
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • 10:55 AM » TED Spread at Record
    Published Thu, Oct 09 2008 10:55 AM by Calculated Risk Blog
    Here is the TED Spread from Bloomberg. The TED spread hit a record 4.13 this morning. This is far above the highs reached during the previous waves of the credit crisis. Note: the TED spread is the difference between the LIBOR interest rate and the three month T-bill. Usually the TED spread is less than 0.5%. The higher the spread, the greater the perceived credit risks (compared to "risk free"
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • 10:54 AM » 11 State AG’s Calling for Nation’s Largest Loan Modification Program
    Published Thu, Oct 09 2008 10:54 AM by loanworkout.org
    In a move to follow in the footsteps of the recent Bank of America $8.4 billion predatory lending settlement, the State Foreclosure Prevention Working Group is adding pressure and much needed media attention on the mortgage servicing crisis. In a letter signed by Iowa Attorney General Thomas Miller on behalf of the State Foreclosure Prevention [...]
    Click Here to Read the Full Article

    Source: loanworkout.org
  • 10:53 AM » Citi-Wells Negotiations Over Wachovia Reveal Bank In Worse Shape Than Thought
    Published Thu, Oct 09 2008 10:53 AM by feeds.feedburner.com
    One has to wonder whether the FDIC's giving a wink and a nod to Wells Fargo's attempt to snatch Wachovia away from Citi will prove to have been too clever by half. The apparent motivation was the lower explicit cost to the taxpayer of the Wells deal (note Wells was going to take large tax writeoffs, which reduce, indeed may eliminate the cost differential, but that point seems lost on the mainstream media), but it may also have been to keep pressure high to wrap up a deal before anyone could take too hard a look at at the supposed prize. Wachovia is looking less desirable than it once did, now that both sides have dug deeper as a result of the negotiation process, further complicating achieving a quick resolution. This is increasingly looking like the FDIC will wind up with egg on its face. They do not want Wachovia hanging in the breeze, and a retraded deal may leave the FDIC back at square one in terms of its support for a transaction, or in a worst-case scenario, they may wind up taking control of the bank. From the : The discussions, which began Sunday, have been snagged over the intricacies of carving up the Charlotte, N.C., bank, ranging from deposits to loans to securities. After burrowing deeper into Wachovia's books, Citigroup and Wells Fargo have been surprised by the concentration of assets they regard as low-quality, these people said. As a result, both banks are worried that buying even part of Wachovia could saddle them with steeper losses than previously expected. The two would-be buyers also have been sparring over the computer system used in Wachovia's 3,348 retail branches, one person familiar with the discussions said Wednesday. Citigroup, known for its hodgepodge of technology that hasn't been fully integrated, wants full control of Wachovia's system when the deal closes. Wells Fargo has countered that the two banks should share it temporarily. Also adding jitters to the Wachovia talks were Bank of America Corp.'s struggles...
    Click Here to Read the Full Article

    Source: feeds.feedburner.com
  • 10:52 AM » Take 10 minutes and listen to Schiff. You'll be glad you did.
    Published Thu, Oct 09 2008 10:52 AM by feeds.feedburner.com
    Click Here to Read the Full Article

    Source: feeds.feedburner.com
  • 10:51 AM » Back to the Great Depression Debates
    Published Thu, Oct 09 2008 10:51 AM by www.econbrowser.com
    Or...Salt Water/Fresh Water Redux! Figure 1: Log GDP (1996$), 1900-1967 (blue line), and linear trend (red line). Source: . From , an argument against the New Deal policies. Lessons from the Past There are many historical precedents of bad policies following crises. The worst case was after the stock-market crash in October 1929, which produced a truly perfect storm of bad policies. Tax rates rose, tariffs rose (reflecting special interest groups attempting to insulate domestic producers from foreign competition), and both Presidents Herbert Hoover and Franklin Roosevelt strongly promoted industry-labor cartels that were designed to stifle domestic competition. In the absence of these policies, the Great Depression would almost certainly have been like every other U.S. recession -- short-lived and relatively mild. Normal recovery didn't begin until the most onerous of these policies were reversed, a process that didn't begin until the end of the 1930s when antitrust activity was resumed, and during World War II when the National War Labor Board reduced union bargaining power by limiting negotiated wage increases to cost-of-living adjustments only.... I am particularly concerned about bad policies because significantly higher taxes have been proposed by Barack Obama. His plan would raise the marginal tax rate on the most productive workers more than 10 percentage points -- an increase that would bring us near Western European levels. His plan would also raise capital income taxes, taxing capital gains and dividends at 20%, compared to a 15% rate under Sen. John McCain's plan. A five percentage-point difference might strike you as small, but it is not. I have calculated that a five percentage-point difference in overall capital income taxation over the long haul is equal to a difference in the nation's capital stock of about 18%. This means a 6% difference in GDP and a 6% difference in the average wage rate. This means that real GDP and the average wage...
    Click Here to Read the Full Article

    Source: www.econbrowser.com
  • 10:50 AM » The Fallacy of the Bailout
    Published Thu, Oct 09 2008 10:50 AM by feeds.feedburner.com
    I’m glad Hank Paulson is that he’s burdened us with. In his speech today he said that the bailout doesn’t protect every bank from failing. Phew, now I feel better that the $700 billion is not just the first round of drinks, but rather the entire bar tab. I mean, granted, it’s a bender - but maybe it’s like a bachelor party - once in a life time type of thing. Excessive, yes. Excusable? Maybe with a forgiving bride who’s too embarrassed to say anything. Except I’m not stupid or too embarrassed, and I hope you aren’t either. It has quickly become clear to anyone paying attention (and finally it seems people are waking up) that the $700 billion is just the first round in this debacle. How do I know? Well let’s look at the fine folks at AIG who needed a tidy $85 billion loan from the Federal Reserve to keep from going bankrupt are doing. They’re back at the front of the dole line, (like their ) going strong. And folks, this isn’t an exception - this WILL BE the rule. The US Government has no idea where the tab is going to go. ? Three weeks? This is not the exception, this is the canary in the coal mine. There will be more cash spewing off the presses as more and more institutions come to the dole line. And it won’t just be banks. None less than the . We’ll see states, auto dealers, airlines, large real estate companies, and more all come to the window looking for a little scratch to get by. Where will we be? We’ll be the stiff with the bill, and even if our drunk friends chip in a bit they’ll always stiff you on the tip. The taxpayers go to the end of the line, go bankrupt, ruin their credit and lose their homes while the government props up irresponsible organizations (no matter their legal formation) with money that doesn’t even exist. It is the ultimate fallacy of the bailout. $700 billion is a drop in the ocean. They can’t print money fast enough. From CNNMoney.com on our canary in the coal mine: The New York Federal Reserve is lending up to $37.8 billion to American...
    Click Here to Read the Full Article

    Source: feeds.feedburner.com
  • 10:49 AM » U.S. May Buy Stakes in Banks
    Published Thu, Oct 09 2008 10:49 AM by feeds.feedburner.com
    It is bit perverse that the powers that be had to try all sorts of measures before considering the course of action that has been the most successful in handling financial crises, namely, letting asset prices fall and recapitalizing banks. In this case it would apparently involve taking equity stakes, say preferred stock and warrants, per the UK rescue program announced earlier today. However, best practice also involves nationaliization (wiping out shareholders, replacing incumbent top brass) and we do not appear to be there yet. The UK is closer to this model, having forced the leadership of RBS out today in tandem with an equity infusion. And note it is not clear that they will stop trying to intervene in the correction in asset prices. A good bit of news: the Treasury may purse this play through the authority granted in the $700 bailout bill. That is a far better use of funds than buying toxic assets, which is a very indirect and costly way to achieve the same end. However, note the interpretation that banks have to request help. However, the article suggests that there may be some backtreading from Paulson's extreme pro-industry posture that the process had to "encourage" banks to participate (recall he was able to secure completely toothless executive comp provisions, when Congress wanted something much tougher but caved fast). The plan version 2.0, for equity injections, appears to have a few teeth at least as far as executive pay is concerned, but it remains to be seen how serious these measures turn out to be. Maybe the near universal condemnation of the TARP as originally envisaged finally got the Treasury's attention. From the (hat tip reader Megan): Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury...
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    Source: feeds.feedburner.com
  • 10:48 AM » Some Signs of a Thaw in the Credit Freeze
    Published Thu, Oct 09 2008 10:48 AM by feeds.feedburner.com
    It is way to early to take cheer, but some of the stress in the money markets is backing off a bit. The TED spread is below 4, and ten year credit swap spreads were down to 45 basis points, which is a serious improvement and a genuine positive sign. From : The spread between the rate on 10- year interest-rate swaps and Treasury yields collapsed to the least since before credit markets began to seize last year after coordinated central bank rate cuts. The spread narrowed to as low as 44.94 basis points, the smallest since Feb. 6, 2007. The differences, or gaps, between swap rates of most maturities over corresponding Treasury yields are down today. The 10-year swap spread was 52.25 basis points at 3:06 p.m. A basis point is 0.01 percentage point. ``The movement in the 10-year swap spread is signaling a break in the upward trend in credit spreads,'' said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York. The movement ``is probably hinting at a drop in the two-year swap spread, which if it occurs would strongly signal an easing of pressures in the inter-bank market.'' Two-year swap spreads are often used as a gauge of credit concern and near-term expectations for the London interbank offered rate, or Libor. The two-year swap spread is down almost 1 basis points to 133 basis points. It reached 167.25 basis points on Oct. 2, the widest since Bloomberg began compiling the data in 1988. Swap rates serve as benchmarks for investors in many types of debt often purchased with borrowed money, including mortgage- backed securities and auto-loan securities. Narrower swap spreads can push borrowing costs lower even if Treasury yields are steady. However, a big offset that might rattle some nerves is , per John Jansen. The result appears in large measure due to Treasury clumsiness, but this market is not in the mood to hear more bad news: The auction of the May 2015 issue was an amazing occurrence. The Treasury gave the dealer community...
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    Source: feeds.feedburner.com
  • 10:48 AM » Surprise! Nouriel Roubini predicts a long recession
    Published Thu, Oct 09 2008 10:48 AM by themessthatgreenspanmade.blogspot.com
    The world's most accurate economic forecaster (if not its most popular economist) is now predicting a recession of at least two years. This at Yahoo! Finance contains a few more observations of just what is happening today in both the economy and in financial markets, providing little hope of any improvement anytime soon. Nouriel believes the recession began in the first quarter of this year and will stretch into early 2010 - at least. When asked if he had perhaps become too bearish recently and whether there's a possibility that he'll "miss the turn", the following response came: I worry that things will actually get worse than I expect rather than the alternative. Look what's happened to the stock market for the last few days, the inter-bank market, credit spreads, the financial system is even worse than I predicted a few months ago. I knew there was a systemic financial risk but the speed at which things have been unraveling has been worse than I expected . I don't think right now that any miracle is going to change things. It's going to be ugly and if we manage it right, we're probably going to have a recession that is severe but not terrible. We'll have a financial crisis that is manageable, but, at this point, I don't think there is much reason to be optimistic I'm afraid. The interviewer chuckled briefly and said, "All right, thanks very much."
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    Source: themessthatgreenspanmade.blogspot.com
  • 10:48 AM » Wachovia’s New Pay Option ARM Plan - ‘The Spend’
    Published Thu, Oct 09 2008 10:48 AM by mrmortgage.ml-implode.com
    There is a new pilot program Wachovia recently put into place intended to rid themselves of that nasty $122 billion Pay Option ARM portfolio while keeping borrowers in their home. While this program definitely has its flaws because it does not come close to addressing the real problem (HOUSE PRICES ARE STILL SIGNIFICANTLY OVERVALUED) it is the closest I have seen yet. Wachovia’s New Program - ‘The Spend’ First, Wachovia selected a certain number of Pay Option borrowers based upon internal modeling. Each borrower was assigned to a participating mortgage banker/broker and given what they call ‘The Spend’ . The Spend is how much money that will be used to modify and refinance the borrower into a new 30-year fixed loan, primarily FHA. A portion of The Spend is used to buy down a 30-year fixed rate to a level at which the borrower can afford according to present day underwriting guidelines. A portion is also used to reduce the principal balance. From what I am hearing from early cases, the interest rate level on some first mortgages has been as low as 2%. That’s pretty sad when it takes 2% to get borrowers to qualify for a fixed coming out of an Option ARM and just goes to show how leveraged up the borrowers still are. However, The Spend is not forgiveness of debt. It is put into the form of a silent second for a specified term and at an interest rate as low as zero that has to be repaid at some time in the future. The benefits to Wachovia are obvious . They get rid of these toxic assets sitting on their balance sheet; they get rid of predatory lending liability through the refinance, as the borrower must sign away all rights to future claims; they outsource the loan origination staff expense to other firms; and they get to bring back a portion of the loan loss reserves set aside on each loan refinanced IF The Spend is less than the amount reserved. If banks are going to start trying to get ahead of the game with proactive loan modifications/refinances, Pay Options are a...
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    Source: mrmortgage.ml-implode.com
  • 9:42 AM » Taking Hard New Look at a Greenspan Legacy
    Published Thu, Oct 09 2008 9:42 AM by www.nytimes.com
    “Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004
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    Source: www.nytimes.com
  • Wed, Oct 8 2008
  • 6:23 PM » Fed Expands Loans to AIG
    Published Wed, Oct 08 2008 6:23 PM by Calculated Risk Blog
    From the Fed: Board authorizes Federal Reserve Bank of New York to borrow securities from certain regulated U.S. insurance subsidiaries of AIG The Federal Reserve Board has authorized the Federal Reserve Bank of New York to borrow securities from certain regulated U.S. insurance subsidiaries of the American International Group (AIG), under section 13(3) of the Federal Reserve Act. Under this
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    Source: Calculated Risk Blog
  • 6:22 PM » Coordinated Central Bank Action Fails to Relieve Money Markets
    Published Wed, Oct 08 2008 6:22 PM by feeds.feedburner.com
    The coordinated central ban effort today to restore some level of activity to stressed funding markets, in which five central banks cut their policy rates by a half a point and China cut rates by 0.27%, is a resounding failure. From : Overnight corporate borrowing costs jumped, Treasury bill yields fell and the bond market remained all but closed after central banks worldwide cut interest rates, showing unprecedented government intervention was failing to aid companies struggling to finance themselves. Overnight rates on dealer-placed commercial paper rose 56 basis points to 3.5 percent, while one-day yields on the debt backed by car loans and credit cards increased 43 basis points to 5 percent, according to data compiled by Bloomberg. Investors sought safety in three-month bills, whose rates fell as much as 26 basis points to 0.5 percent. Two issuers sold $750 million of U.S. company bonds this week, compared with the weekly average this year of $16.8 billion.... The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. Separately, China's central bank lowered its key one-year lending rate by 0.27 percentage point. ``The reality is there's no private sector balance sheet willing to step in so the Fed and the Treasury are becoming the only balance sheet,'' said Mark Kiesel, executive vice president at Pacific Investment Management Co., the manager of the world's biggest bond fund. ``In a market that lacks trust and confidence the private sector is on the sidelines.'' comes from John Jansen at Across the Curve, who also tells us that the pending participation of the Federal Reserve in the commercial paper market is having the unintended consequence of keeping activity on hold: The central bank lowered the target funds rate to 1 ½ percent. The market is...
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    Source: feeds.feedburner.com
  • 6:21 PM » Sad Guys on Trading Floors
    Published Wed, Oct 08 2008 6:21 PM by The Big Picture
    As noted yesterday, we lowered our . As we get closer to that, we start paying closer attention to contrary indicators. Along those lines, a new tumblr blog, , caught my eye. Its funny and sad and poignant, but for our purposes, its a yet another in a list of contrary indicators that suggests things are getting overdone, and that sentiment is moving towards an extreme. A blog such as this could only be conceived of during times of extreme market stress. As of today's lows, the Dow has given up 5,004 points (14,198 to 9,194). Note that this is not a precise timing signal, but it is an interesting anecdotal sign worth watching . . . > THE HORROR I actually believed guy on St. Mark’s when he told me this was a limited edition iPhone. I can’t add a caption to this that could possibly make it any more hilarious. > Hat tip more photos after the jump . . . > Source: http://sadguysontradingfloors.tumblr.com/ A common way traders stay slim and trim is by purging each time the Dow drops 100 points. “Tantrum Strategy.” Just hold your breath until someone approves a bailout package. So… many… numbers… Jazzhands will not save us now, my friend. There's a lot more here: http://sadguysontradingfloors.tumblr.com/
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    Source: The Big Picture
  • 6:20 PM » Global Coordinated Rate Cuts Won't Solve Economic Crisis
    Published Wed, Oct 08 2008 6:20 PM by feeds.feedburner.com
    This morning the Fed, ECB, Bank of England, Bank of Canada, and Sweden's Riksbank all cut rates by 50 basis points. Japan is on the sidelines cheering. US Futures that were down as much 4% are now in the green. Short term perhaps the market was due for a bounce, perhaps not as the day is young, but longer term one cannot cure a solvency issue with rate cuts. Let's take a look at some of the Central Bank statements. I have additional thoughts following the Central Bank statements. Joint Statement Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets. Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability. Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions. The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures. Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households...
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    Source: feeds.feedburner.com
  • 6:20 PM » LIBOR Spike Not Only Hurts Suprime…Pay Options, Jumbo Prime, Alt-A Too
    Published Wed, Oct 08 2008 6:20 PM by mrmortgage.ml-implode.com
    Lets do some brainstorming folks. Which lenders and loan programs will this impact the most… A recent story came out highlighting how the LIBOR spike will hurt those in Subprime ARMs set to adjust. However, LIBOR was a choice for many Jumbo Prime and Alt-A loans such as 5/1, 7/1, 10/1 AMs and the now imfamous Pay Option ARM. Arguably, given that Pay Option ARMs adjust monthly or quarterly in most cases, if LIBOR comes down quickly payments will roll back down with their respective index term value. However, if LIBOR hangs up there this will borrowers will scream towards their maximum negative amortization allowance of 110%, 115% or 125% accelerating the time-line to the ‘Pay Option ARM Implosion. There is more trouble. Other loan types that only adjust yearly such as the 5/1 Jumbo Prime or Alt-A resets the borrower in higher rates for an entire year. Not only that, but many go from interest only to fully amortized. Lastly, on the 5/1 product the first adjustment can be as high as 5% over the start rate. Given the margin on these were between 2.25 and 3.25%, borrowers will get squeezed. Getting squeezed on a monthly payment when the value of your home is now a double-digit percentage less than the loan amount can turn the most ‘Prime’ of borrowers into subprime very quickly. Anyone have an idea on which banks or lenders offered 5/1 product with the highest margins over LIBOR from 03-04? Lehman’s Aurora products come to mind first. Also, which lender’s Pay Option ARM offerings were primarily LIBOR based? Most lenders offered LIBOR and MTA but if my memory serves me, most chose the LIBOR Index on the false premise it was safer and because the rate/rebates were better/larger. -Best, Mr Mortgage Libor Rise to Boost Subprime ARM Defaults 10%, Citigroup Says - Oct. 7 (Bloomberg) — Increases in benchmark London interbank offered rates may boost homeowner defaults on resetting adjustable-rate mortgages, contributing to a “vicious cycle” in the credit crunch, according to Citigroup...
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    Source: mrmortgage.ml-implode.com
  • 6:20 PM » U.S. mint halts gold coin production/sales
    Published Wed, Oct 08 2008 6:20 PM by themessthatgreenspanmade.blogspot.com
    There have been a number of reports over the last 24-hours about the U.S. Mint halting the production and/or sale of gold coins. There doesn't appear to be anything available at the U.S. Mint at the moment - in the past, they've been rather slow to make formal announcements. Here's what appeared yesterday at Reuters: Tue Oct 7, 2008 10:14am EDT By Frank Tang NEW YORK, Oct 7 (Reuters) - Unprecedented demand for precious metals and volatile markets forced the U.S. Mint to cease production for the half-ounce and quarter-ounce popular American Eagle gold coins for the rest of this year and to supply other bullion coins on an allocation basis. "Due to the extreme fluctuating market conditions for 2008, as well as current market conditions, gold and silver demand is unprecedented and the demand for platinum is unusually high," the U.S. Mint said Monday in a memorandum to its authorized coin dealers. "The U.S. Mint has worked diligently to attempt to meet demand, however, blank supplies are very limited and it is necessary for the U.S. Mint to focus remaining bullion production primarily on American Eagle Gold one-ounce and Silver one-ounce coins," the Mint said. The Mint said it would continue to supply one-ounce American Eagle gold coins and one-ounce American Eagle silver coins on an allocation basis to coin dealers. For half-ounce and quarter-ounce American Eagles, the Mint said that inventory was depleted last week and no more coins would be produced for the rest of 2008. In addition, the Mint said it would produce 1-10th ounce Eagles based on current coin blank supplies, but would cease production for the rest of this year once the remaining inventory was depleted. Produced from gold mined in the United States, the 22-karat American Eagles have been novel items among collectors and investors since their introduction in 1986. Each coin has a face value of $50 but it is sold by authorized dealers at a premium to the price of gold. AMERICAN...
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    Source: themessthatgreenspanmade.blogspot.com
  • 12:18 PM » Russian Stock Market Collapse Exacerbates Its Credit Crunch
    Published Wed, Oct 08 2008 12:18 PM by feeds.feedburner.com
    Russia's stock market took a beating as foreigners started getting cold feet over the British Petroleum row, when a consortium of oligarchs engaged in a power and money grab over a Moscow-based development joint venture, TNK. But falling oil prices are also a bad harbinger for a resource-dependent economy. From : Russia's stock market collapse is exacerbating a liquidity squeeze and threatening to cut into production and employment, putting the brakes on 10 years of economic growth. ``The sharp contraction of the stock markets has resulted in a major crisis of confidence between banks,'' said Vladimir Osakovsky, chief economist at UniCredit SpA in Moscow. ``That, in turn has reduced the scale of the interbank lending market, which is cutting into available investment resources to the economy.'' Russian President Dmitry Medvedev's pledge yesterday to channel an another 950 billion rubles ($36 billion) of loans for banks failed to forestall a 14 percent plunge in the Micex Index today. The government already promised last month to make more than $150 billion available to banks and companies with loans, cash auctions and tax cuts to preserve the boom a decade after a crash in 1998 wiped out banks and residents' savings. Micex trading was halted at 11:05 a.m. after it fell for a sixth day to the lowest level in almost 3 1/2 years. The suspension will remain in force until Oct. 10, unless regulators say otherwise. The RTS exchange was suspended indefinitely. Trading was halted 10 times in the past three weeks, including today. ``We should expect a slowdown and the slowdown is already happening,'' said Anton Struchenevsky, an economist at Moscow- based Troika Dialog investment bank. ``Demand is decreasing as consumers are virtually cut off from loans, producers are encountering problems.'' Russian manufacturing shrank for a second month in September, the first back-to-back contraction since November 1998, as companies cut jobs...
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    Source: feeds.feedburner.com
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