"Housing markets from Punta Gorda, Florida, to Stockton, California, will crash and suffer price drops of more than 30 percent before the housing crisis is over, a report from Moody's Economy.com said on Thursday."
Showing posts with label Economy. Show all posts
Showing posts with label Economy. Show all posts
Thursday, December 6, 2007
Monday, December 3, 2007
National debt grows $1 million a minute
"Like a ticking time bomb, the national debt is an explosion waiting to happen. It's expanding by about $1.4 billion a day — or nearly $1 million a minute."
Friday, November 30, 2007
Treasury close to subprime aid plan: sources
"The Treasury Department is finalizing a plan with mortgage industry leaders that will hold interest payments steady for many subprime borrowers facing higher rates and possible foreclosure."
Selling the US by the dollar
"Citigroup's rescue did not come cheap. The deal was structured in the form of convertible securities that will require the company to pay junk-bond levels of coupon interest, reported by Barron's to be close to 11%, for the privilege of selling part of America's premier consumer financial institution into foreign hands."
Tuesday, November 27, 2007
Consumer Confidence Tumbles in November
"With Christmas only a month away, American consumers became more pessimistic about the economy in November, sending a widely watched barometer of confidence to the lowest level in two years."
Report: Foreclosures to hit metro areas
"Rising foreclosures will lead to billions of dollars in lost economic activity next year in the nation's major metropolitan areas, but homeowners and financial institutions have the ability to work together to contain the effects, according to a report compiled for the U.S. Conference of Mayors."
Sunday, November 25, 2007
Forecast: U.S. dollar could plunge 90 pct
"We are going to see economic times the likes of which no living person has seen," Trends Research Institute Director Gerald Celente said, forecasting a "Panic of 2008."
Banks Gone Wild
"“What were they smoking?” asks the cover of the current issue of Fortune magazine. Underneath the headline are photos of recently deposed Wall Street titans, captioned with the staggering sums they managed to lose."
Friday, November 23, 2007
The Financial Tsunami: Sub-Prime Mortgage Debt is but the Tip of the Iceberg
"Even experienced banker friends tell me that they think the worst of the US banking troubles are over and that things are slowly getting back to normal. What is lacking in their rosy optimism is the realization of the scale of the ongoing deterioration in credit markets globally, centered in the American asset-backed securities market, and especially in the market for CDO’s—Collateralized Debt Obligations and CMO’s—Collateralized Mortgage Obligations. By now every serious reader has heard the term “It’s a crisis in Sub-Prime US home mortgage debt.” What almost no one I know understands is that the Sub-Prime problem is but the tip of a colossal iceberg that is in a slow meltdown."
Thursday, November 8, 2007
7 Countries Considering Abandoning the US Dollar
by Jessica Hupp - Nov 7, 2007
It’s no secret that the dollar is on a downward spiral. Its value is dropping, and the Fed isn’t doing a whole lot to change that. As a result, a number of countries are considering a shift away from the dollar to preserve their assets. These are seven of the countries currently considering a move from the dollar, and how they’ll have an effect on its value and the US economy.
Saudi Arabia: The Telegraph reports that for the first time, Saudi Arabia has refused to cut interest rates along with the US Federal Reserve. This is seen as a signal that a break from the dollar currency peg is imminent. The kingdom is taking “appropriate measures” to protect itself from letting the dollar cause problems for their own economy. They’re concerned about the threat of inflation and don’t want to deal with “recessionary conditions” in the US. Hans Redeker of BNP Paribas believes this creates a “very dangerous situation for the dollar,” as Saudi Arabia alone has management of $800 billion. Experts fear that a break from the dollar in Saudi Arabia could set off a “stampede” from the dollar in the Middle East, a region that manages $3,500 billion.
South Korea: In 2005, Korea announced its intention to shift its investments to currencies of countries other than the US. Although they’re simply making plans to diversify for the future, that doesn’t mean a large dollar drop isn’t in the works. There are whispers that the Bank of Korea is planning on selling $1 billion US bonds in the near future, after a $100 million sale this past August.
China: After already dropping the dollar peg in 2005, China has more trouble up its sleeve. Currently, China is threatening a “nuclear option” of huge dollar liquidation in response to possible trade sanctions intended to force a yuan revaluation. Although China “doesn’t want any undesirable phenomenon in the global financial order,” their large sum of US dollars does serve as a “bargaining chip.” As we’ve noted in the past, China has the power to take the wind out of the dollar.
Venezuela: Venezuela holds little loyalty to the dollar. In fact, they’ve shown overt disapproval, choosing to establish barter deals for oil. These barter deals, established under Hugo Chavez, allow Venezuela to trade oil with 12 Latin American countries and Cuba without using the dollar, shorting the US its usual subsidy. Chavez is not shy about this decision, and has publicly encouraged others to adopt similar arrangements. In 2000, Chavez recommended to OPEC that they “take advantage of high-tech electronic barter and bi-lateral exchanges of its oil with its developing country customers,” or in other words, stop using the dollar, or even the euro, for oil transactions. In September, Chavez instructed Venezuela’s state oil company Petroleos de Venezuela SA to change its dollar investments to euros and other currencies in order to mitigate risk.
Sudan: Sudan is, once again, planning to convert its dollar holdings to the euro and other currencies. Additionally, they’ve recommended to commercial banks, government departments, and private businesses to do the same. In 1997, the Central Bank of Sudan made a similar recommendation in reaction to US sactions from former President Clinton, but the implementation failed. This time around, 31 Sudanese companies have become subject to sanctions, preventing them from doing trade or financial transactions with the US. Officially, the sanctions are reported to have little effect, but there are indications that the economy is suffering due to these restrictions. A decision to move Sudan away from the dollar is intended to allow the country to work around these sanctions as well as any implemented in the future. However, a Khartoum committee recently concluded that proposals for a reduced dependence on the dollar are “not feasible.” Regardless, it is clear that Sudan’s intent is to attempt a break from the dollar in the future.
Iran: Iran is perhaps the most likely candidate for an imminent abandonment of the dollar. Recently, Iran requested that its shipments to Japan be traded for yen instead of dollars. Further, Iran has plans in the works to create an open commodity exchange called the Iran Oil Bourse. This exchange would make it possible to trade oil and gas in non-dollar currencies, the euro in particular. Athough the oil bourse has missed at least three of its announced opening dates, it serves to make clear Iran’s intentions for the dollar. As of October 2007, Iran receives non-dollar currencies for 85% of its oil exports, and has plans to move the remaining 15% to currencies like the United Arab Emirates dirham.
Russia: Iran is not alone in its desire to establish an alternative to trading oil and other commodities in dollars. In 2006, Russian President Vladmir Putin expressed interest in establishing a Russian stock exchange which would allow “oil, gas, and other goods to be paid for in Roubles.” Russia’s intentions are no secret–in the past, they’ve made it clear that they’re wary of holding too many dollar reserves. In 2004, Russian central bank First Deputy Chairmain Alexei Ulyukayev remarked, “Most of our reserves are in dollars, and that’s a cause for concern.” He went on to explain that, after considering the dollar’s rate against the euro, Russia is “discussing the possibility of changing the reserve structure.” Then in 2005, Russia put an end to its dollar peg, opting instead to move towards a euro alignment. They’ve discussed pricing oil in euros, a move that could provide a large shift away from the dollar and towards the euro, as Russia is the world’s second-largest oil exporter.
What does this all mean?
Countries are growing weary of losing money on the falling dollar. Many of them want to protect their financial interests, and a number of them want to end the US oversight that comes with using the dollar. Although it’s not clear how many of these countries will actually follow through on an abandonment of the dollar, it is clear that its status as a world currency is in trouble.
Obviously, an abandonment of the dollar is bad news for the currency. Simply put, as demand lessens, its value drops. Additionally, the revenue generated from the use of the dollar will be sorely missed if it’s lost. The dollar’s status as a cheaply-produced US export is a vital part of our economy. Losing this status could rock the financial lives of both Americans and the worldwide economy.
It’s no secret that the dollar is on a downward spiral. Its value is dropping, and the Fed isn’t doing a whole lot to change that. As a result, a number of countries are considering a shift away from the dollar to preserve their assets. These are seven of the countries currently considering a move from the dollar, and how they’ll have an effect on its value and the US economy.
Saudi Arabia: The Telegraph reports that for the first time, Saudi Arabia has refused to cut interest rates along with the US Federal Reserve. This is seen as a signal that a break from the dollar currency peg is imminent. The kingdom is taking “appropriate measures” to protect itself from letting the dollar cause problems for their own economy. They’re concerned about the threat of inflation and don’t want to deal with “recessionary conditions” in the US. Hans Redeker of BNP Paribas believes this creates a “very dangerous situation for the dollar,” as Saudi Arabia alone has management of $800 billion. Experts fear that a break from the dollar in Saudi Arabia could set off a “stampede” from the dollar in the Middle East, a region that manages $3,500 billion.
South Korea: In 2005, Korea announced its intention to shift its investments to currencies of countries other than the US. Although they’re simply making plans to diversify for the future, that doesn’t mean a large dollar drop isn’t in the works. There are whispers that the Bank of Korea is planning on selling $1 billion US bonds in the near future, after a $100 million sale this past August.
China: After already dropping the dollar peg in 2005, China has more trouble up its sleeve. Currently, China is threatening a “nuclear option” of huge dollar liquidation in response to possible trade sanctions intended to force a yuan revaluation. Although China “doesn’t want any undesirable phenomenon in the global financial order,” their large sum of US dollars does serve as a “bargaining chip.” As we’ve noted in the past, China has the power to take the wind out of the dollar.
Venezuela: Venezuela holds little loyalty to the dollar. In fact, they’ve shown overt disapproval, choosing to establish barter deals for oil. These barter deals, established under Hugo Chavez, allow Venezuela to trade oil with 12 Latin American countries and Cuba without using the dollar, shorting the US its usual subsidy. Chavez is not shy about this decision, and has publicly encouraged others to adopt similar arrangements. In 2000, Chavez recommended to OPEC that they “take advantage of high-tech electronic barter and bi-lateral exchanges of its oil with its developing country customers,” or in other words, stop using the dollar, or even the euro, for oil transactions. In September, Chavez instructed Venezuela’s state oil company Petroleos de Venezuela SA to change its dollar investments to euros and other currencies in order to mitigate risk.
Sudan: Sudan is, once again, planning to convert its dollar holdings to the euro and other currencies. Additionally, they’ve recommended to commercial banks, government departments, and private businesses to do the same. In 1997, the Central Bank of Sudan made a similar recommendation in reaction to US sactions from former President Clinton, but the implementation failed. This time around, 31 Sudanese companies have become subject to sanctions, preventing them from doing trade or financial transactions with the US. Officially, the sanctions are reported to have little effect, but there are indications that the economy is suffering due to these restrictions. A decision to move Sudan away from the dollar is intended to allow the country to work around these sanctions as well as any implemented in the future. However, a Khartoum committee recently concluded that proposals for a reduced dependence on the dollar are “not feasible.” Regardless, it is clear that Sudan’s intent is to attempt a break from the dollar in the future.
Iran: Iran is perhaps the most likely candidate for an imminent abandonment of the dollar. Recently, Iran requested that its shipments to Japan be traded for yen instead of dollars. Further, Iran has plans in the works to create an open commodity exchange called the Iran Oil Bourse. This exchange would make it possible to trade oil and gas in non-dollar currencies, the euro in particular. Athough the oil bourse has missed at least three of its announced opening dates, it serves to make clear Iran’s intentions for the dollar. As of October 2007, Iran receives non-dollar currencies for 85% of its oil exports, and has plans to move the remaining 15% to currencies like the United Arab Emirates dirham.
Russia: Iran is not alone in its desire to establish an alternative to trading oil and other commodities in dollars. In 2006, Russian President Vladmir Putin expressed interest in establishing a Russian stock exchange which would allow “oil, gas, and other goods to be paid for in Roubles.” Russia’s intentions are no secret–in the past, they’ve made it clear that they’re wary of holding too many dollar reserves. In 2004, Russian central bank First Deputy Chairmain Alexei Ulyukayev remarked, “Most of our reserves are in dollars, and that’s a cause for concern.” He went on to explain that, after considering the dollar’s rate against the euro, Russia is “discussing the possibility of changing the reserve structure.” Then in 2005, Russia put an end to its dollar peg, opting instead to move towards a euro alignment. They’ve discussed pricing oil in euros, a move that could provide a large shift away from the dollar and towards the euro, as Russia is the world’s second-largest oil exporter.
What does this all mean?
Countries are growing weary of losing money on the falling dollar. Many of them want to protect their financial interests, and a number of them want to end the US oversight that comes with using the dollar. Although it’s not clear how many of these countries will actually follow through on an abandonment of the dollar, it is clear that its status as a world currency is in trouble.
Obviously, an abandonment of the dollar is bad news for the currency. Simply put, as demand lessens, its value drops. Additionally, the revenue generated from the use of the dollar will be sorely missed if it’s lost. The dollar’s status as a cheaply-produced US export is a vital part of our economy. Losing this status could rock the financial lives of both Americans and the worldwide economy.
Wednesday, November 7, 2007
GM reports 3Q net loss of $39 billion
by TOM KRISHER, Associated Press - Nov 7, 2007
General Motors Corp. posted a company record $39 billion loss in the third quarter, as a charge involving unused tax credits brought an abrupt end to string of three profitable quarters for the nation's largest automaker.
The loss reported Wednesday was one of the biggest quarterly corporate deficits ever and it sent GM's shares down more than 8 percent in premarket trading.
The loss was attributed to a $38.6 billion noncash charge largely related to establishing a valuation allowance against accumulated deferred tax credits in the U.S., Canada and Germany, as well as mortgage losses at GM's former financial arm, GMAC Financial Services.
But accounting rules require that companies expecting to keep losing money cannot keep carrying deferred tax credits indefinitely and must write down the value of such credits.
The net loss amounted to $68.85 per share, compared with a net loss of $147 million, or 26 cents per share, in the third quarter of last year.
The results included a $3.5 billion after-tax gain on the $5.4 billion sale of Allison Transmission in August.
Without special items, the company reported a $1.6 billion loss, or $2.80 per share.
The company reported record third-quarter automotive revenue of $43.1 billion and record global sales for the quarter of 2.39 million cars and trucks.
But the automaker continued to lose money in its home market, North America, where it reported a net loss from continuing operations of $38.2 billion for the quarter including the noncash charge. That compares with a net loss of $667 million in the year-ago period.
Without the charge, the company's North American loss was $247 million in the third quarter of 2007.
"We continue to implement the key elements of our North America turnaround strategy, and these initiatives are driving steady improvement in our financial results, despite challenging North America market conditions," GM Chairman and Chief Executive Rick Wagoner said in a statement.
The huge charge, announced after the stock market closed on Tuesday, surprised Wall Street analysts who had expected a relatively small loss excluding special items. Seventeen analysts polled by Thomson Financial expected the company to lose 25 cents per share without the charge.
Its shares fell $3, or 8.3 percent, to $33.16 in premarket trading.
General Motors Corp. posted a company record $39 billion loss in the third quarter, as a charge involving unused tax credits brought an abrupt end to string of three profitable quarters for the nation's largest automaker.
The loss reported Wednesday was one of the biggest quarterly corporate deficits ever and it sent GM's shares down more than 8 percent in premarket trading.
The loss was attributed to a $38.6 billion noncash charge largely related to establishing a valuation allowance against accumulated deferred tax credits in the U.S., Canada and Germany, as well as mortgage losses at GM's former financial arm, GMAC Financial Services.
But accounting rules require that companies expecting to keep losing money cannot keep carrying deferred tax credits indefinitely and must write down the value of such credits.
The net loss amounted to $68.85 per share, compared with a net loss of $147 million, or 26 cents per share, in the third quarter of last year.
The results included a $3.5 billion after-tax gain on the $5.4 billion sale of Allison Transmission in August.
Without special items, the company reported a $1.6 billion loss, or $2.80 per share.
The company reported record third-quarter automotive revenue of $43.1 billion and record global sales for the quarter of 2.39 million cars and trucks.
But the automaker continued to lose money in its home market, North America, where it reported a net loss from continuing operations of $38.2 billion for the quarter including the noncash charge. That compares with a net loss of $667 million in the year-ago period.
Without the charge, the company's North American loss was $247 million in the third quarter of 2007.
"We continue to implement the key elements of our North America turnaround strategy, and these initiatives are driving steady improvement in our financial results, despite challenging North America market conditions," GM Chairman and Chief Executive Rick Wagoner said in a statement.
The huge charge, announced after the stock market closed on Tuesday, surprised Wall Street analysts who had expected a relatively small loss excluding special items. Seventeen analysts polled by Thomson Financial expected the company to lose 25 cents per share without the charge.
Its shares fell $3, or 8.3 percent, to $33.16 in premarket trading.
Welcome to Year 27 of the Reagan Revolution
"The End is Nigh!" Cries Paul Volcker, as Heads Topple at Merrill Lynch and Citigroup
by MIKE WHITNEY - Nov 6, 2007
Last Wednesday, the Federal Reserve dropped its benchmark interest rate by 25 basis points to 4.5 per cent citing ongoing weakness in the housing sector. As expected, the stock market rallied and the Dow Jones Industrial Average went up137 points. Unfortunately, Bernanke's "low interest" stardust wasn't enough to buoy the markets through the rest of the week.
On Thursday, the hammer fell. The Dow plunged 362 points in one afternoon on increasing fears of inflation, a slowdown in consumer spending, a steadily weakening dollar and persistent problems in the credit markets. By day's end, the Fed was forced to dump another $41 billion into the banking system to forestall a major breakdown. This is the most money the Fed has pumped into the financial system since 9/11/2001 and it shows how dire the situation really is.
Why do the banks need such a huge infusion of credit if they are as "rock solid" as Bernanke says?
As most people now realize, the mortgage industry is on life-support. Many of the ways that the banks were generating profits have vanished overnight. The "securitization" of debt (mortgages, car loans, credit card debt etc) has ground to a halt. What had been a booming multi-billion dollar per-year business is now a dwindling part of the banks' revenues. Investors are steering clear of anything even remotely associated to real estate.
Additionally, the banks are holding an estimated $200 billion in mortgage-backed securities and derivatives for which there is currently no market. This is compounded by $350 billion in "off balance sheets" operations -- which are collateralized with dodgy long-term mortgage-backed securities -- that provide funding for "short-term" asset-backed commercial paper. ASCP has shriveled by $275 billion in the last 10 weeks leaving the banks with gargantuan liabilities. Bernanke was forced to add $41 billion to keep the banking system from slipping beneath the waves. But that's just a short-term fix. In the long run, the Fed has less chance of stopping the market from correcting than it does of stopping a runaway truck by standing in its path. Besides, the Fed cannot purchase the banks' bad investments (CDOs, MBSs, or CP) nor can it reflate the multi-trillion dollar the housing bubble. All it can do is provide more cheap credit and hope the problems go away.
So far, the lower rates haven't even decreased the price of the 30-year mortgage or made refinancing any cheaper. In truth, they're just a desperate attempt to perpetuate consumer borrowing while the banks figure out how to offload their enormous debts. That's what Paulson's $80 billion "Banker's Bankruptcy Fund" is really all about; it's just the repackaging of subprime junk so it can be passed off to credulous investors. Fortunately, the public has wised up and isn't buying into this latest fraud. As a result, the banks have taken another blow to their already-flagging credibility.
In the last two months, the pool of qualified mortgage applicants has contracted, as has the market for merger and acquisition deals (private equity). So the banks are probably doing more with the Fed's $41 billion injection than just beefing up their reserves and issuing new loans. The market analysts at Minyanville.com summed it up like this:
"Banks are taking the liquidity the Fed is forcing out there through the discount window and repos. After using it to shore up the declining value of their assets, they have excess to lend out. Finding no traditional borrowers that want to buy a house or build a factory, the new rules the Fed has set forth allows the banks to pass this liquidity onto their broker dealer subsidiaries in much greater quantities. These broker dealers are lending thus to hedge funds and margin buyers who are speculating in stocks. Remember, the Fed is powerless unless it can find people to borrow the credit it wants them to spend. By definition, the last ones willing to take that credit are the most speculative."
This is a likely scenario given the fact that the stock market continues to fly high despite the surge of bad news on everything from the falling dollar to the geopolitical rumblings in the Middle East. Last month, the Fed modified its rules so that the banks could provide resources to their off-balance sheets operations (SIVs and conduits). If the Fed is willing to rubber-stamp that type of monkey-business; then why would they mind if the money was stealthily "back-doored" into the stock market via the hedge funds?
This might explain why the hedge funds account for as much as 40 to 50 per cent of all trading on an average day. It also explains why the stock market is overheating.
The charade cannot go on forever. And it won't. Rate cuts do not address the underlying problem which is bad investments. The debts must be accounted for and written off. Nothing else will do. That doesn't mean that Bernanke will suddenly decide to stop savaging the dollar or flushing hundreds of billions of dollars down the investment bank toilet. He probably will. But, eventually, the blow-ups in the housing market will destabilize the financial system and send the banks and over-leveraged hedge funds sprawling. Bernanke's low interest "giveaway" will amount to nothing.
Bloomberg News ran a story last week which sheds more light on the jam the banks now find themselves in:
"Banks shut out of the market for short-term loans are finding salvation in a government lending program set up to revive housing during the Great Depression. Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest."
Whoa. So, now that the credit markets have frozen over, the banks are going to the government with begging bowl in hand? So much for "moral hazard".
Commercial paper is short-term notes that businesses use for daily operations. Because much of this CP is backed by mortgage-backed securities the banks have been having trouble rolling it over. (Refinancing) So -- unbeknownst to the public -- various banks have been borrowing from the government-sponsored Federal Home Loan Banks (FHLB) so they can cut their losses (or stay afloat?) The FHLB has extended $163 billion of loans to them, which means that the risks that are inherent in supporting "dodgy banks that make bad bets" has been transferred to FHLB's investors. The danger, of course, is that-when investors find out that FHLB is mixed up with these shaky banks, they are liable to sell their shares and trigger a collapse of the system.
Citi's Woes
Over the weekend, Citigroup's CEO Chuck Prince got the axe. Citigroup, which boasts more than 300,000 staff worldwide, has lost more than 20 per cent of its market value from bad bets in sub-prime mortgages. According to the Times Online: "The Securities and Exchange Commission may investigate whether it improperly juggled its books to hide the full extent of the problem."
"Juggled" is not a word that is taken lightly on Wall Street where traders are now bracing for another sell-off of financial stocks. Mr. Prince is not alone in the unemployment line either. He's be accompanied by Merrill Lynch's former boss, Stanley O' Neal who got the boot last week when his firm reported $8.4 billion in write-downs. Deutsche Bank analysts now predict that Merrill may write off another $10 billion of losses related to its portfolio of sub-prime debts. That would wipe out 8 full quarters of earnings and represent the largest loss in Wall Street history.
The news is bleak. The systemic rot is appearing everywhere presaging ongoing losses for the financial giants and a long-downward spiral for the markets. The banks are currently under-regulated, over-leveraged and under capitalized.
Former Fed chief Paul Volcker summarized the overall economic situation last week at the second annual summit of the Stanford Institute for Economic Policy Research. In his speech he said:
"Altogether, the circumstances seem as dangerous and intractable as I can remember.Boomers are spending like there is no tomorrow. Homeownership has become a vehicle for borrowing and leveraging as much as a source of financial security.. As a Nation we are consumingabout 6 per cent more than we are producing. What holds it all together? - High consumption - high leverage - government deficits - What holds it all together is a really massive and growing flow of capital from abroad. A flow of capital that today runs to more than $2 billion per day." The nation is facing "huge imbalances and risks."
Volcker is right. The country is in a bigger pickle than any time in its 230 year history. The credit storm that was engineered at the Federal Reserve has swept across the planet and is now descending on commercial real estate, credit card debt, and the plummeting bond insurers industry. These are the next shoes to drop and the tremors will be felt throughout the broader economy.
As this article is being written, Reuters is reporting that Citigroup may be forced to write-down as much as $11 billion in subprime mortgage-related losses!
Reuters: "Citigroup announced today significant declines since September 30, 2007 in the fair value of the approximately $55 billion in U.S. sub-prime related direct exposures in its Securities and Banking (S&B) business. Citi estimates that, at the present time, the reduction in revenues attributable to these declines ranges from approximately $8 billion to $11 billion (representing a decline of approximately $5 billion to $7 billion in net income on an after-tax basis)."
Citigroup's statement indicates a willingness on its part to come clean with its investors but, in fact, they know that the situation is fluid and there'll be hefty losses in the future. Mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) will continue to be downgraded as time goes by. According to the Financial Times, one banker was having so much difficulty getting a bid on subprime securities; he found the only way he could get rid of them was through "barter. He resorted to using a tactic more normally associated with third world markets than the supposedly sophisticated arena of high finance. 'Barter is the only thing that works,' he chuckled, 'It's like the Dark Ages'" The article continues:
"Never mind the fact that the risky tranches of subprime-linked debt have fallen 80 per cent since the start of the year; in a sense, such declines are only natural for risky assets in a credit storm. Instead, what is really alarming is that the assets which were supposed to be ultra-safe - namely AAA and AA rated tranches of debt - have collapsed in value by 20 per cent and 50 per cent odd respectively. This is dangerous, given that financial institutions of all stripes have been merrily leveraging up AAA and AA paper in recent years, precisely because it was supposed to be ultra-safe and thus, er, never lose value." (Financial Times; Gillian Tett)
AAA and AA assets---the top-graded tranches--- have already been downgraded by 20 per cent to 50 per cent! And the prices are bound to fall even more because there is no market for mortgage-backed securities. This is a bank's worst nightmare; an asset that loses value and requires greater capital reserves every day. In fact, AAA rated MBSs have dropped 14 per cent in one month. It is truly, death by a thousand cuts.
The US financial system is now buckling beneath the weight of its own excesses. The subprime contagion---which can trace its origins to the expansion of credit at the Federal Reserve -- has devastated the housing market generating an unprecedented number of foreclosures, record inventory, and a multi-trillion dollar equity bubble which is now deflating and wiping out much of the mortgage industry in its path. Its effects on the secondary market have been even more devastating where pension funds, insurance companies, hedge funds and foreign banks are left holding hundreds of billions of dollars of complex, mortgage-backed securities and subprime-related derivatives which are now destined to be downgraded to pennies on the dollar ravaging once-robust portfolios. The subprime meltdown has been equally damaging to myriad European investment banks and brokerage houses. We've seen a wave of bank closings in France, Germany and England which has left investors shell-shocked, triggering capital flight from American markets and supplanting confidence in the US financial system with growing suspicion and rage. Where are the regulators?
According to Bloomberg News, "European and Asian investors will avoid most US mortgage-backed securities for years without guarantees from government-linked entities creating an enormous drag on the US housing market". Foreign investors believe they were hoodwinked by bonds that were deliberately mis-rated to maximize profits for the investment banks. This may explain why $882 billion has been diverted into Chinese and Indian stock markets in the last month alone.
The biggest losers of all, however, are the financial giants that created most of the abstruse, debt-instruments that are now devouring the system from within. The productive and "wealth creating" components of the economy have been subordinated to a finance-driven model which suddenly derailed due to the abusive expansion of debt. Inevitably, some of the banks that took the greatest risks will be shuttered and trillions of dollars in market capitalization will disappear.
Is it possible that anyone with a pulse and a minimal ability to reason couldn't see the inherent problems of building a financial edifice on the prospect that millions of first-time homeowners with bad credit history and no collateral would pay off there mortgages in a timely and responsible manner?
No. It is not possible. The real reason that the subprime swindle mushroomed into an economy-busting monster is that the markets are no longer policed by any agency that believes in intervention. The pervasive "free market" ideology rejects the notion of supervision or oversight, and as a result, the markets have become increasingly opaque and unresponsive to rules that may assure their continued credibility or even their ability to function properly.
The "supply side" avatars of deregulation have transformed the world's most vital and prosperous markets into a huckster's shell-game. All regulatory accountability has vanished along with trillions of dollars in foreign investment. What's left is a flea-market for dodgy loans, dubious over-leveraged equities and "securitized" Triple A-rated garbage.
Let's hear it for the Reagan Revolution.
What is striking is how the new "structured finance" paradigm replicates a political system which is no longer guided by principle or integrity. It is not coincidental that the same flag that flies over Guantanamo and Abu Ghraib flutters over Wall Street as well. Nor is it accidental that the same system that peddles bogus, subprime tripe to gullible investors also elevates a "waterboarding advocate" to the highest position in the Justice Department. Both phenomena emerge from the same fetid swamp.
by MIKE WHITNEY - Nov 6, 2007
Last Wednesday, the Federal Reserve dropped its benchmark interest rate by 25 basis points to 4.5 per cent citing ongoing weakness in the housing sector. As expected, the stock market rallied and the Dow Jones Industrial Average went up137 points. Unfortunately, Bernanke's "low interest" stardust wasn't enough to buoy the markets through the rest of the week.
On Thursday, the hammer fell. The Dow plunged 362 points in one afternoon on increasing fears of inflation, a slowdown in consumer spending, a steadily weakening dollar and persistent problems in the credit markets. By day's end, the Fed was forced to dump another $41 billion into the banking system to forestall a major breakdown. This is the most money the Fed has pumped into the financial system since 9/11/2001 and it shows how dire the situation really is.
Why do the banks need such a huge infusion of credit if they are as "rock solid" as Bernanke says?
As most people now realize, the mortgage industry is on life-support. Many of the ways that the banks were generating profits have vanished overnight. The "securitization" of debt (mortgages, car loans, credit card debt etc) has ground to a halt. What had been a booming multi-billion dollar per-year business is now a dwindling part of the banks' revenues. Investors are steering clear of anything even remotely associated to real estate.
Additionally, the banks are holding an estimated $200 billion in mortgage-backed securities and derivatives for which there is currently no market. This is compounded by $350 billion in "off balance sheets" operations -- which are collateralized with dodgy long-term mortgage-backed securities -- that provide funding for "short-term" asset-backed commercial paper. ASCP has shriveled by $275 billion in the last 10 weeks leaving the banks with gargantuan liabilities. Bernanke was forced to add $41 billion to keep the banking system from slipping beneath the waves. But that's just a short-term fix. In the long run, the Fed has less chance of stopping the market from correcting than it does of stopping a runaway truck by standing in its path. Besides, the Fed cannot purchase the banks' bad investments (CDOs, MBSs, or CP) nor can it reflate the multi-trillion dollar the housing bubble. All it can do is provide more cheap credit and hope the problems go away.
So far, the lower rates haven't even decreased the price of the 30-year mortgage or made refinancing any cheaper. In truth, they're just a desperate attempt to perpetuate consumer borrowing while the banks figure out how to offload their enormous debts. That's what Paulson's $80 billion "Banker's Bankruptcy Fund" is really all about; it's just the repackaging of subprime junk so it can be passed off to credulous investors. Fortunately, the public has wised up and isn't buying into this latest fraud. As a result, the banks have taken another blow to their already-flagging credibility.
In the last two months, the pool of qualified mortgage applicants has contracted, as has the market for merger and acquisition deals (private equity). So the banks are probably doing more with the Fed's $41 billion injection than just beefing up their reserves and issuing new loans. The market analysts at Minyanville.com summed it up like this:
"Banks are taking the liquidity the Fed is forcing out there through the discount window and repos. After using it to shore up the declining value of their assets, they have excess to lend out. Finding no traditional borrowers that want to buy a house or build a factory, the new rules the Fed has set forth allows the banks to pass this liquidity onto their broker dealer subsidiaries in much greater quantities. These broker dealers are lending thus to hedge funds and margin buyers who are speculating in stocks. Remember, the Fed is powerless unless it can find people to borrow the credit it wants them to spend. By definition, the last ones willing to take that credit are the most speculative."
This is a likely scenario given the fact that the stock market continues to fly high despite the surge of bad news on everything from the falling dollar to the geopolitical rumblings in the Middle East. Last month, the Fed modified its rules so that the banks could provide resources to their off-balance sheets operations (SIVs and conduits). If the Fed is willing to rubber-stamp that type of monkey-business; then why would they mind if the money was stealthily "back-doored" into the stock market via the hedge funds?
This might explain why the hedge funds account for as much as 40 to 50 per cent of all trading on an average day. It also explains why the stock market is overheating.
The charade cannot go on forever. And it won't. Rate cuts do not address the underlying problem which is bad investments. The debts must be accounted for and written off. Nothing else will do. That doesn't mean that Bernanke will suddenly decide to stop savaging the dollar or flushing hundreds of billions of dollars down the investment bank toilet. He probably will. But, eventually, the blow-ups in the housing market will destabilize the financial system and send the banks and over-leveraged hedge funds sprawling. Bernanke's low interest "giveaway" will amount to nothing.
Bloomberg News ran a story last week which sheds more light on the jam the banks now find themselves in:
"Banks shut out of the market for short-term loans are finding salvation in a government lending program set up to revive housing during the Great Depression. Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest."
Whoa. So, now that the credit markets have frozen over, the banks are going to the government with begging bowl in hand? So much for "moral hazard".
Commercial paper is short-term notes that businesses use for daily operations. Because much of this CP is backed by mortgage-backed securities the banks have been having trouble rolling it over. (Refinancing) So -- unbeknownst to the public -- various banks have been borrowing from the government-sponsored Federal Home Loan Banks (FHLB) so they can cut their losses (or stay afloat?) The FHLB has extended $163 billion of loans to them, which means that the risks that are inherent in supporting "dodgy banks that make bad bets" has been transferred to FHLB's investors. The danger, of course, is that-when investors find out that FHLB is mixed up with these shaky banks, they are liable to sell their shares and trigger a collapse of the system.
Citi's Woes
Over the weekend, Citigroup's CEO Chuck Prince got the axe. Citigroup, which boasts more than 300,000 staff worldwide, has lost more than 20 per cent of its market value from bad bets in sub-prime mortgages. According to the Times Online: "The Securities and Exchange Commission may investigate whether it improperly juggled its books to hide the full extent of the problem."
"Juggled" is not a word that is taken lightly on Wall Street where traders are now bracing for another sell-off of financial stocks. Mr. Prince is not alone in the unemployment line either. He's be accompanied by Merrill Lynch's former boss, Stanley O' Neal who got the boot last week when his firm reported $8.4 billion in write-downs. Deutsche Bank analysts now predict that Merrill may write off another $10 billion of losses related to its portfolio of sub-prime debts. That would wipe out 8 full quarters of earnings and represent the largest loss in Wall Street history.
The news is bleak. The systemic rot is appearing everywhere presaging ongoing losses for the financial giants and a long-downward spiral for the markets. The banks are currently under-regulated, over-leveraged and under capitalized.
Former Fed chief Paul Volcker summarized the overall economic situation last week at the second annual summit of the Stanford Institute for Economic Policy Research. In his speech he said:
"Altogether, the circumstances seem as dangerous and intractable as I can remember.Boomers are spending like there is no tomorrow. Homeownership has become a vehicle for borrowing and leveraging as much as a source of financial security.. As a Nation we are consumingabout 6 per cent more than we are producing. What holds it all together? - High consumption - high leverage - government deficits - What holds it all together is a really massive and growing flow of capital from abroad. A flow of capital that today runs to more than $2 billion per day." The nation is facing "huge imbalances and risks."
Volcker is right. The country is in a bigger pickle than any time in its 230 year history. The credit storm that was engineered at the Federal Reserve has swept across the planet and is now descending on commercial real estate, credit card debt, and the plummeting bond insurers industry. These are the next shoes to drop and the tremors will be felt throughout the broader economy.
As this article is being written, Reuters is reporting that Citigroup may be forced to write-down as much as $11 billion in subprime mortgage-related losses!
Reuters: "Citigroup announced today significant declines since September 30, 2007 in the fair value of the approximately $55 billion in U.S. sub-prime related direct exposures in its Securities and Banking (S&B) business. Citi estimates that, at the present time, the reduction in revenues attributable to these declines ranges from approximately $8 billion to $11 billion (representing a decline of approximately $5 billion to $7 billion in net income on an after-tax basis)."
Citigroup's statement indicates a willingness on its part to come clean with its investors but, in fact, they know that the situation is fluid and there'll be hefty losses in the future. Mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) will continue to be downgraded as time goes by. According to the Financial Times, one banker was having so much difficulty getting a bid on subprime securities; he found the only way he could get rid of them was through "barter. He resorted to using a tactic more normally associated with third world markets than the supposedly sophisticated arena of high finance. 'Barter is the only thing that works,' he chuckled, 'It's like the Dark Ages'" The article continues:
"Never mind the fact that the risky tranches of subprime-linked debt have fallen 80 per cent since the start of the year; in a sense, such declines are only natural for risky assets in a credit storm. Instead, what is really alarming is that the assets which were supposed to be ultra-safe - namely AAA and AA rated tranches of debt - have collapsed in value by 20 per cent and 50 per cent odd respectively. This is dangerous, given that financial institutions of all stripes have been merrily leveraging up AAA and AA paper in recent years, precisely because it was supposed to be ultra-safe and thus, er, never lose value." (Financial Times; Gillian Tett)
AAA and AA assets---the top-graded tranches--- have already been downgraded by 20 per cent to 50 per cent! And the prices are bound to fall even more because there is no market for mortgage-backed securities. This is a bank's worst nightmare; an asset that loses value and requires greater capital reserves every day. In fact, AAA rated MBSs have dropped 14 per cent in one month. It is truly, death by a thousand cuts.
The US financial system is now buckling beneath the weight of its own excesses. The subprime contagion---which can trace its origins to the expansion of credit at the Federal Reserve -- has devastated the housing market generating an unprecedented number of foreclosures, record inventory, and a multi-trillion dollar equity bubble which is now deflating and wiping out much of the mortgage industry in its path. Its effects on the secondary market have been even more devastating where pension funds, insurance companies, hedge funds and foreign banks are left holding hundreds of billions of dollars of complex, mortgage-backed securities and subprime-related derivatives which are now destined to be downgraded to pennies on the dollar ravaging once-robust portfolios. The subprime meltdown has been equally damaging to myriad European investment banks and brokerage houses. We've seen a wave of bank closings in France, Germany and England which has left investors shell-shocked, triggering capital flight from American markets and supplanting confidence in the US financial system with growing suspicion and rage. Where are the regulators?
According to Bloomberg News, "European and Asian investors will avoid most US mortgage-backed securities for years without guarantees from government-linked entities creating an enormous drag on the US housing market". Foreign investors believe they were hoodwinked by bonds that were deliberately mis-rated to maximize profits for the investment banks. This may explain why $882 billion has been diverted into Chinese and Indian stock markets in the last month alone.
The biggest losers of all, however, are the financial giants that created most of the abstruse, debt-instruments that are now devouring the system from within. The productive and "wealth creating" components of the economy have been subordinated to a finance-driven model which suddenly derailed due to the abusive expansion of debt. Inevitably, some of the banks that took the greatest risks will be shuttered and trillions of dollars in market capitalization will disappear.
Is it possible that anyone with a pulse and a minimal ability to reason couldn't see the inherent problems of building a financial edifice on the prospect that millions of first-time homeowners with bad credit history and no collateral would pay off there mortgages in a timely and responsible manner?
No. It is not possible. The real reason that the subprime swindle mushroomed into an economy-busting monster is that the markets are no longer policed by any agency that believes in intervention. The pervasive "free market" ideology rejects the notion of supervision or oversight, and as a result, the markets have become increasingly opaque and unresponsive to rules that may assure their continued credibility or even their ability to function properly.
The "supply side" avatars of deregulation have transformed the world's most vital and prosperous markets into a huckster's shell-game. All regulatory accountability has vanished along with trillions of dollars in foreign investment. What's left is a flea-market for dodgy loans, dubious over-leveraged equities and "securitized" Triple A-rated garbage.
Let's hear it for the Reagan Revolution.
What is striking is how the new "structured finance" paradigm replicates a political system which is no longer guided by principle or integrity. It is not coincidental that the same flag that flies over Guantanamo and Abu Ghraib flutters over Wall Street as well. Nor is it accidental that the same system that peddles bogus, subprime tripe to gullible investors also elevates a "waterboarding advocate" to the highest position in the Justice Department. Both phenomena emerge from the same fetid swamp.
Tuesday, November 6, 2007
Stock Market Mayhem and Bush’s Moral Swamp
by Mike Whitney - Nov 5, 2007
“It’s scary out there---there’s blood on the streets” anonymous Wall Street trader
Last Wednesday, the Federal Reserve dropped its benchmark interest rate by 25 basis points to 4.5% citing ongoing weakness in the housing sector. As expected, the stock market rallied and the Dow Jones Industrial Average soared 137 points. Unfortunately, Bernanke’s “low interest” stardust wasn’t enough to buoy the markets through the rest of the week.
On Thursday, the hammer fell. The Dow plummeted 362 points in one afternoon on increasing fears of inflation, a slowdown in consumer spending, a steadily weakening dollar and persistent problems in the credit markets. By day’s end, the Fed was forced to dump another $41 into the banking system to forestall a major breakdown. This is the most money the Fed has pumped into the financial system since 9-11 and it shows how dire the situation really is.
Why do the banks need such a massive infusion of credit if they are as “rock solid” as Bernanke says?
As most people now realize, the mortgage industry is on life-support. Many of the ways that the banks were generating profits have vanished overnight. The “securitization” of debt (mortgages, car loans, credit card debt etc) has ground to a halt. What had been a booming multi-billion dollar per-year business is now a dwindling part of the banks’ revenues. Investors are steering clear of anything even remotely associated to real estate.
Additionally, the banks are holding an estimated $200 billion in mortgage-backed securities and derivatives for which there is currently no market. This is compounded by $350 billion in “off balance sheets” operations---which are collateralized with dodgy long-term mortgage-backed securities---that provide funding for “short-term” asset-backed commercial paper. ASCP has shriveled by $275 billion in the last 10 weeks leaving the banks with gargantuan liabilities. Bernanke was forced to add $41 billion to keep the banking system from slipping beneath the salty brine.
This shows how powerless the Fed really is when it comes to changing the overall direction of the markets. Sure, Bernanke and his buddies in the Plunge Protection Team can goose the market by buying-up futures and boosting the day’s results. But that’s just a short-term fix. In the long run, the Fed has less chance of stopping the market from correcting than it does of stopping a runaway truck by standing in its path. Besides, the Fed cannot purchase the banks bad investments (CDOs, MBSs, or CP) nor can it reflate the multi-trillion dollar the housing bubble. All it can do is provide more cheap credit and hope the problems go away.
So far, the lower rates haven’t even decreased the price of the 30-year mortgage or made refinancing any cheaper. All they’ve done is postpone the inevitable day of reckoning. In truth, they’re just a desperate attempt to perpetuate consumer borrowing while the banks figure out how to offload their enormous debts. That’s what Paulson’s $80 billion “Banker’s Bankruptcy Fund” is really all about; it’s just the repackaging of subprime junk so it can be passed off to credulous investors. Fortunately, the public has “wised up” and isn’t buying into this latest fraud. As a result, the banks have taken another blow to their already-flagging credibility.
In the last two months, the pool of qualified mortgage applicants has contracted, as has the market for massive merger and acquisition deals (private equity). So the banks are probably doing more with the Fed’s $41 billion injection than just beefing up their reserves and issuing new loans. The market analysts at Minyanville.com summed it up like this:
“Banks are taking the liquidity the Fed is forcing out there through the discount window and repos. After using it to shore up the declining value of their assets, they have excess to lend out. Finding no traditional borrowers that want to buy a house or build a factory, the new rules the Fed has set forth allows the banks to pass this liquidity onto their broker dealer subsidiaries in much greater quantities. These broker dealers are lending thus to hedge funds and margin buyers who are speculating in stocks. Remember, the Fed is powerless unless it can find people to borrow the credit it wants them to spend. By definition, the last ones willing to take that credit are the most speculative.”
This is a likely scenario given the fact that the stock market continues to fly-high despite the surge of bad news on everything from the falling dollar to the geopolitical rumblings in the Middle East. Last month, the Fed modified its rules so that the banks could provide resources to their off-balance sheets operations (SIVs and conduits). If the Fed is willing to rubber-stamp that type of monkey-business; then why would they mind if the money was stealthily “back-doored” into the stock market via the hedge funds?
This might explain why the hedge funds account for as much as 40 to 50% of all trading on an average day. It also explains why the stock market overheating.
The charade, of course, cannot go on forever. And it won’t. Rate cuts do not address the underlying problem which is bad investments. The debts must be accounted for and written off. Nothing else will do. That doesn’t mean that Bernanke will suddenly decide to stop savaging the dollar or flushing hundreds of billions of dollars down the investment bank toilet. He probably will. But, eventually, the blow-ups in the housing market will destabilize the financial system and send the banks and over-leveraged hedge funds sprawling. Bernanke’s low interest “giveaway” will amount to nothing.
Bloomberg News ran a story last week which shedsmore light on the jam the banks now find themselves in:
“Banks shut out of the market for short-term loans are finding salvation in a government lending program set up to revive housing during the Great Depression.
Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest.”
Whoa. So, now that the credit markets have frozen over, the banks are going to the government with begging bowl in hand? So much for “moral hazard”.
Commercial paper is short-term notes that businesses use for daily operations. Because much of this CP is backed by mortgage-backed securities; the banks have been having trouble rolling it over. (Refinancing) So--unbeknownst to the public--various banks have been borrowing from the government-sponsored Federal Home Loan Banks (FHLB) so they can cut their losses (or stay afloat?) The FHLB has extended $163 billion of loans to them, which means that the risks that are inherent in supporting “dodgy banks that make bad bets” has been transferred to FHLB’s investors. The danger, of course, is that—when investors find out that FHLB is mixed up with these shaky banks---they are liable to sell their shares and trigger a collapse of the system. This is a good example of the dim-witted strategies that are being used to bail out the banks. There are probably many similar scams underway just beyond the publics’ view.
Citi's Woes
Over the weekend, Citigroup’s CEO Chuck Prince got the axe. Citigroup, which boasts more than 300,000 staff worldwide, has lost more than 20% of its market value from bad bets in sub-prime mortgages. According to the Times Online: “The Securities and Exchange Commission may investigate whether it improperly juggled its books to hide the full extent of the problem.”
”Juggled” is not a word that is taken lightly on Wall Street where traders are now bracing for another massive sell-off of financial stocks. Mr. Prince won’t be alone in the unemployment line either. He’ll be accompanied by Merrill Lynch’s former boss, Stanley O’ Neal who got the boot last week when his firm reported $8.4 billion in write-downs. Deutsche Bank analysts now “predict that Merrill may write off another $10 billion of losses related to its portfolio of sub-prime debts”. (Times Online) That would wipe out 8 full quarters of earnings and represent the largest loss in Wall Street history.
The news is bleak, bleak, bleak. The systemic rot is appearing everywhere presaging ongoing losses for the financial giants and a long-downward spiral for the markets. The banks are currently under-regulated, over-leveraged and under capitalized. And now the sh** is about to hit the fan.
Former Fed chief Paul Volcker summarized the overall economic situation last week at the second annual summit of the Stanford Institute for Economic Policy Research. In his speech he said:
"Altogether, the circumstances seem as dangerous and intractable as I can temember….Boomers are spending like there is no tomorrow. Homeownership has become a vehicle for borrowing and leveraging as much as a source of financial security….. As a Nation we are consuming…about 6% more than we are producing. What holds it all together? - High consumption - high leverage - government deficits - What holds it all together is a really massive and growing flow of capital from abroad. A flow of capital that today runs to more than $2 Billion per day." The nation is facing “huge imbalances and risks.”
Volcker is right. The country is in a bigger pickle than any time in its 230 year history. The credit storm that was engineered at the Federal Reserve has swept across the planet and is now descending on commercial real estate, credit card debt, and the plummeting bond insurers industry. These are the next shoes to drop and the tremors will be felt throughout the broader economy.
THE DARK AGES?
As this article is being written, Reuters is reporting that Citigroup may be forced to write-down as much as $11 billion in subprime mortgage-related losses!
Reuters: “Citigroup announced today significant declines since September 30, 2007 in the fair value of the approximately $55 billion in U.S. sub-prime related direct exposures in its Securities and Banking (S&B) business. Citi estimates that, at the present time, the reduction in revenues attributable to these declines ranges from approximately $8 billion to $11 billion (representing a decline of approximately $5 billion to $7 billion in net income on an after-tax basis).”
Citigroup’s statement indicates a willingness on its part to come clean with its investors but, in fact, they know that the situation is fluid and there’ll be hefty losses in the future. Mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) will continue to be downgraded as time goes by. According to the Financial Times, one banker was having so much difficulty getting a bid on subprime securities; he found the only way he could get rid of them was through “barter. He resorted to using a tactic more normally associated with third world markets than the supposedly sophisticated arena of high finance. ‘Barter is the only thing that works,' he chuckled, ‘It’s like the Dark Ages’” The article continues:
“Never mind the fact that the risky tranches of subprime-linked debt have fallen 80 per cent since the start of the year; in a sense, such declines are only natural for risky assets in a credit storm. Instead, what is really alarming is that the assets which were supposed to be ultra-safe - namely AAA and AA rated tranches of debt - have collapsed in value by 20% and 50% odd respectively. This is dangerous, given that financial institutions of all stripes have been merrily leveraging up AAA and AA paper in recent years, precisely because it was supposed to be ultra-safe and thus, er, never lose value.” (Financial Times; Gillian Tett)
AAA and AA assets---the top-graded tranches--- have already been downgraded by 20% to 50%!?! And the prices are bound to fall even more because there is no market for mortgage-backed securities. This is a banks worst nightmare; an asset that loses value and requires greater capital reserves EVERY DAY. In fact, AAA rated MBSs have dropped 14% in one month. It is truly, death by a thousand cuts.
The US financial system is now buckling beneath the weight of its own excesses. The subprime contagion---which can trace its origins to the massive expansion of credit at the Federal Reserve---has devastated the housing market generating an unprecedented number of foreclosures, record inventory, and a massive multi-trillion dollar equity bubble which is now catastrophically deflating and wiping out much of the mortgage industry in its path. Its effects on the secondary market have been even more devastating where pension funds, insurance companies, hedge funds and foreign banks are left holding hundreds of billions of dollars of complex, mortgage-backed securities and subprime-related derivatives which are now destined to be downgraded to pennies on the dollar ravaging once-robust portfolios. The subprime meltdown has been equally damaging to myriad European investment banks and brokerage houses. We’ve seen a wave of bank closings in France, Germany and England which has left investors shell-shocked; triggering capital flight from American markets and supplanting confidence in the US financial system with growing suspicion and rage. Where are the regulators?
According to Bloomberg News, ”European and Asian investors will avoid most US mortgage-backed securities for years without guarantees from government-linked entities creating an enormous drag on the US housing market” Foreign investors believe they were hoodwinked by bonds that were deliberately mis-rated to maximize profits for the investment banks. This may explain why $882 billion has been diverted into Chinese and Indian stock markets in the last month alone.
The biggest losers of all, however, are the financial giants that created most of the abstruse, debt-instruments that are now devouring the system from within. The productive and “wealth creating” components of the economy have been subordinated to a finance-driven model which suddenly derailed due to the abusive expansion of debt. Inevitably, some of the banks that took the greatest risks will be shuttered and trillions of dollars in market capitalization will disappear. They are the victims of their own scam.
Is it possible that anyone with a pulse and a minimal ability to reason couldn’t see the inherent problems of building a humongous financial edifice on the prospect that millions of first-time homeowners with “a bad credit history and no collateral” would pay off there mortgages in a timely and responsible manner?
No. It is not possible. It was completely crazy…..and foreseeable! The real reason that the subprime swindle mushroomed into a humongous economy-busting monster is that the markets are no longer policed by any agency that believes in intervention. The pervasive “free market” ideology rejects the notion of supervision or oversight, and as a result, the markets have become increasingly opaque and unresponsive to rules that may assure their continued credibility or even their ability to function properly.
The “supply side” avatars of deregulation have transformed the world’s most vital and prosperous markets into a huckster’s street-corner shell-game. All regulatory accountability has vanished along with trillions of dollars in foreign investment. What’s left is a flea-market for dodgy loans, dubious over-leveraged equities and “securitized” Triple A-rated garbage.
Let’s hear it for the Reagan Revolution.
What is striking is how the new “structured finance” paradigm replicates a political system which is no longer guided by principle or integrity. It is not coincidental that the same flag that flies over Guantanamo and Abu Ghraib flutters over Wall Street as well. Nor is it accidental that the same system that peddles bogus, subprime tripe to gullible investors also elevates a “waterboarding advocate” to the highest position in the Justice Department. Both phenomena emerge from the same fetid moral swamp—Bush’s America.
“It’s scary out there---there’s blood on the streets” anonymous Wall Street trader
Last Wednesday, the Federal Reserve dropped its benchmark interest rate by 25 basis points to 4.5% citing ongoing weakness in the housing sector. As expected, the stock market rallied and the Dow Jones Industrial Average soared 137 points. Unfortunately, Bernanke’s “low interest” stardust wasn’t enough to buoy the markets through the rest of the week.
On Thursday, the hammer fell. The Dow plummeted 362 points in one afternoon on increasing fears of inflation, a slowdown in consumer spending, a steadily weakening dollar and persistent problems in the credit markets. By day’s end, the Fed was forced to dump another $41 into the banking system to forestall a major breakdown. This is the most money the Fed has pumped into the financial system since 9-11 and it shows how dire the situation really is.
Why do the banks need such a massive infusion of credit if they are as “rock solid” as Bernanke says?
As most people now realize, the mortgage industry is on life-support. Many of the ways that the banks were generating profits have vanished overnight. The “securitization” of debt (mortgages, car loans, credit card debt etc) has ground to a halt. What had been a booming multi-billion dollar per-year business is now a dwindling part of the banks’ revenues. Investors are steering clear of anything even remotely associated to real estate.
Additionally, the banks are holding an estimated $200 billion in mortgage-backed securities and derivatives for which there is currently no market. This is compounded by $350 billion in “off balance sheets” operations---which are collateralized with dodgy long-term mortgage-backed securities---that provide funding for “short-term” asset-backed commercial paper. ASCP has shriveled by $275 billion in the last 10 weeks leaving the banks with gargantuan liabilities. Bernanke was forced to add $41 billion to keep the banking system from slipping beneath the salty brine.
This shows how powerless the Fed really is when it comes to changing the overall direction of the markets. Sure, Bernanke and his buddies in the Plunge Protection Team can goose the market by buying-up futures and boosting the day’s results. But that’s just a short-term fix. In the long run, the Fed has less chance of stopping the market from correcting than it does of stopping a runaway truck by standing in its path. Besides, the Fed cannot purchase the banks bad investments (CDOs, MBSs, or CP) nor can it reflate the multi-trillion dollar the housing bubble. All it can do is provide more cheap credit and hope the problems go away.
So far, the lower rates haven’t even decreased the price of the 30-year mortgage or made refinancing any cheaper. All they’ve done is postpone the inevitable day of reckoning. In truth, they’re just a desperate attempt to perpetuate consumer borrowing while the banks figure out how to offload their enormous debts. That’s what Paulson’s $80 billion “Banker’s Bankruptcy Fund” is really all about; it’s just the repackaging of subprime junk so it can be passed off to credulous investors. Fortunately, the public has “wised up” and isn’t buying into this latest fraud. As a result, the banks have taken another blow to their already-flagging credibility.
In the last two months, the pool of qualified mortgage applicants has contracted, as has the market for massive merger and acquisition deals (private equity). So the banks are probably doing more with the Fed’s $41 billion injection than just beefing up their reserves and issuing new loans. The market analysts at Minyanville.com summed it up like this:
“Banks are taking the liquidity the Fed is forcing out there through the discount window and repos. After using it to shore up the declining value of their assets, they have excess to lend out. Finding no traditional borrowers that want to buy a house or build a factory, the new rules the Fed has set forth allows the banks to pass this liquidity onto their broker dealer subsidiaries in much greater quantities. These broker dealers are lending thus to hedge funds and margin buyers who are speculating in stocks. Remember, the Fed is powerless unless it can find people to borrow the credit it wants them to spend. By definition, the last ones willing to take that credit are the most speculative.”
This is a likely scenario given the fact that the stock market continues to fly-high despite the surge of bad news on everything from the falling dollar to the geopolitical rumblings in the Middle East. Last month, the Fed modified its rules so that the banks could provide resources to their off-balance sheets operations (SIVs and conduits). If the Fed is willing to rubber-stamp that type of monkey-business; then why would they mind if the money was stealthily “back-doored” into the stock market via the hedge funds?
This might explain why the hedge funds account for as much as 40 to 50% of all trading on an average day. It also explains why the stock market overheating.
The charade, of course, cannot go on forever. And it won’t. Rate cuts do not address the underlying problem which is bad investments. The debts must be accounted for and written off. Nothing else will do. That doesn’t mean that Bernanke will suddenly decide to stop savaging the dollar or flushing hundreds of billions of dollars down the investment bank toilet. He probably will. But, eventually, the blow-ups in the housing market will destabilize the financial system and send the banks and over-leveraged hedge funds sprawling. Bernanke’s low interest “giveaway” will amount to nothing.
Bloomberg News ran a story last week which shedsmore light on the jam the banks now find themselves in:
“Banks shut out of the market for short-term loans are finding salvation in a government lending program set up to revive housing during the Great Depression.
Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest.”
Whoa. So, now that the credit markets have frozen over, the banks are going to the government with begging bowl in hand? So much for “moral hazard”.
Commercial paper is short-term notes that businesses use for daily operations. Because much of this CP is backed by mortgage-backed securities; the banks have been having trouble rolling it over. (Refinancing) So--unbeknownst to the public--various banks have been borrowing from the government-sponsored Federal Home Loan Banks (FHLB) so they can cut their losses (or stay afloat?) The FHLB has extended $163 billion of loans to them, which means that the risks that are inherent in supporting “dodgy banks that make bad bets” has been transferred to FHLB’s investors. The danger, of course, is that—when investors find out that FHLB is mixed up with these shaky banks---they are liable to sell their shares and trigger a collapse of the system. This is a good example of the dim-witted strategies that are being used to bail out the banks. There are probably many similar scams underway just beyond the publics’ view.
Citi's Woes
Over the weekend, Citigroup’s CEO Chuck Prince got the axe. Citigroup, which boasts more than 300,000 staff worldwide, has lost more than 20% of its market value from bad bets in sub-prime mortgages. According to the Times Online: “The Securities and Exchange Commission may investigate whether it improperly juggled its books to hide the full extent of the problem.”
”Juggled” is not a word that is taken lightly on Wall Street where traders are now bracing for another massive sell-off of financial stocks. Mr. Prince won’t be alone in the unemployment line either. He’ll be accompanied by Merrill Lynch’s former boss, Stanley O’ Neal who got the boot last week when his firm reported $8.4 billion in write-downs. Deutsche Bank analysts now “predict that Merrill may write off another $10 billion of losses related to its portfolio of sub-prime debts”. (Times Online) That would wipe out 8 full quarters of earnings and represent the largest loss in Wall Street history.
The news is bleak, bleak, bleak. The systemic rot is appearing everywhere presaging ongoing losses for the financial giants and a long-downward spiral for the markets. The banks are currently under-regulated, over-leveraged and under capitalized. And now the sh** is about to hit the fan.
Former Fed chief Paul Volcker summarized the overall economic situation last week at the second annual summit of the Stanford Institute for Economic Policy Research. In his speech he said:
"Altogether, the circumstances seem as dangerous and intractable as I can temember….Boomers are spending like there is no tomorrow. Homeownership has become a vehicle for borrowing and leveraging as much as a source of financial security….. As a Nation we are consuming…about 6% more than we are producing. What holds it all together? - High consumption - high leverage - government deficits - What holds it all together is a really massive and growing flow of capital from abroad. A flow of capital that today runs to more than $2 Billion per day." The nation is facing “huge imbalances and risks.”
Volcker is right. The country is in a bigger pickle than any time in its 230 year history. The credit storm that was engineered at the Federal Reserve has swept across the planet and is now descending on commercial real estate, credit card debt, and the plummeting bond insurers industry. These are the next shoes to drop and the tremors will be felt throughout the broader economy.
THE DARK AGES?
As this article is being written, Reuters is reporting that Citigroup may be forced to write-down as much as $11 billion in subprime mortgage-related losses!
Reuters: “Citigroup announced today significant declines since September 30, 2007 in the fair value of the approximately $55 billion in U.S. sub-prime related direct exposures in its Securities and Banking (S&B) business. Citi estimates that, at the present time, the reduction in revenues attributable to these declines ranges from approximately $8 billion to $11 billion (representing a decline of approximately $5 billion to $7 billion in net income on an after-tax basis).”
Citigroup’s statement indicates a willingness on its part to come clean with its investors but, in fact, they know that the situation is fluid and there’ll be hefty losses in the future. Mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) will continue to be downgraded as time goes by. According to the Financial Times, one banker was having so much difficulty getting a bid on subprime securities; he found the only way he could get rid of them was through “barter. He resorted to using a tactic more normally associated with third world markets than the supposedly sophisticated arena of high finance. ‘Barter is the only thing that works,' he chuckled, ‘It’s like the Dark Ages’” The article continues:
“Never mind the fact that the risky tranches of subprime-linked debt have fallen 80 per cent since the start of the year; in a sense, such declines are only natural for risky assets in a credit storm. Instead, what is really alarming is that the assets which were supposed to be ultra-safe - namely AAA and AA rated tranches of debt - have collapsed in value by 20% and 50% odd respectively. This is dangerous, given that financial institutions of all stripes have been merrily leveraging up AAA and AA paper in recent years, precisely because it was supposed to be ultra-safe and thus, er, never lose value.” (Financial Times; Gillian Tett)
AAA and AA assets---the top-graded tranches--- have already been downgraded by 20% to 50%!?! And the prices are bound to fall even more because there is no market for mortgage-backed securities. This is a banks worst nightmare; an asset that loses value and requires greater capital reserves EVERY DAY. In fact, AAA rated MBSs have dropped 14% in one month. It is truly, death by a thousand cuts.
The US financial system is now buckling beneath the weight of its own excesses. The subprime contagion---which can trace its origins to the massive expansion of credit at the Federal Reserve---has devastated the housing market generating an unprecedented number of foreclosures, record inventory, and a massive multi-trillion dollar equity bubble which is now catastrophically deflating and wiping out much of the mortgage industry in its path. Its effects on the secondary market have been even more devastating where pension funds, insurance companies, hedge funds and foreign banks are left holding hundreds of billions of dollars of complex, mortgage-backed securities and subprime-related derivatives which are now destined to be downgraded to pennies on the dollar ravaging once-robust portfolios. The subprime meltdown has been equally damaging to myriad European investment banks and brokerage houses. We’ve seen a wave of bank closings in France, Germany and England which has left investors shell-shocked; triggering capital flight from American markets and supplanting confidence in the US financial system with growing suspicion and rage. Where are the regulators?
According to Bloomberg News, ”European and Asian investors will avoid most US mortgage-backed securities for years without guarantees from government-linked entities creating an enormous drag on the US housing market” Foreign investors believe they were hoodwinked by bonds that were deliberately mis-rated to maximize profits for the investment banks. This may explain why $882 billion has been diverted into Chinese and Indian stock markets in the last month alone.
The biggest losers of all, however, are the financial giants that created most of the abstruse, debt-instruments that are now devouring the system from within. The productive and “wealth creating” components of the economy have been subordinated to a finance-driven model which suddenly derailed due to the abusive expansion of debt. Inevitably, some of the banks that took the greatest risks will be shuttered and trillions of dollars in market capitalization will disappear. They are the victims of their own scam.
Is it possible that anyone with a pulse and a minimal ability to reason couldn’t see the inherent problems of building a humongous financial edifice on the prospect that millions of first-time homeowners with “a bad credit history and no collateral” would pay off there mortgages in a timely and responsible manner?
No. It is not possible. It was completely crazy…..and foreseeable! The real reason that the subprime swindle mushroomed into a humongous economy-busting monster is that the markets are no longer policed by any agency that believes in intervention. The pervasive “free market” ideology rejects the notion of supervision or oversight, and as a result, the markets have become increasingly opaque and unresponsive to rules that may assure their continued credibility or even their ability to function properly.
The “supply side” avatars of deregulation have transformed the world’s most vital and prosperous markets into a huckster’s street-corner shell-game. All regulatory accountability has vanished along with trillions of dollars in foreign investment. What’s left is a flea-market for dodgy loans, dubious over-leveraged equities and “securitized” Triple A-rated garbage.
Let’s hear it for the Reagan Revolution.
What is striking is how the new “structured finance” paradigm replicates a political system which is no longer guided by principle or integrity. It is not coincidental that the same flag that flies over Guantanamo and Abu Ghraib flutters over Wall Street as well. Nor is it accidental that the same system that peddles bogus, subprime tripe to gullible investors also elevates a “waterboarding advocate” to the highest position in the Justice Department. Both phenomena emerge from the same fetid moral swamp—Bush’s America.
Monday, November 5, 2007
PetroChina's Value Tops $1 Trillion, Surpassing Exxon
by Ying Lou - Bloomberg.com - Nov 5, 2007
PetroChina Co. almost tripled on its first day of trading in Shanghai, becoming the world's first company to be valued at $1 trillion, more than Exxon Mobil Corp. and General Electric Co. combined.
PetroChina shares rose to 43.96 yuan from the sale price of 16.7 yuan, giving the state-owned oil producer a greater market value than the entire Russian stock market.
The rally makes PetroChina shares four times more expensive than those of Exxon, even though China's biggest oil producer has a quarter of the revenue. China's stock market was valued at less than $1.1 trillion before tripling this year and giving the communist nation five of the world's 10 biggest companies.
PetroChina's valuation is ``an indication of China coming of age and also of its stock market bubble,'' said Hugh Young, who oversees $50 billion at Aberdeen Asset Management Asia Ltd. in Singapore.
The oil producer's Shanghai listing pushes China's stock market beyond the U.K. as the world's third-largest. PetroChina trades at 55 times earnings, four times Exxon's ratio of 13 times earnings and near the 58 times for Google Inc., the world's most- used Internet search engine.
In Hong Kong, PetroChina fell 8.2 percent to HK$18. Exxon shares rose 0.7 percent to $87.93, valuing the company at $488 billion on the New York Stock Exchange.
`Sense of Responsibility'
``I feel very excited today and also feel a very strong sense of responsibility,'' Chairman Jiang Jiemin said at the Shanghai Stock Exchange. ``This is PetroChina returning to our investors and society.''
Jiang struck a gong as the market opened at 9:30 a.m., then toasted the start of trading with a glass of red wine.
China's largest oil and gas producer had 20.5 billion barrels of oil and gas reserves in 2006, compared with 22.1 billion for Irving, Texas-based Exxon, data compiled by Bloomberg show. PetroChina has been adding new reserves at an average annual rate of 5 percent for the past three years, a faster pace than Exxon, Royal Dutch Shell Plc and BP Plc, the world's largest oil companies by sales.
The share sale, the world's biggest this year, surpassed the 66.6 billion yuan raised by China Shenhua Energy Co. in September. PetroChina raised 66.8 billion yuan selling 4 billion shares last week as investors applied for more than 3.3 trillion yuan of stock, almost 50 times the amount PetroChina sold.
Record Oil
Those investors were until now prevented from directly buying PetroChina stock, missing out on a 15-fold surge as economic growth turned the nation into the largest oil consumer after the U.S. and as crude prices reached a record $96.24 a barrel in New York.
The CSI 300 Index of shares listed on the Shanghai and Shenzhen exchanges has increased about 170 percent this year as mainland Chinese investors seek returns on $2.3 trillion of savings, raising investor concerns that the market is too expensive.
Billionaire investor Warren Buffett's Berkshire Hathaway Inc. sold its stake in PetroChina this year, reaping an eightfold gain that contributed to a 64 percent increase in third-quarter profit for the Omaha, Nebraska-based company. Berkshire had 2.34 billion shares as of the end of 2006, the largest holding after state-owned China National Petroleum Corp.
Buffett said on Oct. 24 that Chinese share prices have risen too fast.
`Carried Away'
``It's easy to be carried away in the stock market when things are going very well,'' he said in the northern Chinese city of Dalian. ``We at Berkshire never buy stocks when we see prices soaring.''
Gains in PetroChina's shares in Shanghai may have more to do with Chinese investors seeking better returns than the outlook for the company's exploration and production operations, or its refining business, known as downstream, said Larry Grace, an oil analyst at Kim Eng Securities Co. in Hong Kong.
``Production is static with limited upside for the next three to four years,'' Grace said. ``As for the downstream, the price controls and overall regulatory trend limit the company's earnings.''
China controls fuel prices to shield consumers in the world's most-populous nation from accelerating inflation. The policy limits the ability of PetroChina and China Petroleum & Chemical Corp. to pass on the burden of higher crude oil costs.
The other Chinese companies that rank among the world's 10 largest by market value are China Petroleum, known as Sinopec, China Mobile Ltd., Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp.
``A-share prices don't reflect global benchmarks of value,'' said Lorraine Tan, head of equity research at Standard & Poor's Investment Services in Singapore. ``There should be other measures of a company's position, including revenue and profitability. Market cap is not necessarily accurate.''
PetroChina's share surge means it beat by years a Russian pledge to create the world's largest company.
OAO Gazprom, Russia's natural gas export monopoly, would become the world's largest company by market value and top $1 trillion in ``seven to 10 years,'' Alexander Medvedev, the company's deputy chief executive officer, said in April. Gazprom's market valuation today is $296 billion.
PetroChina Co. almost tripled on its first day of trading in Shanghai, becoming the world's first company to be valued at $1 trillion, more than Exxon Mobil Corp. and General Electric Co. combined.
PetroChina shares rose to 43.96 yuan from the sale price of 16.7 yuan, giving the state-owned oil producer a greater market value than the entire Russian stock market.
The rally makes PetroChina shares four times more expensive than those of Exxon, even though China's biggest oil producer has a quarter of the revenue. China's stock market was valued at less than $1.1 trillion before tripling this year and giving the communist nation five of the world's 10 biggest companies.
PetroChina's valuation is ``an indication of China coming of age and also of its stock market bubble,'' said Hugh Young, who oversees $50 billion at Aberdeen Asset Management Asia Ltd. in Singapore.
The oil producer's Shanghai listing pushes China's stock market beyond the U.K. as the world's third-largest. PetroChina trades at 55 times earnings, four times Exxon's ratio of 13 times earnings and near the 58 times for Google Inc., the world's most- used Internet search engine.
In Hong Kong, PetroChina fell 8.2 percent to HK$18. Exxon shares rose 0.7 percent to $87.93, valuing the company at $488 billion on the New York Stock Exchange.
`Sense of Responsibility'
``I feel very excited today and also feel a very strong sense of responsibility,'' Chairman Jiang Jiemin said at the Shanghai Stock Exchange. ``This is PetroChina returning to our investors and society.''
Jiang struck a gong as the market opened at 9:30 a.m., then toasted the start of trading with a glass of red wine.
China's largest oil and gas producer had 20.5 billion barrels of oil and gas reserves in 2006, compared with 22.1 billion for Irving, Texas-based Exxon, data compiled by Bloomberg show. PetroChina has been adding new reserves at an average annual rate of 5 percent for the past three years, a faster pace than Exxon, Royal Dutch Shell Plc and BP Plc, the world's largest oil companies by sales.
The share sale, the world's biggest this year, surpassed the 66.6 billion yuan raised by China Shenhua Energy Co. in September. PetroChina raised 66.8 billion yuan selling 4 billion shares last week as investors applied for more than 3.3 trillion yuan of stock, almost 50 times the amount PetroChina sold.
Record Oil
Those investors were until now prevented from directly buying PetroChina stock, missing out on a 15-fold surge as economic growth turned the nation into the largest oil consumer after the U.S. and as crude prices reached a record $96.24 a barrel in New York.
The CSI 300 Index of shares listed on the Shanghai and Shenzhen exchanges has increased about 170 percent this year as mainland Chinese investors seek returns on $2.3 trillion of savings, raising investor concerns that the market is too expensive.
Billionaire investor Warren Buffett's Berkshire Hathaway Inc. sold its stake in PetroChina this year, reaping an eightfold gain that contributed to a 64 percent increase in third-quarter profit for the Omaha, Nebraska-based company. Berkshire had 2.34 billion shares as of the end of 2006, the largest holding after state-owned China National Petroleum Corp.
Buffett said on Oct. 24 that Chinese share prices have risen too fast.
`Carried Away'
``It's easy to be carried away in the stock market when things are going very well,'' he said in the northern Chinese city of Dalian. ``We at Berkshire never buy stocks when we see prices soaring.''
Gains in PetroChina's shares in Shanghai may have more to do with Chinese investors seeking better returns than the outlook for the company's exploration and production operations, or its refining business, known as downstream, said Larry Grace, an oil analyst at Kim Eng Securities Co. in Hong Kong.
``Production is static with limited upside for the next three to four years,'' Grace said. ``As for the downstream, the price controls and overall regulatory trend limit the company's earnings.''
China controls fuel prices to shield consumers in the world's most-populous nation from accelerating inflation. The policy limits the ability of PetroChina and China Petroleum & Chemical Corp. to pass on the burden of higher crude oil costs.
The other Chinese companies that rank among the world's 10 largest by market value are China Petroleum, known as Sinopec, China Mobile Ltd., Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp.
``A-share prices don't reflect global benchmarks of value,'' said Lorraine Tan, head of equity research at Standard & Poor's Investment Services in Singapore. ``There should be other measures of a company's position, including revenue and profitability. Market cap is not necessarily accurate.''
PetroChina's share surge means it beat by years a Russian pledge to create the world's largest company.
OAO Gazprom, Russia's natural gas export monopoly, would become the world's largest company by market value and top $1 trillion in ``seven to 10 years,'' Alexander Medvedev, the company's deputy chief executive officer, said in April. Gazprom's market valuation today is $296 billion.
Citigroup problems grow
by Jonathan Stempel and Dan Wilchins, Reuters - Nov 5, 2007
Citigroup Inc's (NYSE:C - News) problems deepened on Monday as it was unable to assure investors a potential $11 billion write-down for subprime mortgages won't grow, and its nearly pristine credit rating was downgraded.
The largest U.S. bank also reduced previously reported third-quarter profit because of worsening credit market problems, which it expects to reduce future cash flow. Its shares fell more than 5 percent.
"There's no way I think anyone can give you an assurance of how things are going to move," Chief Financial Officer Gary Crittenden said on a conference call. "We've taken what we think is a reasonable stab."
Citigroup's struggles comes as the bank faces a leadership void following Chairman and Chief Executive Charles Prince's resignation on Sunday.
He left after a four-year tenure during which the bank's shares fell 17 percent amid criticism that Citigroup had grown unwieldy and lacked direction.
Former U.S. Treasury Secretary Robert Rubin, who led the bank's executive committee, was named chairman. Sir Win Bischoff, head of Citigroup's European business, became acting chief executive.
The announcement of an expected $8 billion to $11 billion write-down, equal to $5 billion to $7 billion after taxes, helped drag down shares of rivals such as Bank of America Corp (NYSE:BAC - News), Merrill Lynch & Co (NYSE:MER - News) and Morgan Stanley (NYSE:MS - News).
Investors worry that write-downs for subprime mortgages and other debt might not be isolated.
Citigroup on October 15 wrote off just $1.56 billion for its subprime portfolio for the third quarter, part of a $6.5 billion write-down for a variety of losses. The new write-down reflects problems discovered since then.
Analysts said Merrill Lynch may add to its own announced $8.4 billion write-down. That company ousted its chief executive, Stanley O'Neal, last Tuesday.
"It shows the clumsiness of pricing mechanisms across Wall Street," said Michael Holland, a money manager and founder of Holland & Co. in New York. He said it's difficult to value Citigroup "until the dust settles."
PRINCE ALWALEED
Saudi Prince Alwaleed bin Talal, Citigroup's largest individual shareholder, declined to comment on the company's problems until the "picture becomes clearer," spokeswoman Heba Fatani said.
Alwaleed endorsed bringing back Sanford "Sandy" Weill, who built Citigroup and hand-picked Prince to succeed him, to run the company on an interim basis, CNBC television said. Weill is not interested in returning to run Citigroup, but is willing to do what is needed to help, CNBC said.
Much of Citigroup's trouble relates to $43 billion of so-called collateralized debt obligations, or CDOs, linked to lower-quality mortgages.
While these "super-senior" securities were once considered rock-solid, Crittenden said investors stopped buying them.
Fitch Ratings cut Citigroup's credit rating one notch to "AA," its third-highest grade, from "AA-plus," citing "severe pressure" on capital markets operations and "an inhospitable consumer credit environment" as mortgage delinquencies soar.
Its outlook is negative, meaning another cut is possible within two years. Standard & Poor's said it may also downgrade the bank.
Citigroup lowered third-quarter profit to $2.21 billion, or 44 cents per share, from the reported $2.38 billion, or 47 cents, after writing off $270 million for the CDO portfolio. This brought the total quarterly write-down to $6.8 billion.
"We wouldn't be surprised if additional write-downs were forthcoming," wrote Goldman Sachs & Co. analyst William Tanona, who rates Citigroup "neutral."
SHARES FALL
Citigroup shares fell $1.97, or 5.2 percent, to $35.76 in afternoon trading, after earlier falling to $35.61. They began the year at $55.70. The yield on Citigroup's 6 percent notes maturing in 2017 rose to 1.57 percentage points above U.S. Treasuries from 1.45, according to MarketAxess.
Citigroup's problems come as Rubin and Bischoff try to restore morale while hunting for a permanent chief executive.
Four directors, including Rubin and Time Warner Inc (NYSE:TWX - News) Chief Executive Richard Parsons, are conducting the search.
Parsons is expected later Monday to step down as Time Warner chief executive, to be replaced by Chief Operating Officer Jeffrey Bewkes, but will remain chairman, CNBC said.
On a conference call, Rubin said he wants someone at Citigroup with the capacity to "relate ... to the multiplicity of businesses this institution has."
A candidate needs a "strong international focus, not necessarily enormous international experience," he said.
Citigroup operates in more than 100 countries, and generates nearly half its revenue internationally.
The bank declined to say how long the chief executive position will remain unfilled.
"I look forward to an interesting but relatively short period of months before handing over to the next CEO," Bischoff said.
Citigroup Inc's (NYSE:C - News) problems deepened on Monday as it was unable to assure investors a potential $11 billion write-down for subprime mortgages won't grow, and its nearly pristine credit rating was downgraded.
The largest U.S. bank also reduced previously reported third-quarter profit because of worsening credit market problems, which it expects to reduce future cash flow. Its shares fell more than 5 percent.
"There's no way I think anyone can give you an assurance of how things are going to move," Chief Financial Officer Gary Crittenden said on a conference call. "We've taken what we think is a reasonable stab."
Citigroup's struggles comes as the bank faces a leadership void following Chairman and Chief Executive Charles Prince's resignation on Sunday.
He left after a four-year tenure during which the bank's shares fell 17 percent amid criticism that Citigroup had grown unwieldy and lacked direction.
Former U.S. Treasury Secretary Robert Rubin, who led the bank's executive committee, was named chairman. Sir Win Bischoff, head of Citigroup's European business, became acting chief executive.
The announcement of an expected $8 billion to $11 billion write-down, equal to $5 billion to $7 billion after taxes, helped drag down shares of rivals such as Bank of America Corp (NYSE:BAC - News), Merrill Lynch & Co (NYSE:MER - News) and Morgan Stanley (NYSE:MS - News).
Investors worry that write-downs for subprime mortgages and other debt might not be isolated.
Citigroup on October 15 wrote off just $1.56 billion for its subprime portfolio for the third quarter, part of a $6.5 billion write-down for a variety of losses. The new write-down reflects problems discovered since then.
Analysts said Merrill Lynch may add to its own announced $8.4 billion write-down. That company ousted its chief executive, Stanley O'Neal, last Tuesday.
"It shows the clumsiness of pricing mechanisms across Wall Street," said Michael Holland, a money manager and founder of Holland & Co. in New York. He said it's difficult to value Citigroup "until the dust settles."
PRINCE ALWALEED
Saudi Prince Alwaleed bin Talal, Citigroup's largest individual shareholder, declined to comment on the company's problems until the "picture becomes clearer," spokeswoman Heba Fatani said.
Alwaleed endorsed bringing back Sanford "Sandy" Weill, who built Citigroup and hand-picked Prince to succeed him, to run the company on an interim basis, CNBC television said. Weill is not interested in returning to run Citigroup, but is willing to do what is needed to help, CNBC said.
Much of Citigroup's trouble relates to $43 billion of so-called collateralized debt obligations, or CDOs, linked to lower-quality mortgages.
While these "super-senior" securities were once considered rock-solid, Crittenden said investors stopped buying them.
Fitch Ratings cut Citigroup's credit rating one notch to "AA," its third-highest grade, from "AA-plus," citing "severe pressure" on capital markets operations and "an inhospitable consumer credit environment" as mortgage delinquencies soar.
Its outlook is negative, meaning another cut is possible within two years. Standard & Poor's said it may also downgrade the bank.
Citigroup lowered third-quarter profit to $2.21 billion, or 44 cents per share, from the reported $2.38 billion, or 47 cents, after writing off $270 million for the CDO portfolio. This brought the total quarterly write-down to $6.8 billion.
"We wouldn't be surprised if additional write-downs were forthcoming," wrote Goldman Sachs & Co. analyst William Tanona, who rates Citigroup "neutral."
SHARES FALL
Citigroup shares fell $1.97, or 5.2 percent, to $35.76 in afternoon trading, after earlier falling to $35.61. They began the year at $55.70. The yield on Citigroup's 6 percent notes maturing in 2017 rose to 1.57 percentage points above U.S. Treasuries from 1.45, according to MarketAxess.
Citigroup's problems come as Rubin and Bischoff try to restore morale while hunting for a permanent chief executive.
Four directors, including Rubin and Time Warner Inc (NYSE:TWX - News) Chief Executive Richard Parsons, are conducting the search.
Parsons is expected later Monday to step down as Time Warner chief executive, to be replaced by Chief Operating Officer Jeffrey Bewkes, but will remain chairman, CNBC said.
On a conference call, Rubin said he wants someone at Citigroup with the capacity to "relate ... to the multiplicity of businesses this institution has."
A candidate needs a "strong international focus, not necessarily enormous international experience," he said.
Citigroup operates in more than 100 countries, and generates nearly half its revenue internationally.
The bank declined to say how long the chief executive position will remain unfilled.
"I look forward to an interesting but relatively short period of months before handing over to the next CEO," Bischoff said.
Citigroup Inc. Searches for New CEO and Prepares to Take $8 Billion-$11 Billion in Losses
by Madlen Read, Associated Press - Nov 5, 2007
Citigroup Inc. shareholders may have finally gotten what they wanted -- the resignation of Chairman and Chief Executive Charles Prince -- but Wall Street's worries are far from over.
At an emergency meeting of the Citi board Sunday, the nation's largest bank announced Prince's widely expected departure, but also estimated it would take additional losses of $8 billion to $11 billion. In the third quarter, it already took a hit of $6.5 billion in asset mark-downs and other credit-related losses.
Meanwhile, the company remains entrenched in a mire of off-the-books investment vehicles funded by risky debt. Citigroup may need to take the fall for them if they fail.
And Citigroup's not alone in its debt problems. When borrowers with poor credit stopped paying their mortgages, many banks not only had to take losses on those subprime mortgages, they also saw instruments in their portfolios backed by mortgages plummet in value. No one knows how much longer home prices will keep slumping, and whether problems related to the housing market will start affecting other types of consumer debt.
Also to be seen is how much longer the credit markets will stay tight, and if the currently strong portions of the economy will be hampered by banks' inability to make loans.
"It's the lending practices," said Steven Goldman, chief market strategist at Weeden & Co. in Greenwich, Conn. "How much is that going to be impaired?"
Citi said former U.S. Treasury Secretary Robert E. Rubin, once co-chairman of Goldman, Sachs & Co., will be chairing the beleaguered bank. Sir Win Bischoff, chairman of Citi Europe and a member of the Citi management and operating committees, will serve as interim CEO.
Prince joined former Merrill Lynch & Co. CEO Stan O'Neal, who resigned from the investment bank last month, as the highest-profile casualties of the debt crisis that has cost billions at other financial institutions as well.
Prince, 57, became chief executive of Citigroup in October 2003. Many shareholders criticized him openly for much of his tenure, as Citigroup's stock lagged that of its peers while Prince executed what was called an umbrella model of corporate organization, with several separate lines of business. Shares closed Friday at $37.73, about 20 percent below where they were when Prince became CEO.
Rubin, 69, after 26 years at Goldman Sachs, became President Bill Clinton's chief economic adviser in 1993 before leading the Treasury Department. His experience steering the U.S. economy during the Mexican and Asian financial crises could come in handy as Citigroup attempts to navigate the tight credit markets.
Bischoff was the chairman of the British investment bank Schroders PLC, then joined Salomon Smith Barney Inc., a subsidiary of Citi, when it acquired Schroders. He began his current position in May 2000.
"There's no change of strategy that we see, actually, going forward," Bischoff said, noting that the company still plans to focus on international expansion, at least until a new CEO is chosen.
It was not known whether Bischoff was in the running to replace Prince as CEO. Before Sunday's meeting, many ideas for Prince's replacement were floated by industry watchers; one name that has come up often is John Thain, who was once president of Goldman Sachs and is now CEO of NYSE Euronext.
But it may take more than a figurehead change to restore shareholders' confidence in Citigroup, considering how much bad debt it has on its hands and its hard-to-shed image of a rule-flouting old boys club.
In 2004, Citigroup had to close its Japan Private Bank amid allegations of improper activities. And in January, former head of global wealth management Todd Thomson resigned, reportedly having been forced out for extravagant spending and dealings with CNBC anchor Maria Bartiromo.
Citigroup did a minor reshuffing in early October, combining its investment banking and alternative investments businesses into one unit led by Vikram Pandit, who had led Citigroup's alternative investments unit. Tom Maheras, co-CEO of the investment banking unit, left.
Citigroup Inc. shareholders may have finally gotten what they wanted -- the resignation of Chairman and Chief Executive Charles Prince -- but Wall Street's worries are far from over.
At an emergency meeting of the Citi board Sunday, the nation's largest bank announced Prince's widely expected departure, but also estimated it would take additional losses of $8 billion to $11 billion. In the third quarter, it already took a hit of $6.5 billion in asset mark-downs and other credit-related losses.
Meanwhile, the company remains entrenched in a mire of off-the-books investment vehicles funded by risky debt. Citigroup may need to take the fall for them if they fail.
And Citigroup's not alone in its debt problems. When borrowers with poor credit stopped paying their mortgages, many banks not only had to take losses on those subprime mortgages, they also saw instruments in their portfolios backed by mortgages plummet in value. No one knows how much longer home prices will keep slumping, and whether problems related to the housing market will start affecting other types of consumer debt.
Also to be seen is how much longer the credit markets will stay tight, and if the currently strong portions of the economy will be hampered by banks' inability to make loans.
"It's the lending practices," said Steven Goldman, chief market strategist at Weeden & Co. in Greenwich, Conn. "How much is that going to be impaired?"
Citi said former U.S. Treasury Secretary Robert E. Rubin, once co-chairman of Goldman, Sachs & Co., will be chairing the beleaguered bank. Sir Win Bischoff, chairman of Citi Europe and a member of the Citi management and operating committees, will serve as interim CEO.
Prince joined former Merrill Lynch & Co. CEO Stan O'Neal, who resigned from the investment bank last month, as the highest-profile casualties of the debt crisis that has cost billions at other financial institutions as well.
Prince, 57, became chief executive of Citigroup in October 2003. Many shareholders criticized him openly for much of his tenure, as Citigroup's stock lagged that of its peers while Prince executed what was called an umbrella model of corporate organization, with several separate lines of business. Shares closed Friday at $37.73, about 20 percent below where they were when Prince became CEO.
Rubin, 69, after 26 years at Goldman Sachs, became President Bill Clinton's chief economic adviser in 1993 before leading the Treasury Department. His experience steering the U.S. economy during the Mexican and Asian financial crises could come in handy as Citigroup attempts to navigate the tight credit markets.
Bischoff was the chairman of the British investment bank Schroders PLC, then joined Salomon Smith Barney Inc., a subsidiary of Citi, when it acquired Schroders. He began his current position in May 2000.
"There's no change of strategy that we see, actually, going forward," Bischoff said, noting that the company still plans to focus on international expansion, at least until a new CEO is chosen.
It was not known whether Bischoff was in the running to replace Prince as CEO. Before Sunday's meeting, many ideas for Prince's replacement were floated by industry watchers; one name that has come up often is John Thain, who was once president of Goldman Sachs and is now CEO of NYSE Euronext.
But it may take more than a figurehead change to restore shareholders' confidence in Citigroup, considering how much bad debt it has on its hands and its hard-to-shed image of a rule-flouting old boys club.
In 2004, Citigroup had to close its Japan Private Bank amid allegations of improper activities. And in January, former head of global wealth management Todd Thomson resigned, reportedly having been forced out for extravagant spending and dealings with CNBC anchor Maria Bartiromo.
Citigroup did a minor reshuffing in early October, combining its investment banking and alternative investments businesses into one unit led by Vikram Pandit, who had led Citigroup's alternative investments unit. Tom Maheras, co-CEO of the investment banking unit, left.
Sunday, November 4, 2007
Making Up Jobs
by Floyd Norris, NYT - Nov 2, 2007
Today’s employment report is mediocre at best. But to understand that, you have to look past the headline numbers.
Those numbers say that the government’s survey of employers showed a gain of 130,000 private sector jobs, on a seasonally adjusted basis, in October. That seems to be better than in recent months.
I don’t believe it. Most of those jobs — 103,000 of them, before seasonal adjustment — were added by the statisticians, not reported by employers. (It should be noted that, before seasonal adjustment, there were 201,000 jobs added, so this is just more than half.)
Why add jobs? It is an effort to include jobs created by new companies not surveyed, less an estimate for jobs lost at companies that went out of business and therefore did not respond to the survey.
Of those 103,000 jobs, 14,000 were in the construction industry, and 25,000 were in finance. Does anyone believe that all those new companies are being created in those industries now? (You can see the government’s explanation for this here.)
At times of inflection, these adjustments can be wildly off, as I argued a month ago. I think we hit such a point this spring. A couple of years from now, after all the adjustments are made, this year’s job performance will look far less impressive.
Over the last 12 months, the government’s current numbers indicate that the private sector added an average of 115,000 jobs a month. But 80 percent of those jobs came from the statistical adjustments.
It is also worth noting that the govertment’s other survey, of households, has not found those jobs. Over the last 12 months, it has found about 50,000 new jobs a month. In October, it found employment declined by 250,000 jobs.
A few years ago, the survey of employers was showing what turned out to be unreasonably low job numbers. (They have since been revised upward, and those revisions influenced the current rose-tinted adjustments.) Then the household survey sounded the warning that things were not as bad as the survey of employers seemed to indicate. Now it is warning that the job picture is not as good as it appears at first glance.
Today’s employment report is mediocre at best. But to understand that, you have to look past the headline numbers.
Those numbers say that the government’s survey of employers showed a gain of 130,000 private sector jobs, on a seasonally adjusted basis, in October. That seems to be better than in recent months.
I don’t believe it. Most of those jobs — 103,000 of them, before seasonal adjustment — were added by the statisticians, not reported by employers. (It should be noted that, before seasonal adjustment, there were 201,000 jobs added, so this is just more than half.)
Why add jobs? It is an effort to include jobs created by new companies not surveyed, less an estimate for jobs lost at companies that went out of business and therefore did not respond to the survey.
Of those 103,000 jobs, 14,000 were in the construction industry, and 25,000 were in finance. Does anyone believe that all those new companies are being created in those industries now? (You can see the government’s explanation for this here.)
At times of inflection, these adjustments can be wildly off, as I argued a month ago. I think we hit such a point this spring. A couple of years from now, after all the adjustments are made, this year’s job performance will look far less impressive.
Over the last 12 months, the government’s current numbers indicate that the private sector added an average of 115,000 jobs a month. But 80 percent of those jobs came from the statistical adjustments.
It is also worth noting that the govertment’s other survey, of households, has not found those jobs. Over the last 12 months, it has found about 50,000 new jobs a month. In October, it found employment declined by 250,000 jobs.
A few years ago, the survey of employers was showing what turned out to be unreasonably low job numbers. (They have since been revised upward, and those revisions influenced the current rose-tinted adjustments.) Then the household survey sounded the warning that things were not as bad as the survey of employers seemed to indicate. Now it is warning that the job picture is not as good as it appears at first glance.
Saturday, November 3, 2007
Sinking Currency, Sinking Country
by Patrick J. Buchanan - November 2, 2007
The euro, worth 83 cents in the early George W. Bush years, is at $1.45.
The British pound is back up over $2, the highest level since the Carter era. The Canadian dollar, which used to be worth 65 cents, is worth more than the U.S. dollar for the first time in half a century.
Oil is over $90 a barrel. Gold, down to $260 an ounce not so long ago, has hit $800.
Have gold, silver, oil, the euro, the pound and the Canadian dollar all suddenly soared in value in just a few years?
Nope. The dollar has plummeted in value, more so in Bush’s term than during any comparable period of U.S. history. Indeed, Bush is presiding over a worldwide abandonment of the American dollar.
Is it all Bush’s fault? Nope.
The dollar is plunging because America has been living beyond her means, borrowing $2 billion a day from foreign nations to maintain her standard of living and to sustain the American Imperium.
The prime suspect in the death of the dollar is the massive trade deficits America has run up, some $5 trillion in total since the passage of NAFTA and the creation of the World Trade Organization in 1994.
In 2006, that U.S. trade deficit hit $764 billion. The current account deficit, which includes the trade deficit, plus the net outflow of interest, dividends, capital gains and foreign aid, hit $857 billion, 6.5 percent of GDP. As some of us have been writing for years, such deficits are unsustainable and must lead to a decline of the dollar.
A sinking dollar means a poorer nation, and a sinking currency has historically been the mark of a sinking country. And a superpower with a sinking currency is a contradiction in terms.
What does this mean for America and Americans?
As nations realize that the dollars they are being paid for their products cannot buy in the world markets what they once did, they will demand more dollars for those goods. This will mean rising prices for the imports on which America has become more dependent than we have been since before the Civil War.
U.S. tourists traveling to the countries whence their ancestors came will find that the money they saved up does not go as far as they thought.
U.S. soldiers stationed overseas will find the cost of rent, gasoline, food, clothing and dining out takes larger and larger bites out of their paychecks. The people those U.S. soldiers defend will be demanding more and more of their money.
U.S. diplomats stationed overseas, students and businessmen are already facing tougher times.
U.S. foreign aid does not go as far as it did. And there is an element of comedy in seeing the United States going to Beijing to borrow dollars, thus putting our children deeper in debt, to send still more foreign aid to African despots who routinely vote the Chinese line at the United Nations. {Funny how they never mention aid to Israel} (Administrator's comment)
The Chinese, whose currency is tied to the dollar, and Japan will continue, as long as they can, to keep their currencies low against the dollar. For the Asians think long term, and their goals are strategic.
China – growing at 10 percent a year for two decades and now growing at close to 12 percent – is willing to take losses in the value of the dollars it holds to keep the U.S. technology, factories and jobs pouring in, as their exports capture America’s markets from U.S. producers.
The Japanese will take some loss in the value of their dollar hoard to take down Chrysler, Ford and GM, and capture the U.S. auto market as they captured our TV, camera and computer chip markets.
Asians understand that what is important is not who consumes the apples, but who owns the orchard.
Other nations that have kept cash reserves in U.S. Treasury bonds and T-bills are watching the value of these assets sink. Not fools, they will begin, as many already have, to divest and diversify, taking in fewer dollars and more euros and yen. As more nations abandon the dollar, its decline will continue.
The oil-producing and exporting nations, with trade surpluses, like China, have also begun to take the stash of dollars they have and stuff them into sovereign wealth funds, and use these immense and growing funds to buy up real assets in the United States – investment banks and American companies.
Nor is there any end in sight to the sinking of the dollar. For, as foreigners demand more dollars for the oil and goods they sell us, the trade deficit will not fall. And as the U.S. government prints more and more dollars to cover the budget deficits that stretch out – with the coming retirement of the baby boomers – all the way to the horizon, the value of the dollar will fall. And as Ben Bernanke at the Fed tries to keep interest rates low, to keep the U.S. economy from sputtering out in the credit crunch, the value of the dollar will fall.
The chickens of free trade are coming home to roost.
The euro, worth 83 cents in the early George W. Bush years, is at $1.45.
The British pound is back up over $2, the highest level since the Carter era. The Canadian dollar, which used to be worth 65 cents, is worth more than the U.S. dollar for the first time in half a century.
Oil is over $90 a barrel. Gold, down to $260 an ounce not so long ago, has hit $800.
Have gold, silver, oil, the euro, the pound and the Canadian dollar all suddenly soared in value in just a few years?
Nope. The dollar has plummeted in value, more so in Bush’s term than during any comparable period of U.S. history. Indeed, Bush is presiding over a worldwide abandonment of the American dollar.
Is it all Bush’s fault? Nope.
The dollar is plunging because America has been living beyond her means, borrowing $2 billion a day from foreign nations to maintain her standard of living and to sustain the American Imperium.
The prime suspect in the death of the dollar is the massive trade deficits America has run up, some $5 trillion in total since the passage of NAFTA and the creation of the World Trade Organization in 1994.
In 2006, that U.S. trade deficit hit $764 billion. The current account deficit, which includes the trade deficit, plus the net outflow of interest, dividends, capital gains and foreign aid, hit $857 billion, 6.5 percent of GDP. As some of us have been writing for years, such deficits are unsustainable and must lead to a decline of the dollar.
A sinking dollar means a poorer nation, and a sinking currency has historically been the mark of a sinking country. And a superpower with a sinking currency is a contradiction in terms.
What does this mean for America and Americans?
As nations realize that the dollars they are being paid for their products cannot buy in the world markets what they once did, they will demand more dollars for those goods. This will mean rising prices for the imports on which America has become more dependent than we have been since before the Civil War.
U.S. tourists traveling to the countries whence their ancestors came will find that the money they saved up does not go as far as they thought.
U.S. soldiers stationed overseas will find the cost of rent, gasoline, food, clothing and dining out takes larger and larger bites out of their paychecks. The people those U.S. soldiers defend will be demanding more and more of their money.
U.S. diplomats stationed overseas, students and businessmen are already facing tougher times.
U.S. foreign aid does not go as far as it did. And there is an element of comedy in seeing the United States going to Beijing to borrow dollars, thus putting our children deeper in debt, to send still more foreign aid to African despots who routinely vote the Chinese line at the United Nations. {Funny how they never mention aid to Israel} (Administrator's comment)
The Chinese, whose currency is tied to the dollar, and Japan will continue, as long as they can, to keep their currencies low against the dollar. For the Asians think long term, and their goals are strategic.
China – growing at 10 percent a year for two decades and now growing at close to 12 percent – is willing to take losses in the value of the dollars it holds to keep the U.S. technology, factories and jobs pouring in, as their exports capture America’s markets from U.S. producers.
The Japanese will take some loss in the value of their dollar hoard to take down Chrysler, Ford and GM, and capture the U.S. auto market as they captured our TV, camera and computer chip markets.
Asians understand that what is important is not who consumes the apples, but who owns the orchard.
Other nations that have kept cash reserves in U.S. Treasury bonds and T-bills are watching the value of these assets sink. Not fools, they will begin, as many already have, to divest and diversify, taking in fewer dollars and more euros and yen. As more nations abandon the dollar, its decline will continue.
The oil-producing and exporting nations, with trade surpluses, like China, have also begun to take the stash of dollars they have and stuff them into sovereign wealth funds, and use these immense and growing funds to buy up real assets in the United States – investment banks and American companies.
Nor is there any end in sight to the sinking of the dollar. For, as foreigners demand more dollars for the oil and goods they sell us, the trade deficit will not fall. And as the U.S. government prints more and more dollars to cover the budget deficits that stretch out – with the coming retirement of the baby boomers – all the way to the horizon, the value of the dollar will fall. And as Ben Bernanke at the Fed tries to keep interest rates low, to keep the U.S. economy from sputtering out in the credit crunch, the value of the dollar will fall.
The chickens of free trade are coming home to roost.
Zombie Nation
Cowardice, Complicity and the Withering of the Soul of America
by DAVID PENNER - Nov 2, 2007
As The Office of the Vice President continues to scheme and plot for war with Iran, which would also likely correspond with martial law at home, the American worker continues to sink deeper and deeper into a horrifying abyss of economic, moral, and spiritual slavery. Even during the worst days of the Depression, never was the American worker more crushed, more beaten, more defeated. Never was he more atomized, more alienated, more alone.
Listen to what people are talking about on TV, on the streets, and in restaurants, and it is clear the American people are pathologically disconnected from reality. This disconnection from reality is particularly pronounced in both the media and academia, where the most critical issues of our time are either completely ignored, or drowned in a barrage of hyperbole and euphemistic blather. It is as if, due to so many decades of brainwashing, Americans are no longer capable of reason, no longer capable of independent thought.
It is also becoming harder and harder to obtain a good paying job without compromising oneself ideologically due to the destruction of the public sphere. The role that the military and prison industrial complexes play in providing employment, and the role played by the media and the education system in indoctrination, pose grave questions about whether constitutional democracy and American capitalism can continue to coexist, or whether the elite will sever the marriage entirely ushering in a military form of government. The unprecedented domination of work in American society, and the cult of placing one's career above and beyond all other considerations, has dehumanized the American people and turned them into collaborators.
In the education system, where universities are increasingly owned lock, stock and barrel by corporations (many universities are corporations), free market dogma reigns unchallenged. The education system, together with the unprecedented power of the mass media, have ushered in a brave new world where Newspeak reigns over the enlightenment, madness over empiricism, and barbarism over reason.
As Americans, we are so fond of saying how we have freedom of speech, but all too often, this simply is not so. How many students at expensive private colleges are permitted to speak out against any number of the vast myriad of unspeakable issues: the destruction of families and communities in American society, the likelihood of war on Iran, the prison-industrial complex, the use of outsourcing and offshoring to destroy unions, the current genocide being waged against black Americans, the censorship in American society? If a student wants to get good grades so as to be able to secure a good paying job later on, the rules are clear: say what you are supposed to say, write what you're supposed to write: shut up and do as you're told. The almost total absence of meaningful intellectual discussion in many colleges and universities, along with the unprecedented corporate consolidation of the media, has put American society in a totalitarian ideological vice. Tenured liberal professors, or even professors that secretly harbor genuinely radical views, often think things privately that they would never dream of saying in class.
The American worker is more enslaved to his employer than ever before, but instead of rebelling against this enslavement, he feels resistance to be impossible or too dangerous to risk, or he embraces it as proof of his toughness and loyalty to his country.
Public school teachers that teach poor and disadvantaged students are under enormous pressures by authoritarian administrators to keep the level as low as possible and to not intellectually challenge their students. Those who resist are marginalized, harassed, and eventually forced out. This tyranny is blindly embraced in the name of multiculturalism, and enforced by morally bankrupt liberals who view students in troubled inner city schools as incapable of serious academic work.
The liberal adage "You have to work within the system" embodies the total moral spiritual, and intellectual collapse of the American people. The Democrats "work within the system," and consequently we have a one party system. Tenured liberal professors have worked within the system, and have gotten so good at it that they have become the system, feeding Amy Tan and The House on Mango Street to poor students so as to keep them illiterate in the name of protecting diversity.
Expensive private colleges are dominated by almost total unanimity of thought in the liberal arts and social sciences, particularly in politics and economics. What are one's chances of getting hired for a tenure-track economics position at a four-year university when you have written polemics attacking the impoverishment of third world countries by the World Bank and IMF? Almost zero. Is this our great freedom, our great liberty of thought? This overwhelming pressure to conform ideologically in the legal system, the media, and academia, and the relentless pressures to be as obsequious and sycophantic as possible at work, is a cancer that is slowly tearing at the heart of American civilization.
Blind obedience and brainwashing through Newspeak begin in school. The media, and other social pressures complete the process. The destruction of family and community life has made resistance at work extraordinarily difficult, because the loss of a decent job that can so easily come from speaking out against unconscionable abuses of power, puts the now atomized American in a void, a zone of nothingness, a banishment into purgatory.
Americans are constantly lying to themselves about the degree to which they have allowed themselves to become ideologically compromised at work. Even more disturbing than the collapse of the New Deal is the inherently reactionary nature of so many jobs in the twenty first century United States. It is almost absurd to talk about unions if you work for the military and are assisting in the manufacturing of new weapons. Jobs in the mass media and mainstream press are often equally as dubious. The education system, viewed by liberals from the 1960's in such an innocent light, bears at least as much responsibility as the media in the lobotomizing of the American mind.
Instead of desperately trying to ward off a looming martial law, Americans are busy trying to get ahead at work. Fascism hasn't come to America with rallies and bonfires but in the fight for the corner office.
Take a good look at what Americans will put up with at ten dollars an hour, and it is clear that unionization and solidarity have reached their nadir in American history.
The idea of not making much money, yet waking up in the morning and feeling good about oneself is a myth if you are a public school teacher whose hands are tied by anti-literacy administrators, or a defense attorney forced to betray clients and plea bargain innocent people into jail.
There is still time for the American worker to awake and take back his country. There is still time to resist, to stand up for freedom of expression and worker's rights. For the elite are rapidly taking us to a place where it may soon no longer be possible to resist. Once that Rubicon is crossed, there will be naught but demons all around us, the bough will be broken, and constitutional democracy will drown in a sea of death and darkness.
by DAVID PENNER - Nov 2, 2007
As The Office of the Vice President continues to scheme and plot for war with Iran, which would also likely correspond with martial law at home, the American worker continues to sink deeper and deeper into a horrifying abyss of economic, moral, and spiritual slavery. Even during the worst days of the Depression, never was the American worker more crushed, more beaten, more defeated. Never was he more atomized, more alienated, more alone.
Listen to what people are talking about on TV, on the streets, and in restaurants, and it is clear the American people are pathologically disconnected from reality. This disconnection from reality is particularly pronounced in both the media and academia, where the most critical issues of our time are either completely ignored, or drowned in a barrage of hyperbole and euphemistic blather. It is as if, due to so many decades of brainwashing, Americans are no longer capable of reason, no longer capable of independent thought.
It is also becoming harder and harder to obtain a good paying job without compromising oneself ideologically due to the destruction of the public sphere. The role that the military and prison industrial complexes play in providing employment, and the role played by the media and the education system in indoctrination, pose grave questions about whether constitutional democracy and American capitalism can continue to coexist, or whether the elite will sever the marriage entirely ushering in a military form of government. The unprecedented domination of work in American society, and the cult of placing one's career above and beyond all other considerations, has dehumanized the American people and turned them into collaborators.
In the education system, where universities are increasingly owned lock, stock and barrel by corporations (many universities are corporations), free market dogma reigns unchallenged. The education system, together with the unprecedented power of the mass media, have ushered in a brave new world where Newspeak reigns over the enlightenment, madness over empiricism, and barbarism over reason.
As Americans, we are so fond of saying how we have freedom of speech, but all too often, this simply is not so. How many students at expensive private colleges are permitted to speak out against any number of the vast myriad of unspeakable issues: the destruction of families and communities in American society, the likelihood of war on Iran, the prison-industrial complex, the use of outsourcing and offshoring to destroy unions, the current genocide being waged against black Americans, the censorship in American society? If a student wants to get good grades so as to be able to secure a good paying job later on, the rules are clear: say what you are supposed to say, write what you're supposed to write: shut up and do as you're told. The almost total absence of meaningful intellectual discussion in many colleges and universities, along with the unprecedented corporate consolidation of the media, has put American society in a totalitarian ideological vice. Tenured liberal professors, or even professors that secretly harbor genuinely radical views, often think things privately that they would never dream of saying in class.
The American worker is more enslaved to his employer than ever before, but instead of rebelling against this enslavement, he feels resistance to be impossible or too dangerous to risk, or he embraces it as proof of his toughness and loyalty to his country.
Public school teachers that teach poor and disadvantaged students are under enormous pressures by authoritarian administrators to keep the level as low as possible and to not intellectually challenge their students. Those who resist are marginalized, harassed, and eventually forced out. This tyranny is blindly embraced in the name of multiculturalism, and enforced by morally bankrupt liberals who view students in troubled inner city schools as incapable of serious academic work.
The liberal adage "You have to work within the system" embodies the total moral spiritual, and intellectual collapse of the American people. The Democrats "work within the system," and consequently we have a one party system. Tenured liberal professors have worked within the system, and have gotten so good at it that they have become the system, feeding Amy Tan and The House on Mango Street to poor students so as to keep them illiterate in the name of protecting diversity.
Expensive private colleges are dominated by almost total unanimity of thought in the liberal arts and social sciences, particularly in politics and economics. What are one's chances of getting hired for a tenure-track economics position at a four-year university when you have written polemics attacking the impoverishment of third world countries by the World Bank and IMF? Almost zero. Is this our great freedom, our great liberty of thought? This overwhelming pressure to conform ideologically in the legal system, the media, and academia, and the relentless pressures to be as obsequious and sycophantic as possible at work, is a cancer that is slowly tearing at the heart of American civilization.
Blind obedience and brainwashing through Newspeak begin in school. The media, and other social pressures complete the process. The destruction of family and community life has made resistance at work extraordinarily difficult, because the loss of a decent job that can so easily come from speaking out against unconscionable abuses of power, puts the now atomized American in a void, a zone of nothingness, a banishment into purgatory.
Americans are constantly lying to themselves about the degree to which they have allowed themselves to become ideologically compromised at work. Even more disturbing than the collapse of the New Deal is the inherently reactionary nature of so many jobs in the twenty first century United States. It is almost absurd to talk about unions if you work for the military and are assisting in the manufacturing of new weapons. Jobs in the mass media and mainstream press are often equally as dubious. The education system, viewed by liberals from the 1960's in such an innocent light, bears at least as much responsibility as the media in the lobotomizing of the American mind.
Instead of desperately trying to ward off a looming martial law, Americans are busy trying to get ahead at work. Fascism hasn't come to America with rallies and bonfires but in the fight for the corner office.
Take a good look at what Americans will put up with at ten dollars an hour, and it is clear that unionization and solidarity have reached their nadir in American history.
The idea of not making much money, yet waking up in the morning and feeling good about oneself is a myth if you are a public school teacher whose hands are tied by anti-literacy administrators, or a defense attorney forced to betray clients and plea bargain innocent people into jail.
There is still time for the American worker to awake and take back his country. There is still time to resist, to stand up for freedom of expression and worker's rights. For the elite are rapidly taking us to a place where it may soon no longer be possible to resist. Once that Rubicon is crossed, there will be naught but demons all around us, the bough will be broken, and constitutional democracy will drown in a sea of death and darkness.
Friday, November 2, 2007
Dollar hit by US housing troubles
AFP - Nov 2, 2007The dollar fell against the euro on Friday as continuing uncertainty over the US subprime housing sector weighed on the US currency, dealers said.
In early European trade, the European single currency rose to 1.4482 dollars from 1.4422 dollars in New York late on Thursday.
Investors are worried over banks' exposure to the United States' high-risk mortgage sector, which is facing severe problems after they lent cash to borrowers with patchy credit histories.
Such concerns have helped undo much of the optimism generated by Wednesday's quarter point cut in US interest rates to 4.50 percent, with dealers saying the market has slipped back into worry mode about the US economic outlook.
"The optimism expressed by the (US central bank) in its statement on Wednesday that 'strains in financial markets have eased somewhat on balance' is up for debate after the sudden upturn in risk aversion on fears that large financial institutions have not revealed the true scale of losses relating to the sub-prime mortgage fallout," said economist Derek Halpenny at The Bank of Tokyo-Mitsubishi in London.
The market will get a better picture of the health of the world's largest economy later Friday with the release a key monthly US labour market report that Wall Street expects to show 80,000 new jobs were created in October.
US data released overnight was patchy. A government report showed that US consumer spending rose a softer-than-expected 0.3 percent in September as a persistent housing downturn and tighter credit squeezed households.
The report also showed that personal income rose 0.4 percent, matching most analysts' forecasts.
A separate snapshot on home foreclosures by private firm RealtyTrac showed banks and mortgage firms filed notices against 446,726 homes during the third quarter, almost double the number lodged a year earlier.
The US property market has been in a slump since early 2006 and foreclosures have surged in the past year as hundreds of thousands of Americans have struggled to pay their mortgages.
In European trade on Friday, the euro changed hands at 1.4482 dollars, against 1.4422 dollars late Thursday, at 166.12 yen (165.18), 0.6950 pounds (0.6935) and 1.6701 Swiss francs (1.6699).
The dollar stood at 114.72 yen (114.54) and 1.1535 Swiss francs (1.1575).
The pound was at 2.0835 dollars (2.0793).
In London, the price of gold rose to 790.93 dollars per ounce at the morning fixing from 790.25 dollars late on Thursday.
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