Saturday, 29 March 2008
HSBC, Bank of America, and Washington Mutual suffer the highest rates of identity theft in the banking industry
HSBC, Bank of America, and Washington Mutual suffer the highest rates of identity theft in the banking industry, according to an investigative study released Wednesday by a UC Berkeley Law School researcher.The Federal Trade Commission received over 245,000 reports of identity theft in 2006, but does not typically publish the names of the financial firms and companies listed in the reports. Through an extensive Freedom of Information Act request, Chris Hoofnagle, a staff attorney at UC Berkeley's Boalt School of Law, was able to get detailed records on the individual consumer complaints.Hoofnagle received detailed information for three randomly chosen months in 2006: January, March, and September. These months included data from 88,560 complaints, with 46,262 names of institutions identified by victims.
British tax authorities are studying details of accounts held at the Liechtenstein LGT bank
British tax authorities are studying details of accounts held at the Liechtenstein LGT bank. America, Australia, France, Spain, Italy and Sweden are also trawling for information about their tax exiles. The Germans paid €4.2 million for the DVDs and are using the information to spearhead a campaign against tax havens across Europe. Next in line is Prince Albert of Monaco, who is due in Berlin this week. Angela Merkel, the German Chancellor, is set to read him the riot act. Soon, German officials say, the Chancellor will be on her way to Switzerland to make her case there. German secret agents have information from a second bank, the Vaduz subsidiary of the Swiss private bank Vontobel, according to the Süd-deutsche Zeitungnewspaper yesterday. Germany threatens to impose sanctions against Liechtenstein if it does not seal up its tax loopholes. The Liechtensteiners are stubborn. However, if Germany is going to continue to use espionage to end anonymous bank accounts in fellow European states, then it is going to threaten the very existence of the principality.
Canadians are being investigated for possible tax fraud in the European principality of Liechtenstein's ancient and secretive banking system
Canadians are being investigated for possible tax fraud in the European principality of Liechtenstein's ancient and secretive banking system, officials said Thursday.
"The Canada Revenue Agency (CRA) has started looking into about 100 Canadian taxpayers to ensure they've adequately declared their income and paid taxes on monies in Liechtenstein accounts," CRA spokeswoman Beatrice Fenelon told AFP.
Information "from several sources" sparked the probe and informants were not paid, she added.Almost a fortnight ago it emerged that a former employee of a bank in Liechtenstein had sold a disc to Germany's intelligence service allegedly containing the names of about 1,400 suspected tax dodgers from around the world.
The principality has so far defied calls to lift the lid on its banking system's trademark secrecy and assist in foreign probes into tax fraud.The United States, Britain, Australia, Italy, France, Sweden, New Zealand, Greece and Spain also said this week they are hunting for taxpayers hiding their money in the tiny Alpine state.
Liechtenstein -- dubbed an "un-cooperative tax haven" by the Organisation for Economic Cooperation and Development (OECD) -- has retaliated angrily to the attacks on the banking sector that makes up 30 percent of its economy.After announcing a criminal investigation against Heinrich Kieber, the man suspected of stealing the client list from the LGT bank, it signalled that it could bring charges against the German spies who bought it from him.
"The Canada Revenue Agency (CRA) has started looking into about 100 Canadian taxpayers to ensure they've adequately declared their income and paid taxes on monies in Liechtenstein accounts," CRA spokeswoman Beatrice Fenelon told AFP.
Information "from several sources" sparked the probe and informants were not paid, she added.Almost a fortnight ago it emerged that a former employee of a bank in Liechtenstein had sold a disc to Germany's intelligence service allegedly containing the names of about 1,400 suspected tax dodgers from around the world.
The principality has so far defied calls to lift the lid on its banking system's trademark secrecy and assist in foreign probes into tax fraud.The United States, Britain, Australia, Italy, France, Sweden, New Zealand, Greece and Spain also said this week they are hunting for taxpayers hiding their money in the tiny Alpine state.
Liechtenstein -- dubbed an "un-cooperative tax haven" by the Organisation for Economic Cooperation and Development (OECD) -- has retaliated angrily to the attacks on the banking sector that makes up 30 percent of its economy.After announcing a criminal investigation against Heinrich Kieber, the man suspected of stealing the client list from the LGT bank, it signalled that it could bring charges against the German spies who bought it from him.
Liechtenstein named as "un-cooperative tax haven"
Germany said it was rallying fellow European nations to force Liechtenstein to adhere to EU tax rules and a day after the EU agreed the principality's accession to the Schengen free travel zone.
Liechtenstein called for a compromise with European nations amid a worldwide tax fraud probe focused on its banks but said German agents who uncovered the scam committed a crime.Prime Minister Otmar Hasler said in Brussels the tiny principality wanted to reach a "reasonable agreement" with neighbours calling for greater transparency as they hunt for billions of euros (dollars) hidden from the taxman.
"We are bringing pressure and influence to bear on a European level," German Finance Minister Peer Steinbrueck told the Ruhr Nachrichten newspaper.He said the issue would be raised at a meeting of EU finance ministers in Brussels next week and repeated a threat to force all Germans who invest in Liechtenstein to declare their transactions or be taxed at source.The principality has so far defied calls to liftthe lid on its banking system's trademark secrecy and assist in foreign probes into tax fraud, drawing a threat from Germany to refuse to ratify its Schengen membership.
German Interior Minister Wolfgang Schaueble warned in Brussels on Thursday that tax havens "are not compatible with European integration."A fortnight ago, Germany began investigating 600 of its citizens featuring on a client list of a Liechtenstein bank containing 1,400 names which it then made available to other nations.
The United States, Britain, Australia, Italy, France, Sweden, Canada, New Zealand, Greece and Spain this week said they are hunting for taxpayers hiding their money in the tiny Alpine state.German authorities claim they were cheated of "hundreds of million of euros" in taxes while Britain said it was looking for "at least 100 million pounds".Liechtenstein an "un-cooperative tax haven" by the Organisation for Economic Cooperation and Development (OECD) -- has retaliated angrily to the attacks on the banking sector that makes up 30 percent of the economy.After announcing a criminal investigation against Heinrich Kieber, the man suspected of stealing the client list from the LGT bank, it signaled that it could bring charges against the German spies who bought it from him."We had to act. The investigation is a very serious matter because misappropriation of bank data is a crime," Justice Minister Klaus Tschuetscher told a press conference in Vaduz.
A government spokesman said the probe will target "all those involved" in the transaction and Tschuetscher called on Germany to name the agents who bought the data for four million euros (six million dollars).Prime Minister Hasler said Liechtenstein was prepared to conclude accords on banking reforms that were on the table but it was unclear whether this would address the demands of Germany and other EU states."Our aim is to achieve a successful conclusion of the comprehensive tax fraud agreement that is currently under negotiation," he said.
Last week, he had insisted that Liechtenstein would not investigate foreign clients unless they were believed to have contravened the country's own lenient tax laws.
In Germany, the scandal has claimed the scalp of Deutsche Post's chief executive and Handelsblatt daily reported that other prominent figures, including the head of a large southern German food company, were also implicated.A spokesman for LGT told the Sueddeutsche Zeitung that the bank's foreign clients had already complained last year that it was in the sights of tax authorities.
"We had the first indications that investigations were being carried out on the basis of stolen data in the summer of 2007," Hans-Martin Uehlinger told the newspaper."These signs did not come from Germany," he added.Finance Minister Steinbrueck defended Berlin's decision to buy confidential data and suggested that the foreign intelligence agency, the BND, came across the information by chance.
Liechtenstein called for a compromise with European nations amid a worldwide tax fraud probe focused on its banks but said German agents who uncovered the scam committed a crime.Prime Minister Otmar Hasler said in Brussels the tiny principality wanted to reach a "reasonable agreement" with neighbours calling for greater transparency as they hunt for billions of euros (dollars) hidden from the taxman.
"We are bringing pressure and influence to bear on a European level," German Finance Minister Peer Steinbrueck told the Ruhr Nachrichten newspaper.He said the issue would be raised at a meeting of EU finance ministers in Brussels next week and repeated a threat to force all Germans who invest in Liechtenstein to declare their transactions or be taxed at source.The principality has so far defied calls to liftthe lid on its banking system's trademark secrecy and assist in foreign probes into tax fraud, drawing a threat from Germany to refuse to ratify its Schengen membership.
German Interior Minister Wolfgang Schaueble warned in Brussels on Thursday that tax havens "are not compatible with European integration."A fortnight ago, Germany began investigating 600 of its citizens featuring on a client list of a Liechtenstein bank containing 1,400 names which it then made available to other nations.
The United States, Britain, Australia, Italy, France, Sweden, Canada, New Zealand, Greece and Spain this week said they are hunting for taxpayers hiding their money in the tiny Alpine state.German authorities claim they were cheated of "hundreds of million of euros" in taxes while Britain said it was looking for "at least 100 million pounds".Liechtenstein an "un-cooperative tax haven" by the Organisation for Economic Cooperation and Development (OECD) -- has retaliated angrily to the attacks on the banking sector that makes up 30 percent of the economy.After announcing a criminal investigation against Heinrich Kieber, the man suspected of stealing the client list from the LGT bank, it signaled that it could bring charges against the German spies who bought it from him."We had to act. The investigation is a very serious matter because misappropriation of bank data is a crime," Justice Minister Klaus Tschuetscher told a press conference in Vaduz.
A government spokesman said the probe will target "all those involved" in the transaction and Tschuetscher called on Germany to name the agents who bought the data for four million euros (six million dollars).Prime Minister Hasler said Liechtenstein was prepared to conclude accords on banking reforms that were on the table but it was unclear whether this would address the demands of Germany and other EU states."Our aim is to achieve a successful conclusion of the comprehensive tax fraud agreement that is currently under negotiation," he said.
Last week, he had insisted that Liechtenstein would not investigate foreign clients unless they were believed to have contravened the country's own lenient tax laws.
In Germany, the scandal has claimed the scalp of Deutsche Post's chief executive and Handelsblatt daily reported that other prominent figures, including the head of a large southern German food company, were also implicated.A spokesman for LGT told the Sueddeutsche Zeitung that the bank's foreign clients had already complained last year that it was in the sights of tax authorities.
"We had the first indications that investigations were being carried out on the basis of stolen data in the summer of 2007," Hans-Martin Uehlinger told the newspaper."These signs did not come from Germany," he added.Finance Minister Steinbrueck defended Berlin's decision to buy confidential data and suggested that the foreign intelligence agency, the BND, came across the information by chance.
Wednesday, 26 March 2008
Iceland Banks a giant hedge fund
Iceland has been dubbed a “giant hedge fund” because of the way in which the country’s corporate and banking sectors have expanded rapidly on borrowed money to give above average returns. Until the credit crunch, that is. Yesterday, Iceland’s central bank suddenly hiked up interest rates 1.25% to 15% in a bid to restore confidence in its currency and ward off full-scale economic crisis. It may be too late for the country of 300,000 people.Its central bank blamed “deteriorating financial conditions in global markets” for the rate rise, which smacks more of panic than anything else. Confidence in the Icelandic krona has plummeted this year, falling 22% against the euro, driving up inflation to around 7%. Meanwhile, traders in so-called credit default swaps have pushed the cost of protecting the country’s three main banks’ debt against default sky high.Iceland’s plight is a sure sign that the global financial chain is breaking apart, with the weakest and smallest going to the wall first. The intervention of the world’s central banks last week, when countless billions of dollars were thrown at the crisis and US bank Bear Stearns was forcibly taken over, is now being seen as the last despairing throw of the financial dice. And it has made no real difference. The cost of inter-bank borrowing has actually risen since that intervention. Banks are still reluctant to engage in inter-bank loans because they are uncertain whether they will ever get their money back.
While the stock markets are behaving as if nothing is amiss, with shares soaring in London, the latest data from the US economy confirms that things are badly awry. US consumers are at their most pessimistic for 35 years and house prices are falling at the fastest rate on record. Prices in 20 large cities fell by 10.7% in January compared with the same period last year.What these cold statistics manifest is the economic recession that is now gripping America, which has only been staved off in the past by borrowing on a larger and larger scale, both by corporations, individuals and the federal government. When the financial musical chairs stopped last summer, many institutions were left with what used to be “non-performing loans”. This term was used to describe the Latin American debt crisis of the 1980s, where countries like Mexico were unable to repay the interest, let alone the capital, on their mammoth foreign loans.
has been dubbed a “giant hedge fund” because of the way in which the country’s corporate and banking sectors have expanded rapidly on borrowed money to give above average returns. Until the credit crunch, that is. Yesterday, Iceland’s central bank suddenly hiked up interest rates 1.25% to 15% in a bid to restore confidence in its currency and ward off full-scale economic crisis. It may be too late for the country of 300,000 people.Its central bank blamed “deteriorating financial conditions in global markets” for the rate rise, which smacks more of panic than anything else. Confidence in the Icelandic krona has plummeted this year, falling 22% against the euro, driving up inflation to around 7%. Meanwhile, traders in so-called credit default swaps have pushed the cost of protecting the country’s three main banks’ debt against default sky high.Iceland’s plight is a sure sign that the global financial chain is breaking apart, with the weakest and smallest going to the wall first. The intervention of the world’s central banks last week, when countless billions of dollars were thrown at the crisis and US bank Bear Stearns was forcibly taken over, is now being seen as the last despairing throw of the financial dice. And it has made no real difference. The cost of inter-bank borrowing has actually risen since that intervention. Banks are still reluctant to engage in inter-bank loans because they are uncertain whether they will ever get their money back.
While the stock markets are behaving as if nothing is amiss, with shares soaring in London, the latest data from the US economy confirms that things are badly awry. US consumers are at their most pessimistic for 35 years and house prices are falling at the fastest rate on record. Prices in 20 large cities fell by 10.7% in January compared with the same period last year.What these cold statistics manifest is the economic recession that is now gripping America, which has only been staved off in the past by borrowing on a larger and larger scale, both by corporations, individuals and the federal government. When the financial musical chairs stopped last summer, many institutions were left with what used to be “non-performing loans”. This term was used to describe the Latin American debt crisis of the 1980s, where countries like Mexico were unable to repay the interest, let alone the capital, on their mammoth foreign loans.
While the stock markets are behaving as if nothing is amiss, with shares soaring in London, the latest data from the US economy confirms that things are badly awry. US consumers are at their most pessimistic for 35 years and house prices are falling at the fastest rate on record. Prices in 20 large cities fell by 10.7% in January compared with the same period last year.What these cold statistics manifest is the economic recession that is now gripping America, which has only been staved off in the past by borrowing on a larger and larger scale, both by corporations, individuals and the federal government. When the financial musical chairs stopped last summer, many institutions were left with what used to be “non-performing loans”. This term was used to describe the Latin American debt crisis of the 1980s, where countries like Mexico were unable to repay the interest, let alone the capital, on their mammoth foreign loans.
has been dubbed a “giant hedge fund” because of the way in which the country’s corporate and banking sectors have expanded rapidly on borrowed money to give above average returns. Until the credit crunch, that is. Yesterday, Iceland’s central bank suddenly hiked up interest rates 1.25% to 15% in a bid to restore confidence in its currency and ward off full-scale economic crisis. It may be too late for the country of 300,000 people.Its central bank blamed “deteriorating financial conditions in global markets” for the rate rise, which smacks more of panic than anything else. Confidence in the Icelandic krona has plummeted this year, falling 22% against the euro, driving up inflation to around 7%. Meanwhile, traders in so-called credit default swaps have pushed the cost of protecting the country’s three main banks’ debt against default sky high.Iceland’s plight is a sure sign that the global financial chain is breaking apart, with the weakest and smallest going to the wall first. The intervention of the world’s central banks last week, when countless billions of dollars were thrown at the crisis and US bank Bear Stearns was forcibly taken over, is now being seen as the last despairing throw of the financial dice. And it has made no real difference. The cost of inter-bank borrowing has actually risen since that intervention. Banks are still reluctant to engage in inter-bank loans because they are uncertain whether they will ever get their money back.
While the stock markets are behaving as if nothing is amiss, with shares soaring in London, the latest data from the US economy confirms that things are badly awry. US consumers are at their most pessimistic for 35 years and house prices are falling at the fastest rate on record. Prices in 20 large cities fell by 10.7% in January compared with the same period last year.What these cold statistics manifest is the economic recession that is now gripping America, which has only been staved off in the past by borrowing on a larger and larger scale, both by corporations, individuals and the federal government. When the financial musical chairs stopped last summer, many institutions were left with what used to be “non-performing loans”. This term was used to describe the Latin American debt crisis of the 1980s, where countries like Mexico were unable to repay the interest, let alone the capital, on their mammoth foreign loans.
35 percent slowdown in sale of resale property in Spain
35 percent slowdown in sale of resale property in Spain
Data from the National Statistics Institute, INE, has shown a 27% fall in the number of property sales in January this year compared to last. The fall in the sales of new property was 14.6% and in resale property the fall was as large as 35.6%.
The amount of capital lent over the month was 13,395 billion €, down just under 28% over the year, as a total of 61,792 properties changed hands across the country.
The average mortgage amount in January was 142,793 €, just over 3% less than a year previously and 0.7% down on the month of December.
The slowdown is set to continue with the Euribor interest rate on the rise again. The constructors association has called on the Government to increase the tax breaks for those who are purchasing their home, so as to stimulate demand.The Cosmani real estate company has suspended payments with debts of 350 million. All the debt is for monthly interest payments, and not considered too serious as the construction firm has assets of 1.6 billion. The problem comes from a lack of cash, with a fall in sales and a lack of credit.The Minister for Tax and the Economy, Pedro Solbes, has said that the inflation suffered in Spain is down to the world economy, and thus out of his direct control, but figures just released show that foodstuffs and energy rose by 25% more in price here when compared to the rest of Europe. Only in Eastern Europe did prices raise by a greater amount over last year according to the numbers.
However Spanish agriculture increased in price over last year less than elsewhere in Europe. Vegetables were up by 8.7%, but some cereals were 50% higher.The number of new companies created in Spain has fallen by 4% as the economic slowdown continues. 2007 saw 143,620 new companies being created across the country, about 6,000 fewer than the previous year. It’s the first fall to be seen since 2001.
Part of the reason for the slowdown is the greater difficulty in the current climate of obtaining a credit.
Data from the National Statistics Institute, INE, has shown a 27% fall in the number of property sales in January this year compared to last. The fall in the sales of new property was 14.6% and in resale property the fall was as large as 35.6%.
The amount of capital lent over the month was 13,395 billion €, down just under 28% over the year, as a total of 61,792 properties changed hands across the country.
The average mortgage amount in January was 142,793 €, just over 3% less than a year previously and 0.7% down on the month of December.
The slowdown is set to continue with the Euribor interest rate on the rise again. The constructors association has called on the Government to increase the tax breaks for those who are purchasing their home, so as to stimulate demand.The Cosmani real estate company has suspended payments with debts of 350 million. All the debt is for monthly interest payments, and not considered too serious as the construction firm has assets of 1.6 billion. The problem comes from a lack of cash, with a fall in sales and a lack of credit.The Minister for Tax and the Economy, Pedro Solbes, has said that the inflation suffered in Spain is down to the world economy, and thus out of his direct control, but figures just released show that foodstuffs and energy rose by 25% more in price here when compared to the rest of Europe. Only in Eastern Europe did prices raise by a greater amount over last year according to the numbers.
However Spanish agriculture increased in price over last year less than elsewhere in Europe. Vegetables were up by 8.7%, but some cereals were 50% higher.The number of new companies created in Spain has fallen by 4% as the economic slowdown continues. 2007 saw 143,620 new companies being created across the country, about 6,000 fewer than the previous year. It’s the first fall to be seen since 2001.
Part of the reason for the slowdown is the greater difficulty in the current climate of obtaining a credit.
Aguirre Newman consultants and shows Spanish property is taking as long as 56 months to sell
Report was published yesterday by the Aguirre Newman consultants and shows property is taking as long as 56 months to sell
A new report from the consultancy firm Aguirre Newman, on the residential tourism market on the Costa del Sol, has shown that the current slow down in the sector and uncertainty in the financial sector is leaving 45% of newly constructed homes on the coast without a buyer, some 20% more than a year ago. The report says the area is now suffering from an excess offer with a shortage of both national and foreign buyers, and that resale flats along the coast are now taking nearly 52 months to sell, while villas are taking nearly 56 months.What is described as a timid adjustment in price, around 5% has been seen, although it notes larger falls in some areas; 12% in Mijas Costa and 15% in Sotogrande. Aguirre Newman has also noted that the number of homes offered for sale ‘off-plan’ has fallen by 9.5%.There is some positive news in the report, with a prediction of an increase in foreign demand for housing forecast for the last quarter of the year.
A new report from the consultancy firm Aguirre Newman, on the residential tourism market on the Costa del Sol, has shown that the current slow down in the sector and uncertainty in the financial sector is leaving 45% of newly constructed homes on the coast without a buyer, some 20% more than a year ago. The report says the area is now suffering from an excess offer with a shortage of both national and foreign buyers, and that resale flats along the coast are now taking nearly 52 months to sell, while villas are taking nearly 56 months.What is described as a timid adjustment in price, around 5% has been seen, although it notes larger falls in some areas; 12% in Mijas Costa and 15% in Sotogrande. Aguirre Newman has also noted that the number of homes offered for sale ‘off-plan’ has fallen by 9.5%.There is some positive news in the report, with a prediction of an increase in foreign demand for housing forecast for the last quarter of the year.
Sunday, 23 March 2008
Euroland the economic numbers are coming dangerously weak. That will put the massively overvalued Euro into a swan dive
Economic reality is slowly sinking in. In Euroland the economic numbers are coming dangerously weak. That will put the massively overvalued Euro into a swan dive as the ECB is finally forced to cut rates as well. Commodity producing economies will get whacked as their main engine of growth, Chindia, finally stalls out. These are export economies and the US and Euroland were their final destinations. It’s a closed system and the feedback loop is very real. Those economies will all be as badly off or worse. The US dollar will gain significantly as huge quantities of capital are repatriated, especially from emerging economies.“The euro has some room to adjust lower. We're getting confirmation that subprime is shifting to the European financial sector. The euro-zone economy will start to slow from here on.” –Kengo Suzuki, Currency Strategist, Shinko Securities“Commodities -- one of the few remaining long trades -- have turned south. The currency market is next in line, forcing investors out of yielding positions. We underline our bearish commodity currency call. The dollar will rebound.” –Hans-Guenter Redeker, Stragesit, BNP Paribas
Canada's Dollar Falls Most Since 1985 on Plunge in Commodities: “Canada's dollar plummeted the most in more than two decades this week as investors shunned commodities on concern that a slowing U.S. economy will curb global demand for energy, metals and grains.
The currency dropped 3.3 percent, the steepest since 1985, as commodities slumped. Gold declined 11 percent from a record earlier in the week, and copper posted its biggest weekly decline in 10 months. Crude oil fell more than $13, going below $100 a barrel for the first time since March 5. Commodities account for about half of Canada's exports. The oil sands in Alberta contain the largest crude deposits outside the Middle East.”
Canada's Dollar Falls Most Since 1985 on Plunge in Commodities: “Canada's dollar plummeted the most in more than two decades this week as investors shunned commodities on concern that a slowing U.S. economy will curb global demand for energy, metals and grains.
The currency dropped 3.3 percent, the steepest since 1985, as commodities slumped. Gold declined 11 percent from a record earlier in the week, and copper posted its biggest weekly decline in 10 months. Crude oil fell more than $13, going below $100 a barrel for the first time since March 5. Commodities account for about half of Canada's exports. The oil sands in Alberta contain the largest crude deposits outside the Middle East.”
Friday, 21 March 2008
Sberbank's debt climbed to more than 200 basis points from less than 100 basis points at the beginning of August
Credit Suisse Group cut its price estimates for shares of Russian banks on Thursday, saying credit-default swaps on their debt indicate greater risks to holding the sharesThe Swiss bank cut its price estimate for shares of Sberbank, the country's biggest bank, 17 percent to $4.30, while Global Depositary Receipts of VTB Group, the country's second-biggest bank, were reduced 20 percent to $7.20.
Credit-default swaps on Sberbank's debt climbed to more than 200 basis points from less than 100 basis points at the beginning of August, while contracts on VTB's debt rose to almost 350 basis points from just over 100 basis points in the same period, Credit Suisse said.
The fact that debt investors have to pay more to protect their bonds from default indicates "a changing risk appetite for these specific stocks," Credit Suisse analysts Hugo Swann and Nan Li wrote in a report dated Thursday. Credit Suisse kept its recommendation on Sberbank shares at "outperform" and on VTB at "underperform."Credit-default swaps are financial instruments based on bonds and loans, and are used to speculate on a company's ability to repay debt. They pay the buyer face value for the underlying securities or the cash equivalent should a borrower fail to keep to its debt agreements.
An increase indicates worsening perceptions of credit quality, and a decline points to an improvement.A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Credit-default swaps on Sberbank's debt climbed to more than 200 basis points from less than 100 basis points at the beginning of August, while contracts on VTB's debt rose to almost 350 basis points from just over 100 basis points in the same period, Credit Suisse said.
The fact that debt investors have to pay more to protect their bonds from default indicates "a changing risk appetite for these specific stocks," Credit Suisse analysts Hugo Swann and Nan Li wrote in a report dated Thursday. Credit Suisse kept its recommendation on Sberbank shares at "outperform" and on VTB at "underperform."Credit-default swaps are financial instruments based on bonds and loans, and are used to speculate on a company's ability to repay debt. They pay the buyer face value for the underlying securities or the cash equivalent should a borrower fail to keep to its debt agreements.
An increase indicates worsening perceptions of credit quality, and a decline points to an improvement.A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Thursday, 20 March 2008
CIT traded at 23.5 points upfront, an extreme level of distress, according to broker Phoenix Partners
Investors are concerned CIT will have to refinance debt due in coming months, in markets which have either frozen completely or where, at best, the refinancing will cost the financial services company a lot more.
Risk premiums on CIT credit default swaps - privately negotiated contracts that many investors use as a proxy for the creditworthiness of a company - traded at 23.5 points upfront, an extreme level of distress, according to broker Phoenix Partners. This means that an investor would have to pay $2.35 million upfront plus $500,000 a year to protect $10 million of CIT bonds against a default.
Such protection was trading at 16-18 point upfront Wednesday afternoon, an already elevated level, before eventually closing at 23 points upfront, Phoenix Partners levels show. Shares of the company were recently down 25% to $8.72.
Like many of its peers, CIT has found itself caught in a storm of liquidity concerns and investors have lost confidence in the company. today’s developments, CIT Group drew down every last dime in available credit ($7.3B) today as it struggles to remain solvent. Shares of the financial mammoth plunged 44%, as the company drew down the bank line as it contends with a floundering $90B portfolio. The company has some $15 billion of debt to pay back in 2008, and nobody is willing to step up to the table and provide re-financing; especially since $9.2 billion of the overall portfolio is subprime mortgages and $11.5 billion is student loans – items that currently make most investors run for the nearest exit.
Both Moody's Investors Service and Standard & Poor's cut CIT’s long and short term debt ratings this week. The cost to insure CIT debt with credit default swaps is also trading at distressed levels, showing that most institutions expect the financial firm to not be able to meet its obligations.
Every day brings new stories of calamity at major financial institutions; it appears that the credit crisis is far from over for the banking industry.
Risk premiums on CIT credit default swaps - privately negotiated contracts that many investors use as a proxy for the creditworthiness of a company - traded at 23.5 points upfront, an extreme level of distress, according to broker Phoenix Partners. This means that an investor would have to pay $2.35 million upfront plus $500,000 a year to protect $10 million of CIT bonds against a default.
Such protection was trading at 16-18 point upfront Wednesday afternoon, an already elevated level, before eventually closing at 23 points upfront, Phoenix Partners levels show. Shares of the company were recently down 25% to $8.72.
Like many of its peers, CIT has found itself caught in a storm of liquidity concerns and investors have lost confidence in the company. today’s developments, CIT Group drew down every last dime in available credit ($7.3B) today as it struggles to remain solvent. Shares of the financial mammoth plunged 44%, as the company drew down the bank line as it contends with a floundering $90B portfolio. The company has some $15 billion of debt to pay back in 2008, and nobody is willing to step up to the table and provide re-financing; especially since $9.2 billion of the overall portfolio is subprime mortgages and $11.5 billion is student loans – items that currently make most investors run for the nearest exit.
Both Moody's Investors Service and Standard & Poor's cut CIT’s long and short term debt ratings this week. The cost to insure CIT debt with credit default swaps is also trading at distressed levels, showing that most institutions expect the financial firm to not be able to meet its obligations.
Every day brings new stories of calamity at major financial institutions; it appears that the credit crisis is far from over for the banking industry.
IKB Industrie Bank, one of many hit by the US crisis
The IKB Industrie Bank, one of many hit by the US crisis, announced Thursday, March 20, that it had failed to recover from the effects on its investments in the United States and that its future reported losses would be greater than previously anticipated.As a result of the announcement, German stock market operator Deutsche Boerse suspended trading in IKB shares after the bank revealed that it did not expect to post a significant profit for the foreseeable future.
Trading was suspended after the shares had fallen 2.6 percent to 4.93 euros following a press report which said the company had been forced to suspend an auction of risky assets.
The business daily Handelsblatt had said earlier in the day that an auction of most of IKB's three-billion-euro ($4.7 billion) portfolio of risky securities had been suspended due to a lack of satisfactory bids, which might lead to further write-downs at IKB. The Dusseldorf-based bank later confirmed it had been forced to write down the value of more of its assets.Huge losses despite government bail-out
IKB, which primarily offers long-term financing to small- and medium-sized German companies, said losses would total 800 million euros over the financial year to March 2008, up from a maximum of 700 million euros previously made public.
Bildunterschrift: Großansicht des Bildes mit der Bildunterschrift: Everything is gray for the IKB Bank
Last month, the German government -- which owns a 38-percent stake through the KfW, a state-owned bank set up after World War II to help fund reconstruction -- stepped in to prop up the ailing IKB, putting up one billion euros of a 1.5-billion-euro rescue package to prevent the crisis spreading to the rest of the country's banking sector.It also included a 450-million-euro buffer for further write-downs, an amount which may now prove insufficient, Handelsblatt said in its report.The KfW twice plugged the gaps at IKB last year and was expected to do so again following the announcement of further losses.
One Frankfurt trader said he had totally written off IKB. "The bank is dead and as I mention on each and any occasion, it has seen further problems; the bank is not worth a dime," he said in an interview with AFP news agency.
A second trader added that only the very brave were investing in IKB at the moment and that he would recommend others to stay well clear.
Trading was suspended after the shares had fallen 2.6 percent to 4.93 euros following a press report which said the company had been forced to suspend an auction of risky assets.
The business daily Handelsblatt had said earlier in the day that an auction of most of IKB's three-billion-euro ($4.7 billion) portfolio of risky securities had been suspended due to a lack of satisfactory bids, which might lead to further write-downs at IKB. The Dusseldorf-based bank later confirmed it had been forced to write down the value of more of its assets.Huge losses despite government bail-out
IKB, which primarily offers long-term financing to small- and medium-sized German companies, said losses would total 800 million euros over the financial year to March 2008, up from a maximum of 700 million euros previously made public.
Bildunterschrift: Großansicht des Bildes mit der Bildunterschrift: Everything is gray for the IKB Bank
Last month, the German government -- which owns a 38-percent stake through the KfW, a state-owned bank set up after World War II to help fund reconstruction -- stepped in to prop up the ailing IKB, putting up one billion euros of a 1.5-billion-euro rescue package to prevent the crisis spreading to the rest of the country's banking sector.It also included a 450-million-euro buffer for further write-downs, an amount which may now prove insufficient, Handelsblatt said in its report.The KfW twice plugged the gaps at IKB last year and was expected to do so again following the announcement of further losses.
One Frankfurt trader said he had totally written off IKB. "The bank is dead and as I mention on each and any occasion, it has seen further problems; the bank is not worth a dime," he said in an interview with AFP news agency.
A second trader added that only the very brave were investing in IKB at the moment and that he would recommend others to stay well clear.
Iceland's banks have been among the hardest hit in Europe
The cost of protecting the bonds of Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Banki hf against default soared to records this week amid concern Iceland's three largest banks may be unable to fund themselves.
Credit-default swaps on Kaupthing, Iceland's biggest bank, rose 22 basis points to 855, according to CMA Datavision in London. Glitnir, the third biggest, soared 93 basis points to 850. The cost of the contracts is about seven times more than the average for banks in Europe including Commerzbank AG in Frankfurt, which has similar credit ratings to Kaupthing.
``Like all banks, the Icelandics rely on maintaining access to markets,'' said Simon Adamson, an analyst at bond research firm CreditSights Inc. in London. ``Talk about problems can become a self-fulfilling prophecy.''
Iceland's banks have been among the hardest hit in Europe as the credit market freeze prompted investors to shun all but the safest assets. The banks, based in a nation of 300,000 people with a $19 billion economy, have funded lending, acquisitions and other investments in Northern Europe, including Scandinavia and the U.K., by relying mainly on the money markets rather than customer deposits.
The companies, which Moody's Investors Service rated Aaa as recently as March last year, have sought to allay funding concerns. Kaupthing and Landsbanki both opened Internet banks to attract deposits and reduce their dependence on capital markets.
Credit-default swaps on Landsbanki rose 27 basis points in the week to 631. By comparison, the Markit iTraxx Series 8 index of credit-default swaps of 25 banks and insurers across Europe fell 34.6 basis points this week to 123.
Credit-default swaps on Kaupthing, Iceland's biggest bank, rose 22 basis points to 855, according to CMA Datavision in London. Glitnir, the third biggest, soared 93 basis points to 850. The cost of the contracts is about seven times more than the average for banks in Europe including Commerzbank AG in Frankfurt, which has similar credit ratings to Kaupthing.
``Like all banks, the Icelandics rely on maintaining access to markets,'' said Simon Adamson, an analyst at bond research firm CreditSights Inc. in London. ``Talk about problems can become a self-fulfilling prophecy.''
Iceland's banks have been among the hardest hit in Europe as the credit market freeze prompted investors to shun all but the safest assets. The banks, based in a nation of 300,000 people with a $19 billion economy, have funded lending, acquisitions and other investments in Northern Europe, including Scandinavia and the U.K., by relying mainly on the money markets rather than customer deposits.
The companies, which Moody's Investors Service rated Aaa as recently as March last year, have sought to allay funding concerns. Kaupthing and Landsbanki both opened Internet banks to attract deposits and reduce their dependence on capital markets.
Credit-default swaps on Landsbanki rose 27 basis points in the week to 631. By comparison, the Markit iTraxx Series 8 index of credit-default swaps of 25 banks and insurers across Europe fell 34.6 basis points this week to 123.
Bond insurer Security Capital Assurance, LTD, which has been stripped of its AAA bond insurance rating, is trying to cancel insurance it wrote
Bond insurer Security Capital Assurance, LTD, which has been stripped of its AAA bond insurance rating, is trying to cancel insurance it wrote on certain collateralized debt obligations or CDOs. It was reported on March 14, 2008 by Jody Shenn at Bloomberg.com that Security Capital was seeking to terminate seven contracts on CDOs with an entity that it said had not met its obligations under the contracts. At that time Security Capital declined to identity the other entity that was disputing the termination.Subsequently, Merrill Lynch sued a Security Capital subsidiary to prevent the bond insurer from canceling $3.1 billion in contracts on CDOs. Merrill, which has already taken $24.5 billion in writedowns on mortgage-related debt, faced additional losses if the insurance is cancelled.
According to Saskia Scholtes of Financial Times Online, Merrill Lynch saw its share price fall 11% on concerns that it may have to take further writedowns. These concerns were apparently fueled by Merrill’s recent lawsuit against XL Capital, the Security Capital subsidiary. Scholtes reported that Merrill’s lawsuit alleged that XL Capital improperly terminated seven derivative contracts “without any basis and under a pretext based entirely on rank speculation.... Apparently, in light of the current dramatic downturn and deterioration in the credit markets, defendants are having ‘sellers’ remorse’ and are seeking to avoid their potential obligations of up to $3.1 billion under the credit default swaps at issue.”Security Capital has acknowledged that it cancelled the CDO guarantees sold to Merrill Lynch but claims that is was justified in doing so. In a statement, Security Capital said that Merrill gave the control rights on seven CDO “contracts to one or more third parties without our knowledge and in direct violation of our agreements.... As a result, we have a responsibility to take appropriate action and terminate these contracts.”
It is likely that many similar disputes will arise over the coming months as the subprime crisis rolls on.
According to Saskia Scholtes of Financial Times Online, Merrill Lynch saw its share price fall 11% on concerns that it may have to take further writedowns. These concerns were apparently fueled by Merrill’s recent lawsuit against XL Capital, the Security Capital subsidiary. Scholtes reported that Merrill’s lawsuit alleged that XL Capital improperly terminated seven derivative contracts “without any basis and under a pretext based entirely on rank speculation.... Apparently, in light of the current dramatic downturn and deterioration in the credit markets, defendants are having ‘sellers’ remorse’ and are seeking to avoid their potential obligations of up to $3.1 billion under the credit default swaps at issue.”Security Capital has acknowledged that it cancelled the CDO guarantees sold to Merrill Lynch but claims that is was justified in doing so. In a statement, Security Capital said that Merrill gave the control rights on seven CDO “contracts to one or more third parties without our knowledge and in direct violation of our agreements.... As a result, we have a responsibility to take appropriate action and terminate these contracts.”
It is likely that many similar disputes will arise over the coming months as the subprime crisis rolls on.
Wednesday, 19 March 2008
Spain's six largest banks have lost almost a fifth of their stock market value
S
pain's six largest banks have lost almost a fifth of their stock market value since the subprime crisis and ensuing international credit crunch began last 9 August even though the country's bankers and the central bank have remained adamant that they have no direct exposure to bad debt products.In the last eight months, Santander, BBVA, Popular, Sabadell, Bankinter and Banesto have watched as EUR 36.7 billion has been wiped off their share values as the global financial sector has come under suspicion. But even as the liquidity crisis continues worldwide and Spain's economy slows, bankers here are convinced they face few serious risks. "The number of people not repaying loans is increasing in line with the direction of the economy but it would be hard for it to reach unmanageable levels," a spokesman for the banking industry association
Tuesday, 18 March 2008
Northern Rock may take longer to repay the 25 bln stg in government loans
Northern Rock, the UK bank that was nationalised last month, today said it was confident of meeting the proposals set out in its draft business plan, but acknowledged that if current trading and the worldwide credit squeeze got any worse it may take longer to repay the 25 bln stg in government loans and be released from its guarantees.
Release of Jerome Kerviel
An appeals court here Tuesday ordered release of Jerome Kerviel, the rogue trader behind the largest banking fraud, from prison, BFM television reported.
The 31-year-old Kerviel was placed in detention Feb 8 to prevent him from tampering with evidence in the investigation of his unauthorized transactions, which cost his employer, the bank Societe Generale, some 4.9 billion euros ($7.8 billion).
An investigation is underway to determine if Kerviel acted alone or with the help of other Societe Generale employees, or with the tacit approval of his superiors at the bank, as he has claimed.Kerviel could face charges of forgery and breach of trust, with maximum penalties of seven years in prison and a fine of 750,000 euros.
The 31-year-old Kerviel was placed in detention Feb 8 to prevent him from tampering with evidence in the investigation of his unauthorized transactions, which cost his employer, the bank Societe Generale, some 4.9 billion euros ($7.8 billion).
An investigation is underway to determine if Kerviel acted alone or with the help of other Societe Generale employees, or with the tacit approval of his superiors at the bank, as he has claimed.Kerviel could face charges of forgery and breach of trust, with maximum penalties of seven years in prison and a fine of 750,000 euros.
Lord Hugh Rodley, David Nash,Kevin O'Donoghue,Bernard Davies four men accused of trying to steal £220million
Four British men have been accused of trying to steal £220million by hacking into a Japanese bank's computer system, the Serious Organised Crime Agency (Soca) said today.Hugh Rodley, from Tewkesbury, in Gloucestershire, named locally as Lord Hugh Rodley, is alleged to have targeted the London offices of Sumitomo Matsui Banking Corporation. His fellow accused are David Nash, 47, from Durrington, in West Sussex, Kevin O'Donoghue, 33, from Birmingham, and Bernard Davies, 73, from Walton-on-Thames, in Surrey. David Nash, 47, from Durrington was one of four men accused of trying to steal £220millionNash, O'Donoghue and Davies appeared at Snaresbrook Crown Court in east London yesterday but Rodley did not attend due to ill health. All four are yet to enter pleas. A spokesman at Soca said police from the e-crime unit launched investigations in October 2004. The alleged plan involved the electronic transfer of money from Sumitomo Matsui to a series of accounts around the world. four UK men including a Lord of perpretating the cyber heist at Sumitomo in October of 2004.The bank robbers infiltrated the bank posing as cleaning staff and installed hardware key stroke loggers on PCs. They then used information they gained on SWIFT operations to transfer 220 million pounds to ten different accounts around the world.
Soca said the alleged plot was uncovered before the money was moved.
The four men are charged with conspiracy to defraud, conspiracy to steal, conspiracy to transfer criminal property and conspiracy to remove criminal property from England and Wales between January 1 and October 5 2004. Gloucestershire Police confirmed they assisted with the investigation at Rodley's home at Tudor Manor, in Church End, near Tewkesbury - where he and his wife have lived for 16 years.
Judge Martyn Zeidman QC adjourned the case until May 30 at Snaresbrook Crown Court.
Soca said the alleged plot was uncovered before the money was moved.
The four men are charged with conspiracy to defraud, conspiracy to steal, conspiracy to transfer criminal property and conspiracy to remove criminal property from England and Wales between January 1 and October 5 2004. Gloucestershire Police confirmed they assisted with the investigation at Rodley's home at Tudor Manor, in Church End, near Tewkesbury - where he and his wife have lived for 16 years.
Judge Martyn Zeidman QC adjourned the case until May 30 at Snaresbrook Crown Court.
It's a snowball and it keeps getting bigger, Peggy Furusaka, credit specialist at BNP Paribas SA in Tokyo.
Last night, while America slept, investors and dollar-holders around the world held an impromptu election on US stewardship of the global economy. It was a spontaneous referendum triggered by the sudden collapse of Bear Stearns, but it covered many of the issues that have worried investors for the last seven years: the unfunded Bush tax cuts, the $2 trillion war in Iraq, the Federal Reserves low-interest bubble-making policies, the reckless gutting of US industrial base, the $4 trillion increase to the national debt, the multi-billion dollar “no bid” contracts, the opaque deregulated financial system, and the systematic destruction of the world's reserve currency. The ballots are still being counted, but the outcome is certain. The Bush administration lost in a landslide. Investors have had enough Bush's failed leadership and the Fed's reckless, globally-destabilizing monetary policies. A dollar-rout has already begun in earnest and stock markets around the world are plummeting. The Hang Seng index (Hong Kong) fell 4.3 percent to 21,279.40. Japan's benchmark Nikkei index slumped 3.7 percent to finish at 11,787.51, falling below 12,000 for the first time since August 2005. Shares throughout Europe tumbled overnight, shaving tens of billions off market capitalization. The Fed's panicky bailout of Bear Stearns and its surprise quarter-point rate cut has ignited a global equities sell-off and sent the cost of protecting corporate bonds through the roof. The economic tsunami is presently right outside New York ready to touch-down on Wall Street at the opening bell. The futures markets are already gyrating wildly. It should be a raucous St Patrick's day in the Big Apple. In the end, it was a race with the clock. The Federal Reserve wanted to get a deal done before the Asia markets opened hoping to soothe jittery investors and stop a full-blown stock market crash. It was right down to the wire, too. Less than an hour before trading began on Japan's Nikkei Index, the sale of beleaguered Investment giant, Bear Stearns was announced on Bloomberg News. Backed by a $30 billion line of credit from the Fed, JP Morgan reluctantly purchased Bear for the bargain-basement price of $240 million or $2 per share. Less than a year ago, Bear was riding high at $170 per share, but that was before the credit python had wrapped itself around US financial markets. That seems like ancient history now. Without the Fed's intervention the nearly-century old investment warhorse would have been dragged from Wall Street feet first. If the deal with JPM had flipped, Bear would have been forced into bankruptcy.
But Bear's travails are just the beginning of Wall Street's woes. Now there's talk of Lehman Brothers going under. According to the Wall Street Journal:Worries are deepening that other securities firms and commercial banks might be on shaky ground. Lehman Brothers Holdings Inc. Chief Executive Richard Fuld, concerned about the markets and possible fallout from Bear Stearns's troubles, cut short a trip to India and returned home Sunday, ahead of schedule, according to people familiar with the matter. The decision came after a series of calls Saturday to both senior executives at the firm and Treasury Secretary Henry Paulson, these people say.” (“JP Morgan Rescues Bear Stearns”, WSJ) Mr. Fuld has good reason to be concerned, too. Economics professor Nouriel Roubini says that, “Lehman's exposure to toxic ABS/MBS securities is as bad as that of Bear: according to Fitch at the beginning of the turmoil Bear Stearns had the highest toxic waste ("residual balance") exposure as percent of adjusted equity on balance sheet; the exposure of Bear was 54.5% while that of Lehman was only marginally smaller at 53.3%; that of Goldman Sachs was only 21%. And guess what? Today Lehman received a $2 billion unsecured credit line from 40 lenders. Here is another massively leveraged broker dealer that mismanaged its liquidity risk, had massive amount of toxic waste on its books and is now in trouble. Again here we have not only a situation of illiquidity but serious credit problems and losses given the reckless exposure of this second broker dealer to toxic investments.” (Nouriel Roubini's Global EconoMonitor)
So, it looks like Bear will be just the first of many over-leveraged investment banks on their way to the chopping block. As credit gets tighter, banks will have to call in their loans to pare down their debts and increase their capital. That's easier said than done in an environment where consumer's are cutting back on borrowing and traditional revenue streams have dried up. The banks are facing some stiff headwinds in the near future.The Federal Reserve announced two initiatives on Sunday designed to “bolster market liquidity and promote orderly market functioning.
The Fed is “creating a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.This is an incredible move and way beyond the Fed's mandate to insure price stability. Bernanke is now offering to accept dodgy mortgage-backed bonds from NON-BANK institutions. Outrageous. We can be 100% certain now, that Congress's closed door meeting on Friday had nothing to do with Bush's spying on American citizens. Most likely, the Fed convened the meeting to present their extraordinary strategy to save the financial system from a Chernobyl-like meltdown.
The Fed also announced a decrease in the primary credit rate from 3-1/2 percent to 3-1/4 percent (and) an increase in the maximum maturity of primary credit loans to 90 days from 30 days.” (Fed statement)
So Bernanke has not only decided to bailout the banks but everyone else who is even remotely connected to the subprime/securitization swindle. Great. But the rest of the world is not so convinced that this is prudent economic theory, in fact, foreign investors are already shedding US debt instruments faster than any time in history. Let's hope that Bernanke realizes that foreign Central Banks and investors presently hold $6 trillion dollars of US Treasuries and dollars and can dump it on our shores whenever they choose. That's enough greenbacks to start a Wiemar-type blizzard that will last until Resurrection Day.Roubini on the Fed's plan to provide loans to non-bank institutions:By having thrown down the drain the decades old doctrine and rule that the Fed should not lend or bail out non-bank financial institutions the Fed has created an extremely dangerous precedent that seriously aggravates the moral hazard of its lender of last resort support role. If the Fed starts on the slippery slope of providing massive liquidity support to non-bank financial institutions that have recklessly managed their risks it enters into uncharted territory that radically changes its mandate and formal role. Breaking decades-old rules and practices is a radical action that seriously requires a clear public explanation and justification.”(Nouriel Roubini's Global EconoMonitor)
It's clear that Bernanke is just making it up as he goes along. His actions are unprecedented and, yes, counterproductive. He's just generating more panic among investors. That doesn't help. Just a few months ago, Bernanke was reiterating his belief that markets should operate with as little government intervention as possible. What a transformation. Now he has nationalized the banking system and is providing a backstop for privately owned brokerages. What's next; a bailout for the hedge funds?
There's still a great deal that we don't know about the Bear buyout. Like why was it so important to save a bank that had invested its shareholders money so poorly in toxic bonds that were virtually untested in stressful market conditions?
It is complicated, but the real reason for the bailout is that the entire financial industry is now inextricably bound together through multi-billion dollar counterparty transactions called credit default swaps and other unregulated derivatives. When one major player is stricken, the whole system can violently unwind.
According to the Wall Street Journal: “With each firm intricately intertwined with others in a maze of loans, credit lines, derivatives and swaps, the Fed and Treasury agreed that letting Bear Stearns collapse quickly was a risk not worth taking, because the consequences were simply unknowable. ...For Fed officials it was a difficult choice. They did not want to single Bear out for help and they realized their actions aggravated "moral hazard" -- the tendency of bailouts to encourage future risky behavior. But the alternative was potentially far worse. Bear risked defaulting on extensive "repo" loans, in which it pledges securities as collateral for overnight loans from money-market funds. If that happened, other securities dealers would see access to repo loans become more restrictive. The pledged securities behind those loans could be dumped in a fire sale, deepening the plunge in securities prices.” (“Fed Races to Rescue Bear Stearns In Bid to Steady Financial System”, Wall Street Journal)
So Bernanke felt like he had no choice. He could either bailout Bear or sit back and watch a daisy-chain of defaults take down one bank after another. Of course, there was another option. The Fed and the SEC could have fulfilled their responsibilities as regulators and insisted that derivatives trading come under the purvue of government officials. But, apparently, that was never a serious consideration among the non-interventionist free market cheerleaders at the Federal Reserve. They saw their job as simply enabling their obscenely rich constituents to get even richer while putting the public at risk. Now it has all ended badly.Saint Patrick's Day Financial Chainsaw MassacreIn less than an hour, the stock market will open and investors will get a chance to vote on the Fed's latest plan to rescue the US financial system. Good luck. The dollar has already sunk to $1.59 per euro, gold is up to $1017 per ounce, and oil topped out at $111 per barrel; all record highs. At the same time, foreign investors have begun an informal boycott of US debt. Last week's auction of US Treasuries was the worst in a decade. Thus, the anemic greenback has continued its steady decline as the fundamentals get weaker and weaker.
This afternoon, at 2PM, President Bush will meet with the Working Group on Financial Markets (aka; the Plunge Protection Team) at private White House meeting. The group includes the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the SEC, and the Chairman of the Commodity and Futures Trading Commission. The group of financial heavyweights will update the President on developments in the equities markets and explain in greater detail what Henry Paulson calls “the systemic risk posed by hedge funds and derivatives.” Of course, by then, the blood could be running knee-deep down Wall Street.
But Bear's travails are just the beginning of Wall Street's woes. Now there's talk of Lehman Brothers going under. According to the Wall Street Journal:Worries are deepening that other securities firms and commercial banks might be on shaky ground. Lehman Brothers Holdings Inc. Chief Executive Richard Fuld, concerned about the markets and possible fallout from Bear Stearns's troubles, cut short a trip to India and returned home Sunday, ahead of schedule, according to people familiar with the matter. The decision came after a series of calls Saturday to both senior executives at the firm and Treasury Secretary Henry Paulson, these people say.” (“JP Morgan Rescues Bear Stearns”, WSJ) Mr. Fuld has good reason to be concerned, too. Economics professor Nouriel Roubini says that, “Lehman's exposure to toxic ABS/MBS securities is as bad as that of Bear: according to Fitch at the beginning of the turmoil Bear Stearns had the highest toxic waste ("residual balance") exposure as percent of adjusted equity on balance sheet; the exposure of Bear was 54.5% while that of Lehman was only marginally smaller at 53.3%; that of Goldman Sachs was only 21%. And guess what? Today Lehman received a $2 billion unsecured credit line from 40 lenders. Here is another massively leveraged broker dealer that mismanaged its liquidity risk, had massive amount of toxic waste on its books and is now in trouble. Again here we have not only a situation of illiquidity but serious credit problems and losses given the reckless exposure of this second broker dealer to toxic investments.” (Nouriel Roubini's Global EconoMonitor)
So, it looks like Bear will be just the first of many over-leveraged investment banks on their way to the chopping block. As credit gets tighter, banks will have to call in their loans to pare down their debts and increase their capital. That's easier said than done in an environment where consumer's are cutting back on borrowing and traditional revenue streams have dried up. The banks are facing some stiff headwinds in the near future.The Federal Reserve announced two initiatives on Sunday designed to “bolster market liquidity and promote orderly market functioning.
The Fed is “creating a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.This is an incredible move and way beyond the Fed's mandate to insure price stability. Bernanke is now offering to accept dodgy mortgage-backed bonds from NON-BANK institutions. Outrageous. We can be 100% certain now, that Congress's closed door meeting on Friday had nothing to do with Bush's spying on American citizens. Most likely, the Fed convened the meeting to present their extraordinary strategy to save the financial system from a Chernobyl-like meltdown.
The Fed also announced a decrease in the primary credit rate from 3-1/2 percent to 3-1/4 percent (and) an increase in the maximum maturity of primary credit loans to 90 days from 30 days.” (Fed statement)
So Bernanke has not only decided to bailout the banks but everyone else who is even remotely connected to the subprime/securitization swindle. Great. But the rest of the world is not so convinced that this is prudent economic theory, in fact, foreign investors are already shedding US debt instruments faster than any time in history. Let's hope that Bernanke realizes that foreign Central Banks and investors presently hold $6 trillion dollars of US Treasuries and dollars and can dump it on our shores whenever they choose. That's enough greenbacks to start a Wiemar-type blizzard that will last until Resurrection Day.Roubini on the Fed's plan to provide loans to non-bank institutions:By having thrown down the drain the decades old doctrine and rule that the Fed should not lend or bail out non-bank financial institutions the Fed has created an extremely dangerous precedent that seriously aggravates the moral hazard of its lender of last resort support role. If the Fed starts on the slippery slope of providing massive liquidity support to non-bank financial institutions that have recklessly managed their risks it enters into uncharted territory that radically changes its mandate and formal role. Breaking decades-old rules and practices is a radical action that seriously requires a clear public explanation and justification.”(Nouriel Roubini's Global EconoMonitor)
It's clear that Bernanke is just making it up as he goes along. His actions are unprecedented and, yes, counterproductive. He's just generating more panic among investors. That doesn't help. Just a few months ago, Bernanke was reiterating his belief that markets should operate with as little government intervention as possible. What a transformation. Now he has nationalized the banking system and is providing a backstop for privately owned brokerages. What's next; a bailout for the hedge funds?
There's still a great deal that we don't know about the Bear buyout. Like why was it so important to save a bank that had invested its shareholders money so poorly in toxic bonds that were virtually untested in stressful market conditions?
It is complicated, but the real reason for the bailout is that the entire financial industry is now inextricably bound together through multi-billion dollar counterparty transactions called credit default swaps and other unregulated derivatives. When one major player is stricken, the whole system can violently unwind.
According to the Wall Street Journal: “With each firm intricately intertwined with others in a maze of loans, credit lines, derivatives and swaps, the Fed and Treasury agreed that letting Bear Stearns collapse quickly was a risk not worth taking, because the consequences were simply unknowable. ...For Fed officials it was a difficult choice. They did not want to single Bear out for help and they realized their actions aggravated "moral hazard" -- the tendency of bailouts to encourage future risky behavior. But the alternative was potentially far worse. Bear risked defaulting on extensive "repo" loans, in which it pledges securities as collateral for overnight loans from money-market funds. If that happened, other securities dealers would see access to repo loans become more restrictive. The pledged securities behind those loans could be dumped in a fire sale, deepening the plunge in securities prices.” (“Fed Races to Rescue Bear Stearns In Bid to Steady Financial System”, Wall Street Journal)
So Bernanke felt like he had no choice. He could either bailout Bear or sit back and watch a daisy-chain of defaults take down one bank after another. Of course, there was another option. The Fed and the SEC could have fulfilled their responsibilities as regulators and insisted that derivatives trading come under the purvue of government officials. But, apparently, that was never a serious consideration among the non-interventionist free market cheerleaders at the Federal Reserve. They saw their job as simply enabling their obscenely rich constituents to get even richer while putting the public at risk. Now it has all ended badly.Saint Patrick's Day Financial Chainsaw MassacreIn less than an hour, the stock market will open and investors will get a chance to vote on the Fed's latest plan to rescue the US financial system. Good luck. The dollar has already sunk to $1.59 per euro, gold is up to $1017 per ounce, and oil topped out at $111 per barrel; all record highs. At the same time, foreign investors have begun an informal boycott of US debt. Last week's auction of US Treasuries was the worst in a decade. Thus, the anemic greenback has continued its steady decline as the fundamentals get weaker and weaker.
This afternoon, at 2PM, President Bush will meet with the Working Group on Financial Markets (aka; the Plunge Protection Team) at private White House meeting. The group includes the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the SEC, and the Chairman of the Commodity and Futures Trading Commission. The group of financial heavyweights will update the President on developments in the equities markets and explain in greater detail what Henry Paulson calls “the systemic risk posed by hedge funds and derivatives.” Of course, by then, the blood could be running knee-deep down Wall Street.
Monday, 17 March 2008
Gibraltar to be classed as OUTLAW tax haven
Spain is due to ask the Organisation for Economic Cooperation and Development (OECD) to return Gibraltar to a blacklist of tax havens that refuse to cooperate in fighting money laundering and other financial crimes, despite the British colony's promises of greater transparency. A spokesman for the Spanish tax office told EL PAÍS last week that the only fiscal information Spanish authorities receive from Gibraltar is "scarce and mostly useless," and that the government of the rocky outcrop on Spain's south coast routinely refuses to cooperate in investigations into money laundering and tax evasion."As far as we are concerned, Gibraltar is still a non-cooperative tax haven," the Spanish official said.
Macquarie Bank Australias Northern Rock as investors struggle to get out from down under
Macquarie Bank was roaring towards $100 a share. Now it is less than $50 - that's a 50% drop from top to bottom. In contrast most blue chips are down about 25% so far this year.As the bank struggles with a shredded share price, it is cutting back on selective business divisions - such as residential mortgages - and talking of redeploying staff. Management will not rule out lay-offs if things get worse.
Any problems at Macquarie Bank will go though the market like wildfire - as Australia's only world-class investment bank it has innumerable connections with almost every leading business. Not to mention of millions of customers and investors.
What's wrong? First of all the bank has had some very public failures. A Macquarie hedge fund called Fortress is making severe cutbacks to secure its financial position. Worse still, a series of funds called the ALPS funds - pitched as high-yielding funds for small investors - is getting into all sorts of trouble as the US market throws up one disaster after another.More worrying, investors are shunning "financial engineering" stocks such as Macquarie - MFS, a group that liked to style itself as a "junior Macquarie" has collapsed spectacularly with its former executives now being chased down by Citigroup to pay back loans.
But that's just what we see on the surface. It's the more subtle signals at Macquarie that are really turning heads in the market.ure, Macquarie has been sold down. But all banks have been sold down since the start of the year. The difference with Macquarie Bank is that it has been dumped.At the end of last week Macquarie was not just underperforming the ASX, it was underperforming a string of global investment banks that have released the sort of bad news that would put Macquarie's seemingly marginal troubles at Fortress and ALPs to shame.
For example, Macquarie has fared worse than Bear Sterns, the Wall Street bank which has sold out for 2 dollars a share.
Any problems at Macquarie Bank will go though the market like wildfire - as Australia's only world-class investment bank it has innumerable connections with almost every leading business. Not to mention of millions of customers and investors.
What's wrong? First of all the bank has had some very public failures. A Macquarie hedge fund called Fortress is making severe cutbacks to secure its financial position. Worse still, a series of funds called the ALPS funds - pitched as high-yielding funds for small investors - is getting into all sorts of trouble as the US market throws up one disaster after another.More worrying, investors are shunning "financial engineering" stocks such as Macquarie - MFS, a group that liked to style itself as a "junior Macquarie" has collapsed spectacularly with its former executives now being chased down by Citigroup to pay back loans.
But that's just what we see on the surface. It's the more subtle signals at Macquarie that are really turning heads in the market.ure, Macquarie has been sold down. But all banks have been sold down since the start of the year. The difference with Macquarie Bank is that it has been dumped.At the end of last week Macquarie was not just underperforming the ASX, it was underperforming a string of global investment banks that have released the sort of bad news that would put Macquarie's seemingly marginal troubles at Fortress and ALPs to shame.
For example, Macquarie has fared worse than Bear Sterns, the Wall Street bank which has sold out for 2 dollars a share.
worst possible news at the worst possible time
Bear Stearns blew up. It was the worst possible news at the worst possible time. A day earlier, the politically-connected Carlyle Capital hedge fund defaulted on $16.6 billion of its debt. Carlyle boasted a $21.7 billion portfolio of AAA-rated residential mortgage-backed securities, but was unable to make a margin call of just $400 million. (Where did the $21.7 billion go?) The news on Bear was the last straw. The stock market started reeling immediately; shedding 300 points in less than an hour.
Sunday, 16 March 2008
Eurozone breakup predicted as Italy's and Spain's economies are weakening
Europe, Mr Taylor said that while the German economy remains strong, others such as Italy's and Spain's are weakening. "You could see a scenario where the eurozone breaks up if economies continue to be so worried about inflation."
European financial markets were relatively unscathed by Wall Street's crisis but traders expect there to be a backlash when stock markets open tomorrow.
The Fed's plan will give 28 days of secured funding to Bear Stearns, which saw its value slashed over the week by more than a half to $3.7bn. JP Morgan will provide the funding, but the Fed will bear the risk if the loan is not repaid. Fed chairman, Ben Bernanke, who pumped $200bn of loans to cash-strapped institutions last week, said more would be available to help others in distress.
European financial markets were relatively unscathed by Wall Street's crisis but traders expect there to be a backlash when stock markets open tomorrow.
The Fed's plan will give 28 days of secured funding to Bear Stearns, which saw its value slashed over the week by more than a half to $3.7bn. JP Morgan will provide the funding, but the Fed will bear the risk if the loan is not repaid. Fed chairman, Ben Bernanke, who pumped $200bn of loans to cash-strapped institutions last week, said more would be available to help others in distress.
Friday, 14 March 2008
Allied Irish Bank carrying out covert trading activities that broke tax law.
Allied Irish Banks, the scandal prone lender, yesterday admitted it had discovered five former senior executives had been carrying out covert trading activities that broke tax law.Allied Irish Banks, the scandal prone lender, yesterday admitted it had discovered five former senior executives had been carrying out covert trading activities that broke tax law.The group had set up a British Virgin Islands-registered company, called Faldor. It held 750,000 euros (£500,000) with the funds being managed by the bank's asset management arm AIB Investment Managers. The group appears to have made 48,000 euros out of the arrangement, AIB said in a statement. It added that "appropriate disciplinary action" was being taken.
While the scale of the possible fraud is small, it is the latest example of wrongdoing at AIB. The Irish bank was left reeling two years ago when John Rusnak, a trader at its US business Allfirst, hid trading losses of $691m (£380m). The business has since been sold.In the past few weeks, AIB also admitted it overcharged customers on foreign exchange trades, and possibly on mortgages and trusts the bank set up to look after the estates of deceased customers.Dermot Gleeson, chairman of AIB, said he received news of the latest misdeeds with "dismay". "A number of the practices disclosed were completely unacceptable. I am resolved to insist upon high standards of probity and compliance throughout the organisation," he said.AIB is carrying out an internal review into its problems under Laurie McDonnell, the former auditor general of Ireland. The review is expected to be concluded in mid June.
Mr McDonnell's findings could lead to a wide-ranging spreading of blame within AIB, and it is possible that a number of senior heads will have to roll to take responsibility for the bank's control failures.However, many of the problems that have come to light now date back to the early 1970s. The questionable practices at Faldor happened between 1989 and 1996. AIB has known about the offshore company since last August, but decided to make a public statement about it now in order to have full disclosure about wrongdoing in the past.
While the scale of the possible fraud is small, it is the latest example of wrongdoing at AIB. The Irish bank was left reeling two years ago when John Rusnak, a trader at its US business Allfirst, hid trading losses of $691m (£380m). The business has since been sold.In the past few weeks, AIB also admitted it overcharged customers on foreign exchange trades, and possibly on mortgages and trusts the bank set up to look after the estates of deceased customers.Dermot Gleeson, chairman of AIB, said he received news of the latest misdeeds with "dismay". "A number of the practices disclosed were completely unacceptable. I am resolved to insist upon high standards of probity and compliance throughout the organisation," he said.AIB is carrying out an internal review into its problems under Laurie McDonnell, the former auditor general of Ireland. The review is expected to be concluded in mid June.
Mr McDonnell's findings could lead to a wide-ranging spreading of blame within AIB, and it is possible that a number of senior heads will have to roll to take responsibility for the bank's control failures.However, many of the problems that have come to light now date back to the early 1970s. The questionable practices at Faldor happened between 1989 and 1996. AIB has known about the offshore company since last August, but decided to make a public statement about it now in order to have full disclosure about wrongdoing in the past.
Banks have liquidity problems. Credit default swap derivatives exposure is estimated at $26 trillion.
Banks have liquidity problems. Credit default swap derivatives exposure is estimated at $26 trillion.
2/28/2008 Fannie Mae posts $3.56 billion loss
1/25/2008 Societe General posts $7.2 billion loss
2/27/2008 Bond Insurer MBIA default loss estimate $13.7 billion
2/25/2008 Bond insurer AMBAC looking to raise $3 billion in capital
2/18/2008 Northern Rock bank London nationalized to secure $107 billion
2/22/2008 Credit default swaps loss is $2 trillion
2/28/2008 Fannie Mae posts $3.56 billion loss
1/25/2008 Societe General posts $7.2 billion loss
2/27/2008 Bond Insurer MBIA default loss estimate $13.7 billion
2/25/2008 Bond insurer AMBAC looking to raise $3 billion in capital
2/18/2008 Northern Rock bank London nationalized to secure $107 billion
2/22/2008 Credit default swaps loss is $2 trillion
There is fear that something dramatic will happen
“It’s another round of the credit crisis. Some markets are getting worse than January this time. There is fear that something dramatic will happen and that fear is feeding itself,” Jesper Fischer-Nielsen, interest rate strategist at Danske Bank, Copenhagen; Reuters Yesterday’s action by the Federal Reserve proves that the banking system is insolvent and the US economy is at the brink of collapse. It also shows that the Fed is willing to intervene directly in the stock market if it keeps equities propped up. This is clearly a violation of its mandate and runs contrary to the basic tenets of a free market. Investors who shorted the market yesterday, got clobbered by the not so invisible hand of the Fed chief. In his prepared statement, Bernanke announced that the Fed would add $200 billion to the financial system to shore up banks that have been battered by mortgage-related losses. The news was greeted with jubilation on Wall Street where traders sent stocks skyrocketing by 416 points, their biggest one-day gain in five years. “It’s like they’re putting jumper cables onto a battery to kick-start the credit market,” said Nick Raich, a manager at National City Private Client Group in Cleveland. “They’re doing their best to try to restore confidence.” “Confidence”? Is that what it’s called when the system is bailed out by Sugar-daddy Bernanke? To understand the real meaning behind the Fed’s action; it’s worth considering some of the stories which popped up in the business news just days earlier. For example, last Friday, the International Herald Tribune reported: “Tight money markets, tumbling stocks and the dollar are expected to heighten worries for investors this week as pressure mounts on central banks facing what looks like the “third wave” of a global credit crisis….Money markets tightened to levels not seen since December, when year-end funding problems pushed lending costs higher across the board.”The Herald Tribune said that troubles in the credit markets had pushed the stock market down more than 3 percent in a week and that the same conditions which preceded the last two crises (in August and December) were back stronger than ever. In other words, liquidity was vanishing from the system and the market was headed for a crash.A report in Reuters reiterated the same ominous prediction of a “third wave” saying: “The two-year U.S. Treasury yields hit a 4-year low below 1.5 percent as investors flocked to safe-haven government bonds….The cost of corporate bond insurance hit record highs on Friday and parts of the debt market which had previously escaped the turmoil are also getting hit.”Risk premiums were soaring and investors were fleeing stocks and bonds for the safety of government Treasuries; another sure sign that liquidity was disappearing.Reuters: “The level of financial stress is … likely to continue to fuel speculation of more immediate central bank action either in the form of increased liquidity injections or an early rate cut,” Goldman Sachs said in a note to clients.” Indeed. When there’s a funding-freeze by lenders, investors hit the exits as fast as their feet will carry them. That’s why the lights started blinking red at the Federal Reserve and Bernanke concocted a plan to add $200 billion to the listing banking system.
New York Times columnist Paul Krugman also referred to a “third wave” in his article “The Face-Slap Theory”. According to Krugman, “The Fed has been cutting the interest rate it controls - the so-called Fed funds rate – (but) the rates that matter most directly to the economy, including rates on mortgages and corporate bonds, have been rising. And that’s sure to worsen the economic downturn.”…(Now) “the banks and other market players who took on too much risk are all trying to get out of unsafe investments at the same time, causing significant collateral damage to market functioning.” What the Times’ columnist is describing is a run on the financial system and the onset of “a full-fledged financial panic.”
The point is, Bernanke’s latest scheme is not a remedy for the trillion dollar unwinding of bad bets. It is merely a quick-fix to avoid a bloody stock market crash brought on by prevailing conditions in the credit markets.
Bernanke coordinated the action with the other members of the global banking cartel—The Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank—and cobbled together the new Term Securities Lending Facility (TSLF), which “will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally.” (Fed statement)
The plan, of course, is wildly inflationary and will put additional downward pressure on the anemic dollar. No matter. All of the Fed’s tools are implicitly inflationary anyway, but they’ll all be put to use before the current crisis is over.
The Fed’s statement continues: “The Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008.”
So, why is the Fed issuing loans to foreign banks? Isn’t that a tacit admission of its guilt in the trillion dollar subprime swindle? Or is it simply a way of warding off litigation from angry foreign investors who know they were cheated with worthless toxic bonds? In any event, the Fed’s largess proves that the G-10 operates as de facto cartel determining monetary policy for much of the world. (The G-10 represents roughly 85% of global GDP)As for Bernanke’s Term Securities Lending Facility (TSLF) it is intentionally designed to circumvent the Fed’s mandate to only take top-grade collateral in exchange for loans. No one believes that these triple A mortgage-backed securities are worth more than $.70 on the dollar. In fact, according to a report in Bloomberg News yesterday: “AAA debt fell as low as 61 cents on the dollar after record home foreclosures and a decline to AA may push the value of the debt to 26 cents, according to Credit Suisse Group.
“The fact that they’ve kept those ratings where they are is laughable,” said Kyle Bass, chief executive officer of Hayman Capital Partners, a Dallas-based hedge fund that made $500 million last year betting lower-rated subprime-mortgage bonds would decline in value. “Downgrades of AAA and AA bonds are imminent, and they’re going to be significant.” Bass estimates most of AAA subprime bonds in the ABX indexes will be cut by an average of six or seven levels within six weeks.” (Bloomberg News) The Fed is accepting these garbage bonds at nearly full-value. Another gift from Santa Bernanke. Additionally, the Fed is offering 28 day repos which –if this auction works like the Fed’s other facility, the TAF—the loans can be rolled over free of charge for another 28 days. Yippee. The Fed found a way to recapitalize the banks with permanent rotating loans and the public is none the wiser. The capital-starved banksters at Citi and Merrill must feel like they just won the lottery. Unfortunately, Bernanke’s move effectively nationalizes the banks and makes them entirely dependent on the Fed’s fickle generosity.
The New York Times Floyd Norris sums up Bernanke’s efforts like this:
“The Fed’s moves today and last Friday are a direct effort to counter a loss of liquidity in mortgage-backed securities, including those backed by Fannie Mae and Freddie Mac. Given the implied government guarantee of Freddie and Fannie, rising yields in their paper served as a warning sign that the crunch was worsening and investor confidence was waning. On Oct. 30, the day before the Fed cut the Fed funds rate from 4.75 percent to 4.5 percent, the yield on Fannie Mae securities was 5.75 percent. Today the Fed Funds rate is 3 percent, and the Fannie Mae rate is 5.71 percent, virtually the same as in October…..A sign of the Fed’s success, or lack of same, will be visible in that rate. It needs to come down sharply, in line with Treasury bond rates. Today, the rate was up for most of the day, but it did fall back at the end of the day. Watch that rate for the rest of the week to see indications of whether the Fed’s move is really working to restore confidence.”
New York Times columnist Paul Krugman also referred to a “third wave” in his article “The Face-Slap Theory”. According to Krugman, “The Fed has been cutting the interest rate it controls - the so-called Fed funds rate – (but) the rates that matter most directly to the economy, including rates on mortgages and corporate bonds, have been rising. And that’s sure to worsen the economic downturn.”…(Now) “the banks and other market players who took on too much risk are all trying to get out of unsafe investments at the same time, causing significant collateral damage to market functioning.” What the Times’ columnist is describing is a run on the financial system and the onset of “a full-fledged financial panic.”
The point is, Bernanke’s latest scheme is not a remedy for the trillion dollar unwinding of bad bets. It is merely a quick-fix to avoid a bloody stock market crash brought on by prevailing conditions in the credit markets.
Bernanke coordinated the action with the other members of the global banking cartel—The Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank—and cobbled together the new Term Securities Lending Facility (TSLF), which “will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally.” (Fed statement)
The plan, of course, is wildly inflationary and will put additional downward pressure on the anemic dollar. No matter. All of the Fed’s tools are implicitly inflationary anyway, but they’ll all be put to use before the current crisis is over.
The Fed’s statement continues: “The Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008.”
So, why is the Fed issuing loans to foreign banks? Isn’t that a tacit admission of its guilt in the trillion dollar subprime swindle? Or is it simply a way of warding off litigation from angry foreign investors who know they were cheated with worthless toxic bonds? In any event, the Fed’s largess proves that the G-10 operates as de facto cartel determining monetary policy for much of the world. (The G-10 represents roughly 85% of global GDP)As for Bernanke’s Term Securities Lending Facility (TSLF) it is intentionally designed to circumvent the Fed’s mandate to only take top-grade collateral in exchange for loans. No one believes that these triple A mortgage-backed securities are worth more than $.70 on the dollar. In fact, according to a report in Bloomberg News yesterday: “AAA debt fell as low as 61 cents on the dollar after record home foreclosures and a decline to AA may push the value of the debt to 26 cents, according to Credit Suisse Group.
“The fact that they’ve kept those ratings where they are is laughable,” said Kyle Bass, chief executive officer of Hayman Capital Partners, a Dallas-based hedge fund that made $500 million last year betting lower-rated subprime-mortgage bonds would decline in value. “Downgrades of AAA and AA bonds are imminent, and they’re going to be significant.” Bass estimates most of AAA subprime bonds in the ABX indexes will be cut by an average of six or seven levels within six weeks.” (Bloomberg News) The Fed is accepting these garbage bonds at nearly full-value. Another gift from Santa Bernanke. Additionally, the Fed is offering 28 day repos which –if this auction works like the Fed’s other facility, the TAF—the loans can be rolled over free of charge for another 28 days. Yippee. The Fed found a way to recapitalize the banks with permanent rotating loans and the public is none the wiser. The capital-starved banksters at Citi and Merrill must feel like they just won the lottery. Unfortunately, Bernanke’s move effectively nationalizes the banks and makes them entirely dependent on the Fed’s fickle generosity.
The New York Times Floyd Norris sums up Bernanke’s efforts like this:
“The Fed’s moves today and last Friday are a direct effort to counter a loss of liquidity in mortgage-backed securities, including those backed by Fannie Mae and Freddie Mac. Given the implied government guarantee of Freddie and Fannie, rising yields in their paper served as a warning sign that the crunch was worsening and investor confidence was waning. On Oct. 30, the day before the Fed cut the Fed funds rate from 4.75 percent to 4.5 percent, the yield on Fannie Mae securities was 5.75 percent. Today the Fed Funds rate is 3 percent, and the Fannie Mae rate is 5.71 percent, virtually the same as in October…..A sign of the Fed’s success, or lack of same, will be visible in that rate. It needs to come down sharply, in line with Treasury bond rates. Today, the rate was up for most of the day, but it did fall back at the end of the day. Watch that rate for the rest of the week to see indications of whether the Fed’s move is really working to restore confidence.”
Russia stretches its financial muscles
Kazakhstan, along with its Central Asian neighbors Turkmenistan and Uzbekistan, will receive a huge increase in energy-related revenue following a flurry of regional diplomatic activity. Ukraine, meanwhile, stands to lose the most under the new pricing framework for Central Asian natural gas.
The most important development over the past week or so was a March 11 announcement by the Russian state-controlled conglomerate Gazprom that, starting in 2009, it would pay European market prices for Central Asian natural gas. Gazprom did not specify a price, but given the current market conditions, Kazakhstan, Turkmenistan and Uzbekistan can expect to receive somewhere in the range of $200-$300 per 1,000 cubic meters (tcm) of gas next year. At present, Gazprom is paying up to 180/tcm for Central Asian gas. A statement issued by Gazprom said the deal was is "based upon the interests of the national economies and considering the international commitments with regard to the energy supply reliability and continuity."
The deal is certain to hit Gazprom’s bottom line. It could also potentially cause supply disruptions down the road by sparking pricing disputes, likely involving Ukraine, which is the key transit nation for European energy exports. But the Russian conglomerate’s action helps solidify Moscow’s position as the gatekeeper for Central Asian energy exports to Western European markets. Over the past year, the competition over Caspian Basin energy has intensified, with the United States, European Union and China all seeking to break Russia’s current stranglehold over regional export routes.
Gazprom officials have indicated they do not intend to absorb all of the shock of the higher costs, but will pass along some of the added expense to its own consumers. On March 14, Gazprom CEO Alexei Miller announced that the gas price for European customers could reach $400/tcm by the end of 2008. Earlier estimates for late 2008 had pegged the price at $310/tcm.
The most important development over the past week or so was a March 11 announcement by the Russian state-controlled conglomerate Gazprom that, starting in 2009, it would pay European market prices for Central Asian natural gas. Gazprom did not specify a price, but given the current market conditions, Kazakhstan, Turkmenistan and Uzbekistan can expect to receive somewhere in the range of $200-$300 per 1,000 cubic meters (tcm) of gas next year. At present, Gazprom is paying up to 180/tcm for Central Asian gas. A statement issued by Gazprom said the deal was is "based upon the interests of the national economies and considering the international commitments with regard to the energy supply reliability and continuity."
The deal is certain to hit Gazprom’s bottom line. It could also potentially cause supply disruptions down the road by sparking pricing disputes, likely involving Ukraine, which is the key transit nation for European energy exports. But the Russian conglomerate’s action helps solidify Moscow’s position as the gatekeeper for Central Asian energy exports to Western European markets. Over the past year, the competition over Caspian Basin energy has intensified, with the United States, European Union and China all seeking to break Russia’s current stranglehold over regional export routes.
Gazprom officials have indicated they do not intend to absorb all of the shock of the higher costs, but will pass along some of the added expense to its own consumers. On March 14, Gazprom CEO Alexei Miller announced that the gas price for European customers could reach $400/tcm by the end of 2008. Earlier estimates for late 2008 had pegged the price at $310/tcm.
Bear Stearns' goes belly up.classic run-on-the-bank
The struggling brokerage firm spent Friday trying to assure fearful investors that it isn't on the brink of insolvency. CEO Alan Schwartz and finance chief Sam Molinaro used a midday conference call to emphasize that Bear Stearns' financial situation isn't as dire as rumors suggest. They said the firm sees Friday's 28-day financing agreement with JPMorgan Chase (JPM, Fortune 500) as buying time to "get more facts out into the marketplace."But Wall Street wasn't buying it. Bear Stearns (BSC, Fortune 500) shares, after plummeting as much as 50% to an 11-year low on the announcement of the Fed-backed JPMorgan financing deal, held steady at much-reduced levels throughout Friday's conference call. The shares were down 38% at 1 p.m. EDT after the call wrapped up. Schwartz and Molinaro insisted on Friday's call that there have been "no material changes" in Bear Stearns' financial strength in recent days, and that the firm expects its first-quarter results to be within the range of analysts' estimates when Bear Stearns posts its numbers Monday afternoon.
But Molinaro also admitted that Bear Stearns was in dire straits Thursday night, after some firms that trade with it - fearful about rumors of a liquidity squeeze at Bear Stearns - "no longer wanted to provide financing."
That comment shows that Bear Stearns is dealing with a classic run-on-the-bank. The firm's short-term creditors refused to lend the firm any more money via the extension of overnight loans, and simultaneously demanded repayment of outstanding debt. The one-two punch overwhelmed Bear's cash position, forcing it to seek help. Had the Fed not stepped in, it appears doubtful Bear could have operated today.
The stunning developments cut Bear Stearns' stock value as low as $26.85. The shares opened the week at $69.75 and traded as high as $159 last year.
With no counterparties willing to lend Bear short-term credit - the lifeblood of a securities firm - the firm's ability to function independently appears to be over. The firm hinted at the need to find a more lasting solution on the call when Molinaro said he viewed the JPMorgan financing as "a bridge to permanent strategic alternatives." Rumors have Bear Stearns talking with firms, including JPMorgan and China's Citic, which bought a big stake in the firm last year. But the stock market action Friday suggests few investors believe a deal is near.
In short, the Fed is allowing J.P. Morgan - a commercial bank - to act as a conduit for pumping cash into Bear Stearns. The bank is being permitted to give Bear Stearns collateral at the Fed's emergency-lending discount window to secure 28-day financing, which in turn is lent back to Bear Stearns in order to finance its business.
The Fed's role in the deal suggests federal officials fear a systemic collapse of the U.S. financial system were Bear Stearns to fail. The fear stems from Bear central role in a multitrillion-dollar web of interconnecting derivative contracts.
Rumors that Bear Stearns was on the verge of collapse started buzzing around Wall Street trading desks on Monday. Schwartz - who took over as CEO in early January from longtime chief Jimmy Cayne - appeared on CNBC Wednesday afternoon to reassure the markets that the firm was stable. Schwartz was right in one respect: The firm had about $17 billion in short-term capital available as of Nov. 30 and had a net cash position of $8.2 billion - more than it had previously.
Schwartz's problem was that none of Bear Stearns' counterparties cared about its ability to pay off debts in the long term. With the value of debt securities in a nosedive, lenders care only about recovering on the loans they have out now. And starting late last week, they began to call in those loans.
This played directly upon Bear's biggest weakness relative to many of its competitors: It is the smallest of the investment banks and doesn't have a consumer banking or retail investor business to draw upon. Almost daily, Bear Stearns has to renew a large percentage of its $102 billion worth of open repurchase agreements - or short term loans from Wall Street dealers - or make up the difference out of its cash position.
It's unclear what exactly started Bear Stearns' nightmare this week. Veteran repurchase agreement traders told Fortune.com that a major European bank last week refused to accept Bear Stearns as a counterparty to a large swap trade. By late Monday and early Tuesday, traders at hedge funds told Fortune that they were being charged a premium by the swaps desks at Deutsche Bank (DB), UBS (UBS) and Citigroup (C, Fortune 500) to execute trades with Bear Stearns as the counterparty or which involved its credit.
The bottom fell out on Thursday, Bear Stearns CFO Molinaro told investors. The demands for cash came from counterparties as well as hedge fund clients who wanted to close out their prime brokerage accounts. The market voted with its feet and wallets.
Bear Stearn's biggest challenge now is panicked investors, who see the firm's debt as extremely risky. The swaps market, for instance, was pricing Bear Stearns' five-year credit default swaps, which are contracts that function as insurance against the risk of default of the firm's debt, 730 on Thursday. This means that an investor who wants to insure against the default of Bear Stearns debt pays an annual premium of $730,000 per $10 million face value.
In contrast, at the height of another recent high-profile liquidity crisis, Countrywide Financial's (CFC, Fortune 500) credit-default swaps traded in the low 600s prior to its purchase by Bank of America (BAC, Fortune 500).
If the panic doesn't subside soon, Bear Stearns may the least of the Fed's problems.
But Molinaro also admitted that Bear Stearns was in dire straits Thursday night, after some firms that trade with it - fearful about rumors of a liquidity squeeze at Bear Stearns - "no longer wanted to provide financing."
That comment shows that Bear Stearns is dealing with a classic run-on-the-bank. The firm's short-term creditors refused to lend the firm any more money via the extension of overnight loans, and simultaneously demanded repayment of outstanding debt. The one-two punch overwhelmed Bear's cash position, forcing it to seek help. Had the Fed not stepped in, it appears doubtful Bear could have operated today.
The stunning developments cut Bear Stearns' stock value as low as $26.85. The shares opened the week at $69.75 and traded as high as $159 last year.
With no counterparties willing to lend Bear short-term credit - the lifeblood of a securities firm - the firm's ability to function independently appears to be over. The firm hinted at the need to find a more lasting solution on the call when Molinaro said he viewed the JPMorgan financing as "a bridge to permanent strategic alternatives." Rumors have Bear Stearns talking with firms, including JPMorgan and China's Citic, which bought a big stake in the firm last year. But the stock market action Friday suggests few investors believe a deal is near.
In short, the Fed is allowing J.P. Morgan - a commercial bank - to act as a conduit for pumping cash into Bear Stearns. The bank is being permitted to give Bear Stearns collateral at the Fed's emergency-lending discount window to secure 28-day financing, which in turn is lent back to Bear Stearns in order to finance its business.
The Fed's role in the deal suggests federal officials fear a systemic collapse of the U.S. financial system were Bear Stearns to fail. The fear stems from Bear central role in a multitrillion-dollar web of interconnecting derivative contracts.
Rumors that Bear Stearns was on the verge of collapse started buzzing around Wall Street trading desks on Monday. Schwartz - who took over as CEO in early January from longtime chief Jimmy Cayne - appeared on CNBC Wednesday afternoon to reassure the markets that the firm was stable. Schwartz was right in one respect: The firm had about $17 billion in short-term capital available as of Nov. 30 and had a net cash position of $8.2 billion - more than it had previously.
Schwartz's problem was that none of Bear Stearns' counterparties cared about its ability to pay off debts in the long term. With the value of debt securities in a nosedive, lenders care only about recovering on the loans they have out now. And starting late last week, they began to call in those loans.
This played directly upon Bear's biggest weakness relative to many of its competitors: It is the smallest of the investment banks and doesn't have a consumer banking or retail investor business to draw upon. Almost daily, Bear Stearns has to renew a large percentage of its $102 billion worth of open repurchase agreements - or short term loans from Wall Street dealers - or make up the difference out of its cash position.
It's unclear what exactly started Bear Stearns' nightmare this week. Veteran repurchase agreement traders told Fortune.com that a major European bank last week refused to accept Bear Stearns as a counterparty to a large swap trade. By late Monday and early Tuesday, traders at hedge funds told Fortune that they were being charged a premium by the swaps desks at Deutsche Bank (DB), UBS (UBS) and Citigroup (C, Fortune 500) to execute trades with Bear Stearns as the counterparty or which involved its credit.
The bottom fell out on Thursday, Bear Stearns CFO Molinaro told investors. The demands for cash came from counterparties as well as hedge fund clients who wanted to close out their prime brokerage accounts. The market voted with its feet and wallets.
Bear Stearn's biggest challenge now is panicked investors, who see the firm's debt as extremely risky. The swaps market, for instance, was pricing Bear Stearns' five-year credit default swaps, which are contracts that function as insurance against the risk of default of the firm's debt, 730 on Thursday. This means that an investor who wants to insure against the default of Bear Stearns debt pays an annual premium of $730,000 per $10 million face value.
In contrast, at the height of another recent high-profile liquidity crisis, Countrywide Financial's (CFC, Fortune 500) credit-default swaps traded in the low 600s prior to its purchase by Bank of America (BAC, Fortune 500).
If the panic doesn't subside soon, Bear Stearns may the least of the Fed's problems.
Liechtenstein reaching a "reasonable" deal with the European Union over tax fraud.
The prime minister of Liechtenstein, which is at the centre of a tax evasion scandal, said yesterday talks were well advanced on reaching a "reasonable" deal with the European Union over tax fraud. "Our aim is to achieve a successful conclusion of the comprehensive tax fraud agreement that is currently under negotiation," Otmar Hasler said after signing a deal on joining Europe's border-free area of 24 nations. "Of course, we will continue to represent the legitimate interests of our citizens in these negotiations, as our European partners do," Hasler said in a statement. Countries across three continents have launched raids on suspected tax dodgers and pressure has increased on Liechtenstein to lift the cloak of secrecy covering its banks' operations. Liechtenstein, a tiny country with a population of 35,000 sandwiched between Switzerland and Austria, depends heavily on its banking sector. Germany has spearheaded a crackdown on tax havens after suspicions that hundreds of rich Germans evaded taxes by parking money in Liechtenstein banks. It wants the principality to take rapid action to combat fraud and make its finance sector more transparent.
Liechtenstein said yesterday it had no choice but to investigate the theft and sale to Germany of bank data that has sparked a global hunt on tax evaders because the actions constituted a crime. "We had to act. The investigation is a very serious matter because misappropriation of bank data is a crime," Justice Minister Klaus Tschuetscher told a press conference in Vaduz. He called on Germany to cooperate with the probe and to identify the intelligence agents who bought the data from a whistleblower, alleged to be a former Liechtenstein bank employee, for four million euros. Tschuetscher said Berlin was obliged to do so under a justice cooperation pact between Germany and the principality, where prosecutors on Wednesday announced a preliminary investigation against the suspected informant, Heinrich Kieber, "and others." Kieber is a former employee of Liechtenstein's LGT bank, which claims that a client list stolen from it in 2002 is being used by Germany as the basis for the country's biggest tax fraud probe ever. Germany has made the list featuring the names of 1,400 foreign investors in Liechtenstein available to other nations.
This week, 10 other countries-including the United States, Britain, France and Austrialia-announced investigations into suspected tax fraud through Liecthenstein, putting the principality under international pressure over its tax haven status.
It has resisted calls for greater cooperation on fighting cross-border tax fraud and accused Berlin of violating its sovereignty by spying on its banks and buying secret data. Germany has in turn threatened to isolate Liechtenstein from its European neighbours. When asked if Germany could hold off on ratifying Liechtenstein's accession to the European border-free area, Interior Minister Wolfgang Schaeuble told reporters in Brussels "in principle we are willing to ratify it, but there have been talks (on combating fraud), and they have to show some effect".
Liechtenstein is one of three countries on the Organisation for Economic Cooperation and Development's (OECD) black list of uncooperative tax havens, alongside Andorra and Monaco. The European Commission says the Schengen deal will oblige Liechtenstein to boost cooperation with EU countries in fraud investigations but will not make it alter its tax laws.
US banks are likely to fail as a result of the housing crisis
US banks are likely to fail as a result of the housing crisis, Ben -Bernanke said yesterday, warning that his country faced a more difficult situation than in the aftermath of the dotcom bust in 2001.
"There will probably be some bank failures," the Fed chairman told the Senate banking committee in his second day of biannual testimony to Congress.
He said the banks at risk were "small and in many cases de novo [new] banks that are heavily invested in real estate in localities where prices have fallen".
But he said: "I do not anticipate any serious problems" at any of the big banks, which played the most important role in the US financial system.
The Standard & Poor's financials index declined 3 per cent yesterday.
Mr Bernanke, meanwhile, dodged efforts by senators to enlist his support for proposals to reform the bankruptcy code or use taxpayers' money to intervene directly in the mortgage market.He said it was worth "thinking about" additional steps but could not recommend any at this point, beyond existing proposals to modernise the Federal Housing Administration and reform Fannie Mae and Freddie Mac.
The Fed chairman said there were "some similarities with the 2001 experience" - in so far as this downturn, like the previous one, was being driven by a sharp fall in asset prices.But he said there were "important differences". The fall in house prices was creating a "much broader set of issues" than the slump in tech stocks did.
Falling house prices affected more consumers than falling stock prices, while the house prices had also caused a "sustained disruption in the credit market".
Moreover, the US was in a weaker position to respond to the negative growth shock today than it was in 2001.
"There will probably be some bank failures," the Fed chairman told the Senate banking committee in his second day of biannual testimony to Congress.
He said the banks at risk were "small and in many cases de novo [new] banks that are heavily invested in real estate in localities where prices have fallen".
But he said: "I do not anticipate any serious problems" at any of the big banks, which played the most important role in the US financial system.
The Standard & Poor's financials index declined 3 per cent yesterday.
Mr Bernanke, meanwhile, dodged efforts by senators to enlist his support for proposals to reform the bankruptcy code or use taxpayers' money to intervene directly in the mortgage market.He said it was worth "thinking about" additional steps but could not recommend any at this point, beyond existing proposals to modernise the Federal Housing Administration and reform Fannie Mae and Freddie Mac.
The Fed chairman said there were "some similarities with the 2001 experience" - in so far as this downturn, like the previous one, was being driven by a sharp fall in asset prices.But he said there were "important differences". The fall in house prices was creating a "much broader set of issues" than the slump in tech stocks did.
Falling house prices affected more consumers than falling stock prices, while the house prices had also caused a "sustained disruption in the credit market".
Moreover, the US was in a weaker position to respond to the negative growth shock today than it was in 2001.
Monday, 10 March 2008
Blackstone Stone Group 170 million dollar quarterly loss Monday.
"Difficult market conditions in the US and Europe continue in 2008 and there is little visibility on when these conditions might improve," said Stephen Schwarzman, Blackstone's chief executive.
The Blackstone Stone Group LP, a large private equity firm which launched one of the biggest share offerings on the US market last year, announced a 170 million dollar quarterly loss Monday.
Blackstone's management cited "the meltdown in the credit markets" affecting the private equity industry in explaining the three-month loss after the firm had reaped a net profit of 1.18 billion dollars in the fourth quarter of 2006.
The private equity firm's shares slumped to all-time lows in the wake of its latest financial report.Its shares were down 3.7 percent from Friday at 14.04 dollars in early afternoon trading, but have tumbled heavily since closing at 35.06 dollars on June 22 last year when the company launched an initial public offering (IPO) which netted 4.13 billion dollars.Private equity firms like Blackstone typically borrow money from banks and investors to takeover public companies which they then take private, overhaul and seek to re-float for a handsome profit.The industry has seen its finances plagued since last August, however, as a widespread credit crunch has ravaged Wall Street making banks more reluctant to lend money and more aggressive about grabbing back collateral."As a consequence of reduced borrowing ability, the volume of new private equity acquisitions has materially declined," Blackstone said.
The private equity group's quarterly revenues fell a hefty 73 percent to 345 million dollars compared with 1.28 billion dollars during the fourth quarter a year earlier.
The company, which has 102 billion dollars of assets under management, said its earnings were also dented by its investments in the Financial Guaranty Insurance Company (FGIC), a major US bond insurer which has seen its finances stressed by the upheavals buffeting the money markets.
Blackstone said FGIC had been "adversely affected" by the financial market turmoil.
Executives said a sharp moderation in property-related revenues had also dragged down Blackstone's earnings.
On an adjusted basis, taking into account some of Blackstone's IPO-related expenses and other accounting measures, the private equity firm reported a net profit of 88 million dollars or eight cents per share, compared with 808.1 million and 72 cents a share a year earlier.
The Blackstone Stone Group LP, a large private equity firm which launched one of the biggest share offerings on the US market last year, announced a 170 million dollar quarterly loss Monday.
Blackstone's management cited "the meltdown in the credit markets" affecting the private equity industry in explaining the three-month loss after the firm had reaped a net profit of 1.18 billion dollars in the fourth quarter of 2006.
The private equity firm's shares slumped to all-time lows in the wake of its latest financial report.Its shares were down 3.7 percent from Friday at 14.04 dollars in early afternoon trading, but have tumbled heavily since closing at 35.06 dollars on June 22 last year when the company launched an initial public offering (IPO) which netted 4.13 billion dollars.Private equity firms like Blackstone typically borrow money from banks and investors to takeover public companies which they then take private, overhaul and seek to re-float for a handsome profit.The industry has seen its finances plagued since last August, however, as a widespread credit crunch has ravaged Wall Street making banks more reluctant to lend money and more aggressive about grabbing back collateral."As a consequence of reduced borrowing ability, the volume of new private equity acquisitions has materially declined," Blackstone said.
The private equity group's quarterly revenues fell a hefty 73 percent to 345 million dollars compared with 1.28 billion dollars during the fourth quarter a year earlier.
The company, which has 102 billion dollars of assets under management, said its earnings were also dented by its investments in the Financial Guaranty Insurance Company (FGIC), a major US bond insurer which has seen its finances stressed by the upheavals buffeting the money markets.
Blackstone said FGIC had been "adversely affected" by the financial market turmoil.
Executives said a sharp moderation in property-related revenues had also dragged down Blackstone's earnings.
On an adjusted basis, taking into account some of Blackstone's IPO-related expenses and other accounting measures, the private equity firm reported a net profit of 88 million dollars or eight cents per share, compared with 808.1 million and 72 cents a share a year earlier.
Sunday, 9 March 2008
Spanish economic crisis glut of unsold homes
The twin engines of the coming Spanish economic crisis are a collapsing housing market and a current account deficit, now at 10 per cent of gross domestic product. The two are related, of course, as the property bubble has been a driving force behind a credit-financed spending boom.
In response to a question about what to do about the rising current account deficit, I heard a respected Spanish economist say the best response would be to stop publishing it. He was joking, I think, but I am not entirely sure. There can be no currency crisis, of course, since Spain does not have its own currency. But even for countries in a monetary union, huge current account imbalances have a meaning. They point to future adjustment. In no sector is that adjustment going to be more painful than in the housing market.
I have become a collector of scary housing statistics of late. One of my favourites is a chart from the Bank of Spain, which shows that building approvals and permits*have fallen off the edge of a cliff since the end of 2006. At their peak, building permits were rising at an annual growth rate of 25 per cent. In the autumn of 2007, their annual change was minus 20 per cent – probably still going down. House prices have not fallen nearly as much, but this is only a matter of time, as sellers tend to suffer from a collective delusion at this stage in the housing cycle.
Between 1995 and last year, Spanish house prices tripled in nominal terms, and doubled in real terms. Several explanations have been offered: a trend for young people to leave their parental homes earlier; a rise in immigration; and the country’s popularity among northern European homebuyers. But beware of demand-side arguments. They are usually cyclical, and the cycle is just turning. Also, as supply increases with demand, there is now a glut of unsold homes.
I would expect real Spanish house prices to fall by almost as much as they have risen over the past 10 years. If one looks at real house prices in the US or Germany over very long periods, one finds that they have been virtually flat – as they should be.
The cost of building a house is relatively constant, and the land is not used for productive work. The purchase of a home protects its investor against inflation, for sure. But as long as the housing supply is relatively elastic, housing prices should not rise in real terms. Since Spain still happily generates fairly robust rates of inflation, the impact on nominal prices will be somewhat less severe.
There are some notable exceptions to the zero-price increase rule, for example the UK, where real prices have been going up over the years, but for very pathological reasons that are not necessarily present in other countries. The Spanish market is structurally more similar to the US and Germany, in the sense that a rise in demand is usually met by an offsetting rise in supply. By this logic, a substantial part of the abnormal inflation-adjusted house price gains we have seen will be reversed as the housing cycle turns down.
The economic impact of this downturn in the housing cycle is going to be worse for Spain than for other countries. A truly staggering statistic about Spain is the fact that construction investment constitutes 18 per cent of the Spanish gross domestic product, according to the European Union’s Ameco database. In France and Germany, that proportion is about 10 per cent.
When house prices fall, GDP will be hit in two ways: the first is the direct effect of a fall in construction investment, and the second is the indirect consumption effect, as people cannot extract new liquidity from their homes, which they could use for consumption spending. If the construction sector’s share of GDP were to shrink to 10 per cent gradually over a period of, say, four years, the direct effect on growth would be close to 2 percentage points per year.
Add the consumption effect from lower house prices, and you easily get a half-decade of zero growth – perhaps longer, perhaps worse, perhaps both.
Of course, the Spanish economy has some notable strengths. One is the fiscal position. The country has been running budget surpluses and has a manageable debt-to-GDP ratio. Spain is therefore relatively better equipped to compensate for a short cyclical shock than, for example, countries that have started out with excessive deficits, such as the UK. For a long period of adjustment, fiscal policy, however, is not going to help.
Second, Spain has a modern and robust banking sector that has avoided some of the pitfalls of modern credit markets. Yet Spanish banks will have problems once mortgage default rates are rising. And in terms of structural reforms, Spain ranks low in league tables on product market and retail regulation, and in terms of competition policy.
In response to a question about what to do about the rising current account deficit, I heard a respected Spanish economist say the best response would be to stop publishing it. He was joking, I think, but I am not entirely sure. There can be no currency crisis, of course, since Spain does not have its own currency. But even for countries in a monetary union, huge current account imbalances have a meaning. They point to future adjustment. In no sector is that adjustment going to be more painful than in the housing market.
I have become a collector of scary housing statistics of late. One of my favourites is a chart from the Bank of Spain, which shows that building approvals and permits*have fallen off the edge of a cliff since the end of 2006. At their peak, building permits were rising at an annual growth rate of 25 per cent. In the autumn of 2007, their annual change was minus 20 per cent – probably still going down. House prices have not fallen nearly as much, but this is only a matter of time, as sellers tend to suffer from a collective delusion at this stage in the housing cycle.
Between 1995 and last year, Spanish house prices tripled in nominal terms, and doubled in real terms. Several explanations have been offered: a trend for young people to leave their parental homes earlier; a rise in immigration; and the country’s popularity among northern European homebuyers. But beware of demand-side arguments. They are usually cyclical, and the cycle is just turning. Also, as supply increases with demand, there is now a glut of unsold homes.
I would expect real Spanish house prices to fall by almost as much as they have risen over the past 10 years. If one looks at real house prices in the US or Germany over very long periods, one finds that they have been virtually flat – as they should be.
The cost of building a house is relatively constant, and the land is not used for productive work. The purchase of a home protects its investor against inflation, for sure. But as long as the housing supply is relatively elastic, housing prices should not rise in real terms. Since Spain still happily generates fairly robust rates of inflation, the impact on nominal prices will be somewhat less severe.
There are some notable exceptions to the zero-price increase rule, for example the UK, where real prices have been going up over the years, but for very pathological reasons that are not necessarily present in other countries. The Spanish market is structurally more similar to the US and Germany, in the sense that a rise in demand is usually met by an offsetting rise in supply. By this logic, a substantial part of the abnormal inflation-adjusted house price gains we have seen will be reversed as the housing cycle turns down.
The economic impact of this downturn in the housing cycle is going to be worse for Spain than for other countries. A truly staggering statistic about Spain is the fact that construction investment constitutes 18 per cent of the Spanish gross domestic product, according to the European Union’s Ameco database. In France and Germany, that proportion is about 10 per cent.
When house prices fall, GDP will be hit in two ways: the first is the direct effect of a fall in construction investment, and the second is the indirect consumption effect, as people cannot extract new liquidity from their homes, which they could use for consumption spending. If the construction sector’s share of GDP were to shrink to 10 per cent gradually over a period of, say, four years, the direct effect on growth would be close to 2 percentage points per year.
Add the consumption effect from lower house prices, and you easily get a half-decade of zero growth – perhaps longer, perhaps worse, perhaps both.
Of course, the Spanish economy has some notable strengths. One is the fiscal position. The country has been running budget surpluses and has a manageable debt-to-GDP ratio. Spain is therefore relatively better equipped to compensate for a short cyclical shock than, for example, countries that have started out with excessive deficits, such as the UK. For a long period of adjustment, fiscal policy, however, is not going to help.
Second, Spain has a modern and robust banking sector that has avoided some of the pitfalls of modern credit markets. Yet Spanish banks will have problems once mortgage default rates are rising. And in terms of structural reforms, Spain ranks low in league tables on product market and retail regulation, and in terms of competition policy.
Hedge funds still pose significant risks to the financial system
Despite closer monitoring by regulators, hedge funds still pose significant risks to the financial system, a government report said Monday.
The report by the Government Accountability Office, the investigative arm of Congress, found that hedge funds’ inclination to take substantial risks with increasingly large sums of money - and to leverage those bets - means losses can spread and be magnified throughout the financial system.
The report said banks eager to do business with hedge funds often are not critical enough when assessing the risks of their complex investment strategies.
The head of the Managed Funds association, a trade group for hedge funds, said there are ways to fix the problems and said a committee appointed by President Bush will soon offer specifics. “Remedies may be found,” said Richard Baker, a former House Republican from Louisiana.
Hedge funds are vast pools of capital that operate with little government supervision. Investors use them in hopes of obtaining healthy returns, even when the stock market declines, through sophisticated and often-complicated investment strategies.
Traditionally catering to institutional investors and wealthy individuals, they have grown explosively in recent years, luring an increasing number of pension funds and university endowments.
Hedge funds are also big players in the market for derivative investments such as credit default swaps, essentially insurance contracts that protect investors against default of certain securities.
Some have suffered due to the credit crisis that has ravaged Wall Street over the past year. For example, New York-based Bear Stearns Cos. (nyse: BSCPRE - news - people ) managed two hedge funds that filed for bankruptcy last year after making losing bets on mortgage investments.
The GAO noted that those problems recall concerns about risks associated with hedge funds that have been present since 1998, when hedge fund Long-Term Capital Management came close to collapsing.
Still, the report noted that regulators including the Securities and Exchange Commission and the Federal Reserve have stepped up scrutiny of the parts of hedge fund activity that are able to oversee.
The SEC oversees nearly 2,000 hedge fund advisers, accounting for about one-third of total hedge fund assets under management in the U.S., the report noted.
The report also said that hedge fund advisers “have increased their level of disclosure” in response to demands from big investors like pension funds.
Since 1998, hedge funds have grown from more than 3,000 funds with $200 billion in assets to more than 9,000 funds with more than $2 trillion in assets last year, the report said. The majority of those assets - an estimated $1.5 trillion - is managed by U.S.-based hedge fund advisers.
The report “illustrates that even with the combined expertise of all the relevant regulators, we still lack the data necessary to judge the full risks associated with hedge funds,” Rep. Michael Capuano, D-Mass., one of the lawmakers who requested the report, said in a statement.
While Congressional Democrats have expressed concerns about the industry’s growth, business groups and a White House policy group have urged increased vigilance, not new government rules, as the best way to handle risks.
Pensions plans’ investments in hedge funds have grown from $3.2 billion in 2001 to $50.5 billion in 2006, the report found.
The report by the Government Accountability Office, the investigative arm of Congress, found that hedge funds’ inclination to take substantial risks with increasingly large sums of money - and to leverage those bets - means losses can spread and be magnified throughout the financial system.
The report said banks eager to do business with hedge funds often are not critical enough when assessing the risks of their complex investment strategies.
The head of the Managed Funds association, a trade group for hedge funds, said there are ways to fix the problems and said a committee appointed by President Bush will soon offer specifics. “Remedies may be found,” said Richard Baker, a former House Republican from Louisiana.
Hedge funds are vast pools of capital that operate with little government supervision. Investors use them in hopes of obtaining healthy returns, even when the stock market declines, through sophisticated and often-complicated investment strategies.
Traditionally catering to institutional investors and wealthy individuals, they have grown explosively in recent years, luring an increasing number of pension funds and university endowments.
Hedge funds are also big players in the market for derivative investments such as credit default swaps, essentially insurance contracts that protect investors against default of certain securities.
Some have suffered due to the credit crisis that has ravaged Wall Street over the past year. For example, New York-based Bear Stearns Cos. (nyse: BSCPRE - news - people ) managed two hedge funds that filed for bankruptcy last year after making losing bets on mortgage investments.
The GAO noted that those problems recall concerns about risks associated with hedge funds that have been present since 1998, when hedge fund Long-Term Capital Management came close to collapsing.
Still, the report noted that regulators including the Securities and Exchange Commission and the Federal Reserve have stepped up scrutiny of the parts of hedge fund activity that are able to oversee.
The SEC oversees nearly 2,000 hedge fund advisers, accounting for about one-third of total hedge fund assets under management in the U.S., the report noted.
The report also said that hedge fund advisers “have increased their level of disclosure” in response to demands from big investors like pension funds.
Since 1998, hedge funds have grown from more than 3,000 funds with $200 billion in assets to more than 9,000 funds with more than $2 trillion in assets last year, the report said. The majority of those assets - an estimated $1.5 trillion - is managed by U.S.-based hedge fund advisers.
The report “illustrates that even with the combined expertise of all the relevant regulators, we still lack the data necessary to judge the full risks associated with hedge funds,” Rep. Michael Capuano, D-Mass., one of the lawmakers who requested the report, said in a statement.
While Congressional Democrats have expressed concerns about the industry’s growth, business groups and a White House policy group have urged increased vigilance, not new government rules, as the best way to handle risks.
Pensions plans’ investments in hedge funds have grown from $3.2 billion in 2001 to $50.5 billion in 2006, the report found.
Warned all mobile users not to reply to the international SMS
Telecommunications Regulatory Authority (TRA) has warned all mobile users not to reply to the international SMS, which informs that they have won big financial awards provided by one of the international mobile manufacturers. TRA has urged mobile users not to respond to any of the numbers stated in such SMS for receiving the financial awards. In a statement issued here yesterday, TRA said it has received a number of complaints from mobile users saying that they have received international SMS informing them that they have won huge funds and urge them to call certain international numbers to receive the same. “Any message saying that you have won £500,000 is a false message and one of the fraud methods by suspected foreign organisations,” the TRA statement added. To avoid being a victim of such fraud, TRA called upon all mobile users not to answer such messages or reveal their personal information to them.
Great Depression American financial system in meltdown
Harry Koza in the Globe and Mail quotes Bernard Connelly, the global strategist at Banque AIG in London, who claims that the likelihood of a Great Depression is growing by the day.Martin Wolf, celebrated columnist of the U.K.-based Financial Times, cites Dr. Nouriel Roubini of the New York University's Stern School of Business, who, in 12 steps, outlines how the losses of the American financial system will grow to more than $1 trillion - that's one million times $1 million. That amount is equal to all the assets of all American banks.Every day now, thousands of people all over the U.S. and Great Britain are walking away from their homes - simply mailing their house keys to the banks - as housing bailout plans fail.With unemployment growing, the next phase will hit commercial real estate making the financial institutions the unwilling owners not only of quickly depreciating houses, but also of empty strip malls and even larger shopping centres.
The next domino to fall will be credit card defaults, and after that... who knows? There are so many exotic funds out there, with trillions of dollars in paper - or rather computer-screen money - all carrying assorted acronyms, and all about to disintegrate into nothingness. Over the next couple of years, scores of banks that have thrived on these devices, based on quickly disappearing equities, will fail.
"The end of the third quarter of 2008 (thus late September, a mere seven months from now) will be marked by a new tipping point in the unfolding of the global systemic crisis
"At that time indeed, the cumulated impact of the various sequences of the crisis will reach its maximum strength and affect decisively the very heart of the systems concerned, on the front line of which (is) the United States, epicentre of the current crisis."In the United States, this new tipping point will translate into - get this - a collapse of the real economy, (the) final socio-economic stage of the serial bursting of the housing and financial bubbles and of the pursuance of the U.S. dollar fall. The collapse of U.S. real economy means the virtual freeze of the American economic machinery: private and public bankruptcies in large numbers, companies and public services closing down."The report goes on to say that we are entering a period for which there is no historic precedent. Any comparisons with previous situations in our modern economy are invalid.We are not experiencing a "remake" of the 1929 crisis nor a repetition of the 1970s oil crises or 1987 stock market crisis.What we will have, instead, is truly a global momentous threat - a true turning point affecting the entire planet and questioning the very foundations of the international system upon which the world was organized in the last decades.
The report emphasizes that it is, first and foremost, in the United States where this historic happening is taking an unprecedented shape (the authors call it "Very Great U.S. Depression").It continues to predict that, although this crucial event is global, it will be the beginning of an economic 'decoupling' between the U.S. and the rest of the world. However, non 'decoupled' economies will be dragged down the U.S. negative spiral.Concerning stock markets, the GEAB anticipates that international stocks would plummet by 40 to 80 per cent depending where in the world they are located, all affected in the course of the year 2008 by the collapse of the real economy in the U.S. by the end of summer.The European authors of this report - it appears simultaneously in French, German and English - state that they simply and without prejudice try to describe in advance the consequences of the ominous trends at play in this 21st-century world, and to share these with their readers, so that they can take the proper means to protect themselves from the most negative effects.
So there you have it. Three reports from three different sources, all well regarded, and all pointing to a disastrous fall-out from our monetary moves.
The next domino to fall will be credit card defaults, and after that... who knows? There are so many exotic funds out there, with trillions of dollars in paper - or rather computer-screen money - all carrying assorted acronyms, and all about to disintegrate into nothingness. Over the next couple of years, scores of banks that have thrived on these devices, based on quickly disappearing equities, will fail.
"The end of the third quarter of 2008 (thus late September, a mere seven months from now) will be marked by a new tipping point in the unfolding of the global systemic crisis
"At that time indeed, the cumulated impact of the various sequences of the crisis will reach its maximum strength and affect decisively the very heart of the systems concerned, on the front line of which (is) the United States, epicentre of the current crisis."In the United States, this new tipping point will translate into - get this - a collapse of the real economy, (the) final socio-economic stage of the serial bursting of the housing and financial bubbles and of the pursuance of the U.S. dollar fall. The collapse of U.S. real economy means the virtual freeze of the American economic machinery: private and public bankruptcies in large numbers, companies and public services closing down."The report goes on to say that we are entering a period for which there is no historic precedent. Any comparisons with previous situations in our modern economy are invalid.We are not experiencing a "remake" of the 1929 crisis nor a repetition of the 1970s oil crises or 1987 stock market crisis.What we will have, instead, is truly a global momentous threat - a true turning point affecting the entire planet and questioning the very foundations of the international system upon which the world was organized in the last decades.
The report emphasizes that it is, first and foremost, in the United States where this historic happening is taking an unprecedented shape (the authors call it "Very Great U.S. Depression").It continues to predict that, although this crucial event is global, it will be the beginning of an economic 'decoupling' between the U.S. and the rest of the world. However, non 'decoupled' economies will be dragged down the U.S. negative spiral.Concerning stock markets, the GEAB anticipates that international stocks would plummet by 40 to 80 per cent depending where in the world they are located, all affected in the course of the year 2008 by the collapse of the real economy in the U.S. by the end of summer.The European authors of this report - it appears simultaneously in French, German and English - state that they simply and without prejudice try to describe in advance the consequences of the ominous trends at play in this 21st-century world, and to share these with their readers, so that they can take the proper means to protect themselves from the most negative effects.
So there you have it. Three reports from three different sources, all well regarded, and all pointing to a disastrous fall-out from our monetary moves.
Hedge funds, banks and other financial institutions come under pressure to cut their losses before conditions deteriorate further.
Tim Bond, head of global asset allocation at Barclays Capital, said: “It’s inflicting heavy losses on the banking system, eroding their capital and reducing their ability to lend. The spread widening is so severe, you’re seeing a rise in borrowing rates across the board for everybody except top-quality governments. It’s affecting both the price and availability of credit.”Turmoil in the credit derivatives markets is having an increasingly brutal impact on the wider financial system as a vicious cycle of forced selling drives risk premiums on company debt to new highs
The trend accelerated on both sides of the Atlantic last week as investors rushed to unwind highly leveraged positions in complex structured products. The cost of protecting US investment grade debt against default soared to a high of 188 basis points, from 80bp in January.Institutions that lapped up credit risk products in recent years – many financing their purchases through borrowing – are scrambling to reduce their exposure following heavy losses, traders say.
But many investors fear conditions could worsen as hedge funds, banks and other financial institutions come under pressure to cut their losses before conditions deteriorate further.Liquidating structured credit instruments requires buying large amounts of protection using credit default swaps. This, in turn, drives the cost of protection higher, potentially triggering a chain reaction.
“There is potential for some wild and possibly inexplicable price movements as the unwinds get bigger,” said Mehernosh Engineer, credit strategist at BNP.
The markets are so illiquid that a few trades can lead to sharp movements, producing violent price swings and knock-on effects.Some structured credit vehicles have in-built triggers that force them to be liquidated.Bank of America estimates that if the cost of US investment grade credit insurance rises above 200bp, the unwinding of structures could trigger a jump towards 220bp.Jim Sarni, portfolio manager at Payden & Rygel, an investment management firm, said: “The market is very concerned about counterparty risk and how stable positions are as they are marked to market as prices keep falling.”
The trend accelerated on both sides of the Atlantic last week as investors rushed to unwind highly leveraged positions in complex structured products. The cost of protecting US investment grade debt against default soared to a high of 188 basis points, from 80bp in January.Institutions that lapped up credit risk products in recent years – many financing their purchases through borrowing – are scrambling to reduce their exposure following heavy losses, traders say.
But many investors fear conditions could worsen as hedge funds, banks and other financial institutions come under pressure to cut their losses before conditions deteriorate further.Liquidating structured credit instruments requires buying large amounts of protection using credit default swaps. This, in turn, drives the cost of protection higher, potentially triggering a chain reaction.
“There is potential for some wild and possibly inexplicable price movements as the unwinds get bigger,” said Mehernosh Engineer, credit strategist at BNP.
The markets are so illiquid that a few trades can lead to sharp movements, producing violent price swings and knock-on effects.Some structured credit vehicles have in-built triggers that force them to be liquidated.Bank of America estimates that if the cost of US investment grade credit insurance rises above 200bp, the unwinding of structures could trigger a jump towards 220bp.Jim Sarni, portfolio manager at Payden & Rygel, an investment management firm, said: “The market is very concerned about counterparty risk and how stable positions are as they are marked to market as prices keep falling.”
Saturday, 8 March 2008
The credit market is showing significantly more fear than the equity market. There's a gaping hole between them
"The credit market is showing significantly more fear than the equity market. There's a gaping hole between them," says Tim Backshall, chief strategist of Credit Derivatives Research in Walnut Creek, Calif. In ordinary times, stock and bond investors see pretty much eye-to-eye when sizing up the risk of corporate default. When bond investors get nervous about a default, the stock price gets whacked because shareholders are the first to be wiped out in a bankruptcy. Lately, though, bond and derivative investors have been far more pessimistic than their equity brethren. If they're right, stocks could be in for big trouble. One of the most sensitive gauges of risk is the credit default swap market, and it's flashing red. The swaps are contracts on the possibility of a corporate default. One party buys protection from default for an annual fee, while the counterparty that collects the fee commits to paying in case of a default. If the cost of protection goes up, it means the shares are in some danger, even if the stock price doesn't show it.
A recent example of the swaps market's prescience is the case of insurers American International Group and MBIA . Swaps turned skittish about their prospects long before the stock market caught on to the companies' problems. The cost of default protection on MBIA bonds soared last summer and fall at a time when "the story from the equity market was that MBIA was going to benefit from the turbulence in the credit market by insuring more bonds," says Gary Kelly, head of research in the New York office of Tradition, a Swiss-owned broker for big dealers.
A recent example of the swaps market's prescience is the case of insurers American International Group and MBIA . Swaps turned skittish about their prospects long before the stock market caught on to the companies' problems. The cost of default protection on MBIA bonds soared last summer and fall at a time when "the story from the equity market was that MBIA was going to benefit from the turbulence in the credit market by insuring more bonds," says Gary Kelly, head of research in the New York office of Tradition, a Swiss-owned broker for big dealers.
Brokers at Lehi Mortgage Services Inc. inflated incomes and savings account balances
The Massachusetts attorney general filed suit yesterday against a Quincy mortgage broker, charging the firm with falsifying applications from customers to ensure they would qualify for loans.Brokers at Lehi Mortgage Services Inc. inflated incomes and savings account balances of loan applicants to boost their qualifications, the lawsuit filed in Suffolk Superior Court said. The civil suit charges Lehi with engaging in unfair and deceptive practices and fraudulently procuring loans, and it seeks to stop the firm from making new mortgages.The suit is based on an audit conducted by the Massachusetts Division of Banks of 100 loans the firm closed in 2006 and 2007.That audit, conducted last fall, determined that at least one in four of the applications contained fake information, according to the lawsuit. The banking division referred the results of its audit to the attorney general's office.
Lehi Mortgage "engaged in a widespread practice" of submitting false information about bank accounts and incomes that "it knew or should have known were inflated," the attorney general's suit said.Boston lawyer Jonathon Friedmann, who represents Lehi, declined to comment. "We have not seen the suit yet," he said.Loan brokers are intermediaries who shop for competing mortgage offers on behalf of borrowers, and they are paid a fee by the lender who wins the business.The lawsuit is the latest action by state regulators to crack down on subprime mortgage lenders and brokers in the wake of the foreclosure crisis, which has resulted in a near-record number of homeowners in Massachusetts losing their properties and many others facing foreclosure.In the subprime market, many borrowers purchased homes they could not afford using these expensive loans, and regulators said many applications were falsified. The Division of Banks in recent months has closed several mortgage firms for falsifying mortgage applications or for charging extraordinarily high fees.
At Lehi Mortgage, the state said 23 applications contained inflated or fake bank account statements from Citizens Bank - some of the accounts didn't exist at all. In three cases, a single Citizens employee in a Dorchester branch created verification of deposit forms, or VODs, with incorrect statements from the bank. Lenders often require these verification forms be submitted with a prospective borrowers' loan application.One of the falsified Citizens statements said Lehi's client had $18,341 in her bank account; in fact, she had $25, the suit said.
Citizens fired the employee in August, the court document said.
Citizens spokesman Michael Jones said the bank is cooperating with the state's investigation.
Lehi also inflated loan applicants' incomes, the suit said. In one application, an unnamed borrower earned an annual salary of $29,858. But in two different applications for loans, his income was stated as $63,000 and $55,800.
The suit said the Division of Bank's audit of Lehi's activity uncovered 26 problem loan applications out of 100 audited. Lehi also has offices in Mattapan, Lynn, and Dorchester.
Lehi Mortgage "engaged in a widespread practice" of submitting false information about bank accounts and incomes that "it knew or should have known were inflated," the attorney general's suit said.Boston lawyer Jonathon Friedmann, who represents Lehi, declined to comment. "We have not seen the suit yet," he said.Loan brokers are intermediaries who shop for competing mortgage offers on behalf of borrowers, and they are paid a fee by the lender who wins the business.The lawsuit is the latest action by state regulators to crack down on subprime mortgage lenders and brokers in the wake of the foreclosure crisis, which has resulted in a near-record number of homeowners in Massachusetts losing their properties and many others facing foreclosure.In the subprime market, many borrowers purchased homes they could not afford using these expensive loans, and regulators said many applications were falsified. The Division of Banks in recent months has closed several mortgage firms for falsifying mortgage applications or for charging extraordinarily high fees.
At Lehi Mortgage, the state said 23 applications contained inflated or fake bank account statements from Citizens Bank - some of the accounts didn't exist at all. In three cases, a single Citizens employee in a Dorchester branch created verification of deposit forms, or VODs, with incorrect statements from the bank. Lenders often require these verification forms be submitted with a prospective borrowers' loan application.One of the falsified Citizens statements said Lehi's client had $18,341 in her bank account; in fact, she had $25, the suit said.
Citizens fired the employee in August, the court document said.
Citizens spokesman Michael Jones said the bank is cooperating with the state's investigation.
Lehi also inflated loan applicants' incomes, the suit said. In one application, an unnamed borrower earned an annual salary of $29,858. But in two different applications for loans, his income was stated as $63,000 and $55,800.
The suit said the Division of Bank's audit of Lehi's activity uncovered 26 problem loan applications out of 100 audited. Lehi also has offices in Mattapan, Lynn, and Dorchester.
Rogue trading is a daily occurrence
Societe Generale posts 4th-quarter loss of $4.91 billion after trading fraud
was the headline in the Star Tribune in the wake of the $7 billion trading
scandal. The French bank took a 4.9 billion euro ($7.18 billion) hit closing
the unauthorized positions of futures trader Jerome Kerviel, who is being
held in a Paris prison and has been questioned by investigators for a third
time.An internal report said bank officials failed to follow up on dozens of
warnings about questionable trades. The report commissioned by a committee
of three independent board members detailed 75 warnings signs in Kerviel's
exchanges, such as a trade with a maturity date on a Saturday or a missing
broker name. The signals weren't always flagged to superiors and "when the
hierarchy was warned, they didn't react," the report said.Kerviel told investigators that he believes his bosses were well aware of
his risk taking but turned a blind eye as long as he earned money. "I can't
believe that my superiors were not aware of the amounts I was committing, it
is impossible to generate such profits with small positions," according to
excerpts of his police testimony published in Le Monde newspaper. Kerviel
also insisted that his top concern was "earning money for my bank. As long
as I was earning cash, the signs were not that worrisome," he said. "As long
as you earn money and it isn't too obvious, and it's convenient, nobody says
anything."Nick Leeson, the rogue trader who brought down Barings Bank told the BBC
that he was not shocked that the latest fraud had taken place - only its
scale. "Rogue trading is probably a daily occurrence within the financial
markets," he said.
Friday, 7 March 2008
Carlyle Capital Corp., a $21-billion European investment fund that had borrowed heavily to buy high, said it was unable to satisfy all of the lenders
credit crunch is showing signs of worsening, defying efforts by the Federal Reserve to restore confidence in the financial system.Bond and stock markets were rocked Thursday by mounting credit woes of hedge funds and other investment firms that bought securities with borrowed money.Some of those firms now are facing demands by their lenders to put up more capital against the falling value of their investments -- which in some cases are high-quality securities, not the low-quality mortgage debt at the heart of the housing crisis.Despite the Fed's deep cuts in short-term interest rates in recent months, "what the market is telling you is that there isn't any credit available," said Christopher Whalen, an analyst at Hawthorne-based research firm Institutional Risk Analytics, which analyzes risk for financial firms.
Further strain on borrowers could weaken the already fragile economy.
Late Wednesday, Carlyle Capital Corp., a $21-billion European investment fund that had borrowed heavily to buy high-quality mortgage-backed bonds, said it was unable to satisfy all of the lender demands, known as margin calls, that it received in recent days. The firm, a unit of private-equity firm Carlyle Group, said one lender had served it with a notice of default.
Another home-loan investor, Santa Fe, N.M.-based Thornburg Mortgage Inc., also said it couldn't meet margin calls. Its shares plunged $1.75 to $1.65 on worries that it might file for bankruptcy protection from creditors.
Fear of spreading margin calls hammered shares of other mortgage investment companies that had survived the industry shakeout of the last year. Annaly Capital Management in New York dived $3.47 to $15.81; Santa Monica-based Anworth Mortgage Asset Corp. sank $2.62 to $6.23.
Wall Street, facing another round of turmoil rooted in the housing market debacle, drove share prices down across the board. The Dow Jones industrial average tumbled 214.60 points, or 1.8%, to 12,040.39, its lowest since Jan. 22.
What has unnerved some investors is that the margin calls this week have stemmed in part from a drop in the prices of mortgage bonds issued by Freddie Mac and Fannie Mae, the two government-sponsored home loan finance giants.
As mortgage defaults continue to surge, investors' concerns about the financial health of the two companies have been evident in the deep declines in their stock prices. Shares of Fannie plummeted $2.57 to $21.70 on Thursday and are down 22% for the week; Freddie's shares slid $1.50 to $20.14 on Thursday and are down 20% for the week.
Some investors also have been dumping the companies' bonds despite their top-rank credit ratings. That has pushed down prices of the bonds and boosted their yields.
The falling value of the bonds has in turn triggered margin calls by nervous lenders who financed investment funds' purchases of the securities. The funds used leverage to juice their bets, but in a falling market that debt magnifies the funds' losses.
"The whole leverage game is unwinding," Whalen of Institutional Risk Analytics said.
As lenders pull back, they are fueling a vicious circle: Leveraged investment funds facing margin calls are forced to dump securities they bought on credit, which further drives down the value of the securities in the market, in turn triggering margin calls against other funds.
For the financial system, "margin calls can metastasize the problem" of credit-market woes, said T.J. Marta, fixed income strategist at RBC Capital Markets in New York.
Last week the normally low-key municipal bond market was upended by margin calls against some hedge funds that had bought the tax-free securities with borrowed money. Forced selling helped to drive yields on long-term muni bonds to their highest levels in nearly six years.
That spike helped to attract new investors, however. The result: Muni yields have edged lower this week, and the state of California's sale of $1.75 billion in general obligation bonds on Monday and Tuesday attracted record demand.
But troubles have persisted this week in other corners of the credit markets. The average yield on an index of 100 corporate junk bonds reached 9.74% on Tuesday, its highest level since 2003.
And in Europe rates have been rising on large loans that banks make to each other.
The three-month LIBOR, or London Interbank Offered Rate, on euro-currency loans was at 4.43% on Thursday, up from 4.39% on Wednesday and the highest since Jan. 17.
Higher LIBOR rates signal continued nervousness among banks about extending credit, analysts said.
Likewise, in the market for so-called credit default swaps -- contracts that allow investors to insure against default on corporate and other debt -- the cost of such insurance has rocketed in recent weeks, indicating investors are more fearful of worse to come.
Although the Federal Reserve's interest-rate cuts so far haven't calmed the credit markets, the central bank has no choice but to keep lowering rates, analysts say.
The Fed is expected to drop its key rate, now 3%, to 2.5% or 2.25% at its March 18 meeting.
"There is plenty of cash in the world, but you can't finance a thing" because investors and lenders remain on edge, said James Kauffman, who manages $80 billion at ING Investment Management in Atlanta. But at some point, he said, paltry short-term rates should give investors more incentive to pump money into higher-yielding long-term assets.
Further strain on borrowers could weaken the already fragile economy.
Late Wednesday, Carlyle Capital Corp., a $21-billion European investment fund that had borrowed heavily to buy high-quality mortgage-backed bonds, said it was unable to satisfy all of the lender demands, known as margin calls, that it received in recent days. The firm, a unit of private-equity firm Carlyle Group, said one lender had served it with a notice of default.
Another home-loan investor, Santa Fe, N.M.-based Thornburg Mortgage Inc., also said it couldn't meet margin calls. Its shares plunged $1.75 to $1.65 on worries that it might file for bankruptcy protection from creditors.
Fear of spreading margin calls hammered shares of other mortgage investment companies that had survived the industry shakeout of the last year. Annaly Capital Management in New York dived $3.47 to $15.81; Santa Monica-based Anworth Mortgage Asset Corp. sank $2.62 to $6.23.
Wall Street, facing another round of turmoil rooted in the housing market debacle, drove share prices down across the board. The Dow Jones industrial average tumbled 214.60 points, or 1.8%, to 12,040.39, its lowest since Jan. 22.
What has unnerved some investors is that the margin calls this week have stemmed in part from a drop in the prices of mortgage bonds issued by Freddie Mac and Fannie Mae, the two government-sponsored home loan finance giants.
As mortgage defaults continue to surge, investors' concerns about the financial health of the two companies have been evident in the deep declines in their stock prices. Shares of Fannie plummeted $2.57 to $21.70 on Thursday and are down 22% for the week; Freddie's shares slid $1.50 to $20.14 on Thursday and are down 20% for the week.
Some investors also have been dumping the companies' bonds despite their top-rank credit ratings. That has pushed down prices of the bonds and boosted their yields.
The falling value of the bonds has in turn triggered margin calls by nervous lenders who financed investment funds' purchases of the securities. The funds used leverage to juice their bets, but in a falling market that debt magnifies the funds' losses.
"The whole leverage game is unwinding," Whalen of Institutional Risk Analytics said.
As lenders pull back, they are fueling a vicious circle: Leveraged investment funds facing margin calls are forced to dump securities they bought on credit, which further drives down the value of the securities in the market, in turn triggering margin calls against other funds.
For the financial system, "margin calls can metastasize the problem" of credit-market woes, said T.J. Marta, fixed income strategist at RBC Capital Markets in New York.
Last week the normally low-key municipal bond market was upended by margin calls against some hedge funds that had bought the tax-free securities with borrowed money. Forced selling helped to drive yields on long-term muni bonds to their highest levels in nearly six years.
That spike helped to attract new investors, however. The result: Muni yields have edged lower this week, and the state of California's sale of $1.75 billion in general obligation bonds on Monday and Tuesday attracted record demand.
But troubles have persisted this week in other corners of the credit markets. The average yield on an index of 100 corporate junk bonds reached 9.74% on Tuesday, its highest level since 2003.
And in Europe rates have been rising on large loans that banks make to each other.
The three-month LIBOR, or London Interbank Offered Rate, on euro-currency loans was at 4.43% on Thursday, up from 4.39% on Wednesday and the highest since Jan. 17.
Higher LIBOR rates signal continued nervousness among banks about extending credit, analysts said.
Likewise, in the market for so-called credit default swaps -- contracts that allow investors to insure against default on corporate and other debt -- the cost of such insurance has rocketed in recent weeks, indicating investors are more fearful of worse to come.
Although the Federal Reserve's interest-rate cuts so far haven't calmed the credit markets, the central bank has no choice but to keep lowering rates, analysts say.
The Fed is expected to drop its key rate, now 3%, to 2.5% or 2.25% at its March 18 meeting.
"There is plenty of cash in the world, but you can't finance a thing" because investors and lenders remain on edge, said James Kauffman, who manages $80 billion at ING Investment Management in Atlanta. But at some point, he said, paltry short-term rates should give investors more incentive to pump money into higher-yielding long-term assets.