Financial Market Mayhem

[Guest David Guyatt]

I can't help but wonder if we are all being bled to bail out the banks -- the rampant increases in fuel costs, the leap in the cost of living, the price increase in foodstuffs etc., have largely impacted (or it seems so anyway) over the last year or so.

Back in the early Seventies the 400% jack in oil prices was used to defray the leap in the US deficit - following on from the Vietnam war.

[William Kelly]

Commodity Policies Set for Revision. Or is it too late?

http://www.nytimes.com/2008/05/31/business...ml?ref=business

[Mark Stapleton]

A research paper by the world's second-largest hedge fund suggesting that the "large financial crisis" is just about to begin is apparently causing jitters amongst the self-styled Masters of the Universe...

http://www.creditwritedowns.com/2008/07/16...writedowns.html

[My emphasis]

The large financial crisis has just begun

U.S. study estimated losses of financial institutions at $1.6 trillion dollars

by Marco Zanchi

Those that assume the misery is coming to an end are wrong. When it comes to writedowns, losses and raising fresh capital, the crisis has only just begun for banks. Losses are expected to reach $1.6 trillion, only a fraction of which have been uncovered. This is the conclusion of a confidential study made available to (the Swiss newspaper) Sonntagszeitung.

But that is not everything. While banks give their word of honor that no further capital is needed, the paper by Bridgewater Associates says: "We have big doubts that financial institutions will be able to obtain enough new capital in order to cover the losses. This will worsen the credit crunch. "

"If everything they say is true," says Charles Wyplosz, a professor at the University of Geneva, " a number of financial institutions will face bankruptcy." The research paper is ‘hot ‘in professional circles not only because of its content, but also because of the originator; Bridgewater Associates is the second-largest hedge fund in the world. The people behind it are brilliant, first among them Ray Dalio, who founded the company more than thirty years ago.

$26.6 trillion of debt is considered risky

The company is one of the big names in the industry. Their macro-analyses especially have weight in central banks - some central banks are customers of Bridgewater. When asked, the Swiss National Bank replied that they do not comment on such studies on principle.

What is at risk for the banks? In order to identify the dimensions of the crisis for financial institutions, Bridgewater has calculated the expected losses on a wide range of risky credit-based U.S. assets such as mortgages, credit- or credit card-receivables. Then, one would need to know basically who had how much on the books. The total value of these risky comes to $26.6 trillion dollars. The losses on these assets would then sum to $1.6 trillion dollars, if all of the assets were valued at market prices and not marked to model, writes Ray Dalio.

Traditional credit loans are not on the balance sheet at market prices, because they are not traded. The loss, when applied to the $26.6 trillion face value of assets, is an impairment of 6 percent. If market prices rise, the size of the loss is reduced; If prices fall, the losses increase.

US credit institutions are holding the largest losses.

Bridgewater has calculated that, so far, financial institutions have only acknowledged losses of $400 billion. Non-US banks - especially UBS - have provided the lion’s share of that at $238 billion. Therefore, the greatest expected future losses should be at U.S. credit institutions. This includes names such as Citigroup, Bank of America and JP Morgan Chase and many smaller institutions unknown here in Switzerland.

Why? That’s because lending is their core business, and they hold the majority of the assets. But, it is also because a large part of the losses are in the form of traditional bank loans, and, unlike securitized mortgages, these are not traded. So, their value has not been corrected on the balance sheet. "If we assess [the validity of] current market prices, we have a long way to go, because these institutions have only acknowledged one-sixth of their expected losses resulting from the credit crisis," writes Bridgewater. Five-sixths comes to nearly $500 billion.

The big question is: Can the banks plug these holes from the losses with new equity capital? Alone for the U.S. banks named above, we are talking about $400 billion, estimates Bridgewater. The banking industry does not have enough healthy institutions to absorb the sick. Meanwhile bank shares are in freefall. And the Middle Eastern Sovereign Wealth Funds have lost the appetite.

The international interdependence makes everything much more complicated

If the banks, as Dalio fears, do not succeed in mobilizing enough fresh capital, they would be forced to sell assets - and in a cyclical downturn at that. That could trigger a classic death spiral downwards, as sales of assets would pressure their share prices, which in turn weakens the banks' balance sheets and further sales would be necessary. "Once again we have a mountain of distressed assets to sell, which is enormous in comparison with any conceivable demand [for those assets]," says Dalio.

Exacerbating the situation is the fact that, in the Spring, "smart" investors bought large quantities of securitized loans, as their prices fell - in the hope of snapping up a bargain. If the prices continue to drop, these investors will come under severe pressure, especially many who are using borrowed funds.

What’s gotten Dalio so pessimistic? The United States is stuck in a large debt-relief process, a "classic deleveraging," as Japan was in the nineties or as many countries during the world economic crisis in the 30s or developing countries during their debt crises. Only this time everything is much more complex, primarily because of the enormous international interdependence of the financial services industry. Making things worse, U.S. consumers are overly indebted and access to cheap money is blocked now.

Moreover, the United States is dependent on foreign capital in order to finance their lifestyle. "The outlook for the dollar is bleak. Very, very bleak, " a former central banker said to Sonntagszeitung.

The real downturn in the U.S. is only beginning

So far, the financial problems resulting from the financial crisis have been large, but the economic ones have been small, because economic problems follow financial ones with a time delay. After liquidity injections by the U.S. central bank induced a short uptick from March to June, the economy and financial system of the USA should now be on the threshold of a real slowdown, he says. The poor credit environment crisis in the real economy resulting from the financial crisis will now have a negative reciprocal effect on the financial sector.

Phase one of the credit crisis was marked by the collapse of the real estate market in the U.S. and the crash in the market for subprime mortgages. Phase two - a kind of calm before the storm - began with the rescue of the U.S. investment bank Bear Stearns in mid-March. This phase came to an end in June, when optimism in the financial markets waned again. Now phase three is set to start. "Bridgewater is on the pessimistic side, no question," says George Magnus, Senior Economic Adviser at UBS in London, "but Bridgewater is absolutely right."

Nice post, Jan. Bridgewater should know.

The Anglo economies, and the US in particular, are about to be hit by an anvil like Wile-e-Coyote in the Road Runner cartoons.

Unlike all previous economic downturns in the modern era, this one contains an additional sting in the tail--there's no cheap energy left. i.e. the economy can't be resuscitated (barring a breakthrough discovery).

Realism shouldn't be confused with pessimism. There's massive social dislocation imminent. Survivalists will have their day in the sun.

[John Simkin]

http://www.guardian.co.uk/business/2008/ju....subprimecrisis

Shares in America's two largest mortgage lenders, Fannie Mae and Freddie Mac, plummeted for a third day on expectations that the government will bail them out if their funding problems worsen.

In early trading, Fannie shares sank $6.10, or 46.2%, to $7.10, while Freddie plummeted $4.01, or 50.1%, to $3.99. Both have lost more than 90% of their value since last August.

The Dow Jones industrial average dropped 176.6 points to 11,052.42 points, a fall of 1.6%, by 3.30pm BST. The FTSE 100 index in London, reversed earlier gains and dipped into bear territory again this afternoon. It was down 86.9 points at 5319.9 points, a drop of 1.6%.

Fannie and Freddie, which together own or guarantee nearly half of the nation's $12 trillion (£6tn) mortgage debt, have been hit hard by the US housing crisis.

The New York Times reported today that the government is considering a plan to place the companies into conservatorship. This could wipe out shareholders, and force taxpayers to cover losses on home loans Fannie and Freddie own or guarantee.

"I think everybody's just holding their breath in expectation that something substantive from the government will happen today or over the weekend," said Karen Shaw Petrou, managing partner of consulting firm Federal Financial Analytics in Washington.

A statement from US Treasury secretary Henry Paulson on the two mortgage lenders is expected later today.

Analysts said the government could not allow Fannie and Freddie to fail. "In a nutshell they are simply too big," said Phil Barleggs, Insight Investment's head of fixed product management. "There will be a lot of political pressure to bail them out."

[William Kelly]

It looks to me and several experts I trust that the collapse has now begun in earnest. It will start slowly, pick-up speed, snowball and who knows where it will bottom-out. I do think this will be VERY ugly and could play into the hands of the madmen at the helm in the beltway [a WAR will distract - and the ONLY thing that will]......

duck and cover.....

Yes, they will 'bail-out' some of these banks, hedge funds, and other entitities...but one can only do that with monopoly money.....confidence in the entire financial system will collapse and there is not enough money in the world [literally] to cover all the hedges.....if they just print that much, it will be inflation like in pre-War Germany. [bread for only $100.000 per loaf]

"It is well enough that the people of the nation do not understand our banking and monetary system for, if they did, I believe there would be a revolution before tomorrow morning." - Henry Ford

They wouldn't bail out the little guy, with the $200,000 mortgage who wants to keep his house, but they'll bail out five foreign governments who own most of Fannie Mac

BK

http://www.marketwatch.com/news/story/chin...D&dist=hppr

[John Simkin]

They wouldn't bail out the little guy, with the $200,000 mortgage who wants to keep his house, but they'll bail out five foreign governments who own most of Fannie Mac

BK

http://www.marketwatch.com/news/story/chin...D&dist=hppr

WASHINGTON, Jul 11, 2008 (BUSINESS WIRE) -- As politicians call for taxpayer bailouts and a government takeover of troubled mortgage lenders Freddie Mac and Fannie Mae, FreedomWorks would like to point out that a bailout is a transfer of possibly hundreds of billions of U.S. tax dollars to sophisticated investors and governments overseas.

The top five foreign holders of Freddie and Fannie long-term debt are China, Japan, the Cayman Islands, Luxembourg, and Belgium. In total foreign investors hold over $1.3 trillion in these agency bonds, according to the U.S. Treasury's most recent "Report on Foreign Portfolio Holdings of U.S. Securities."

FreedomWorks President Matt Kibbe commented, "The prospectus for every GSE bond clearly states that it is not backed by the United States government. That's why investors holding agency bonds already receive a significant risk premium over Treasuries."

"A bailout at this stage would be the worst possible outcome for American taxpayers and mortgage holders, who have been paying a risk premium to these foreign investors. It would change the rules of the game retroactively and would directly subsidize the risks taken by sophisticated foreign investors."

"A bailout of GSE bondholders would be perhaps the greatest taxpayer rip-off in American history. It is bad economics and you can be sure it is terrible politics."

SOURCE: FreedomWorks

What an amazing story. How is the government attempting to justify this action. Does Bush now believe in "nationalization"? It is ironic that one of the reasons that the CIA attempted to bring down the Labour government in Britain (1945-51) was that it was a socialist regime because it nationalized some of the country's main industries. However, in many cases, the industries wanted to be nationalized because they could not make a profit from the free-market. This is what is happening today. Capitalism cannot survive in the free-market and is therefore being subsidized by the state. Part of the drift towards a state capitalist system that exists in China today.

[David G. Healy]

Top Post

http://www.cnn.com/2008/US/07/13/indymac/i...tion=cnn_latest

Karl Denninger is the creator of Ticker Forum - probably the largest & most influential financial market trading site on the web. He's a lifelong Republican voter, and absolute believer in free markets. He's been predicting financial disaster for a lot longer than a year, and in his latest editorial piece, he lays out the horrific options for Freddie & Fannie, and the likelihood of the FDIC scheme (guaranteeing American bank deposits) running out of cash in the near future in an easy to grasp (but never simplistic) fashion. In fact, Denninger suspects the terminal bank run may start on Monday morning when Americans try to get their money out of IndyMac.

In other words, an Argentina-style collapse is entirely possible in the good ole US of A.

Once again, as you read the piece, please bear in mind that these are the words of a Republican free-marketeer, who has created & run successful businesses, and is still earning a very healthy living from trading financial markets. He ends with a call for ordinary Americans to reach for their pitchforks, French-style...

Fannie, Freddie, Banks and Government Debt

Ok folks, its time for a long sit-down type of Ticker - the sort that I usually don't write.

Let's start with Fannie and Freddie.

As anyone who has been reading The Ticker knows, I have been saying for quite some time that Fannie and Freddie are in fact "short to zero" candidates for the common stock. This is simply due to the mathematics of their financial situation - they are levered up anywhere from 60 to more than 200:1, depending on what you include and exclude from "capital" and "credit book."

I use the worst-case set of numbers, because in a bad market, that's what you wind up with - therefore, I include all of their credit guarantees, and exclude all intangibles such as "good will" and "tax loss carryforwards", with the latter being particularly important in this case because Fannie, for example, has some $13 billion in deferred tax assets.

That's not money, its an offset against future taxes. But to pay taxes you must first make a profit, and in a bad market, those are worth a big fat zero.

So here we sit with two firms that are running with leverage ratios that make a Hedge Fund look like a convocation of the Girl Scouts.

The Federal Government continues to claim that they are "well-capitalized." Uh huh. And I'm the Easter Bunny. Nobody running with a leverage ratio of 60:1 is "well-capitalized", say much less someone running with a leverage ratio of 200:1.

How did this happen? Quite simple - our government allowed it and in fact prodded these firms into doing it.

Fannie and Freddie began as firms that existed to provide liquidity to the conforming marketplace for mortgages, defined as 80/20 full-doc 30 year and 15 year loans. That is, you put down 20% of the purchase price of the house in cash, limiting your leverage ratio to 5:1, and in addition the typical "back end ratio", or total debt to income, was limited to 36%.

These loans are extremely safe because they have a fixed interest rate, your leverage is limited, and even in a severely-down housing market if you find yourself unable to pay the losses taken by the noteholder are limited or non-existent (you may be wiped out, but the note holder is likely to get most or all of their money back at foreclosure.)

As the 1990s and especially 2000 passed, however, Fannie and Freddie began to loosen standards. They put in place "automated approvals" that were, for the most part, essentially driven by FICO scores - that is, whether you pay your credit cards on time. In addition Congress prodded them to be the "standard bearer" for what was and is a horrible mis-allocation of capital - that is, to push the "American Dream" of homeownership to the maximum possible extent, and to glorify not owning a small bungalow in which you had enough room to sleep and raise a kid or two, but rather the "McMansion" philosophy of building on every square inch of farmland within 100 miles of a population center.

This is a misallocation of capital for a simple reason - a house does not generate GDP. It has utility value as shelter but, unlike a machine, it generates no new GDP by being in existence.

You cannot base an economy on housing for this reason.

Normally a private company could not pursue their end of the "bargain" in this sort of non-GDP-growing enterprise because as they continued to drop credit standards and increase leverage by issuing more and more debt the market would impose discipline. That is, as your gearing ratio went up so would the coupon - or interest rate - that you'd have to pay to issue that debt. The free market works quite well in this regard, and severely punishes those who buy debt that doesn't pay enough to cover their risk - its called "bankruptcy" and tends to result in big capital losses for the bondholders.

But Fannie and Freddie were seen to be "government backed", even though every one of their prospectuses for their debt clearly says it is not. That is, the market has perceived that they would not be allowed to fail irrespective of the amount of risk they took on! Thus, as we went through the 2000s, literally $5 trillion worth of credit was issued and sold off to people - but at a spread to Treasuries - that is, at an implied level of risk that was not equivalent to US sovereign obligations.

But was this marketing reasonable? No. In truth hundreds of billions of dollars worth of mortgages were sold into Fannie and Freddie using automated underwriting systems from firms like Countrywide, many of them refinances, that literally verified almost nothing more than the applicant's credit score! Debt-to-income and even in some cases property appraisals were either done by "automated" (meaning - nobody actually LOOKED at the property) means or not done at all! The former stodgy - and reasonably safe - 80/20 mortgage in fact represented only a fraction of the total "buy" of mortgages during the 2000s.

Even worse, Fannie and Freddie, who guarantee their own bond issues, started buying their own paper. That is, they are writing insurance on a hurricane when they are both the writer of the insurance and the loss payee. This looks brilliant in that the "expense" of providing that insurance effectively disappears, thereby making the entirety of the spread they get from their source-of-funds to their paper issue theirs to keep, but that's the wrong way to look at it.

In fact that paper is uninsured, because the money comes from one hand goes to the other, attached to the same body.

Where were the regulators? Congress? Intentionally asleep. Remember that back in 2003 and 2004 both firms were found to have improperly accounted for their results. This should have led to an immediate clampdown and forced deleveraging to no more than 10:1 on an audited basis.

It did not, and in fact neither firm timely filed accounting statements until last year, more than three years after the "errors" were discovered.

But for Congress, The Fed and OFHEO looking the other way on purpose most of the Housing Bubble could not have happened, as the money necessary to fuel it simply would not have been available.

Now we are faced with the reality - Fannie and Freddie, under fair value accounting rules, are insolvent (if you listen to Bill Poole.) What does that mean? It means that if Fannie and Freddie were to sell their assets and net it out today, you'd wind up with a negative number. That is, its assets are less than its liabilities.

The question now comes down to "what do we do about this?"

There are several choices, all of which will have bad side effects. It is critical, however, that we understand those side effects and choose the path forward that represents the least risk to the broader economy and to the government, not just the most expedient or the one that the people who would lose will scream most loudly about.

Here are the options:

1. The Fed "decides" to "open the discount window." This is a non-starter, right up front. Fannie and Freddie need longer-term - years in length - money. Repos for 28 or even 90 days don't do them a damn bit of good and in fact destabilize them further as the rate and thus cost of that money makes hedging their portfolio against interest risk extremely difficult. Forget this one.

2. The Fed "decides" to essentially backstop Fannie and Freddie by exchanging what's left of their balance sheet (longer-term bonds and notes) with GSE paper. Down this road lies the immediate implosion of the Treasury market. If they attempt this the dollar will instantaneously implode as The Fed will have converted the "backing" of our currency to houses declining in value while people's jobs and thus incomes necessary to pay the mortgages on same are being lost! If Bernanke is stupid enough to do this (and note that from Friday's Ticker, Ben said he will do whatever he wants unless Congress explicitly passes a law to stop him) you are very likely to need steel and lead, not gold or dollars, as this would almost certainly provoke an immediate currency and treasury market crisis.

3. The Federal Government steps in and decides to "formally" guarantee Fannie and Freddie's debt. This is an unmitigated disaster as it does nothing about the risk management policies and procedures in these firms. In fact, The Senate has just passed a bill that will increase, rather than decrease, the risk on Fannie and Freddie's book via their funding of the "mortgage bailout bill." The threat of this possibility is why, on Friday, the risk of default on US Government Debt doubled! In my years in the market I have never seen this kind of bond market dislocation - the spread moved from 9 to 20 basis points in one day. Further, the 10 year bond moved 15 basis points higher on yield on a day when people were scared to death and should have been demanding Treasuries, not selling them. "Risk free" was partially removed from the description of Treasuries and if this path is taken much more damage will accrue to US Government debt. ALL debt costs will rocket higher if this happens as everything is referenced, with a spread, off US Treasuries.

4. The government could attempt to prop them up without actually formally assuming control, by, for instance, forcing them to issue preferred stock which the government then buys. This would also impact treasury funding costs but not as severely as (1-3) above, and it also likely does little or nothing to stop the problem, because deleveraging to reasonable levels (e.g. 10:1) would require a literal $500 billion worth of capital! It would also destroy equity holders (stockholders) of their shares immediately by diluting them to an insane degree.

5. The government can decide to do nothing. If Fannie and Freddie are unable to fund, they go under. Period. This would produce a monstrous dislocation in the housing market, but it would not cut off all mortgages. It would, however, have a fairly dramatic impact on funding costs, probably adding 300 basis points to the cost of a mortgage - in other words, 30 year money would immediately go to about 9%. However, other forms of credit would be largely unaffected, including and most importantly, US Government debt.

6. OFHEO could step in and declare Fannie and Freddie "severely undercapitalized" and put them into "conservatorship." The next obvious step would be to place them into runoff, where they slowly divest their bond portfolio as it matures over the next 30 years. This would have the same impact on mortgage money as (5) above, but current bondholders would see different amounts of damage depending on exactly where they are in the capital structure and what and when they bought. Those who bought "trash paper" backed by what amount to no-doc loans would get creamed, while those who bought paper backed by 80/20 loans would likely lose nothing.

The only sane path forward, folks, is option #6.

Here's why.

#1 through #4 simply transfer the risk of loss, all of which was taken by Fannie and Freddie as private companies, to the taxpayer, in either whole or part. It potentially doubles the Federal Public Debt from $5 trillion to $10 trillion (there is another $4 trillion in Federal Debt that is "not publicly held".) Depending on which path and what combination of "pieces" are done, the impact would change, but none of this actually addresses the issue, which is that the credit book is too-highly leveraged and needs to be cut back.

#5 is a bad choice as well. Doing nothing will lead to these firms destruction. They are incapable of publicly offering equity at these stock prices and with this volatility - nobody in their right mind is going to buy, and the amount of equity they need is insane. Trying to raise $500 billion is simply not going to happen, but its what needs to happen in order to restore their leverage ratios to sane levels (e.g. 10:1)

So this leaves one with #6, conservatorship and forced runoff.

Where does that leave us as an economy?

1. A return to sound mortgage standards. 30 year fixed money on an 80/20 basis (you put up 20% of actual cash as a down payment) will likely blow out by 100-200 basis points from where it is now - that is, 1-2% higher. 8% rates with 20% down will become the norm, with somewhat-lower rates, say, 7%ish, for those who are very well capitalized and can prove it.

2. Low-doc, higher ratio loans will remain available but they will be extremely expensive, as they should be.

3. House prices will contract immediately to where the average American will be able to afford the average house in a given area under a 30/fixed, 80/20 loan at 8%. For many parts of this country this means a further huge decrease in home "values" - back to actual historical norms of 2.5-3x incomes.

4. The people who bought those Fannie and Freddie bonds thinking they were "risk free", while getting a premium over Treasuries, will take some losses. We cannot allow those losses not to be suffered, as that will, in effect, have allowed $50 billion per year to have been siphoned off by the buyers of these bonds, or nearly a half-trillion dollars over the last decade!

By the way, rumor is that Treasury is going to try to step in for $15 billion of preferred stock and access to the discount window. The latter means nothing and the former is like trying to take a leak on a forest fire to put it out - at best it buys them a small cushion against losses for a quarter or two.

The market already gave you its opinion of any such "recapitalization" on the back of The American taxpayer. Default swap spreads on GOVERNMENT debt doubled Friday. That has never happened before. Clearly there is a LOT of nervousness about the impact on the fiscal stability of The United States (as a whole!) should this attempt be made.

Now let's talk about IndyMac. You have to have been in a cave not to know that they were seized yesterday.

The good news is that the FDIC covers you up to $100,000.

The bad news is that the FDIC took a huge charge on this one, somewhere between 10-20% of their total balance sheet - they think. Unfortunately the damage will only stop there if people don't show up Monday to take all their money out, and if it does not spread to the other similarly-situated banks that also wrote scads of Option ARMs in California.

Both of these beliefs are, if the public has one lick of sense, the sort of magical thinking we should not tolerate from lawmakers and regulators.

Who else is on the list? As I said before, pick any bank with substantial real estate exposure in California and/or Florida that offered Option ARMs - that is, negative amortization loans.

Most of them are already near zero in their stock prices; here's a partial (very partial!) list - Downey, First Federal, Wachovia and Washington Mutual.

Not all of these are "modest regional" banks. Washington Mutual, in particular, is one institution that I highlighted last spring when their 10Q showed they were effectively paying dividends out of capitalized interest (that is, money they hadn't received yet as it was "increase" in loan value on Option ARMs.) I predicted then that this would end badly for them.

OTS was out complaining about Chuck Schumer "causing" IMB to fail by inciting a bank run.

OTS, you're wrong - you are the reason that IMB failed, and you, Congress, The Fed and OCC are the reason that all other institutions similarly situated are likely to fail as well!

OTS and OCC (not to mention The Fed or Congress) could have stepped in last spring when that 10Q from WaMu was released and started going through all of these banks, hitting every one of them with enforcement orders demanding that they stop that crap and divest themselves of that paper immediately.

They did not.

In fact, Wachovia didn't stop offering PayOption Mortgages (albeit "fixed rate" ones) until just a week or so ago, and Downey announced they were going to stop doing so just this last week!

So OTS, I think you need to shut up. While Mr. Schumer and I could probably count the things we agree on using the fingers of one hand, the fact remains that in this he was absolutely right, and you were absolutely wrong.

Your job is to guarantee the safety and soundness of our thrifts. That means paying attention to what they're doing and the embedded risk of loss and default in each of those scenarios and programs. You seem to think this is some sort of game, where you can simply "hope and pray", while fostering whatever sort of bubble economy the banks wish to dream up, and it will all be ok.

That of course is pure nonsense.

As for The Fed, OTS and OCC generally, you put the banks into an impaired capital position in the first place by allowing them to play games with sweeps and such, thereby destroying the usual 10% reserve requirements. This degradation of reserves means that much smaller problems destroy the bank than would otherwise be the case.

This too is intentional; The Fed could have hiked reserve requirements going into this mess and in fact could have done so when the property markets started to overheat. It did not and you did not raise any warnings about this, nor have you been out there pounding the drum for raising more capital and taking down leverage.

I have no sympathy - at all - for your position at this time. Zero. This is a crisis of your own manufacture and you deserve what you get.

CNN is reporting that there are ninety other banks on the "troubled" list. Yoo hoo - do 'ya think the $50 billion the FDIC has will be enough?

That's what I think too.

Again, to Americans, I say:

* If you have more than $100,000 in a bank, get under the FDIC limits immediately. Like Monday. How many times do you need to hear this before you figure it out? While nearly $200 million was cleared out of IMB before it blew up the fact remains that nearly a billion dollars of uninsured deposits remained, and those people are very likely to lose at least some of their money, perhaps as much as half.

* Consider getting all your liquid cash over immediate expenses into Treasury Direct and buying T-bills with it. If the government goes down you will need steel, lead and brass, not money.

* Get away from a reliance on debt. Immediately, if not sooner. You simply cannot afford to be in debt in this environment. Period. The odds are very high that any callable line will be called as stress continues to increase, or interest rates, if adjustable, will be ramped significantly.

Look folks, OTS and OCC are not doing their jobs and haven't been since 2003 when the housing bubble began. IndyMac bank was spun off by Countrywide to take paper that they couldn't sell to Fannie and Freddie!

This very same bank has been offering way-above-market CDs in an attempt to attract deposits. How were they intend to pay the coupon on those CDs? Isn't this like doubling down every time you lose at Blackjack? Do you know what the Pit Boss in Vegas calls someone who does that? BROKE. Again - the regulators saw all this as it was advertised - where were they and why didn't they stop it?

The Fed has sat on its hands as well through all of this, and in fact instead of forcing people to deleverage they have made more liquidity available since August, just like, as I've noted, giving heroin to an addict instead of forcing him or her to detox and suffer withdrawals.

Finally, Congress has refused to step in. In fact, their latest "Housing Bill", which The Senate passed last night and which a whole bunch of Senators didn't even have the gonads to vote on, attempts to continue the party for the drug addicts by further increasing the leverage in the FHA and pouring yet more liquidity - dope - into the addicts veins!

Unfortunately at this point the addict is about to suffer heart failure and can't survive another hit. In fact, he may not survive the hits he's already taken!

How much more of a warning do you need folks?

I have been saying that the clock is about to expire for over a year.

The alarm just rung.

Wake up.

Every American who reads this needs to understand that you must choose now whether you are going to sit idly by while Congress and the regulatory agencies put their fingers in their ears and allow the blasts to continue to occur at ever-increasing rates and sizes, including those that engulf and destroy you financially, or whether you are going to, right now, get every one of your neighbors and friends together and organize to shut down your local city and/or Washington DC in peaceful protest until Congress, OCC, OTS and The Fed cut this crap out.

Believe me folks, the French know how to do this. Spontaneously, 5,000 people will appear and literally block the streets, effectively closing them until their complaints are heard.

We as Americans either act now or you are giving consent.

Do you need a bigger warning than the possible implosion of the mortgage agencies that hold more than half of all outstanding mortgages today? Does not the failure of a large regional bank in California - the second largest failure in FDIC history - wake you up?

If not, you're beyond hope.

If so, its time to act.

http://market-ticker.denninger.net/

[John Simkin]

The US government has announced sweeping measures to shore up the nation's two largest mortgage finance companies, Freddie Mac and Fannie Mae. The plan calls on Congress to expand the companies' access to credit and allow the Treasury to buy shares in the companies if needed. The two firms own or guarantee almost half of all US home loans - more than $5 trillion (£2.5 trillion) of debt.

Fannie Mae (Federal National Mortgage Association) was created by Roosevelt's New Deal in 1938. It was privatised by Lyndon Johnson in 1968 to help pay for the Vietnam War. To provide competition in the secondary mortgage market, and to end Fannie Mae's monopoly, Congress chartered Federal Home Loan Mortgage Corporation (Freddie Mac) as a private corporation.

[John Simkin]

BBC News Website:

http://news.bbc.co.uk/1/hi/business/7522160.stm

The US House of Representatives has passed a massive housing rescue bill that could help struggling homeowners get cheaper loans.

The vote came after the White House announced that President George W Bush had dropped his threat to veto it.

The bill will now be passed to the Senate for approval before being signed into law.

More than a million Americans have lost their homes in the worst housing crisis since the Great Depression.

President Bush's change of heart came despite his objection to a provision for $3.9bn (£1.95bn) in community grants to buy up and repair repossessed homes.

Under the rescue plan, hundreds of thousands of homeowners trapped in mortgages they cannot afford on homes that have fallen in value would be able to refinance their mortgages with more affordable, fixed-rate loans backed by the Federal Housing Administration.

The bill would set up the first national licensing system for mortgage brokers and other loan officers.

It also includes a tax break of as much as $7,500 for first time home buyers, as well as help for troubled mortgage finance providers Fannie Mae and Freddie Mac.

Republican anger

The BBC's Michelle Fleury in New York says the need for a rescue plan for Fannie Mae and Freddie Mac gave the housing bill a new sense of urgency.

Keeping the two firms open is seen as crucial to the functioning of the housing market, since between them they own or guarantee half the entire mortgage debt in the US.

But correspondents say a government rescue could land US taxpayers with a big bill.

Earlier this week, the Congressional Budget Office said it could cost up to $25bn.

Many congressional Republicans are angry about the legislation, which they say bails out irresponsible homeowners and unscrupulous lenders.

Nonetheless, the White House is now in favour of the plan - which is expected to be approved by the Senate, possibly on Friday or Saturday.

"The positive aspects of the bill are needed now to increase confidence and stability in the housing and financial markets," White House spokeswoman Dana Perino said.

The bill passed in the House by a vote of 272 to 152.

US Treasury Secretary Henry M Paulson and both Democratic and Republican lawmakers negotiated the final deal.

The bill hands the Treasury Department the power to extend Fannie Mae and Freddie Mac an unlimited line of credit and to buy an unspecified amount of their stock if necessary.

Mr Paulson called the legislation "a strong message that we are sending to investors" that would play a crucial role in "helping turn the corner" on the housing crisis.

Will it work?

[Mark Stapleton]

But...we don't even have any bananas to trade....maybe we should be called a Fast-Food/Walmart Republic. Yeah, things look even worse than I thought, and everyone thought I was crazy and pessimistic.. I think this next week or two should prove very 'interesting' and depressing........U.S. Style Corporate Capitalism is really a GIANT Ponsy-scheme and they can only be carried so far, then they collapse and are exposed for what they really ARE!.....coming to a shopping mall / bank account near your real soon....a 'dead-zone'.

Re: bananas - I thought Chiquita was the new (blood-free) name of the United Fruit Company? Silly me.

I suspect that, very shortly, we're about to see what the End Game consists of.

Until now, Shock Therapy has been prescribed for everywhere from Chile & Argentina to Poland & the former USSR - with Africa permanently vibrating as the electric current courses through its bones. Will Shock Therapy be tried in America and western Europe?

Or will it be Business As Usual - ie some catastrophic war?

1001% congruence - It's called when the 'chickens come home to roost' - and they xxxx on wherever/whomever they are at home - don't they.... I suspect they will relieve themselves on the USA, UK, much or Europe, all of the developing nations and Iran [and middle-east] in particular.

A personal note. I was in deep depression today. My love died not long ago and life seems meaningless on that 'level' and now the political and economic 'magic show' is 'folding'......very sad. A Planet and Species with such potential...and apparently not realized........."so it goes" [K. Vonnegut] I shed a tear for the current reality/nightmare. What would have been bizarre parody a few months ago is now sad reality....and things will soon get much worse. Goodbye all. Good luck to us all. We'll really need it. Endgame is here and it looks 'rigged' to me....[to fail for the average Human]. But we must fight on just in case.....just in case.......just......

The banana republics are notorious for their political violence and instability. Political upheaval in America is likely, imo, as the population discovers that the current political system has failed. And it's a massive 300 million population.

What system will emerge is anyone's guess but I predict the USA will break up into several separate entities.

[Mark Stapleton]

Good to see Arnie The Governator doing his best to kick start riots in the streets by shifting c80% of California state employees onto the minimum wage of $6.55 per hour!

http://www.sfgate.com/cgi-bin/article.cgi?.../BAFJ11UH46.DTL

A quick google search reveals the California Democrat proposals which have been rejected out of hand by Republicans, thus creating this legislative deadlock. Most of the tax increases apply to big business and high income earners. Much of the tax relief and exemptions benefitting high income earners were legislated in the late 1990's when the economy was booming, but now the economy is contracting these greedy pigs are unwilling to return some of the largesse they were granted in boom times, preferring instead to place the load on the burgeoning underclass.

So much for the Christian ethics and morality which the Republicans are supposedly famous for. Of course, Republicans would probably find some biblical justification for their selfishness. Maybe 'charity begins at home'.

http://www.sacbee.com/111/story/1069555.html

Democrats detail tax increase proposals

By Judy Lin and Dan Smith - jlin@sacbee.com

Last Updated 9:23 pm PDT Tuesday, July 8, 2008

Republican Assemblyman Roger Niello of Sacramento, right, said the Democratic budget proposal "will be a troubled and very challenged proposal on the Assembly floor."

Brian Baer / bbaer@sacbee.com

Democrats on Tuesday proposed billions in tax increases on businesses and high earners to help bridge California's budget shortfall.

The proposed hikes include rolling back the dependent child income tax credit expanded in the 1990s, creating two higher income tax brackets for the state's biggest earners and increasing corporate taxes.

The long-awaited list of revenue proposals faces near certain defeat, however, as Republican lawmakers have repeatedly said they are unified in their opposition to any tax increases. Approving a budget and increasing taxes requires a two-thirds vote, which means GOP support is mandatory.

"I guarantee you it will be a troubled and very challenged proposal on the Assembly floor," said Assemblyman Roger Niello, a member of the two-house budget conference committee that finished its work over Republican opposition Tuesday. "After we're done (rejecting the tax increases), we can all go back to square one to figure out how we get a supermajority vote on this budget."

Gov. Arnold Schwarzenegger and state lawmakers have yet to strike a compromise on how to close a $15.2 billion budget shortfall in the $101 billion general fund. The entire budget proposed by the governor is $144 billion, including bond and special funds.

Lawmakers missed a June 15 constitutional deadline for passing a balanced spending plan for the fiscal year that began July 1.

In earlier drafts of the budget, majority Democrats presented plans that called for as much as $11 billion in added revenues. Tuesday's proposals amount to $8.2 billion, plus another $1.5 billion from a proposed tax amnesty plan.

Democrats have proposed before -- a 2005 move failed to receive a single GOP vote -- the creation of 10 percent and 11 percent tax brackets for high earners. The highest tax bracket now is 9.3 percent.

The plan unveiled Tuesday would impose a 10 percent rate on the portion of couples' incomes above $321,000 a year and an 11 percent rate on the portion of income above $642,000.

It would raise about $5.6 billion a year.

Big business would lose its net operating loss deduction for three years, bringing the state another $1.1 billion, according to the Senate plan. And the plan would restore the franchise tax rate for businesses from 8.4 percent to 9.3 percent, raising $470 million.

Reducing the dependent income tax exemption would bring the state about $215 million in the fiscal year that started July 1.

Lawmakers and then-Gov. Pete Wilson expanded the child dependent exemption in 1997 and 1998 when the state's budget picture was brighter and tax relief was a necessary political piece to approve the spending plan.

The Senate's proposal would apply only to households with adjusted gross income more than $150,000 a year. It would lower the current allowable exemption for each child from $294 to $94 - the same amount currently allowed for a personal exemption.

Democrats rejected a more ambitious plan advanced by Legislative Analyst Elizabeth Hill who called for the dependent credit to be rolled back for all families, regardless of annual income. It would have raised $1.3 billion for then state.

Niello and other Republicans said the tax proposals would drive businesses out of the state and hurt families already reeling from a flagging economy.

Democrats countered that schools and health care programs will suffer without higher taxes.

"It's not possible to get anywhere near to current year (education) funding without (new) revenues," said Sen. Denise Moreno Ducheny, D-San Diego and chair of the budget conference committee.

"These really are just rolling back the tax cuts that have been made since 1997," Ducheny said. "These restore some of these in as modest a way as possible."

State Controller John Chiang and Treasurer Bill Lockyer have warned several times that the state would face a cash shortage next month unless lawmakers can come to an agreement.

A protracted budget fight, they warn, would force the state to borrow billions in an unfriendly lending atmosphere. The move would jeopardize the state's credit rating, which is already among the nation's worst.

Already, the state cannot pay some programs for school districts, community colleges, local governments, vendors and salaries and per diem of state elected officials and their appointed staff.

California lawmakers will now be the last of their colleagues in the 46 states with a fiscal year beginning July 1 to pass an annual spending plan. The Golden State earned the same title last year when the budget standoff dragged on for 52 days.

Despite a sour economy, only a handful of states missed their July 1 deadlines. On Tuesday, North Carolina's Legislature shipped off a compromise budget bill to Gov. Mike Easley after two weeks of negotiations.

Edited July 26, 2008 by Mark Stapleton

[Mark Stapleton]

You want to see sustainable home ownership?

Deflate home prices.

Period.

ALL of the politicians who claim they are "for" sustainable home ownership yet who did nothing to stop the housing bailout bill are LYING.

Their actions are diametrically opposed to sustainable home ownership, and the sooner you, as Americans, wake up to this reality and do something about it, the better off we all shall be.

http://market-ticker.denninger.net/

It should be noted that many of the politicians, or more accurately those who manipulate the politicians, have substantial personal property portfolios so it is in their interests to keep property values artificially inflated. Increasing immigration is one of the ways of achieving this, and the people of Paris and London are now discovering the social costs of this policy.