Thursday, February 26, 2009

Breakin' the banks

By David Ellis
Last Updated: February 26, 2009: 2:50 PM ET

NEW YORK ( -- The government's closely watched listed of troubled banks grew during the fourth quarter to its highest level since 1994, regulators said Thursday.

The Federal Deposit Insurance Corp. reported that the number of firms on its so-called "problem bank" list grew to 252 during the last three months of 2008, compared with 171 banks making the list in the prior quarter.

"There is no question that this is one of the most difficult periods we have encountered during the FDIC's 75 years of operation," agency Chairman Sheila Bair said Thursday.

Grandmaster Funk

By Peter L. Bernstein
Published: February 25 2009 17:34
Financial Times

The “long run” used to be one of the most popular topics among investors, particularly institutional investors. In recent months, discussion of the long run has disappeared from view.

Indeed, the possibility the long run has run away is one of the few pieces of good news I have been able to find in the financial and economic turmoil of recent months.

The cold statistics have hardly been encouraging for the traditional view. On a total return basis, the Ibbotson data show that the S&P 500 has underperformed long-term Treasury bonds for the last five-year, 10-year, and 25-year periods, and by substantial amounts.

(My expectation is that the next quarter century will be quite the opposite.-AM)

These data are not to be taken lightly.

If the long-run expected return on bonds in the future were higher than the expected return on equities, the capitalist system would grind to a halt, because the reward system would be completely out of whack with the risks involved. After all, from the end of 1949 to the end of 2000, the S&P 500 provided a total annual return of 13.1 per cent, while long Treasuries could grind out only 5.8 per cent a year.

But does this history really tell us anything about what lies ahead? Neither the awesome historical track record of equities nor the theoretical case is a promise of a realised equity risk premium. John Maynard Keynes, in an immortal observation about the future, expressed the matter in simple but obvious terms: “We simply do not know.”

Relying on the long run for investment decisions is essentially relying on trend lines. But how certain can we be that trends are destiny? Trends bend. Trends break. Today, in fact, we have no idea where any trend lines might begin or end, or even whether any trend lines still exist.

As Lord Keynes in one of his best known (and wisest) observations, reminded us: “The long run is a misleading guide to current affairs. Economists set themselves too easy, too useless a task if in the tempestuous seasons they only tell us that when the storm is past the ocean will be flat.” To Lord Keynes, the tempestuous seas are the norm. We cannot escape the short run.

There is an even deeper reason to reject the long run as a guide to future investment policy. The long-run results we can discern in the data of stock market history are not a random set of numbers: each event was the result of a preceding event rather than an independent observation. This is a statement of the highest importance. Any starting conditions we select in the historical data cannot replicate the starting conditions at any other moment because the preceding events in the two cases are never identical. There is no predestined rate of return. There is only an expected return that may not be realised.

Recent experience raises a different but perhaps an even more serious question relating to the long run. How do you frame a view of the long run from early 2009? The world has a ruptured financial system showing only fragile signs of recovery. The economic recession now encompasses the whole world. The speed of economic decline is without precedent. Government intervention is also without precedent, in its magnitude, depth, and complexity. Fiscal deficits are reaching numbers no one dreamed about even 12 months ago, yet they will have to be financed.

What kind of a long run is this mess going to produce? Was Bill Gross correct when he wrote for the December 2008 issue of Pimco’s Investment Outlook that “capitalism is and will remain a going concern, that risk-taking – over the long run – will be rewarded, but only from a starting price that correctly anticipates the economy’s growth and its share of after-tax corporate profits within it?”

Can capitalism remain “a going concern” after an extended period characterised by massive government intervention into the economy – and bail-outs of firms that would otherwise have failed? To what extent will the “going” in Mr Gross’s vision be tied to government intervention in these forms and magnitude? Or is Mr Gross’s optimism justified? Will we be able to unwind the role of government in the capitalist system as we know it and go back to the status quo ante?

Will our economy and society emerge so risk-averse after these experiences that years will have to pass before we return to a system naturally generating vibrant economic growth and a renewed willingness to both borrow and lend? Or will we head in the opposite direction, where faith in ultimate bail-outs will justify the wildest kind of risk-taking? Or will the entire structure collapse from government debts and deficits that turn out to be so unmanageable that chaos is the ultimate result?

We can neither answer those questions nor can we claim they are a complete list of the possibilities. The unknown today seems more than usually unknown. Then my whole point remains the same. The long run is an impenetrable mystery. It always has been.

Why did Kamikaze pilots wear helmets?

(The same reason that the Chinese can't admit they are contracting ... ya' need to keep up appearances.-AM)

LEX column
February 26, 2009
Financial Times

Japanese exports almost halved in January. A geographic breakdown of yesterday's 46 per cent year-on-year drop in exports shows the buyers' strike is global . Japanese exports to the US fell 53 per cent and to the European Union and Asia by 47 per cent. This follows an 18 per cent drop in China, 33 per cent in South Korea and 44 per cent in Taiwan.

Statistics are skewed by the Chinese lunar new year holidays. But lead indicators suggest there is worse to come. Throughput at China's once bustling ports is thinning. After growing at an annual 20-30 per cent from 2004, volumes have now returned to 2006 levels. Chinese import processing, which leads exports by a month or two, plunged 50 per cent, year on year, in January, according to Citigroup.

Japanese export data now paint the same picture. Some of the biggest casualties in yesterday's figures were components: semiconductor exports, for example, were down 53 per cent, and car parts down 52 per cent. That will feed in to exports of finished goods bought directly by consumers.

Hey Mr. Market watch me pull this bunny ...

If we close under 740 on the S&P it triggers a buy signal.

Doesn't mean you buy at 739, it just means that an intermediate bottom is coming and its' time to do a Radar O'Reilly ... wait for it.

Historically you would look for the whoosh down and try to catch the bottom of that V.

However, this would most probably only be an intermediate bottom because usually bear markets bottom with a whimper not a bang.

I mentioned the other day that 'After FAS 157, after uptick, after overpaying for the toxic assets, the bullishtness crowd ain't got nothin' left.'

Well, they floated the repeal of FAS 157 a couple of days ago, Bernanke floated reviving the uptick rule yesterday, the headlines yesterday suggested that the stress tests wouldn't be too tough and today the commentary is that there will be hundreds of billions of more scrip going to the banksters.

The fly in the Nancy Capitalist ointment?

Goldie came out and said that S&P earnings are going to be $40.

The longer the Federales wait to pull one of the bunnies out of the hat as opposed to just teasing the lower we go, but when the magic show starts this feline is going to ramp.

Jeremy Siegel is a witless hack

(I am submitting this article from the Wall Shill Journal by Jeremy Siegel as an inductee into the Anonymous Monetarist All-Time Hall of Shame. It is an embarrassment and a joke. I feel sorry for any poor cretin that would use such utter nonsense as a basis by which to invest in equities. After the article an obvious comment. -AM)

FEBRUARY 25, 2009
Wall Street Journal

Standard & Poor's recently shocked investors with an announcement that reported earnings for its S&P 500 Index for the fourth quarter of 2008 are forecast to be negative for the first time since such data were calculated in 1936. S&P further reports that for all of 2008, earnings are expected to be less than $40 per share, indicating that the market now has a price/earnings ratio over 20, well above its historical average of 15.

What this dismal news actually reflects is the bizarre way in which S&P (and most other index providers) calculate "aggregate" earnings and P/E ratios for their indexes. Unlike their calculation of returns, S&P adds together, dollar for dollar, the large losses of a few firms to the profits of healthy firms without any regard to the market weight of the firm in the S&P 500. If they instead weight each firm's earnings by its relative market weight, identical to how they calculate returns on the S&P 500, the earnings picture becomes far brighter.

A simple example can illustrate S&P's error. Suppose on a given day the only price changes in the S&P 500 are that the largest stock, Exxon-Mobil, rose 10% in price and the smallest stock, Jones Apparel Group, fell 10%. Would S&P report that the S&P 500 was unchanged that day? Of course not. Exxon-Mobil has a market weight of over 5% in the S&P 500, while the weight of Jones Apparel is less than .04%, so that the return on Exxon-Mobil is weighted 1,381 times the return on Jones Apparel. In fact, a 10% rise in Exxon-Mobil's price would boost the S&P 500 by 4.64 index points, while the same fall in Jones Apparel would have no impact since the change is far less than the one-hundredth of one point to which the index is routinely rounded.

Yet when S&P calculates earnings, these market weights are ignored. If, for example, Exxon-Mobil earned $10 billion while Jones Apparel lost $10 billion, S&P would simply add these earnings together to compute the aggregate earnings of its index, ignoring the vast discrepancy in the relative weights on these firms. Although the average investor holds 1,381 times as much stock in Exxon-Mobil as in Jones Apparel, S&P would say that that portfolio has no earnings and hence an "infinite" P/E ratio. These incorrect calculations are producing an extraordinarily low reported level of earnings, high P/E ratios, and the reported fourth-quarter "loss."

As the fourth-quarter earnings season draws to a close, there are an estimated 80 companies in the S&P 500 with 2008 losses totaling about $240 billion. Under S&P's methodology, these firms are subtracting more than $27 per share from index earnings although they represent only 6.4% of weight in the index. S&P's unweighted methodology produces a dismal estimate of $39.73 for aggregate earnings last year.

If one applies market weights to each firm's earnings using the same procedure that S&P employs to compute returns, the results yield a more accurate view of the current profit picture. Market weights produce a reported earnings estimate of $71.10 for 2008 -- nearly 80% higher than the unweighted procedure. The reason for this stark difference is that the firms with huge losses generally have extremely low market values and hence have a much smaller impact on the total earnings in the index.

Similarly, operating earnings (essentially, earnings before write-offs), of the S&P 500 are boosted to $81.94 per share when earnings are weighted by market value, yielding a P/E ratio of about 9.4 for the market, instead of S&P's $61.80, which yields a P/E ratio of 12.5 when firm profits are simply added. Even the negative earnings for the fourth quarter disappear when market weights are accounted for, as fourth-quarter GAAP earnings on the S&P 500 Index total $7.44 per share and operating earnings reach $14.40.

No one can deny that the recent economic downturn has badly hurt corporate earnings. But let's not fool ourselves into thinking that this is an expensive market. When computed accurately, P/E ratios show that this market is much cheaper than is currently being reported by the S&P. Those who venture into today's stock market are indeed buying good values.

(I could not believe this tripe as I read it. It took all of a few seconds of rubbing a couple of brain cells together to generate the obvious retort. The methodology of computing S&P earnings is only valuable in the context of the constancy of such methodology over a long duration. Taking a snapshot utilizing a different method tells you nothing lest you perform that calculation over the long-term and then compare your snapshot with historical results using the same methodology. In other words using a new methodology to come up with a PE of 20 needs to be understood within the context of using that same methodology to come up with PEs at say historical troughs...

Clearly Jeremy Siegel is a witless hack. He should be ashamed of himself as should the WSJ. Stay away from anything this fella associates himself with. In closing, check out this entry on WIKI:

Jeremy Siegel was famously bullish in 2000 just as the stock market was collapsing. In a BusinessWeek interview in May 2000 when asked whether valuation measures indicated the stock market was overvalued he replied: {Have we learned anything over the past 50 years? When we compare a 100 years' PE's, we're going through the Great Depression, a banking collapse, and all the rest. Have we learned how to prevent a banking collapse? A Great Depression? I would say, yes, we've had incredible success. Have we been in the longest economic expansion in history? I would say yes. Are earnings of the top companies growing at the fastest rate that they ever have, far faster than the peaks that you mentioned in the past? Yes."}

At the 2006 Berkshire Hathaway annual meeting, Berkshire Vice Chairman Charlie Munger called Siegel "demented" for "comparing apples to elephants"
in making future predictions. Siegel's personal, for-profit website,, is highly atypical among academic professors. In addition, Siegel has not published any peer-reviewed academic works over the past decade.

Mr. Siegel you are officially in the Hall of Shame. He is a professor of finance at the University of Pennsylvania's Wharton School - absolutely flippin'incredible!-AM

Wednesday, February 25, 2009

At least someone pulled this taxpayer-financed fiddle

(Talk about ridiculous...-AM)
Copyright 2009 Houston Chronicle
Feb. 24, 2009, 11:21PM

Mayor Bill White yanked a controversial plan Tuesday that called for the city to use taxpayer funds to pay off some personal debts for first-time homebuyers, following a flood of outrage and criticism from across the city and beyond.

“I don’t think we ought to be in the business of paying off someone’s debt so they can buy a house,” White conceded during an impassioned City Council meeting. “Paying off people’s credit cards is ridiculous.”

Many council members expressed “embarrassment” over the idea, which received national media attention after the Chronicle wrote about it in Tuesday’s editions. The story appeared to strike a nerve among taxpayers already angry over the recession, the housing meltdown, and federal bailouts of banks and automobile companies.

“Everybody’s outraged about this,” said Councilman Ron Greene, adding that a constituent e-mailed him a copy of a bill and asked him to pay it. “This was not well reasoned.”

The “Credit Score Enhancement Program” would have given up to $3,000 in grants to individuals who are trying to qualify for mortgages through the city’s homebuyers assistance program. City officials had said some applicants fall short of eligibility by only 10 or 20 points on their credit scores, and paying off some debt balances can quickly improve their numbers.

Councilwoman Pam Holm waved a thick stack of e-mails from angry residents.

“I do not understand how we can ever justify spending taxpayer dollars to pay somebody’s credit card,” she said. “I don’t understand how it can be even considered to come up. I am truly embarrassed. I think it shows poor leadership.”

Excuse me Commissioner... I have an urgent call from the bank on the other line

ABC NEWS Business Unit
Feb. 24, 2009

You've heard plenty of stories about foreclosures, but the latest victims of this brutal recession are about to lose their cave.

The mortgage meltdown forces a family's cave to be auctioned off on eBay.

That's right. For nearly five years, Curt Sleeper and his family have lived in a cave. His mortgage is about to come due and, like millions of other Americans, he can't refinance.

So now, the 17,000-square-foot, subterranean home is being auctioned off on eBay.

Those that go oobatz get pinched

FEBRUARY 25, 2009
Wall Street Journal

WASHINGTON -- The U.S. government's rescue of the financial system is vulnerable to fraud that could potentially cost taxpayers tens of billions of dollars, government watchdogs warned lawmakers Tuesday.

Neil Barofsky, the special inspector general for the $700 billion Troubled Asset Relief Program, told a House subcommittee that the government's experiences in the reconstruction of Iraq, hurricane-relief programs and the 1990s savings-and-loan bailout suggest the rescue program could be ripe for fraud.

He also said fewer than 5% of banks receiving government aid have responded to a request about what they have done with their bailout money.

"History teaches us that an outlay of so much money in such a short period of time will inevitably draw those seeking to profit criminally," Mr. Barofsky said.

The Treasury Department "has yet to develop comprehensive written policies and procedures governing TARP activities or implement a disciplined risk-assessment process," Mr. Dodaro said.

It's Bizarro time

Was a bit out-of-pocket yesterday but saw enough to generate some serious head-scratching.

B.S. Bernanke being credited for causing a rally because he was 'ruling out nationalization' in a speech where he was basically laying out the groundwork for nationalization?

Traders saying the real reason for a rally were rumors of repealing/adjusting FAS 157 (mark-to-market) 2 days after Moody's downgraded jumbo prime, following downgrades of Option-Arms, and Alt-A many from A level to C level? It's barn door meets horse boys and girls. Google reflexivity please.

A market being proclaimed as grossly oversold that is probably trading for around 20X+ PE for 2009 and 2010? Average trough valuation last 13 recessions is 11 PE, some hitting single digits? Do the math.

Aside from all these mark-to-market 'rumors' I am finding 'nuthin honey' in the MSM about this ... I guess the Nancy Capitalists are doing whatever they can to defend the 50% level on the averages lest the trap door open.

After FAS 157, after uptick, after overpaying for the toxic assets, the bullishtness crowd ain't got nothin' left.

Biggest smartypants on the Street all expect a counter-trend bounce, but the trend is still not our friend. Mr. Market is a bit pissed that the we've inflated our way out of the business cycle for the last quarter century and the devil wants to be paid his due.

The thesis thus far from this humble blogger is that it is Barry versus the Banksters. That's what you get for putting a pragmatic liberal intellectual in the big house ... elections have consequences. The stress tests are pablum narrative, the banksters will take a nickel for that worth a nickel when it is an offer they can't refuse, Mr. Dunham will hustle the hustlers by sweating them out, our only solution for the 'toxic assets plugging the pipes' is time and price, and the vaguer the administration is the cheaper the assets become that we'll need to provide taxpayer leverage for.

I'm hopeful but want it verified and his speech last night did nothing to temper the above opinion.

Black Swan Rising

By Nassim Nicholas Taleb
Published: February 24 2009 19:53
Financial Times

One of the arguments one hears in the compensation debate is that the bonus system used by Wall Street – as John Thain, former Merrill Lynch chief executive, put it – is there to “reward talent”. While I find this notion of “talent” debatable, I fully agree that incentives are the heart of capitalism and free markets – but certainly not that incentive scheme.

In fact, the incentive scheme commonly in place does the exact opposite of what an “incentive” system should be about: it encourages a certain class of risk-hiding and deferred blow-up. It is the reason banks have never made money in the history of banking, losing the equivalent of all their past profits periodically – while bankers strike it rich. Furthermore, it is thatincentive scheme that got us in the current mess.

Take two bankers. The first is conservative. He produces one annual dollar of sound returns, with no risk of blow-up. The second looks no less conservative, but makes $2 by making complicated transactions that make a steady income, but are bound to blow up on occasion, losing everything made and more. So while the first banker might end up out of business, under competitive strains, the second is going to do a lot better for himself. Why? Because banking is not about true risks but perceived volatility of returns: you earn a stream of steady bonuses for seven or eight years, then when the losses take place, you are not asked to disburse anything. You might even start again, after blaming a “systemic crisis” or a “black swan” for your losses. As you do not disgorge previous compensation, the incentive is to engage in trades that explode rarely, after a period of steady gains.

Here you can see that this mismatch between the bonus payment frequency (typically, one year) and the time to blow up (about five to 20 years) is the cause of the accumulation of positions that hide risk by betting massively against small odds. As traders say, they have the “free option” on their performance: they get the profits, not the losses. I hold that this vicious asymmetry is the driving factor behind investment banking.

If capitalism is about incentives, it should be about true incentives, those resistant to blow-ups. And there should be disincentives to remove the asymmetry of the free option. Entrepreneurs are rewarded for their gains; they are also penalised for their losses. Now, by comparison, consider that Robert Rubin, the former US Treasury secretary, earned close to $115m (€90m, £80m) from Citigroup for taking risks that we are paying for. So far no attempt has been made to claw it back from him – only UBS, the Swiss bank, has managed to reclaim some past bonuses from its former executives.

For hedge funds and medium-sized companies, the incentive problem might be a simple governance issue between private entities free to choose their contract terms. However, when it comes to banks and other “too big to fail” entities, the problem is severe: we taxpayers in our respective countries are funding these global monsters and are coughing up money for mistakes made by bankers who retain their bonuses and are hijacking us because, as we are discovering (a little late), banking is a utility and we need them to clean up their mess. We, in fact, are the seller of that free option. We should claim it back.

The Obama administration has been trying to set compensation limits for banks under the troubled asset relief programme. But this is insufficient. We need to remove the free option. Beware the following situations.

First, those who are taking risks even outside Tarp or society’s protection can still be gaming the system – since their risk-taking can result in a collapse, with the taxpayer having to step in. For instance, Goldman Sachs, the US bank, might want to avoid the limits on executive compensation for its managers. That should be fine so long as society does not have to bail out Goldman Sachs (or, worse, its creditors) in the future.

Second, Vikram Pandit, Citigroup’s chief executive, while claiming to want to earn one single dollar a year in compensation unless the bank returns to profitability, is still getting a free option given to him by society. He does not partake of further losses; we do.

Third, leveraged buy-out companies used the free option by borrowing heavily from the banks and taking monstrous risks: they get the upside, banks (hence we taxpayers) get the downside. These partnerships made fortunes in the past on deals that society will have to bail out. They too should have their past profits clawed back.

Indeed, the incentive system put in place by financial companies has produced the worst possible economic system mankind can imagine: capitalism for the profits and socialism for the losses.

Finally, I was involved in trading for 21 years and I can testify that traders consciously play the free option game. On the other hand, I worked (in my other job as risk adviser) with various military organisations and people watching over our safety. We trust military and homeland security people with our lives, yet they do not get a bonus. They get promotions, the honour of a job well done and the disincentive of shame if they fail. Roman soldiers signed a sacramentum accepting punishment in the event of failure. This is prompting me to call for the nationalisation of the utility part of banking as the only solution in which society does not grant individuals free options to look after its risks.

No incentive without disincentive. And never trust with your money anyone making a potential bonus.

Monday, February 23, 2009

We're No. 2! We're No.2!

As posted on November 15th, 2008:

13 recessions since 1929 lasted on average 10 months.
Longest - Great Depression, 44 months.
2nd longest - 1973-1975, 1981-1982, each lasted 16 months.

In 13 recessions median S&P bottom occurred 58% of the way through the recession.

Average return from each recession's closing low to the end of the recession was 20.3% while the average return for the year following was 15.9%.

If this recession started in the 4th quarter of 2007 and lasts as long as the Great Depression the bottom (58%) is the 1st quarter of 2010.


Now that all major indices have busted through their November lows, if we optimistically assume the bottom will be here soon (odds are that it will be an intermediate not cycle low, but let's be positive!)then assuming we are roughly 58% through and given that the recession was called as starting in December 2007(had not yet been called as of the date of my first post, lucky guess!)... that quantifies the length of this recession at ~ 26 months.

26 months would be the longest 'recession' since the Great Depression.

Here's a real sobering thought:

If we pick a number our of the hat, let's say S&P 600, and assume we hit the number this quarter and this level is THE BOTTOM, then playing the averages (as stated above 20.3% and 15.9%) would suggest that we would only gain 20% by the end of the 'recession' (in this example,February 2010) for a level around S&P 720.

Stickin' with the averages it would suggest we hit S&P 825 at the end of 2010.

This of course is just quotin' averages, actual results may vary.

T' would be a shame if somethin' terrible were to occur...

By Alistair Barr, MarketWatch
Last update: 4:57 p.m. EST Feb. 23, 2009

SAN FRANCISCO (MarketWatch) -- American International Group Inc. said Monday that it's evaluating "potential new alternatives" with the Federal Reserve Bank of New York to tackle the giant insurer's problems.

"We continue to work with the Federal Reserve Bank of New York to evaluate potential new alternatives for addressing AIG's financial challenges," company spokesman Joseph Norton said. "We will provide a complete update when we report financial results in the near future."

Norton declined to comment further, while a spokesman at the New York Fed didn't immediately return a phone message seeking comment.

AIG's statement came after cable network CNBC reported that the company will report a $60 billion loss next Monday and is seeking more government support.

The loss may trigger more ratings downgrades, which would leave AIG needing to raise more collateral, according to CNBC's David Faber.

It ain't over until the fat lady forecloses

From Jesse's blog:

Don't cry for me Greenwich, you were supposed to have been immortal.

Last updated: 8:33 pm
February 15, 2009
NY Post

It's a gold-plated ghost town.

Almost 50 mansions built on spec for the hedge-fund set - and priced from $5 million to upwards of $25 million - sit empty in Greenwich, Conn., where the real-estate market has tanked.

"They're going nowhere. Nothing's selling," said Christopher Fountain, who writes a blog called "For What It's Worth" about the Greenwich real-estate scene.

"There are just so many of these brand new houses sitting there, and nobody's going to buy them."

Those who still have cash can find spectacular, never-occupied estates in move-in condition, complete with wine cellars for their Bordeaux and Sub-Zero refrigerators for their caviar.

There were 161 houses from $5 million to $95 million for sale in Greenwich as of Friday, according to

Greenwich home sales dropped 40 percent last year from 2007 and foreclosures, once almost unheard of, shot up 1,000 percent.

4 out of 5 Deutschschweizer recommend UBS

By Haig Simonian in Zurich
Published: February 23 2009 02:00
Financial Times

UBS's problems with the US authorities spring from the bank's operations in Geneva, Zurich and Lugano, where 60-70 private bankers catered to the needs of wealthy US clients with accounts in Switzerland.

Such business with US holders of "offshore" accounts had been conducted for decades. As with other Swiss private banks, UBS argued it was not responsible for policing whether customers had declared their holdings to their relevant domestic tax authority - in the US case, the Internal Revenue Service.

In published testimony, Bradley Birkenfeld, the former Geneva-based UBS private banker who has co-operated with the US Department of Justice, revealed, for example, how he squeezed diamonds into tubes of toothpaste to help a key client transfer assets without detection.

Sunday, February 22, 2009

Bung them Rats and Mice
By Andrew Porter, Political Editor
Last Updated: 9:50PM GMT 22 Feb 2009

The Prime Minister is to unveil a series of key measures that will see the Government insure the ‘toxic assets’ of major lenders and pump around £14 billion into the mortgage market through Northern Rock.

Five months after Mr Brown’s first bank bail-out, there is a growing acceptance in Downing Street that it has not worked - beyond stopping the total collapse of the banks.

Businesses are continuing to go bust and workers are losing their jobs as the financial crisis continues to deepen and banks refuse to start lending.

The Government has drawn up a new rescue package that will start today with an announcement that Northern Rock, which was nationalised last year, will increase mortgage lending by up to £14 billion over the next two years.

Ministers will this week also pave the way for “quantitative easing” – the so-called printing money option – with £150 billion being spent on buying bonds and gilts from banks.

On Thursday, the Treasury is expected to announce plans to form a “toxic bank”, using taxpayers’ money to insure £500 billion of bad debt

In addition, Mr Brown has signalled that he wants a return to more ‘sober’ banking practices, with a possible ban on 100 per cent mortgages to ensure people must save a deposit before buying a house.

(In further comments, Brown said he fully supported the silly Yanks offering 105% mortgages, hoping it would strengthen the pound. Snap! -AM)

It's called eating your own cookin'

(Looks like the Karmic Cookin' Hour over at the weekend WSJ. -AM)


Inside Citigroup, bank executives are growing increasingly exasperated with what they view as the Obama administration's failure to state even more explicitly that nationalization isn't imminent and that "stress tests" announced as part of the latest financial-rescue package aren't a guise for government takeovers that likely would make their common shares worthless. The tests, expected to begin next week, will be required for any bank with more than $100 billion in deposits. Government takeovers likely would make common shares of those banks worthless.

"They've got to make a statement against nationalization," said one person familiar with Citigroup's thinking. The Obama administration's rhetoric so far amounts to "destructive ambiguity," this person said.

('Destructive ambiguity' is a pretty darn good description of the collective balance sheets of 21st century banksters. -AM)


The jobless rate is hanging high -- for many of the roughly 3,000 political appointees who served President George W. Bush. Finding work has proved a far tougher task than those appointees expected.

"This is not a great time for anyone to be job hunting, including numerous former political appointees," said Carlos M. Gutierrez, Mr. Bush's commerce secretary.

Mr. Gutierrez is keeping busy during his job hunt...he hopes to run a company again because "I have a lot of energy."

(Oh my stars and garters. Nuff said! Thanks for the laugh WSJ. -AM)

Saturday, February 21, 2009

Look on the bright side : Collapse of U.S.S.R. turned out well

Sat Feb 21, 2009 4:19pm EST

NEW YORK (Reuters) - Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.

Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.

He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system.

"We witnessed the collapse of the financial system," Soros said at a Columbia University dinner. "It was placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom."

His comments echoed those made earlier at the same conference by Paul Volcker, a former Federal Reserve chairman who is now a top adviser to President Barack Obama.

Volcker said industrial production around the world was declining even more rapidly than in the United States, which is itself under severe strain.

"I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world," Volcker said.

Banks for the Memories : 958 more to go

Only 1 failure on Bank Failure Friday, folks must be occupied: Silver Falls Bank, Silverton, Oregon.

Cheeerleader's near miss with the Dark Side

(Kopin Tan at Barron's is an unabashed cheerleader. When one reads his columns it is hard not to hum Monty Python's 'Bright Side of Life'. Even he though played horeshoes with the dark side today. -AM)

February 21, 2009
By Kopin Tan

During recent recessions, the S&P 500 slumped to roughly 12 times what companies earned in the preceding year. (That is misleading, for example the U.S. economy was in recession from March 2001 to November 2001, a period of eight months. In December 2001 the trailing PE of the S&P was 30... if memory serves.-AM) Today, the market is still trading near 16 times earnings(Uh the math suggests that at S&P of 770 16X gives earnings of $48? -AM) that, and those earnings are still falling. If the market hews to the historical script, and S&P 500 companies manage to earn $50 a share this year (If earnings are falling and you are using $48 to start out with how do you get to $50? -AM), the benchmark's true value could be closer to the 600 mark. (Is it just me or is the consensus right now that oh we'll test the lows but maybe it can go to 600 -cause you know low interest rates give ya' higher historical PE at bottom- and then its' back to milk-and-honey time... just sayin'-AM)

The picture grows even more daunting when one considers the price-to-earnings multiples following major market crashes. John Roque, Natixis Bleichroeder's chief market technical analyst, counted just four prior instances in the past 127 years when the market's multiple climbed above a pricey 20 times and then buckled. Each time, stocks didn't bottom until the price-to-earnings multiples had retracted to the single digits -- say, 5.6 times in June of 1932, or 6.6 times in the summer of 1982. (Come to the dark side my young padawan.-AM)

Compared to these historical troughs, however, inflation is far more benign today, and although consumer prices ticked up a smidge in January, they remain essentially flat compared to a year ago. (Oh really? Inflation was benign in 1932? That's interesting I thought there was a Depression going on back then. Inflation in 1982 was 4%.I think he wanted to say low interest rates, but with zombie banks,zombie consumers and an obliterated shadow banking system,it's 'neither a lender or borrower be' time. -AM)

(Add-on: Oh and by the way, the trailing PE per the DOW JONES MARKET DATA CENTER as of Friday 20,2009 is 18.56 for the S&P, 27.25 for the Nasdaq, 40.32 for the Russell 2000 -Whoa!- and drumroll please, 46.71 for the Dow Industrial - Yowza! -AM

Ursus arctos horriblis in Tech

(Eric Savitz has become increasingly bearish over the last several months. Today's column is a good summation of his recent views. This is quite interesting because he has usually come across as fairly astute on tech-land matters and his current perspective is a bit at odds with the views of Hickey, Faber & Fleck who have, as of late, been more bullish of select large tech. -AM)

By Eric Savitz
February 21, 2009

Investors seeking an entry point in this horrendous stock-market slide are faced with two inevitable but contradictory truths. In the long run, we'll surely see higher prices. But as John Maynard Keynes said, in the long run we are all dead.

Unafraid of Keynes, pundits keep trying to call the bottom. Demand, they say, will turn around in the second quarter. Or maybe Q3. Certainly by Q4. Or at least by 2010. Out come comparisons to the tech downturn in 2001-'02, or the 1973-'74 recession, or the Great Depression, or the bust in Japan, or some other financial crisis.

I find none of it convincing. Do you really think we're going to have a recovery in tech demand in the second half? Well, then I admire your optimism. I see no evidence anywhere. And if the recovery doesn't arrive until, say, mid-2010, we still have to endure another five to six more quarters of absolutely nasty earnings news.

Maybe the market has priced that in. And maybe not.

Last week, the market got a rude reminder of just how pervasive the downturn really is when Hewlett-Packard (ticker: HPQ) reported a sizable top-line miss for its fiscal Q1 ended in January, and provided highly disappointing guidance for the October 2009 fiscal year.

As perhaps the most broad-based tech company, HP offers investors a nice snapshot of what's happening in the sector. Unfortunately, almost everything it disclosed about its latest quarter contained ominous portents for other tech firms.

HP's Personal Systems Group, which sells PCs, saw revenue fall 19%. Desktop personal-computer revenue was down 25%, on a 15% decline in units, while notebook revenue was down 13%, on an 8% increase in units. This suggests that average selling prices over the past year fell 10% for desktop PCs and 21% for laptops -- reflecting not only shrinking demand but also the damaging effects of the netbook boom. And skeptics, beware: It's not just that netbooks are cheap. People actually like them: Research firm ChangeWave reports that a survey of PC buyers found netbook specialists Acer (2353.Taiwan) and Asus had higher customer-satisfaction ratings than any PC company other than Apple (AAPL).

That's trouble for everyone in the PC food chain. Dell (DELL) would appear particularly vulnerable here; we'll find out more when the company reports earnings this Thursday. Apple isn't immune, either; data from retail-sales tracker NPD finds Apple has lost U.S. retail-market share in PCs in each of the past three months; Mac sales fell 6% in January from the level a year earlier. The trend is also bad news for Intel, which makes less money from its netbook-oriented Atom processor than from other CPUs. It is bad for the disk-drive makers Western Digital (WDC) and Seagate (STX), since they make less money on lower-capacity drives. And it is bad for Microsoft (MSFT), which makes less per copy of Windows on netbooks than on higher-priced PCs.

HP also said its imaging and printing revenue was down 19% in the quarter. Consumer-printer revenue fell 37%, on a 31% drop in units. Commercial-printer revenue was down 34%, on a 39% drop in units. Supplies, HP's historic cash cow, dropped 7%. And it's hard to imagine that things are much better at HP rivals like Canon (7751.Japan), Epson (6724.Japan) and Lexmark (LXK).

Enterprise storage and server revenue was down 18%. That includes a 7% drop in storage, a 22% decline in industry-standard servers and a 17% tumble in business-critical systems. In those data points, I see bad omens for EMC (EMC), Sun Microsystems (JAVA), IBM (IBM) and a host of enterprise-hardware players. Finally, HP had a 7% fall in software revenue.

Not surprising, that software slid less; that's the beauty of long-term maintenance contracts. But when people stop buying hardware, they buy less software. Remember that when you assess stocks like Oracle (ORCL), SAP (SAP) and (CRM).

And that takes us back to where we started. Somewhere, a massive rally is waiting to happen. And some day, the Cubs will win the Series. But I'm reluctant to bet on either. (Low blow Eric. This is the Cubs year!Woo -Woo!. -AM)

Honey I shrunk the TARP


The Ethisphere Institute, a non-partisan research think tank, announced today the establishment of the Ethisphere TARP Index, a new financial monitor that tracks the U.S. Federal Government's return on its investments under the capital purchase portion of its Troubled Asset Recovery Program (TARP). Weekly reports detailing performance and drivers will be published at

Results for Week Ended February 13, 2009

When markets closed on Friday, the aggregate Ethisphere TARP Index was down approximately 44 percent or $86.5 billion out of the original investment principal of $195.5 billion.

"While certain investments were necessary in order to prevent financial calamity in the fall of 2008, many of the more than 400 investments in the TARP program are with companies with far stronger balance sheets and operating results," said Douglas Allen, the lead research analyst behind the Ethisphere TARP Index. "Therefore, investment return statistics under the Ethisphere TARP Index are presented both on the comparative basis of including and excluding the calamity investments to provide a more accurate cross-section of the Treasury's investing campaign."

Excluding 'calamity investments' in Bank of America, Citigroup, JP Morgan and Wells Fargo, the Adjusted Ethisphere TARP Index was down approximately 29 percent or $27.6 billion out of the original investment principal of $95.5 billion.

The following rankings are based on the Adjusted Ethisphere TARP Index.

Top performers on an absolute basis as of Friday, February 13, 2009 include: 1. Morgan Stanley - gain of $2.6 billion or 26.3 percent 2. BB&T Corporation - gain of $64.0 million or 2.0 percent 3. 1st Source Corporation - gain of $32.8 million or 29.5 percent

Top performers on a relative basis as of Friday, February 13, 2009 include: 1. Central Valley Community Bancorp - gain of 45.9 percent or $3.2 million 2. Great Southern Bancorp - gain of 35.3 percent or $20.4 million 3. First Community Bank Corp. of America - gain of 33.9 percent or $3.6 million
Worst performers on an absolute basis as of Friday, February 13, 2009 include: 1. US Bancorp - loss of $3.7 billion or 56.1 percent 2. SunTrust Banks - loss of $3.6 billion or 74.8 percent 3. PNC Financial Services - loss of $3.0 billion or 39.5 percent

Worst performers on a relative basis as of Friday, February 13, 2009 include: 1. Huntington Bancshares - loss of 81.5 percent or $1.1 billion 2. Webster Financial Corp. - loss of 76.1 percent or $304.5 million 3. SunTrust Banks - loss of 74.8 percent or $3.6 billion

In addition to the aggregate investment basis costs and current valuation of investments under TARP's capital purchase program, the Ethisphere TARP Index also tracks individual TARP investments. The methodology is based on the cumulative total of public and private companies' value, as well as interest set to have been received by The U.S. Treasury.

Friday, February 20, 2009

Take the mic and make it happen

Friday, 20 February 2009
Credit Crisis diary

Yet more tales reach us concerning Sir Fred Goodwin's ultimately disastrous tenure at Royal Bank of Scotland. Sir Fred reputed to have been something of an authoritarian boss, apparently kept a karaoke machine at RBS's impressive head office on the outskirts of Edinburgh. Not because he enjoyed a sing-song himself, you understand – no, the idea was that getting top executives to belt out some tunes would hone their competitive instincts.

I tire of this banal is the time in Swissland when we fraud

February 20, 2009 4:18 PM ET

MIAMI (AP) - Swiss bank UBS AG used coded language in internal e-mails and memos, created hundreds of sham offshore entities and lied to U.S. officials in an elaborate scheme to conceal the overseas accounts of wealthy Americans, the Internal Revenue Service claimed in federal court documents.

The IRS filed the documents this week seeking to force the bank to turn over records for an estimated 52,000 U.S customers who allegedly violated American tax laws by concealing Swiss accounts worth at least $14.8 billion.

According to the IRS, UBS allegedly staged training sessions so that "client advisers" could travel frequently to consult with secret U.S. customers without attracting the attention of tax agents or law enforcement officials. They were told to keep "an irregular hotel rotation" and falsely claim on customs forms that they were in the U.S. on pleasure, not business.

UBS also maintained a 24-hour, seven-day-a-week "hot line" for advisers to call if they ran into trouble with authorities, according one UBS document filed with the court.

"Travel laptops were to have a generic UBS PowerPoint presentation to show U.S. authorities in the event of a border search," the IRS affidavit said.

The documents show UBS was worried that U.S. officials might tap their advisers' telephones or eavesdrop on cell phone conversations. No one was allowed to bring a printer to the U.S. out of fear that creation of a document might trigger criminal liability, according to one document.

At least one UBS adviser used code language in e-mails to describe his business dealings, adding that "orange" meant euros; "green" was U.S. dollars; and "blue" signified British pounds. The e-mail from this adviser, "Dieter," that a "C" was $100,000, a "nut" was $250,000 and a "swan" $1 million.

The e-mail goes on to describe a transaction involving "2.5 orange nuts" and "2.05 green nuts," ending with "all clear?"

The IRS said a declaration that clients were asked to sign flatly stated: "I would like to avoid disclosure of my identity to the U.S. Internal Revenue Service." But that did not go over well with the Americans, according to a 2000 UBS e-mail included in the IRS filing.

"This sentence was refused by many clients, provoked angry outcries and we were being told, which if signed, fully incriminates a U.S. person of criminal wrongdoing should this document fall into the wrong hands," according to the e-mail. It said the offending language was replaced with this: "I consent to the new tax regulations."

A monopoly on COOL

February 18, 2009 - 2:39 P.M.
by Preston Gralla

The blogosphere regularly excoriates Microsoft for being a monopoly, but Google, not Microsoft, may be in the cross-hairs of the nation's next anti-trust chief for monopolistic behavior. Last June Christine A. Varney, President Obama's nominee to be the next antitrust chief, warned that Google already had a monopoly in online advertising.

The Bloomberg news service did an excellent job of sleuthing, and uncovered statements Varney made about Google and what she considers its monopoly in online advertising. Here's what Bloomberg reports her as saying:

"For me, Microsoft is so last century. They are not the problem," Varney said at a June 19 panel discussion sponsored by the American Antitrust Institute. The U.S. economy will "continually see a problem -- potentially with Google" because it already "has acquired a monopoly in Internet online advertising."

(And a monopoly on COOL ... check this out ...AM)

By Matthew Moore
Last Updated: 9:49AM GMT 20 Feb 2009

The network of criss-cross lines is 620 miles off the coast of north west Africa near the Canary Islands on the floor of the Atlantic Ocean.

The perfect rectangle – which is around the size of Wales – was noticed on the search giant's underwater exploration tool by an aeronautical engineer who claims it looks like an "aerial map" of a city.

The underwater image can be found at the co-ordinates 31 15'15.53N 24 15'30.53W.

Last night Atlantis experts said that the unexplained grid is located at one of the possible sites of the legendary island, which was described by the ancient Greek philosopher Plato.

According to his account, the city sank beneath the ocean after its residents made a failed effort to conquer Athens around 9000 BC.

Dr Charles Orser, curator of historical archaeology at New York State University told The Sun that the find was fascinating and warranted further inspection.

"The site is one of the most prominent places for the proposed location of Atlantis, as described by Plato," the Atlantis expert said. "Even if it turns out to be geographical, it definitely deserves a closer look."

Bernie Bamford, 38, of Chester who spotted the "city", compared it to the plan of Milton Keynes, the Buckinghamshire town built on a grid design. "It must be man made," he said.

Google Ocean, an extension of Google Earth, allows web users to virtually explore the ocean with thousands of images of underwater landscapes.

Launched earlier this month, it lets users swim around underwater volcanoes, watch videos about exotic marine life, read about nearby shipwrecks, contribute photos and watch unseen footage of historic ocean expeditions.

The legend of Atlantis has excited the public imagination for centuries. In recent years "evidence" of the lost kingdom has been found off the coast of Cyprus and in southern Spain.

Plato described it as an island "larger than Libya and Asia put together" in front of the Pillars of Hercules - the Straits of Gibraltar. He said Atlantis was a land of fabulous wealth, advanced civilisation and natural beauty destroyed by earthquakes and floods 9,000 years earlier.

(Add-on, quick someone get a boat and start sailing! -AM :)

Fri Feb 20, 2009 2:14PM EST
by Ben Patterson

Quick—fire up Google Earth on your PC, and find the following coordinates: 31 15'15.53N, 24 15'30.53W (hint: it's about 600 miles west of Morocco, deep in the Atlantic Ocean). Zoom in, and check out that rectangle on the ocean floor. Could it be … Atlantis?
That's what a squad of "Atlantic experts" are telling the Daily Telegraph, and indeed, the rough rectangle—complete with dozens of shaky grid marks carved into the ocean floor—is a surreal sight, at least to the untrained eye.

Apparently, the oddly shaped box marks "one of the most prominent places for the proposed location of Atlantis, as described by Plato," said New York State University historical archaeology curator Dr. Charles Orser (as reported by the Telegraph).

Amazing—so amazing, in fact, that the story touched off an online firestorm Friday morning, with the search term "Atlantis" ending up as a top trend on Twitter. So ... should we dispatch James Cameron and his team of IMAX-equipped submersibles to investigate?

Well, maybe not, says this party-pooping report from the Daily Mail.

Turns out the odd rectangle doesn't actually exist, according to a Google rep; instead, it's simply an "artifact of the data collection process," representing the criss-cross patterns of sonar-equipped boats scanning the ocean floor.

Uhhhh … "artifact of the data collection process"? Please. I smell a cover up!

Another Swedish model for us to complain about... Vägverket, the Swedish Road Administration, is reporting that General Motors used ten human cadavers for crash research. While it isn't clear which GM vehicle hosted the corpses on their one-way trip into a wall, a spokesman for Vägverket said it was most likely the Saab brand. The spokesman was also quick to point out that all of the cadavers were people "who had donated their own bodies."
Posted on February 20, 2009 at 8:15 AM
Baz Hiralal

Check one item off our GM bailout checklist: With no rescue from Sweden, Saab Automobile AB filed for bankruptcy on Friday. As General Motors Corp. lobbied for more money from Washington, it presented a massive restructuring plan that severed its ties with the unit.

In a statement, Saab said the Swedish court process is to reorganize Saab into a fully independent business, aiming to bring resources back to Sweden. It also has three new models ready to be launched over the next year and a half. And as it turns out, the Swedish government could still provide loan guarantees to Saab following a restructuring, a senior official told Reuters.

Of the restructuring, Saab managing director Jan Ake Jonsson said, "We explored and will continue to explore all available options for funding and/or selling Saab and it was determined a formal reorganization would be the best way to create a truly independent entity that is ready for investment."

As noted by a Bloomberg article, Sweden has ruled out taking over Saab, saying taxpayers' money shouldn't be pumped into a company that's been unprofitable for 19 of the last 20 years. Saab is seeking funds from both public and private sources.

Option ARM wipeout

From Citizen Sedacca via Minyanville Buzz&Banter:

Last nite, Moody's downgraded nearly 1400 Option ARM CDO tranches...

Risks remain extremely high.

Thursday, February 19, 2009

Give em the knee shooters



(The joke is better with a logarithmic scale...-AM)

The Art of Dow

By Ari Charney
4:04 p.m. EST Feb. 18, 2009

For those investors anxious about how the market might fare in a retest of its Nov. 20 closing low, Tuesday's close was likely torturous. At least that's how noted Dow Theorist Richard Russell felt when watching the market close less than half a point above the bear market low.

While Russell is patiently awaiting the market's verdict, Mark Hulbert decided to see if he could divine whether the market is likely to breach its bear-market low. Using his own propriety sentiment index along with three other well-known gauges of investor sentiment, Hulbert tested how sentiment behaved during successful retests of past bear-market bottoms. His finding? Unfortunately, current sentiment still remains too optimistic for the bear-market low to hold.

(And it didn't. -AM)

FEBRUARY 19, 2009, 5:05 P.M. ET
Wall Street Journal

The Dow Jones Industrial Average set a new bear-market closing low, as the financial sector continued to decline and investors found little impetus to buy in a flurry of economic data.

The Dow industrials dropped 89.68 points, or 1.2%, to close at 7465.95. The blue-chip benchmark had flirted all week with its five-and-half-year closing low of 7552.29, set on Nov. 20.

(So what happens now? -AM)

Financial Post
Wednesday, February 18, 2009
By Levi Folk

The November low for the Dow is an important signal according to Richard Russell, technical analyst and editor of Dow Theory Letters. "I doubt if most of the world understands the supreme importance of this chart [of the Dow]," writes Russell in his Daily Remarks Tuesday.

Dennis Gartman, editor of the Gartman Letter on a visit to Toronto Tuesday concurs.

"There is nothing underneath it, expect for some support at 7100, until 4000," says Gartman. "It could theoretically go all the way. I am scared to death and every day that passes, the odds of that happening are more and more likely."

(The Dow Transports broke through the November low a few days ago and in fact today they were down for the 8th day in a row. That is the worse series so far in this bear market. With the Industrials breaking the low this confirms per Dow Theory that the primary trend is still a bear market. Here are the stages from

Primary Bear Market - Stage 1 - Distribution

Just as accumulation is the hallmark of the first stage of a primary bull market, distribution marks the beginning of a bear market. As the "smart money" begins to realize that business conditions are not quite as good as once thought, they start to sell stocks. The public is still involved in the market at this stage and become willing buyers. There is little in the headlines to indicate a bear market is at hand and general business conditions remain good. However, stocks begin to lose a bit of their luster and the decline begins to take hold.

While the market declines, there is little belief that a bear market has started and most forecasters remain bullish. After a moderate decline, there is a reaction rally (secondary move) that retraces a portion of the decline. Reaction rallies during bear markets were quite swift and sharp. As with his analysis of secondary moves in general, Hamilton noted that a large percentage of the losses would be recouped in a matter of days or perhaps weeks. This quick and sudden movement would invigorate the bulls to proclaim the bull market alive and well. However, the reaction high of the secondary move would form and be lower than the previous high. After making a lower high, a break below the previous low would confirm that this was the second stage of a bear market.

Primary Bear Market - Stage 2 - Big Move (This would be October-November 2008.-AM)

As with the primary bull market, stage two of a primary bear market provides the largest move. This is when the trend has been identified as down and business conditions begin to deteriorate. Earnings estimates are reduced, shortfalls occur, profit margins shrink and revenues fall. As business conditions worsen, the sell-off continues.

Primary Bear Market - Stage 3 - Despair (Buckle up Dorothy. -AM)

At the top of a primary bull market, hope springs eternal and excess is the order of the day. By the final stage of a bear market, all hope is lost and stocks are frowned upon. Valuations are low, but the selling continues as participants seek to sell no matter what. The news from corporate America is bad, the economic outlook bleak and not a buyer is to be found. The market will continue to decline until all the bad news is fully priced into stocks. Once stocks fully reflect the worst possible outcome, the cycle begins again.

My God ... it's full of cars

Google says I've coined 'carservatorship' but I expect to see it on the Bloomberg crawl soon. What other choice is there? There were hints to this effect in the FT today:

by Andrew Ward
White House officials have hinted that the administration could be open to government-managed bankruptcy for GM and Chrysler but that option is opposed by Democrats from Michigan and other car producing states.

Ultimately, and it very much saddens me to say this, American car production will probably go the way of the flat screen T.V.

Since liquidation is impossible and viability in the present condition is unlikely only bankruptcy seems to be the probable outcome.

However,a bankruptcy that results in a credit event may be a truly devastating event.

And why is that?

Nardelli, himself, gave the MSM a clue in an interview I commented on:

Friday, December 5, 2008
The trillion in the closet

(Nardelli was on Chris Matthews's last night and was obviously a bit tuckered out. He let slip that some folks predict that the fallout would be around 1 trillion. This was at the end of a long sentence that delineated the impact to the general economy in jobs and to the domestic automotive sector. What he was talking about doesn't seem to be talked about outside of blogs. Single name CDS and CDOs where Chrysler is present in the form of CDS are a clear and present danger. These are basically bonds, that have to be returned at par in case of a credit event. DTCC decides if there is a credit event and a bankruptcy would certainly qualify. If Chrysler cannot continue as a going concern a 'carservatorship' is the only option. However they do it they will have to do it. At this point in the game I would say that if they let Chrysler be a credit event they want the whole bloody thing to go off the cliff. Chrysler-and GM- are Lehman sized disasters in the shadow banking world and by now the Federales have to know this. DTCC hasn't provided clarity to the public but certainly folks have to know what could happen here. - AM)

Another reference was made on this blog a week later:

Thursday, December 11, 2008
Carservatorship without credit event please

(The devil is on the details,in this case how do you not trigger a Lehman style explosion in CDSs. Remember the narrative fantasy that Lehman was contained because the 400 billion in notional value was reduced to 8 billion after netting? DTCC says General Motors and GMAC have a notional value of 118 billion but what puts icing on this cake is their presence in synthetic CDOs that are edging towards the abyss. - AM) (Add-on : upon further investigation not compelling that they have a large presence in CDOs, they were not listed in the top 50. -AM)

The way I see it, the choice is carservatorship or credit event ... pick your poison.

Now c'mon, that's just plain rude ...


The Securities and Exchange Commission has obtained a court order halting a Ponzi scheme that specifically targeted members of the Deaf community in the United States and Japan.

The SEC alleges that Hawaii-based Billion Coupons, Inc. (BCI) and its CEO Marvin R. Cooper raised $4.4 million from 125 investors since at least September 2007 by, among other things, holding investment seminars at Deaf community centers. The SEC also alleges that Cooper misappropriated at least $1.4 million in investor funds to pay for a new home and other personal expenses. The order obtained by the SEC freezes the assets of BCI and Cooper.

Playing hard to get

(Let's hope the devil doesn't get lucky, though I fear he will be paid his due.-AM)

Reuters, February 13th : With Japan flirting with deflation, Bank of Japan Governor Masaki Shirakawa joined a growing chorus urging G7 finance leaders to take concrete steps to rescue the worsening global economy., February 11th : China is certainly flirting with deflation.

New York Times, January 17th : “We could potentially be flirting with deflation in 2009,” said Haseeb Ahmed, U.S. economist at JPMorgan Chase, before the consumer-price data were released. “I think it's a real possibility.”

Thompson Financial, January 21st : "We expect retail price inflation to be in negative territory by February, with CPI flirting with deflation by mid-2009,"said Ross Walker, a U.K. economist at Royal Bank of Scotland.

Wednesday, February 18, 2009

Safe and Sound

12 hours ago
Posted By: Cindy Perman

The Executive Safe-T Bed from Hollandia International has a heavy-duty safe built right into the mattress so paranoid investors can sleep on their cash and other valuables like a dog on his favorite chew toy.

That may have seemed ridiculous a few years ago — why not at least have that money earning 4.5 percent in an online savings account? — but after all the stocks that went poof! and Madoffs that made off with your money, stashing it under your mattress doesn't sound so crazy anymore.

At $20,400, Safe-T doesn’t come cheap, but CEO Avi Barseessat told the New York Times in an interview last year that it’s not just the benefit of knowing where your money is, “you also get a good quality sleep.”

Oh, and it has a flat-screen TV built into the foot of the bed, so theoretically, you could ride out the entire recession … in bed!

Boom, Gloom and then ... maybe Doom

(Dr. Faber provides a history lesson for the WSJ. -AM)

Wall Street Journal
February 18, 2009

The world has gone from the greatest synchronized global economic boom in history to the first synchronized global bust since the Great Depression. How we got here is not a cautionary tale of free markets gone wild. Rather, it's the story of what can happen when governments ignore market signals and central bankers believe in endless booms.

Following the March 2000 Nasdaq bust, the Federal Reserve began to slash the fed-funds rate from 6.5% in January 2001 to 1.75% by year-end and then to 1% in 2003. (This despite the fact that officially the U.S. economy had begun to recover in November 2001). Almost three years into the economic expansion, the Fed began to increase the fed-funds rate in baby steps beginning June 2004 from 1% to 5.25% in August 2006.
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But because interest rates during this time continuously lagged behind nominal GDP growth as well as cost of living increases, the Fed never truly implemented tight monetary policies. Indeed, total credit increased in the U.S. from an annual growth rate of 7% in the June 2004 quarter to over 16% in early 2007. It grew five-times faster than nominal GDP between 2001 and 2007.

The complete mispricing of money, combined with a cornucopia of financial innovations, led to the housing boom and allowed buyers to purchase homes with no down payments and homeowners to refinance their existing mortgages. A consumption boom followed, which was not accompanied by equal industrial production and capital spending increases. Consequently the U.S. trade and current-account deficit expanded -- the latter from 2% of GDP in 1998 to 7% in 2006, thus feeding the world with approximately $800 billion in excess liquidity that year.

When American consumption began to boom on the back of the housing bubble, the explosion of imports into the U.S. were largely provided by China and other Asian countries. Rising exports from China led to that country's strong domestic industrial production, income and consumption gains, as well as very high capital spending as capacities needed to be expanded in order to meet the export demand. An economic boom in China drove the demand for oil and other commodities up. Rapidly accumulating wealth allowed the resource producers in the Middle East, Latin America and elsewhere to go on a shopping binge for luxury goods and capital goods from Europe and Japan.

As a consequence of this expansionary cycle, the world experienced between 2001 and 2007 the greatest synchronized economic boom in the history of capitalism. Past booms -- of the 19th century under colonial economies, or after World War II when 40% of the world's population remained under communism, socialism, or was otherwise isolated -- were not nearly as global as this one.

Another unique feature of this synchronized boom was that nearly all asset prices skyrocketed around the world -- real estate, equities, commodities, art, even bonds. Meanwhile, the Fed continued to claim that it was impossible to identify any asset bubbles.

The cracks first appeared in the U.S. in 2006, when home prices became unaffordable and began to decline. The overleveraged housing sector brought about the first failures in the subprime market.

Sadly, the entire U.S. financial system, for which the Fed is largely responsible, turned out to be terribly overleveraged and badly in need of capital infusions. Investors grew apprehensive and risk averse, while financial institutions tightened lending standards. In other words, while the Fed cut the fed-funds rate to zero after September 2007, it had no impact -- except temporarily on oil, which soared between September 2007 and July 2008 from $75 per barrel to $150 (another Fed induced bubble) -- because the private sector tightened monetary conditions.

In 2008, a collapse in all asset prices led to lower U.S. consumption, which caused plunging exports, lower industrial production, and less capital spending in China. This led to a collapse in commodity prices and in the demand for luxury goods and capital goods from Europe and Japan. The virtuous up-cycle turned into a vicious down-cycle with an intensity not witnessed since before World War II.

Sadly, government policy responses -- not only in the U.S. -- are plainly wrong. It is not that the free market failed. The mistake was constant interventions in the free market by the Fed and the U.S. Treasury that addressed symptoms and postponed problems instead of solving them.

The bad policy started with the bailout of Mexico following the Tequila crisis in 1994. This prolonged the Asian bubble of the 1990s, because investors became convinced there was no risk in growing current-account deficits and continued to finance Asia's emerging economies until the bubble burst with the start of the Asian crisis in 1997-98.

Then came the ill-advised bailout of Long-Term Capital Management in 1998, which encouraged the financial sector to leverage up even more. This was followed by the ultra-expansionary monetary polices following the Nasdaq bubble in 2000, which led to rapid and unsustainable credit growth.

So what now? Unfortunately, Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner were, as Fed officials, among the chief architects of easy money and are therefore largely responsible for the credit bubble that got us here. Worse, their commitment to meddling in markets has only intensified with the adoption of near-zero interest rates and massive bank bailouts.

The best policy response would be to do nothing and let the free market correct the excesses brought about by unforgivable policy errors. Further interventions through ill-conceived bailouts and bulging fiscal deficits are bound to prolong the agony and lead to another slump -- possibly an inflationary depression with dire social consequences. (Paging Peter Schiff. The difference of course between Faber and Schiff is that if you had followed the latter's advice over the last few years you would have actually made money. - AM)

Barmy Business Secretary brassed off : Schultz talking bollocks!

Times Online
February 18, 2009
by Marcus Leroux

Lord Mandelson, the Business Secretary, has attacked the chairman and chief executive of Starbucks, the American coffee giant, in a foul-mouthed tirade for talking down the British economy.

Howard Schultz, who built the coffee chain which is now struggling in America, said in a television interview last night: “The concern for us is Western Europe and specifically the UK. The UK is in a spiral.”

Lord Mandelson later said, within earshot of journalists: “Why should I have that guy running down the country? Who the **** is he?”.

The Business Secretary hinted that Mr Schultz was deflecting attention away from Starbucks’ domestic travails. The Starbucks juggernaut went into reverse for the first time last year and in January it announced that it was to close another 1,000 poorly-performing stores.

He said: "How the hell are they doing?”

Continuing the USO Tour

By Brian Baskin
FEBRUARY 18, 2009, 3:04 P.M. ET

(USO hit its' all-time low today. -AM)

A tweak to the way United States Oil Fund LP (USO) manages its oil futures investment may not be enough to right the vehicle for ordinary investors to enter the market.

USO uses investments from shareholders to buy long positions, or bets that prices will rise, in the front-month oil futures contract on the New York Mercantile Exchange. An investor would need to pay tens of thousands of dollars to directly purchase a futures contract on the Nymex, but only $23.30 for a share of USO.

The fund, which started in 2006, has become so popular that as of Tuesday it held 19% of all Nymex crude contracts, and 30% of a similar contract on the ICE Futures Europe exchange, according to data from the fund and the exchanges. Traders say USO is big enough to cause a major shift in prices on the day each month that it "rolls" its position by selling out of the front-month and into the second-month contract.

But the oil market today barely resembles the world USO entered nearly three years ago. Oil prices were trading near a record high when USO debuted, and more than doubled over the next two years, lifting the fund's shares by 70% in the process.

Oil's 75% tumble since July has hurt USO, but the structure of the futures market itself is creating an even bigger problem for the fund and similar investors. On its latest roll, USO paid anywhere from a $4 to $6.10 premium to sell March and buy April futures contracts, as robust oil supplies and weak demand drove down near-term prices relative to outer months. USO's first roll likely carried a premium of between $1 and $1.50. Oil prices have fallen 3% over the last two months, but USO shares are down 28% over the same period.

Goldman Sachs Group Inc. (GS) analysts went so far as to call long-term holdings in front-month futures contracts "not investable" in a research note published Tuesday, citing the large roll cost.

USO will take four days to roll instead of one starting in March, according to a filing with the Securities and Exchange Commission. A longer period will allow USO to find enough counterparties to complete its roll, said a person familiar with the fund's operations. The fund will stick with holding front-month contracts, however.

"You can't go around changing the rules in the middle of the game," the person said. "USO was designed to be the front month, for good or for bad."

Market participants said a longer roll is likely to mitigate the massive one-day selloffs seen in recent months. These increased the cost to USO by exaggerating the gap between the front two futures contracts, and led some traders to blame the fund for distorting the market.

Others see USO as prisoner to an unprecedented set of market conditions. The global economic downturn is the most severe since the creation of the Nymex crude futures contract. Demand has fallen faster than supply, and the extra oil is piling up in storage. Usable tanks are nearly full at Cushing, Okla., the delivery point for the physical oil underpinning the Nymex contract.

As demand falls and tightening storage becomes more expensive, the value of holding oil today has dropped to an unprecedented low relative to outer-month futures contracts, a structure known as contango. When oil is in short supply, front-month crude trades at a premium, which would boost USO's returns.

USO's roll merely adds volume to a market structure that would have existed anyway, said Andy Lebow, senior vice president for energy at brokerage MF Global in New York.

"(USO) is a part of the market, and they definitely have exacerbated the roll, but I think the real problem is that you have to look at the fundamentals," Lebow said. "It's a fairly extraordinary situation - Cushing is full. Once Cushing starts to draw, they're going to have less of an impact."

Investors are starting to catch on. The United States 12 Month Oil Fund LP (USL), a USO sister fund that owns crude oil futures out one year, has seen its total assets more than double in the last two weeks. The gaps between futures contracts tend to narrow further out from the front month, reducing roll-day losses.

As for the USO, the economic problems driving the storage crunch are showing little sign of abating, which means shareholders may need to eat losses for several rolls to come.

"There is nothing they can do ... they are a victim of their own hype," said Stephen Schork, editor of the Schork Report, an energy newsletter. "As long as retail investors are dumb enough to buy into a contango ... we will continue to have this problem." (Ouch!-AM)