Friday, December 28, 2007

Home Sales Plunge, Feed Recession Fears

Friday December 28, 2:22 pm ET
By Jeannine Aversa, AP Economics Writer

New-Home Sales Plunge to Lowest Level in More Than 12 Years, Heighten Recession Fears WASHINGTON (AP) -- The housing market plunged deeper into despair last month, with sales of new homes plummeting to their lowest level in more than 12 years.

The slump worsened even more than most analysts expected, heightening fears that the country might be thrust into a recession.

New-home sales tumbled 9 percent in November from October to a seasonally adjusted annual sales pace of 647,000, the Commerce Department reported Friday. That was the worst sales pace since April 1995.

"It was ugly," declared Richard Yamarone, economist at Argus Research. "It is the one sector of the economy that doesn't show any signs of life. It doesn't look like there is any resuscitation in store for housing over the next year," he said.

The housing picture turned out to be more grim than most anticipated. Many economists were predicting sales to decline by 1.8 percent to a pace of 715,000.

By region, sales fell in all parts of the country, except for the West.

In the Midwest, new-home sales plunged 27.6 percent in November from October. Sales dropped 19.3 percent in the Northeast and fell 6.4 percent in the South. In the West, however, sales rose 4 percent.

Over the last 12 months, new-home sales nationwide have tumbled by 34.4 percent, the biggest annual slide since early 1991, and stark evidence of the painful collapse in the once high-flying housing market.

"I think you can classify what we are seeing in the housing market as a crash," said Mark Zandi, chief economist at Moody's "Sales and home prices are in a free fall. The downturn is intensifying."

The median sales price of a new home dipped to $239,100 in November. That is 0.4 percent lower than a year ago. The median price is where half sell for more and half for less.

On Wall Street, the grim home sales report added to investor angst. The Dow Jones industrials were off 40 points in afternoon trading.

Would-be home buyers have found it more difficult to secure financing, especially for "jumbo" mortgages -- those exceeding $417,000. The tighter credit situation is deepening the housing slump. Unsold homes have piled up, which will force builders to cut back even more on construction and look for ways to sweeten the pot to lure prospective buyers.

"A lot of borrowers are being disqualified for loans. If you can't qualify for a mortgage the game is over. For those who do qualify, it takes longer to get loans," said Brian Bethune, economist at Global Insight.

The housing market has been suffering through a severe slump following five years of record-breaking activity from 2001 through 2005. Sales turned weak as did home prices. The boom-to-bust situation has increased dangers to the economy as a whole and has been especially hard on some homeowners.

Foreclosures have soared to record highs and probably will keep rising. A drop in home prices left some people stuck with balances on their home mortgages that eclipsed the worth of their home. Other home buyers were clobbered as low introductory rates on their mortgages jumped to much higher rates, which they couldn't afford.

Problems in housing are expected to persist well into 2008 -- a major election year.

The housing and mortgage meltdowns have raised the odds that the country will fall into a recession. And, the situation has given Democrat and Republican politicians-- including those who want to be the next president -- plenty of opportunities to spread blame around.

The economy's growth is expected to have slowed sharply to a pace of just 1.5 percent or less in the final three months of this year. Former Federal Reserve Chairman Alan Greenspan recently warned that the economy is "getting close to stall speed." The big worry is that the housing and credit troubles will force individuals to cut back on spending and businesses to cut back on hiring and capital investment, throwing the economy into a tailspin.

To help bolster the economy, the Federal Reserve has sliced a key interest rate three times this year. Its latest rate cut, on Dec. 11, dropped the Fed's key rate to 4.25 percent, a two-year low. Many economists are predicting the Fed will lower rates again when they meet in late January.

"The risks are as high as they've ever been during this expansion that started in late 2001 that the economy will fall into a recession," said Bethune. "The odds are now nudging up close to the 50 percent mark."

New-home sales report:

Saturday, December 22, 2007

Fed lends another $20B to ease crunch

Federal Reserve, in round 2 of new effort to help banks, says it received bids for $58 billion and pledges more.

WASHINGTON (AP) -- The Federal Reserve, working to combat the effects of a severe credit crunch, announced Friday it had auctioned another $20 billion in funds to commercial banks at an interest rate of 4.67 percent.

Fed officials pledged to continue with the auctions "for as long as necessary."

The central bank said it had received bids for $57.7 billion worth of loans, nearly three times the amount being offered, indicating continued strong interest in the Fed's new approach to providing money to cash-strapped banks.

It was the second of four scheduled auctions. The first auction, on Monday, of $20 billion resulted in loans being awarded at an interest rate of 4.65 percent. There were 93 bidders seeking $63.6 billion at the first auction and 73 at the second.

Two more auctions will occur in early January. In a statement Friday, the central bank said it would continue with further auctions "for as long as necessary to address elevated pressures in short-term funding markets."

The new auction process was announced by the Fed last week in a coordinated action with central banks around the world trying to address a global credit crunch.

Federal Reserve Chairman Ben Bernanke and his colleagues decided to try the new process because their efforts to inject funds into the banking system through the Fed's discount window, which makes direct loans to banks, had proven less successful than Fed officials had hoped.

Many banks had avoided using the Fed's discount window out of concern that investors would see the move as an indication of underlying problems at their financial institutions.

The auction process was developed as a second way to get money into the banking system with the hopes that it would not carry the stigma of the discount window.

The Fed said Friday that it would announce on Jan. 4 the sizes of the next two auctions which will be held Jan. 14 and Jan. 28. Officials have said the Fed will evaluate the interest in the auctions after the initial four and determine whether more auctions will be scheduled.

The new auction results cover short-term loans for 35 days.

The global credit crisis has made banks reluctant to lend to each other even as the Fed has been lowering its federal funds rate, the interest that banks charge each other for overnight loans.

The rate currently stands at 4.25 percent, a full percentage point lower than it was in September when the Fed began slashing rates in the wake of a severe credit squeeze that had roiled global markets in August.

The 4.67 percent rate for the second $20 billion in funds and the 4.65 percent rate for the first auction means that banks who are using the auction process to get needed reserves are getting them at a rate slightly below the 4.75 percent rate they could get in direct loans through the discount window.

The Fed cut the federal funds rate and the discount rate by a quarter-point at its last meeting on Dec. 11, disappointing investors who had hoped for a bigger half-point reduction in the funds rate.

Many economists believe the Fed will keep cutting rates with three more quarter-point reductions expected in the funds rate at the Fed's first three meetings of the new year.

Analysts believe that a serious slowdown in overall economic growth will force the Fed to continue cutting rates even though some Fed officials have expressed worries that the rate cuts could exacerbate inflation pressures, which have flared up again, reflecting a renewed surge in oil prices. To top of page

Friday, December 21, 2007

The Bear Flu: How It Spread

A novel financing scheme used by Bear Stearns' hedge funds became a template for subprime disaster

When the subprime mortgage market began to unravel late in 2006, global bond markets barely flinched. But when two Bear Stearns (BSC) hedge funds collapsed in June, the event sparked a global credit crisis that has yet to ease. New evidence sheds light on how those hedge funds—and their managers—became star players in the subprime bust, the biggest financial disaster in decades. The revelations also show how other players in the mortgage market adopted the Bear funds' tactics, collectively building a financing structure with many of the hallmarks of a pyramid scheme.

The legal consequences are still unfolding. In recent weeks securities regulators and federal prosecutors have stepped up their investigations into the two funds, probing the fuzzy math used to value the underlying assets, the aggressive sales pitches that portrayed the funds as safe, and frequent trades with other Bear-managed portfolios. On Dec. 19, Barclays (BCS), which lent one Bear fund hundreds of millions, filed a lawsuit alleging fraud over misleading statements about the portfolio's health. Says a Bear spokesman: "We believe that any such lawsuit is unjustified and without merit."

Investigators also are asking why Ralph R. Cioffi, the funds' top manager, moved $2 million of his own $6 million investment in the hedge funds into another fund in early 2007 while simultaneously raising cash for the funds, trying to sell them to Cerberus Capital Management, and telling investors they couldn't redeem their shares until the end of June. People familiar with the situation at Bear stress that Cioffi, who left the firm the week of Dec. 10, was simply investing in a different Bear fund with which he was involved. Cioffi's lawyers did not return e-mails or calls seeking comment.

A CDO Called Klio

It's too soon to tell whether authorities will find any wrongdoing. But a BusinessWeek analysis of confidential hedge fund reports and interviews with lawyers, investors, and securities experts reveals just how pivotal a role Cioffi's funds played in the mortgage market's dramatic rise, dizzying peak, and disastrous fall.

The analysis shows Cioffi and his team developed a novel investment product to attract money-market funds—a new class of investor—to the mortgage market. Their innovation, a particularly aggressive form of collateralized debt obligation, or CDO, became the building blocks of the industry's push to keep growing for longer than it otherwise would have. After the market turned, it became clear the Cioffi money machine contributed to much of the $10 billion-plus in writedowns that Citigroup (C) and Bank of America (BAC) revealed in November. Fresh evidence also suggests Cioffi's team may have engaged in self-dealing by using the new CDOs to buy assets from the funds, artificially boosting returns. Citi and Bank of America declined to comment.

At the center of it all was the new breed of CDO pioneered by Cioffi and his team to tap into the $2 trillion universe of money-market accounts in which individuals and corporations stash their spare cash. Cioffi's CDOs, initially branded "Klio Funding," were entities that sold commercial paper and other short-term debt to buy higher-yielding, longer-term securities. The Klios were a win-win proposition for money-market funds. They paid a higher interest rate than the usual short-term debt. And investors didn't need to worry about the risky assets the Klios owned because Citigroup had agreed to refund their initial stake plus interest, through what's known as a "liquidity put," if the market soured. Cioffi engineered three such deals in 2004 and 2005, raising $10 billion in all.

What did Citigroup get for guaranteeing the Klios? For one thing, fees. The Klios were also a ready buyer of Citi's own stash of mortgage-backed securities and other debt. Citi probably never imagined it would have to make good on those guarantees because the underlying assets had the highest credit ratings.

Cioffi used the money from each deal to purchase billions in mortgage-backed securities and pieces of other CDOs for his three Klios. He bought many of the assets directly from the two Bear hedge funds he managed. The move also supplied the hedge funds with cash.

A Pyramid Structure

The Klios had another powerful feature: They allowed the Bear funds to lock in longer-term financing. Typically, hedge funds borrow for short periods of time, usually just days or weeks. Under the terms of the Klio deals, Cioffi could use the money for at least a year without having to worry that it would disappear overnight if the market got volatile. He discussed that advantage in an Apr. 25 call with hedge fund investors, boasting that the funding wasn't subject to market fluctuations.

The Klio structure spread rapidly as other hedge funds, CDO managers, and banks, including Barclays, Bank of America, and Société Générale, followed Cioffi's lead. From 2004 through 2007, Wall Street raised some $100 billion through these innovative CDOs, essentially creating a whole new way for the industry to finance risky subprime loans. That success, in turn, inspired copycat products such as structured investment vehicles, which also sold short-term debt. At their peak, in February, 2007, SIV assets hit $300 billion. Barclays declined to comment, but the company announced on Nov. 15 losses from CDO investments that it had been forced to take on its books. A Société Générale spokesman said it has transferred all of its risk to a large, global financial institution.

In hindsight, CDOs and SIVs served as a foundation for a pyramid-like structure that Yale University economist Robert J. Shiller says occasionally arises from bull markets. As new investors arrive to the party, they bid up prices, boosting returns for those who got in earlier. The big gains attract more investors, and the cycle continues—as long as the players don't try to take out their money en masse.

The mortgage-market system played out much the same way. The new type of CDO lured a different tier of investors: money-market funds. The flood of fresh money made it even cheaper and easier for buyers to get mortgages. That, in turn, drove up home prices, holding off defaults and foreclosures. The process enriched the people who bought earlier in the boom and triggered more speculation.

"An Incestuous Relationship"

The complexity of the Klios and their ilk only encouraged lax lending practices by putting too much distance between the borrowers and the ultimate holders of their debt. Since the Klios offered a refund policy, money-market managers didn't have to worry about whether home buyers would pay back their loans. Their investments were protected even if the owners eventually defaulted on their mortgages.

Indeed, as the bubble inflated, there was little incentive for the array of middlemen collecting fees—mortgage brokers, real estate appraisers, bankers, money managers, and others—to do the proper checks. The lack of oversight likely contributed to the rampant fraud on some underlying loans, says S. Kenneth Leech, chief investment officer of bond-investing firm Western Asset Management. "Nobody wanted to take the punch bowl away from the party," adds Charles Calomiris, a professor at Columbia Business School. "They were all making fees."

Now investigators are trying to determine whether Cioffi and his team crossed legal lines. The Klios provided the Bear hedge funds with a ready, in-house trading partner. Their financial reports, which were reviewed by BusinessWeek, show many months in which the Cioffi-managed Klios traded only with the Cioffi-managed Bear funds. For example, in April, 2006, one Klio CDO bought $114 million worth of securities from one of the Bear funds. Such trades, says Steven B. Caruso, an attorney who represents several Bear hedge fund investors, may be "indicative of an incestuous, self-serving relationship that appears to have been designed to establish a false marketplace."

If that's why the trades were made, the maneuvers could have falsely boosted the hedge funds' returns—and the fees Cioffi and his team collected. In an e-mail to Cioffi and co-manager Matthew Tannin cited in a legal filing, Raymond McGarrigal, another executive at the Bear funds, gushed about the Klio setup, writing that "one of the great things we've done is allow the Klio to buy assets from the hedge fund." Lawyers for Tannin and McGarrigal declined to comment.

The End of an Era?

Amid the market turmoil earlier this spring, Cioffi hoped the Klios would work their magic once again. In April, as losses at the funds began mounting, Cioffi set up another CDO, High Grade Structured Credit CDO 2007-1, which issued short-term paper and offered investors a money-back guarantee from Bank of America. Cioffi had raised nearly $4 billion by late May, making it the biggest CDO of the year, according to Thomson Financial (TOC).

Just as before, Cioffi used the money to buy assets from the hedge funds, perhaps to prop up the portfolios, which by then were on the brink of collapse. In an April conference call with the hedge funds' investors, Cioffi said the new CDO was part of his plan "to get the funds back on track to generate positive returns." It didn't work. Just weeks after the deal for the CDO closed, the Bear funds imploded, wiping out $1.6 billion of investors' money. (The fund into which Cioffi moved $2 million, Bear Stearns Structured Risk Partners, was up 6.5% as of Nov. 30.)

By autumn the practice of using CDOs to raise cash was dead. Money-market funds had stopped buying the short-term debt, and the credit markets were frozen. That forced Citigroup and Bank of America to make good on their guarantees to investors in Cioffi's CDOs, triggering big losses at the two banks.

The global markets are dealing with the consequences: The tab from the mortgage mess could run up to $500 billion, and central bankers are struggling to stave off recession. As investigators sort through the wreckage, the records of Bear Stearns' doomed hedge funds are turning out to be some of the most revealing in an era of financial folly.

Henry is a senior writer at BusinessWeek. Goldstein is an associate editor at BusinessWeek, covering hedge funds and finance.

Thursday, December 20, 2007

Food prices soar in America

Higher food prices, led by milk, are hitting consumers where it hurts - in the stomach.

By Aaron Smith, staff writer

NEW YORK ( -- John Norris' family is drinking a lot less milk these days. He said he considers the higher prices and has cut back on his kids' milk consumption. But between work and family obligations, he still drives almost as much as he used to.

"That's the reason I cut down on milk consumption - so I can drive my car," said Norris.

And Norris should know. He's the director of wealth management for Oakworth Capital Bank and a food price expert.

The Norrises aren't the only family getting pinched at the grocery store. Prices of food and non-alcoholic beverages rose 4.7 percent since the beginning of the year through November, outpacing the 4.3 percent increase in the overall cost-of-living, according to the federal government's Consumer Price Index.

Everyday foods like fruits and vegetables, beef, poultry and cereals are on the rise. The price of milk is the biggest culprit, with a staggering increase of 23.2 percent through November. And with basic foods like dairy and wheat driving up the cost of other groceries, almost everyone is feeling the squeeze.

Families with children, who typically go through a couple gallons of milk per week and spend hundreds of dollars on other groceries, are especially vulnerable.

"Kids need a lot more food than we do," said John Mulhern, a grandfather and one of several shoppers who spoke to outside a Key Food grocery in Brooklyn. "So your hearts go out to young families, especially [those who] have multiple children. They're the ones who are hurting the most with the rising prices."

Marie Thompson, a mother from Brooklyn with a couple of kids in tow at the grocery store, said she spends hundreds of dollars a week on groceries, including two gallons of milk.

"It seems to me that I spend more and more every week on food," said Thompson. "It's hard, because I have three children at home so there are five of us to feed. Beef is very expensive. The milk is very expensive. Even the butter has gone up."

Even with gasoline prices soaring, milk still tops gas prices. The nationwide average for a gallon of whole milk is $3.80, according to the U.S. Department of Agriculture. That dwarfs the nationwide average of $2.99 for a gallon of unleaded, according to AAA.

"A lot of basic foodstuffs seem to be going up and dairy products are going through the roof," said Norris of Oakworth Capital.

It's not just milk-drinking kids - coffee drinkers are taking a hit from higher dairy prices as well. Back in August, Starbucks Corp. (SBUX, Fortune 500) chief executive Jim Donald blamed "rising expenses, particularly higher dairy costs" for a 9-cent rise in the price of coffee drinks. For the first time in three years, Starbucks reported a 1 percent drop in customer visits to their stores, even as the value per transaction increased 5 percent.

Many retailers, including industry leaders like Wal-Mart (WMT, Fortune 500), absorb the initial cost increases for basic food items to stay competitive, said Charles Cerankosky, food marketing analyst for FTN Midwest Securities Corp.

"For things that are purchased day after day like milk, retailers take a more judicious view about passing it on," said Cerankosky. "You don't want to be looked at as the guy who started raising prices."

At first, retailers keep down prices for "high visibility" items like milk and make up for it by increasing the price of other items, like apples, said Cerankosky. But this is just a temporary measure, and eventually the price of milk will go up anyway, he said.

Of the Brooklyn shoppers interviewed for this story, none of them said that they were eating less, but a couple of them said there will be fewer Christmas presents under the tree this year. Santa's tightening his belt, so the kids don't have to.

But if price increases continue into 2008, families will have an even harder time stocking their pantries.

"I do expect food prices to keep going up," said Norris of Oakworth Capital Bank. "Let's just keep our fingers crossed that we're not going to have another year like this year." To top of page

Schilling sticks it to Clemens

He says pitcher should lose the last four of his seven Cy Young Awards.
By Bill Shaikin, Los Angeles Times Staff Writer
December 20, 2007
Curt Schilling challenged Roger Clemens to come out from behind his prepared statement, calling on Clemens to surrender the final four Cy Young Awards he has won unless he obtains a retraction for his citation in the Mitchell Report as a user of steroids and human growth hormone.

In a scathing indictment of several of the biggest names in the game, the outspoken Boston Red Sox pitcher Wednesday urged baseball to strip Clemens of his statistics and records over the past decade unless he can refute the Mitchell Report, called the career of Jose Canseco a drug-aided "sham" and "hoax" and expressed concern for the sport that Clemens and Barry Bonds each has yet to clear himself amid evidence each used performance-enhancing substances.

"What does that say about this game, us as athletes and the future of the sport and our place in it?" Schilling wrote on his blog, "The greatest pitcher and greatest hitter of all time are currently both being implicated, one is being prosecuted, for events surrounding and involving the use of performance-enhancing drugs."

The Mitchell Report cites Clemens for using steroids and human growth hormone from 1998 to 2001, starting after he joined the Toronto Blue Jays in 1997. Clemens has won the Cy Young Award a record seven times, including in 1997, 1998, 2001 and 2004.

On Tuesday, Clemens issued a statement denying he had used performance-enhancing drugs "at any time in my baseball career or, in fact, my entire life." On Wednesday, Schilling said Clemens must back his denial by retaining lawyers to obtain a retraction and public apology so his name can be "completely cleared."

"If he doesn't do that," Schilling said, "then there aren't many options as a fan for me other than to believe his career 192 wins and three Cy Youngs he won prior to 1997 were the end. From that point on the numbers were attained through using [performance-enhancing drugs]. . . .

"The four Cy Youngs should go to the rightful winners and the numbers should go away if he cannot refute the accusations."

The Baseball Writers Assn. of America administers the Cy Young Award -- and baseball's other major awards -- and BBWAA President Bob Dutton said he was unaware of any such precedent.

"We didn't take anything away from [Pete] Rose when he was banned from baseball," Dutton said. "If Roger said he didn't want them, I don't know what we'd do."

Clemens is far from the only award winner named in the Mitchell Report. Eric Gagne won a Cy Young Award, and the most-valuable-player winners include Canseco, Miguel Tejada, Jason Giambi, Mo Vaughn and Ken Caminiti.

The runners-up would not necessarily be free of suspicion. Canseco edged Wally Joyner for the 1986 American League rookie of the year award; Joyner admitted in the Mitchell Report that he used steroids later in his career.

Schilling saluted Canseco for shattering the code of silence on steroids in baseball but rebuked him for building his career upon them.

"He never belonged in the big leagues and anything he ever did in the major leagues is a hoax," Schilling said. "He made it clear that he would not have been the player he was had he not cheated. His statistics should be erased, his MVP given to the runner up and he should go down as the guy who broke the silence on a horrible period of the game, period."

Schilling credited the players who had admitted to drug use cited in the report, including backup catcher Gary Bennett, signed by the Dodgers on Monday.

"Gary Bennett is a guy who I always respected because I never figured him as a guy that would be able to play as long as he has," Schilling said. "He was always a hard worker and a nice guy and I always enjoyed throwing to him because he cared about his game calling skills.

"He's made a nice career for himself and my hope is that it was more through his hard work and effort than through cheating, either way he's a friend of mine and always will be."

Doug Casey on Gold

As you have probably heard, Federal Reserve Chairman Ben Bernanke has gone on record stating that, if the need arose, the Fed would print dollars by the helicopter load to smooth over a collapse in the 25-year borrow-and-spend bubble, a collapse that is now underway.

Putting Bernanke's words into action, since early August of 2007, the Fed has stepped up to the plate with tens of billions of dollars. On November 15 alone, the Fed injected almost $50 billion into the banking system, the largest single-day cash infusion since 9/11.

Then, on December 12, the Fed announced that it would open the spigots by providing lending $28 billion created out of nowhere to the nation's banks in exchange for a "wide variety of collateral."

In other words, the Fed will accept as collateral even the very same toxic waste paper now bedeviling the financial system.

And that's just one of many ways that the government is scrambling to keep the house of cards from falling. For instance, there are 12 Federal Home Loan Banks (FHLBs) whose job it is to serve as "lenders of last resort" by making cash available to banks and other financial institutions.

In the third quarter of 2007 alone, FHLB loans skyrocketed to a record $746.2 billion, nearly 18 times the yearly average between 2003-2006.

That alone should tip you off to how serious the government considers the current credit crisis to be. And no wonder. The following chart shows the steeply worsening increase in non-performing bank loans and outright charge-offs.

Faced with the very real threat of a deep recession caused by a freeze-up in credit, falling home values and soaring loan defaults, the Fed is left with a rock-and-a-hard-place decision. Hold tight and let the economy fall... hard. Or, open the money spigots wide in an attempt to maintain liquidity in the markets, sacrificing the dollar in the process.

Given two untenable choices, it is our view that the government will continue on the path of a loose monetary policy, the implications of which are not hard to figure out.

Sticking with the helicopter metaphor for a moment longer, creating billions of new dollars out of thin air to smooth over a litany of problems caused by decades of irresponsible debt creation is analogous to a helicopter trying to put out a raging forest fire by dropping tank loads of gasoline.

In other words, the "solution" is more of the same. It is only making the situation worse.

The result is simply this: as more and more dollars are created and injected into the economy, the purchasing power of all the dollars in circulation comes under pressure. It's called inflation. The last time we saw anything like what we are seeing today was in the 1970s. Here's a snapshot of the dollar against foreign currencies, then and now. The parallels are eye-opening.

You don't need me to tell you that, regardless of what the Fed would like you to think, inflation is already a problem. Yesterday I paid $3.10 for a gallon of gas, $7.50 each for movie tickets, and just shy of $30 for two cheese Stromboli's following the show.

Since March 2002, the U.S. Dollar Index, which measures the value of the dollar against a basket of six major currencies, has fallen 35.3%. The downtrend in the U.S. dollar is far from over.

Balancing Risk

Once you've identified the problem, identifying how to balance the risk to your portfolio is easy. In times of inflation, people turn to tangible "stuff." Viewed in that context, it is perfectly understandable why oil, gold and other commodities have been moving higher.

And, just as the U.S. dollar has farther to fall, so do the commodities have farther to rise. On that point, JPMorgan went on record a few days ago with their forecast that of all the commodities, they expect precious metals to be the strongest in 2008... followed by agricultural products, base metals and energy.

We think JPMorgan has it right, and that of all the possible portfolio diversifications you can make today in an attempt to protect your overall portfolio and to profit over the coming year, few will serve you better than gold.

Racket exposed by John Sugg CL

It would be the most ironic of ironies, but we'd probably be too dehydrated to laugh.

Should Atlanta plum run out of water – even though the state says we've prayed enough to avoid it – we'd most likely turn to the dolled-up, overpriced, bottled variety. And how rich it'll be when folks learn that often what swishes around in the plastic container is a slightly altered version of what we were watching dwindle away all along.

Like Dasani. The Coca-Cola brand is the second best-selling bottled water product in the United States, right behind Pepsi's Aquafina. And both are, essentially, glorified tap water. Dasani, for example, is the product of what the company calls "reverse osmosis." According to a dazzling animation on the product's website, water is taken from a municipal source – which usually means it's the same water the local community also uses. It is then filtered, purified, treated and tinged with trace minerals such as potassium chloride, salt and magnesium sulfate. Voila – Dasani.

And right up in Marietta, just before where U.S. 41 crosses Canton Road, the soda-pop giant has a plant where humdrum municipal water, pulled from Lake Allatoona and the Chattahoochee River, is morphed through the process, bottled and then shipped throughout the Southeast.

"If people in Atlanta knew that they need to go to the store to buy bottled water because they're asked to conserve, and find out they're buying [municipal water] that's bottled in a Marietta plant ..." says Gigi Kellett of Corporate Accountability International, a big-business watchdog group. "And then these corporations are turning around and selling it to these individuals when they're taking it directly from their source."

This summer, Kellett's group influenced Pepsi to agree to change its labels to more accurately reflect the water's origin. Coca-Cola has said it doesn't think Dasani consumers are confused about the source and continues simply to label the water as "purified."

According to Marietta Power and Water, the Marietta facility at 1091 Industrial Park Drive used nearly 8.4 million gallons of water in November. That's a huge improvement from the same month last year, when it gulped 9.8 million gallons, and a far cry from the Pepsi Gatorade plant in southwest Atlanta – the city's biggest water user – which gobbled up 70.8 million gallons in September alone. The only customer in the Marietta district to top Dasani's consumption was Tip-Top Poultry, a chicken plant three miles down the road. Wellstar-owned Kennestone Hospital followed.

Commercial water users in Marietta get a sweet deal by paying less the more water they use. There is a graduated grid of rates. The first 2,000 gallons a commercial user such as Coca-Cola uses cost a total of $10.61; once that usage reaches a million gallons or more a month, the company pays $2.02 per 1,000 gallons.

Use more, pay less. It's a pricing structure that stands to change later this month when Marietta Power and Water's board considers doing away with the different block systems and charging a flat rate to commercial customers. The Metropolitan North Georgia Water District has urged municipalities to adopt such conservation pricing, but most of them are just now getting around to doing so.

Bottled water is one of marketing's great success stories. According to the Pacific Institute, an Oregon-based environmental-policy center, the $15 billion industry is enjoying tremendous annual growth: 10 percent every year, far outpacing paltry gains for fruit drinks and soda. And water's a moneymaker, too; it doesn't cost much to buy and industry analysts have predicted that after advertising and production, bottled water makes double the profit of carbonated beverages. A 1.25-pint bottle of Dasani costs $1.19 at a local gas station. Compare that with the $2.02 Coca-Cola pays for 1,000 gallons of municipal water to bottle it.

"We have to ask ourselves," says Allen Hershkowitz, senior scientist at the Natural Resources Defense Council, "is it fair to subsidize a company with public water supplies that they then turn around and market, at a time when those public water supplies are at crisis levels?"

The drought has hit at a time when Coke already is embroiled in an international controversy over water rights and findings that global warming may be exacerbated by the plastic industry's energy-intensive business plan. That recently added to a backlash from water works in the United States that launched a massive PR campaign aimed at informing the public that tap water wasn't just safe to drink, but vitally important in terms of health, quality of life and economic development.

And while Gov. Sonny Perdue in late October ordered municipal water providers to cut back 10 percent compared with their average consumption prior to the drought restrictions – a goal that Atlanta and DeKalb County failed to meet – there's still neither a deadline for compliance nor a penalty for missing the cuts.

But records show Dasani cut back and did its part. Coca-Cola, as well as big water users, already are cutting cut back. The company says it's done so at the Dasani plant and across the board, claiming conservation programs since 2002 have cut its water use worldwide by 19 percent. Coke spokeswoman Michele McKillip says the Marietta facility – which also bottles Coca-Cola Classic, Sprite and other drinks – had already reduced water use by 8 percent from 2005 to 2006 and was continuing to cut back by using air-powered rinsers, fixing leaky pipes, ceasing truck washes, and using "dry lubes" on the conveyance line.

"Coca-Cola takes the drought very seriously," McKillip says. "And we share the state and community's concerns. The issue of water is something we've been looking at for a long, long time."

Late Thursday night last week, visible through a plate-glass window to motorists driving by, the bottling operation was humming along. The bottles were in motion. And in the parking lot sat another idling tractor trailer, ready to roll out more of that purified water.

Wednesday, December 19, 2007

America: The Land of the Drugged

With the story breaking last week about the trainer ratting out all of the players doing steroids, I thought it was time to revisit an article I wrote back in 2005.

National Pastimes, Steroids and Media Circuses

Last week congress was engaged in one of its favorite past times; grandstanding. A congressional panel heard testimony from current and former professional baseball players including Mark McGwire and Sammy Sosa. The biggest buzz-making item to come out of the testimony was Mark McGwire’s refusal to answer the question of whether or not he had taken steroids. His unwillingness to answer the question has fueled speculation that he was in fact taking steroids while chasing Maris’ home run record and his reputation has predictably suffered as a result.

Several observations can be drawn from the hearings that really illustrate the sort of illusory world that Americans live in today. To begin with, the whole circus sideshow was instigated by a book written by former slugger Jose Canseco. Canseco outs a number of player, including McGwire, as taking steroids when he was still in the game. Not surprisingly, Canseco has become the target of much condemnation from managers, owners and players alike, one of which is Curt Schilling.

Schilling has been an outspoken critic of steroids for a number of years; even implying in the past that steroid use in baseball is “rampant”. In last Thursday’s testimony Schilling called Canseco, whose book corroborates Schillings views on steroids, a liar. This is the conundrum that the issue of drugs creates in United States. When an outspoken critic of steroid use brands the one person who openly admits to using steroids as a liar, we begin to see the quandary this issue causes.

The issue, in a broader sense, isn’t solely about steroids; it is about American’s acceptance of certain drugs and their opposition to others. It is a kind of built-in hypocrisy that seems to come with being an American. McGwire’s public conscience wrestling seemed to show a man who was not desirous of being a liar, while struggling with the knowledge that if he did tell the truth, he would be branded a cheat; a dilemma seemingly not shared by his contemporaries. However, the worst hypocrites in this spectacle are the shameless congress members pretending to be the protectors of old-fashioned American values while at the same time accepting enormous amounts of money from the pharmaceutical industry, an industry that shamelessly advertises their drugs even after many are known to be harmful to people’s health.

Americans are bombarded daily with advertisements from the pharmaceutical companies that encourage all manner of drugs to enhance their performance. You cannot watch television for more than ten minutes without being subjected to commercials hocking male sexual arousal pills, like Viagra and Cialis. Schools across the country have become defacto pharmacies dispensing drugs likes Ritalin and adderall to our nation’s children to enhance their concentration. Celexa, Lexapro, Prozac and Zoloft, just to name a few, are now household words. These are all drugs, we are told, that supposedly enhance the quality of our lives and all of these drugs have the full backing and support of the government and Congress especially.

The message that is being sent is clear, it is not only proper to ingest drugs to enhance performance but it is absolutely encouraged. However, when it comes to athletes using drugs to enhance their performance we are supposed to be incredulous that they would even entertain such an idea. What absurdity! Why on earth would anyone be shocked by the revelation that athletes use steroids? Drug use is ingrained in our culture, it is inescapable. We are the most medicated society on earth and yet we still feign outrage that athletes use steroids.

These are classic symptoms of the American psyche’s need to present itself as steadfastly moral while at the same time giving a wink and a nod to behavior we supposedly don’t tolerate. This is America’s real, national past time

Tuesday, December 18, 2007

ECB pumps in extra €170bn

By Ralph Atkins in Frankfurt

Published: December 18 2007 11:38 | Last updated: December 18 2007 11:38

Emergency help for financial markets has entered new territory with the European Central Bank pumping-in almost €170bn extra liquidity at below market interest rates in a special operation to head off a year-end liquidity crisis.

The surprise move, which followed last week’s co-ordinated barrage of measures by the world’s central banks to increase market liquidity, suggested the ECB was still frustrated at the failure to ease financial market tensions.

Late on Monday, the ECB announced that it would offer unlimited funds on a two-week basis at an interest rate of 4.21 per cent – significantly below the market rate before its statement. On Tuesday, it confirmed some €348.6bn - the largest ever for an ECB money market - had been allotted, compared with the €180.5bn it had estimated would be needed in normal circumstances.

The ECB move was reminiscent of its operation on August 9, during the earlier stages of the credit squeeze. But that was only for overnight loans.

“This is basically Father Christmas to those who have access,” said Erik Nielsen, economist at Goldman Sachs. “They are bailing out people who have not really adjusted their balance sheets to the new reality.” But Julian Callow, economist at Barclays Capital in London, said the ECB was “simply doing their job at being lender of last resort”.

The ECB had announced that Tuesday’s weekly money market operation would mature on January 4 – covering the year-end when banks will be under pressure to secure a strong liquidity position. Prior to the announcement, the cost of borrowing two-week money hit 4.9 per cent but it fell sharply afterwards as the ECB move in effect put a cap on market interest rate. The ECB said the move was “fully consistent” with its aim of keeping interest rates close to its main policy rate of 4 per cent.

The latest move underlines the limited impact of last week’s co-ordinated central bank intervention and highlights continued operational differences between the ECB and the more incremental Fed and Bank of England. A report by the Bank for International Settlements on Monday revealed the striking variation in money market operations used by central banks.

Sunday, December 16, 2007

Turkey Bombs Iraq

Suppose the Russians bombed Alaska, wouldn't that be considered an act of war?

Turkey planes bomb northern Iraq
Large numbers of Turkish fighter jets have bombed suspected Kurdish rebel bases in northern Iraq, reports say.

Turkish officials said the warplanes had targeted the Kurdistan Workers' Party (PKK), in areas near the border.

But officials in northern Iraq said the planes had struck several villages. There were reports that one woman was killed, although this was unconfirmed.

Turkey's deputy prime minister said more strikes against "terrorists" were possible in the coming weeks.

"We, as the government, are resolute to remove this trouble from the agenda of our country," Cemil Cicek told the state-run Anatolia news agency.

Mr Cicek also called on Kurdish militants to lay down their arms and return to their homes, insisting their fight was futile.

Turkey has regularly targeted the PKK inside Iraq in recent months, but this is thought to be the first fighter jet raid outside its own territory.

Previous strikes had used artillery or helicopters.

'Comprehensive campaign'

The Turkish planes struck several targets in different areas of northern Iraq, according to reports. Private Turkish TV reports spoke of "large numbers" planes involved, with numbers ranging from 20 to 50.

The planes hit the regions of Zap, Hakurk and Avasin as well as areas in the Kandil mountains, the military said.

After the night-time strikes ended, artillery barrages continued across the border from the border town of Cukurca in Turkish territory, reports said.

One of the sorties hit an area near the Kandil mountains, a region further away from the border into Iraqi territory, and regularly cited by Turkey as a centre of PKK activity.

Turkey's military said a "comprehensive air campaign" had been carried out at 0100 on Sunday (2300 GMT on Saturday).

"The operations solely target the... terrorist movement. They are not conducted against people living in northern Iraq or local groups not engaged in enemy activity," the military said in a statement.

But local officials in northern Iraq spoke of families fleeing their homes.

A spokesman for Iraqi Kurdish forces said troops were being sent to the Kandil area to check for damage and possible casualties, the AFP news agency reported.

Bitter dispute

Ankara toughened its line against the PKK after a spate of rebel attacks inside Turkey that prompted widespread calls for action.

In October, Turkey's parliament voted to allow the military to launch operations into Iraq to combat the PKK, which had stepped up attacks in Turkey.

Ankara has massed up to 100,000 troops near the mountainous border with northern Iraq, backed by tanks, artillery and warplanes.

But Iraq and the US have urged Turkey not to carry out its threat.

As many as 3,000 PKK members are believed to be based inside northern Iraq. Turkey has accused the local Kurdish authorities of supporting them.

Thursday, December 13, 2007

Gold & Mortgage Failure Avalanche

Jim Willie CB
Jim Willie CB is the editor of the "
Hat Trick Letter"
Dec 13, 2007

Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

An avalanche comes in 2008. Its wreckage will hit both the USEconomy and banking world. The greatest deception in the bank sector this year has been the misrepresentation of the mortgage debacle as a subprime problem. That is akin to calling an iceberg only a problem for what one can see, when 90% of its mass lies below water. Ice is lighter than water. Most mortgage bonds are like acidic stones weighing down bank and investor balance sheets. Wall Street and the USGovt con artists, using tools are fraud and distortion, prefer the public and investment community to think of the 'Subprime Problem' as the source of distress. On mortgage bonds, collateralized debt obligation derivatives, structured investment vehicles, all dominant in the news, reports constantly stress how the problem is traced to subprime mortgages to all those unworthy home loan borrowers who never should have been given such loans, even at higher mortgage rates. The systemic threat, both to the US banking system and USEconomy, has entered a new stage. The remedy addressed is sure to force the USDollar lower and the gold price higher, to occur in the next gear. Breakouts are coming which will seem to lose control, like what was seen in September and October.

Official policy in reaction to the USEconomic threat of recession will spill money into every corner and crevice. Gold and mining stocks will benefit. My forecast stated all summer long is that the USGovt maestros will gradually introduce increasingly broader rescue elements, since everything they try at early stages will fail. The USFed remains badly behind the curve, as yesterday they cut the official Fed Funds target rate, but did not sufficiently cut the Discount Window rate that imposes a Stigma Tax. Today, the USFed announced a much broader bank liquidity policy, focused upon more auctions at set rates and a swap line with the Euro Central Bank. They have announced more coordination with the Bank of England, the Bank of Canada, the Swiss National Bank, and the US Federal Reserve. This is part of my forecast. They must have been working all night long.

By summertime 2008, the requirements for a grandiose Resolution Trust platform will be etched more clearly. The key to the gold price lies in two spots: 1) massive monetary inflation to treat the banking problems and prevent recession, 2) realized price inflation in a manner lacking disguise. John Mauldin uses the metaphor of fire trucks being called to the scene. The USFed has been amazingly shamefully slow in recognizing the problems. Stuck in their stupid "inflation versus growth" framework mindset, they miss both the interbank system seizures and home mortgage avalanche coming outside the prime mortgage corral.

The threat to the banking system will be staggering. The threat to the economic system will be broad and deep. The avalanche will expose the combined system as insolvent, broken, in need to total rescue. The damage will necessitate rescue platforms to undermine the entire US$-based monetary system, certainly sufficient to lift gold well past the $1000 level. By the time 2009 approaches, the system will be recognized as totally broken. The new question will be whether that system can indeed be repaired. As measures put in place and debated for consensus approval, the urgently demanded movement should be the particulars on the new Resolution Trust Corporation. The desperation no longer hidden (like on Bernanke's face) will lift gold well past the $1000 mark. The impetus behind the gold price will turn to inflation much more than the US$ counter-lever. All major currencies will be inflating heavily, as seen in recent central bank decisions either to cut official interest rates or to hold steady. Major currencies will begin to be compared in a manner to judge which ones are weaker as they are undermined during stimulus to discourage economic recession and credit flow interruptions.

The new 2008 year will smash that notion, as an absolute avalanche of failed mortgages will slam the bank system and financial sector in general, the majority being prime mortgages. SHOCK & AWE IS RIGHT AROUND THE CORNER ON PRIME MORTGAGES, A FACT THE BANKERS ARE KEENLY AWARE OF!!! The villainous failed mortgages have a few traits in common. These primes are adjustable rate mortgages (ARMs) with harsh resets. They contain destructive features certain to cause as much pain as laughter for their insanity. Recall they are prime mortgages with lax features resembling subprime loans without the higher rates. A reaction to the incredibly flimsy inadequate Subprime Mortgage Freeze Plan, with dire descriptions of the prime mortgage avalanche can be found in the December special report to the Hat Trick Letter, entitled "National Bailout & Looming Mortgage Disaster."

Only 150 to 225 thousand subprime mortgages will be addressed by this flimsy HOPE NOW freeze plan, and nothing among the looming prime mortgages heading for certain default. The innovative mortgage products face ruin. Large cross sections of newer mortgages, written since year 2000, are under-water badly. Their loan balances are much greater than their home values. THE NEW PHENOMENON IN 2008 IS RECOGNITION OF ZOMBIE LOANS, ZOMBIE HOMEOWNERS, ZOMBIE CONSUMERS, AND ZOMBIE BANKS. They are bankrupt without declaration; they are walking dead. An added footnote is needed to this auxiliary HTL special report, tied to accusations of fraud by large mortgage bond investors, both in the United States and foreign institutions.

The threat of court-ordered forced contractual bond buyback by Wall Street con artists is nearing a reality. If investors engage the Wall Street banker broker dealers in the renegotiation, refinances, and workouts, then those institutional investors will lose the right to sue Wall Street firms, and lose the opportunity to force fraudulent bonds to be bought back at perhaps ten times their current traded prices. Wall Street, given its Fascist Business Model connection with the USGovt, has enlisted Congressional help to place 'Safe Harbor' obstructions to lawsuits, thus absolving the criminal activities perpetrated by Wall Street. The gaggle of Wall Street firms engaged in packaging mortgage bonds, ensuring they contained a 'AAA' false label, colluding with key agencies to misrepresent the sale of securities, has made a bold move to freeze troubled mortgages, and to dupe/lure investors into the process. If they take the bait, they lose the opportunity for remedy on hundreds of billion$ in fraud-ridden bond losses. My contention made for over two years is that the USGovt and Dept Treasury and Wall Street and numerous major icons in the United States embody institutionalized dishonesty. That perception is much more clear in 2007. Legal address and remedy of that institutionalized dishonesty might come in 2008.

Wall Street and other major bankers continue to soil their pants. They realize several looming tragedies:

  • Prime 'AAA' mortgage bonds have lost roughly 20% of value
  • Innovative flexible adjustable mortgages are due to default in droves
  • Enormous growing list of under-water mortgages are beyond rescue
  • Big banks are facing dire insolvency threats, as new defaults approach
  • Enormous bond writedowns have only begun for big banks
  • Insolvency can turn to bankruptcy with more debt rating agency downgrades
  • Mortgage bond investors contemplate lawsuits, accusing Wall Street fraud
  • Wall Street banks face the prospect of over $1 trillion in mortgage bond buybacks
  • Rescue & remedy will trash the USDollar and catapult the gold price

As a preface, one should know that politicians did not advance this plan. The key initiators of the HOPE NOW project were three banks. It was an alliance led by the Federal Deposit Insurance Corp (insurer of banks), along with big banks and their lobbyists from Citigroup, JPMorgan, and Wells Fargo. These banks in my opinion are insolvent, soon to be forced into bankruptcy as the next round of the mortgage debacle unfolds from the 'innovative' adjustable and option laden mortgages. They all face bankruptcy, insured by the FDIC. If lawsuits are filed and that road is traveled, declared bankruptcy is assured. The rescues to save the Ruling Elite will lift gold and trash the USDollar, as much from a new unprecedented round of monetary inflation, as from destroyed image of the US financial system. Freezes never work. When in college, my memory is vivid of the lunatic Nixon Wage Price Freeze. When it lifted, the price inflation rampage was the worst in modern history. My suspicion is that when any mortgage freeze is lifted, both mortgage rates will rise sharply and mortgage bonds will fall sharply in value.

Few have bothered to think about the infectious disease of moral hazard, to consumer and household reactions. Many economic participants will feel left out with the current rescue, against a backdrop of watching colossal fraud go unpunished. They will possibly act destructively, an intentional effort to destroy their credit rating so they can participate in national bailouts. Many live in homes with negative home equity. They might feel above the rules, immune to impact of their actions, engrained in destructive habits, feel powerful from a reprieve, want to be included, or just not care. They will feel they have nothing to lose. The likelihood that property taxes will be paid, water & sewer fees paid, lawns mowed, hedges & trees pruned, garbage removed, broken windows repaired, holes in walls filled, driveway cracks filled, shingles straightened, liens on the property resolved, these are all in doubt in my book. Pride in ownership will turn ugly, into a free ride game. Practicalities are strained to the extreme. A zombie comes to learn to act with disregard, disrespect, and disobedience. Henry David Thoreau wrote 'Civil Disobedience' almost two centuries ago in response to the Spanish Civil War, yet another false flag self-inflicted attack. That was done to the USS Maine vessel off the Cuban coastline. Expect such disobedience to be practiced widely in reaction.

If 'AAA' rated mortgage bonds have lost 20% already, this is not a subprime problem anymore. My contention is that many 'AAA' bonds are likely to lose over 50% of their value, as home collateral value drops another 10%. Wells Fargo announced a whopping $1.2 billion loss from prime second mortgages recently. Remember how people could borrow their entire down payment with an immediate 20% second mortgage out of the gate? Well, they are failing, with Moodys estimating 15% of them to fail. That is on par with the horrendous subprime default rate. The E*Trade bond loss writedowns were not subprime. After taxes and cash infusion is removed from Citadel Investments, the E*Trade fire sale salvaged only 11 cents per dollar on their $3.1 billion prime mortgage bond portfolio. The liquidation damaged the entire market by exposing its low value. This is not a subprime mortgage problem anymore. The debt ratings agencies writedowns have entered a second gear, with some acceleration. They are not only downgrading massive bank portfolios, they are threatening to downgrade the bond insurers such as ACA Capital and MBIA, as well as others. What is a house or business worth when it cannot be insured due to faulty structures? NOT MUCH!!!

However, here is where the real damage comes, as an extension of the Fascist Business Model.
The sickest and often most fraud-ridden banking entities will receive fresh new money, possible USGovt handout infusions. The failures will be rewarded, leaving the successful, honest, competent to struggle or to go begging. Banks will issue fewer prime mortgages. The plan will force extreme focus on subprimes, ignoring primes. Banks will be forced to hold back on funding new loans since old loans must be addressed. In the process, their plan will very possibly accelerate the downside for housing prices. Home inventory levels will continue to rise. Sellers will not find willing buyers so easily capable to make final their loans. The lending institutions in general will be rendered less inefficient. The most glaring example of this principle will be the capital funding of Freddie Mac and Fannie Mae. F&F are failed institutions with broken apparatuses, having operated for years without disclosure, but will dominate the national program if our current leaders have their way. Instead, new financial entities should be created, not revival of broken entities. Inefficient capital usage will be the main feature of this plan.

In my opinion, THE FINANCIAL SYSTEM HAS OFFICIALLY ENTERED CHAOS, with that chaos more widely recognized in year 2008. To be sure, it is an early stage. Massive housing losses have occurred. Even more massive mortgage bond and related credit derivative losses will occur. Rewards are being prepared for the most reckless of participants. Encouraged destruction of credit and credit ratings is possibly around the corner, so that marginal households can participate in freezes, bailouts, or whatever is handed out. Subprime loan failures are the tip of the iceberg. In 2008, the breakdown of numerous other types of mortgages will occur, already in their initial phase. They are NOT subprime mortgages. The mortgage finance sequence of boom, bubble, bust is entering the third stage. Prices for housing properties will revert at least to where they were in 2001 when the insanity began, which was actively encouraged by Greenspan. History tells us that. His fingerprints are everywhere. All subprime mortgage bonds will go to zero in value. All CDO bonds containing subprimes will go to zero in value. All prime mortgage bonds will lose at least half their value. If the national decline in home prices falls over 10% to 15% more, then almost all recently issued prime mortgage bonds might possibly head to zero in value. Few talk about the next destructive factor for mortgage bonds.

Ultimately, a minimum of a $2 trillion bailout is necessary, as mortgage bond losses will be at least that high, especially when considering the leveraged CDO bond losses. The new bigger broader Resolution Trust Corporation must be created as soon as possible without delay. Urgency is here and now. The system is in the process of degradation, sure to lead to some increased disorder. The changes will be similar in England and possibly to some degree Spain, because they went overboard on real estate speculation. England built an economic dependence upon an inflated housing sector. Spain permitted uncontrollable vacation property speculation. Be sure to know that Wall Street firms are in charge of the solution to a disaster that they themselves perpetrated. Wall Street firms will want to be in charge of the bailouts, even the Resolution Trust Corp. Wall Street firms will want to be involved in the grotesque bailouts, since so much corruption and opportunity will be presented. Like the parasites they are, they sense gain. Think Halliburton and the Iraq & Afghan Wars, with profits abounding to insiders on cozy contracts. Think contractors in New Orleans and Hurricane Katrina relief. Think the next RTC administrators, with more huge profits. To even consider the fraud-ridden Freddie Mac and Fannie Mae for serving as the foundation financial agency for secondary market reinvigoration is a travesty. It is a blatant endorsement of the entrenched Fascist Business Model.

Anyone who believes the mortgage debacle is limited to subprime loans and bonds has bought hookline & sinker the story trumpeted by Wall Street and the larger banking community. The risk pricing model has broken, with authorities determined not to have the story properly. Instead, it is framed in friendly terminology, distorted to the public and the investment community. The world of bizarre reckless adjustable rate mortgages (ARM) is soon to suffer a publicly visible and horrible implosion. The aftermath of irresponsible 0% down payment mortgages is soon to suffer implosion. The innovative creative flexible mortgages are soon to suffer implosion. No documentation, no income mortgages, unimaginable in normal cultures, are soon to suffer implosion. A vast world of under-water mortgages exists in the United States, soon to suffer implosion. The abuse of second mortgages and home equity loans is soon to suffer implosion. The main focus of attention will be on California, the center of innovation and creativity. Think the American Home Dream turning to a Ball & Chain toward serfdom, the New American Nightmare. Many details are provided in the Hat Trick Letter Special Report.

The key theme with innovative adjustable mortgages is their zombie nature. Resale is hindered, as is refinance, since the property is vastly under-water, loan balance greatly exceeding the home value. A return to similar mortgage loans is impossible, since they no longer exist. A loan rate freeze is a certified prescription for another zombie loan and zombie home title owner. Particular gratitude goes to ScottM in Seattle and that anonymous San Francisco mortgage broker who offered details after his personal experience in approving over $2 billion in mortgage loans himself. His information is appreciated, and needs to be made more public.

Negative amortization mortgage implosion. This type loan has permitted home title owners to pay less than the appropriate interest amount, thus adding to the loan balance. When the loans hit their maximum negative potential allowance, a huge increase is forced which could result in required monthly payments not 20% to 35% higher, but 100% to 200% higher. The full interest requirement kicks in, based upon the full loan balance, having risen. Imagine a $1400 monthly payment shooting to $2800 or $4000!

Prime second mortgages implosion. This type of loan enabled a huge number of home title owners to effectively invest 0% down payment in their original purchase. Many lending institutions have cut off further withdrawals from the home equity source, in a lockdown much like applying a tourniquet to a bleeding limb. Wells Fargo once boasted this spring not to be involved in subprime mortgages, but they possess $84 billion of these worthless loans. Expect Wells Fargo to go bankrupt. The bankrupt banks will not just have Wall Street addresses.

Pay option adjustable rate mortgage implosion. Called 'Option ARMs' in the finance industry, this category will make national news for their insanity in negative amortization features. In volume, they will greatly eclipse the subprime story, since the loan type involves all risk levels of borrowers and all sizes of properties. Again, this feature enabled many people to buy far too large a property. Shocking statistics are cited in the special report, pertaining to these truly reckless loans. Bear in mind that homes have fallen in value, so underwater percentages in extreme cases of these loans might be more than 25%!!! Analysts estimate that on many of these Option ARM loans, home title owners are underwater by 15% to 20%. Many of these loans have seen their balances rise by 7% per year for at least three years. These loans are more disguised subprimes. The negative amortization features act like a timeduse to explode, in a situation offering no hope of refinance, no qualification for other loans, and no equity. They will go bust.

Hybrid interest only adjustable rate mortgage implosion. The hybrids attracted borrowers by offering a fixed low introductory teaser rate for a fixed three, five, or seven years. After that period, they adjust annually. Again, this feature enabled many people to buy far too large a property. The 3/1 (3-year fixed, adjust every 1 year later) began to reset in 2006, with many more in 2007. The 5/1 will begin to reset in 2008, causing a nightmare. Many lenders offered Hybrid ARMs to lower quality borrowers. Plenty such loans did not require income verification. Like the Option ARM, the low teaser rate caused the loan balance to rise during the introductory period, thus leading to vast number of loans being under-water. Again, refinance or new mortgage loans will not be approved. They will go bust.

The downtrend in housing prices generally might actually motivate banks and other lending institutions not to make more home loans.
A tidal wave of foreclosures comes soon, not related to subprime in any way, with California at the epicenter. Mortgage bond holders of above described abusive INSANE mortgage loans packaged into bonds will suffer massive losses. For some, like Option ARMs, no bond market exists anymore. The banks on the other hand will suffer from the tidal wave of loan losses, much of which is deserved. My only hope is that Wall Street banks suffer their fair share of the pain. Home property values in some metropolitan areas are likely to fall by 30% to 50% from peak, taking them back to 2000 and 2001 levels. THE ONLY SOLUTION IS UNTHINKABLE, A NATIONAL BAILOUT OF THE MAJORITY OF HOME MORTGAGES AND MORTGAGE BONDS, SINCE THE ENTIRE SYSTEM IS BROKEN IRREPARABLY.

The effect on the USDollar and gold price is uncertain, but surely negative for the clownbuck and positive for gold. As Persian Gulf oil producers watch in horror, they will be increasingly motivated to cut their US$ formal currency pegs. The upcoming US mortgage debacle will kill the USDollar as the recognized practiced endorsed world reserve currency, with the abolition of the defacto PetroDollar standard certain. The gold price will rise amidst the absolute hurricane of low pressure asset deflation and colossal monetary inflation to fight it. THE GOLD PRICE IS CONSOLIDATING NEAR AND ABOVE 800, A DISPLAY OF STRENGHT AND RESILIENCE.

My dire forecast for 2008 is that the USDollar DX index will find its way to 65 and the gold price will find its way to $1200 per ounce. A 10% to 15% decline in the USDollar comes. A 30% to 50% rise in gold comes. The positive rub to investors is that as the national emergency becomes more widely recognized, the need to flood the bank & bond arenas, as well as the corporate credit & household arenas, will become broadly understood as desperate. Without that flood, the system will enter a deeper economic recession than already is in progress. Without that flood, the system will see the banking system actually fail.

The helicopters start to drop money

The helicopters start to drop money

Published: December 12 2007 18:01 | Last updated: December 12 2007 18:01

The central bank helicopters are planning a co-ordinated drop of liquidity on troubled market waters. The money to be dropped now is not that large. But if this does not work, more will surely follow. The helicopters will fly again and again and again.

One point is clear: central banks must be pretty worried to take such a joint action. For what is remarkable about Wednesday’s statement is that five central banks – the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve and the Swiss National Bank – are co-ordinating their (different) interventions. Their hope must be that this action will trigger not panic (”what do the central banks know that I do not?”) but confidence (”now that the central banks are prepared to intervene in this way, I can at last stop worrying”).


Monetary Policy Committee

Have central banks done enough to restore confidence in the global financial system? Have your say

It is easy to understand why central banks should have decided to take heroic action. Confidence has fled the markets in a four-month long episode of “revulsion”. As a result, monetary policy is not being transmitted to the ultimate borrowers as central banks wish. Particularly worrying has been the widening of gaps between three-month inter-bank lending rates and policy rates in the dollar, euro and sterling markets. Spreads in the last of these have recently become enormous (at more than 100 basis points).

Yet this is not the only indication of distress: in the US, for example, the spread between the rate of interest on 3-month treasury bills and AA-rated asset-backed commercial paper has widened to 270 basis points from a mere 30 basis points earlier in the year. This is revulsion, indeed.

So why might Wednesday’s co-ordinated interventions succeed where previous actions have not? In a word, the answer is: stigma.

Central banks have become increasingly worried about the unwillingness of banks to borrow from them. These banks reasonably fear that exceptional borrowing is a signal mainly of distress. The hope of the central bankers is that by auctioning funds to a wide group of institutions such anxiety would diminish, if not disappear. That hope is strengthened by the fact that these actions are joint: they are evidently aimed at lifting sentiment rather than saving specific institutions.

Will this work? The answer is that if the fundamental problem in the markets is lack of liquidity (that is, panic), rather than insolvency, and if central banks are believed willing to offer liquidity to solvent institutions without limit at what the latter consider a “reasonable” discount, then symptoms of stress should indeed disappear.

Yet these are both important provisos. In particular, there is good reason to believe that a good part of the stress is caused by worries over solvency, indeed by the reality of threatened insolvency in at least some cases. True, central banks or, more precisely, the treasuries that stand behind them, could eliminate that concern, too, by buying up every piece of paper, good, bad and indifferent. But that would also be an open-ended, possibly very expensive and certainly unpopular bail out.

Moreover, even if today’s stress is indeed a liquidity problem (something that we do not now know), there remains the question of the scale of the intervention required. Assume, for example, that central banks end up buying a vast amount of paper and so providing liquidity to institutions that have deliberately taken on big risks, by lending long and borrowing short. They have then validated those strategies, after the event.

So does the action by the central banks give us good reason to stop worrying? Only if you like huge rescue operations of incompetent bankers, would be my answer. They may well get the markets back into order. They may, in this way, rescue economies from the threat of recessions. But that is not the end of the story. The bigger the rescue has to be today, the more stringent regulation of financial institutons will have to be in future.

Monday, December 10, 2007

Tell it like it is, Mortgage Fraud

New proposals to ease our great mortgage meltdown keep rolling in. First the Treasury Department urged the creation of a new fund that would buy risky mortgage bonds as a tactic to hide what those bonds were really worth. (Not much.) Then the idea was to use Fannie Mae and Freddie Mac to buy the risky loans, even if it was clear that U.S. taxpayers would eventually be stuck with the bill. But that plan went south after Fannie suffered a new accounting scandal, and Freddie's existing loan losses shot up more than expected.

Now, just unveiled Thursday, comes the "freeze," the brainchild of Treasury Secretary Henry Paulson. It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of "teaser" subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.

But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.

The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.

The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it.

I can hear the hum of shredders working overtime, and maybe that is the new "hot" industry to invest in. There are lots of people who would like to muzzle subpoena-happy New York Attorney General Andrew Cuomo to buy time and make this all go away. Cuomo is just inches from getting what he needs to start putting a lot of people in prison. I bet some people are trying right now to make him an offer "he can't refuse."

Despite Thursday's ballyhooed new deal with mortgage lenders, does anyone really think that it can ultimately stop fraud lawsuits by mortgage bond investors, many of them spread out across the globe?

The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.

The problem isn't just subprime loans. It is the entire mortgage market. As home prices fall, defaults will rise sharply - period. And so will the patience of mortgage bondholders. Different classes of mortgage bonds from various risk pools are owned by different central banks, funds, pensions and investors all over the world. Even your pension or 401(k) might have some of these bonds in it.

Perhaps some U.S. government department can make veiled threats to foreign countries to suggest they will suffer unpleasant consequences if their largest holders (central banks and investment funds) don't go along with the plan, but how could it be possible to strong-arm everyone?

What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back. The time to look into this is before the shredders have worked their magic - not five years from now.

Those selling the "freeze" have suggested that mortgage-backed securities investors will benefit because they lose more with rising foreclosures. But with fast-depreciating collateral, the last thing investors in mortgage bonds ought to do is put off foreclosures. Rate freezes are at best a tool for delaying the inevitable foreclosures when even the most optimistic forecasters expect home prices to fall. In October, Goldman Sachs issued a report forecasting an incredible 35 to 40 percent drop in California home prices in the coming few years. To minimize losses, a mortgage bondholder would obviously be better off foreclosing on a home before prices plunge.

The goal of the freeze may be to delay bond investors from suing by putting off the big foreclosure wave for several years. But it may also be to stop bond investors from suing. If the investors agreed to loan modifications with the "real" wage and asset information from refinancing borrowers, mortgage originators and bundlers would have an excuse once the foreclosure occurred. They could say, "Fraud? What fraud?! You knew the borrower's real income and asset information later when he refinanced!"

The key is to refinance borrowers whose current loans involved fraud in the origination process. And I assure you it was a minority of borrowers whose loans didn't involve fraud.

The government is trying to accomplish wide-scale refinancing by tricking bond investors, or by tricking U.S. taxpayers. Guess who will foot the bill now that the FHA is entering the fray?

Ultimately, the people in these secret Paulson meetings were probably less worried about saving the mortgage market than with saving themselves. Some might be looking at prison time.

As chief of Goldman Sachs, Paulson was involved, to degrees as yet unrevealed, in the mortgage securitization process during the halcyon days of mortgage fraud from 2004 to 2006.

Paulson became the U.S. Treasury secretary on July 10, 2006, after the extent of the debacle was coming into focus for those in the know. Goldman Sachs achieved recent accolades in the markets for having bet heavily against the housing market, while Citigroup, Morgan Stanley, Bear Sterns, Merrill Lynch and others got hammered for failing to time the end of the credit bubble.

Goldman Sachs is the only major investment bank in the United States that has emerged as yet unscathed from this debacle. The success of its strategy must have resulted from fairly substantial bets against housing, mortgage banking and related industries, which also means that Goldman Sachs saw this coming at the same time they were bundling and selling these loans.

If a mortgage bond investor sues Goldman Sachs to force the institution to buy back loans, could Paulson be forced to testify as to whether Goldman Sachs knew or had reason to know about fraud in the origination process of the loans it was bundling?

It is truly amazing that right now everyone in the country is deferring to Paulson and the heads of Countrywide, JPMorgan, Bank of America and others as the best group to work out a solution to this problem. No one is talking about the fact that these people created the problem and profited to the tune of hundreds of billions of dollars from it.

I suspect that such a group first sat down and tried to figure out how to protect their financial interests and avoid criminal liability. And then when they agreed on the plan, they decided to sell it as "helping working families stay in their homes." That's why these meetings were secret, and reporters and the public weren't invited.

The next time that Paulson is before the Senate Finance Committee, instead of asking, "How much money do you think we should give your banking buddies?" I'd like to see New York Sen. Chuck Schumer ask him what he knew about this staggering fraud at the time he was chief of Goldman Sachs.

The Goldman report in October suggests that rampant investor demand is to blame for origination fraud - even though these investors were misled by high credit ratings from bond rating agencies being paid billions by the U.S. investment banks, like Goldman, that were selling the bundled mortgages.

This logic is like saying shoppers seeking bargain-priced soup encourage the grocery store owner to steal it. I mean, we're talking about criminal fraud here. We are on the cusp of a mammoth financial crisis, and the Federal Reserve and the U.S. Treasury are trying to limit the liability of their banking friends under the guise of trying to help borrowers. At stake is nothing short of the continued existence of the U.S. banking system.

Sean Olender is a San Mateo attorney. Contact us at

Thursday, December 06, 2007

Home Foreclosures Hit Record High

Thursday December 6, 10:37 am ET
By Jeannine Aversa, AP Economics Writer

Home Foreclosures Hit Record High in Third Quarter WASHINGTON (AP) -- Home foreclosures shot up to an all-time high in the third quarter, fresh evidence of the problems afflicting distressed homeowners amid the housing meltdown.

The Mortgage Bankers Association in its quarterly snapshot of the mortgage market released Thursday said that the percentage of all mortgages nationwide that started the foreclosure process jumped to a record high of 0.78 percent during the July-to-September period. That surpassed the previous high of 0.65 percent set in the prior quarter.

More homeowners also fell behind on their monthly payments.

The delinquency rate for all mortgages climbed to 5.59 percent in the third quarter. That was up from 5.12 percent in the second quarter and was the highest since 1986, the association said. Payments are considered delinquent if they are 30 or more days past due.

Homeowners with spotty credit who have subprime adjustable-rate loans were especially hard hit. Foreclosures and late payments for these borrowers also reached all-time highs in the third quarter.

The percentage of subprime adjustable-rate mortgages that entered the foreclosure process soared to a record of 4.72 percent in the third quarter. That was up from 3.84 percent in the second quarter. Late payments jumped to a record high of 18.81 in the third quarter, up from 16.95 percent in the second quarter.

The association's survey covers more than 45 million home loans nationwide.

The new figures came as President Bush, accused by Democrats and other critics of not doing enough to help stem the mortgage crisis, was set to unveil a plan Thursday that would allow some homeowners with certain subprime home loans to freeze their interest rate for five years. The plan aims to prevent some distressed borrowers from losing their homes. It also is intended to ease the danger facing the economy from a wave of foreclosures -- something that would further aggravate problems in the housing market.

Homeowners with spotty credit histories or low incomes who took out higher-risk subprime adjustable-rate mortgages have suffered the most distress as the housing market went from boom to bust.

Initially low interest rates that reset to much higher rates have clobbered these borrowers. Analysts estimate that nearly 2 million adjustable-rate subprime mortgages will reset to higher rates this year and next.

Doug Duncan, the association's chief economist, said in an interview with The Associated Press that foreclosures and late payments are likely to stay high or get worse in the coming quarters.

The mortgage meltdown has hit financial companies with billions of dollars in losses from bad subprime mortgage investments. Some lenders have been forced out of businesses. The situation has elevated the odds of the country falling into a recession. It has roiled Wall Street and has offered lots of fodder for Democrats and Republicans to blame each other for the mess.

Against this backdrop, the Federal Reserve next week is expected to slice a key interest rate for a third time this year to bolster the economy.

Duncan said there were a host of factors to blame for the rise of foreclosures and late payments in the third quarter: broad-based declines in home values; the resetting of adjustable-rate mortgages to higher rates; the drying up of credit for subprime and "jumbo" mortgages, those exceeding $417,000; and economic weakness in some parts of the country.

California and Florida -- the two largest states in terms of outstanding mortgages -- were key drivers in the increase in the national foreclosure rates, the association said. The two states together accounted for 33.7 percent of the subprime adjustable-rate loans that entered the foreclosure process in the third quarter. The two states combined also accounted for 42.4 percent of creditworthy "prime" adjustable-rate mortgages that started the foreclosure process.