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More from Boston:
http://bostonist.com/2008/12/01/even_death_cant_stop_sox_fans.php
You might have trouble getting tickets at Fenway, like most of us do. But it's comforting to know that when all those and myriad other troubles have gone away, you can still proclaim your allegiance to the boys even as you while away the centuries.
The Globe today introduces us to Eternal Image, a Michigan company that's correctly deduced that people don't want to spend the hereafter in a boring old coffin when they can cheerfully decay surrounded by the logo of their favorite team.
So we now have the option of Red Sox-themed caskets and urns. The steel casket, of which the first was just delivered to a Rockland funeral home, has a Sox logo on the outside, logo-festooned interior lining, and (we hope) the voice of Joe Castiglione beamed inside for all of eternity. Think of it as a never-ending rain delay.
The caskets carry a suggested retail price of $4,499, so it is not their most modestly-priced receptacle. But if the Sox fan in has already spent their earthly existence saturated with caps, shirts, pennants, books, etc., etc., why not take the last step, and let St. Peter know to strike up "Sweet Caroline" when they get to the gates? They will soon be available for all 30 MLB teams, so you can suggest one to your Yankee-fan coworkers (who have spent the last few years coming to grips with mortality anyway), or make arrangements to be buried in a Seattle Mariner setup if there's a good inside joke behind it. But the company fully expects the Sox one to be among their biggest sellers, and they're ready to, in the words of an MLB spokesman, "take care of the long-term fan".
(And, no, it doesn't come in pink. Yet.)
Picture from EternalImage.com
Associated Press:
Link doesn't work so I didn't post it, but it's a short article anyway.
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Red Sox fans can show their loyalty for eternity
3 hours ago
ROCKLAND, Mass. (AP) — Lifelong Red Sox fans can now take their love of the team to the next level — eternity.
A Massachusetts funeral home recently took delivery of the first Red Sox casket, which features the team logo on the exterior as well as the inside.
The casket is manufactured by Eternal Image of Michigan, which has a licensing agreement with Major League Baseball.
Bob Biggins, co-director of Magoun-Biggins Funeral Home in Rockland, tells The Boston Globe families in mourning often want their loved ones buried with favorite items. In the past that's included Red Sox paraphernalia; the casket takes it to the next step.
Biggins says the family that chose the $3,000 Red Sox casket bearing serial number 0001 did not hesitate in picking it for their father.
From the Boston Globe-
http://www.boston.com/news/local/massachusetts/articles/2008/12/01/for_sox_fans_eternally/?page=1
ROCKLAND - For years, lifelong Red Sox fans wanted their team to win the World Series so they could finally go to the grave in peace. Now, they can do it encased in the team's logo as well.
Yes, the officially licensed Red Sox casket has arrived. The team logo is embroidered on the soft velvet of the lining and pillow, each of which is as white as a home uniform on Opening Day. The logo also appears on the exterior of the casket, which is made of high-gloss 18-gauge steel accented with baseball bat-style wood, tassels, and polished chrome - more Cadillac than bullpen car, headed for the hereafter.
"It's really a beautiful thing," said Dan Biggins, 28, co-director of Magoun-Biggins Funeral Home in Rockland, which recently took delivery of the first Sox casket, serial number 0001. "It's really neat."
The casket is manufactured by Eternal Image, a Michigan company started about five years ago on the notion that branded funeral products could make money and fill an overlooked need. The founder, who hatched the idea after looking unsuccessfully on the Internet for a 1967 Ford Mustang casket for himself, spent the next few years persuading well-known brands - including the Vatican Library, the American Kennel Club, and Star Trek - to enter licensing agreements.
Major League Baseball products are Eternal Image's bestsellers. The company introduced its ballclub urns early last year; the team-logo caskets will become available to the wider market this month. (Magoun-Biggins, owned by avid Sox fans, had been promised the first.) Not surprisingly, the Yankees and Red Sox urns have been locked in a close race for the sales lead - ahead of all other teams and products.
"That's very respectable, especially up against the Vatican," said Clint Mytych, 27, founder and president of Eternal Image. Through the end of the company's fiscal second quarter in 2008, about 330 Yankees urns had been sold, and about 325 for the Sox, Mytych said.
The company's die-cast urns for cremated remains include a home-plate base and a baseball in a clear dome that can be signed by family and friends. The suggested retail price is $799. The caskets carry a suggested retail price of $4,499.
Mytych first displayed prototypes of a Red Sox casket and a Detroit Tigers casket at the annual convention of the National Funeral Directors Association last fall in Las Vegas, hiring Sparky Anderson, the septuagenarian former Detroit manager, to man the booth.
"As soon as we saw it, we knew we wanted it," said Bob Biggins, Dan's father and co-director of Magoun-Biggins. "We fell in love with it."
At 51, the elder Biggins is like a lot of New Englanders his age, able to rattle off the lineup for Boston's pennant-winning "Impossible Dream" team of 1967. He is also attuned to memorial and burial trends and mores, and his funeral home straddles the traditional and the new, which includes special services and tailored caskets.
"It's important in the midst of someone's mourning that we're able to help them focus on all the wonderful things about a person's life," said Bob Biggins, who is a former president of both the national and Massachusetts associations of funeral directors.
Sometimes that's as simple as dressing the deceased in a favorite flannel shirt or showing a video slide show. It has also meant embroidering images into casket linings, setting up an indoor campsite at the service for a cancer victim who loved to camp with his children, and leading the procession for a late ice cream vendor with the man's ice cream truck, with Popsicles for everyone at the cemetery.
But until now, father and son have been unable to do anything formal with a Sox logo - for lack of licensing, not lack of interest. Around the Magoun-Biggins office table, families planning funerals routinely mention a passionate attachment to the Red Sox in sketching biographies of those they are mourning. The Bigginses, in turn, have prepared the recently departed for viewing in their favorite Sox jackets and arranged displays with memorabilia and souvenirs, including pictures and ticket stubs from as far back as 1918.
After they took delivery of the Sox casket in late October, they made a "pre-need" sale the same week. A family preparing for the death of a terminally ill father chose it immediately.
"They looked at that casket, and they said, 'That's for our Dad.' They didn't even look at anything else," said Bob Biggins, who offers the Red Sox casket for about $3,000, making it a mid-range selection.
For years, Red Sox fans have been able to buy an array of branded items beyond traditional T-shirts and pennants, including dog leashes, baby bibs, and golf balls. The interest in this latest marketing venture is another sign of the team's popularity, Sox spokeswoman Susan Goodenow said: "It just really demonstrates the passion of our fan base."
The club supports the idea of the licensed caskets, but the decision was made at the league level, where Major League Baseball controls the licenses for all 30 teams. Revenue from the caskets, and other licensed products, is shared throughout the league.
Before Eternal Image approached, the league had received periodic requests from teams - with the Red Sox among the leaders - asking whether caskets or urns were available, said Howard Smith, senior vice president of licensing for Major League Baseball.
League officials considered that some might criticize team-branded caskets as too commercial. But fan interest made the decision easy, Smith said.
"This had nothing to do with the money. I can't even quote you a figure of how much money we've made from this license," Smith said in a phone interview from New York.
Eternal Image "is doing the same thing we're doing," Smith added. "They want to take care of the long-term fan."
Over $7 trillion committed so far and still no effect. And the opnly answer they have is to throw more $$$ at the problem.Any guesses on the final costs? 15 trillion? 20 trillion? 55 trillion? When this current mess finally clears and all those digitized dollars become monetized, $5000 gold will be cheap.
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This is a copy of an email I sent to my US senator on July 28 of this year. A little OT here, but I thought everyone could use a little laugh. Looking back, my request was timely however it was ignored. Both my senators (PA) voted for the TARP bailout but my representative voted no. All this abuse of our tax dollars just makes me want to go underground and quit paying taxes altogether.
.........al
Senator Casey-
It seems that many of our tax dollars are now being used to bail out
mismanaged public corporations and foreign investments in these same
corporations. I have stocks in my portfolio that are now worthless due
to the same type of mismanagement. I will send for the certificates.
Would you kindly send me the address to forward them to. I'm not asking
for hundreds of billions of dollars, just maybe $20,000. I have received
no bonuses from these companies or any other compensation. I am just a
small investor that used some poor judgement in the past and would like
to turn some of this worthless paper into our Federal Reserve in
exchange for cash. I understand it is now the trendy thing to do. Please
send this information as soon as possible before Fannie, Freddie, and
Wall Street take it all and there is none left.
Thank you
Is The End Of The COMEX Nigh?
Link for article and accompanying charts;
http://news.goldseek.com/GoldSeek/1228061100.php
-- Posted Sunday, 30 November 2008 | Digg This ArticleDigg It! | Source: GoldSeek.com
By Andy Hoffman
The war over gold and silver rages on, with its center stage as always at the NY COMEX futures exchange, often referred to affectionately as the “CRIMEX”. Myself and other metal market observers, most notably Jim Sinclair, Marc Faber, Eric Sprott, and Bill Murphy, have painstakingly watched this horror show play out over the past decade, under the guise of the U.S. “Strong Dollar Policy”, the ultimate oxymoron and falsehood.
We and others have discussed at length the incredibly positive fundamentals for both gold and silver, and by now it should be clear to all that supply for both are PLUMMETING while demand is EXPLODING. And there’s a reason why I’ve capped these words, as I cannot underestimate how powerful these forces have become, and how much strength they gain each day. Aside from the sharp increase in demand, depicted in last week’s World Gold Council quarterly report and by the fact that the Perth Mint, one of the world’s largest, is not accepting any more orders, supply is completely collapsing in nearly all markets.
But, once again, the key to this story is NOT the dollar, NOT other commodities, NOT the credit crisis, and NOT even gold’s supply/demand balance. It is one thing, and one thing alone; the ability of the gold/silver Cartel to surreptitiously (and in many cases illegally) sate the soaring physical demand. Clearly, they are losing the battle of the physical markets, given global shortages, record demand, and record premiums being paid over spot prices. Not to mention that gold is hitting new record highs in nearly all global currencies outside the yen and the dollar, the two currencies that have benefitted the most from the deleveraging (NOT safe haven buying) going on over the past two months. See the link below.
http://jsmineset.com/index.php/2008/11/24/gold-in-us-dollars-is-only-part-of-the-picture/#respond
But the WAR is fought in the NY COMEX market from 8:20 am to 1:30 pm EST each day, as that is where essentially ALL of gold and silver’s losses occur. Amazingly, throughout this nearly nine-year bull market, gold has declined far more than it has risen in New York, and last I read it had fallen in something like 93% of this year’s trading sessions despite being down just 2% this year. And, by the way, that 2% decline has outperformed essentially every asset on earth, not just this year but for seven straight years, soon to be eight!
Anyone wonder why in today’s massive “reflation” trade, in which copper, oil, and stocks all rose sharply, somehow the ONLY asset to decline was gold, which by definition is the asset class of choice if one is betting on “reflation” (read: inflation)? I think you know the answer, an answer which once again was given between 8:20 am and 1:30 pm EST in the NY COMEX futures market.
But the COMEX’s days of setting global gold and silver prices appears to be nearing its end (in itself a ridiculous concept, given that such a tiny percentage of futures traders have anything to do with the business of gold and silver production). As I have been noting for some time now, COMEX open interest, or the number of outstanding contracts, has been plummeting for both metals all year. Consequently, open interest for both gold and silver are currently at multi-year lows amidst the greatest financial crisis in a century.
The gold open interest has plummeted from an all-time high of 593,000 in January to an astounding 276,000 today, a level not seen in three and a half years, at a time when the gold price was just $430/oz versus $817/oz. today. In silver, open interest has fallen from a record 189,000 in February to a scanty 86,000 today, a level not seen since 2004 when the price of silver was about $6.80/oz versus $10.35/oz today. See the charts below.
But the crazy part of this year’s plunge in COMEX gold open interest is that during this period, the price of gold only declined by 10%, from $910/oz at the peak to about $815/oz. today. In silver, the price decline was more significant, but as you know the CFTC is currently investigating this price drop due to the fact that one or two banks (evidence suggests it was just one) shorted 25% of global silver production this summer, taking up something like 90% of the entire short position on the COMEX. Silver is a much smaller market than gold, which is why it tends to be more volatile (read: more manipulated), but either way the record physical demand shows that this drop in the futures price had little semblance to reality.
The other crazy thing about gold and silver futures are that they are the ONLY commodities to have lopsided short positions, not just now but ALWAYS. Gold and silver have been in bull markets for nearly a decade, with nearly all mining companies DE-HEDGING over the past five years. However, somehow the “Commercials” always seem to have a vastly lopsided short position. Remember when oil and copper blew their tops this year to the upside, or corn, soybeans or you name it? Well guess what, none of them EVER had a short position materially larger than their long position, OR vice-versa. In fact, silver has had an acknowledged supply/demand DEFICIT (by CPM and the Silver Institute) for 15 years in a row, but is the ONLY commodity to have had a non-stop commercial short position over the past decade! In fact, as gold and silver continued to rise from 2000 to 2008, each year the “Commercials” short position got LARGER. See charts below.
But let’s see WHY the open interest has dropped to multi-year lows at the same time that global demand for physical gold and silver has reached ALL-TIME records. Looking at the two above charts, one can see that the “Commercials”, which for the most part are really banks such as JP Morgan and Goldman Sachs, have been massively covering their shorts this summer, to the point that net positive positions are starting to look like a near-term possibility.
The net Commercial short position in gold has not been this low since mid-2005, when gold was about $420/oz, and in silver since EARLY 2003, when silver was just $3.80/oz.. And this trend is not just seen in the U.S., but in Japan as well where the “Commercial” shorts have now gone essentially neutral (including Goldman Sachs) after having MASSIVE short positions 12-18 months ago. In Japan, individual firms such as Goldman Sachs must disclose their long/short position, but in the U.S. the NYMEX allows them anonymity by simply publishing the collective position of the “four or fewer” and “two or fewer” largest positions.
Of course, given that JP Morgan holds the most derivative contracts on the planet, including the most gold derivatives (in amounts FAR EXCEEDING the actual amount of gold in existence), it is reasonable to deduce that they are the largest and most powerful player on the COMEX. And slightly off topic, does anyone find it weird that JP Morgan, the company with BY FAR the most derivatives outstanding, has been not only spared an equivalent level of financial carnage as the other money-center commercial and investment banks , but has additionally been used essentially as a “government garbage can” for smaller, insolvent firms like WaMu and Bear Stearns? Just as Fannie Mae and Freddie Mac were ambiguously called “quasi-government entities” before being fully taken over by the government this summer, I believe JP Morgan has become a de facto “quasi-government entity”.
On the other side of the coin (no pun intended), let’s take a look at the “Large Speculators” positions, in other words the positions of honest to goodness traders simply looking to profit on gold and silver price trends:
Except for a few minor blips, these positions have also fallen to levels last seen three to four years ago. This will happen in a market that falls 93% of the time despite being in a bull market for nearly a decade. Aside from the obviously massive financial losses that gold and silver futures traders have amassed on the COMEX, it is becoming crystal clear that they are fighting the house in a rigged casino.
This likely explains not only the colossal decline in gold and silver open interest during an historic “safe haven period”, but also the massive increases seen in the physical holdings of physical ETFs (such as GLD and SLV), as well as the enormous growth in physical closed-end funds such as CEF.
Yep, it is quite amazing that despite 30% and 60% declines this summer in the prices of gold and silver, respectively, both GLD and SLV are now holding all-time record holdings of actual physical metal. To find this info, use the below link and scroll down to the charts titled “SPDR Gold Shares – Gold held in Trust” and “SLV Silver Holdings”.
http://www.resourceinvestor.com/pebble.asp?relid=48202
Not only are such losses enormously apparent in the COMEX futures market, but in the real world where essentially ALL gold and silver miners are operating at losses, with several of the larger players moving toward bankruptcy as we speak. And don’t forget about South Africa, once the largest gold miner in the world by far, where its entire gold industry is now underwater and on the brink of economic catastrophe due to the artificially low price. Unless gold trades well above $1,000/oz for an extended period of time, not only will much of the gold industry shut down, but the risk of civil unrest will increase exponentially.
Anyhow, what makes me think the end of the COMEX is nigh, at least in its role as a price-setting mechanism for global gold and silver prices? Well, nothing is guaranteed, but the December futures contract is the largest of the year, and is set to expire shortly. Physical gold and silver have already started to slowly leave the COMEX warehouses (particularly in silver), and the amount of outstanding contracts this late in the contract yields the potential for significant demands for physical delivery.
Several well-known Precious Metals experts (such as Jim Sinclair and Eric Sprott) have been actively bringing this point into the public light, doing their best to organize physical offtake of the 100 oz. gold and 5,000 oz. silver contracts. At current prices, one such gold contract would cost about $80,000, and one such silver contract about $50,000, hardly large amounts in today’s world of multi-trillion bailouts and “liquidity injections”.
All of the COMEX inventories (currently 8.5 million ounces of gold and 129 million ounces of silver) do not need to be delivered, but any kind of material change has the potential to spook the market into fearing a run on the metals. If this occurs, the COMEX market rigging scheme will be finished, with the obvious results being that 1) gold and silver prices would immediately rise to significantly higher levels, and 2) the non-stop attacks on COMEX gold and silver would either halt or lose their ability to impact the REAL global gold and silver prices. Would such action also have a spillover impact on industrial metals such as copper? It is hard to tell, but clearly the inflationary signal given by rising gold and silver could only help the base metals, particularly at a time where global inventory levels are historically low.
I am not naïve enough to believe the Cartel is not aware of this potential “situation” on the COMEX, and will likely do everything in their power to prevent it from happening. But the December contract will likely see them face some stiff competition, perhaps the most they have experienced yet. And even if it doesn’t happen now, the odds of it occurring in the near-future are rising exponentially, especially given the escalating nature of the financial crisis and its accompanying bailouts.
‘Structural deficit’ in gold supply could send prices higher
Wellington West Capital Markets analysts suggest that investors “revisit investing in the junior and intermediate gold producers.”
Author: Dorothy Kosich
Posted: Thursday , 27 Nov 2008
RENO, NV -
Based on the assumption that current strong physical gold demand highlights an existing supply deficit, Toronto's Wellington West Capital Markets forecasts that, "if the increased structural deficit in gold supply continues, gold prices should adjust higher."
Wellington metals analysts also advised, "Given the potential change in market fundamentals, we believe it is time investors revisit investing in the junior and intermediate gold producers."
The analysts said their data indicates that a Central Bank Gold Agreement (CBGA) signatory "has become a gold buyer, putting further pressure on the existing supply deficit in the bullion market." In their analysis, Wellington suggests that China is building a strategic gold reserve.
Meanwhile, possible Russian, Ecuadorian and Iranian gold liquidation in the face of internal credit woes "has not fazed the market," the analysts advised.
Analysts Catherine Gignac, Paolo Lostritto, John Miniotis, and Ryan Walker also noted that investment demand for physical gold increased by 179% in the third quarter of this year.
"Severe stock shortages of bars and coins were reported among bullion dealers in many parts of the world. A continuation of strong gold investment demand has been seen so far in Q4/08, leading to the Perth Mint being forced to suspend orders until January," they said.
Wellington also urged precious metals investors, who "are expected to initially focus on large, capitalized liquid producers" to consider coming down the food chain. "If the market starts to regain confidence and applies higher future gold prices, we would expect more speculative funds to invest in intermediate and junior gold producers."
"Funds should continue to focus on well-managed senior producers but we believe it prudent to start considering the junior and intermediate gold space," the analysts advised.
In their research for the third quarter of this year, Wellington's analysis found that, despite a 19% increase in gold average gold price, gold mining production fell 2%, costs rose 37%, and margins declined by 13%, resulting in operating cash flows declining an average 29% for the group. "We note that debt levels are rising for most of the companies, in comparison to previous years when equity financing was more common."
The analysts also discovered that the relationship with the price of gold relative to the price of oil began to break down in October, resulting in the price of gold only decreasing by 8.1% since the end of September while the price of WTI crude oil decreased 51%.
have their gold holding open to confiscation
That's one of the prime reasons I advocate holding the physical. If and a big IF, confiscation is ordered, all paper gold becomes worthless. The first places raided will be the ETFs that are onshore. Then the private mints will be targeted. I think it is unlikely tho. US dollars are not backed in any way by that barberous relic.
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Thanks superbee, I'll look at that link later. My RAM doesn't allow that app to load when I have the streamer running.
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Enjoy, Happy Thanksgiving all. eom
Been off the computer for a while. I caome back and see almost 1.3 million shares traded. Can someone kindly post a breakdown of the sales? Thanks
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Right now I'd be happy for updates on the previous PRs. SNV contracts, buyback status, float and TA debacle. Lack of info on these items is what is killing this stock right now. And slam me if you want, I still suspect dilution.
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Volcker issues dire warning on slump
Paul Volcker, the former chairman of the US Federal Reserve, has warned that the economic slump has begun to metastasise after a shocking collapse in output over the past two months, threatening to overwhelm the incoming Obama administration as it struggles to restore confidence.
By Ambrose Evans-Pritchard
Last Updated: 10:39PM GMT 17 Nov 2008
"What this crisis reveals is a broken financial system like no other in my lifetime," he told a conference at Lombard Street Research in London.
"Normal monetary policy is not able to get money flowing. The trouble is that, even with all this [government] protection, the market is not moving again. The only other time we have seen the US economy drop as suddenly as this was when the Carter administration imposed credit controls, which was artificial."
His comments come as the blizzard of dire data in the US continues to crush spirits. The Empire State index of manufacturing dropped to minus 24.6 in October, the lowest ever recorded. Paul Ashworth, US economist at Capital Economics, said business spending was now going into "meltdown", compounding the collapse in consumer spending that is already under way.
Mr Volcker, an adviser to President-Elect Barack Obama and a short-list candidate for Treasury Secretary, warned that it is already too late to avoid a severe downturn even if the credit markets stabilise over coming months. "I don't think anybody thinks we're going to get through this recession in a hurry," he said.
He advised Mr Obama to tread a fine line, embarking on bold action with a "compelling economic logic" rather than scattering fiscal stimulus or resorting to a wholesale bail-out of Detroit. "He can't just throw money at the auto industry."
Mr Volcker is a towering figure in the US, praised for taming the great inflation of the late 1970s with unpopular monetary rigour. He is no friend of Alan Greenspan, who replaced him at the Fed and presided over credit excess that pushed private debt to 300pc of GDP.
"There has been leveraging in the economy beyond imagination, and nobody was saying we need to do something," he said. "There are cycles in human nature and it is up to regulators to moderate these excesses. Alan was not a big regulator."
Even so, he said the arch-culprit was the bonus system that allowed bankers to draw forward "tremendous rewards" before the disastrous consequences of their actions became clear, as well as the new means of credit alchemy that let them slice and dice mortgage debt into packages that disguised ri
Volcker issues dire warning on slump
Paul Volcker, the former chairman of the US Federal Reserve, has warned that the economic slump has begun to metastasise after a shocking collapse in output over the past two months, threatening to overwhelm the incoming Obama administration as it struggles to restore confidence.
By Ambrose Evans-Pritchard
Last Updated: 10:39PM GMT 17 Nov 2008
"What this crisis reveals is a broken financial system like no other in my lifetime," he told a conference at Lombard Street Research in London.
"Normal monetary policy is not able to get money flowing. The trouble is that, even with all this [government] protection, the market is not moving again. The only other time we have seen the US economy drop as suddenly as this was when the Carter administration imposed credit controls, which was artificial."
His comments come as the blizzard of dire data in the US continues to crush spirits. The Empire State index of manufacturing dropped to minus 24.6 in October, the lowest ever recorded. Paul Ashworth, US economist at Capital Economics, said business spending was now going into "meltdown", compounding the collapse in consumer spending that is already under way.
Mr Volcker, an adviser to President-Elect Barack Obama and a short-list candidate for Treasury Secretary, warned that it is already too late to avoid a severe downturn even if the credit markets stabilise over coming months. "I don't think anybody thinks we're going to get through this recession in a hurry," he said.
He advised Mr Obama to tread a fine line, embarking on bold action with a "compelling economic logic" rather than scattering fiscal stimulus or resorting to a wholesale bail-out of Detroit. "He can't just throw money at the auto industry."
Mr Volcker is a towering figure in the US, praised for taming the great inflation of the late 1970s with unpopular monetary rigour. He is no friend of Alan Greenspan, who replaced him at the Fed and presided over credit excess that pushed private debt to 300pc of GDP.
"There has been leveraging in the economy beyond imagination, and nobody was saying we need to do something," he said. "There are cycles in human nature and it is up to regulators to moderate these excesses. Alan was not a big regulator."
Even so, he said the arch-culprit was the bonus system that allowed bankers to draw forward "tremendous rewards" before the disastrous consequences of their actions became clear, as well as the new means of credit alchemy that let them slice and dice mortgage debt into packages that disguised ri
Volcker issues dire warning on slump
Paul Volcker, the former chairman of the US Federal Reserve, has warned that the economic slump has begun to metastasise after a shocking collapse in output over the past two months, threatening to overwhelm the incoming Obama administration as it struggles to restore confidence.
By Ambrose Evans-Pritchard
Last Updated: 10:39PM GMT 17 Nov 2008
"What this crisis reveals is a broken financial system like no other in my lifetime," he told a conference at Lombard Street Research in London.
"Normal monetary policy is not able to get money flowing. The trouble is that, even with all this [government] protection, the market is not moving again. The only other time we have seen the US economy drop as suddenly as this was when the Carter administration imposed credit controls, which was artificial."
His comments come as the blizzard of dire data in the US continues to crush spirits. The Empire State index of manufacturing dropped to minus 24.6 in October, the lowest ever recorded. Paul Ashworth, US economist at Capital Economics, said business spending was now going into "meltdown", compounding the collapse in consumer spending that is already under way.
Mr Volcker, an adviser to President-Elect Barack Obama and a short-list candidate for Treasury Secretary, warned that it is already too late to avoid a severe downturn even if the credit markets stabilise over coming months. "I don't think anybody thinks we're going to get through this recession in a hurry," he said.
He advised Mr Obama to tread a fine line, embarking on bold action with a "compelling economic logic" rather than scattering fiscal stimulus or resorting to a wholesale bail-out of Detroit. "He can't just throw money at the auto industry."
Mr Volcker is a towering figure in the US, praised for taming the great inflation of the late 1970s with unpopular monetary rigour. He is no friend of Alan Greenspan, who replaced him at the Fed and presided over credit excess that pushed private debt to 300pc of GDP.
"There has been leveraging in the economy beyond imagination, and nobody was saying we need to do something," he said. "There are cycles in human nature and it is up to regulators to moderate these excesses. Alan was not a big regulator."
Even so, he said the arch-culprit was the bonus system that allowed bankers to draw forward "tremendous rewards" before the disastrous consequences of their actions became clear, as well as the new means of credit alchemy that let them slice and dice mortgage debt into packages that disguised ri
Just some quick math. Pre reverse split this hit a high of .008¢. That equates to 16¢ post split. That was with almost no revenues, no public plans to uplist, and before all the free publicity was in high gear. What could happen with an uplisting, more licenses, and an increasing revenue stream?
.....al
George was certainly a failure all the way around.
That has got to be the understatement of the year.
.....al
I can't speak for anyone else, but I view the uplisting as a large step in the right direction. It is not to end all, rather the beginning. It gives the transparency that a large majority of investors demand before committing funds. The announcement of a successful addition to the bb may give the share price a spike and it may just float back down again to these current levels. I don't know and don't have a crystal ball. What I do know is the required filings showing increased sales each quarter will itself take care of the share price. For this one I have a lot of patience. I have always maintained this is a longer term play.
..........al
Thanks for the link. I vaguely recalled the name but had to refresh my memory. Back in his heyday, he was a little too radical for me. Having spent considerable time in SE Asia back then, anti war protesters were not on the top of my A list. But the again one of my favorite sayings from my Amish heritage is "we get too soon old and too late smart."
...........al
Good evening all. CHOMP CHOMP CHOMP That's me eating my former words. As promised in that post a few weeks back, I will apologize to the board. I went out on a limb and said we would be uplisted this month and the prospects look a little dim right now, hence my apology. Disappointed but not deterred in the least. IMHO this is still the best long term penny play in the market. As long as we don't have to wait for Heppie's retirement to uplist we'll be just fine.
.........al
I expect several years of a gold/silver bull. Maybe 3-4?? Hard to say.
I know many here are chartists and most likely from what you see the bull is coming. I'm more on fundamentals and the fundamentals are telling me we could have a gold bull for up to 10 years or possibly more. A lot of that will depend the condition of world economies and speed of the printing presses. It will take years to wring out the derivatives mess we are in. If the best they can come up with is to throw more money at it and not let it work itself through the way it should, we could be in for a decade or more of inflation. Not a pretty picture no matter which way you look at it.
..........al
It will work out just fine until the rest of the world decides to quit financing it.
.........al
When to sell your gold- some notable events to look for
1. When your taxi driver says to buy gold
2. When Time magazine has a gold bar on the front cover
3. When Businessweek starts touting gold(best contrarian indicator for any play)
4. When your brother in law who doesn't even know what gold is starts saying to invest
5. When you see the mother of all parabolic rises on the chart
6. Best of all- when everyone else is buying causing a feeding frenzy(see #5)
None of these will be applicable if at the same time your local currency is hyperinflating. All bets are off until that comes under control.
Sorry, but you are probably just as confused as before, but it's the best I could do.
........al
First, no one knows what gold will do in deflationary times. The price of gold has never been unregulated in any defaltionary period in US history. If we have a deflationary period in the future it will be a first with gold trading freely. Second, you are correct that a period of inflation will follow. In fact considering the amounts of dollars being created, it may be an inflation like no one in America has ever seen before, far eclipsing the late 70s and early 80s period. Fundamentals are quite different now than they were then. Everyone is eyeing gold right now because they believe, and I agree, that it has bottomed in this price range. Demand is exceeding supply the world over and spot price seems to be only reflecting paper prices at the comex. Silver is doing much the same. Precious metals "bugs" are a different breed from paper investors for the most part. They (we) tend to look longer term and like the fact that gold and silver have no 3rd party claims or guarantees upon them. I hope that helps a little.
..........al
Will do. eom
re TSHL- I swing traded that one a couple times a few months ago. Then one day the AS count went ballistic. I tried to tell that board that those shares would materialize sooner rather than later, but they have a bunch of believers over there. Not my battle.
.......al
Saw that earlier today. My daughter lives in that area. I called her to go check it out.
......al
TARP was peanuts, look what they can do without congressional approval.
U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit (Update2)
By Mark Pittman and Bob Ivry
Enlarge Image/Details
Nov. 24 (Bloomberg) -- The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.
The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.
When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.
“Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. “The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones.”
Too Big to Fail
Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort.
The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.
William Poole, former president of the Federal Reserve Bank of St. Louis, said the two programs are unlikely to lose money. The bigger risk comes from rescuing companies perceived as “too big to fail,” he said.
‘Credit Risk’
The government committed $29 billion to help engineer the takeover in March of Bear Stearns Cos. by New York-based JPMorgan Chase & Co. and $122.8 billion in addition to TARP allocations to bail out New York-based American International Group Inc., once the world’s largest insurer.
Citigroup received $306 billion of government guarantees for troubled mortgages and toxic assets. The Treasury Department also will inject $20 billion into the bank after its stock fell 60 percent last week.
“No question there is some credit risk there,” Poole said.
Congressman Darrell Issa, a California Republican on the Oversight and Government Reform Committee, said risk is lurking in the programs that Poole thinks are safe.
“The thing that people don’t understand is it’s not how likely that the exposure becomes a reality, but what if it does?” Issa said. “There’s no transparency to it so who’s to say they’re right?”
The worst financial crisis in two generations has erased $23 trillion, or 38 percent, of the value of the world’s companies and brought down three of the biggest Wall Street firms.
Markets Down
The Dow Jones Industrial Average through Friday is down 38 percent since the beginning of the year and 43 percent from its peak on Oct. 9, 2007. The S&P 500 fell 45 percent from the beginning of the year through Friday and 49 percent from its peak on Oct. 9, 2007. The Nikkei 225 Index has fallen 46 percent from the beginning of the year through Friday and 57 percent from its most recent peak of 18,261.98 on July 9, 2007. Goldman Sachs Group Inc. is down 78 percent, to $53.31, on Friday from its peak of $247.92 on Oct. 31, 2007, and 75 percent this year.
Regulators hope the rescue will contain the damage and keep banks providing the credit that is the lifeblood of the U.S. economy.
Most of the spending programs are run out of the New York Fed, whose president, Timothy Geithner, is said to be President- elect Barack Obama’s choice to be Treasury Secretary.
‘They Got Snookered’
The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages.
“It’s unprecedented,” said Bob Eisenbeis, chief monetary economist at Vineland, New Jersey-based Cumberland Advisors Inc. and an economist for the Atlanta Fed for 10 years until January. “The backlash has begun already. Congress is taking a lot of hits from their constituents because they got snookered on the TARP big time. There’s a lot of supposedly smart people who look to be totally incompetent and it’s all going to fall on the taxpayer.”
President Franklin D. Roosevelt’s New Deal of the 1930s, when almost 10,000 banks failed and there was no mechanism to bolster them with cash, is the only rival to the government’s current response. The savings and loan bailout of the 1990s cost $209.5 billion in inflation-adjusted numbers, of which $173 billion came from taxpayers, according to a July 1996 report by the U.S. General Accounting Office, now called the Government Accountability Office.
‘Worst Crisis’
The 1979 U.S. government bailout of Chrysler consisted of bond guarantees, adjusted for inflation, of $4.2 billion, according to a Heritage Foundation report.
The commitment of public money is appropriate to the peril, said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. and a former economist at the New York Fed. U.S. financial firms have taken writedowns and losses of $666.1 billion since the beginning of 2007, according to Bloomberg data.
“This is the worst capital markets crisis in modern history,” Harris said. “So you have the biggest intervention in modern history.”
Bloomberg has requested details of Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral.
Collateral is an asset pledged to a lender in the event a loan payment isn’t made.
‘That’s Counterproductive’
“Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting,” Bernanke said Nov. 18 to the House Financial Services Committee. “We think that’s counterproductive.”
The Fed should account for the collateral it takes in exchange for loans to banks, said Paul Kasriel, chief economist at Chicago-based Northern Trust Corp. and a former research economist at the Federal Reserve Bank of Chicago.
“There is a lack of transparency here and, given that the Fed is taking on a huge amount of credit risk now, it would seem to me as a taxpayer there should be more transparency,” Kasriel said.
Bernanke’s Fed is responsible for $4.74 trillion of pledges, or 61 percent of the total commitment of $7.76 trillion, based on data compiled by Bloomberg concerning U.S. bailout steps started a year ago.
“Too often the public is focused on the wrong piece of that number, the $700 billion that Congress approved,” said J.D. Foster, a former staff member of the Council of Economic Advisers who is now a senior fellow at the Heritage Foundation in Washington. “The other areas are quite a bit larger.”
Fed Rescue Efforts
The Fed’s rescue attempts began last December with the creation of the Term Auction Facility to allow lending to dealers for collateral. After Bear Stearns’s collapse in March, the central bank started making direct loans to securities firms at the same discount rate it charges commercial banks, which take customer deposits.
In the three years before the crisis, such average weekly borrowing by banks was $48 million, according to the central bank. Last week it was $91.5 billion.
The failure of a second securities firm, Lehman Brothers Holdings Inc., in September, led to the creation of the Commercial Paper Funding Facility and the Money Market Investor Funding Facility, or MMIFF. The two programs, which have pledged $2.3 trillion, are designed to restore calm in the money markets, which deal in certificates of deposit, commercial paper and Treasury bills.
Lehman Failure
“Money markets seized up after Lehman failed,” said Neal Soss, chief economist at Credit Suisse Group in New York and a former aide to Fed chief Paul Volcker. “Lehman failing made a lot of subsequent actions necessary.”
The FDIC, chaired by Sheila Bair, is contributing 20 percent of total rescue commitments. The FDIC’s $1.4 trillion in guarantees will amount to a bank subsidy of as much as $54 billion over three years, or $18 billion a year, because borrowers will pay a lower interest rate than they would on the open market, according to Raghu Sundurum and Viral Acharya of New York University and the London Business School.
Congress and the Treasury have ponied up $892 billion in TARP and other funding, or 11.5 percent.
The Federal Housing Administration, overseen by Department of Housing and Urban Development Secretary Steven Preston, was given the authority to guarantee $300 billion of mortgages, or about 4 percent of the total commitment, with its Hope for Homeowners program, designed to keep distressed borrowers from foreclosure.
Federal Guarantees
Most of the federal guarantees reduce interest rates on loans to banks and securities firms, which would create a subsidy of at least $6.6 billion annually for the financial industry, according to data compiled by Bloomberg comparing rates charged by the Fed against market interest currently paid by banks.
Not included in the calculation of pledged funds is an FDIC proposal to prevent foreclosures by guaranteeing modifications on $444 billion in mortgages at an expected cost of $24.4 billion to be paid from the TARP, according to FDIC spokesman David Barr. The Treasury Department hasn’t approved the program.
Bernanke and Paulson, former chief executive officer of Goldman Sachs, have also promised as much as $200 billion to shore up nationalized mortgage finance companies Fannie Mae and Freddie Mac, a pledge that hasn’t been allocated to any agency. The FDIC arranged for $139 billion in loan guarantees for General Electric Co.’s finance unit.
Automakers Struggle
The tally doesn’t include money to General Motors Corp., Ford Motor Co. and Chrysler LLC. Obama has said he favors financial assistance to keep them from collapse.
Paulson told the House Financial Services Committee Nov. 18 that the $250 billion already allocated to banks through the TARP is an investment, not an expenditure.
“I think it would be extraordinarily unusual if the government did not get that money back and more,” Paulson said.
In his Nov. 18 testimony, Bernanke told the House Financial Services Committee that the central bank wouldn’t lose money.
“We take collateral, we haircut it, it is a short-term loan, it is very safe, we have never lost a penny in these various lending programs,” he said.
A haircut refers to the practice of lending less money than the collateral’s current market value.
Requiring the Fed to disclose loan recipients might set off panic, said David Tobin, principal of New York-based loan-sale consultants and investment bank Mission Capital Advisors LLC.
‘Mark to Market’
“If you mark to market today, the banking system is bankrupt,” Tobin said. “So what do you do? You try to keep it going as best you can.”
“Mark to market” means adjusting the value of an asset, such as a mortgage-backed security, to reflect current prices.
Some of the bailout assistance could come from tax breaks in the future. The Treasury Department changed the tax code on Sept. 30 to allow banks to expand the deductions on the losses banks they were buying, according to Robert Willens, a former Lehman Brothers tax and accounting analyst who teaches at Columbia University Business School in New York.
Wells Fargo & Co., which is buying Charlotte, North Carolina-based Wachovia Corp., will be able to deduct $22 billion, Willens said. Adding in other banks, the code change will cost $29 billion, he said.
“The rule is now popularly known among tax lawyers as the ‘Wells Fargo Notice,’” Willens said.
The regulation was changed to make it easier for healthy banks to buy troubled ones, said Treasury Department spokesman Andrew DeSouza.
House Financial Services Committee Chairman Barney Frank said he was angry that banks used the money for acquisitions.
“The only purpose for this money is to lend,” said Frank, a Massachusetts Democrat. “It’s not for dividends, it’s not for purchases of new banks, it’s not for bonuses. There better be a showing of increased lending roughly in the amount of the capital infusions” or Congress may not approve the second half of the TARP money.
To contact the reporters on this story: Mark Pittman in New York at mpittman@bloomberg.net; Bob Ivry in New York at bivry@bloomberg.net.
Last Updated: November 24, 2008 13:26 EST
U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit (Update2)
By Mark Pittman and Bob Ivry
Enlarge Image/Details
Nov. 24 (Bloomberg) -- The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.
The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.
When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.
“Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. “The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones.”
Too Big to Fail
Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort.
The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.
William Poole, former president of the Federal Reserve Bank of St. Louis, said the two programs are unlikely to lose money. The bigger risk comes from rescuing companies perceived as “too big to fail,” he said.
‘Credit Risk’
The government committed $29 billion to help engineer the takeover in March of Bear Stearns Cos. by New York-based JPMorgan Chase & Co. and $122.8 billion in addition to TARP allocations to bail out New York-based American International Group Inc., once the world’s largest insurer.
Citigroup received $306 billion of government guarantees for troubled mortgages and toxic assets. The Treasury Department also will inject $20 billion into the bank after its stock fell 60 percent last week.
“No question there is some credit risk there,” Poole said.
Congressman Darrell Issa, a California Republican on the Oversight and Government Reform Committee, said risk is lurking in the programs that Poole thinks are safe.
“The thing that people don’t understand is it’s not how likely that the exposure becomes a reality, but what if it does?” Issa said. “There’s no transparency to it so who’s to say they’re right?”
The worst financial crisis in two generations has erased $23 trillion, or 38 percent, of the value of the world’s companies and brought down three of the biggest Wall Street firms.
Markets Down
The Dow Jones Industrial Average through Friday is down 38 percent since the beginning of the year and 43 percent from its peak on Oct. 9, 2007. The S&P 500 fell 45 percent from the beginning of the year through Friday and 49 percent from its peak on Oct. 9, 2007. The Nikkei 225 Index has fallen 46 percent from the beginning of the year through Friday and 57 percent from its most recent peak of 18,261.98 on July 9, 2007. Goldman Sachs Group Inc. is down 78 percent, to $53.31, on Friday from its peak of $247.92 on Oct. 31, 2007, and 75 percent this year.
Regulators hope the rescue will contain the damage and keep banks providing the credit that is the lifeblood of the U.S. economy.
Most of the spending programs are run out of the New York Fed, whose president, Timothy Geithner, is said to be President- elect Barack Obama’s choice to be Treasury Secretary.
‘They Got Snookered’
The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages.
“It’s unprecedented,” said Bob Eisenbeis, chief monetary economist at Vineland, New Jersey-based Cumberland Advisors Inc. and an economist for the Atlanta Fed for 10 years until January. “The backlash has begun already. Congress is taking a lot of hits from their constituents because they got snookered on the TARP big time. There’s a lot of supposedly smart people who look to be totally incompetent and it’s all going to fall on the taxpayer.”
President Franklin D. Roosevelt’s New Deal of the 1930s, when almost 10,000 banks failed and there was no mechanism to bolster them with cash, is the only rival to the government’s current response. The savings and loan bailout of the 1990s cost $209.5 billion in inflation-adjusted numbers, of which $173 billion came from taxpayers, according to a July 1996 report by the U.S. General Accounting Office, now called the Government Accountability Office.
‘Worst Crisis’
The 1979 U.S. government bailout of Chrysler consisted of bond guarantees, adjusted for inflation, of $4.2 billion, according to a Heritage Foundation report.
The commitment of public money is appropriate to the peril, said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. and a former economist at the New York Fed. U.S. financial firms have taken writedowns and losses of $666.1 billion since the beginning of 2007, according to Bloomberg data.
“This is the worst capital markets crisis in modern history,” Harris said. “So you have the biggest intervention in modern history.”
Bloomberg has requested details of Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral.
Collateral is an asset pledged to a lender in the event a loan payment isn’t made.
‘That’s Counterproductive’
“Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting,” Bernanke said Nov. 18 to the House Financial Services Committee. “We think that’s counterproductive.”
The Fed should account for the collateral it takes in exchange for loans to banks, said Paul Kasriel, chief economist at Chicago-based Northern Trust Corp. and a former research economist at the Federal Reserve Bank of Chicago.
“There is a lack of transparency here and, given that the Fed is taking on a huge amount of credit risk now, it would seem to me as a taxpayer there should be more transparency,” Kasriel said.
Bernanke’s Fed is responsible for $4.74 trillion of pledges, or 61 percent of the total commitment of $7.76 trillion, based on data compiled by Bloomberg concerning U.S. bailout steps started a year ago.
“Too often the public is focused on the wrong piece of that number, the $700 billion that Congress approved,” said J.D. Foster, a former staff member of the Council of Economic Advisers who is now a senior fellow at the Heritage Foundation in Washington. “The other areas are quite a bit larger.”
Fed Rescue Efforts
The Fed’s rescue attempts began last December with the creation of the Term Auction Facility to allow lending to dealers for collateral. After Bear Stearns’s collapse in March, the central bank started making direct loans to securities firms at the same discount rate it charges commercial banks, which take customer deposits.
In the three years before the crisis, such average weekly borrowing by banks was $48 million, according to the central bank. Last week it was $91.5 billion.
The failure of a second securities firm, Lehman Brothers Holdings Inc., in September, led to the creation of the Commercial Paper Funding Facility and the Money Market Investor Funding Facility, or MMIFF. The two programs, which have pledged $2.3 trillion, are designed to restore calm in the money markets, which deal in certificates of deposit, commercial paper and Treasury bills.
Lehman Failure
“Money markets seized up after Lehman failed,” said Neal Soss, chief economist at Credit Suisse Group in New York and a former aide to Fed chief Paul Volcker. “Lehman failing made a lot of subsequent actions necessary.”
The FDIC, chaired by Sheila Bair, is contributing 20 percent of total rescue commitments. The FDIC’s $1.4 trillion in guarantees will amount to a bank subsidy of as much as $54 billion over three years, or $18 billion a year, because borrowers will pay a lower interest rate than they would on the open market, according to Raghu Sundurum and Viral Acharya of New York University and the London Business School.
Congress and the Treasury have ponied up $892 billion in TARP and other funding, or 11.5 percent.
The Federal Housing Administration, overseen by Department of Housing and Urban Development Secretary Steven Preston, was given the authority to guarantee $300 billion of mortgages, or about 4 percent of the total commitment, with its Hope for Homeowners program, designed to keep distressed borrowers from foreclosure.
Federal Guarantees
Most of the federal guarantees reduce interest rates on loans to banks and securities firms, which would create a subsidy of at least $6.6 billion annually for the financial industry, according to data compiled by Bloomberg comparing rates charged by the Fed against market interest currently paid by banks.
Not included in the calculation of pledged funds is an FDIC proposal to prevent foreclosures by guaranteeing modifications on $444 billion in mortgages at an expected cost of $24.4 billion to be paid from the TARP, according to FDIC spokesman David Barr. The Treasury Department hasn’t approved the program.
Bernanke and Paulson, former chief executive officer of Goldman Sachs, have also promised as much as $200 billion to shore up nationalized mortgage finance companies Fannie Mae and Freddie Mac, a pledge that hasn’t been allocated to any agency. The FDIC arranged for $139 billion in loan guarantees for General Electric Co.’s finance unit.
Automakers Struggle
The tally doesn’t include money to General Motors Corp., Ford Motor Co. and Chrysler LLC. Obama has said he favors financial assistance to keep them from collapse.
Paulson told the House Financial Services Committee Nov. 18 that the $250 billion already allocated to banks through the TARP is an investment, not an expenditure.
“I think it would be extraordinarily unusual if the government did not get that money back and more,” Paulson said.
In his Nov. 18 testimony, Bernanke told the House Financial Services Committee that the central bank wouldn’t lose money.
“We take collateral, we haircut it, it is a short-term loan, it is very safe, we have never lost a penny in these various lending programs,” he said.
A haircut refers to the practice of lending less money than the collateral’s current market value.
Requiring the Fed to disclose loan recipients might set off panic, said David Tobin, principal of New York-based loan-sale consultants and investment bank Mission Capital Advisors LLC.
‘Mark to Market’
“If you mark to market today, the banking system is bankrupt,” Tobin said. “So what do you do? You try to keep it going as best you can.”
“Mark to market” means adjusting the value of an asset, such as a mortgage-backed security, to reflect current prices.
Some of the bailout assistance could come from tax breaks in the future. The Treasury Department changed the tax code on Sept. 30 to allow banks to expand the deductions on the losses banks they were buying, according to Robert Willens, a former Lehman Brothers tax and accounting analyst who teaches at Columbia University Business School in New York.
Wells Fargo & Co., which is buying Charlotte, North Carolina-based Wachovia Corp., will be able to deduct $22 billion, Willens said. Adding in other banks, the code change will cost $29 billion, he said.
“The rule is now popularly known among tax lawyers as the ‘Wells Fargo Notice,’” Willens said.
The regulation was changed to make it easier for healthy banks to buy troubled ones, said Treasury Department spokesman Andrew DeSouza.
House Financial Services Committee Chairman Barney Frank said he was angry that banks used the money for acquisitions.
“The only purpose for this money is to lend,” said Frank, a Massachusetts Democrat. “It’s not for dividends, it’s not for purchases of new banks, it’s not for bonuses. There better be a showing of increased lending roughly in the amount of the capital infusions” or Congress may not approve the second half of the TARP money.
To contact the reporters on this story: Mark Pittman in New York at mpittman@bloomberg.net; Bob Ivry in New York at bivry@bloomberg.net.
Last Updated: November 24, 2008 13:26 EST
Think this might be good for gold?
U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit (Update2)
By Mark Pittman and Bob Ivry
Enlarge Image/Details
Nov. 24 (Bloomberg) -- The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.
The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.
When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.
“Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. “The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones.”
Too Big to Fail
Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort.
The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.
William Poole, former president of the Federal Reserve Bank of St. Louis, said the two programs are unlikely to lose money. The bigger risk comes from rescuing companies perceived as “too big to fail,” he said.
‘Credit Risk’
The government committed $29 billion to help engineer the takeover in March of Bear Stearns Cos. by New York-based JPMorgan Chase & Co. and $122.8 billion in addition to TARP allocations to bail out New York-based American International Group Inc., once the world’s largest insurer.
Citigroup received $306 billion of government guarantees for troubled mortgages and toxic assets. The Treasury Department also will inject $20 billion into the bank after its stock fell 60 percent last week.
“No question there is some credit risk there,” Poole said.
Congressman Darrell Issa, a California Republican on the Oversight and Government Reform Committee, said risk is lurking in the programs that Poole thinks are safe.
“The thing that people don’t understand is it’s not how likely that the exposure becomes a reality, but what if it does?” Issa said. “There’s no transparency to it so who’s to say they’re right?”
The worst financial crisis in two generations has erased $23 trillion, or 38 percent, of the value of the world’s companies and brought down three of the biggest Wall Street firms.
Markets Down
The Dow Jones Industrial Average through Friday is down 38 percent since the beginning of the year and 43 percent from its peak on Oct. 9, 2007. The S&P 500 fell 45 percent from the beginning of the year through Friday and 49 percent from its peak on Oct. 9, 2007. The Nikkei 225 Index has fallen 46 percent from the beginning of the year through Friday and 57 percent from its most recent peak of 18,261.98 on July 9, 2007. Goldman Sachs Group Inc. is down 78 percent, to $53.31, on Friday from its peak of $247.92 on Oct. 31, 2007, and 75 percent this year.
Regulators hope the rescue will contain the damage and keep banks providing the credit that is the lifeblood of the U.S. economy.
Most of the spending programs are run out of the New York Fed, whose president, Timothy Geithner, is said to be President- elect Barack Obama’s choice to be Treasury Secretary.
‘They Got Snookered’
The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages.
“It’s unprecedented,” said Bob Eisenbeis, chief monetary economist at Vineland, New Jersey-based Cumberland Advisors Inc. and an economist for the Atlanta Fed for 10 years until January. “The backlash has begun already. Congress is taking a lot of hits from their constituents because they got snookered on the TARP big time. There’s a lot of supposedly smart people who look to be totally incompetent and it’s all going to fall on the taxpayer.”
President Franklin D. Roosevelt’s New Deal of the 1930s, when almost 10,000 banks failed and there was no mechanism to bolster them with cash, is the only rival to the government’s current response. The savings and loan bailout of the 1990s cost $209.5 billion in inflation-adjusted numbers, of which $173 billion came from taxpayers, according to a July 1996 report by the U.S. General Accounting Office, now called the Government Accountability Office.
‘Worst Crisis’
The 1979 U.S. government bailout of Chrysler consisted of bond guarantees, adjusted for inflation, of $4.2 billion, according to a Heritage Foundation report.
The commitment of public money is appropriate to the peril, said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. and a former economist at the New York Fed. U.S. financial firms have taken writedowns and losses of $666.1 billion since the beginning of 2007, according to Bloomberg data.
“This is the worst capital markets crisis in modern history,” Harris said. “So you have the biggest intervention in modern history.”
Bloomberg has requested details of Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral.
Collateral is an asset pledged to a lender in the event a loan payment isn’t made.
‘That’s Counterproductive’
“Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting,” Bernanke said Nov. 18 to the House Financial Services Committee. “We think that’s counterproductive.”
The Fed should account for the collateral it takes in exchange for loans to banks, said Paul Kasriel, chief economist at Chicago-based Northern Trust Corp. and a former research economist at the Federal Reserve Bank of Chicago.
“There is a lack of transparency here and, given that the Fed is taking on a huge amount of credit risk now, it would seem to me as a taxpayer there should be more transparency,” Kasriel said.
Bernanke’s Fed is responsible for $4.74 trillion of pledges, or 61 percent of the total commitment of $7.76 trillion, based on data compiled by Bloomberg concerning U.S. bailout steps started a year ago.
“Too often the public is focused on the wrong piece of that number, the $700 billion that Congress approved,” said J.D. Foster, a former staff member of the Council of Economic Advisers who is now a senior fellow at the Heritage Foundation in Washington. “The other areas are quite a bit larger.”
Fed Rescue Efforts
The Fed’s rescue attempts began last December with the creation of the Term Auction Facility to allow lending to dealers for collateral. After Bear Stearns’s collapse in March, the central bank started making direct loans to securities firms at the same discount rate it charges commercial banks, which take customer deposits.
In the three years before the crisis, such average weekly borrowing by banks was $48 million, according to the central bank. Last week it was $91.5 billion.
The failure of a second securities firm, Lehman Brothers Holdings Inc., in September, led to the creation of the Commercial Paper Funding Facility and the Money Market Investor Funding Facility, or MMIFF. The two programs, which have pledged $2.3 trillion, are designed to restore calm in the money markets, which deal in certificates of deposit, commercial paper and Treasury bills.
Lehman Failure
“Money markets seized up after Lehman failed,” said Neal Soss, chief economist at Credit Suisse Group in New York and a former aide to Fed chief Paul Volcker. “Lehman failing made a lot of subsequent actions necessary.”
The FDIC, chaired by Sheila Bair, is contributing 20 percent of total rescue commitments. The FDIC’s $1.4 trillion in guarantees will amount to a bank subsidy of as much as $54 billion over three years, or $18 billion a year, because borrowers will pay a lower interest rate than they would on the open market, according to Raghu Sundurum and Viral Acharya of New York University and the London Business School.
Congress and the Treasury have ponied up $892 billion in TARP and other funding, or 11.5 percent.
The Federal Housing Administration, overseen by Department of Housing and Urban Development Secretary Steven Preston, was given the authority to guarantee $300 billion of mortgages, or about 4 percent of the total commitment, with its Hope for Homeowners program, designed to keep distressed borrowers from foreclosure.
Federal Guarantees
Most of the federal guarantees reduce interest rates on loans to banks and securities firms, which would create a subsidy of at least $6.6 billion annually for the financial industry, according to data compiled by Bloomberg comparing rates charged by the Fed against market interest currently paid by banks.
Not included in the calculation of pledged funds is an FDIC proposal to prevent foreclosures by guaranteeing modifications on $444 billion in mortgages at an expected cost of $24.4 billion to be paid from the TARP, according to FDIC spokesman David Barr. The Treasury Department hasn’t approved the program.
Bernanke and Paulson, former chief executive officer of Goldman Sachs, have also promised as much as $200 billion to shore up nationalized mortgage finance companies Fannie Mae and Freddie Mac, a pledge that hasn’t been allocated to any agency. The FDIC arranged for $139 billion in loan guarantees for General Electric Co.’s finance unit.
Automakers Struggle
The tally doesn’t include money to General Motors Corp., Ford Motor Co. and Chrysler LLC. Obama has said he favors financial assistance to keep them from collapse.
Paulson told the House Financial Services Committee Nov. 18 that the $250 billion already allocated to banks through the TARP is an investment, not an expenditure.
“I think it would be extraordinarily unusual if the government did not get that money back and more,” Paulson said.
In his Nov. 18 testimony, Bernanke told the House Financial Services Committee that the central bank wouldn’t lose money.
“We take collateral, we haircut it, it is a short-term loan, it is very safe, we have never lost a penny in these various lending programs,” he said.
A haircut refers to the practice of lending less money than the collateral’s current market value.
Requiring the Fed to disclose loan recipients might set off panic, said David Tobin, principal of New York-based loan-sale consultants and investment bank Mission Capital Advisors LLC.
‘Mark to Market’
“If you mark to market today, the banking system is bankrupt,” Tobin said. “So what do you do? You try to keep it going as best you can.”
“Mark to market” means adjusting the value of an asset, such as a mortgage-backed security, to reflect current prices.
Some of the bailout assistance could come from tax breaks in the future. The Treasury Department changed the tax code on Sept. 30 to allow banks to expand the deductions on the losses banks they were buying, according to Robert Willens, a former Lehman Brothers tax and accounting analyst who teaches at Columbia University Business School in New York.
Wells Fargo & Co., which is buying Charlotte, North Carolina-based Wachovia Corp., will be able to deduct $22 billion, Willens said. Adding in other banks, the code change will cost $29 billion, he said.
“The rule is now popularly known among tax lawyers as the ‘Wells Fargo Notice,’” Willens said.
The regulation was changed to make it easier for healthy banks to buy troubled ones, said Treasury Department spokesman Andrew DeSouza.
House Financial Services Committee Chairman Barney Frank said he was angry that banks used the money for acquisitions.
“The only purpose for this money is to lend,” said Frank, a Massachusetts Democrat. “It’s not for dividends, it’s not for purchases of new banks, it’s not for bonuses. There better be a showing of increased lending roughly in the amount of the capital infusions” or Congress may not approve the second half of the TARP money.
To contact the reporters on this story: Mark Pittman in New York at mpittman@bloomberg.net; Bob Ivry in New York at bivry@bloomberg.net.
Last Updated: November 24, 2008 13:26 EST
Who's going to pay for this?
U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit (Update2)
By Mark Pittman and Bob Ivry
Enlarge Image/Details
Nov. 24 (Bloomberg) -- The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.
The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.
When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.
“Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. “The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones.”
Too Big to Fail
Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort.
The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.
William Poole, former president of the Federal Reserve Bank of St. Louis, said the two programs are unlikely to lose money. The bigger risk comes from rescuing companies perceived as “too big to fail,” he said.
‘Credit Risk’
The government committed $29 billion to help engineer the takeover in March of Bear Stearns Cos. by New York-based JPMorgan Chase & Co. and $122.8 billion in addition to TARP allocations to bail out New York-based American International Group Inc., once the world’s largest insurer.
Citigroup received $306 billion of government guarantees for troubled mortgages and toxic assets. The Treasury Department also will inject $20 billion into the bank after its stock fell 60 percent last week.
“No question there is some credit risk there,” Poole said.
Congressman Darrell Issa, a California Republican on the Oversight and Government Reform Committee, said risk is lurking in the programs that Poole thinks are safe.
“The thing that people don’t understand is it’s not how likely that the exposure becomes a reality, but what if it does?” Issa said. “There’s no transparency to it so who’s to say they’re right?”
The worst financial crisis in two generations has erased $23 trillion, or 38 percent, of the value of the world’s companies and brought down three of the biggest Wall Street firms.
Markets Down
The Dow Jones Industrial Average through Friday is down 38 percent since the beginning of the year and 43 percent from its peak on Oct. 9, 2007. The S&P 500 fell 45 percent from the beginning of the year through Friday and 49 percent from its peak on Oct. 9, 2007. The Nikkei 225 Index has fallen 46 percent from the beginning of the year through Friday and 57 percent from its most recent peak of 18,261.98 on July 9, 2007. Goldman Sachs Group Inc. is down 78 percent, to $53.31, on Friday from its peak of $247.92 on Oct. 31, 2007, and 75 percent this year.
Regulators hope the rescue will contain the damage and keep banks providing the credit that is the lifeblood of the U.S. economy.
Most of the spending programs are run out of the New York Fed, whose president, Timothy Geithner, is said to be President- elect Barack Obama’s choice to be Treasury Secretary.
‘They Got Snookered’
The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages.
“It’s unprecedented,” said Bob Eisenbeis, chief monetary economist at Vineland, New Jersey-based Cumberland Advisors Inc. and an economist for the Atlanta Fed for 10 years until January. “The backlash has begun already. Congress is taking a lot of hits from their constituents because they got snookered on the TARP big time. There’s a lot of supposedly smart people who look to be totally incompetent and it’s all going to fall on the taxpayer.”
President Franklin D. Roosevelt’s New Deal of the 1930s, when almost 10,000 banks failed and there was no mechanism to bolster them with cash, is the only rival to the government’s current response. The savings and loan bailout of the 1990s cost $209.5 billion in inflation-adjusted numbers, of which $173 billion came from taxpayers, according to a July 1996 report by the U.S. General Accounting Office, now called the Government Accountability Office.
‘Worst Crisis’
The 1979 U.S. government bailout of Chrysler consisted of bond guarantees, adjusted for inflation, of $4.2 billion, according to a Heritage Foundation report.
The commitment of public money is appropriate to the peril, said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. and a former economist at the New York Fed. U.S. financial firms have taken writedowns and losses of $666.1 billion since the beginning of 2007, according to Bloomberg data.
“This is the worst capital markets crisis in modern history,” Harris said. “So you have the biggest intervention in modern history.”
Bloomberg has requested details of Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral.
Collateral is an asset pledged to a lender in the event a loan payment isn’t made.
‘That’s Counterproductive’
“Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting,” Bernanke said Nov. 18 to the House Financial Services Committee. “We think that’s counterproductive.”
The Fed should account for the collateral it takes in exchange for loans to banks, said Paul Kasriel, chief economist at Chicago-based Northern Trust Corp. and a former research economist at the Federal Reserve Bank of Chicago.
“There is a lack of transparency here and, given that the Fed is taking on a huge amount of credit risk now, it would seem to me as a taxpayer there should be more transparency,” Kasriel said.
Bernanke’s Fed is responsible for $4.74 trillion of pledges, or 61 percent of the total commitment of $7.76 trillion, based on data compiled by Bloomberg concerning U.S. bailout steps started a year ago.
“Too often the public is focused on the wrong piece of that number, the $700 billion that Congress approved,” said J.D. Foster, a former staff member of the Council of Economic Advisers who is now a senior fellow at the Heritage Foundation in Washington. “The other areas are quite a bit larger.”
Fed Rescue Efforts
The Fed’s rescue attempts began last December with the creation of the Term Auction Facility to allow lending to dealers for collateral. After Bear Stearns’s collapse in March, the central bank started making direct loans to securities firms at the same discount rate it charges commercial banks, which take customer deposits.
In the three years before the crisis, such average weekly borrowing by banks was $48 million, according to the central bank. Last week it was $91.5 billion.
The failure of a second securities firm, Lehman Brothers Holdings Inc., in September, led to the creation of the Commercial Paper Funding Facility and the Money Market Investor Funding Facility, or MMIFF. The two programs, which have pledged $2.3 trillion, are designed to restore calm in the money markets, which deal in certificates of deposit, commercial paper and Treasury bills.
Lehman Failure
“Money markets seized up after Lehman failed,” said Neal Soss, chief economist at Credit Suisse Group in New York and a former aide to Fed chief Paul Volcker. “Lehman failing made a lot of subsequent actions necessary.”
The FDIC, chaired by Sheila Bair, is contributing 20 percent of total rescue commitments. The FDIC’s $1.4 trillion in guarantees will amount to a bank subsidy of as much as $54 billion over three years, or $18 billion a year, because borrowers will pay a lower interest rate than they would on the open market, according to Raghu Sundurum and Viral Acharya of New York University and the London Business School.
Congress and the Treasury have ponied up $892 billion in TARP and other funding, or 11.5 percent.
The Federal Housing Administration, overseen by Department of Housing and Urban Development Secretary Steven Preston, was given the authority to guarantee $300 billion of mortgages, or about 4 percent of the total commitment, with its Hope for Homeowners program, designed to keep distressed borrowers from foreclosure.
Federal Guarantees
Most of the federal guarantees reduce interest rates on loans to banks and securities firms, which would create a subsidy of at least $6.6 billion annually for the financial industry, according to data compiled by Bloomberg comparing rates charged by the Fed against market interest currently paid by banks.
Not included in the calculation of pledged funds is an FDIC proposal to prevent foreclosures by guaranteeing modifications on $444 billion in mortgages at an expected cost of $24.4 billion to be paid from the TARP, according to FDIC spokesman David Barr. The Treasury Department hasn’t approved the program.
Bernanke and Paulson, former chief executive officer of Goldman Sachs, have also promised as much as $200 billion to shore up nationalized mortgage finance companies Fannie Mae and Freddie Mac, a pledge that hasn’t been allocated to any agency. The FDIC arranged for $139 billion in loan guarantees for General Electric Co.’s finance unit.
Automakers Struggle
The tally doesn’t include money to General Motors Corp., Ford Motor Co. and Chrysler LLC. Obama has said he favors financial assistance to keep them from collapse.
Paulson told the House Financial Services Committee Nov. 18 that the $250 billion already allocated to banks through the TARP is an investment, not an expenditure.
“I think it would be extraordinarily unusual if the government did not get that money back and more,” Paulson said.
In his Nov. 18 testimony, Bernanke told the House Financial Services Committee that the central bank wouldn’t lose money.
“We take collateral, we haircut it, it is a short-term loan, it is very safe, we have never lost a penny in these various lending programs,” he said.
A haircut refers to the practice of lending less money than the collateral’s current market value.
Requiring the Fed to disclose loan recipients might set off panic, said David Tobin, principal of New York-based loan-sale consultants and investment bank Mission Capital Advisors LLC.
‘Mark to Market’
“If you mark to market today, the banking system is bankrupt,” Tobin said. “So what do you do? You try to keep it going as best you can.”
“Mark to market” means adjusting the value of an asset, such as a mortgage-backed security, to reflect current prices.
Some of the bailout assistance could come from tax breaks in the future. The Treasury Department changed the tax code on Sept. 30 to allow banks to expand the deductions on the losses banks they were buying, according to Robert Willens, a former Lehman Brothers tax and accounting analyst who teaches at Columbia University Business School in New York.
Wells Fargo & Co., which is buying Charlotte, North Carolina-based Wachovia Corp., will be able to deduct $22 billion, Willens said. Adding in other banks, the code change will cost $29 billion, he said.
“The rule is now popularly known among tax lawyers as the ‘Wells Fargo Notice,’” Willens said.
The regulation was changed to make it easier for healthy banks to buy troubled ones, said Treasury Department spokesman Andrew DeSouza.
House Financial Services Committee Chairman Barney Frank said he was angry that banks used the money for acquisitions.
“The only purpose for this money is to lend,” said Frank, a Massachusetts Democrat. “It’s not for dividends, it’s not for purchases of new banks, it’s not for bonuses. There better be a showing of increased lending roughly in the amount of the capital infusions” or Congress may not approve the second half of the TARP money.
To contact the reporters on this story: Mark Pittman in New York at mpittman@bloomberg.net; Bob Ivry in New York at bivry@bloomberg.net.
Last Updated: November 24, 2008 13:26 EST
Thank you Rick, I was more concerned about the float. That number will be the key factor short term if and when we get off the ground.
...........al
http://online.wsj.com/article/SB122748912533552007.html
Wall Street Journal
NOVEMBER 24, 2008
The Fed Is Out of Ammunition
A discredited dollar is a likely outcome of the current crisis.
By CHRISTOPHER WOOD
With an estimated $4 trillion in housing wealth and $9 trillion in stock-market wealth destroyed so far in the United States, there is little doubt that we are witnessing a classic debt-deflation bust at work, characterized by falling prices, frozen credit markets and plummeting asset values.
Chad Crowe
Those who want to understand the mechanism might ponder Irving Fisher's comment in 1933: When it comes to booms gone bust, "over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money."
The growing risk of falling prices raises a challenge for one of the conventional wisdoms of the modern economics profession, and indeed modern central banking: the belief that it is impossible to have deflation in a fiat paper-money system. Yet U.S. core CPI fell by 0.1% month-on-month in October, the first such decline since December 1982.
The origins of the modern conventional wisdom lies in the simplistic monetarist interpretation of the Great Depression popularized by Milton Friedman and taught to generations of economics students ever since. This argued that the Great Depression could have been avoided if the Federal Reserve had been more proactive about printing money. Yet the Japanese experience of the 1990s -- persistent deflationary malaise unresponsive to near zero-percent interest rates -- shows that it is not so easy to inflate one's way out of a debt bust.
In the U.S., the Fed can only control the supply of money; it cannot control the velocity of money or the rate at which it turns over. The dramatic collapse in securitization over the past 18 months reflects the continuing collapse in velocity as financial engineering goes into reverse.
True, this will change one day. But for now, the issuance of non-agency mortgage-backed securities (MBS) in America has plunged by 98% year-on-year to a monthly average of $0.82 billion in the past four months, down from a peak of $136 billion in June 2006. There has been no new issuance in commercial MBS since July. This collapse in securitization is intensely deflationary.
It is also true that under Chairman Ben Bernanke, the Federal Reserve balance sheet continues to expand at a frantic rate, as do commercial-bank total reserves in an effort to counter credit contraction. Thus, the Federal Reserve banks' total assets have increased by $1.28 trillion since early September to $2.19 trillion on Nov. 19. Likewise, the aggregate reserves of U.S. depository institutions have surged nearly 14-fold in the past two months to $653 billion in the week ended Nov. 19 from $47 billion at the beginning of September.
But the growth of excess reserves also reflects bank disinterest in lending the money. This suggests the banks only want to finance existing positions, such as where they have already made credit-line commitments.
Monetarist Bernanke and others blame Japan's postbubble deflationary downturn on policy errors by the Bank of Japan. But he and others are about to find out that monetary gymnastics are not as effective as they would like to think. So too will the Keynesians who view an aggressive fiscal policy as the best way to counter a deflationary slump. While public-works spending can blunt the downside and provide jobs, it remains the case that FDR's New Deal did not end the Great Depression.
There are no easy policy answers to the current credit convulsion and intensifying financial panic -- not as long as politicians and central bankers are determined not to let financial institutions fail, and so prevent the market from correcting the excesses. This is why this writer has a certain sympathy for Treasury Secretary Henry Paulson, even if nobody else seems to. The securitized nature of this credit cycle, combined with the nightmare levels of leverage embedded in the products dreamt up by the quantitative geeks, means this is a horribly difficult issue to solve.
Virtually everybody blames Mr. Paulson for the decision to let Lehman Brothers go. But this decision should be applauded for precipitating the deflationary unwind that was going to come sooner or later anyway.
The Japanese precedent also remains important because the efforts in the West to prevent the market from disciplining excesses will have, as in Japan, unintended, adverse, long-term consequences. In Japan, one legacy is the continuing existence of a large number of uncompetitive companies which have caused profit margins to fall for their more productive competitors. Another consequence has been a long-term deflationary malaise, which has kept yen interest rates ridiculously low to the detriment of savers.
Meanwhile, the most recent Fed survey of loan officers provides hard evidence of the intensifying credit crunch in America. A net 83.6% of domestic banks reported having tightened lending standards on commercial and industrial loans to large and midsize firms over the past three months, the highest since the data series began in 1990. A net 47% of banks also indicated that they had become less willing to make consumer installment loans over the past three months.
Consumers are also more reluctant to borrow. A net 48% of respondents indicated that they had experienced weaker demand for consumer loans of all types over the past quarter, up from 30% in the July survey. This hints at the Japanese outcome of "pushing on a string" -- i.e., the banks can make credit available but cannot force people to borrow.
What happens next? With a fed-funds rate at 0.5% or lower in coming months, it is fast becoming time for investors to read again Mr. Bernanke's speeches in 2002 and 2003 on the subject of combating falling inflation. In these speeches, the Fed chairman outlined how policy could evolve once short-term interest rates get to near zero. A key focus in such an environment will be to bring down long-term interest rates, which help determine the rates of mortgages and other debt instruments. This would likely involve in practice the Fed buying longer-term Treasury bonds.
It would seem fair to conclude that a Bernanke-led Fed will follow through on such policies in coming months if, as is likely, the U.S. economy continues to suffer and if inflationary pressures continue to collapse. Such actions will not solve the problem but will merely compound it, by adding debt to debt.
In this respect the present crisis in the West will ultimately end up discrediting mechanical monetarism -- and with it the fiat paper-money system in general -- as the U.S. paper-dollar standard, in place since Richard Nixon broke the link with gold in 1971, finally disintegrates.
The catalyst will be foreign creditors fleeing the dollar for gold. That will in turn lead to global recognition of the need for a vastly more disciplined global financial system and one where gold, the "barbarous relic" scorned by most modern central bankers, may well play a part.
Mr. Wood, equity strategist for CLSA Ltd. in Hong Kong, is the author of "The Bubble Economy: Japan's Extraordinary Speculative Boom of the '80s and the Dramatic Bust of the '90s" (Solstice Publishing, 2005).
Very true. I spend at least 30-40 hours a week reading and (hopefully) learning. It all kind of centers around what affects the life of myself and family. It sounds almost narcissistic but the people we elect to watch out for us seem only to be concerned about themselves, so I compensate alittle. Never forget government is a living entity that will do whatever it takes to survive no matter what costs the people must bear.
So keep the bricks coming. No one knows all the pieces so we just gather what we can.
.........al
Mr Hamilton has some valid points and much of what he said is known to avowed silver bugs. What I failed to see or perhaps overlooked or missed altogether, was the multi uses for silver causing non replaced consumption. I am certainly not knocking gold here, but as a store of value there is virtually no consumption of gold that cannot return to supply in a hurry given the right circumstances. While the same is also true for some silver uses, there are many that make the retrieval and reuse of silver nearly impossible or economically unfeasable. So it disappears never to be "seen" again. I think longer term this will eventually cause the uncoupling of the silver/gold pricing ratios. I'm sure most have read some authors that claim there is now more above ground gold available than there is silver. I don't buy it (yet) but it makes a silver investor feel quite good about his/her investment no matter what the spot price is.
.......al
Yep! Sure did. eom
"If I am in control of the money supply of a nation, I don't care who makes the laws"
Guess who?
........al
So these figures taken from the iBox are up to date and still accurate?
Thanks
.....al
Total Authorized Shares: 100,000,000 (September 8, 2008)
Outstanding Shares: 38,056,924 (September 8, 2008)
Restricted Shares: 7,100,000 (September 8, 2008)
The Company Treasury: 21,200,000 (September 8, 2008)
Public Float: 9,756,924 (September 8, 2008)
The info in this article referring to dwindling comex stocks to me is very significant. It was bound to happen. Look for the comex to close the delivery market and offer only cash for positions.
......al
http://www.resourceinvestor.com/pebble.asp?relid=48202
Got Gold Report – COMEX Commercial Short Positions Still Low For Gold, Silver
By Gene Arensberg
23 Nov 2008 at 09:00 AM GMT-05:00
While equity markets were once again bludgeoned unmercifully this week, gold and silver fared relatively better. Perhaps that is in part because the largest of the largest futures traders continued to have the lowest COMEX futures net short positioning in years.
ATLANTA (ResourceInvestor.com) -- As the world once again fell into an abyss of fear over the past week, the reasons for which are well documented elsewhere, investors are coming to the realization that a violent new bubble has been forming since July. The new bubble is the global rush into U.S. treasuries and into the U.S. dollar. However, the largest of the largest traders of gold and silver futures continued to report very low net short positions, right near the lowest net short positions they have had in years.
A net short position means that the trader profits if prices fall.
Used to be strong dollar means weak gold, but now?
From July up to now, in November, a combination of the rapidly rising U.S. dollar index, vicious forced and panic selling of all asset classes and massive deleveraging have helped to put downward price pressure on both gold and silver along with all other commodities. Very large funds and investors that were faced with the need to raise cash have been forced to sell anything liquid, even that which they wished they could hold, in order to meet redemptions, margin requirements or what have you.
Carry trade unwinding has forced offshore investors to buy U.S. dollars as a function of selling off dollar denominated assets. Perversely, the U.S. dollar has gotten the mother of all forex bids during this horrible financial bedlam. Not because the dollar is inherently strong, mind us all, but mostly because it happens to be what things are traded in the most and, thanks to the U.S. Federal Reserve, it is also the most liquid of liquid currencies.
When people are suddenly and violently frightened financially they just want cash and treasuries. Without getting too much more into exactly why, (which could take up all the space allotted to this report by itself), suddenly the dollar has merely become one of the strongest and healthiest looking members of the global fiat currency leper colony. All fiat currencies are sick, but apparently not equally sick.
The dollar is rising and rising fast. Too fast. The spike in the dollar is a signal flare. It is a warning klaxon sounding. This is a flame out just before the inevitable stall.
The net short-term effect has been to see gold (and silver) unnaturally hammered as measured in those rapidly-rising-in-relative-value paper U.S. dollars and a few other currencies, such as Japanese yen. At the same time gold has appeared stable to strong in others such as in euro, Australian dollars, Canadian dollars and pounds sterling as examples.
Just when gold metal should have been screaming higher (with silver tagging along), as measured in U.S. dollars it plunged on futures markets all the way down from the $900s to the high $600s before the opposing forces of deleveraging/fear versus safe haven demand/wealth protection set up a tighter trading range in the low USD $700s.
Demand is there all right
Meanwhile, as covered in the last Got Gold Report, premiums for actual gold and silver metal on the street skyrocketed because people wanted more of the precious metals than was actually available. The very high premiums continue, by the way, and availability of real physical gold and silver remains tighter than a cheap rubber band.
Premiums are the amount paid and charged by dealers over the spot price for metals.
This week we learn from the World Gold Council that, as we suspected it would from those very high physical metal premiums, all over the world demand for gold has been tremendous, especially in the Middle East, India, Indonesia, Asia and in Europe.
On Friday, November 21, we may have seen a taste of what gold is supposed to do in times of real economic crisis. Why?
As financial terror once again escalated through the week, with equity markets plumbing new depths, fear of systemic financial collapse escalated on the price cave in of Citigroup to just over $3.00. Attempts to explain and to reassure by public officials, including Treasury Secretary Henry Paulson, failed to slow the carnage. While that financial nightmare was unfolding we observed gold holding steady in a tight consolidation range. That was even as the U.S. dollar remained quite strong relative to a basket of other fiat currencies.
Then, on Friday, the heretofore dominant sellers of gold futures across the globe saw their $750 Maginot Line give way as gold powered higher $43.00 or 5.8% in one day. Technicians love consolidation breakouts and tend to gain confidence from them provided they show staying power and follow through right afterwards.
Time will tell whether or not what we saw on Friday is a portent of more to come or a one-off news-driven event, but some of the most astute observers out there today are suggesting that at some point the current “bubble” in the U.S. dollar will reach a crescendo, followed by a hard and fast plunge in the purchasing power of the greenback. These analysts, the same ones that correctly predicted the current set of dire circumstances, continue to encourage people to find safety in gold.
Once the unnatural deleveraging and panic selling pressure becomes exhausted, as analysts say it has to eventually, gold looks set to explode much higher. It is merely a question of when. With that in mind, let’s look at the gold and silver ETFs and the Commitments of Traders reports from the CFTC.
First a scheduling note. Due to travel conflicts the next Got Gold Report will likely be in three weeks instead of two.
Gold ETFs
SPDR Gold Shares, [GLD], the largest gold exchange traded fund, reported adding 6.12 to 755.06 tonnes of gold bars held for its investors by a custodian in London.
Source for data SPDR Gold Trust
So that the price of each share of GLD tracks very closely with the price of 1/10 ounce of gold (less accumulated fees), authorized market participants (AMPs) have to add metal and increase the shares in the trading float when buying pressure strongly outstrips selling pressure. The reverse occurs when selling pressure overwhelms buying pressure.
Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, dipped 0.63 tonnes for the week, to 119.18 tonnes of gold held. Barclay’s iShares COMEX Gold Trust [IAU] gold holdings remained flat at 63.88 tonnes of gold held for its investors.
For the week ending Friday, 11/21, all of the gold ETFs sponsored by the World Gold Council showed a collective addition of 5.76 tonnes to their gold holdings to 912.66 tonnes worth $22.8 billion.
From the additions to the world’s gold ETF holdings it is clear that there was more buying pressure than selling pressure for gold ETFs over the past week.
SLV Metal Holdings
Metal holdings for Barclay’s iShares Silver Trust [SLV], fell by 61.41 tonnes this week, to 6,686.75 tonnes of silver metal held for its investors by custodians in London.
This, while the major equities markets were getting yet another brutal pasting Monday-Thursday. With so much fear and forced selling out there, a small reduction of 61.41 tonnes is actually less than we would have expected, especially given the sometimes wider than normal spread between the share price of SLV and its per-share NAV Monday and Tuesday.
Source for data Barclay’s iShares Silver Trust.
Gold COT Changes
In the Tuesday 11/18 Commodities Futures Trading Commission (CFTC) commitments of traders report (COT) for gold metal the COMEX large commercials (LCs) collective combined net short positions (LCNS) inched 1,620 contracts or 2.33% higher from a very low 69,496 to a still very low 71,116 contracts net short Tuesday to Tuesday as spot (paper contract) gold rose $6.31 or 0.86% from $731.89 to $738.20.
Gold established the same trading floor on three consecutive days to begin the week, failing to dip below $731 each day. Until breakout day Friday, it actually traded in a tighter range than it has for weeks, between the $730s and $760s. Then Friday gold surged decisively higher, breaking through implied resistance of around $756 for a last trade of $800.52 on the cash market.
Gold versus the commercial net short positions as of the Tuesday COT cutoff:
Source for data CFTC for COT, cash market for gold.
The chart below compares the COMEX commercial net short position with the total open interest (LCNS:TO).
Source for data CFTC for COT, cash market for gold
Repeating from the last full Got Gold Report two weeks ago: “Under more normal market conditions such a very low LCNS would be extraordinarily bullish, especially the low percentage of LCNS to the total open which, up to now at least, has been a fairly reliable bullish indicator below 27%. Now that we have transitioned into a market that is abnormal in the extreme, it will definitely be interesting to see if this indicator remains reliable.
Should gold catch a bid in the coming few weeks, then this indicator is (excuse me) ‘as good as gold.’”
Well, so far it looks like the LCNS:TO indicator came through again, but it surprisingly took two weeks for the move higher to show.
Silver COT
As silver fell $0.39 or 3.89% COT reporting Tuesday to Tuesday (from $10.03 to $9.64 on the cash market), the large commercial COMEX silver traders (LCs) decreased their collective net short positioning (LCNS) by a miniscule 506 or 1.81% to 27,458 contracts of net short exposure, while the total open interest on the COMEX fell yet another 2,641 contracts to a very low 91,853 COMEX 5,000-ounce contracts.
Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market
What is kind of interesting about the little change in LCNS is that silver actually tested the $8.80s on Thursday, November 13 before popping back up to close that day at $9.42 on the cash market. The trading that day was suggestive of at least some short covering, but we find in this latest CFTC report that there was little in the way of commercial short covering.
Silver repeated the feat again this week, testing $8.83 on Thursday, but this time closing closer to the low at $8.96 that day. Then on Friday, as gold powered higher, silver reacted too, but in a more muted fashion for a last trade of $9.65. Although that was a 7.7% one-day move higher, the action in silver seemed tame in comparison to gold.
It will be doubly interesting to see if Friday's move higher was the result of significant commercial short covering, but we will have to wait until the next COT report to know.
For context, the chart below compares the silver LCNS to the total number of open contracts on the COMEX, division of NYMEX. When compared to all the contracts open, the commercial net short positioning in silver futures amounts to a still low 29.89%.
Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market
The very low silver LCNS is supportive of higher prices historically.
Odds and Ends
The gold:silver ratio (GSR), which reached a 16-year high in October of 88 ounces of silver to one ounce of gold, has once again spiked back up to the level that should attract robust conversion of gold to silver. As of the Friday close the GSR was back up to 82.95 ounces of silver to one ounce of gold using cash market closing figures.
While the very high GSR is an ominous sign for global equity markets generally, it may also accelerate the exodus of silver metal from the COMEX member warehouses as investors take advantage of the rare opportunity to convert gold into silver at such historically high conversion rates.
Speaking of the COMEX silver inventories, just since October 17, the inventory of silver metal of COMEX depositories has dropped by an eye opening 4,932,992 ounces. That’s metal leaving the COMEX for the physical market or for industry.
Source for data NYMEX.com
So long as the futures markets continue to grossly under price silver relative to the popular physical markets, we can expect the trend of silver metal exiting the COMEX for the real physical markets to continue and probably to accelerate into December.
End Notes
There is plenty of very scary news out there this week for people to consume, so I won’t add any at this time. Instead, here’s a repeat of the close in the last full report.
At the same time the newswires are flooded with reports of mining companies having to close existing mines due to low prices of metals. New mines that were due to come on line are also being shelved. So, at the same time that we have the highest premiums since 1980 for physical gold and silver – when one cannot actually find gold and silver bullion at anything even close to the futures-dominated spot price - we learn that there is a huge increase in the number of “currencies” out there about to be chasing a vastly reduced amount of physical production.
Short term virtually anything is possible in this crazy futures-dominated market, but shouldn’t that be a potent recipe for an explosion in precious metals prices over the longer term? Got gold? Got Silver? Got mining shares?
Got Gold Report Charts
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1-year daily gold
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2-year weekly gold
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1-year daily silver
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2-year weekly silver
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3-year weekly HUI
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2-year weekly Gold:HUI ratio
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2-year weekly U.S. dollar index
That’s it for this offering of the Got Gold Report. Until next time, hopefully in about three weeks, as always, MIND YOUR STOPS.
The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author currently holds a long position in iShares Silver Trust, SPDR Gold Shares and holds various long positions in mining and exploration companies.
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John Mauldin with some thoughts on deflation. I enjoy reading Mr Mauldin although I don't always agree with him. He always stimulates the thought processes.
.........al
Posted Nov 21 2008, 10:52 PM
by John Mauldin
Leverage Is an 8 Letter Word
If Loans Are So Cheap, Why Don't They Sell?
Deflation and Helicopters: Time for a Review
Commercial Property Loans Start to Haunt the Banks
Warren Makes a Bet
Thanksgiving, Moving, and New Orleans
Leverage is an eight-letter word, which the markets now regard as twice as bad as the two four-letter words debt and pain (or fill in your own four-letter words). This week I try to give some insight into what is happening in the credit markets, some of it below the radar screen of most analysts. We will look at the potential for deflation and the Fed's response. There is a lot to cover, so let's jump right in.
If Loans Are So Cheap, Why Don't They Sell?
I talked with a friend who runs a collateralized loan obligation fund, or CLO. There are a lot of these funds in the Shadow Banking System. Typically they buy certain types of debt, with a lot of it in the bank loan space. In the "old" days of the last few years, banks would make loans to corporations and then sell them to CLOs and other institutions, making a spread on the loan and a profit on the servicing business. Some funds would typically leverage up somewhat and make a decent return.
Today, many highly rated loans are selling for 80 cents on the dollar. There is nothing wrong with the collateral or the corporation which owes the money; there is just no one with ready cash to buy the loans. I asked my friend why he doesn't buy them, since they offer very good returns.
The problem is that his fund, and most other CLOs, have covenants in their offering documents that prevent them from buying debt at less than 85 cents on the dollar. That covenant is a good thing in normal markets, as it prevents possible mischief by the manager, but right now it means that a lot of opportunity is being missed. The only way he can buy these highly undervalued bank loans is to create a new fund, which he is in the process of doing. But getting the money is tough, as the pension funds and endowments who would normally be the investors are waiting for cash to come from their redemptions in other funds, which are of course selling whatever they can to raise money for the redemptions, including these very same bank loans. Can you say vicious circle?
The good news is that the market is (albeit slowly) responding to low prices and a market for undervalued assets. But the bad news is that it could be months before there will be meaningful recovery in asset prices. In the meantime, these and many other assets are being marked down and impairing the balance sheet of a lot of banks, funds, and institutions.
As an aside, the prices for loans made for leverage buyouts in the last few years have fallen significantly. Anybody want to buy some loans made on the Chrysler sale to private equity fund Cerberus? I think not. Just because a loan is cheap does not mean it is necessarily a reasonable value.
Forbes.com
Commercial Property Loans Start to Haunt the Banks
As I have written for a very long time, there are two aspects to the current recession and financial crisis. The first is the fallout from the subprime crisis, which has morphed into a full-blown credit crisis. That coupled with a housing crisis has sent the nation into what looks like it will be the worst recession since 1974.
The second phase to hit banks and lending institutions is the normal recession problem of increased losses on all sorts of loans. Credit cards, home equity loans, residential mortgages, and especially commercial property mortgages all suffer during a recession. As documented a few letters ago, default rates are soaring on all types of consumer loans. That is what you would expect to happen in a recession. The problem is that many of the larger banks have already had their capital depleted dealing with the credit crisis. Now they are going to have to raise even more capital (or reduce lending) to deal with the normal loan problems that come with a recession.
Let's look at a few charts from www.markit.com which show the stress in commercial property lending. A number of very large firms come together to create a market index for commercial mortgage-backed securities, or CMBS (which is listed at market.com). They put 25 different commercial property trusts, created by JPMorgan, Merrill, UBS (the usual suspects), and so on into the index. Traders can then trade on the market value of the underlying combined assets by trading the index. In principle, this is just like trading a stock index that gives you exposure to all the stocks included in the index.
If you have bought commercial mortgages and want to hedge your portfolio, you can do so with this index, or if you want to sell protection (insurance) you can also do so. The price is determined by the spread between the coupon and (I believe) the 10-year US Treasury bond. From trading at a spread of 100 basis points in May and 200 basis points (bps) in July, the spread on AAA-rated commercial mortgages skyrocketed in the last few weeks to 850 before settling back to 667, or more than six times what it was just a few months ago.
According to the Wall Street Journal, at the peak a few days ago this meant that the AAA part of this index was trading at $.70 on the dollar. That suggests there will be losses of 70% on the lower tranches!
Every six months the 12 investment banks that help create the index build a new index comprised of recently created trusts composed of hundreds of individual mortgages. As with most asset-backed paper, these trusts are divided into different tranches, with the highest-rated tranche getting the lowest return but first call on the return of principle and interest. Lower-rated tranches take successively more risk.
There are seven different indexes on the Markit platform, from AAA to lowly BB. Each index is composed of the corresponding tranche in the 25 trusts within the index. Let's look at what the lowest-rated tranche has done.
The lowest tranche is now trading at 4,750 basis points or, if you add in the Treasury price, at over 50%! If you were an institution or fund and wanted to buy protection on a BB-rated CMBS in your portfolio, you would have to be willing to pay 50% annual interest!
On the web site, they note that they have not created a new series that was planned for October 25th of this year, as there have not been enough new commercial mortgages created to actually build an index. Why? Because any commercial mortgages that the banks now make will have to be kept on the books of those banks, since the price to securitize the loans is prohibitive. Is it any wonder there has been a serious reduction in large commercial property loans?
On a rather sad note, look at the logos of the banks involved in creating this index, from the marketing brochure that Markit uses to inform potential buyers and sellers of the CMBS index:
Fourteen banks were involved as of a few months ago, but now? Bear, Lehman, Wachovia, and Merrill have either passed from this world or have been swallowed up. It makes you wonder who is next. (Side bet: the Treasury or Fed will inject some capital into Citibank this weekend.)
We could do the same analysis on high-yield bonds. Interest on high-yield bonds is now approaching 20%. Credit default swaps on many issues are simply out of sight. That means that if a lower-rated company wanted to issue bonds, they would have to pay 20% or more! There are very few projects that can justify 20% in a low-inflation world. And without access to capital, it will be difficult for businesses to grow. It also means they have to cut costs and jobs. As noted above, even highly rated corporate bonds are selling at steep discounts. Deleveraging is going to be a problem for a few years. We need to get used to it.
Deflation and Helicopters: Time for a Review
I wrote six years ago (November 2002) about Ben Bernanke's speech on deflation, where he tried to make a joke about beating back deflation by dropping money from helicopters. He was immediately tagged as "Helicopter Ben." My thoughts on that speech took up about half of one chapter in Bull's Eye Investing, and I still think it is a very important speech.
I have been saying for a long time that we would be dealing with deflation next year, and that has been met with a lot of reader skepticism. And when inflation hit 5.6% last July, that skepticism was understandable. But this would be a strange world indeed if you had the twin bubbles of housing and credit burst and didn't see a whiff of deflation. Recessions and the bursting of bubbles are by definition deflationary.
And I have been giving thought to the idea that we may have seen a mini-bubble in the price of many commodities, and that bubble has been bursting as well. And since commodity prices were the main cause of inflation, as they retreat the rise in the inflation rate is retreating. This week the latest inflation numbers showed a drop to 3.7% on a year-over-year basis.
But the Consumer Price Index (CPI) fell by a full 1% in October. You have to go back to the 1930s to find a one-month drop as large. And I don't think this is just a one-month anomaly caused by falling energy prices. The housing component, which is 32% of the index, is based on Owners' Equivalent Rents (OER). As I have written elsewhere, over very long periods of time this works as well as actual housing prices. You simply have to pick your basis for comparison and stick with it.
If, for instance, we had been using house prices for the last ten years, we would have seen large increases in inflation up until a year ago, and since then the index would have been in outright (and serious) deflation. But we use OER, so prices in the CPI have been more stable. But that looks like it could be changing.
OER has been rising steadily over the last decade as rents went up. The index showed a 3% rise in 2007, for instance. The recent trend has been down from there, and last month there was no rise in the cost of shelter. Given the number of houses for sale and a weakened economy, I think it is likely we will see outright reductions in the cost of rent, which will translate into a much lower inflation number.
Lower prices are a two-way street. When they result from improved productivity and efficiency, that is considered to be a good thing. But when they are the result of lower demand, that can be problematic.
There is the likelihood that the Fed will lower rates to 50 basis points, and some major and very seasoned economists are now predicting a zero percent Fed funds rate early next year. Given that Fed funds are actually trading at 38 basis points, a drop to 50 basis points would change nothing on a practical level. (Can we say Japan?)
With that in mind, let's revisit Bernanke's speech. Every central banker is mindful of Japan and the 1930s in the US. Deflation is something that will not be allowed. But what if the Fed lowers interest rates to zero and demand does not pick up, along with a little inflation? Quoting Ben:
"To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system -- for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation."
Just a thought here. We could see real drops in the CPI next year. We could also see a US government deficit approach $1 trillion and go right on through that heretofore unthinkable number. As I wrote last week, a reduced trade deficit means that there will be fewer dollars abroad to buy our debt. The difference will have to be made up by either increased savings in the US or higher rates to attract buyers OR the Fed monetizing the debt.
I think the Fed would be highly reluctant to monetize debt in a period of inflation like we have been in, no matter what problems we face. But in a period where we could be facing deflation? It is very possible they would consider monetizing the debt, as will central banks all over the world.
We are in unprecedented times. A (1) deep recession coupled with (2) financial institutions deleveraging, added to (3) a consumer who is going to be forced to save more and spend less while (4) commodity prices are falling, on top of (5) a serious slowdown in the velocity of money, and you have the makings of a perfect deflationary storm. The Fed would be forced to fight it.
What would they do if lowering the Fed rate to zero was not enough? As Bernanke stated, they would simply set the rates for 1- and 2-year notes and further out the curve if they felt they needed to. And if Goldman Sachs is right in its latest revised forecast, the economy is going to need some help:
"Goldman said it now expects U.S. GDP to fall 5 percent in the current quarter, with unemployment rate reaching 9 percent in the fourth quarter of 2009. It also forecast the 10-year yield to fall to 2.75 percent by the end of the first quarter of 2009, as compared to previously estimated 3.5 percent.
" 'The combination of weaker real activity and slower inflation means that profits of U.S. companies will fall even more sharply than we had previously expected,' Goldman said in a note to clients. Goldman now sees economic profits falling 25 percent in 2009 on an annual average basis, the biggest drop since 1938. It had earlier expected a fall of 20 percent. Goldman expects unemployment rates to further go up in 2010 as well, as there is little chance of the economy returning to trend growth by that year."
Other mainstream economists think GDP might fall this quarter by as much as 5%. That does not bode well for retails sales this Christmas.
Forbes.com
Warren Makes a Bet
And let's close on this note brought to my attention by Bill King.
"MSN Money's John Markman: Shares of Warren Buffett's insurance holding company are on the ropes this month, plunging 30% in part because the famed investor dabbled in an area of the market he has long publicly derided: derivatives. And due to a tangled web of financial relationships, they may be taking Goldman Sachs shares down with them. Investors are concerned about a $37-billion bet that Buffett made last year that U.S. and world equity values would be higher in 15 to 20 years than they were then, when the Dow Jones Industrials were trading around 13,000. Through his firm, Berkshire Hathaway, Buffett sold option contracts, known as "naked puts" to an undisclosed group of investors for around $4.85 billion, reportedly using Goldman as broker...
"Because of its solid-gold credit rating, Berkshire Hathaway was not required to put up collateral to make this trade. But now rumors are flying on Wall Street that the owners of the contracts have demanded that broker Goldman Sachs put up collateral for the rest of the amount due. Since the value of the trade could be infinite, the collateral demands are said to be large, and fears that Goldman will struggle to make good on its obligation has panicked shareholders. Indeed one theory making the rounds this week is that Buffett put $5 billion into Goldman at around $125 per share in September not as an investment but to help provide funds for the collateral.
http://blogs.moneycentral.msn.com/topstocks/archive/2008/11/20/buffett-s-huge-derivatives-bet-proves-costly.aspx
"Isn't this the oracle that called derivatives, 'financial weapons of mass destruction'?"
I personally think that Warren made a very good bet. I would be shocked if the Dow was not at 13,000 in 20 years. Inflation will do most of that heavy lifting. But it does make for an interesting discussion now.