Leftovers --- Radio Show 2/6/2010

We discussed the burgeoning European debt crisis with details on the problems in Greece and Spain, the growth of public debt, the euro, high leverage levels in the private banks, the asset bubbles that formed in the Eurozone countries, how the low interest rates of the ECB and the overvalued exchange rates which fueled the asset bubbles, and unemployment in these countries.

We are late in writing this post, because the week following was filled with the unfolding of the pan-European debt crisis.

We did not get to these items during the show.

On February 10, FINRA will hold a closed meeting to discuss charges that the former chairman of FINRA and now the chairman of the SEC, Mary Shapiro, acted negligently and incompetently in failing to warn investors about Lehman, Bear Stearns, and Merrill Lynch as well as about Auction Rate Securities, despite liquidating FINRA's own ABS holdings in mid-2007 and in not taking action against the Ponzi schemes of Bernard Madoff and Robert Stanford.  Under her administration FINRA suffered almost $700 million in investment losses and paid its senior executives nearly $30 million dollars.  Mary Shapiro has never been able to comprehend that her job was --- and is --- to protect the American public.  She has always ended up representing her perceived salesmen constituency.

The TARP Inspector General, in his quarterly report to Congress, stated the government's concerted efforts to support housing prices risk re-inflating the housing bubble and the government has effectively taken over
the housing market, directly or implicitly, through purchases and guarantees of nearly all residential mortgages.

The TARP Inspector General is reported to be investigating insider trading not only on the lower foot soldier level but the executive level of eight of the largest banks with respect to TARP information and actions.  He is also investigating gaming of the Public Private Investment Partnerships, such as selling a security form a non-PPIP fund and buying it back at a slightly higher price with a tax payer supported PPIP fund minutes later.

The FHA and Fannie May are pushing foreclosure sales with the FHA lifting bans for one year and allowing investors to buy a home and then flip it within 90 days, but their profits will limited to 20% and transactions must be arms length.  Fannie May will offer 3.5% seller assistance for buyers of its Homepath properties, which are properties Fannie May already owns.  There have been approximately 2.8 million foreclosures in 2009.

Fannie May and Freddie Mac both face an uncertain future with many, including Barney Frank, wanting to do away with them as the financial community has long sought to extinguish the competition which some advocates still maintain made owning a house a legitimate reality for more middle class citizens.  It is amazing how the forces which seek to destroy Fannie and Freddie rather than reform the GSE concept conveniently forget it was the mortgage and banking interests that lobbied to get Fannie and Freddie to lower their standards and take on more mortgages, which the financial community could then bundle into derivative securities, from which the profits drove the greed which propelled the housing market into an asset bubble.

Mortgage insurers, such as MGIC Investment, have rescinded or refused to pay approximately $6 billion in claims from banks on delinquent home loans since January 2008 and the bond insurers are also trying to recover more than $4 billion for breaches of representation and warranties on residential mortgage-backed securities they guaranteed.  Bank of America and Wells Fargo may be particularly exposed, but all of the large banks are increasing their reserves for the potential costs of being forced to repurchase these troubled home loans.  J. P. Morgan's first quarterly loss in two years was partially the result of these reserves.

Italy seized $102 million of Bank of America assets in a police investigation of the losses from derivatives linked to the sale of 870 million euro of bonds sold by regional governments in 2003 and 2004 on the grounds the bank mislead the municipalities on the economic advantages of the transactions and concealed their fees.  The police have also segregated and sequestered another 30 million euro Bank of America would have managed for one municipality.  Swap derivatives arranged to create funds to repay the bonds were skewed to the the advantage of the bank and to hide their fees.

Trim Tabs has reported that the mysterious large volume buyer of S&P 500 futures has dropped 6.6% in eleven trading days starting the day before President Obama announced he wanted to restrict the proprietary trading of banks.  There has been speculation the buyer could have been the Federal Reserve or the U. S. Treasury.  The question now has the mysterious buyer stopped buying?

It has been suggested that the UK and Netherlands demands on Iceland for repayment of their reimbursement of their citizen's for investment losses on interest bearing deposits in Icelandic banks are unreasonable.  The UK has even put Iceland on the list of international terrorists.  It would be in the interest of all three countries to compromise and agree for Iceland to compensate the UK and Netherlands for any shortfall in recovery from the assets of Landsbanki when it is wound down.  Iceland cannot afford to pay now with their economy in deep recession.

A Swiss administrative court has ruled that data belonging to an UBS client cannot be given to the United States, although UBS must provide information on at least 10,000 of 14,700 US clients to the IRS.  However, the IRS has also refused to give any indication how many UBS client information it has received.  The Swiss Justice Minister said that the Swiss economy and job market would be adversely impacted if UBS lost its US license.  UBS shares fell on those comments.

St. Louis Fed President Bullard said deflation is no longer a worry and it is too early to tighten monetary policy, although the Fed could increase the discount rate.

At Davos, Roubini said the outlook for US growth is dismal and more than half of the current growth has been from replenishing inventory while consumption was dependent on monetary and fiscal stimulus.  Stiglitz again reiterated that the prior stimulus was not enough, although in the right direction, and there has to be a second stimulus focusing on investment

In a public presentation of his new book Freefall, Stiglitz asserted  the US botched the economy over the last eight years.and that is the reason we got into this mess was banks.  Banks misallocated capital, took on excessive risk, and charge transactions fees which were so high that financial service companies accounted for more than 40% of US corporate profits in 2007.  The financial system failed and the regulators, the Fed and government, failed to constrain them.  Regulatory reform has failed to materialize and the banks are free to destabilize the global economy again.  The need for a second, better targeted stimulus is urgently needed.  Stemming the tide of foreclosures by addressing the 25% of mortgages which are underwater is necessary.

Paul Volcker, citing the conflicts of interest in commercial banks being involved in proprietary trading, said the risks taken by banks need to be curbed and there needs to be international consensus that banks should be regulated to avoid being treated as too big to fail.

Rather than have banks increase risk retention from 5% to 10%, the Comptroller of the Currency said regulations should be formulated requiring minimum underwriting standards which would apply to all loan originators.  While he supports the return of securitizations to balance sheets properly aligned with risk, he is worried it will impair the development of a robust securitizattion market.

Primary dealers (big banks and investment firms) are complaining that the increase in direct purchasers at Treasury auctions hurts their margins, because it drives up the price and spreads and hurts their margin in subsequent resale.

The FDIC has proposed to change the requirements for a securitization to be treated as a true sale, which means investors could not go back to the originator for recourse.  The FDIC proposed mortgages must be seasoned 12 months before  they can be securitized, the originator must retain at least 5% interest in the credit risk, the interests of all parties must be clearly disclosed, resecuritizations, i.e., CDOs, are not permitted, and compensation to servicers will include incentives for loss mitigation.  The FDIC also made various proposals to insure transparency for investors.

Oil supplies up 2.3 million barrels, gas down 1.3 million, distillate down 1.0 million.

Personal consumption up 2 tenths of a percent; income up 4 tenths; disposable income up 4 tenths; real; PCE (after adjustment for revenue changes) up 8 tenths; savings up to 4.8% December (4.5% in November).

January ADP private survey -- large business down 19,000 jobs; small business down 12,000 jobs; non-farm service sector up 38,000; total private sector down 22,000 but businesses plan to layoff 71,482, which is largest since August 2009.

ISM non-manufacturing index service sector up to 50.5 (below estimates) from 49.8.

ISM manufacturing index up to 58.4 in January from 54.9, construction down 1.2%.

Weekly jobless claims up 8000 to 480, 000; 4 week moving average up 11,750 to 468,750; continuing claims up 2000 to 4,602,000.

December factory new orders up 1%, shipments up 1.6%, unfilled orders down 1%, inventory down 1 tenth.

Consumer credit down to annualized rate of 4.75% January -- 12 months off 4% -- consumer credit dropped $1.8 billion in January.

German factory orders down 2.3% in December.

Bank of England did no asset purchases for the first time in 11 months but reserved the possibility to resume.

Russian GDP 2009 was <7.9%>;  -- for largest contraction in 15 years.

IMF said it would help Greece if asked while saying it is confidant Greece will take steps to head off the debt crisis.

NY Fed President Dudley is worried the recovery is weak but sees double dip chances as low.

Kansas City Fed President Hoenig said interest rates cannot remain low as the economy recovers.

GMAC wrote down bad mortgage assets for $5 billion Q4 loss -- $10.3 billion loss for year.

While the S&P 500 rose 63%, S&P 500 earnings (inflation adjusted) have fallen below 10% while the financial sector is up 173%.

Bankruptcy filings are up 15% vs year ago January.

Pending home sales were up 1% in December but empty, privately owned houses up 2.7% in Q4.  Home ownership rate is 67.2%, which is the lowest since 2000.  This suggests there are over 1.8 million excess housing units.

UK manufacturing activity was up to 56.7 in January from 54.0 -- fastest pace in 15 years.

Greece will need to refinance 50 billion euro of debt in 2010.

Portugal reduced 500 million euro Treasury bill offer to 300 million and still had a poor sale with yield 50 basis points higher than two weeks ago.

ECB holds interest rate at 1%.  Trichet is looking to 2nd Quarter for exit strategy.

Bank of England holds interest rate at 5 tenths.

Investors have turned bearish on the euro.

European producer prices (factory gate) fell 2.7% in December vs year ago -- 12 months of monthly decline.

UK producer prices rose 4 tenths in January, wholesale costs up 3.8% vs year ago.

French economy is estimated to be up 3 tenths - 4 tenths in first half of 2010.

German industrial output down 2.6% December vs November.

China GDP estimated to rise 11.5% Q1 (10.7% Q4 2009).





 

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