NightBlogger

July 21 (Bloomberg) — Investors worldwide are betting more than $1 trillion on a collapse in stock prices. Managers from William Ackman to Jim Rogers made a total of at least $1.4 billion in July with wagers against U.S. mortgage financiers Fannie Mae and Freddie Mac, data compiled by Bloomberg as of last week show. Harbinger Capital Partners staked $665 million that U.K. mortgage lender HBOS Plc would drop and Sao Paulo-based hedge-fund manager Francisco Meirelles de Andrade’s short selling of Cia. Vale do Rio Doce is also paying off. More than $1.4 trillion of equities worldwide are now on loan, about a third higher than at the start of 2007, data compiled by Spitalfields Advisors, the London-based firm specializing in securities lending, show. Almost all of that is being used to speculate that shares will fall, according to James Angel, a finance professor at Georgetown University who studies short selling. The global economic slowdown, $453 billion in bank losses and an explosion of funds that can profit from stock declines spurred the increase in short selling, helping send 22 of 23 countries in the MSCI World Index into bear markets. More

Source: Seeking Alpha.com
We are a year into the financial pain and virtually no systemic problem has been solved. Markets have entered into a new unsustainable cycle. The new dance is a two-step. Home prices slide, delinquencies rise, defaults rise. This puts additional pressure on housing going forward. Financial firms announce greater write-offs. Retailers slump and contagion goes global. Selling grips the markets, the good and the bad are sold off indiscriminately. Commodities rise, fear escalates and reaches a crescendo as at least one major institution nears or reaches insolvency. Forecasts of impossible return to the good old days are debated and rebound timetables are pushed back. In the depths of the swoon, the Fed opens the discount window to some new and previously barred set of institutions. Bail-outs are readied, Treasury checks are cut and we rebound off the lows. Bad news becomes good, commodities sell-off and financials soar.

We are at least three episodes deep. Discount window borrowing is open to anyone not convicted of a federal crime. Interest rates are under half the official rate of inflation. House prices keep falling, delinquencies keep rising and losses keep mounting. Mountains of dubious debt have and will be parked on the Government’s books. Bad mortgages, mortgage bundles and sundry cycle on and off Fed books as the Treasury writes checks to the public, maybe JPMorgan Chase (JPM) and likely Fannie Mae (FNM) and Freddie Mac (FRE). The dollar rallies when folks ignore that the Greenback is ever more backed by home mortgages. Interest-rate jawboning replaces inflation management and traders adapt to buying policy driven rallies and shorting on rising fear and fading intervention. Fear returns, babies are tossed with bath-water, commodities rally and short attacks batter firms based on rumor and trend.

Each round sees lower lows and greater intervention. Early on, reassurances and rate cuts rallied the believers. When that failed, new regulation and credit action were added. When that failed, Treasury assisted liquidation, greater assurance and rebate checks were put into motion. As that failed, direct mortgage aid, tightened regulation and enforcement of short position mixed with explicit assurance of implicit guarantees. New housing assistance is now forthcoming and another round of rebate checks appears increasingly likely. Now that we know this cycle is not working to solve any systemic or structural problem, we will do more. How much bad debt can Uncle Sam paper over or eat? How much household and financial pain can be pushed onto government books? How much more will the Fed, Treasury, SEC and Congress have to do to reverse the next leg down? Are we flirting with disaster? With a loss of confidence in state intervention to slow or reverse the slide?

There are distinct patterns emerging. Slides are lasting longer and falling to new lows. More dramatic and extensive interventions are required to generate shorter rebounds. These factors do not augur well. Fed and Treasury actions stall downslide and nibble at the edges of larger problems. Nothing like an actual solution is in the offing. Time buying and slide soothing will have to continue long enough for an organic turn around to take effect.

Otherwise, we will ride this unsustainable wave into the rocks. Rates are below comfort levels. Consumer, producer and import price inflation are well above stated target levels and recent historic norms. Deficit spending is rising fast. There are few candidates left for discount window action that have not already been invited. Recent slides in oil and commodity prices are creating some rotation back into equities and financials in particular. There is no meaningful improvement in fundamentals - yet.

The weakness of US and EU demand has put downward pressure on oil futures prices. This is combining with housing policy, Fannie Mae and Freddy Mac assistance to breathe new life. Folks are buying on oil and commodity declines. There has been some dollar strength as US economic weakness pressures oil and commodity prices. Does that sound sustainable? The dollar has done some strengthening - further pressuring oil and commodities - as Congress and candidates get down to promising spending and tax cuts that can not possible be paid for out of tax revenues? Oil is down on declining demand from economic pain. Federal Deficit spending is spiking on bail-outs, bail-ins and rebate checks. This is good news for American equities and the macroeconomic outlook?

If this bounce is like those leading into it, I expect a real show as it reverses and greater drama is called for form the Fed, the Treasury and traders. Who will get creative temporary assistance next? Who will be attacked suddenly by a rabid short crowd on 3 month old news? What further guarantees are forthcoming? What will they say when the discount window gets a “billions served” sign a la the golden arches?

Ailing savings & loan Downey Financial Corp. (DSL: 1.96 -28.21%) said Thursday morning before market open that it lost $218.9 million during the quarter — that’s a loss of $7.86 per share — as the number of bad loans on its books continued to spiral higher. The quarterly loss represents a huge swing into the red for the Newport Beach, Calif.-based lender, which one year ago reported earnings of $32.7 million, or $1.17 per share. On the heels of yet another quarterly loss amid a housing slump that shows no signs of slowing down, the bank also said it had sacked key members of its board and executive team — including CEO Daniel Rosenthal, and current chairman and company founder Maurice McAlister (who the company said had decided to retire). More

This reporting season, there have been some major, major writedowns from the likes of WaMu, Citi, Merrill, and Wachovia. Most analysts see this quarter as the last quarter of major writedowns from the credit crisis. Haven’t we heard that every quarter? Wachovia’s share price even rallied after it reported an outsized $8.9 billion loss for the quarter. But, far from representing the last of a slew of writedowns, these writedowns represent the last sub-prime writedowns. Many more writedowns are to come in Alt-A, Option Arm and even Prime classes of mortgages. To date, there have been over $450 billion in credit writedowns by the world’s financial institutions. Bloomberg has done an amazing job in summing up the writedowns in the financial services sector as they are reported. Below is the chronological list of tallies as presented by Bloomberg starting right before New Year’s 2008.

The credit writedown tallies have unexpectedly increased dramatically every quarter since Q4 2007 (see entries in red). With the European banks still left to present Q2 2008 results, one can imagine the tally easily reaching $500 by September.

2007 12 27 Subprime Bank Losses Reach $97 Billion, Led by Citigroup: Table
2008 01 22 Subprime Bank Losses Reach $133 Billion, Led by Merrill: Table
2008 01 31 Subprime Bank Losses Reach $146 Billion as Europe Joins: Table
2008 02 22 Subprime Losses Reach $163 Billion With Asian Banks
2008 02 29 Subprime Losses Reach $181 Billion With European Banks: Table
2008 03 07 Subprime Losses Reach $188 Billion With Canada, Europe: Table
2008 03 14 Subprime Losses Reach $195 Billion; German Banks Get Hit: Table
2008 03 26 Subprime Losses Exceed $208 Billion With U.S. Writedowns: Table
2008 04 01 Subprime Losses Reach $232 Billion With UBS, Deutsche: Table
2008 04 10 Subprime Bank Losses Reach $245 Billion With WaMu, HSH: Table
2008 04 28 Subprime Bank Losses Reach $312 Billion With RBS, Nomura: Table
2008 05 09 Subprime Bank Losses Top $323 Billion With HBOS, Lloyds: Table
2008 05 19 Subprime Losses Top $379 Billion on Balance-Sheet Marks: Table
2008 06 18 Subprime Losses Top $396 Billion on Brokers’ Writedowns: Table
2008 07 02 Reference within article: Writedowns have topped $403 Billion
2008 07 15 Reference within article: Writedowns reach $415 Billion
2008 07 22 Reference within article: Writedowns reach $462 Billion
2008 07 23 Reference within article: Writedowns reach $467 Billion
More

Says trading firm attempted to ‘bang the close’ by amassing large positions just before markets closed, but overall effect on oil prices small.

NEW YORK (CNNMoney.com) — The government charged an oil trading firm Thursday with manipulating oil prices, the first complaint to be announced since the regulators began a new investigation into wrongdoings in the energy markets. The Commodity Futures Trading Commission accused Optiver Holding, two of its subsidiaries, and three employees, with manipulation and attempted manipulation of crude oil, heating oil and gasoline futures on the New York Mercantile Exchange. “Optiver traders amassed large trading positions, then conducted trades in such a way to bully and hammer the markets,” CFTC Acting Chairman Walt Lukken said at a press conference. “These charges go to the heart of the CFTC’s core mission of detecting and rooting out illegal manipulation of the markets.” More

SAN DIEGO (Reuters)
San Diego’s city attorney said on Wednesday he filed a lawsuit against Bank of America Corp and its Countrywide unit to prevent the mortgage lenders from foreclosing on homes in the city, which he aims to make a “foreclosure sanctuary.” City Attorney Michael Aguirre plans to file similar lawsuits against Washington Mutual Inc, Wells Fargo & Co and Wachovia Corp in an effort to make the lenders negotiate with mortgage borrowers facing foreclosure. “We would like to see San Diego become a foreclosure sanctuary,” Aguirre said. Housing markets across Southern California, including the city of San Diego and the county of the same name, are seeing steep increases in foreclosure rates because so many homes bought there earlier this decade involved subprime mortgages and other types of risky loans. More

John Browne
It was camouflaged by means of securitization, in the form of Collateralized Debt Obligations (CDO’s), sometimes packaged within triple “A” bundles. This so-called “toxic waste” was passed on to unsuspecting financial institutions around the world. The hidden virus infected the entire vast international financial system. Soon, the credit markets tightened, threatening first their own financial crisis and then, with their reduced lending ability, an economic recession.

When the Treasury/Fed team moved to rescue Bear Stearns and, more recently, Fannie Mae and Freddy Mac, the $5 trillion-plus burden of risk was neatly transferred to the American citizen. This week, the Wall Street Journal commented on Nouriel Roubini, the New York University economist. He aptly observed that it was “the price of a system that privatizes profit and socializes losses.” People could be excused for protesting strongly against such political policies as outrageously un-American.

The rescue of Fannie Mae and Freddy Mac, in particular, generated a wave of buying amongst the so-called “bargain basement” financial stocks, off some 80 percent from their highs. This optimism was based largely on the belief that the taxpayer would be forced to rescue the banks. But the banks are not the only financial institutions in trouble. The home lending and credit boom provided a feast for all manner of other speculations. Credit cards lenders became very aggressive as did auto lenders and lenders to students. Even businesses borrowed in order to participate in the great consumer credit boom.

These categories of lending are vast, in sum, amounting to several trillion dollars. All financials are exposed, but the degree of infection is not yet fully understood. Soon, even the government must wonder how much more taxpayer “rescue” the $14 trillion U.S. economy can afford? As the recession takes hold, borrowers are heading for stringent times, especially those with large, high cost credit card debts. Likewise, their lenders, including many regional banks, are likely to experience massive loan defaults. Then, there are the insurance companies who have invested much of their own reserve funds in real estate.

In short, investors should become urgently aware that banks are not the only financial institutions that will be adversely affected by the severe economic conditions now looming ahead. Before being tempted back into buying financial stocks as “bargains”, investors should assess carefully whether or not the government will be able, either financially or even politically, to extend taxpayer obligations to underwrite the entire financial industry. Finally, investors should estimate what the long-term cost of government support will be in terms of higher taxes and the hyperinflation that will cause the further debasement of the U.S. dollar. More

As Bernanke points out, when a country has a government-controlled paper money system, then it can use the printing press to increase the relative supply of domestic currency. As the printing presses crank up, the price of money relative to goods and services falls. In other words, the domestic currency loses value as inflation takes hold. Bernanke’s last sentence is positively chilling; “under a paper money system, a determined government can always generate higher spending and hence positive inflation.” His words are extremely precise, and worth close examination. The qualification “paper money system” is crucial. There are plenty of monetary regimes where the government could not devalue the currency; for example; a gold standard, a silver standard; a fixed change rate; or a currency board. Unfortunately, a paper money system is exactly what we have here in the UK and in the US. More

MISH
Reuters is reporting WaMu has $3.33 bln loss, may be cut to “junk”. It is now time to explore the implications of the desperate deal that Washington Mutual made with TPG. Please consider Lack of Transparency = Shareholders Get Ratcheted. Following are a few highlights from the above lengthy, but well written article. I condensed this down as best as I can but inquiring minds will definitely want to read the entire article.

Even though hundreds of billions of dollars of capital have been raised by the financial sector over the past several months, which of the investors in a financial institution have made money since their initial investment? Answer: Zero.

We can’t think of one. They are all underwater. When Abu Dhabi first invested $7.5 billion in Citigroup last November, Citi’s stock was $35. Subsequently, when Citi did their $14.5 billion raise in January, the stock was trading at $30. Today Citigroup’s stock is under $20… and it keeps falling. Merrill Lynch did a combined raise of $12.8 billion in December and January at $48. Now the stock is under $35… and also falling. Warburg Pinkus made their now infamous $1 billion investment in MBIA at $31 per share. MBIA has fallen over 80% since and is now trading at under $5 per share.

Those who participated in Ambac’s $1.5 billion rights issue in March are down a similar amount, 80%, as the stock now hovers under $2. Bank of America made their initial investment in Countrywide Financial last August at $18 per share (rather surprising to us, given that Countrywide looked to be going bankrupt if BofA didn’t come to the rescue). Bank of America subsequently made a takeover offer in January. Today Countrywide shares can be got for under $5 per share.

TPG invested in Washington Mutual to the tune of $7 billion at $8.75 per share, a substantial discount at the time to WaMu’s stock price of $13. Today WaMu’s stock is $6. Last month AIG raised $20 billion when their stock was trading at $37 per share. Today AIG stock is just above $30 per share. Even those who participated in Lehman Brothers’ $6 billion equity offering last week at $28 per share are already underwater, with LEH currently trading below $24 (year-to-date Lehman’s stock is down over 60%).

Ironically, thanks to full ratchet provisions, this promises to lead to further dilution and even weaker stock performance going forward.

There were at least some smart investors who noted the downward trend and successfully negotiated for downside protection. We know of at least two cases (though there are doubtless others); namely, Merrill Lynch’s $12.8 billion investment from Temasek (the Singapore sovereign wealth fund) and Washington Mutual’s $7 billion raise from TPG (a private equity firm).

Quite unbeknownst to the general public at the time, downside protection was built into these equity raises to protect these investors. They are called “look back” provisions or “full ratchet” compensation.

We believe it is more accurate to call them “death spiral” securities. They work as follows. The investors in the equity raise would have their investment “protected” by a provision which states that should the bank afterwards raise money at a lower price than what they paid, these investors would be compensated retroactively by having their initial investment priced at this lower price, thereby being issued new shares for free. It doesn’t take a mathematician to see how these provisions can result in massive dilution should the bank subsequently raise even a paltry amount of capital. A new offering will trigger a lower price because of the dilution it would cause, which would trigger even more dilution because of the lower price, which would then trigger an even lower price because of the even higher dilution, etc. This is why we call such securities a death spiral.

However, unless the bank goes bankrupt, these investors can’t lose. And we already know to what lengths the Fed will go to prevent a banking bankruptcy. It’s heads I win, tails I win.

They can even short the stock in the expectation that it will go down and still not lose. At the next financing, which is sure to come, they will be made whole… even making money on the short!

More

Andrew Cuomo, the New York Attorney-General, is preparing to file civil securities fraud charges against embattled investment bank UBS, according to reports. Mr Cuomo may file the charges, which relate to the Swiss bank’s participation in the auction rate securities market, in the next few days, according to The Wall Street Journal. Auction rate securities are short-term financial instruments that investors hold as an alternative to cash. Mr Cuomo’s charges will relate to whether UBS gave investors sufficient warning that the securities, which are generally easy to sell, can become illiquid. The $330 billion market, in which charities, student loan companies and other institutions issue the securities via investment banks, collapsed in February leaving thousands of investors unable to sell their holdings. More

The Market Ticker
Henry Paulson is about to be given an $800 BILLION dollar blank check in the form of an increased Federal Debt Ceiling which he can spend on Fannie Mae and Freddie Mac IN ANY WAY HE CHOOSES, INCLUDING BUYING THE CRAPPIEST LOANS THEY HAVE AND STICKING A ONE HUNDRED PERCENT LOSS, $800 BILLION WORTH, ON YOUR TAX BILL. A huge percentage of the debt issued by Freddie and Fannie - about $1.5 trillion worth - is held by foreign central banks. Paulson is proposing to bail out the Chinese and Japanese governments with our tax money! Paulson SAYS he will “protect the taxpayer.”

THE BILL ALLOWS HIM TO SCREW YOU WITH ABSOLUTELY NO RECOURSE. More

Fannie and Freddie own or guarantee nearly half of the nation’s $12 trillion worth of home mortgages. If they collapse, so may the whole system of finance for American housing, threatening a most unfortunate string of events: First, an already plummeting real estate market might crater. Then the banks that have sunk capital into American homes would slip deeper into trouble. And the virus might spread globally. The central banks of China and Japan are on the hook for hundreds of billions of dollars worth of Fannie’s and Freddie’s bonds - debts they took on assuming that the two companies enjoyed the backing of the American government, argues Brad Setser, an economist at the Council on Foreign Relations. Commercial banks from South Korea to Sweden hold investments linked to American mortgages. Their losses would mount if American homeowners suddenly couldn’t borrow. The global financial system could find itself short of capital and paralyzed by fear, hobbling economic growth in many lands. More

NEW YORK (Reuters) - E*Trade Financial Corp reported a wider-than-expected second-quarter loss on Tuesday, and warned it could see more losses as the economy deteriorates and more loans sour. E*Trade posted a net loss of $94.6 million, or 19 cents a share, in the quarter ended June 30, compared with a profit of $159.1 million, or 37 cents per share, a year earlier. The quarterly loss was its third in a row. More

NEW YORK (Reuters) - Washington Mutual Inc, the largest U.S. savings and loan, posted a $3.33 billion second-quarter loss on Tuesday as souring mortgages forced it to set aside more money for loan losses. The thrift’s deteriorating health prompted Moody’s Investors Service to say it may downgrade Washington Mutual to “junk” status. Shares of Washington Mutual fell in after-hours electronic trading. Washington Mutual said its third straight quarterly loss was $3.34 per share, more than triple the $1.09 per share loss that analysts on average expected according to Reuters Estimates. Year-ago profit was $830 million, or 92 cents per share. More

The bad news buyers were all over Wachovia (WB) today. The stock was about 10% down at one point is now about 10% up. The market is apparently cheering the dividend cut and job cuts. Bank of America (BAC), the second biggest US bank is up another 7% at one point today after reporting yesterday it may not guarantee $38.1 billion of Countrywide Financial Corp.’s debt after taking over the mortgage lender. “There is no assurance that any such debt would be redeemed, assumed or guaranteed,” the bank said in an April 30 regulatory filing.

The short squeeze in Fannie Mae (FNM) and Freddie Mac (FRE) may be over although both are significantly higher than the morning lows. What is American Express (AXP) going to do for an encore? Wachovia (WB)? Citigroup (C)? Washington Mutual (WM)? Lehman (LEH)? Wells Fargo (WFC)?

Wells Fargo “beat the street” last week only because it made a policy change to write off home equity loans after 180 days instead of 120 days? What’s next Wells Fargo, 210 days? Wachovia now effectively has no dividend. Can it go negative? Citigroup wants to sell $500 billion in assets. To who? At what price? Other than eliminating its dividend inquiring minds are asking “Then what?” Every company above is already hiding ever increasing amounts of garbage in level 3 “marked to fantasy” assets. Will investors overlook this forever? More

The City watchdog has laid out plans to allow banks to tap the Bank of England for emergency funding without informing the market, in a move which might avoid a repeat of the run on the bank which led to the collapse of Northern Rock. Under the European Union’s market abuse directive, regulated firms have to disclose price sensitive information. However, the Financial Services Authority yesterday said there were potentially situations where banks would be allowed to keep it secret if they had applied to the Bank. The main case for an exception would be if disclosure could panic investors and lead to fears for a bank’s solvency, the regulator said. The FSA laid out a series of proposals in a consultation document. It invited industry groups to respond by September 30.

Critics may say the move comes too late. The Government has been attacked over Northern Rock, which, following a leak, confirmed to the stock market in September that it had appealed to the Bank for emergency funding. The announcement prompted thousands of its customers to queue to withdraw their money, and led to a plunge in the bank’s share price. The Bank was forced to lend billions of pounds to Northern Rock before it was nationalised in February. More

Daily Kos
If you look down from a very high level what you see is this: There is $75 trillion in global real estate, $50 trillion in annual global GDP, and $675 trillion in derivatives - synthetic financial instruments loosely associated with the real world that, when inspected, prove to be worth a small fraction of their face value. Nine years ago Weathervane McCain’s chief economic adviser, Phil Gramm, got the Glass Steagall Act largely repealed. Investment houses engaged in an orgy of what can only be described as private money printing, taking real assets, puffing them up, marking them up, passing them around, and they kept at it until there were five or six dollars of funny money for every real dollar of stuff. Ssshhh, don’t anyone tell the pension funds …

What is the connection to commercial banks?

We have 8,500 commercial banks in the United States. They take deposits from folks, they make loans, and the bigger ones are publicly held, so their fortunes influence the stock market’s so called “financial sector”. It’s in quotes because it was 5% of the economy for a long, long time, then it mysteriously poofed up to 25% … before beginning a slow motion deflation starting last August. Again, we should keep the pension funds in the dark …

So these 8,500 commercial banks wrote and sold mortgages and they made commercial real estate loans. Now the housing market is tanking because the asset inflation associated with houses is over because five dollars in funny money isn’t going to get you a nickel of real stuff soon. The commercial real estate market, that being the strip malls and such desired by all those newly minted suburbanites, well … as Marvin the Martian would say There’s supposed to be a huge ka-b00m! There will be and make no mistake about it … Ilargi summed it up nicely in the July 19th Debt Rattle.

Ilargi: The rate of failure among the approximately 8500 US banks is about to start accelerating, probably in large and fast steps. The main reason for most of the smaller ones is their positions in commercial real estate and construction, where “The loss rates are just astronomical.” More

The number of companies facing “critical problems” surged by more than a quarter between the first and second quarter of the year as tightening credit conditions continued to bite, according to Begbies Traynor, the corporate insolvency and restructuring specialist. Year-on-year comparisons in the company’s Red Flag Alert survey show a near eightfold rise in financially troubled companies in the second quarter. The survey showed 4,258 companies facing winding-up petitions from creditors or county court judgments in excess of £5,000, compared with just 542 in the same period a year ago. Quarter-on-quarter, the number of companies facing critical problems increased by 29 per cent. More

The Telegraph
The Treasury may be planning to raise the limit on public borrowing in an effort to give it “room for manoeuvre” for a potential rescue operation for the banking system, a leading expert has suggested. Alistair Darling’s review of the borrowing rules he inherited from Gordon Brown may have been influenced by plans under consideration for a rescue of struggling mortgage banks, according to Peter Spencer, economic adviser to the Ernst & Young Item Club. It comes amid growing disquiet about the funding position of Britain’s biggest mortgage lenders, with banking groups urging the Treasury or Bank of England to extend its mortgage support scheme to cover home loans issued since the start of the year. More

BBC
A former sub-prime mortgage lender is offering an 8% discount to its borrowers if they redeem their loans. Edeus, which started up in 2006, is making the cash-back offer to 400 customers and may extend it to thousands more if it proves popular. The lender wants to get the loans off its books but can no longer find professional investors willing to buy. A spokesman admitted the idea sounded “bizarre” but it was cheaper than selling the loans in any other fashion. “The market for selling on the mortgages is almost dead, and they can be sold only at a very distressed price,” said Ray Boulger, from mortgage brokers John Charcol. More

BILL MOYERS JOURNAL
Author Bill Greider explains to Moyers that the magic of the “free market” is coming to a close.

“This is a really perilous moment.” That’s how one top financier and former treasury official described our economic crisis on the NewsHour this week. Our banking system, he said, “is in worse shape than at any point since the 1930s. We’ve never seen such large losses so fast.”

As he was speaking, California’s big IndyMac Bank went down with a crash, the second worst collapse in U.S. history and sent thousands of depositors out looking for their money. The FDIC, the Federal Deposit Insurance Corporation, took over as reports circulated that the FBI is investigating IndyMac for mortgage fraud. Analysts are predicting that as many as 150 of the 7,500 banks in America may fail over the next 18 months, and one analyst even said that number might double over the next 3 years. More

“By almost any measure, the U.S. economy and business environment are much weaker than the assumptions” the company had in January, Chief Executive Officer Kenneth Chenault said today in a conference call. “Unemployment rates took the largest jump in over twenty years. Home prices declined at the fastest rate in decades and consumer confidence is at one of its all-time low points.” The U.S. economic slowdown worsened in June, affecting even American Express’s wealthier cardholders with high credit scores, Chenault, 57, said in the call. Late and uncollectible loans were higher than expectations in the quarter and will rise as the year progresses, Chenault said. The U.S. lost 62,000 jobs in June, the sixth straight period of shrinking payrolls. More

NEW YORK (Reuters) - Wachovia Corp led several large U.S. banks in posting weak second-quarter results on Tuesday, as soaring losses from mortgages and other debt led to large write-downs. The loss for Wachovia totaled $8.86 billion. Two Ohio-based regional banks, Fifth Third Bancorp and KeyCorp, posted losses, after warning last month of weak results. Southeast regional banks Regions Financial Corp and SunTrust Banks Inc each said profit fell. Wachovia and Regions also slashed their dividends, while Wachovia, Fifth Third and KeyCorp incurred charges from their tax treatment of some lease transactions. Banks are suffering as the nation’s housing crisis deepens, making it harder for consumers, businesses and homebuilders to stay current on their loans. More

Implode.com
We are hearing about the impending shutdown of wholesale mortgage operations at Wachovia. This morning, we received the following:

“Wachovia wholesale is shutting down today. Press release at 1PM.”

“All us reps were told this morning by top managment that wholesale will be completely shutdown by August 31st and a conference call will be this afternoon. All reps were called Sunday afternoon on the east coast…both Portfolio and marketable products.”

The info is coming in from various sources including tipsters, forum members and outside sources - many of whom are (or were) Wachovia employees. We have no detailed information at this point on the number of people who will be affected.

An email sent to brokers by one AE says:

“Good Morning just wanted to let you know that we learned last night that today Wachovia will announce its closing its Wholesale division. More

(RTTNews) - The FDIC is looking for ways to shore up its depleted deposit fund, including charging higher premiums on riskier brokered deposits, FDIC Chairman Sheila Bair said Friday. However, that fund is “a myth,” according to longtime banking consultant Bert Ely, and consumers may end up paying the price of what is expected to be a growing wave of bank failures. NYU Economics Professor Nouriel Roubini predicts that Congress will have to intervene in order to bail out the deposit fund. “They’re going to run out of money, with certainty,” he predicted. “Congress is going to have to recapitalize the FDIC, those $50 billion plus is not going to be enough, by no means.” More

Source: Mike “Mish” Shedlock
Last week all eyes were on the Short Squeeze In Financials, triggered by a SEC Order To Protect Those Most Responsible For Naked Shorting, and fueled by nearly everyone going ga-ga over fabricated earning reports at Wells Fargo and Citigroup. However, most missed the quiet but extremely important action in the corporate bond market. Please consider Bond Sales Slow to $5.3 Billion as Spreads Approach March Highs:

Corporate bond sales fell to $5.3 billion this week as the yield over benchmark rates that investors demand to own the debt approached the highest levels of the year. Sales compare with $11.7 billion last week, according to data compiled by Bloomberg.

Issuance slowed as the average spread on investment-grade bonds climbed to 7 basis points shy of its 2008 high and junk- bond spreads surpassed 800 basis points for the first time since March.

Overall corporate sales compare with a weekly average this year of $21.2 billion.

The extra yield investors demand to own investment-grade bonds rather than U.S. Treasuries climbed 9 basis points to 297 basis points as of yesterday, compared with 305 basis points reached on March 20, according to Merrill Lynch & Co.’s U.S. Corporate Master index.

The strong rally brought out bottom callers in financials who made an appearance for the umpteenth time. And if oil prices keep falling, perhaps the rally will continue for a bit more on the misguided notion that lower energy prices will help the economy. They won’t. Falling oil prices will be a result of falling demand and a weakening global economy. Weakening job prospects will come on on top of it.

The key point however, is the odds of a sustainable rally in the wake of such poor action in the corporate bond market is highly unlikely regardless of what oil prices do.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

The nation’s second-largest bank by assets said Monday its profit fell 41 percent, as losses in its struggling mortgage operations were offset by business in other parts of the company. The company more than tripled the amount it set aside for bad loans to $5.83 billion, up from $1.81 billion a year ago, largely for consumer and commercial portfolios directly tied to the housing market, including home equity, residential mortgages and homebuilding. The figure surged to $6.01 billion in the first quarter. Net charge-offs, loans it doesn’t think are collectable, jumped to $3.62 billion, up from $1.5 billion a year ago, reflecting housing market deterioration and slowing economic conditions, the company said. Bank of America has said it plans to cut about 7,500 jobs as it integrates the company into its own operations. The job cuts amount to about 12.5 percent of the combined companies’ mortgage, home equity and insurance businesses. More

Bankimplode.com
Being stingy in your loss provisioning is unethical policy, at least in my opinion, and a generally bad business practice. I believe a few of the Doo Doo 32 banks are guilty of this. The following is an interesting email that I recently received from a BoomBustBlogger:

AS you know, I’m very negative (and short) on California banks and have taken a beating these last 2 days. PACW is my largest short and is up 30% in those 2 days. They released their earnings today and buried deep in their financials I found something very interesting. At the end of last qtr. their allowance for credit losses was $68.8 million with $38 million in non-performing assets. Today their non-performing assets have doubled to $74 million. Their allowance for credit losses went DOWN to $67.4 million. Their allowance for losses now stands at 91% of their non-performing assets. This compares to 181.2% at the end of March and 242% and the end of 2007. Had they provided reserves for just the increase of $36 million in non-performing assets this quarter it would have swung them from a profit of $12.8 million (.47/share) to a loss of $23.2 million (-.82/share). Now I’m no banker, but I do know how to read income statements and balance sheets. How common is it to have allowances reserved for less than your actual non-performing assets? This to me smells like a complete blowup coming down the road. I don’t think that California real estate is going to heal itself in the next six months. Somebody enlighten me about where I am wrong. Their non-performing assets in commercial real estate, construction, and land were up 300% since Mar.31.

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Webster G. Tarpley
…the United States and NATO now escalating the hopeless and unwinnable Afghan war, and is preparing to send US and NATO forces on the ground to seize parts of Pakistan, a country which is almost 3 times more populous than Iran, and possesses a nuclear arsenal and the means to deliver it. The Bush-Cheney-neocon era in foreign policy is over, and the Brzezinski-Trilateral-Rockefeller-Soros phase of aggression has begun; the US hit list now features Chinese allies like Sudan, Zimbabwe, and Pakistan. Brzezinski is striving to put together some huge provocation for the Beijing Olympics, to make the Chinese government lose face and begin disintegrating. The ultimate targets of the new Obama-Brzezinski foreign policy are Russia, China, and the other members and friends of the Shanghai Cooperation Organization, the main pole of resistance in the world to the designs of Washington and London. The stakes are now much higher than a mere conventional clash in the Persian Gulf. Brzezinski’s adventurism goes far beyond that of the neocons, and objectively places the danger of a thermonuclear exchange on the world agenda. Watch for the Polish-Czech-Lithuanian missile crisis, a Balkan crisis, and a crisis between Georgia and Russia to point the world in this ominous new direction.

The US government is now being run by the Principals’ Committee, an interagency cabal that includes Defense Secretary Gates, Secretary Of State Rice, Joint Chiefs Chairman Mullen, Secretary of the Treasury Paulson, and other operatives of the Trilateral Wall Street financier faction. It is clear that under the new policy, Iran will be able to continue to process uranium: ‘The Bush administration’s decision to send a senior American official to participate in international talks with “More news and information about Iran.” Iran this weekend reflects a double policy shift in the struggle to resolve the impasse over the country’s nuclear program. First, the Bush administration has decided to abandon its longstanding position that it would meet face to face with Iran only after that country suspended its uranium enrichment, as demanded by the “More articles about Security Council, U.N.” United Nations Security Council. Second, an American partner at the table injects new importance to the negotiating track of the six global powers confronting Iran - France, Britain, Germany, Russia, China and the United States - even though their official stance is that no substantive talks can begin until uranium enrichment stops. The increased engagement raised questions of whether the Bush administration would alter its stance toward Iran as radically as it did with North Korea, risking a fresh schism with conservatives who have accused the White House of granting concessions to so-called rogue states without extracting enough in return.’ (New York Times, July 17, 2008) This gambit of appeasing Iran is being done in the hopes of turning Iran against Russia and China ­ a project of incalculable folly. Brzezinski is glad to see the Iranians have nukes, because he thinks he can keep them, pointed at Moscow. More

MIKE WHITNEY
The Fed’s emergency rescue plan for the financial markets is hopelessly flawed. It’s a scattershot approach that doesn’t address the real source of the problem; an unregulated, unsustainable structured finance system that emerged in full-force after 2000 and spawned a shadow banking system that creates trillions of dollars of credit without sufficient capital reserves. This is the heart of the problem and it needs to be debated openly. The present system doesn’t work; it’s as simple as that. It makes no sense to provide trillions of dollars of taxpayer money to shore up a system that is essentially dysfunctional. It’s just throwing money down a rat-hole.

The Federal Reserve and US Treasury want a blank check to prop up Fannie Mae and Freddie Mac, the two war-horses of the mortgage industry, that currently underwrite nearly 80 per cent of all new mortgages in the US. But by any objective standard both of these GSEs are already insolvent. Thus, the taxpayer is being asked to rescue a failed industry that has been used for private gain so that speculators will not have to suffer the losses. Even worse, Fannie and Freddie have written hundreds of billions of dollars worth of mortgages that have not yet defaulted, but will certainly default within the next two years. This is bound to batter the already faltering economy.

The bad paper held by Fannie and Freddie are mortgages that were made to unqualified applicants who are presently losing their homes in record numbers. Their loans were approved because there was no functioning regulatory body to oversee their issuance and because the mortgages were transformed into complex securities that were sold to credulous investors around the world. The ratings were fixed to meet the requirements of their employers, the investment banks, which marketed these exotic bonds to foreign banks, insurance companies and hedge funds. That puts Fannie and Freddie at the center of a system that needs radical surgery to eradicate the bad paper. If this doesn’t happen in a timely fashion, then foreign investors will stop purchasing US debt and the dollar will crash. By creating a backstop for Fannie and Freddie, the Fed is linking US sovereign debt with mortgages and derivatives that are already known to be fraudulent. This is a big mistake. According to Merrill Lynch, the US is already facing a long-term “financing crisis” as the weakening US economy and sluggish consumer spending could signal an end to the $700 billion in foreign investment that covers America’s current account deficit. By assuming the GSE’s enormous debts, the Bush administration is just speeding this process along and inviting disaster. More

The credit derivative market, which has ballooned to over $62 trillion to dwarf the underlying debt market, has yet to experience the default of significant issuer since its rapid growth. Corporate defaults, however, are on the uptick and expected to accelerate, and the number of companies with credit default swaps trading at distressed levels are also on the rise indicating the market may soon be tested. Some lags in processing credit derivative trades have made regulators and market participants nervous there could be confusion if a large borrower, or even worse a counterparty, failed. More

Christina Rexrode
State regulators inspect Wachovia Securities’ HQ in Missouri in the latest fallout of market’s collapse. Eileen Selkis had some money left over from selling her house in Connecticut, and she knew she couldn’t afford to lose any of it. She says her broker at Wachovia Securities pointed out that she could get a good return – better than the money market account it was in – by moving it to something called auction-rate securities. The higher interest rate was appealing, but Selkis wanted to make sure she’d be able to access her money easily.

“They’re as good as liquid cash,” she recalls her broker telling her, in late 2006. “You can get to your principal any time; you just need to let me know about seven days ahead.” That was before the market for those securities began to dry up in February, another result of the tumultuous state of the financial services industry. That means that many investors can’t sell their holdings and get their money out of those securities, and they allege that brokers understated the risks of such investments.

Major financial institutions across the country – including Charlotte’s Bank of America and Wachovia – are facing lawsuits and regulatory inquiries over how they marketed those securities. The latest twist came Thursday, when securities regulators from Missouri and other states showed up to inspect the St. Louis headquarters of Wachovia Securities, seeking documents and other records related to the sale of such bonds. More

Congressman Ron Paul confronts Federal Reserve Chairman Ben Bernanke on monetary policy and its consequences. 7/16/08

Ron Paul
There are reasons to believe this coming crisis is different and bigger than the world has ever experienced. Instead of using globalism in a positive fashion, it’s been used to globalize all of the mistakes of the politicians, bureaucrats and central bankers. Printing dollars over long periods of time may not immediately push prices up–yet in time it always does. Now we’re seeing catch-up for past inflating of the monetary supply. As bad as it is today with $4 a gallon gasoline, this is just the beginning. It’s a gross distraction to hound away at “drill, drill, drill” as a solution to the dollar crisis and high gasoline prices. Its okay to let the market increase supplies and drill, but that issue is a gross distraction from the sins of deficits and Federal Reserve monetary shenanigans.

This bubble is different and bigger for another reason. The central banks of the world secretly collude to centrally plan the world economy. I’m convinced that agreements among central banks to “monetize” U.S. debt these past 15 years have existed, although secretly and out of the reach of any oversight of anyone–especially the U.S. Congress that doesn’t care, or just flat doesn’t understand. As this “gift” to us comes to an end, our problems worsen. The central banks and the various governments are very powerful, but eventually the markets overwhelm when the people who get stuck holding the bag (of bad dollars) catch on and spend the dollars into the economy with emotional zeal, thus igniting inflationary fever. This time–since there are so many dollars and so many countries involved–the Fed has been able to “paper” over every approaching crisis for the past 15 years, especially with Alan Greenspan as Chairman of the Federal Reserve Board, which has allowed the bubble to become history’s greatest.

The mistakes made with excessive credit at artificially low rates are huge, and the market is demanding a correction. This involves excessive debt, misdirected investments, over-investments, and all the other problems caused by the government when spending the money they should never have had. Foreign militarism, welfare handouts and $80 trillion entitlement promises are all coming to an end. We don’t have the money or the wealth-creating capacity to catch up and care for all the needs that now exist because we rejected the market economy, sound money, self reliance and the principles of liberty. Since the correction of all this misallocation of resources is necessary and must come, one can look for some good that may come as this “Big Event” unfolds. More