Fannie says they would be close to profitable if they didn’t have to pay interest on the money they received in the bailout. Isn’t that like a home owner not going into foreclosure if they didn’t have to repay their loan.
I started a thread about Fannie Mae nearly three years ago but stopped because the story was always the same. There was a single line is this AP article that inspired me. The article: Fannie Mae asks for $2.5 billion in new US aid. And the line from that article: “Fannie and Freddie together have repaid $16.7 billion as dividends to the Treasury Department.”
The reason I found that line so interesting was that the AP writer, Marcy Gordon, said that they have “repaid…as dividends” quite a bit of money. Dividends are like interest, it is earned off of the principle. They have yet to repay any of the principle. Fannie issued a statement last week saying that they would have been profitable if they didn’t have to pay back the government.
From Fannie Mae’s November 5, 2010 Press Release:
“WASHINGTON DC – Fannie Mae (FNMA/OTC) today reported a net loss of $1.3 billion in the third quarter of 2010, compared to a net loss of $1.2 billion in the second quarter of the year. The company continues to focus on building a strong new book of business and returning to profitability (excluding Treasury dividend payments)”
In fact they haven’t “repaid” the government anything, all they have done is to pay the dividends on the money they needed to keep them from going under. Since the government takeover and they received their bailout money, Fannie and Freddie have been asking for billions every quarter. Yet they have the nerve to suggest that it’s the governments fault their not making money.
In order not to mislead, Fannie has announced the repurchase of $1.3 billion of notes on the 15th. So they need $2.5 billion more so they can repay $1.5 billion. Now that is how you get ahead.
Fannie Mae and Freddie Mac hold 70% of all mortgages in the U.S. and FHA hold another 20%. In the last two years they have lost $249 billion. or $1768 for every taxpayer. Notice I said taxpayer because if you don’t pay taxes they haven’t cost you anything.
Over that same period the Treasury has purchased $1.25 trillion in MBO’s (Mortgage Backed Obligations) leaving almost no private mortgage market. It is all government owned or backed.
Both the Federal Reserve and the Treasury have well over a trillion dollars each to use to ease the credit markets. So why are they printing another $600 billion?
The media is saying that it is to stimulate the economy by spreading some money around and to create jobs by making our exports more attractive. The money spreading helps the financial markets and the cheaper dollar only helps the multi-nationals. Aren’t those the same ones they have been blaming for our situation.
The Fed is putting the money into the economy by buying (with newly printed money)$75 billion in Treasury Notes each month for eight months. The question is why are they doing it this way. Why is the government borrowing money from the government and not in a way that that gets the money into the pockets of consumers. You and I, the consumers, represent 70% of the economy. Or into an investment tax credit that motivates business to upgrade and hire.
The answer is in the housing market. There has never been a recovery that didn’t include housing and the abnormally low rates we have had has not been enough to overcome the unemployment rate and the depressed wages it has caused. By purchasing $90 billion a month they will keep the price of Treasuries artificially low as to not effect mortgage rates.
That brings up the point that at these rates private enterprise would never be interested in funding home mortgages. So without Fannie, Freddie and FHA there would be no housing market.
If the recovery doesn’t kick-in in the next eight months, will they have to print more? As the dollar weakens because of this financial engineering will they have to raise rates to slow the economy to keep inflation from getting totally out of hand.
Again the winners are the major corporations that are flooding the debt markets with cheap paper. IBM just raised $1.6 billion at ¾ of one percent. Unbelievable. Did you ever think that companies could borrow money at less than 1%.
The government, in their politically expedient effort to make home ownership available to everyone, caused this recession. They loosened the rules and demanded that the banks make loans that they would of never done in the past. The banks stood to lose little with Fannie and Freddie either buying or securing them.
If the government would of let the chips fall, the housing crisis would have been washed out by now. Because of government intervention there is still 3 million homes that still need to go through foreclosure. That is as many as been foreclosed on in the last two years.
The result of this financial engineering could be worse. Bye replacing the mortgage bubble with a Treasury or liquidity bubble we could end up with a devalued dollar, devastating debt payments, crippling inflation and soaring interest rates. The Federal Reserve seems to be making all of their long term assumptions that foreign entities will continue to want Treasuries. If the dollar falls any more they will accelerate the rate at which they have been pulling their money out of the U.S..
It’s not too late for Washington to change direction and make some sound decisions instead of taking the path that produces the best sound bite. The media needs to stop reporting political sound bites as fact. The President needs to stop social engineering.
Nov 7, 2010
Fannie says they would be close to profitable if they didn’t have to pay interest on the money they received in the bailout. Isn’t that like a home owner not going into foreclosure if they didn’t have to repay their loan.
Aug 18, 2010
Russell Berman, in a recent article in THE HILL, reports that the legislation proudly pushed through Congress as “Not adding to the deficit” has actually done so by tapping funds from the Supplemental Nutrition Assistance Program or commonly called the food stamp program.
”The proposed cuts would come on top of a 13.6 percent food stamp reduction in the $26 billion Medicaid and education state funding bill that President Obama signed this week.”
The cuts he refers to is for Michelle Obama’s $8 billion child-nutrition bill. Since it is not considered emergency legislation it needs to have its’ funding defined in the bill. The bill is at the center of the first lady’s “Let’s Move” initiative and the people that want it pushed through don’t want to take the time to establish a new tax to cover its cost. Congress has so over used the concept of taxing-the-rich, they propose taking the money from food stamps.
When the Food Stamp Program runs short on funds they will push through emergency legislation to cover the short fall and will blame the Republicans for not caring for the poor if they balk. Emergency legislation does not need to specify where the money is coming from and is just added to the deficit. That way they will be able to pass their pet projects and appear to be doing only what is necessary.
There is a real need by the states to find addition funds to cover their lack of discipline. The state aid bill has been called a union bailout bill because the funds are designated to support the wage levels and jobs of state unionized workers. But why did they need some money for Medicaid? Could it be that they are just replacing funds to Medicaid that they pillaged to cover the cost of one of their other initiatives. And so it goes, what we don’t know won’t hurt us.
Last week I watched a Democrat Senator tell Cavuto that the State Aid Bill does not add a penny to the deficit and that there is even some extra in it to pay the deficit down. Remember this the next time you hear any of our Proud Elected Officials brag about anything. Not once has this been brought out in any of the discussions before the bill was passed.
Link to Mr. Bermans’ article: Dems may use food stamp money to pay for Michelle Obama's nutrition initiative
Aug 17, 2010
During his campaign Obama promised that he will tax the coal burning utilities to death. The EPA has one public hearing left before they pass some very tight restrictions on carbon emissions that affect half of our nations power needs.
Here is a link to what the EPA has to say about this new set of rules:
Standards for the Management of Coal Combustion Residuals Generated by Commercial Electric Power Producers
From a Business Journal article, New EPA regs could prompt Constellation to close some coal plants, there is a good chance that Constellation will close at least three of their power plants when the regulations do pass. At another plant they have spent $1 billion installing scrubbers in anticipation of the new regulations. With the new regs affecting half of this countries production, rates which have been steadily rising, have only one direction to go.
Obama tried to push his “Cap and Trade” legislation but Democrats balked at forcing through one more of his initiatives after driving up the deficit three times higher than at any time in the past. Of course his buddies in Chicago were very disappointed at this because the yet-to=be established trading floor for the carbon credits will be located in the Chicago Mercantile Exchange.
Getting rid of a known source of air pollution is important but to do so in a way that restricts, reduces and drives the cost up on power generation is incredibly irresponsible at this time. As with most of Obama’s initiatives his prime concern seems to be getting something in place so he can tweak it later without publicity or transparency. Any concern that he expounds is betrayed when the details come out.
Mar 23, 2010
As reported on Bloomberg.com by Daniel Kruger and Bryan Keogh the government now has to pay a higher interest rate than the top U.S. companies. Obama Pays More Than Buffett as U.S. Risks AAA Rating.
Last year the money center banks could borrow from the Fed at rates below ½% and use that money to buy Treasuries and keep the 1% for nothing. Since the Fed has raised their discount window rate to 1 % some of the fun is out of the game but what-the-hell, where else can you get paid to take money. That’s why the money center banks have been cleaning up in a bad economy.
From the article:
“The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.”
“Last year’s $2.1 trillion in borrowing by the government exceeded the $1.08 trillion issued by investment-grade companies, the biggest gap ever, Bloomberg data show.
Moody's states that interest payments this year will be 7% of the governments revenues and will increase to 11% in three years. That is a 63% increase in three years. And that's assuming interest rates don't go crazy.
Mar 16, 2010
At present the Social Security Administration holds 20% or $2.4 trillion of the $12 trillion that the U.S. now owes. That means that the government will soon lose its single biggest customer of U.S. debt. No one is saying exactly when this will occur but I’ll guess that the party is winding down and will end in the next two years. At the same time the next two largest purchasers of U.S. debt, China and Japan, are trimming their purchases of U.S. debt by 15% a year.
As I wrote last May in, The Honeymoon Is Over And I Want A Divorce - Obama’s Interest Rate Quagmire, there are pressures coming from all directions that will push interest rates up. The dollar has been losing value against all currencies except the Euro and the Pound, which are having their own fiscal problems. As soon as the problems in the EU start to subside the demand for the safe-haven dollar will also decrease.
When the above circumstances are combined with the need to fund an extra trillion a year in spending, interest rates have to move and move big. The first casualty will be a housing market that, because of government intervention, has not been able to work through its current downturn. Higher mortgage rates mean less affordability putting pressure on both home sales and home values that have little room for bad news.
The major money center banks like Goldman and Chase-Morgan have been thriving because the fed has kept the money flow to these guys at full blast and at little or no cost. They have been using that flood of short term money for everything but small business lending. For them it has been the perfect storm. When their interest rates raise the major money center banks will be in the exact place that stated this mess; an immediate cash squeeze.
As the government issues massive amounts of debt, corporate debt will also be entering the peak of their debt cycle. As stated in the Times article below, corporations will be bringing $700 billion of debt to the market. Competition for money is another factor for an increase in rates.
Currently the only positives for the future of interest rates would be if a if the U.S. has a phenomenal economic turnaround or if a war breaks out somewhere leading to another flight-to-safety.
Posted on HOT AIR by ED MORRISSEY: Social Security starts cashing in US debt
An AP article by STEPHEN OHLEMACHER: Social Security to start cashing Uncle Sam's IOUs
An AP article by MARTIN CRUTSINGER: China trims holdings of Treasury securities
A New York Times article by NELSON D. SCHWARTZ: Corporate Debt Coming Due May Squeeze Credit
Nov 23, 2009
This morning my son and I were discussing the prevalence of misleading economic data out there. Robert Samuelson is one of the few economists that I have respect for. Samuelson in his article, Health 'reform' that burdens our young presents yet another set of reasons why the Health Care Bill is bad legislation. He is correct, the lions’ share of Medicare is going to be sucked-up by the retiring hoards. But if you paid into the system for 40+ years wouldn’t you expect to get what you have paid for and have been promised?
He also has issue with the proposed rate structure that is part of the Health Bill for MANDATED coverage. Insurance pools work because they spread the costs of a few over a much larger group of people, most elderly are going to require more services but they have also been the ones that have paid into those pools for 30 years covering the higher rate of usage by their elders. If you accurately price coverage for each person’s age then people could never afford coverage and would end up either without coverage or on the government dole anyway. Having small risk pools that are tightly grouped by age only exacerbates the problem.
If the cost of health coverage increases as someone ages then employers would be much more reluctant to hire someone over forty strictly on the cost factor. One of the big problems with medical care is that those, even with good insurance, often find themselves with medical bills that exceed coverage and wipe out a lifetime of work and can be forced into bankruptcy after just a few months of illness.
His argument about AARP is good except that AARP by supporting the Health Care Bill is also supporting the $500 billion in cuts to Medicare. He criticizes their support for subsidizing premiums for the elderly but fails to recognize the fact that they have been paying that subsidy for most of their lives.
He also fails in his comparison of health insurance to auto insurance. Auto insurance is competitive, you can buy it from a local company or from a company in another state, you’re free to drop one coverage and pick up another. Auto insurance is not employment driven, when you change or lose your job you do not lose your auto insurance and if you have coverage for a health condition you may not be able to get covered for that condition ever again. Nor is auto insurance subsidized by the government, . A worker who pays into a health insurance pool making it possible for older workers to receive lower rates also expects a similar benefit when they reach their fifties.
The only solution to the health care problems plaguing the U.S. he presents is that seniors should pay premiums in accordance to their age. This is not an expectable solution and is much less than I expect from him.
Oct 2, 2009
In a Colgate Maroon-News article the authors made a strong argument that Sarah Palin lacked the intellectual depth to lead the country and if given the chance, would represent the GOP to a resounding defeat.
This is a true case of be careful what you wish for. The American people didn’t vote for Obama’s superior scholastic accomplishments or his homiletic discourse, they were just bored with a do nothing Bush and voted for a change in government. Now they are surprised to find out that it is government that wants to change them.
Palin took on the incredibly strong oil lobby in Alaska and then cleaned house throughout the upper levels of the Alaskan politically elite. This gave her the highest approval ratings of any Governor or Congressmen in the United States. Then why has she become the over-night archenemy of the intellectually advantaged, the villainess extraordinaire whose every word or deed is proof positive that she is unfit for anything but commonality.
Could it be that those who strive to be intellectually superior just will not accept that her overly simplistic and populace approach is the change that is needed. Some solutions require the elimination and not the addition of bureaucratic layers and the reclamation of constitutional fundamentals. After two hundred years of becoming the country that most want to emulate, we need to stop over-thinking this change thing.
Aug 19, 2009
I tried to E-mail Senator Specter with my opinions on the health care debate and found out he does not want them. This seemed strange because he was out front with his Town Halls, but after viewing his website I have decided that the Town Halls were more of a politically inspired defensive move than an honest interest in what his constituents are thinking.
When you use the contact section of his website you’re asked to specify the subject that you are referring to. There are seventeen different categories and when you select Health you’re asked for a subcategory: Medicare, Medicaid, Abortion, Nutrition and so on. There are selections for just about everything like Gun Control, Card Check, Amtrak, FEMA, Food Safety, Climate Change, Endangered Species, Cemeteries, HIV, Asbestos, Hunger and even a category on The Sudan. But if you have a comment on the Health Care debate or on a new legislative initiative, he doesn’t seem to be interested.
I’ve only been in Pennsylvania for five years so I’m not sure what qualities Specter had to become the state’s longest serving Senator. From what I’ve seen, in these five years, whatever positive qualities that first endeared him to the voters in Pennsylvania, are now gone.
Aug 18, 2009
THE PEOPLE DON’T TRUST THE GOVERNMENT AND ARE EVEN MORE SUSPICIOUS WHEN THEY ATTEMPT TO RAM THEIR PROGRAMS THROUGH WITHOUT DISCUSSION.
The dems’ claim that the resistance to Health Care Reform is being orchestrated by private interests and fringe groups is untrue. As someone who does not belong or support any group or party, I resent that our elected officials are erecting blinders to a majority of their constituents concerns. It doesn’t matter which side you’re on, both Democrats and Republicans have concerns with this Bill and their representatives stonewalling blocks both the reasonable and the unreasonable. This tactic just detracts from any real discussion of the issues in the Health Care Bill.
There have been numerous attempts to create a system for universal health care in the U.S. and all have failed because the overhaul was too large and unwieldy. People are willing to let the politicians play at politics but this Bill is too much of a change. All we’re getting is promises that it will be revenue neutral and our taxes won’t increase, that our level of care will not be managed by cost control committees and that over-all, life-is-good and things will not change. And you wonder why people aren’t falling in line behind the Bill?
This Bill creates preferential treatment to certain groups such as unions, mandates intrusion into families that use the system and penalizes those that don’t. There are a thousand pages of new bureaucracy’s, new rules and regulations that are open ended and tons of unintended consequences. Most of us agree that health care needs reforms but this is just too big and too expensive to pass with no real and open discussion.
I am against government run health care but favor serious and well thought out programs of reform, most of the average Joe’s and Jane’s out there would also support intelligent reform. Here are a few issues to start with.
· Tort Reform – Just look at John Edwards, the main beneficiaries of medical malpractice suits are the attorneys.
· State Regulation – Eliminate the system of state boundaries, they reduce competition and drive up costs.
· Insurance Mandates - All physicians should have to accept all legitimate forms of insurance eliminating insurance directed and managed medical care.
· Portability – COBRA is a joke, if someone loses their job they cannot afford $1,000 a month or more for health insurance.
· Pre-existing conditions – Too many people pay into a system for twenty/thirty years and if anything should happen to that job they can lose coverage for serious and expensive conditions.
· Generic Drugs and Drug Pools – Twenty years is too long of a window and drug pricing could be reduced if pooling were allowed.
· Medical Training – Offer serious subsidies for people to enter the medical field. Do not lower standards allowing less qualified people in, but make it possible for lower income people with sufficient aptitude to enter.
Any one of these would be a massive undertaking but trying to do them all and more is just too much.
May 16, 2009
He lives in Fairy Land and The White House has become His Magic Kingdom.
My last article talked about the quagmire that our economy will be in if Obama's uncontrolled deficit spending, in His attempt to reshape America, is not brought under control. Two days ago He made a speech where He stated the same thing. Bloomberg published this article: Obama Says U.S. Long-Term Debt Load ‘Unsustainable’.
Yes, higher interest rates would devastate the budget causing astronomical deficits – beyond the enormous ones already in the pipeline. But the problem is NOT HIGHER INTEREST RATES, it’s that He will not stop spending money He does not have. It’s the spending that is causing us to borrow in the first place. He will not give up his dreams to reshape the American economy. Here is another campaign speech (oops, Presidential Address) He made a couple of days ago. He recognizes the danger of increased borrowing but places His vision for health care, energy and the environment at a higher level of importance than mere monetary concerns.
The implication is that we will have to raise our level of commitment to society, lowering the level of our bank accounts.
If He will not stop deficit spending then the only way to reduce the governments’ need to float Treasury Notes is to find different ways of raising taxes. He loves hidden taxes; a dime on a coke or candy bar, a quarter on a gallon of gas, a buck a six-pack, 10% on anything plastic. He’ll nickel-dime-quarter us to death but will not raise our taxes.
His carbon tax could devastate the lower income portion of our society, severely curb the spending habits of the middle class and we already know what He plans for the upper class. His health plan would eventually dictate everything that impacts our health. People that are considered over-weight will have restrictions put on them because they are now a burden to the health care system. We will be told what foods we’re allowed to eat, what doctors we will see and our health care will be monitored for our own welfare. The majority of a person’s medical expenses come in the last few years of life, euthanasia would be the single biggest money saver.
He said today that people should pursue fulfilling careers such as volunteering their time or working for a non-profit. That the American People should aspire to higher level of commitment to the society. That leaves government work out, their all about the money. If He thinks He can dictate salaries in the private sector then the next logical step is to dictate salaries of Physicians, Nurses, procedures, medicines and hospital costs. All would benefit society. Doctors should aspire to a higher level and donate their time.
He lives in Fairy Land and The White House has become the Magic Kingdom.
May 8, 2009
Two years ago I showed a small article in the WSJ to a friend, the article was about two unknown hedge funds that were failing. My point was that this was just the tip-of-the-iceberg, the first signs of a much bigger problem; the unraveling of the credit market.
Since then, the government has tried to fix the collapse of the credit market by re-inflating it with government debt. Every week the Treasury sells $10’s of billions of “Treasury Notes” to fund that debt. Insurance Companies, Pension Funds, and Municipalities that are required to invest in ultra safe bonds buy about 45% of these and the remainder is purchased by foreigners that need to find a safe place to park their money that they get from selling their goods to the U.S..
Increasing the money supply, cash in circulation, stimulates the economy. The more money out there the more it flows around.
The Obama budget spends more than $25,000 per every single person in the U.S. than they are going to take in. That works out to a deficit of $42,500 for every working American. That is $42,500 above what we already pay in taxes.
In the short term this is working, but there are several things that are also working against this vast expansion of the U.S. debt and money supply. As the government prints money the value of that money decreases, that is why Obama went to Europe urging them to step up their stimulus. If they also print money then our dollar wouldn’t shrink as far or as fast. The dollar versus the Euro hit a 6 year high in March but has shrunk 7% since then. It is still strong but as you keep expanding the money supply its value only has one way to go.
A weaker dollar also means higher prices. The big disadvantage here is that foreign investors are not going to buy Treasuries if they get paid 2% on the bond and lose 7% to 10% on the dollar conversion when they trade it in. Why not just invest somewhere else where you don’t have the threat of losing money caused by a dropping value in the dollar.
As the government pushes more Treasuries out on the market, the market will push back by demanding higher interest rates. This phenomenon started yesterday with a 30-year sale pushing the rates up to 4.25%. Still very low but it was the first sign that the Obama administration is going to have to pay a premium for their borrowing needs in the future. Interest on government debt was four times what they paid for education last year, that represented 15% of the entire budget and that was at a historically low interest rate. It’s not unconceivable that as borrowing and interest rates increase, that the cost to the budget will take a much larger piece of the pie.
As the interest rates for Treasuries move up so do the rates for other debt such as home mortgages, business loans, auto loans, credit card and school loans are all going to have to raise their rates to compete. Money will become expensive and as this happens business slows down. Even as the economy starts to pull itself out of the doldrums the system is working to take it back down.
The indiscriminant printing of money is inflationary, so far the dollar has been barely hurt because other countries have also fired up their printing presses but have since put on the brakes. This allows other countries to enjoy a stronger currency while the dollar will keep falling. Economists say that you can’t have inflation without strong demand, but if you look around the world, many countries have had extreme inflation in a terrible economy because their currency was debased.
Again this will take a couple of years to play out but I am seriously concerned for my grand kids and yours.
Mar 31, 2009
In today’s shows both Neil Cavuto and Rush Limbaugh made articulate recitations on the need for retirees to take it on the chin to allow the auto companies the opportunity to get themselves out of their current predicament. There are some issues that I’d like to argue.
First would be Cavuto's reference to the steel industry. Unlike the current situation that the retirement funds of the auto workers are in, the steel workers retirement funds were massively overfunded. Wall Street came up with the scheme that would allow them to purchase these companies using the employee pension funds as their preferred funding source. After a few take-over’s any weakening in the economy was enough to tank them, forcing the fed to assume their pension responsibilities.
You can argue that it was the cheap Japanese imports that caused the steel industries failure, but the pension funds were fully funded prior to the long series take over’s that raided their pension funds.
Next would be the assumption that the retirees have to accept reduced benefits so that the companies can be saved. That may be the case today but if these companies were forced to adequately fund their commitments instead of filling the funds with promises; we would not be in this position today.
Today everyone is falling all-over themselves to save companies where managements have taken their companies to the brink of failure because of some past decision that were made to obtain some short term gain. At some point we have to make companies live up to the agreements made to their staff or it will be open season on retirees forever.
The unions AND the auto companies want Obama to land the big one; the retiree’s pension responsibilities. Neither one wants that on their plate.
I believe that Obama has a deal with the unions that trade major concessions by the auto unions in return for Card Check and government guarantees on the pension funds.
The one issue that is never discussed are the workers that have put in their forty years and are demonized for having a retirement plan that is inferior to the average politician. The unions knew that this would happen when they made the deal, and the autos were more than happy to squeeze their way out of negotiations with just a promise of future payment.
Feb 24, 2009
Tonight on his CNBC show Mad Money, Cramer presented his own bailout plan that should take care of both the housing crisis and a weakened financial system.
The first step that Obama should do is to purchase preferred non-voting stock from banks that require additional cash to meet a conservative asset-to-liability ratio. These preferred would carry a low percentage of interest and would be repurchased by the bank and not converted to common. That would protect shareholders from having their investment diluted and the banks from Nationalization.
The second phase would be to offer current and new home owners a 40 year fixed-rate government backed mortgage at 4%. This would reduce mortgage payments sufficiently so that most people could afford their payment even if they currently have negative equity. This would give those home owners time to turn negative equity around, bring new life to the housing market and make home ownership available to a wider range of people.
Obama at first dismissed these ideas as just chatter from the Chattering Class. But no one can accuse Obama of not being sharp. We’ll let the banks issue newly printed preferred non-voting stock and in exchange they will get newly printed dollars. Both the newly printed dollars and the newly shares will have about the same value that would make it an even trade. Besides, when the time comes he’ll just change his mind, a politician’s prerogative, and convert those preferred and we’ll end up owning those banks for next to nothing.
The government backed mortgage program had him confused for only a moment, he soon realized that this program could achieve the pinnacle of his dreams. As long as these sponsored mortgages had an inflation clause, when the dollar tanks by the endless printing of greenbacks, almost all families in America would be living in government owned housing.
Consumer Confidence Records All-time Low
Obama Promises New Stimulus Will Finish the Pesky Index before the End of His First Term - A Parody
The New York-based Conference Board issued their monthly reading on consumer confidence at an all time low of 25, the lowest reading since the indexes start in 1967. January’s reading was an extremely low 37.4 and last February was a 76.4. The professionals that prognosticate such things saw a 35 in February and there were rumors that several of them were seen running through the halls of Congress cheering that finally there is something with a lower rating than Congress. The cheering soon ended when someone reminded the Representatives and Senators that only 12% (February’s Rasmussen Poll) of the American people think that Congress is doing a good job.
President Obama, when hearing the news, immediately called together his Cabinet of tax cheats, Lobbyists and a token Republican, rumored to be a senior Pennsylvania Senator, who together laid out a plan that will insure that the remaining 25 points left on the Index would be gone by the end of Obama’s first term. Obama wasn’t sure they could hit ZERO by the end of his first term but approved the measure anyway because he felt sure that it would work by the end of his second or third.
The American dream is under attack; better paying jobs are being shipped overseas, our larger companies and universities are contracting out jobs to companies that import H-1B Visa holders that receive lower wages and fewer benefits, the cost of sending our children to university often requires taking out a second mortgage, a major illness can wipe out 40 years of work and saving and now our retirement funds are disappearing.
Craig M. Douglas and Tim McLaughlin penned an article about Boston’s mutual fund companies with major stakes in Citi Group. The largest holder of Citi stock, which have fallen 68% just this year, is Fidelity Investments which purchased an additional 100 million shares in the last quarter of 2008. As I read this article I thought of my previous employer that had their 401k through Fidelity and my son who also has his 401k with Fidelity. At the end of 2008 his fund had lost more than 50%.
It’s more than plausible that a majority of Americans have lost as much as 75% of their retirement. Already we have seen our steel workers retirement being taken over by the government. The auto workers who have worked 40 years building for their retirement are watching as Congress and the media demonizes them for bringing down the auto industry. Wasn’t this accomplished by an auto industry that made promises to workers then failed to provide the funding needed to fulfill those commitments?
The private sector isn’t the only part of our economy that is reeling from the obligations made to future retirees. Many communities offered lavish retirement programs to their leadership only to find themselves under a burden that they are no longer able to fund. Communities have a severe need to raise capital for human services, infrastructure repairs, police and fire services only to find that any increase in revenues are being eaten up by retirement liabilities.
Every week we pay 14% of our gross income to Social Security and Medicare; our esteemed politicians and economists have told us that both will be bankrupt in twenty years. That is if the Federal Government pays back what it has borrowed from it. There has been numerous papers written stating that the retirement age has to be moved up while benefits have to be cut if the Social Security Administration is to survive.
Even the last bastion of retirement security is being taken away from us. With property values dropping in most areas of the country, the equity that many had planned on using for their retirement has disappeared. The family home is the single largest retirement saving investment that Americans have used, that investment has also taken a 25% haircut.
All of this is happening while the government is the only part of the economy that is growing. The future demands for our tax dollars also has to grow which means that we will have less to work with. Even as our weekly checks will grow by a massive $13, the government seems to be on a consumption tax spree. Proposed increases in our taxes are in the pipeline for everything from a 50% increase in the fuel tax, a 150% increase in cigarette taxes, a massive carbine emissions tax will cause our electricity costs to increase (again), water and sewer fees will have to increase as new mandates come on line and the continuing need for school and education funding will affect our property tax.
The only answer I have is counter to the advice of our government; not to consume, not to spend and become even more conservative than I already am.
Jan 16, 2009
It was just reported on CNBC that a proposed buy-out by the Golden Gate Group, that would salvage Circuit City as a going concern, fell through. The handful of liquidation companies that were standing by are coordinating their efforts that will result in about 35,000 being laid off. So far there is no announcement from the company, but I doubt that any useful information would be in it anyway. Good luck to a very large group of people that have stuck by while Circuit City tried to make the best of a bad situation.
Does Low Wages Equal Strong Management
Circuit City Is Now Hiring – Cheap
Dec 12, 2008
In July Bank of America announced that they would be slashing CountryWide staff down to 7,500 from a high of 50,600 in 2007. That’s 85%. If past deeds is a prediction of future action then BofA will be shrinking Merrill significantly. Some layoffs have already occurred but my guess would be that three out of five Merrill employees will be pink-slipped out. That would account for the 35,000 announced cuts.
If you have any specifics please post them in our comment section.
From Dealbreaker.com: “Bank of America is said to be planning on canning half of its New York equity trading desk in the next 2-4 weeks.”
From NETWORKWORLD: “Sony has named its Westmoreland, Pennsylvania, plant as the second factory of a planned 5 or 6 that will be shut down as part of a global restructuring. The factory is Sony's last remaining TV manufacturing facility in the U.S. and the closure will see 560 people lose their jobs.”
The plant which manufactures 46” and 52” LCD TVs will stop production in February and the facility will be completely shuttered in March 2010 when Sony also closes their east-cost logistics operations. Sony will now manufacture these TVs in Baja, Mexico.
Westmoreland County web site post this in October: “The park, located in East Huntingdon and Hempfield Townships, further bolsters Westmoreland County’s major employment zone surrounding the Sony Technology Center.”
Here is an interesting comment on MSN QnA Beta by toadhead: “There are no TV currently manufactured in the USA."
"The last one I new of were Phillips not a US company but they had a manufacturing plant in Missouri . As I understand it Wal-Mart said they would not sell there equipment, essentially unless they moved manufacturing to China so they would be cheaper and contain more lead, so they did. That was a few years ago all the other manufactures of TV have also moved over seas.”
Nov 28, 2008
From InternetNews.com: “Gartner's market analysis for mobile handset makers, released today, now rates Motorola (NYSE: MOT) in fourth place behind Nokia, Samsung and Sony Ericsson in global sales.”
Motorola Slips in Worldwide Sales
From the chicagotribune.com: “Motorola reported a net loss of $397 million, or 18 cents a share, in the third quarter, down from a net profit of $60 million, or 3 cents a share, in the same period last year.”
Motorola posts hefty 3Q loss, delays spinoff
From USA Today: ”The maker of communications gear said it would get rid of 3,000 jobs by April, with about 2,000 of them coming from the cellphone unit. The company last announced 2,600 job cuts in April.”
Motorola posts big loss, plans to cut 3,000 jobs
From cnet.com: “The iconic American technology company Motorola is in big trouble. But can a last ditch effort by a new top executive help the company pull one of the biggest comebacks in American business history?”
Motorola's struggle for survival
From BusinessWeek: “The company's falling star at AT&T, the largest U.S. mobile-phone carrier, underscores Motorola's persistent failure to release handsets that grab the attention of consumers and the service providers whose marketing is crucial to sales.”
Motorola's Market Share Mess
From rerwireless.com: “It will eliminate about 120 of the 600 positions in Motorola Labs, the unit responsible for basic research in everything from cellphones to radio technology,…”
Moto to cut jobs from R&D unit
More thin gray line articles
Nov 27, 2008
From an AP article on RGJ.com: “The government has decided that guaranteeing hundreds of billions of dollars in possible losses and injecting $20 billion more into Citi trumps the alternative: a panic that could leave retirement accounts and investment portfolios of millions of ordinary Americans in tatters and shove more people out of jobs.”
Analysis: Why Citi had to be rescued
View from the Radcliff India: “There's only one reason to agree to such terms, says Ellison: to stay alive."There are capitalists all over the place, but no one wanted to do the deal," he adds. "This is chemo. They need this capital to stay alive."”
If Citi's in such a mess, what about other banks?
From the WSJ online: “The Bush administration's rescue of Citigroup Inc. is creating new confusion about the government strategy to shore up volatile markets.”
Uncertainty on Strategy in Citi Rescue
From the Arab News: “Citibank went into overseas markets long before its competitors and often secured an inside track by attending to the financial needs of government elites and leading local organizations.”
Editorial: Implications of Citibank bailout
From an AP article in the Columbus Dispatch: “Citigroup Inc. said yesterday that it will slash 53,000 more jobs in the coming months… Earlier this year, the New York-based financial giant trimmed 22,000 jobs.”
Citigroup shedding 53,000 positions
Citibank is cutting another 53,000 from its payroll, on top of the 22,000 job cuts it has already announced. This follows at least 17,000 last year.
Previous Citibank articles
Nov 7, 2008
It looks as if the final insult to the good people at LandAmerica will come from the $150 million in synergies Fidelity National will achieve(from their Press Release) by this merger. To me it doesn’t look like a merger, it looks as if Fidelity is buying their accounts & agents and will be laying off the majority of LandAmerica’s staff that still remains after a year of endless layoffs.
As much as I dislike giving attorneys money, it would seem prudent for the LandAmerica employees to secure legal consul to ensure that they receive any and all compensation promised. At this point of the merger any legal action would have to be dealt with expeditiously. If anyone has retained consul, please post their consuls contact information on the comment section below so others may join as a group.
Good Luck and Best Wishes to all of LandAmerica’s staff.
Oct 9, 2008
One and a half years ago I criticized numerous economists for their rosy opinions of our economy. Life is great and there is nothing to worry about from here to eternity. There were hundreds of economists snubbing those of us posting our opinions that there were clear and distinctive warning signs that the leveraging taking place by the biggest and most successful investments banks, Freddie & Fannie and a handful of brokers, like Countrywide or New Century that wanted to act like an investment bank, were in serious trouble.
But last week Phil Izzo printed the results from a team of 56 economists that comprise the Wall Street Journal Economist Board. The board believes by a margin of 89% that we are headed into a recession of at least 2 quarters. That is negative GDP for 6 straight months; some believe that it will last longer.
That is the best news I’ve heard in a long time because this is the same board was wrong about the effects that the housing downturn. If they were wrong then it’s a good bet that they are wrong now. I’m going out and buying options for January.
Oct 5, 2008
No one is asking the right questions.
Since the government has now committed to purchase $700,000,000,000 (I think I’ve gotten all the zeros right) in the toxic paper that the banks, domestic and foreign, are holding as assets on their books, I felt it was time to give my vast audience my view of what the government will be purchasing with our tax dollars.
Dictionary.com explains simply: a financial contract whose value derives from the value of underlying stocks, bonds, currencies, commodities, etc. Riskglossary.com defines derivative as: A derivative instrument (or simply derivative) is a financial instrument which derives its value from the value of some other financial instrument or variable.
OK, that tells us that a derivative is a contract-on-a-contract. But what is in these contracts that the average American will now own. Why have the banks cut the value in financial instruments to the point that causes them to go out of business?
Money was raised for home and commercial mortgages by issuing bonds. The banks that originated the mortgage would sell it to someone like Fannie, Freddie or one of the other commercial banks. They would bundle the mortgages and send them to the rating agencies. The rating agencies would rate the best of the bunch as AAA and the rest could be divided up into 15 lower ratings. Since many pension funds, insurance companies, financial institutions or investment groups require a AAA rating on the bonds they purchase, the lower rated bonds have to pay a premium interest rate to entice the sale of these bonds.
That’s where derivatives come in. Thanks to the Community Reinvestment Act of 1977 and its’ reworking in 1995, Congress allowed the banks to become more inventive with the way they sell and fund mortgages. The lower rated bonds are re-bundled with other contracts that could be anything from options and warrants (a contract allowing the purchase of stock at a future date at a specified price), or other types of debt obligations to other bonds themselves. This process snowed the rating agencies to re-rate 96% of the lower rated securities as AAA.
We don’t know what we’re buying. We don’t know what we’re paying for it. But we’re sure it is going to work and hey, we could even make something. This is from the people that voted multiple times against increased regulations to control Fannie and Freddie.
The point is that no one is asking the right questions. The banks and the rating agencies have records to show what is in each of these bundles, but I have not heard one banker or politician ask for that information. It’s time a little light is thrown on this stuff. How can we effectively regulate if we don’t know what we’re regulating. No more free passes.
Sep 29, 2008
Michael Scherer in his article, A Failure Of Leadership and posted on Time's blog Swampland, expresses what most of us know but haven't put into words yet. At least by the media.
It seems that the American people would rather face economic ruin than put their trust in today's Congress.
Vote our incumbants out.
Sep 24, 2008
E-mail your congressmen, find it here, now and tell them that you will never vote for them again if they do not authorize the E-Verify Bill for another five years. Not the temporary six month extension they are trying to slip through Congress that will effectively put the issue off till after the election.
E-Verify works and is one of the few programs our government does that actually protects American Jobs. Please act now. Numbers can change things, make yours count.
By utilizing an English company to hand-craft these commemoratives, the Democrats are saving Americans the arduous task of producing these high quality keep-sakes. Since the average contribution to the Obama campaign is approximately $65, 2,300 hard working Americans have contributed to the Obama Campaign so that our Democratic Congressmen, Governors and party Dignitaries can have these valuable collectibles and admire there English craftsmanship.
After our Democratic Leadership has received these commemoratives, WEW plans to give the average American the opportunity to purchase the “Obama – The President” Commemoratives. These coins should gain considerably in value since this is the first time a Presidential Commemorative has been produced prior to the election.
This also gives the Republicans an opportunity to save the economy millions of barrels of oil by not having to drive to the polls to vote.
The picture of the commemorative being produced is from the Birmingham Post.net.
Jun 27, 2008
Last year I wrote an article: Dell Computers; Layoffs, Issues And More Layoffs. At that time I had no idea that I would be writing practically the same article this year. But Dell is like their service, consistently bad.
Dell has never given out straight forward information about their plans for staff reductions but rather they throw out a target number for the national business media and the small local layoffs get reported on in the smaller news markets around the country. The most accurate information has come from a NETWORKWORLD article by Dan Nystedt and reports that Dell has already completed 3,200 layoffs with another 5,200 happening soon.
Even though desktop computer sales improved by 10% last year, they will be closing their desk top facility in Austin, Texas and many that aren’t losing their jobs will be forced to take unpaid time off.
For more than a year Dell has been going through an audit that they claim was caused by certain departments fudging their numbers. As a result they will restate their earnings reports from 2002 through 2006 by a mere $150 million. That's a lot of fudge.
Dell is also being sued on two fronts, first for not performing on their extended warranties sold directly to customers and second for falsely advertising the terms being offered by their company owned financial arm. It has been reported that Dell’s financing division is now up for sale.
Dell, IBM, Intel, Cisco, HP and Microsoft have all gazed into the crystal ball and have seen their future in Asia and India. Doing business in the U.S. has just become too tenuous.
Jun 26, 2008
Of course this depends on the meaning of “it”.
Earlier this week I watched the press conference held by Gloucester Mayor Carolyn Kirk concerning the high pregnancy rate at their high school. The story of a "pregnancy pact," by at least eight students, was reported on by Time Magazine who listed Principal Joseph Sullivan as their source. Since then Principal Sullivan has been mum and because of privacy concerns only several girls have come forward who claim no knowledge of a “pact.”
What amazed me about the press conference was that Mayor Kirk insinuated that sex education has been cut because of Bush’s No Child Left Behind Program. Yes, it was Bush’s fault that these girls got pregnant. Since the mandated program was under funded the school system had no choice but to cut other programs such as Sex Ed. The fact that Governor Patrick refused to accept a $700,000 funding package to help pay for abstinence training had nothing to do with it.
What would have happened if these girls took a virginity pact, for sure there would much less attention and publicity, I would also assume they wouldn’t become the Prom Queen. But then at least they would have a Prom without a baby strapped to their back.
What media ignore about teen pregnancy pact by Jill Stanek
Principal Sullivan has just issued a written public statement.
The Media Spotlight Catches Nielsen Outsourcing, Downgrading Full-Time Too Part-Time And Aggressively Abusing H-1B Visas
Theresa Blackwell penned a very good article in the St. Petersburg Times on the commitment by the powers at Nielsen to do everything possible to cut payroll. The controversy justifiably received national attention on the Lou Dobbs Show who emphasized the H-1B Visa abuse. Nielsen while putting Americans out of work is replacing the positions with H-1B Visa holders from India.
I’ve consistently written about H-1B Visa abuse and how companies, tech companies and our universities in particular, have shamelessly imported staff where there should have been more than a sufficient supply of qualified Americans to fill the positions. The only motive for the push to hire foreign staff would be to cap salary ranges.
From Ms. Blackwell’s article:
“Just four days ago, Nielsen gave up $3.1-million in future incentives for creating new jobs in Oldsmar, saying the controversy over the government money had become a distraction for employees and a source of conflict with the city.”
This would not be such a controversy or distraction if the Nielsen Company wasn’t absolutely committed to replacing U.S. workers with H-1B Visa holders.
One other point of contention that the article brings up but does not emphasize is the ratio of full time to part time employees at their Dunedin facility. With 4.4 part-time or temporary workers to every full-timer demonstrates that a desire to cut costs by cutting benefits.
Would this be the type of company you want to work for; maybe if you’re from India. You can browse the Nielsen Careers Page here.
Our Universities Have To Go Offshore To Find Talent
Companies Hiding Offshoring
LSI - More “Partnering” Lay Offs Coming To Kansas City?
Sun Micro's Jonathan Schwartz The Genius?
American Axle Moving More Jobs Out Of The U.S.
California Sending DMV Data To Mexico
Altria Optimizes Worldwide Cigarette Production
Dell Computers; Layoffs, Issues And More Layoffs
Freightliner The Long Haul From North Carolina To Mexico
IBM An Extreme View On Offshoring
According to the USDA website: “On May 13, 2002, the Farm Security and Rural Investment Act of 2002, more commonly known as the 2002 Farm Bill, became law.” This legislation was delayed twice and is now scheduled to be implemented September 8, this year.
The part that doesn’t make sense is that the fruit, meat and vegetables that we import are already identified, on the outside of there packaging, with the country of origin. It would be a small inconvenience to carry that information to the display. The only reasoning for not posting the Country of Origin with the product being sold would be that the retailer doesn’t want to handle the questions or comments that their customers might have.
But this is a huge step forward in the fight to keep jobs in America. Would Hershey be so aggressive in their closing of the Reading, Pa, plant if they knew that their Peppermint Patty Brand would have to be labeled “Hecho en Mexico”
Apr 29, 2008
There is no recession at the Federal Pork Buffet. During the first seven years, Bush loaded up the federal buffet for all of Congress to wallow in. In FY 2008 there are 11,737 earmarks for a total of $16.9 billion of tax payers’ money allocated by congress for their individual pet projects. By requesting $2.3 billion in earmarks for FY2009, Mrs. Clinton has nearly tripled the largest amount received by any other single senator. Clinton’s office justified the requests by stating that the money is needed because of the Bush administration. So I take it that she is saying that her fiscal irresponsibility is because Bush forced her to do it.
Apr 3, 2008
Consumer late payments at 16 year high. Could higher prices at the grocery check-out and at the fuel pump be putting the squeeze on our wallets?
Unemployment claims at there highest level in two years.
ATA Airlines shuts down stranding thousands and laying off 2,000. The cost of fuel was listed as one of the primary causes. Last week Aloha Airlines also shut-down operations.
Corn sets new record price of $6 per bushel. At least our all-knowing government officials tell us that inflation is under control.
Gasoline at new national record. Even with oil backing off there peaks, the cost of refined gasoline is starting its summer rise. Every spring refiners increase their crack spread (the mark-up on gasoline) to reflect the increase in demand. This process has just started.
Motorola disconnecting 2,600 more. Last year they had lay offs of 3,500 in January and 4,000 in May. During a cutting stretch in 2000 and 2001 their payroll shrank by more than 47,000 jobs.
Google planning to cut 25% in the Double-Click work force, in the U.S. that is.
Dell needs to find $3 billion more in cuts than the 8,800 they announced last year. From my article last July.
Merrill Lynch to lay off 4,000 to 7,000.
Schering-Plough will be cutting $1.5 billion a year in expenses, no estimate on how many jobs will be lost. Schering-Plough shares are down about 50 percent this year so heads have to roll.
Are you ready to pay for the poor Home Builders losses? Time to E-mail your congressmen.
NASA estimates as many as 7,300 will loose their jobs as the shuttle program ends in the next 2 ½ years.
La-Z-Boy is shipping jobs to Mexico, all of their cut and sew divisions will be relocated with no lay off estimates given.
Hamiliton Sundstrand will be completing its move to Singapore by lying off the last 65.
United Way officials in Dayton said record numbers of families are seeking emergency food assistance because of lay offs caused by the strike at Detroit-based American Axle & Manufacturing. My article: American Axle Moving More Jobs Out Of The U.S.
CBS Moves Ahead With Layoffs in News
1,500 Possible Layoffs at Freightliner Cleveland Plant. My previous article: Freightliner The Long Haul From North Carolina To Mexico
From the CoStar web site that monitors the Fed’s watch list:
The Federal Reserve Banks moved up the planned closing of several of its check processing facilities, most of the cuts will come from permanent result work reductions.
Newsweek announced that 111 staffers on its news and business sides in New York City accepted a buyout last week.
Chromcraft Revington Inc. is progressively shifting manufacturing of products from its Delphi, IN, plant at 1100 N. Washington St. to suppliers primarily in Asia. Manufacturing activities at the Delphi facility will conclude on May 30. The reduction in force is expected to impact approximately 150 Associates at the Delphi location. Within the past 18 months, the company has closed and sold its plants in Sumter, SC, and Warrenton, NC, as well as its warehouse and distribution center in Knoxville, TN. The company also relocated its upholstery operations into its existing facilities in Lincolnton, NC, and sold its upholstery plant.
EMI Christian Music Group confirms layoffs of between 1,500 to 2,000 staffers by this June.
Long-expected layoffs begin at W.Va. steel mill, from a peak of 13,000 to 1,000 after these latest cuts. Steel mills have been devastated throughout the northeast by Asian steel and like most of the problems facing America; all the politicians do is use this issue as political fodder.
Earlier this week, Wheeling-Pitt's parent, Esmark Inc., announced it would shut down a mill in Allenport, Pa., and idle parts of the operation in Martins Ferry, Ohio. Those cuts could cost as many as 360 jobs.
Analysts see 200,000 banking industry layoffs in the next 18 months.
Whirlpool, a great old Mexican brand. 350 Cleveland jobs go to Mexico. Behr Climate Systems plans layoffs, plant closure. From the Germany based Behr Groups web site: “Today we are active in all major markets in Asia and take advantage of the opportunities they offer.”
Mar 17, 2008
The question is can the Fed keep these banks afloat till after the election.
Last week BS was forced to close two of their funds that were leveraged 32 : 1. The current trend was to issue very short-term low-interest notes to pay for their higher interest debt that they had purchased, allowing them too subsequently book the difference in the interest rates as profit. When the market for these short-term notes dried up they lost their ability to redeem the ones that were coming due, creating a devastating margin call. This was the game that most of the investment banks were using to build their bottom lines over the last five years.
The next headache happens when the Fed is forced to react to inflation and raise interest rates to the point where these guys can no longer cover the cost of the longer term debt, which they are holding, with lower-rate short term money. Each time the Fed cuts rates, the game keeps going. It has only been a little over two years when the Fed started raising rates and the “biggies” started having troubles, this will happen again and again as long as the Fed feeds the cycle and prevents the unwinding of these debt instruments.
Mar 4, 2008
We visited a JCPenny’s store yesterday and when checking the lables we found the following: “Made in Jordan”, “Made in China”, “Made in Vietnam”, “Made in Taiwan”, “Made in Philippines”, “Made in Honduras”, “Made in Macau”.
From A LA Times Blog TOP OF THE TICKET Hillary’s held a rally in Texas that had “seating” room only. Clinton spokesperson said: "These accommodations should in no way be taken as a comment on the quality of our media coverage." (But if you’re not careful next time it will be the Ladies Room)
We need a change in the bankruptcy law that puts employees and customers before other financial creditors.
As it turns out the Sharper Image story is interesting. Wikipedia takes a good look at the company along with some links to background stories. The building of this brand started in 1977 and their growth was based on adult gadgetry, soon after the Ionic Breeze hit the store shelves it dominated their product line. That same product turned out to contaminate the environment with the very agent that it was designed to remove; ozone. Law suits ensued and the Ionic Breeze was discontinued. With the loss of their numeral uno product to drive traffic to their stores a steady decline in customer counts and sales was initiated.
Journalists familiar with the company have estimated that they will shutter about halve of their stores. But at the time of the bankruptcy they only had $700,000 in cash, without significant additional funding they just don’t have the bucks to close only halve. They will be forced to do an over-night skedaddle leaving customers, employees and vendors on the hook.
Feb 19, 2008
There is no real estate crisis. There is a wash-out of speculators in the areas where prices were driven by that speculation along with a serious lack of interest for property in the great shrinking rust-belt. Quality loans at extremely low rates are readily available to “A” borrowers.
What it should be called is the “bad exotic vehicle bubble”. The investment banks made a ton by repackaging high-risk/high-interest mortgages into a more complicated structured investment vehicles like CDO’s and SIV’s. When a mortgage becomes part of one of these, the normally straight forward mortgage accounting rules get fuzzed-up, allowing the bank to book a greater portion of the anticipated interest as an asset. This became the trough that the fattest of the hogs ate.
The write-downs that are dominating the financial media space are just a reversal of the “profits” that these investments banks have already booked that would of never happened if normal accounting rules had applied in the first place. The 25 top players in this game lost more than $100 billion in 2007 and that number could be doubled if you add in the next 100 or so regional banks, retirement funds and investment trusts that bought into the higher rates that the CDO’s and the SIV’s offered.
As the default rate for exotic mortgages started to increase and the market for these securities dried up, the speculators lost their biggest tool that allowed them to acquire their properties. When the speculators were stymied, housing prices flattened out and in the most active areas, declined. This gave the creators of these investment vehicles, having New York as their play ground, an opportunity to blame their potential negative exposure on a housing crisis.
Our largest investment banks enticed the financial media by leaking the assumption that they had billions in exposure, all because of unscrupulous and corrupt mortgage brokers. The fact that none of these brokers would exist if it weren’t for the eagerness of the investment banks to purchase these loans, with very lucrative commissions attached, from the very brokers they now blamed. With sub-prime, alt-a and jumbo mortgages becoming prohibitively expensive, the housing market produced a constant supply of bad news that eventually sucked in even Congress. As expected they produced a landmark deal with the Treasury that accomplishes nothing, a months grace after three months of non activity is just the solution that will definitively save the market.
The financial media was also instrumental in determining the Feds current disposition. By presenting one economist, guru, potentate and mogul after another calling for rate cuts, they created a public ground swell that anything but substantial cuts would have demonstrated that the Fed was out of touch with the real world. This frenzy to inject liquidation into the economy has little to do with the housing crisis and all to do with the fact that Wall Street loves cheap money. These same investment banks are now able to book enormous profits because their cost of capital has come down so low.
When thecost of money comes down and liquidity is added to our system, the banks have money to put to work and credit standards loosen. The resulting effect of “easy credit” is always an upturn in the default rate and the banks respond by tightening those same standards. Our economy has always had swings from loose credit to tight credit and back again, the difference here is we are just entering a period where credit is starting to tighten and the Fed is literally dumping liquidity on top of a tightening market. At this point it just doesn’t matter how much money is available, if someone doesn’t qualify they will not get the loan.
The credit crunch is definitely spreading; lenders are tightening standards on all types of loans and investors have lost their appetite for “exotic” instruments that can’t be accurately valued. This is just a normal swing that happens after an abuse. The fact that “UBS AG and Credit Suisse Group last week announced the write-down of a combined $400 million” should not come as a surprise. In this atmosphere where write-downs are expected there will never be a better time to clean-up your books. They could even be tilting the books to favor future profits; this is not an unknown concept to investment banks.
As far as these write-downs being a forward looking indicator of the future doom that our corporations will experience, is quite a stretch. Our economic slow-down will have it’s casualties but for the most part our corporations are sitting on enormous cash positions, the street anticipates them to start spending these cash hoards providing the impetuses for another growth cycle in our economy.