Housing Bubble Bursts Wide Open In Spain

The Telegraph is reporting Foreign banks flee Spanish property debt.

International banks are scrambling to sell their holdings of Spanish mortgage debt at a steep discount, fearing that the country may be sliding into the worst economic downturn in its modern history.

My Comment: What took them so long? How tough was it to see this one coming?

A blizzard of grim data has soured the mood, capped yesterday by a plunge in PMI purchasing managers' index to an all-time low of 40.9. Car sales fell 28pc in March, and even Madrid's legendary tapas bars seem to have lost their late-night sparkle.

My Comment: Spain is in recession for all practical purposes, even if Spain's GDP does not yet show it.

Inmobiliaria Colonial - once the country's biggest property group --is in emergency talks with banks after Dubai's Investment Corporation pulled out of a rescue deal.

Developer Martinsa Fadesa is struggling to restructure €5bn of debt to stave off insolvency.

My Comment: Forget it. It's over.

Traders says the market price for Spanish mortgage securities has begun to slide abruptly, replicating the pattern seen in the US last year. Large French and German funds and insurers appear to be liqudiating assets in a pre-emptive move, afraid being caught yet again in a violent downturn.

Ismael Clemente, head of Deutsche Bank's property arm RREEF in Spain, told a panel of experts in Madrid that foreign banks were now dumping Spansih mortgaged debt at a 40pc discount.

Mikel Echavarren, director of the property consultancy Irea, said Spain's housing market was far weaker than the official statitics suggest, warning that prices could fall 20pc to 25pc.

"We have a very worrying situation. The developers simply cannot refinance their debts. We need to cut interest rates by 2pc, which is obviously not going to happen," he said, adding that the crash could be sharper than the property crisis in the early 1990s.

My Comment: Developers can't refinance debt? Looks like banks are going to be landlords in Spain, just like the US.

Santiago Baena, head of Spain's estate agents lobby API, said the downturn had already forced 40,000 agents to close their doors, laying off 120,000 staff.

The Bank of Spain said default rates would rise but insisted that the Spanish banking system remains in good health, without much exposure to the US subprime debacle. The loan-to-value ratio on mortgages was kept to 70pc - although a report in Germany's Die Welt newspaper today alleges that false pricing was often used to circumvent the rule.

My Comment: OK so they do not have US subprime debt. Instead they have Spain subprime debt. Is that such a comfort?

The root cause of the crisis is in a sense Europe's monetary union. The euro effect halved Spain's interest rates almost overnight. Rates then fell below Spain's inflation rate for several years, fuelling an explosive credit boom. The country's current account deficit has reached 10pc of GDP, the highest of any major economy.

My Comment: It will be interesting to see what happens to the European Union. I am no longer certain the EU survives as we know it today.

Spain Services Plunge

The Guardian is reporting Spain services plunge as property collapse spreads.

A plunge in consumer confidence and services sector activity shows the collapse in the property market is fast infecting the wider Spanish economy.

The purchasing managers' index reading of 40.9 -- far below the 50 mark separating growth from contraction -- was the lowest ever for any PMI survey of European economies, said data compilers NTC Economics on Thursday. "In Spain it seems to be an all-round malaise," said NTC chief economist Chris Williamson. "It was a dreadful survey."

Not only that, consumer confidence fell in March to 73.1 from 76.8 in February, the Official Credit Institute said on Thursday, close to January's all-time low of 70.9, and well below the 100 mark which separates pessimism from optimism.
"Spain is a real disaster," said Marco Valli at Unicredit MIB.

"The housing downturn is spilling over very quickly to all other sectors, helped by the surge in inflation that dampens purchasing power at a time in which consumer confidence drops due to the weakening labour market and economic outlook".

"Spain will recover only after the ECB starts lowering rates, I hardly see any other way out," said Valli.

Spain's ruling Socialists were still predicting economic growth of 3 percent this year when they won re-election on March 9 but slashed their outlook a couple of days after their victory.

The idea that Spain housing will recover if the ECB lowers rates is nonsense. The Fed has slashed rates and US housing did not recover. Why should Spain be any different?

UK and Spain Risk Major Correction

Creditman is reporting U.K. And Spanish Housing Markets At Risk Of A Major Correction.

Housing markets in the U.K. and Spain are due a major, and likely painful, adjustment, says a report titled "European Economic Forecast: Major Corrections On The Cards As Housing Markets Turn Down," published yesterday by Standard & Poor's.

"Europe's housing markets are overwhelmingly turning down. And in those countries where the housing bubbles have been expanding for longer, we believe the corrections could be severe and painful," said Jean-Michel Six, Standard & Poor's chief economist for Europe. "Particularly at risk are the U.K. housing market, where the financial crisis is exacerbating issues of affordability and general economic gloom, and the Spanish housing market, which is coming to terms with a largess of new homes."

The combination of a sharp deterioration in affordability, scarce funding, and the economic slowdown are about to cause a major slowdown in the U.K. real estate market.

Country by country, a recession looms. The UK cannot be far behind.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Affordable Housing Project Turns Radioactive

Was there ever an "affordable housing" program that actually worked? I am not aware of any. Let's take a look a recent affordable housing plan that has gone completely awry. The Monterey County Herald is reporting Developers of affordable Salinas housing seek change in rules.

The Commons at Rogge Road was to be the model for providing low-cost homes and apartments for people priced out of a superheated Monterey County housing market. The project — 171 homes and apartments on 12 acres just outside Salinas to the northeast — was praised at every juncture as it made its way through the approval process to its March 2006 unanimous blessing by Monterey County supervisors.

The Commons was the first project brought forth under a county program to give builders incentives — more units, fee waivers, less required parking — to build below-market housing. And praise gushed forth from public officials, housing advocates and others for Chapin's vision.

A great project, they said. Thinking outside the box.

Today, the first 46 homes in the phased development are empty. They have been on the market since August. Not one has been sold.

And the developers — Chapin and Woodman Development — are seeking changes to the original deal designed to ensure affordability of the homes and apartments. They want the changes just to sell the homes, complete the project and avoid big losses.

The plan originally was to sell the homes to income-qualified buyers — families making up to 180 percent of median county income — for $273,553 to $483,517. Silva said they've cut prices by up to $84,000 to lure buyers, but to no avail.

Those one-time affordable prices — up to $300,000 below what some homes in North Salinas were selling for a couple years ago — are now bobbing on the wave of a deflated housing market, where new or foreclosed homes in the same area may be going for the same price or less, he said.

Another condition, which Chapin voluntarily put on the homes to ensure they would remain affordable for many years, has added to the developers' woes as housing values have plummeted. As a resale condition, homebuyers in The Commons would have to share their equity for 20 years with an affordable housing trust.

Buyers can now find homes in the same price ranges without those kinds of strings attached. The resale restriction is radioactive. "No discerning buyer in their right mind is going to buy our house, as nice as they are, with a 20-year deed restriction," Silva said.

Another problem is that some would-be buyers, who may have been able to get a home loan a couple of years ago, can't qualify today, as the credit market has been screwed tight. Other potential buyers — nurses, public safety officers and other "essential workers" for which the project was tailored — can qualify for loans, but they make too much money to fit the program's income cap, Silva said.

Last week, the five county supervisors held a brief hearing and gave their blessing to Chapin's application for $6 million in tax-exempt bond financing for affordable housing to complete the apartments. There were no questions asked or public testimony.

After the vote, Supervisor Fernando Armenta offered the latest words of praise for The Commons. He said the project will be "a great addition" and represents "the way to take care of affordable housing."

The best way to ensure affordable housing is to stop promoting affordable housing plans, end government sponsorship of the GSEs, Eliminate HUD, stop promoting the ownership society, and in general just let the free market work.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Opes Prime: Collapse Down Under

Melbourne Australia Stockbroker Opes Prime Has Collapsed.

Australia has seen some of the big corporations and financial houses going down like draining water over the past couple of month. Some good examples were RAMS, AllCo, ABC Learning Centres, Challenger etc. And this time, it’s Melbourne’s popular finance house Opes Prime turn as it’s become the latest victim in Australia being hurt by the subprime turmoil (although recent news has suggested that it was probably insider trading and account manipulation that contribute to the collapse more than anything else). The news are out and ANZ is owed about $650 million and Merrill Lynch about $400 million.

The Australian is reporting Opes 'share manipulation' probe.

The collapse of stockbroking firm Opes Prime has widened into a full-scale investigation of false accounting and manipulation of six key accounts worth $200 million to help clients to avoid margin calls.

It is alleged that Opes staff moved shares between the accounts of clients with margin loans in a "round robin" fashion.

By moving shares, or by changing loan-to-valuation ratios, accounts could be made to look healthier, avoiding margin calls that could have forced the clients to dump shares or inject extra cash.

A senior Australian Securities and Investments Commission investigator, Richard Vandeloo. told the Federal Court on Friday that between December and February, Opes chief executive Laurie Emini had instructed various Opes Prime staff to "make entries" in the accounts of high-net-worth clients so they could avoid margin calls.

But under Opes's business model, the shares many thought they owned were pledged to the firm's lenders as collateral for loans to the broker.

This means clients have been forced to watch helplessly as ANZ and Merrill have sold the stock to recover their loans to Opes.

"So domino-like, once things started to fall over, they could lose their shares even though they could continue to meet their obligations," he said. "There are questions about whether the full nature of those obligations were disclosed to them."

Treasurer Wayne Swan Says Opes Prime collapse unlikely to badly hurt market.

Federal Treasurer Wayne Swan says the collapse of stockbroking firm Opes Prime is unlikely to have wider implications for the Australian stock market. Opes Prime went into receivership last week, leaving investors facing millions of dollars worth of losses.

Mr Swan says Australia is not immune from the United States' subprime crisis but the Australian economy does not have anywhere near the problems the United States does.
But he says the Opes collapse is a serious issue.

"It's being investigated by ASIC at the moment," he said. "I don't intend to comment any further, but I'm assured by the regulator that it will not necessarily have wider market implications."

Margin Investors Lose Everything

ABC Science is reporting Investor loses everything after Opes Prime collapse.

David Reganspurger took out a margin loan for a $100,000 with Opes Prime last year, using his $300,000 share portfolio as a loan guarantee.

He has since paid off the margin loan, but was told last week, when the company collapsed, that he no longer owns his shares.

It is alleged Opes Prime was pooling clients' share portfolios and when the market crashed, it would dip into that pool to bail out its big clients.

David Reganspurger spoke to Brigid Glanville.

DAVID REGANSPURGER: I had a margin loan at the time of the collapse of about $100,000. We had a $400,000, $420,000 share portfolio, but I was making sure that I was only ever borrowing about ... a 25 or 30 per cent LVR ratio to the entire portfolio to make sure that we were very well clear of even the market collapsing. We were still very clear that we were never going to get a margin call or [be] in any danger of losing our stock in that regard.

Brigid Glanville: And what were you told, what's happened to your shares when Opes Prime collapsed late last week?

DR: Well I initially rang and spoke to someone at Deloitte, who I think they're the receivers, and I asked the question, 'Look, can we just pay off our margin loan and therefore then get our share portfolio back?' We could source the money from friends and family if need be and just unlock our account.

And I received a call later that day, from, I think a Merrill Lynch broker up in Sydney. Basically it was very polite but also very short in that 'well look David, you don't own the shares any more, ANZ do, and we've been advised to sell the shares so you don't have an opportunity to buy these shares back, or pay off your margin loan, because they're not your shares any more, they're ANZ's'.

BG: So going through the paperwork, or even at the time, were you told that when you took out the margin loan that Opes Prime would be pooling your equity along with everyone else's and you would no longer own those shares?

DR: Absolutely not. We've had a good look at our original application and all the associated paperwork since then, and we can't find anything that says that Opes are going to borrow against these shares.

There's a reference to the fact that you're signing the shares across to ANZ, but there's no reference that they're going to borrow against those shares. And I guess in the same way, when you buy a house, the bank owns the house and you have equity in the house, so it was no big deal that OK, Opes are going to own these shares. It was no big deal because we're going borrow against them. That makes sense. But had I known that they were going to borrow against those shares themselves. I mean, that's a risk element that I'm not privy to.

BG: So what have you got left?

DR: I've got nothing. We have about $,5000 in the bank and that is it. Everything's gone.

In a story about the same man, the Herald Sun is reporting Man loses all in Opes Prime collapse.

DAVID Regenspurger is the personal face of the Opes Prime collapse. He turns 40 in a few weeks, has a wife and two children under five, and in the past week watched his net worth sink from more than $400,000 to $5000.

Opes chief executive Laurie Emini -- the man at the centre of the collapse triggered by fraud -- surrendered his Australian and Macedonian passports yesterday after requests from ASIC.

The ban is of little comfort to Mr Regenspurger, whose situation was revealed in a letter to stockbroker Marcus Padley. "I had spent the last two hours rocking my crying wife to sleep," reads the letter.

The energy consultant sold his house almost a year ago and temporarily invested the proceeds in the stockmarket with plans to upgrade to a bigger house for his growing family.

Thinking he was playing it safe he invested $320,000 in big-name companies such as BHP Billiton and National Australia Bank.

He also took out a $100,000 margin loan through online trading house Trader Dealer, which was linked to Opes Prime. Unlike other margin lenders Opes Prime claims legal and beneficial interest to the shares. If a typical margin lender goes into administration the client can get their shares back by paying out the margin loan. But not, it seems, with Opes Prime.

Ironically, he was days away from moving his money to another firm when Opes collapsed.

Merrill Lynch Has No remaining Exposure

SmartMoney is reporting Merrill Lynch Says No Exposure To Australia's Opes Prime

Merrill Lynch & Co. Inc. (MER) said Friday that it no longer has any exposure to Opes Prime Group Ltd. after selling a basket of stocks received from the failed Australian stockbroker as security for a loan.

Opes Prime was put into receivership last week owing A$1 billion to lenders.

It owed Australia & New Zealand Banking Group Ltd. (ANZ)A$650 million and Merrill Lynch a further A$350 million, receiver Deloitte said last week. Merrill Lynch and ANZ took control of Opes Prime's shares last week and started selling them off to recoup the loan amounts.

How to Keep your Investments Safe

Herb Greenberg was writing about margin accounts in How to Keep your Investments Safe.

The original post contained several pieces of misinformation so please read the recent addendum at the end before you panic. Had the Opes Prime situation occurred in the U.S., SIPC would have covered the first $500,000 of it. Some brokers, Interactive Brokers (IB) is one of them, carry insurance above and beyond SIPC.

Here is the Securities Account Protection Statement from Interactive Brokers.

Customer securities accounts at Interactive Brokers are protected up to $30 million (including up to $1 million for cash). The market value of your stocks, options, warrants, debt, and cash -- denominated in all currencies -- is covered by this insurance. Futures, options on futures, and single stock futures are not covered, but available cash will be swept from your futures account to your securities account periodically to take advantage of insurance coverage as much as possible. As with all securities firms, this insurance provides protection against failure of a broker-dealer, not against loss of market value of securities.

This protection is provided by the Securities Investor Protection Corporation (SIPC) and Lloyd’s of London insurers. SIPC provides the first $500,000 per customer (including up to $100,000 for cash). For customers who have received the full SIPC protection, the Lloyd’s policy provides up to an additional $29.5 million (including $900,000 for cash), subject to an aggregate limit of $150 million.

High net worth individuals may wish to ask what levels of protection they have on their accounts.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bankruptcies: The No. 1 Growth Area For 2008

The St. Louis Post Dispatch is writing Bankruptcy filings expected to soar as economy slides

The law that drastically changed the Bankruptcy Code in October 2005 was supposed make it tougher to escape debts and reduce the number of filings. It worked, for a time.

Although the law made filing for bankruptcy more complex and expensive, the number of cases locally and nationally is rising again. Experts predict a big hike later this year, triggered by the nation's wobbling economy and heavy levels of consumer debt.

My Comment: Actually the law never worked. There was a mad rush of filings in 2005 to beat the law changes. That reduced filings in 2006 and perhaps for a bit in 2007. Now nature has reasserted itself. The spike that came immediately following and the subsequent slowdown is not a sign that anything "worked". There is also an unseen effect that we will see in just a bit.

National statistics indicate the trend is well under way, with bankruptcy filings by individuals up 27 percent nationwide in the first quarter of 2008 compared to the year-ago period, according to new figures from the American Bankruptcy Institute, a research and education group.

Individuals' bankruptcies nationwide rose 40 percent in the 2007 calendar year compared to 2006. The ABI, which bases its figures on data from the National Bankruptcy Research Center, said the increase is due to rising household debt and growing mortgage problems.

My Comment: Bankruptcies in 2005 were unusually high, and bankruptcies in 2006 were unusually low. Also Katrina hit in 2005 so the data is distorted by natural disasters (hurricanes) and manmade disasters (the bankruptcy reform act of 2005).

The full impact of the nation's sliding economy is not reflected in the most-recent figures — that may take a few more months — and many lawyers believe there will be a lot of bankruptcy-related business up for grabs this year.

"Nationally, people think that the No. 1 area of growth this year will be bankruptcy," said Carrie Titus, division director of Robert Half Legal, which provides legal staffing to law firms and corporate legal departments.

The reason the increase is expected later this year is because the impact of bad economic developments doesn't translate immediately into a sharp hike in bankruptcy filings, said Jack Williams, scholar-in-residence for the Alexandria, Va.-based Bankruptcy Institute. He's also a bankruptcy professor at Georgia State University College of Law in Atlanta.

"That spike generally lags about six to nine months behind the economy," Williams said. "Bankruptcy is a lagging economic indicator."

Because of this, Williams predicted that the number of filings across the country, including business and individual cases, will rise to between 1.2 million and 1.4 million by the end of 2008. Most cases are filed by individuals.

"This is a huge number…"…. This is fast approaching previous levels," he said, referring to the period before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 took effect. "It's the very thing that Congress sought to fix. It will turn out to be a legislative failure."

My Comment: Typically there are spike in bankruptcies well into the recession and lingering after because recoveries are uneven. We are now starting to see spike with a recession barely underway. This is not a good sign. Nor was the last three job reports. See Unemployment Soars, Jobs Collapse for more details.

Changes to the Bankruptcy Code have drawn widespread criticism from debtors' lawyers, who describe the law as ill-conceived and badly written. Some provisions refer to sections that don't exist, some amendments contradict others and some sentences don't make sense, they said.

My Comment: The banking industry got every provision it lobbied for. Most likely, the sentences lobbyists wrote made grammatical sense. It now looks like no one bothered to read the rest of the bill. If so, it should not be too surprising. This does go to show that we could save money by directly electing lobbyists instead of congressmen. The legislative process is so flawed lobbyists write our legislation anyway. Why not cut out the middle man?

But even if lawyers and the courts are learning to work with the new bankruptcy law, some of the changes have taken their toll on consumers — and even may have contributed to the mortgage loan crisis, said T.J. Mullin, a bankruptcy lawyer in Clayton.

Before the law's enactment, Mullin had helped to save thousands of clients' houses by having them reorganize their finances through Chapter 13 filings. These filings are geared toward individuals with regular income who temporarily are unable to pay their debts, but can do so over time.

In the past, many Chapter 13 debtors have been able to keep their homes through the use of repayment plans that stopped foreclosures or repossessions.

However, the 2005 bankruptcy law changes imposed so many additional requirements and restrictions that Chapter 13 no longer is a practical way for many wage earners to save their houses from foreclosure, Mullin said. Also, the extra work required by the new law has caused the typical attorney's fee to double, putting it beyond the reach of most people.

"The passage of the bankruptcy amendments in 2005 will without a doubt lead to many more foreclosures, distressed sales of real estate, neighborhoods going into decay and families shattered," Mullin said. "We are seeing only the tip of the iceberg at this time unless some changes in the bankruptcy law are passed to allow this valuable remedy to one again be efficiently offered."

My Comment: There is the seen and unseen. The seen suggests the law "worked" even if only for a while. It was a mirage. The unseen led to an increase is foreclosures and walk aways. Also unseen is the mammoth increase in mortgage debt, the mammoth drop in lending standards, and the mammoth increase in credit card lending, all on the belief that consumers could not write off their debts.

It's tough to pay the bills when you don't have a job. It's tough to pay the bills when you are in a liar loan that you cannot afford. It's tough to pay the bills when gasoline and food costs are soaring. Expect to see mammoth increase in bankruptcies later this year.

You can forget about that "means test". Under a Democratic Congress and Democratic president (Obama), expect to see massive revisions in Credit Card law. The law will be revised, or consumers will lose their job (on purpose if necessary) to prove they have no means to pay back debt. If you have no job you have no means. The means test is going to blow up in spectacular fashion. Massive writeoffs in credit card debt are coming.

Bankruptcy filings jump 30%
Bloomberg is reporting Bankruptcy filings jump 30%

More than 90,000 bankruptcy filings were made in March, the highest since insolvency laws became more restrictive in October 2005, according to statistics compiled from court records by Jupiter ESources. Filings in March were 30% above the pace in 2007.

California led the nation with a 42% increase in bankruptcy filings at an annual pace in the first quarter, according to Jupiter ESources.

"We're seeing fairly high readings in these measures of distress like bankruptcies, foreclosures and mortgage defaults," said Chris Low, chief U.S. economist at FTN Financial in New York. The most affected states are "also where the most housing-related business growth was," Low said.

The states most affected by the housing recession, including California, Nevada and Florida, were among those with the largest increases in bankruptcies.

They also are among states where unemployment rates exceed the national average. The jobless rate in California was 5.7% and Nevada's was 5.5% in February. Nationally, 5.1% of workers were unemployed in March, the highest level since September 2005, the Labor Department reported Friday.

Tailing California's 42% rate, Florida had a 35% increase in bankruptcy filings at an annual pace in the first quarter and Nevada saw a 32% rise, according to Oklahoma City-based Jupiter's Automated Access to Court Electronic Records service.

Business bankruptcies appear to be soaring as well. Let's take a look at a few recent cases.

Jewelery Store liquidation sale
Friedman's begins bankruptcy liquidation sale

Friday, April 4, 2008
Addison-based Friedman's Inc., operator of 455 jewelry stores in 23 states, begins a bankruptcy court-ordered liquidation today. Friedman's, which also operates stores under the Crescent brand, filed for bankruptcy in January.

ATA Airlines Goes Under
ATA seeks bankruptcy protection

Low-fare carrier ATA Airlines Inc. said Thursday it has filed for bankruptcy court protection, grounding all flights and stranding thousands of passengers.

"We deeply regret the disruption and hardship caused by the sudden shutdown of ATA, an outcome we and our employees had worked very hard and made many sacrifices to avoid," Doug Yakola, the airline's chief operating officer, said in a statement.

ATA said it was forced to ground operations because it lost a key military charter contract. In addition to scheduled airline service, ATA also provided charter service for the Pentagon.

Skybus Is Bust
Skybus ceasing operations, plans to file for bankruptcy.

Saturday, Apr. 5, 2008
The celebrated discount airline is ceasing all operations today and plans to file for bankruptcy protection next week, becoming the latest of the nation's airlines to fall because of rising fuel costs and a slowing economy.

The shutdown deals a major blow to the Pease Development Authority as it strives to tap the potential of Portsmouth International Airport.

"Skybus struggled to overcome the combination of rising jet fuel costs and a slowing economic environment," the Ohio-based company said in a statement on its Web site. "These two issues proved to be insurmountable for a new carrier.

Bye Bye Miss American Pie
Vicorp Restaurants Inc. has filed for Chapter 11 bankruptcy

Vicorp Restaurants Inc. has filed for Chapter 11 bankruptcy to restructure its debts and closed 56 Bakers Square restaurants, including nine in Illinois.

The Denver-based company closed Bakers Square restaurants in Lake in the Hills, St. Charles and Oswego on Wednesday. The company’s location in Crystal Lake remains open.

Vicorp spokeswoman Amy Moynihan said 1,700 of the restaurants’ 13,000 employees would be laid off as part of the cost-savings effort.

In a prepared statement Thursday, company officials said that lenders agreed to provide a $60 million financing arrangement to keep the remaining restaurants at normal operations during the restructuring.

Vicorp Chief Executive Officer Ken Keymer blamed the slowing economy and increasing operations costs for the bankruptcy filing and restaurant closings.

“Certainly, we regret the necessity of filing Chapter 11 and the closure of 56 restaurants in various communities across the country,” Keymer said. “The company concluded that today’s court filings were both prudent and necessary.”

Vicorp owns 193 Bakers Square restaurants in six states, including Illinois.

Nursing Home Company Files Bankruptcy
Marathon Healthcare files for bankruptcy

April 4, 2008

Marathon Healthcare Inc, an East Hartford-based nursing home company that operates six facilities in Connecticut, including in Waterbury, Torrington and Prospect, filed for bankruptcy protection late Thursday.

The filing comes about three months after the state Department of Social Services launched an investigation of the company over concerns that it was struggling to meet its financial obligations, and about a month after a state audit said Marathon's finances should be closely monitored.

Aloha Grounded
Aloha Air halting passenger service

March 31, 2008
Aloha Airlines said Sunday it will halt all passenger service after Monday, signaling the end of an airline that has served Hawaii for more than 60 years.

Aloha, which filed for bankruptcy for Chapter 11 bankruptcy protection on March 20, was a casualty of fierce competition and rising fuel prices. The airline said it will stop taking reservations for flights after Monday.

"We simply ran out of time to find a qualified buyer or secure continued financing for our passenger business," said Aloha President David Banmiller in a statement. "We had no choice but to take this action."

Three airlines went under in two weeks (a little problem with jet fuel costs on top of falling demand perhaps). And in the last few days there was a Jewelry store liquidation sale involving 455 stores, Bakers Square closed 56 restaurants, and a nursing home filed for bankruptcy. Within the past month, several furniture stores have file bankruptcy including Wickes and CJ Woodmaster. This is just a down payment. Regional banks overleveraged in commercial real estate loans are going to fail. It's just a matter of time.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Two Wrongs Make A Wrong

Before you can fix any problem, you first have to recognize a problem exists, exactly what the problem is, and who was responsible. With that in mind, let's flashback to March 5th 2008 when the Fed Admits Missteps on Banks.

A top Federal Reserve official said the central bank failed to fully appreciate risks that financial institutions were taking before the recent credit problems, and it is reviewing its regulations.

During a sometimes-contentious Senate hearing, Fed Vice Chairman Donald Kohn said the central bank is likely to become "more forceful" with the financial institutions it supervises. Mr. Kohn didn't explain what new actions the Fed might take, but he did warn banks to rely less on the assessments of credit-rating agencies.

That's an interesting admission of guilt, and certainly the Fed is to blame. However, the Fed failed to find the root cause of this mess. It was not inaction, it is the very existence of the Fed itself.

When one fail to correctly identify the problem, strange and unfortunate things happen such more unwarranted intervention and an alphabet soup of new lending facilities such as the TAF, TSLF, and PDCF. I talked about this in the Fed Uncertainty Principle and the Fed Defends The Indefensible and Big Brother Monitors Investment Activity.

Tax Breaks For Homebuilders

And now, before correctly identifying the problem, still more ill conceived legislation is pending in Congress including complete silliness such as Tax Breaks For Homebuilders.

Homebuilders and the mortgage industry are emerging as big victors in a bipartisan agreement reached by Senate leaders on legislation designed to limit the housing crisis.

The $15 billion Foreclosure Prevention Act of 2008, expected to be debated Thursday afternoon on the Senate floor, is drawing fire from critics who say it would do little to actually prevent foreclosures. The bill contains a $6 billion emergency tax break that would let companies use losses from 2008 and 2009 to offset profits earned over the previous four years, instead of the usual two-year timeframe.

That's good news for big homebuilders such as KB Home and Pulte Homes Inc., which have been saddled with massive losses over the past year.

Jerry Howard, chief executive of the National Association of Home Builders, said in an interview that the tax break is "very important to the building community." It will keep many small homebuilders out of bankruptcy, he said, and will prevent large builders from having to liquidate assets.

Other big beneficiaries would be Wall Street banks such as Citigroup Inc., Merrill Lynch & Co. and Morgan Stanley. In fact, any company now struggling after years of healthy profits that pumped up their tax bills could benefit.

The absence of bankruptcy intervention was criticized by 15 civil rights, labor and consumer groups — including the Center for Responsible Lending and the Consumer Federation of America. In a joint statement, they called lawmakers' actions "a win for the financial services industry that brought us this mess."

Sen. Richard Durbin, D-Ill. was expected Thursday to try to get the bankruptcy provision back in the bill.

Two Wrongs Make A Wrong

And there you have it. Instead of scrapping this absurd bill in entirety, more handouts will be added to it to make everyone happy.

Bernanke Displeased With Paulson's Plan

On April 2nd, testifying before Congress Bernanke Nods at Possibility of a Recession while hinting he was not quite pleased with Paulson's plan. Let's take a look:

Even without additional authority from Congress, Mr. Bernanke said the Fed had already established “on-site” teams of monitors for investment banks to make sure that they adhered to sound practices, and he urged Congress not to dilute the Fed’s authority on such matters.

By the end of his comments, it was also clear that he and the Fed were not entirely pleased with the “blueprint” for regulatory changes issued on Monday by the Treasury secretary, Henry M. Paulson Jr.

That proposal called for an overhaul and consolidation of the financial regulatory system. The Fed chief, in an almost classic case of damning with faint praise, said Mr. Paulson’s blueprint was “a very interesting and useful first step” for Congress to consider.

Paulson Plan vs. Bernanke Plan

In an exclusive report, and with a big tip of the hat to Keith Taylor, I have obtained a graphical representation of both the Paulson Plan and the alternative Bernanke Plan.

Paulson's Economic Plan



Bernanke's Economic Plan



These are just the kinds of plans that emerge when one never bothers to figure out exactly what the problem is.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Unemployment Soars, Jobs Collapse

On April 4th the Bureau of Labor Statistics (BLS) released the March Employment Report. Here is a synopsis of that report.

The unemployment rate rose from 4.8 to 5.1 percent in March, and nonfarm payroll employment continued to trend down (-80,000), the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Over the past 3 months, payroll employment has declined by 232,000. In March, employment continued to fall in construction, manufacturing, and employment services, while health care, food services, and mining added jobs.

Unemployment Rate




Household Data



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Last month the unemployment rated dipped by .1% from 4.9% to 4.8% based on 374,000 workers dropping out of the labor force (and are thus no longer considered unemployed). This month, 225,000 workers were added back in and the unemployment rate soared. Even still, only a portion of those workers were added back in. It is likely unemployment is understated even by the BLS's own suspect reporting.

Jobs Required To Keep Pace With Growing Labor Force

The following chart is thanks to VisionsFromSpace.
Data for the chart came from the BLS.



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The above chart shows the economy needs to create 150,000 jobs a month just to keep up with population growth. Over the past 3 months the economy has lost 232,00 jobs.

Establishment Data



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The establishment data was an absolute disaster.

Highlights

• 51,000 construction jobs were lost
• 48,000 manufacturing jobs were lost
• 12,000 retail trade jobs were lost
• 35,000 professional services jobs were lost
  
• 18,000 government jobs were added

A whopping 93,000 goods producing jobs in total were lost (higher paying jobs), and even the lower paying service providing jobs such as those at Wal-Mart (WMT), Pizza Hut (YUM), Target (TGT) etc, provided a net gain of a mere 13,000 jobs.

It should not be long now before even the service sector starts to contract. Wal-Mart has canceled many stores and so have other retailers. Consumers are shopping and eating out less. More layoffs are coming. No one should be denying that we are in a recession now.

Birth/Death Model

This was a very weak jobs report. But it is even worse when one looks at Birth/Death Model assumptions.



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The BLS should be embarrassed to report this data. Its model suggests that there was a net jobs of 28,000 coming from construction businesses, 44,000 jobs coming from leisure and hospitality, and a whopping 142,000 jobs in total coming from net new business creation.

Virtually no one can possibly believe this data. The data is so bad, I doubt those at the BLS even believe it. But that is what their model says so that is what they report. Just as there is mark to model in the investment world, there is mark to model in the BLS world.

BLS Black Box

For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth of death of businesses (not individuals). Those assumptions are made according to estimates of where the BLS thinks we are in the economic cycle. The BLS will not disclose what their methodology is or even on what it is based. Essentially it is a "black box" with the BLS essentially saying "trust us, we know what we are doing".

The BLS has admitted however, that their model will be wrong at economic turning points.

The latest birth/death numbers appear to be from Mars, Pluto, or France. With housing falling like a rock and homebuilders demanding concessions from contractors, the BLS is assuming that 28,000 new jobs were added in construction and 7,000 new jobs in manufacturing. With subprime lenders blowing up everywhere (going out of business) the BLS is assuming 6,000 new jobs were added in financial activities. The total number of jobs added by such assumptions for February was 142,000 jobs.

No doubt you will see some who will subtract 142,000 jobs from -80,000 jobs and conclude that 222,000 jobs were lost as opposed to the reported loss of 80,000 jobs. Such math is inaccurate because the establishment numbers are seasonally adjusted and the birth/death assumptions are not and one cannot simply add the two together and come up with an accurate total.

Here is the pertinent snip from the BLS on Birth/Death Methodology.

• The net birth/death model component figures are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations.
• Note that the net birth/death figures are not seasonally adjusted, and are applied to not seasonally adjusted monthly employment links to determine the final estimate.
• The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.

The important point in this mess is that both the job data and employment data are much worse than appears at first glance (and the first glance looked horrid).

Table A-12

Table A-12 is where one can find a better approximation of what the unemployment rate really is. Let's take a look



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If you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, etc., you get a closer picture of what the unemployment rate is. The official government number is 5.1% but Table A-12 suggests it is closer to 9.1%. I believe that is on the low side.

Regardless, the trend in unemployment is now clear, it is rising sharply. Expect to see 6% this year. This report was a disaster.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Big Brother Monitors Investment Activity

Previously, and by charter, the Fed only lent directly to banks. On March 17, the Fed overreached that charter and started direct lending to broker dealers via the Primary Dealer Credit Facility (PDCF).

As one might expect, Investment firms have already tapped the Fed for billions.

The Fed, for the first time, agreed to let big investment houses temporarily get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, will continue for at least six months. It was the broadest use of the Fed's lending authority since the 1930s.

Doing this was "a very substantial step," Bernanke told lawmakers at a Senate Banking Committee hearing on Thursday. "We didn't take it lightly."

The Federal Reserve reported Thursday that those firms averaged $38.1 billion in daily borrowing over the past week from the new lending program. That compared with $32.9 billion in the previous week and $13.4 billion in the first week the lending facility opened.

Big Brother Moves In

Since the Fed has violated its charter by lending to broker dealers, it should come as no surprise to find it usurps still more authority to monitor them. The price (in freedom lost) keeps getting bigger and bigger. Big Brother has moved in.

The Times Online is reporting Federal Reserve staff move into offices of investment banks to monitor activities.

The US Federal Reserve has sent staff into some of Wall Street’s biggest firms and its New York branch is gathering evidence on key traders’ activities as America’s central bank raises its scrutiny of risk to an unprecedented level.

Fed staff have set up shop in Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, and Bear Stearns to monitor their financial condition just days after Henry Paulson, the US Treasury Secretary, proposed that the Fed become the financial industry’s “risk czar”.

This is the first time in more than a decade that the Fed has put staff in securities firms and is a response, in part, to its decision to extend to investment banks the “discount window” of cheap loans traditionally offered only to the commercial banks. The Fed argues that if it is to act as lender of last resort to the securities firms, it should keep a closer eye on their activities.

The Fed declined to comment on its attempts to increase its market scrutiny.

Fed Uncertainty Principle In Action

Sadly, we are already seeing Corollary Number Two to the Fed Uncertainty Principle being carried out in spectacular fashion.

Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

If you have not yet done so, please read the Fed Uncertainty Principle. Inquiring minds may also wish to read Fed Defends The Indefensible.

Ron Paul vs. Bernanke

Ron Paul was the only one who stood up to Bernanke during the Fed's testimony before the Senate Banking Committee on the Fed's role in the Bear Stearns debacle. Click here to play a video of the exchange.

Partial Transcript

Ron Paul: Does the Federal Reserve contribute to the business cycle?
Bernanke: It has. It has at times ....
Ron Paul: Does excessive credit and artificially low interest rates cause malinvestment?
Bernanke: The question is, [what] is the judgment as to where interest rates ought to be? Of course we have a mandate for maximum employment and price stability and we try and balance those obligations. So we could make mistakes and put the interest rate at the wrong place and that would have negative impacts, I agree. So we are doing the best we can to find the right place to put the interest rate, the one that's consistent with the neutral rate, the rate that establishes a full employment economy.
Ron Paul: And some day we may try the market to determine the interest rates. Thank You.

Suggestions For Ron Paul

These exchanges are welcome given that no one else is willing to stand up to Bernanke. However, I am frustrated every time because Ron Paul does not make good use of his time. Instead of starting with a long dialog, a shorter dialog and more pointed questions would serve everyone far better.

I propose a question like "You have blown bigger bubble after bigger bubble and we have neither price stability nor full employment to show for it. Instead of micromanaging interest rates, why don't you simply let the market set the interest rates? You don't really have any idea where interest rates should be, do you?"

"Now you are in a power grab in a mad attempt to bail yourselves out of a crisis a free market would never have created."

That's something that needs to be heard. And phrased that way, it might have made front page news.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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