CS-CPI Sinks To Negative 5.0%

The following chart shows the effect if one substitutes the Case-Shiller housing index for Owners' Equivalent Rent in the CPI.

Case-Shiller-CPI (CS-CPI) vs. CPI-U



click on chart for sharper image.

The above chart is courtesy of my friend "TC" who writes:

For Dec 2008 the CS-CPI fell to a stunning negative 5.0% year-over-year as compared to a positive 0.1% for the CPI-U. Moreover, the Government OER data continues to move higher while home prices continue to move lower amplifying the divergence between the two CPIs to its largest level ever. The CS-CPI now reflects a price level last seen in Dec 2006.

What is equally amazing is that it was less than 2 1/2 years ago (Sep 2005) when the CS-CPI was positive 7.8% year-over-year and we're now 1280 basis points lower. Deflation is here and it's now even beginning to show in the government's CPI-U data.

"Owners' Equivalent Rent" (OER) is the largest component in the government measure of the Consumer Price Index (CPI).

OER is a process in which the BEA estimates what it would cost if owners were to rent the homes they own from themselves. OER is not a valid pricing barometer.

By ignoring housing prices, CPI massively understated inflation for years. The CPI is massively overstating inflation now.

Data for the above chart is from two sources.

• Case Shiller January 2009 Release
  
• December 2008 CPI report. See CPI at .1% Annually, Smallest Increase Since 1954 for details.
  

For more on the methodology behind this post please see the discussion following CS-CPI Negative 3.1% Year over Year in November.

Real interest are very high even at zero percent!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Triage For Troubled Assets

The Obama administration, led by Geithner, is proposing a triage of bad ideas for troubled assets. The Washington Post has the story in Bank Rescue Would Entail Triage for Troubled Assets.

The Obama administration's emerging rescue plan for the banking system would amount to financial triage, with the Treasury Department playing the delicate role of deciding which of the trillions of dollars in troubled assets plaguing the economy to buy, guarantee or leave in the hands of banks, sources said.

The high-stakes approach would dramatically increase the investment of taxpayer money in the financial industry, and the potential losses.

The basic problem confronting the government is that banks hold large quantities of assets that they value on their books for much more than investors are willing to pay. Banks cannot sell these assets without recording massive losses. But holding the assets is tying up vast amounts of money, choking the financial system.

My Comment: That is admittedly what Obama, and Geithner thinks is the basic problem, but the reality is different. The basic problem is the Fed together with Congress micromanaged the economy into a black hole from which there is no escape. If that sounds grim it is because it is grim.

The enabling force is fractional reserve lending and Congressional spending gone rampant. The only real solution involves time (more of it), price (falling), bankruptcies (more), and an increase in savings. Of course that is a short term solution. The long term solution to prevent this from happening again is to abolish the Fed and eliminate fractional reserve lending.

Since the early days of the financial crisis, officials have struggled to unwind that knot. If the government buys the assets at prices that banks consider fair, the Treasury would take a huge loss when it ultimately sells the assets for much less. If, instead, the government insists on paying market prices, the banks may not survive their losses.

My Comment: There is no knot except in Geithner's head. It is all imaginary. The only fair price is the market price. The sooner the insolvent banks go under, the quicker the recovery.

Instead of taking a single approach, the Obama administration plans to divide assets and other loans into three categories, each with its own solution, according to sources familiar with the discussions, speaking on condition of anonymity because the details are not finalized.

The government would buy and hold on to those assets whose falling prices are putting banks under the most pressure. Officials want to limit these purchases because of the vast expense.

The centerpiece of the plan would be a guarantee to limit losses on a second group of troubled assets that can be kept by the banks because they have more stable prices.

And it would allow banks to retain and profit from their healthiest assets.

My Comment: The centerpiece is insanity. The Government has already guaranteed $400 billion in bad debts of Citigroup and Bank of America. Now Geithner wants more. Note that the market cap of Citigroup (C) is roughly $19 billion and Bank of America (BAC) is roughly $27 billion. The treasury is guaranteeing $400 billion of debt on companies that would be worthless without those guarantees. Does this make sense?

Beyond these initiatives, the government also is likely to inject more capital into troubled institutions.

My Comment: Hells bells, Geithner is likely to do anything. He is in the very late stages of FIV, the dreaded Fiscal Insanity Virus.

The triage approach is a response to accounting rules.

When banks buy assets such as loans, they must specify for accounting purposes whether they plan to hold the asset until it is repaid in full or whether they might sell the asset earlier. If the price of similar assets begins to fall, banks may be required to record a loss in value. Those rules apply much more strictly to assets that a bank has said it may sell.

The government plans to focus on buying assets "available for sale" -- those assets whose values banks have already written down substantially, sources said. Such assets are causing immediate problems for banks because they must set aside substantial amounts of capital to compensate for the losses recorded on their books.

My Comment: Here's the deal. The government will buy the worst assets, dramatically overpay for them, stick taxpayers will the losses, and only reduce bonus pools of the banks by 40%. It's a great deal for those in the bonus pools. It's a horrid deal for everyone else.

Assets "held to maturity" would remain with the companies, but the government would guarantee to limit any losses.

My Comment: Preventing losses will keep that bonus pool humming.

Allowing institutions to hold those assets rather than selling them to the government would avoid a moment of reckoning because the banks will also be able to avoid acknowledging on their books the sharp declines in market prices. Government officials argue the approach is better for banks and taxpayers because the price of many assets will eventually recover after the financial crisis passes, so there is no value in forcing the banks to record losses.

My Comment: The whole scheme is nothing but a shell game. In fact, it is the Super SIV Bailout Plan revived once again.

Don't Ask - Don't Sell

• The plan boils down to this: Don't Ask - Don't Sell.
• Don't Ask what the asset is worth.
• Don't Sell or you will find out and not like the result.

The idea that asset prices are going to come back is sheer nonsense. And this carp about "better for taxpayers" is preposterous. What's better for taxpayers, the country, and in fact everyone in the world who is not in the bonus pool, is for the banks to go under.

Joshua Rosner, a financial analyst at Graham Fisher, said in a recent research note that it makes no sense to accept the prices banks have assigned to assets as more accurate than the prices assigned by investors in the marketplace.

"I would argue that it is a thinly veiled attempt to prevent losses from being recognized and which will result in larger levels of ultimate losses," he wrote.

My Comment: This is a rarity. Someone is making sense. Ring the bell and give Joshua Rosner a well deserved cigar.

In November, the government agreed to limit Citigroup's losses on a portfolio of $301 billion of troubled assets. Last month, the government issued a similar guarantee to Bank of America covering $118 billion in troubled assets. In both cases, the companies agreed to absorb an initial increment of losses -- about $30 billion for Citigroup and $10 billion for Bank of America -- with the government absorbing 90 percent of any subsequent losses.

To address public anger over the bailout, White House officials are set to detail today the restrictions that would be imposed on financial firms receiving what the government deems to be "exceptional" assistance. A minority of recipients would fall into this category.

Such companies would be required to cap their executives' pay at $500,000, a source said.

Instead of being fired for incompetence, executive salaries will be capped at $500,000.

For the record, I am not in favor of salary caps, especially caps imposed by the government. I am in favor of letting the free market work. What would happen under a free market approach is these executives would be out on their ass and their companies bankrupt and sold off in pieces.

Geithner's plan is a triad of stupidity. The reason Geithner is struggling with these ideas is none of them are worth a plug nickel. His solution is straight out of the "Official Bureaucrat's Handbook": take the worst of three bad ideas, merge them into one plan, and expect it to work.

I know I am going to get questions on this. Here is my reply in advance. No, this does not mean massive inflation is coming. What it means is the recovery is going to be slow in coming, weak in strength, and create few jobs, a veritable triad of bad news.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Downward Spiral In Autos: GM 49%, Ford 40%, Toyota 32%

The downward spiral in autos continues: GM, Ford Say January Sales Fell at Least 40%; Toyota Drops 32%.

General Motors Corp. and Ford Motor Co. said U.S. sales plummeted at least 40 percent in January and Toyota Motor Corp. dived by almost a third as the recession ravaged demand in the world’s biggest auto market.

The declines were 49 percent at GM, the largest U.S. automaker, and 40 percent at No. 2 Ford, according to statements released today. Toyota dropped 32 percent, Honda Motor Co. fell 28 percent and Nissan Motor Co. was down 30 percent.

The reports showed the toll of sinking confidence among car and truck buyers. GM, Ford and Chrysler LLC executives have all said that January deliveries may have tumbled to an annual rate of fewer than 10 million vehicles, after full-year sales averaged almost 17 million this decade before 2008.

“In this downward spiral, as a company it’s hard to plan your business and as a consumer it’s hard to change your sentiment,” said Joe Barker, an analyst at consulting firm CSM Worldwide Inc. in Northville, Michigan. “We’re all looking for some sense of stability in the sale rate.”

Plummeting sales hamper efforts by GM and Chrysler to pare labor costs, cut debt, trim dealers and idle plants to reduce cash use and make a case to keep $17.4 billion in loans from the U.S. Treasury that kept them from slipping into bankruptcy. The companies face a Feb. 17 federal deadline for a progress report.

January had 26 selling days, 1 more than a year earlier. Some automakers release results adjusted for sales days, meaning the totals will be about 4 percent lower than unadjusted numbers. Bloomberg uses unadjusted figures.

Toyota, Honda, Nissan Sales Slump

The Japanese auto manufacturers are all in a deep slump as Toyota Leads Drop in Japan Car Sales.

Toyota Motor Corp. and Honda Motor Co., Japan’s two largest carmakers, led the biggest drop in the country’s auto sales in 35 years last month as a recession cut wages and jobs and crippled consumer demand.

Sales of cars, trucks and buses fell 28 percent to 174,281 vehicles in January, excluding minicars, the Tokyo-based Japan Automobile Dealers Association said in a statement today. It was the biggest monthly drop since May 1974, the group said.

Honda slashed its full-year profit forecast 57 percent on Friday as sales plunge in Japan, the U.S. and Europe. Japan is headed for its worst postwar recession as factory output slumped an unprecedented 9.6 percent in December and unemployment surged.

Toyota, the world’s largest carmaker, sold 81,985 vehicles excluding its Lexus brand, down 22 percent, and sales at Honda dropped 31 percent to 22,087 units. Sales at Nissan Motor Co., Japan’s third-largest automaker, fell 31 percent to 30,786 vehicles last month.

The drop in domestic demand echoes a sales slump in the U.S., the most profitable market for Japan’s carmakers. In December, Toyota’s sales in the world’s largest car market dropped 37 percent. Nissan’s plunged 31 percent and Honda had a 35 percent drop.

GM Looking To Sell Truck Unit

In an effort to convince the "car czar" that GM can become profitable Union Says GM in Talks With Isuzu to Sell Truck Unit.

General Motors Corp., trying to prove its viability to the U.S. Treasury Department, is in talks to sell a division that produces work trucks to Isuzu Motors Ltd., a local union leader said.

The United Auto Workers has agreed to allow the transfer of the unit if talks are successful, said Local 598 Chairman Mark Hawkins, citing a UAW letter about the talks. The plant in Flint, Michigan, employs about 525 hourly workers and produced about 22,000 trucks last year, GM spokesman Tony Sapienza said. GM doesn’t provide revenue or profit figures for the unit.

The Detroit automaker is trying to cut labor and debt costs and sell assets to persuade Treasury that it will be viable and should keep $13.4 billion in pledged government loans GM says it needs to stay in business. Isuzu would keep making so-called medium-duty trucks at the factory for at least five more years under a plan being discussed, Hawkins said. GM spokeswoman Julie Gibson said no decision has been reached.

“We would rather have Isuzu than Navistar because Isuzu will keep the jobs in Flint,” Hawkins said, referring to an earlier plan to have Navistar International Corp. buy the unit.

Killing the entire Saturn line might have some meaning, but selling a division of a truck unit is more like attacking a glacier with an icepick.

GM, Chrysler Gain Momentum on Labor Cuts to Keep Aid

Bloomberg is reporting GM, Chrysler Gain Momentum on Labor Cuts to Keep Aid

General Motors Corp. and Chrysler LLC, propped up by $17.4 billion in U.S. loans, are speeding up efforts to pare union payrolls and meet a Feb. 17 deadline to justify keeping the money.

Buyouts are being offered to almost all their 91,600 United Auto Workers members to make room for new employees earning half of the $28 hourly wage of their predecessors. The UAW’s “jobs bank,” in which workers were paid when they didn’t have duties, ended at GM yesterday, a week after being halted at Chrysler.

“With everything that has happened over the past 24 hours, it’s almost desperation pace,” Dennis Virag, president of Automotive Consulting Group in Ann Arbor, Michigan, said yesterday. “When you offer all of your hourly workers a buyout, that’s certainly a sign of a troubled organization.”

Bringing in lower-cost employees and unwinding programs such as the jobs bank moved Detroit-based GM and Chrysler closer to two hurdles they must clear to retain the federal aid.

While working on labor costs, GM also is in talks to pare $27.5 billion in unsecured debt to about $9.2 billion in a swap for equity, and it plans to shut dealers and reduce obligations to a union retiree health fund by 50 percent to $10.2 billion in a separate equity swap.

GM fell 16 cents, or 5.5 percent, to $2.73 at 10:40 a.m. in New York Stock Exchange composite trading. GM’s 8.375 percent note due in July 2033 gained 0.25 cent to 15 cents on the dollar yesterday, yielding 55.7 percent, according to Trace, the bond- pricing service of the Financial Industry Regulatory Authority.

The GM program covers about 62,000 workers willing to retire or quit and consists of a $25,000 voucher to buy a new auto and $20,000 in cash, said a UAW official, who didn’t want to be identified because the details are private.

Chrysler is offering a $50,000 cash payment and a voucher for $25,000 to purchase a new vehicle for workers who are eligible to retire, said another UAW leader, who also didn’t want to be named because the specifics haven’t been announced. Workers not eligible for retirement are being offered $75,000 in cash plus a $25,000 voucher, the union leader said.

“Abolishing the job bank doesn’t do much,” Virag said. “It’s more of a sign, the significance of it rather than the actual losing of it.”

GM is indeed a deeply troubled organization, and that jobs bank program which paid laid off workers as much as 90% of their salary for doing nothing was certainly a significant piece of the problem, along with health care benefits, pay scales, and union work rules.

Bondholders do not want to give concessions, but the alternative might mean finding out what they would get in bankruptcy proceedings, arguably nothing. With long term bonds trading at 15 cents, perhaps some bond holders would just assume take their chances in a liquidation sale. However, I doubt it would come to that, at least initially. Restructuring is far more likely than liquidation.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Runaway Trains Gather Momentum

The runaway train of bad economic news continues. On another track, a runaway train of bad ideas as to how to deal with the economic crisis is also picking up steam. Here are a sampling of headlines to consider from the US and around the world.

U.S. Property Owners Lost $3.3 Trillion in Home Value Last Year

The U.S. housing market lost $3.3 trillion in value last year and almost one in six owners with mortgages owed more than their homes were worth as the economy went into recession, Zillow.com said.

The median estimated home price declined 11.6 percent in 2008 to $192,119 and homeowners lost $1.4 trillion in value in the fourth quarter alone, the Seattle-based real estate data service said in a report today.

“It’s like a runaway train gaining momentum,” Stan Humphries, Zillow’s vice president of data and analytics, said in an interview. “It’s difficult to say when we’ll see a bottom to the housing market.”

The U.S. economy shrank the most in the fourth quarter since 1982, contracting at a 3.8 percent annual pace, the Commerce Department said on Jan. 30. Record foreclosures have pushed down prices as unemployment rose. More than 2.3 million properties got a default or auction notice or were seized by lenders last year, according to RealtyTrac Inc., a seller of data on defaults.

About $6.1 trillion of value has been lost since the housing market peaked in the second quarter of 2006 and last year’s decline was almost triple the $1.3 trillion lost in 2007, Zillow said.

Car sales: From bad to worse

Even as credit starts to flow to potential car buyers, sales could fall to a 26-year low due to a sharp drop in purchases by car rental companies.

Consumers may have had an easier time getting car loans last month, but don't look for that to fuel a rebound in battered auto sales when automakers report their January sales Tuesday.

Forecasts of a modest pickup in sales to consumers are being more than offset by a sharp plunge in purchases by rental car companies, which in a typical year can buy close to 3 million vehicles a year.

China Puts Joblessness for Migrants at 20 Million

The government offered a telling indicator Monday of the slowdown in China’s once-galloping economy, announcing that more than one in seven rural migrant workers had been laid off or was unable to find work, twice as many as estimated just five weeks ago.

The new statistics followed a hint on Sunday by Prime Minister Wen Jiabao that the government might have to expand a recently announced $585 billion stimulus plan to deal “pre-emptively” with growing economic problems.

About 20 million of the total estimated 130 million migrant workers, whose cheap labor underpins China’s manufacturing sector, have been forced to return to rural areas because of a lack of work, according to a survey conducted by the Agriculture Ministry that was cited at a briefing.

In late December, employment officials estimated that at least 10 million migrant workers had lost their jobs in the third quarter of 2008 as waves of factories and businesses shut their doors.

The specter of millions more unemployed clearly has the Chinese government worried. The government has not released annual figures on social unrest — what it terms “mass incidents” — for several years, but foreign news reports suggest growing protests as unemployment spreads.

Any ideas that China is about to start another commodities boom, that China will decouple, or even that the RMB is hugely undervalued vs. the US dollar now seem far-fetched.

Billions in Stimulus Are Proposed for Australia

Australia announced another major stimulus plan and its central bank delivered a deep cut in interest rates on Tuesday as the country sought to prop up growth.

The government said it would spend $42 billion Australian dollars, or $26.5 billion, on infrastructure, schools, housing and payments for low-income earners. Last year, Australia announced several measures as the economic slowdown in the United States and Europe began to spread around the world and engulf the economies of the Asia-Pacific region.

“The weight of the global recession is now bearing down on the Australian economy,” Wayne Swan, Australia’s treasurer, said in a statement. “In the midst of this global recession it would be irresponsible not to act swiftly and decisively to support jobs.”

The only responsible action government can take is to cut taxes, stop wasting money, and otherwise getting out of the way so that the private sector can function properly.

Australia Cuts Key Interest Rate to 45-Year-Low 3.25%

Australia’s central bank cut its benchmark interest rate to the lowest level in 45 years and the government announced it will spend a further A$42 billion ($27 billion) to ward off a recession.

Governor Glenn Stevens lowered the overnight cash rate target to 3.25 percent in Sydney today, saving borrowers with an average A$250,000 home loan more than A$120 a month. Treasurer Wayne Swan said the government will spend A$12.7 billion in handouts to families and A$28.8 billion on infrastructure, sending the budget into its first deficit since 2001-2002.

Rent-Hungry Los Angeles Landlords Hide Tenants With Pepsi Signs

Andy Safir says he paid a premium for a view of the Santa Monica Mountains and Los Angeles skyline when he leased space for his economic consulting firm.

He was surprised one morning to find the office in shadows even though the sun was shining. While he traveled abroad, the side of the building had been draped with a giant Statue of Liberty in protest against a city sign moratorium on just that kind of display.

So-called supergraphics, huge posters made of vinyl and mesh, can bring in $20,000 a month or more, said Paul Fisher, a lawyer in Newport Beach, California, who represents advertising firms and landlords in disputes with the city of Los Angeles.

That’s drawing landlords hungry for revenue, as vacancy rates rise for Los Angeles office buildings. Ads for Tropicana orange juice, Pepsi-Cola, Club Med and other products cover as much as 10 stories of building faces, including windows.

Tenants complain that the signs block their natural light, while other opponents say the banners clutter an urban landscape already filled with commercial messages. The city opposes some signs for safety reasons, and the fire department ordered removal of about 20, City Councilman Jack Weiss said at a news conference last week.

If I was a renter in one of those buildings I would vote with my feet.

California delays $3.5B in payments

Running short of cash, California has started delaying $3.5 billion in payments to taxpayers, contractors, counties and social service agencies.

With the governor and state lawmakers locking horns on resolving California's budget crunch, the controller Monday halted checks covering these obligations so the state could continue funding its school system and making its debt payments.

The delay will inflict more pain on the already sorry condition of the Golden State, which is facing a $40 billion budget gap. People won't have tax refund money to spend, businesses won't get paid for their services and agencies won't have funds to help the needy until the budget situation is addressed.

Nearly $2 billion in personal state income tax refunds are being held up, according to state estimates. Last year, some two million Californians received refunds in February.

"People are going to be hurt starting today," said Garin Casaleggio, a spokesman for Controller John Chiang.

People have been hurting badly for years thanks to the policies of the Bush administration, the Fed, Congress, and coming soon Geithner, who is slated to become the worst treasury secretary ever. That is quite an achievement.

BOJ may buy $111.5 billion in shares held by banks

Japanese stocks ended lower Tuesday, in volatile trading highlighted by a midday announcement that the Bank of Japan will resume buying shares held by financial institutions, with plans to spend up to 1 trillion yen ($111.5 billion) through April 2010.

The Nikkei rose as much as 2.7% after the announcement, but retreated later in the afternoon to close 0.6% lower at 7,825.51. The BoJ did not say when it would begin buying shares. It plans to halt the buying by the end of April 2010 and dispose of all shares it acquires by autumn 2017.

The last time the central bank had run a similar share purchase, it spent 202 billion yen purchasing shares from financial institutions during the 22 months ended in September 2004. At the time, the central bank had pledged to buy as much as 3 trillion yen of shares.

The BoJ began disposing of its holdings in October 2007 but suspended the program during the market slump last autumn. The central bank held 1.273 trillion yen of shares as of September 2008, it said in the statement.

The BOJ never managed to unload the shares it bought the last time it tried this ridiculous maneuver. Buying shares to prop up prices can never work.

Macy's cuts 7,000 jobs, slashes dividend

Macy's Inc said on Monday it would slash about 7,000 jobs and cut its quarterly dividend as it forecast earnings for fiscal 2009 that fell far below Wall Street expectations, sending its shares down 4 percent.

The department store operator said it took the steps to counter what it expects will be a very tough retail market this year, and that it would plan conservatively despite efforts by the U.S. government to build an economic stimulus package.

Macy's expects these initiatives, which also include integrating its divisions into one unit, to reduce its previously planned expenses by about $400 million per year starting in 2010, and $250 million in part of 2009.

"We just believe that this is a time when nothing should be considered a sacred cow," Chief Executive Terry Lundgren said in a conference call following the announcement.

The job cuts announced on Monday are about 4 percent of the company's workforce and should mostly be completed by May 1, Lundgren said. Macy's also cut its quarterly dividend to 5 cents a share from 13.25 cents.

Macy's is way late in cutting that dividend. Furthermore, it ought to slash the dividend to no more than 1 cent. It is going to need that cash and raising money in this environment will not be easy.

20,000 NEC employees to be let go

As losses continue to mount at NEC, news has reached us that the company will embark on plans to start massive layoffs in an effort to slash the red ink. Like many other Japanese companies, NEC is expecting to struggle unless the industry rebounds sooner than expected.

The company plans to start laying off employees company-wide. Currently the exact numbers are not set in stone, but the number of workers to be slashed are projected to be as high as 20,000 when it is all said and done. The company says that the layoffs will be split evenly between full time and part time workers.

With over 150,000 employees worldwide, the cuts at NEC come at a time for the company when the Japanese tech sector has been hard hit in the wake of the current financial crisis. It is currently unknown if the company plans to discontinue any of its product lines in light of the current announcement.

20,000 jobs is a lot of jobs. There is no decoupling for Japan.

L.A. Times at the Abyss

"It was a really, really depressing thing," says the L.A. Times reporter. "If you weren't depressed before you came in, you were walking out."

The staffer, who spoke to the L.A. Weekly on condition of anonymity, was describing the scene in the Times' newsroom last Friday, when Times editor Russ Stanton personally announced a few changes - 20 minutes after outlining them in an email soon posted by L.A. Observed. Things like the folding of the paper's California section into Section A in March, and the loss of 300 jobs - 70 of which would come from the very room in which the assembled reporters were gathered.

The only silver lining Stanton offered his audience was that he was trying to ensure that the California-section reporters would be the least hard hit when the layoffs come in the next few weeks. Besides editorial, the biggest hits are expected on the business side, where advertising-sales staff members fear their jobs are about to be contracted out. And, because the folding of California means one less print run, the move will also hit the pressmen and designers.

I am saddened to see this. The LA Times provided many good stories for the blogging world. I wish the best of luck to everyone affected.

Citigroup to Use $36.5 Billion of Funds for Expanding Lending

Citigroup Inc. plans to use $36.5 billion to lend to consumers and companies and to fund U.S. mortgage loans after receiving $45 billion as part of the government’s bailout of the banking industry last year.

The New York-based bank will use $25.7 billion for mortgage lending, $2.5 billion for consumer loans, $1 billion for student loans, $5.8 billion for credit card lending, and $1.5 billion for corporate loans, according to a report to be issued today by Citigroup and which was obtained by Bloomberg News.

Citigroup and other banks that received funds from the U.S. Troubled Asset Relief Program have been criticized by politicians including Representative Barney Frank for not using the money for making loans. President Barack Obama will require banks to boost lending to consumers and companies in return for taxpayer aid from the $700 billion bailout fund, in a departure from Bush administration policy, a key lawmaker said yesterday.

“The government, on behalf of the American taxpayer, has invested in Citigroup,” Chief Executive Officer Vikram Pandit said in the report. “We have an obligation to repay in ways that go well beyond the $3.41 billion Citigroup will pay the government each year in dividends associated with its TARP investment, and a separate loss sharing agreement.”

The Treasury has distributed more than $194 billion through its program of purchasing stakes in U.S. banks. It has also mounted rescues of Citigroup and Bank of America Corp., insuring a total of more than $400 billion of illiquid assets on their balance sheets.

The US taxpayer has guaranteed hundreds of billions of dollars of Citigroup debt and Pandit comes across as bragging about paying a lousy $3.41 billion in dividends back to the government, all of which really came from the taxpayers in the first place.

In essence Citigroup is taking a bag of peanuts from the taxpayers and bragging about returning the shells.

FDIC seeks to triple Treasury Dept borrowing power

The Federal Deposit Insurance Corp is seeking to more than triple its credit line with the U.S. Treasury Department to $100 billion, a move to give it more financial power to handle U.S. bank failures, the agency said on Monday.

Frank said the FDIC's desire to increase its borrowing power is a safeguard to ensure the agency can quickly pay out insured deposits when a bank fails and the FDIC is named as a receiver.

"They have no immediate need for it, but they just want to make sure they're not constrained in the decision by a lack of the insurance fund," Frank told reporters after meeting Treasury Secretary Timothy Geithner on Monday. "They don't want to say, 'We have to keep this bank open longer than it should because we don't have enough money.'"

Translation: The FDIC is in deep *@&&, and has an immediate need for taxpayer money.

The deflation train continues to gather steam. Unfortunately Geithner, Frank, Bernanke, and Obama (along with numerous counterparts worldwide) are on a runaway train of their own, taking countermeasures guaranteed to make a very bad situation, much worse.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Wells Fargo's Balance Sheet: Scaring the Horses

This look at Wells Fargo (WFC) strangely begins with an investigation into 3.875% mortgage loans - fixed for 30 years - offered by Arbor Custom Homes near Portland Oregon.

3.875% is rather interesting given that current mortgage rates are much higher as the following Table of Mortgage Rates from Bloomberg shows.



The Lending Partner for Arbor Homes is Wells Fargo. How can Wells offer a fixed rate of 3.875% for 30 years given the current rate term structure and conditions in the MBS/CDO markets?

The only answer I can come up with is Wells Fargo is going to promptly bundle and dump those securities straight into the insolvent arms of Freddie Mae (FNM) and Fannie Mac (FRE). Who else would take them?

Furthermore, the Portland area is saturated with homes already (see the section Happy Valley Foreclosed in Housing gridlock: Trapped in Suburbia for more details).

Leading the Way Home

Wells Fargo claims to be Leading the Way Home to Stabilize Hard-Hit Communities.

Wells Fargo Merger Gives 478,000 Wachovia Customers Access to New Wells Fargo Solutions if Their Mortgage Payments Become At-Risk.

Through active calling and letter-writing campaigns, workshops, regional outreach events and door-to-door contact, Wells Fargo Home Mortgage has reached 94 percent of its customers who are two or more payments past due. For every 10 of these customers, it has worked with seven on a solution, two declined the help, and the remainder cannot be reached or a solution simply cannot be found. Of the customers who received a loan modification, one year after the loan was modified approximately seven of every 10 of these customers were either current on their loans or less than 90-days past due.

That is a rather self serving way of looking at things. Notice the grouping of current with less than 90-days past due.

Here is a more accurate way of phrasing things: 30% of Wells Fargo's reworked mortgage loans are 90 days past due or longer, one year after loan modification. That does not sound so good does it?

Moreover, hidden in the 70% grouping is an undisclosed percentage of customers who are not even current. What percentage is that?

Odds are high that those not current shortly after a rework are going to fail. What's the percentage? Wells Fargo does not say. With that backdrop, it's time to dive into Wells Fargo's 4th quarter earnings and balance sheet details to see what we can find.

Wells Fargo 4th Quarter Earnings

Please consider Well's Fargo's 4th Quarter 2008 News Release announcing a net loss of $2.55 billion, $0.79 per share, after significant de-risking and merger-related actions.

“Despite the unprecedented contraction in the credit markets, we remained ‘open for business’ and continued to lend to credit-worthy customers. We made $106 billion in new loan commitments during 2008 to consumer, small business and commercial customers and originated $230 billion of residential mortgages.

The allowance for credit losses, including unfunded commitments, totaled $21.7 billion (Wells Fargo and Wachovia combined) at December 31, 2008, compared with $8.0 billion (Wells Fargo only) at September 30, 2008.

The Wachovia acquisition was completed on December 31, 2008, and therefore Wachovia’s results are not consolidated in Wells Fargo’s income statement. Wells Fargo’s balance sheet includes Wachovia’s period-end balance sheet data net of closing purchase accounting adjustments.

Wells Fargo's Balance Sheet



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Wells may be open for business, but the amount of securities it is seeking to dump increased from $86+ billion to $151+ billion. Goodwill, which may easily be worthless, increased to $22+ billion.



Note that Wells has $110+ billion in junior mortgage liens. That is a lot of risk. Total consumer loans, most of which is mortgage related is a whopping $474+ billion. That's a lot of risk. And given that commercial real estate is just now starting to crumble badly, commercial and commercial real estate exposure of $356 billion is a lot of risk. Will $21 billion in loan loss provisions cover that? I doubt it.

Off-Balance Sheet Exposure

The balance sheet shows the risk we can easily talk about. What about the off-balance sheet risk? There was no mention of off-balance sheet exposure in the 4th quarter news release so inquiring minds are looking at balance sheet statements from the Wells Fargo's 3rd quarter 2008 release.

OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS

Almost all of our off-balance sheet arrangements result from securitizations. Based on market conditions, from time to time we may securitize home mortgage loans and other financial assets, including commercial mortgages. We normally structure loan securitizations as sales, in accordance with FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities – a replacement of FASB Statement No. 125. This involves the transfer of financial assets to certain qualifying special-purpose entities (QSPEs) that we are not required to consolidate.

What Exactly Are QSPEs?

Those wondering about QSPEs are reading The CPA Journal July 2004 Issue.

Basically, an off–balance-sheet entity is created by a party (the transferor or the sponsor) by transferring assets to another party (the SPE) to carry out a specific purpose, activity, or series of transactions.

Regardless of their legal form, off–balance-sheet entities share the following characteristics:

• They are often thinly capitalized.
• They typically have no independent management or employees.
• Their administrative functions are often performed by a trustee who receives and distributes cash in accordance with the terms of contracts and who serves as an intermediary between the SPE and the parties that created it.
• If the SPE holds assets, one of these parties usually services them under a servicing agreement.

The challenge for investors is the difficulty in spotting these transactions. Unfortunately, the magnitude of the dollar amounts involved in these transactions notwithstanding, any available disclosures about them are buried in footnotes. There is no easy way of estimating the amount of assets or liabilities that are subject to these arrangements.

As the Enron crisis brought attention to the use of SPEs, FASB responded by issuing a proposed interpretation of existing accounting principles aimed at putting many off–balance-sheet entities back onto the balance sheet of the companies that created them.

The current accounting standards require an enterprise to include in its consolidated financial statements subsidiaries in which it has a controlling financial interest. The existing common definition of “control” is met when a parent company has more than 50% of the voting stock in a subsidiary. Over the years, however, companies have found ways to obtain economic control of other entities without owning 50% of the voting stock, thereby avoiding consolidation of these entities.

If you were ever wondering why all these 49% ownership arrangements appear all over the place, now you know.

Not Practical To Tell The Truth

It's ridiculous for corporations to be hiding 49% of stuff off the balance sheet. Much of that stuff is now highly toxic. Citigroup (C) alone is sitting on $800+ billion of it, down from about $1.1 trillion.

New rules were supposed to go into effect late last year requiring corporations to put such assets back on the balance sheet where they belong. I talked about this in Not Practical To Tell The Truth on August 1, 2008.

FASB Postpones Off-Balance-Sheet Rule for a Year

On July 30th, FASB Postpones Off-Balance-Sheet Rule for a Year.

The Financial Accounting Standards Board postponed a measure, opposed by Citigroup Inc. and the securities industry, forcing banks to bring off-balance-sheet assets such as mortgages and credit-card receivables back onto their books.

FASB, the Norwalk, Connecticut-based panel that sets U.S. accounting standards, voted 5-0 today to delay the rule change until fiscal years starting after Nov. 15, 2009. The board needs to give financial institutions more time to prepare for the switch, FASB member Thomas Linsmeier said at a board meeting.

"We need to get a new standard into effect," Linsmeier said, though "it's not practical" to begin requiring companies to put assets underlying securitizations onto their books this year.

Citigroup's Mysterious Shadow Assets

Of that $11 trillion in total bank off balance sheet entities, Citigroup has $1.1 trillion of it. Enquiring minds may wish to consider Citigroup's $1.1 Trillion in Mysterious Shadow Assets.

If Citigroup is looking for an award, it can take the blue ribbon for greed, arrogance, and stupidity in the off balance sheet category. There are plenty of other categories and more blue ribbons will be awarded. Nominations are being taken now.

Wells Fargo claims it is "well capitalized". Is it? By what measure? What is hidden off its balance sheet that we do not know enough about? Can anyone believe what any financial institution says when it is perfectly clear all these games are being played?

Clearly, the Fed is engaged in delaying tactics. However, those tactics are increasing mistrust. It was hard enough before to measure a corporation, but given toxic assets everywhere one looks, it is even harder now.

Balance Sheet Is The Future

In periods of deflation, where asset prices are rapidly depreciating, a key point to remember is balance sheet concerns are paramount. Minyan Peter discussed this issue along with goodwill writeoffs in Deflation Accounting Signals Bleak Future.

For those who have not yet done so, I also highly recommend reading read Bank Earnings 102: The Best of Times, The Worst of Times when Minyan Peter, former treasurer for a large Midwest bank, first penned the phrase "The income statement is the past. The balance sheet is the future."

Diving into the balance sheet of Wells Fargo, I do not like what I see. Of equal concern is what I don't see, things hidden in QSPEs.

Bernanke wants us to believe everything is under control. When everything is hidden, how could one possibly know?

Every quarter is another disaster and every quarter more taxpayer money is handed straight over to the banks and brokerages that caused the problem. All this talk about helping the consumer get loans is a lie. No one is really concerned about the little guy; the concern is to bail out insolvent banks, by hook or by crook, using Fannie Mae as the slush fund.

Once that is accomplished, taxpayers will be left holding the losses in an insolvent Fannie Mae. Is it any wonder mistrust is high and growing?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Railroad Traffic Plunges

The American association of Railroads says it was a Down Week for Freight Traffic on U.S. Railroads.

WASHINGTON, January 29, 2009 — Freight traffic on U.S. railroads continued to trend downward during the third week of 2009, the Association of American Railroads (AAR) reported today. Carload freight totaled 267,634 cars, down 14.6 percent from the comparison week in 2008, with loadings down 9.2 percent in the West and 22.1 percent in the East. Intermodal volume of 195,182 trailers or containers was off 7.1 percent from last year, with container volume falling 2.3 percent and trailer volume dipping 23.9 percent. Total volume was estimated at 28.4 billion ton-miles, off 13.4 percent from 2008.

Combined North American rail volume for the three weeks of 2009 on 14 reporting U.S., Canadian and Mexican railroads totaled 1,015,857 carloads, down 17.3 percent from last year, and 738,351 trailers and containers, down 12.3 percent from last year.

Railroads reporting to AAR account for 89 percent of U.S. carload freight and 98 percent of rail intermodal volume. When the U.S. operations of Canadian railroads are included, the figures increase to 96 percent and 100 percent. The Canadian railroads reporting to the AAR account for 91 percent of Canadian rail traffic. Railroads provide more than 40 percent of U.S. intercity freight transportation, more than any other mode, and rail traffic figures are regarded as an important economic indicator.

Weekly Traffic of Major U.S. Railroads



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The only thing on the list that held up was coal, most likely utility related. Coke, used in manufacturing was down 19.9%; coal was only down 2.2%. Motor vehicle traffic was down a whopping 65.4%. Thanks to Bobbi-Sue for sending that chart.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Exports Plunge In China, Japan, South Korea

Global contractions are very rare. However, it's increasingly clear we are going to have one. Consumer spending continues to weaken worldwide, and as goes consumer spending, so goes exports from the goods producing nations, especially those in Asia.

Exports plunge in China, Japan, and South Korea. Let's start off with look at China: Chinese Manufacturing Shrinks After Exports Collapse

China’s manufacturing contracted for a sixth month in January as the global recession sent growth sliding in Asia’s export-driven economies.

China is considering extra measures to boost growth, Wen said in an interview with the Financial Times, published today. While declining to explicitly rule out a devaluation of the yuan, he said that the government intended to keep the currency stable at a balanced and reasonable level.

Aluminum Corp. of China Ltd., the nation’s biggest producer of the metal, has cut capacity because of waning demand and China International Marine Containers Co., the world’s largest maker of boxes for freight, said profit has tumbled because of the global crisis.

Competitive currency devaluations are now underway. I smell beggar thy neighbor fireworks. The US wants a stronger Renminbi, China wants a weaker one. Smoot Hawley II may be brewing. Passing a big import tariff would be a huge mistake, but sabre rattling under Obama has started already.

Record Annual Loss At Hitachi

Demand for industrial electronics is weakening and Hitachi Shares Fall on Outlook for Record Annual Loss.

Hitachi Ltd. fell to the lowest in more than 28 years in Tokyo trading after the company forecast a record 700 billion yen ($7.8 billion) loss in the year ending March 31 amid the global recession.

Hitachi, which made the announcement after the close of trading on Jan. 30, joins NEC Corp. and Fujitsu Ltd. in forecasting full-year losses as the recession curbs spending on consumer and industrial electronics. Hitachi blamed slumping demand, losses from affiliates, taxes, writedowns of equipment and the stronger yen for the projected loss.

“This marks a heavier deterioration than called for in our forecast, which was near the bottom of the projected range,” Hitoshi Shin, a Tokyo-based analyst at UBS AG, wrote in a Jan. 30 report after the announcement. Shin has a “neutral” rating on the stock.

Japanese Companies Cry For Yen Intervention

Currency intervention never works. It has been proven time and time again. Nonetheless, Japan Companies ‘Crying Out’ for Action on Yen

Japanese companies are “crying out” for the government to sell the yen, whose strength is deepening the worst recession since 1945, an official at the nation’s largest business lobby said.

“The yen is the most critical problem for exporters,” Masakazu Kubota, a managing director at Keidanren, said in an interview in Tokyo on Jan. 30. “Whether the government does it alone or in cooperation with others, they should do something about the yen,” he said. “Industry is crying out for it.”

Japan’s currency is trading near a 13-year high against the dollar, cutting the value of overseas sales at a time when exports are collapsing. Companies from Hitachi Ltd. to NEC Corp. are forecasting losses and firing workers, worsening a downturn the central bank forecasts will be the sharpest in the postwar era.

Exports fell an unprecedented 35 percent in December from a year earlier, prompting companies to cut production at a record pace, reports showed last month.

Manufacturers are campaigning for the government to step into the foreign-exchange market, which it hasn’t done for almost five years. The Finance Ministry sold 14.8 trillion yen ($165 billion) in the first three months of 2004, when the currency traded around 103 per dollar.

“I want the government to call for intervention with other nations” if the yen’s appreciation continues, Fujio Mitarai, chairman of Keidanren, said on Jan. 13. Honda Motor Co. President Takeo Fukui also asked for action in December.

Australia Manufacturing Shrinks 8th Straight Month

It now seems certain that Australia will follow the US and Japan into recession. Evidence is easy to find. Australia’s January Manufacturing Index Shrinks for Eight Month

Australian manufacturing contracted for an eighth month in January as companies received fewer orders and fired workers.

The performance of manufacturing index rose 2.9 points to 36.6 from December, the Australian Industry Group and PricewaterhouseCoopers said in a report released in Canberra today. A reading below 50 signals manufacturing is shrinking.

Today’s report adds to signs Australia’s economy may follow the U.S., Europe and Japan into a recession, after expanding in the third quarter at the weakest pace in eight years. Central bank Governor Glenn Stevens will cut the benchmark interest rate tomorrow to the lowest level since the 1960s, economists forecast.

“Ongoing falls in new orders in particular highlight the challenging conditions manufacturers are facing in the early months” of this year, said Heather Ridout, chief executive officer of the Australian Industry Group.

Coupling continues with a vengeance. How so many some could have thought otherwise is quite amazing.

South Korea's Exports Plunge By Record Amount

South Korea’s January Exports Decline by Record 32.8%

South Korea’s exports tumbled by a record 32.8 percent in January, foreshadowing a deepening slump in Asia’s export-driven economies.

Shipments fell by the most since figures were first compiled in 1957, and at almost twice the pace of December’s 17.9 percent decline, the Ministry of Knowledge Economy said in Gwacheon today. The trade report is among the region’s first economic releases for January.

“An outright recession is inevitable,” said Kwon Young Sun, an economist at Nomura International Ltd. in Hong Kong. “This is an early indicator for the region, and the drop suggests exports in Asia won’t be good.”

South Korea’s economy shrank 5.6 percent last quarter from the previous three months, the biggest drop since 1998. Exports are equivalent to 50 percent of gross domestic product.

“Things are getting worse as the global recession spills over to China and other emerging economies,” said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul.

Exports to China, the nation’s biggest overseas market, tumbled 32.2 percent during the first 20 days of January, today’s report showed. Shipments to the U.S. declined 21.5 percent, exports to the Europe Union plunged 46.9 percent and sales to Latin America dropped 36 percent. Exports to the Middle East fell 7.5 percent.

Email From Korean Reader "Spiral Naseon"

Dear Mish,

Many thanks to you for maintaining a wonderful economic analysis blog. I've been following your blog as early as year 2007 and started reading books/websites that you mentioned. Being a Korean, I started introducing your blog and my own explanations to our web blog and internet economy forums, hoping to educate people what would come to them in near future (of course, advertising deflation, recoupling of global economy).

After years of consistently warning of debt deflation and government's mal-investments, I became a well-known person and ended up writing a book about economic cycles (credit cycles) and inflation/deflation. This book will be published in Feb 9th. Although it is written in Korean, I wish to send you this book since I mentioned your name in dedication/acknowledgment section.

Thanks,

Spiral Naseon

'Spiral Naseon' is a pseudonym for the name he posts on at the economic forum agora.daum.net, the very same one where Minerva worked before he got arrested. See the LA Times story Case of Internet economic pundit Minerva roils South Korea.

'Spiral Naseon' translated means "Debt Spiral".

Naseon assures me he posts from an IP address outside of South Korea in a manner that cannot be traced. He goes on to say "There are many copy cats of Minerva. No one knows whether the person arrested is a real Minerva or not. At least, the one I know is not arrested yet."

Good luck to you and your book Spiral. I look forward to receiving a copy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List