Stupidity Has No Bounds: Chrysler Urges Dealers To Buy More Cars

Any dealer dumb enough to do what Chrysler is asking deserves to go bankrupt tomorrow. Please consider Chrysler urges dealers to buy more cars.

With Chrysler LLC’s U.S. sales down 30 percent last year, an economy mired in recession and the automaker living on government loans, the last thing you’d expect a dealer to do is order more cars and trucks.

But that’s exactly what Michael Andretta, owner of a Chrysler-Jeep-Dodge dealership in central Pennsylvania, intends to do after being inspired by Vice Chairman Jim Press’ presentation at an auto dealers convention in New Orleans.

“I’m going to go back and I’m going to order cars that I don’t need,” Andretta said today after Press and other Chrysler managers met with dealers at the National Automobile Dealers Association convention.

Chrysler executives asked the dealers each to order a wholesale allocation set by the company that totals 78,000 vehicles for February, and Andretta and other dealers said they have no problem doing it. The company has a total 3,300 dealers nationwide.

“A feeling we took away from this meeting is that we’re all in this together,” Andretta said. “And that we’re going to survive together, that we’re doing the right things.”

Press wouldn’t reveal what concessions he will ask dealers to make other than ordering more cars. The concessions are part of the company’s effort to meet a plan filed in Washington to get $4 billion in government loans with another $3 billion under consideration.

He said dealers understand the need for everyone to “put some skin in the game,” to help Chrysler to survive.

“They also realize they can help save us all some money that will help preserve the future and make us more successful,” he said.

Press and Landry plan to take their presentation this week in eight cities across the country starting Monday in New Jersey, explaining Chrysler’s viability plan and talking to dealers.

Press's viability plan is nothing but a giant ponzi scheme to get dealers to buy more cars than they need. Bear in mind Chrysler will be offering special terms on this offer thanks to Congressional stupidity in granting Chrysler billions in loans. Good Lord, more and more it seems like I was right when I suggested Fed Destined To Become World's Largest Auto Dealership.

Someone send me an email when Michael Andretta, owner of a Chrysler-Jeep-Dodge dealership in central Pennsylvania, declares bankruptcy. Buying cars you do not need is a sure fire way for a dealer to get there.

Thanks to "Kevin" for suggesting the title of this post, along with the link.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Obama Announces "New Rules" To Address Crisis

As part of his rescue plan, Obama Signals Tough Restrictions on Banks in Rescue Package.

President Barack Obama signaled that he would toughen restrictions on and oversight of banks as part of a fresh plan to aid the battered industry.

Obama blasted the banks yesterday over reports that they’ve spent money renovating offices after receiving billions of dollars from the government and vowed they would be held accountable for any aid they receive in the future.

The tough talk seemed designed to build support for a rescue plan that aides say Obama will roll out soon by reassuring lawmakers and voters that the administration will keep close tabs on money it hands out. Pressure for a plan is building after the Standard & Poor’s 500 Index fell for the third straight week, in part because of concerns about the health of the banks.

White House press secretary Robert Gibbs said the president has directed his advisers to come up with new restrictions on the second half of the $700 billion financial-rescue plan, saying the money won’t go to “line the pockets of people” who’ve gotten financial assistance.

Senator Bill Nelson, a member of the Finance Committee, said he talked yesterday with Geithner and was told the administration would increase oversight of the TARP money. “I have received direct assurances today from the nominee for Treasury secretary that he will support disclosures and transparency including for money already spent,” Nelson, a Florida Democrat, said yesterday.

Obama Plans Fast Action to Tighten Financial Rules

The New York Times goes into greater detail in Obama Plans Fast Action to Tighten Financial Rules.

Officials say they will make wide-ranging changes, including stricter federal rules for hedge funds, credit rating agencies and mortgage brokers, and greater oversight of the complex financial instruments that contributed to the economic crisis.

Broad new outlines of the administration’s agenda have begun to emerge in recent interviews with officials, in confirmation proceedings of senior appointees and in a recent report by an international committee led by Paul A. Volcker, a senior member of President Obama’s economic team.

A theme of that report, that many major companies and financial instruments now mostly unsupervised must be swept back under a larger regulatory umbrella, has been embraced as a guiding principle by the administration, officials said.

Officials said they want rules to eliminate conflicts of interest at credit rating agencies that gave top investment grades to the exotic and ultimately shaky financial instruments that have been a source of market turmoil. The core problem, they said, is that the agencies are paid by companies to help them structure financial instruments, which the agencies then grade.

“Until we deal with the compensation model, we’re not going to deal with the conflict of interest, and people are not going to have confidence that the ratings are worth relying on, worth the paper they’re printed on,” Mary L. Schapiro said in testimony earlier this month before being confirmed by the Senate to head the Securities and Exchange Commission.

My Comment: Finally!!! I have been harping about this forever.

Please see Time To Break Up The Credit Rating Cartel. The big problems are 1) government sponsorship of the ratings agencies and 2) The way the agencies made money.

It seems as if at least one of those problems will be fixed.

Timothy F. Geithner, the nominee for Treasury secretary, made similar comments in written and oral testimony before the Senate Finance Committee.

Aides said they would propose new federal standards for mortgage brokers who issued many unsuitable loans and are largely regulated by state officials. They are considering proposals to have the S.E.C. become more involved in supervising the underwriting standards of securities that are backed by mortgages.

The administration is also preparing to require that derivatives like credit default swaps, a type of insurance against loan defaults that were at the center of the financial meltdown last year, be traded through a central clearinghouse and possibly on one or more exchanges. That would make it significantly easier for regulators to supervise their use.

“I believe that our regulatory system failed to adapt to the emergence of new risks,” Mr. Geithner said in a written response to questions that was made public on Friday by Senator Carl Levin, Democrat of Michigan. “The current financial crisis has exposed a number of serious deficiencies in our federal regulatory system.”

Other elements of the regulatory overhaul, such as the requirement that hedge funds register with and be more closely supervised by the S.E.C., would mark a sharp departure from the policies of the Bush administration. Many hedge funds now voluntarily register and subject themselves to some regulation, but the Bush administration opposed attempts to make registration and tighter oversight mandatory, even though that was proposed by William H. Donaldson, a chairman of the commission appointed by President George W. Bush.

My Comment: The Hedge Fund model is dying, primarily on its own accord because of excessive fees and lockup restrictions preventing withdrawals. Hedged funds in general claimed to be able to make money in any market climate and most failed miserably. It was a huge mass of roll the dice with massive leverage using OPM. Other people's money. Incentives were such that it spawned recklessness.

However, to expect the SEC to do anything that makes any sense is a bit farfetched. It was the SEC that created the rating agency model that blew up and it was the SEC that ignored Madoff. All in all, Hedge funds at least outperformed the S&P 500 and the amazingly bullish buy and hold nonsense heard nearly everywhere on Wall Street. Hedge funds are mostly being used as a scapegoat.

But other proposals the Obama administration is preparing to make, like tighter federal regulation of mortgage brokers, had been recommended in Mr. Paulson’s blueprint.

Officials said some credit default swaps with unique characteristics negotiated between companies might not be able to trade on exchanges or through clearinghouses. But standardized or uniform ones could.

“We want to make sure that the standardized part of those markets move into a central clearinghouse and onto exchanges as quickly as possible,” Mr. Geithner testified. “I think that’s really important for the system. It will help reduce risk and the system as a whole.”

The new trading procedures for derivatives could also enable regulators to impose capital and collateral requirements on companies that issue credit default swaps that would make them safer investments. American International Group, one of the largest issuer of such swaps, never had to post collateral and nearly collapsed as a result of issuing a huge volume of such instruments that it was unable to support.

My Comment: Nearly collapsed? AIG did collapse and it should have been allowed to go bankrupt. The reason it was bailed out is counterparties like Goldman were on the other side of the swaps. Taxpayers essentially are bailing out not only AIG, but Goldman, and anyone else involved in those swaps.

Officials said the plan may include a broader role for the Federal Reserve in protecting the economy from companies whose troubles pose systemwide risks, as the report issued under the leadership of Mr. Volcker, a former Fed chairman, has proposed. The report was issued this month by a subcommittee of the Group of 30, a not-for-profit body of senior representatives from various governments and the private sector. The group’s members include Mr. Geithner and Lawrence H. Summers, the director of the White House National Economic Council.

My Comment: This is the Fed Uncertainty Principle corollary number two in action.

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.

Administration officials have begun to study ways to control executive compensation.

For example, they are preparing proposals to limit executive pay at companies that receive money under the bank bailout program. In response to written questions by Senator John Kerry, Democrat of Massachusetts, Mr. Geithner said that in such circumstances the administration was planning to set a limit and that any compensation over that amount would “be paid in restricted stock or similar form that cannot be liquidated or sold until government assistance has been repaid.”

“Excessive executive compensation that provides inappropriate incentives,” Mr. Geithner said, “has played a role in exacerbating the financial crisis.”

The most hilarious video I have seen in a long time on YouTube covers much of the above. I highly recommend playing it for a laugh. However, I issue a big warning in advance: Very harsh language throughout.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Is Big Inflation Coming?

Adam Hamilton at Zeal is predicting Big Inflation Coming.

The growing legions of deflationists see an unstoppable depression-like deflationary spiral approaching like a freight train. They cite some convincing data. The stock markets have been cut in half in just a year. In the past 6 months, some key commodities prices fell farther and faster than they did in the entire Great Depression. House prices are down by double digits across the nation, with no bottom in sight. And credit is a lot harder to come by today than in any other time in modern memory.

My Comment: Well yes, that is convincing data. Indeed a perfect 15 out of 15 conditions experienced in the great depression are happening today as discussed in Humpty Dumpty On Inflation.

Of course Humpty Dumpty can and does pretend that deflation is specifically about money supply, totally ignoring credit. And those same Humpty Dumpties were amazed by the collapse in commodities and were crushed shorting treasuries because they did not see this coming.

In light of these universal falling prices, how could we not be entering a sustained deflationary period? The case may seem airtight, but I’d like to offer a contrarian view in this essay. Believe it or not, despite 2008’s price collapse there is plenty of overlooked evidence suggesting big inflation is coming. You won’t hear much about this on CNBC, but it could have a big impact on your investments in the years ahead.

My Comment: I am not sure what Hamilton means by "sustained". We have been in deflation for about a year, and maybe it lasts another, or five. Then again, perhaps we drift in and out of a slow growth recessionary period much like Japan for a decade. We have to take this one step at a time.

Inflation and deflation are purely monetary phenomena. Inflation is not just a rise in prices, lots of things can drive prices higher. Inflation is the very specific case of a rise in general price levels driven by an increasing money supply.

My Comment: That last sentence puts the cart in front of the horse. Inflation is not rising prices; rising prices are a result of inflation (an increase in money supply and credit).

Acknowledging that debt-financed house prices are a special case that may indeed be deflationary (contraction of credit), I am focusing on stocks and commodities in this essay. From October 2007 to November 2008, the flagship S&P 500 stock index plunged 51.9%. About 4/7ths of these losses snowballed in just 9 weeks during the stock panic. From July 2008 to December 2008, the flagship Continuous Commodity Index plummeted 46.7%. Almost half of this mushroomed during the stock panic.

Deflationists argue these price drops are proof of deflation, and most people today believe this. But they are only deflationary if they were driven by a contraction in the money supply. Stocks and commodities are generally cash markets. Credit such as stock margin can be used, but it is trivial relative to the market sizes. And real commodities purchased for industrial uses are paid for in cash or near-cash (short-term trade loans), not multi-decade loans like houses. So the money supply during 2008’s slides is the key.

My comment: What deflationist has argued that commodity price declines are proof of deflation? Can I have a name? Most mainstream media is concentrating on prices.

More to the point, no single indicator alone can constitute proof. However, 15 out of 15 symptoms one might expect to see in deflation should be ample proof for anyone.

If available money to spend indeed contracted, then the deflationists are right about seeing deflation in 2008. But if the money supply fell by less than stocks and commodities plunged, was flat, or even grew, then deflationists are wrong. When prices fall simply because demand declines (too much fear to buy anything immediately), this is merely supply and demand. If money didn’t drive it, then it isn’t deflation.

There is the humpty dumpty argument again. And again I reply that it is foolish to ignore credit (debt). Debt is actually more important than money simply because it dwarfs base money. And much of that debt cannot be paid back and that is why banks are failing.

Come to think of it, I need to add bank failures to my list. That makes a perfect 16 out of 16 things.

The key point in this rebuttal is that money supply does not have to shrink to cause deflation unless you insist on a humpty dumptyish definition that has no real world practical application.

Here is a practical application: There is no money to pay back loans. What cannot be paid back will be defaulted on and the default avalanche has been triggered. Once an avalanche starts, it is impossible to stop.

That avalanche of defaults amounts to deflation if it exceeds the expansion of money supply.

Banks are attempting to hide the avalanche by not marking their books to market. Citigroup alone is sitting on over $800 billion in SIVs of dubious value. However pretending credit will be paid back does not make it so, just as ignoring an avalanche does not stop it.

Hamilton goes on and on with straw man arguments about what deflationists believe. In practice I do not know a single deflationist who believes the strawman Hamilton is rebutting.

Hamilton also talks about various money supply charts as if they are proof of inflation. Here is my rebuttal.

Base Money % Change From A Year Ago



Hamilton's definition shows there was massive inflation during the great depression, starting in 1931!

Of course that is ridiculous. But it is what one must conclude if one defines inflation as an expansion of money supply alone.

That chart shows why it is foolish to look at one indicator as proof of inflation. A more practical approach and a more practical definition, gives more practical results.

Soaring base money supply is not proof "Big Inflation Is Coming" soon, just as it was not proof that "Big Inflation" was coming in 1931. There cannot possibly be any other logical conclusion when confronted with the data.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Al Gore And Abby Cohen Discuss The Economy

The Senior U.S. investment strategist at the Goldman Sachs Abby "The Guru" Cohen and Former V.P. Al Gore are discussing the global economy.

In speeches yesterday in Philadelphia, a Goldman Sachs strategist said the U.S. economy was not "the 1930s revisited," and Al Gore said short-term thinking had been catastrophic for capitalism.

The economy is in an era of swinging between extremes, Goldman's Abby Joseph Cohen said at the Greater Philadelphia Chamber of Commerce economic-outlook breakfast.

"In the course of six to nine months, many investors and many businesspeople have gone from one extreme, fearing rip-roaring inflation, to the other extreme, fearing the extraordinarily negative consequences of deflation," said Cohen, senior U.S. investment strategist at the Goldman Sachs Group Inc.

"Our belief is that we are not entering a period of dramatic deflation. We do not think this will be the 1930s revisited," she said. "A true deflation is when incomes deflate not just for a few quarters, as we expect, but for a multiyear period."

Cohen said her firm predicted that the recession would end in six months or so, at least in terms of declining gross domestic product.

Cohen said, spreads on "BBB" corporate bonds, the highest grade of junk bond, have increased to levels never seen before. Current spreads "imply that the default rate will increase four times. Now we think there will be problems in some corporate debt, but will the default rate increase four times? On average, probably not," Cohen said.

Former Vice President Gore railed against the impact of short-term thinking on the environment and economy.

"In the banking business, in the investing business, in financial services generally, this short-term thinking has been catastrophic, and it has now gotten to the point where our system of American capitalism is itself really taking a major hit," Gore said. He spoke at a Center City event hosted by state Treasurer Robin L. Wiessmann and sponsored by PNC Financial Services Group.

"Vast areas of the financial system have been effectively nationalized now, and all around the world where they've looked to the United States as the leader of how we can organize democratic capitalism, the confidence in the American vision of how to do this has been shaken," Gore said.

Abby Cohen to Stop Making S&P 500 Forecasts

Flashback March 17: Goldman Sachs Says Abby Cohen to Stop Making S&P 500 Forecasts

Abby Joseph Cohen, the most bullish investment strategist on Wall Street this year, will stop making Standard & Poor's 500 Index forecasts for Goldman Sachs Group Inc.

She was succeeded in the role by David Kostin, Goldman's U.S. investment strategist, spokesman Ed Canaday said in a telephone interview. Kostin today predicted the S&P 500 may fall 10 percent to 1,160 before rebounding to 1,380 by year's end.

My Comment: Looks like Goldman replaced one perpetually bullish clown with another.

Cohen, as chief investment strategist, last predicted the benchmark for American equities would end 2008 at 1,675, representing a 32 percent rally from its current level.

My Comment: Let's do the math. The S&P closed the year at 903. Her call was 1,675. It will only take an 85.5% rally from the December close to get to her target. How long will that take? Five years? A decade? Longer?

The 56-year-old Cohen now has the title "senior investment strategist" and contributor to the portfolio strategy team, according to Canaday. Her prediction for the S&P 500 this year was the highest among 14 Wall Street forecasters followed by Bloomberg.

"She will continue to meet with our clients around the world and provide commentary on financial markets focusing more on longer-term market activity," Canaday said in an e-mailed statement.

Excuse me for asking, but why would anyone want her advice?

Abby Joseph Cohen, the Sunny Side

Some may suggest that one year is not a good basis on which to make a judgment. Fair enough. Guru Grades is featuring Abby Joseph Cohen, the Sunny Side.

The following chart shows the absolute errors for Abby Joseph Cohen's annual S&P 500 index forecasts (yellow columns) along with: (1) the average absolute errors for the experts from the same-year Business Week forecasts (blue columns); and, (2) the absolute errors for annual mechanical extrapolations of historical S&P 500 index performance (red columns).



click on chart for sharper image

There is slight evidence that Ms. Cohen is a better forecaster than the average expert but a worse forecaster than a simple algorithm.

So it was not just "The Guru" who was wildly off in 2001, 2002, and 2008, every "expert" was wildly off in every bear market year since 1999. I guess you can only get to be an "expert" by constantly being bullish.

Goldman Sachs guru Cohen says extreme market volatility is over

Flashback January 27 2001: Goldman Sachs guru Cohen says extreme market volatility is over.

One Of Wall Street's leading stock market pundits, Abby Cohen of Goldman Sachs, yesterday forecast a return to more normal stock market conditions after the turmoil of the last eighteen months and recommended that investors go overweight in technology stocks once more.

Speaking to delegates at the World Economic Forum in Davos, Switzerland, Ms Cohen said she believed the extreme volatility seen in markets had come to an end. ... Rest By Subscription

How Did Cohen Get Her "Guru" Status?

Inquiring minds are pondering the above question. I actually remember it well. It was called the "Shot Heard Around The World". In March of 2000, right at the peak of the bubble Abby Cohen announced a reduction in the stock allocation in Goldman Sachs' model portfolio from 70% to 65%. The market tanked big time on the day of the announcement.

Seriously, that's it. Right before one of the biggest crashes in history she reduced her model equity exposure by 5%. You can find the rest of the story in SAY WHAT, Abby Joseph Cohen?

How much is Goldman paying this perpetually bullish guru? Sorry, I do not have the answer to that question.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Unprecedented Crisis In US, UK, Australia, Europe

Today was like most any day in recent memory: Another day, Another day of grim news.

In the US, President Obama is struggling to cope with an "unprecedented crisis", regulators closed Centennial Bank in California, Freddie Mac is asking for more cash, and 30 year bonds are getting shellacked.

Overseas, French and Flemish governments are intervening in the markets, the UK is shrinking at the fastest pace since 1980, and Australia needs action to save jobs. Rounding up the grim news, 1.2 million corporate networks have become infected with worms that attack Microsoft Corp.’s Windows operating system.

Here are the grim details.

Obama Seeks $825 Billion For "Unprecedented Crisis"

Citing an unprecedented crisis Obama Presses Congress on Stimulus.

President Barack Obama said his administration and Congress will reach agreement within weeks on an $825 billion stimulus plan to cope with what may be an “unprecedented” economic crisis.

“We are experiencing an unprecedented, perhaps, economic crisis that has to be dealt with,” Obama said today as he began a meeting with nine Democratic and Republican leaders at the White House, his first such session with lawmakers since taking office on Jan. 20. He also called for greater oversight of spending by financial institutions that get bailout money.

Obama is confronting a weakening economy and eroding investment values. Average home prices in November dropped 8.7 percent from a year earlier, the most in at least 18 years, the government said yesterday. Housing starts fell 16 percent last month, the number of Americans filing first-time claims for jobless benefits climbed to a 26-year high, and the Standard & Poor’s 500 Index has lost 7.9 percent since the start of the year.

Undeniably Grim News In The UK

There is "undeniably grim news" in the UK, as the Economy Shrinks Most Since 1980, in Recession.

The U.K. economy shrank more than economists forecast during the fourth quarter in the biggest contraction since 1980 as the financial crisis crippled the banking industry and mired Britain deeper in the recession.

Gross domestic product fell 1.5 percent from the previous quarter, the Office for National Statistics said in London today. Economists had predicted a 1.2 percent drop, according to a Bloomberg News survey. The economy has now shrunk in two quarters, the conventional definition of a recession.

The pound dropped against the dollar and U.K. stocks fell after the report. Prime Minister Gordon Brown said that the government is using “every weapon at our disposal” to fight the crisis. Bank of England Governor Mervyn King says officials may start buying up securities soon as interest rates lose their potency to aid the economy.

“This is undeniably grim,” said Stewart Robertson, an economist at Aviva Investors in London, which manages about $230 billion in assets. “Two or three quarters more like this and you’re talking about depression, not recession. This should hasten activity to address the credit and money market issues.”

Service industries shrank by 1 percent on the quarter, manufacturing dropped 4.6 percent and construction fell 1.1 percent, the statistics office said. Business services and finance, accounting for 30 percent of the economy, contracted 0.5 percent and also slipped into a recession.

Regulators Close 1st Centennial Bank

A quick check of my calender shows this is Friday. And as often happens on Fridays, Regulators close 1st Centennial Bank in California

Regulators have shut down 1st Centennial Bank in California, the third U.S. bank to fail this year. California regulators closed the Redlands-based bank on Friday and appointed the Federal Deposit Insurance Corp. as receiver. 1st Centennial had assets of $803.3 million and deposits of $676.9 million as of Jan. 9.

The FDIC says 1st Centennial's insured deposits will be assumed by First California Bank, based in Westlake Village, Calif. Its six branches will reopen Monday as offices of First California.

Major Financial Institutions Collapse

Australia's treasurer Wayne Swan says Australia Won’t ‘Hesitate’ to Boost Economy.

Australia’s government won’t hesitate to stimulate the economy further should the need arise amid the global recession, Treasurer Wayne Swan said. Swan, speaking to the New York investment community, said the government could add to some A$45 billion ($29 billion) in stimulus already announced should economic conditions worsen.

“We will not hesitate to take whatever further action is necessary to support growth and jobs,” Swan, 54, said in speech notes received via e-mail. “Major financial institutions, some of which have withstood world wars and the Great Depression, have either collapsed or been bailed out.”

Freddie Mac Asks For $35 Billion More Taxpayer Funds

The GSEs are running out of cash as expected (at least as readers of this blog expected), so it id no surprise that Freddie Mac asks the government for more help

Freddie Mac plans to ask the government for up to $35 billion in extra support as the housing slump continues to hammer the mortgage giant.

The Federal Housing Finance Agency, Freddie Mac's conservator, will ask the Treasury Department for additional funds of between $30 billion and $35 billion, the mortgage giant said in a regulatory filing Friday.

Based on a preliminary evaluation of its fourth-quarter operations, Freddie Mac's management believes that it will need the extra support to offset the impact of operating losses as well as other items that could affect the company's net worth.

Freddie Mac (FRE) has already drawn $13.8 billion under the $100 billion agreement. That happened in November, after Freddie reported very weak third-quarter results.

Let's do the math: $35 billion + $13.8 billion = $48.8 billion. Freddie Mac is nearly halfway towards burning up $100 billion in taxpayer money. I predict Freddie will be out of money by the end of the year.

Tough Year Ahead For Credit Card Industry

Capital One massive $1.4 billion writeoff yesterday suggests the Credit card industry faces tough 2009

Capital One (COF) , one of the largest card issuers, reported a $1.4 billion fourth-quarter net loss late Thursday as it set aside another $1 billion to cover higher charge-offs this year.

The fourth-quarter charge-off rate in the U.S. card business was 7.08%, up from 6.13% during the third quarter. That's expected to jump to roughly 8.1% in the first quarter of 2009, up from the mid-7% range Capital One previously forecast.
Credit-card companies are being hit as falling house prices, the financial crisis and surging unemployment limit the ability of some customers to pay back debt racked up on their cards.

Capital One said it expects the U.S. unemployment rate to reach 8.7% by the end of 2009 from 7.2% currently and that, on average, home prices will fall another 10% this year.

"From a credit perspective, 2009 is literally and figuratively a write-off," Richard Shane, an analyst at Jefferies & Co., wrote in a note to investors on Friday. "We view the entire industry embarking on a path of permanently lower equity returns."

Richard Shane is thinking clearly, a rare happenstance these days.

Citigroup Raises $12 Billion

Struggling to save the bank, Citigroup Raises $12 Billion in FDIC-Backed Bond Sale

Citigroup Inc. sold $12 billion of notes guaranteed by the Federal Deposit Insurance Corp. as Chief Executive Officer Vikram Pandit tries to bolster capital and save the bank from insolvency.

The sale is the biggest offering of debt backed by the FDIC since banks began using the government’s Temporary Liquidity Guarantee Program on Nov. 25, according to data compiled by Bloomberg. The offering by Citigroup and its Citigroup Funding unit surpasses GE Capital Corp.’s $10 billion sale on Jan. 5.

Dwindling capital and a sinking stock price have already forced Pandit to take $45 billion in cash from the U.S. government and abandon the bank’s decade-old strategy of selling multiple financial services under one roof.

Citigroup cannot be saved from insolvency, Citigroup was insolvent a year or more ago. The effort now is to save Citibank, as every other part of the "group" is for sale. Of course Citibank itself is insolvent, but no one wants to come out and say it.

Manhattan’s Largest Apartment Complex Facing Eventual Default

The party is nearly over for the owners of Manhattan’s largest apartment complex. Tishman’s Stuyvesant Town Fund May Run Dry This Year

Tishman Speyer Properties LP and BlackRock Realty, owner of Manhattan’s largest apartment complex, are relying on a reserve fund to pay debt on the property and have only six months of money left before it runs out, Fitch Ratings said in a report.

The fund for the Stuyvesant Town and Peter Cooper Village apartments has declined to $127.7 million as of Jan. 15, from $400 million when it was established. Property cash flow is not expected to improve from 2008 based on the borrower’s restated budget for 2009, the ratings company said.

‘Although the property’s performance remains consistent, the cash flow generated from the property continues to require significant reserves to cover debt service obligations,” Fitch analysts Sue Ann Butera and Adam Fox in New York said.

Tishman Speyer and BlackRock paid $5.4 billion for the properties in 2006 with plans to convert rent-regulated units to market rates. A $3 billion loan to finance the acquisition was bundled with commercial mortgages and sold as bonds.

A general reserve fund for the property has also been “completely depleted,” the Fitch analysts said today.

Kiss this baby goodbye. There is no hope of survival. Some bank is going to become the proud owner of Stuyvesant Town and Peter Cooper Village.

Treasury Bonds Routed

On fears of massive supply, U.S. Treasury 30-Year Bonds Post Biggest Weekly Loss Since 1987

Treasuries fell, with 30-year bonds posting the biggest weekly loss in almost 22 years, on concern that debt sales will increase as the government boosts spending to ease the deepening economic slump.

Ten-year yields touched a six-week high amid speculation President Barack Obama’s administration will join governments around the world in selling record amounts of bonds to rescue banking systems and battle a global recession. Goldman Sachs Group Inc. yesterday raised its 2009 Treasury borrowing estimate to $2.5 trillion.

“Supply is a concern for this year,” said Michael Pond, interest-rate strategist in New York at Barclays Capital Inc., one of 17 primary dealers required to bid at U.S. debt auctions. “We are approaching the refunding period where we will get long-dated issuance, so it’s not surprising that it is weighing on investors’ minds.”

Thirty-year yields increased six basis points, or 0.06 percentage point, to 3.32 percent at 4:04 p.m. in New York, according to BGCantor Market Data. For the week, the bond’s yields were up 43 basis points, the most since the five days ended April 24, 1987.

It is possible bond bears are finally right and the low in yields is in. But even if it is, a retest is likely.

French And Flemish Government Aid Banks

In Europe, French and Flemish government capital infusions failed to stop the markets from falling. European stocks fall to near six-year low

European shares hit their lowest level for almost six years on Friday after a dismal week that saw heavy selling of bank and insurance shares. Any hopes that bank stocks might rally during the week, after a rout the previous Friday, were swiftly crushed on Monday when sentiment was soured by a record loss from Royal Bank of Scotland.

The FTSE Eurofirst 300 index of blue-chip shares Friday fell 0.3 per cent to 760.54, its lowest level since April 2003, after touching a low of 741.37. The pan-European index has fallen in 12 of the past 13 sessions. Over the week it fell 5.4 per cent and it is down 43 per cent over the past year.

Intervention from the French and Flemish governments provided some relief. France’s three largest banks, BNP Paribas, Société Générale and Credit Agricole, all gained after the government said it would provide a further €10.5bn to its banks in return for their executives’ forgoing bonuses. SocGen added cheer by announcing that it expected to break even for the fourth quarter of 2008 and earn a net profit of €2bn for the year.

The bounce, however, was brief. BNP Paribas ended the week 26 per cent lower at €21.38 and SocGen fell 14 per cent to €27.25. Credit Agricole was a relative success, posting a weekly fall of just 8.5 per cent to close Friday at €7.58.

Shares in Belgium’s KBC were crushed in the first three days of trading. They lost losing 55 per cent as investors panicked over the banking and insurance group’s exposure to toxic structured credit products.

By Thursday the savageness of the sell-off forced the Flemish government to act. It injected €2bn of extra capital into KBC as the bank seized the opportunity to announce a provisional 2008 loss of €2.5bn. Its shares rallied 50 per cent, as traders who had sold the shares short were forced to buy them back to limit their losses. KBC closed 40 per cent lower for the week at €12.24.

Computer Virus Spreads Through Microsoft Networks

Microsoft is back in the news as the Downadup Computer Worm Infects 1.2 Million Networks

A computer worm called Downadup, the most severe outbreak in years, continues to spread after infecting millions of corporate computers and servers.

About 1.2 million networks were contaminated as of yesterday, Mikko Hyppoenen, chief research officer at Helsinki- based Internet security software maker F-Secure Oyj, said in an interview. That’s up from less than a million on Jan. 20.

The virus, also know as Conficker, infects computers and servers running on Microsoft Corp.’s Windows operating system, according to F-Secure. The worm, which can block users from accessing their accounts, also spreads through portable storage devices. F-Secure posted a warning about the virus on its Web site on Jan. 7.

The strain is different from other outbreaks because it mainly affects corporations and not home computers.

“A few minutes after the virus has intruded a company network, all laptops, desktops and servers have become infected,” Hyppoenen said. “We have had cases where hospital networks with computers in operating rooms have become contaminated. You can’t just unplug them, making the cleanup more difficult.”

Another day, Another day of grim news

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Extreme Leverage In Reverse Portends Global Systemic Crash

Inquiring minds are investigating a visual comparison of banks' market caps valuation as of January 20, 2009 vs. the second quarter of 2007.

Bank Market Cap Comparison

Note: I had posted a draft version of the chart that follows.
Here is the corrected copy with thanks to Financial Times Alphaville.



click on chart for sharper image
chart courtesy of JP Morgan and Bloomberg.

Extreme Leverage In Reverse

The chart is an illustration of extreme leverage in reverse.

Bear in mind that fallout from Alt-A, prime home equity, credit cards, small business, and commercial real estate are still on the way.

The global banking system is clearly insolvent as discussed in Fed and BOE Shell Games to Bailout Insolvent Banks and British banks are 'technically insolvent' (and other secrecies).

Possible Systemic Collapse

My friend BC pinged me with these thoughts:

US banks levered cash to loans at 25:1 and liabilities at 33:1 at the credit bubble peak. The long term historic average ratios are about 5-7:1, and 7-10:1 respectively.

Moreover, historically, the ratio of real estate loans to cash averaged 1.25 to 2 (!!!) on a sustained basis, whereas the ratio at the unprecedented hyper-leveraged point in 2007-2008 reached 12-13:1, with real estate loans as a share of all bank loans reaching almost 60%. Real estate loans/GDP topped out at 26-27% (!!!).

Were the banks' cash ratio to "unreal" estate loans to return to the historically sustainable range, banks would either need to (1) triple and quadruple their cash assets from $1T to $3T-$4T and/or (2) write down real estate assets commensurately or a combination thereof.

Wells Fargo is loaded to the rafters with eventually non-performing residential and commercial real estate loans in the US Pacific Northwest the last region of the country to enter the Kuznets Cycle bust to date.

Consider what virtually no growth in real estate loans combined with a tripling or quadrupling of banks' cash assets means to the real estate market and US overall investment, consumption, government receipts, and payrolls going forward.

The negative effects of bank liquidation and reverse leverage risk outright systemic collapse.

In Brink of Debt Disaster we looked at how consumer debt has the United States and the United Kingdom stand on the brink of the largest debt crisis in history. Together, these posts show the threat of an outright global systemic deflationary crash is very real.

This is not a call for a global crash, rather a warning that one could easily occur.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Time Magazine Best 25 Financial Blogs

I am honored to make this front page of Time Magazine's Best 25 Financial Blogs.

It has been over a year since we published our feature "The 25 Best Financial Blogs." A great deal has changed. Some of the blogs on the list are gone or no longer have regular posts. Others have grown and become better.

This is a list of independent blogs. However, several major media outlets have excellent blog sections. David Gaffen at WSJ.com, Fortune.com's Apple 2.0 blog, BusinessWeek.com's Fine On Media, and BloggingStocks at AOL (24/7 contributes content to this site). Obviously, these blogs have a level of financial support that independent blogs do not enjoy.

Their writers are paid salaries. They have greater exposure due to their relationship with larger websites. They are excellent, but really should not be compared with websites operated by one person or a small group of individuals. Nevertheless, they should be recognized for their own commentary as well as the exposure that they give to independent blogs.

Financial blogs end up being either labors of love or ways to promote small money management or paid newsletter businesses. It would seem to be a tough way to make a living. ...

After we narrowed the number of financial blogs down to about 50, we tracked posts for several weeks before picking the final twenty-five.

Original content was our most important measurement: specifically, content that was well-written, well-researched and crisp. Blogs that were mostly aggregations of content from mainstream media did not make the cut. This meant that the majority of the copy had to be directly written by the blog's author(s).

24/7 Wall St. also looked at how well read the blogs were based on the number of other blogs that linked to each websites on our list. These figures were provided by Technorati, the internet's leading blog search engine.

The list is stated to be not in any particular order but I am pleased to be selected for the lead.

1. Mish's Global Economic Trend Analysis (7,903 links). Although Mish (aka Mike Shedlock) is not an economist by training, he adroitly gets into the thick of economic data. Mish uses observations made by those in major media, so-called experts and government officials and serves up analysis based on his impression of their relevance and validity. The author is not afraid to attack conventional wisdom.

7.The Big Picture by Barry Ritholtz (11,223 links). Ritholtz is one of the most well-respected market and economic pundits and bloggers who manages money as his day job. Multiple posts a day on subjects as diverse as criticisms of the business press, digital media, and key economic indicators. An excellent job of using relevant and interesting charts, tables, and graphs.

14. Calculated Risk (11,057 links) is among the most thoughtful and thorough financial commentary on the internet. Period. Tears apart poor economic assumptions. Gets to the heart of the elements that move the economy and markets. Big focus on housing and economic analysis.

I regularly read Calculated Risk and The Big Picture. Calculated Risk actually created the initial template for my blog several years ago. He started his blog a few week earlier. We are friends and talk on the phone semi-regularly, helping each other out as best we can.

In terms of traffic as ranked by Gongol, Big Picture and Calculated Risk are numbers 1 and 2. That order sometimes changes.



click on chart for sharper image

I thank all my readers for their support over the years and a special thanks to Calculated Risk and Barry Ritholtz, the former for setting up my blog and for being a good friend, the latter for publicizing my blog in the early going before anyone ever heard of "Mish".

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