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13 мая 2014, 00:56

San Francisco Seeks To Be First U.S. Hub For Trading China's Currency

SAN FRANCISCO -- Known for its tech prowess and liberal politics, San Francisco is hoping to claim a new mantle: North America's first offshore hub for trading in China's currency. During a recent visit here, Hong Kong's secretary for financial services and the Treasury, K.C. Chan, met with business leaders to discuss the prospects for San Francisco to pioneer transactions in RMB, or renminbi. If successful, the move promises to open the floodgates of increased trade, investment and job creation in the Bay Area, but could also pour more liquidity into property markets already tipsy on tech wealth. “Whether you’re going to be opening a savings account in RMB, conducting trade in RMB, or just taking in money from China for an investment, we want San Francisco to be the hub where all of that happens freely,” Darlene Chiu Bryant, executive director at ChinaSF, a public-private partnership spearheading the initiative, told The WorldPost. China’s currency has historically been tightly controlled by the Chinese government, which limits capital flows and essentially sets exchange rates. But over the past decade, as China has looked to liberalize its own financial markets and popularize the use of the RMB abroad, the country has established offshore RMB hubs in Hong Kong (the first and most popular), London, Singapore and Frankfurt. These hubs facilitate the depositing, converting and investing of China’s currency outside of mainland China. If San Francisco were to establish a hub of its own, local companies exporting to China could choose to be paid in RMB, which they could then convert to dollars or reinvest in China. Chinese investors could also dip into a wider variety of local markets through RMB holdings in the United States. Advocates for the hub say it will be particularly beneficial for driving new investment around the Bay Area, throughout California and eventually across the whole continent. “It’s a much-needed thing, and if it happens the ripple effects will be huge, clear across the United States,” said Philip Wong of the Bank of Communications in San Francisco, a Chinese bank that has pioneered dual-currency accounts in the city. “It would open more doors for businesses from China, and it’ll trickle way up north to Canada and then down into Latin America.” But a surge in Chinese investment in San Francisco comes with perils in a city struggling to adapt to the massive influx of tech wealth from Silicon Valley. Over the last year, some residents have revolted against a tech invasion that has dramatically reshaped neighborhoods. Chinese homebuyers have contributed to rising home prices in some Bay Area cities, despite being subject to currency controls that limit the money they can move offshore. If controls were lifted, a simultaneous surge in Chinese investment and influx of high-paying finance jobs could add to local tensions. "Currency traders are always the highest paid financial professionals, and if you see a couple hundred or a couple thousand of them moving into the downtown or Mission District area then it's going to make some of these conflicts even more intense," Stanley Kwong, managing director and professor of the China Business Studies Initiative at the University of San Francisco, told The WorldPost. Kwong noted that locating the hub in San Francisco could bring about dueling effects in the city: While it would bring in more finance jobs and real estate investors, Chinese businesses would also likely bring more housing units onto the market, taking some heat off of housing prices. Advocates for the hub say that the move would spread benefits evenly throughout the city, creating the blue-collar jobs that are increasingly hard to find. In the past year, investments from China have funded some of the largest housing development projects under construction in both Oakland and San Francisco. “I think the hub will do more to create jobs for San Francisco and the Bay Area than it will drive up prices,” Bryant of China SF said. “Once you start bringing more construction jobs, there are more people spending money and more people moving in. It’s a good thing.” San Francisco is reportedly competing with cities like Toronto and Vancouver to be the first RMB hub in North America. America’s traditional financial capital of New York has yet to throw its hat in the ring. Representatives from San Francisco Mayor Ed Lee’s office did not respond to a request for comment, but the gears appear to be turning behind the scenes; Bloomberg reported last fall on meetings between Lee and representatives from the Bank of China, a group that has taken the lead on past offshore RMB projects. “When you think about what’s lacking, what’s needed to complete the picture, it’s North America,” Chan told The WorldPost during the recent visit to San Francisco. “Traditionally, we think about New York, but it could be any city in North America.” Analysts point out that in order for RMB exchanges to be available at all times of the day, a North American hub is required to link exchanges in Asia with those in Europe. Professor Yin-Wong Cheung of the City University of Hong Kong said that San Francisco in particular has several advantages for being an RMB hub: the Bay Area’s strong business links with mainland China, a large and deeply integrated Chinese-American community, and a blossoming relationship between state leaders and their counterparts across the Pacific. In the past year, both Lee and California Gov. Jerry Brown have led well-received trade delegations to China. San Francisco may lack the high-flying finance markets of New York and London, but trade and investment from China have flourished there in recent years. Analysts estimate California could receive up to $60 billion in Chinese investment by 2020. By focusing on tangible trade and investment, advocates for the hub hope to avoid entanglements with the federal government required for bilateral financial exchanges. “San Francisco would not necessarily have an offshore RMB hub the way that Hong Kong and London do, because a lot of that is done via currency swap agreements between the two countries,” said Bryant of ChinaSF. “If San Francisco were to do it we’d do it on a more commercial level. There’s demand here and the question is, how does San Francisco become a hub without getting the federal government involved?” Although there is no clear timetable for the creation of a North American RMB hub, analysts say that China’s positive experience with other hubs coupled with its drive for financial reforms at home could drive the project in coming years. “My feeling is that this is going to happen much faster than in the past couple of years,” Chan said. “The first couple of years were trying out and testing the water, but with the RMB market in Hong Kong developing very nicely ... it’s a good time to see an acceleration of the process.”

01 апреля 2013, 14:17

Global Banking Crisis - How & Why YOU Will Get "Cyprus'd" As This Bank Scrambled For Capital!!!

  It is my opinion that banks worldwide are simply not safe anymore, and we are on the precipice of a banking crisis that will make the Lehman fiasco look like a test run. For one, interest rates will definitely have to rise. Yes, I know Bernanke is running ZIRP, the ECB is QE to infinity and beyond, yada, yada... But these entities are not the end all and be all for market rates. They can manipulate rates, but they can't ultimately control them for the long term. After 6 years, it's been long term...  With banks failing and taking depositor's and bondholder's funds with them, there's simply not enough people stupid enough to accept .7% returns in exchange for the very likely possibility of losing a large chunk of (the majority of, or possibly all of) their principal to go around!!! This central bank Ponzi scheme of printing more money to pay for the debt that you couldn't afford to pay back because you didn't have the money relies on the "Greater Fool Theory". Common sense dictates that this theory is predicated on an ample supply of "Greater Fools". What you will read below should shake the foundations of your belief in the EU banking system, and hopefully will start a dearth in "Greater Fools"! Even more alarming, it actually gets worse from here. Oh yeah, if you have believe that the information below actually identifies a gross misrepresentation of fact, omission or outright fraud, simply contact the SEC and let them know that Reggie Middleton suggested they look into it. You canactually use this form to convery my message. First Off Let's Make Bank Collapse Real... To begin with, let's make this Cyprus thing real, by showing a live example of what happens when to a real small business that had the gall to bank with Laikie Bank, from the Bitcoin forum I excerpt a post that puts things into perspective, re: bank account confiscation: Most of the circulating assets on our business Current Account are blocked. Over 700k of expropriated money will be used to repay country's debt. Probably we will get back about 20% of this amount in 6-7 years.I'm not Russian oligarch, but just European medium size IT business. Thousands of other companies around Cyprus have the same situation.The business is definitely ruined, all Cypriot workers to be fired.We are moving to small Caribbean country where authorities have more respect to people's assets. Also we are thinking about using Bitcoin to pay wages and for payments between our partners.Special thanks to:- Jeroen Dijsselbloem- Angela Merkel- Manuel Barroso- the rest of officials of "European Comission" Laiki Bank has offered details... Next, Let's Realize That Cyprus Is Not A "Special Case", It Is Like The Template For Future Actions Just the fear of another wave of bank collapse has government officials and regulators in fear. Why are they afraid? I made the cause of such fear clear to all at the ING Valuation Conference in Amsterdam.

01 апреля 2013, 14:17

Global Banking Crisis - How & Why YOU Will Get "Cyprus'd" As This Bank Scrambled For Capital!!!

  It is my opinion that banks worldwide are simply not safe anymore, and we are on the precipice of a banking crisis that will make the Lehman fiasco look like a test run. For one, interest rates will definitely have to rise. Yes, I know Bernanke is running ZIRP, the ECB is QE to infinity and beyond, yada, yada... But these entities are not the end all and be all for market rates. They can manipulate rates, but they can't ultimately control them for the long term. After 6 years, it's been long term...  With banks failing and taking depositor's and bondholder's funds with them, there's simply not enough people stupid enough to accept .7% returns in exchange for the very likely possibility of losing a large chunk of (the majority of, or possibly all of) their principal to go around!!! This central bank Ponzi scheme of printing more money to pay for the debt that you couldn't afford to pay back because you didn't have the money relies on the "Greater Fool Theory". Common sense dictates that this theory is predicated on an ample supply of "Greater Fools". What you will read below should shake the foundations of your belief in the EU banking system, and hopefully will start a dearth in "Greater Fools"! Even more alarming, it actually gets worse from here. Oh yeah, if you have believe that the information below actually identifies a gross misrepresentation of fact, omission or outright fraud, simply contact the SEC and let them know that Reggie Middleton suggested they look into it. You can actually use this form to convery my message. I have compiled a list of at least 6 banks which I feel are at risk of being Cyprus'd, with more being added weekly. The first bank report, whose subject is still steadily accepting deposits at measly interest rates, is available for download right now for all paying BoomBustBlog subscribers (click here to subscribe), reference  EU Bank Capital Confusion, Potential Failure. Those of you who actually follow this banking stuff may very well be shocked at how bold the actions described therein actually are! First Off Let's Make Bank Collapse Real... To begin with, let's make this Cyprus thing real, by showing a live example of what happens when to a real small business that had the gall to bank with Laikie Bank, from the Bitcoin forum I excerpt a post that puts things into perspective, re: bank account confiscation: Most of the circulating assets on our business Current Account are blocked. Over 700k of expropriated money will be used to repay country's debt. Probably we will get back about 20% of this amount in 6-7 years.I'm not Russian oligarch, but just European medium size IT business. Thousands of other companies around Cyprus have the same situation.The business is definitely ruined, all Cypriot workers to be fired.We are moving to small Caribbean country where authorities have more respect to people's assets. Also we are thinking about using Bitcoin to pay wages and for payments between our partners.Special thanks to:- Jeroen Dijsselbloem- Angela Merkel- Manuel Barroso- the rest of officials of "European Comission" Laiki Bank has offered details... Next, Let's Realize That Cyprus Is Not A "Special Case", It Is Like The Template For Future Actions Just the fear of another wave of bank collapse has government officials and regulators in fear. Why are they afraid? I made the cause of such fear clear to all as the keynote speaker at the ING Valuation Conference in Amsterdam. With the knowledge contained in the video above, it's not hard to see the Infection spreads to North America as The Canadian Government Offers "Bail-In" Regime, Prepares For The Confiscation Of Bank Deposits To Bail Out Banks! Hold on, before you start worrying about your Canadian bank, you should be aware that the EU banks are still much, much, much worse off. Let's forget Cyprus for a minute and look deeper into the EU, into a larger country with more globally interconnected banks. On Thursday, 29 April 2010 I warned my subscribers to Beware of the Potential Irish Ponzi Scheme! Shortly thereafter, the BoomBustBlog Irish Research Became Reality. That same month, I warned again with the post, "Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!" Five months later, I went back at Ireland again with "If the World Knew What BoomBustBlogger's Know, Would Ireland Default Today?" This post was the clincher, to wit: The Farce! The government has set up an asset management agency – NAMA, which will buy toxic assets from banks at a discount and will in turn issue government-guaranteed securities. NAMA was expected to buy about $81 billion of toxic assets at a price of $43 billion and issue government-guaranteed securities in return. Since these securities have collateral backing and are likely to be repaid through the pay back of underlying loans, these securities are considered off-balance-sheet and are not part of general government debt by Eurostat. According to Davy research, while the projected gross government debt excluding the impact of promissory notes and NAMA bonds is 84.8% in 2012, including the impact of promissory notes and NAMA bonds (in other words, including the truth), the gross government debt can rise to 117.4% of GDP. This either competes with or bests Greece, 2010's poster child of flagrant spending. This means that the teacher has created a very harsh austerity plan for its "learner"/student/tax paying populace that has materially lowered the standard of living - all based upon numbers that were bogus to begin with. In other words, it ain't gonna work! Well, today we have proof and that proof will likely leave some EU bank despositors "Cyprus'd", and I don't mean just those in Cyprus either. Introduction and Background In 2007 Ireland had significant cross border exposure to UK and US banks through derivatives and property products. As I warned in 2007, the real estate bubble in the the US/UK popped in 2008, sending pathogenic contagion straight through the Irish banking system. The entire banking system started collapsing. On February 15, 2008, Ireland took extraordinary measures (which we will explore in depth a little later on) to mitigate said collapse, measures that many a layperson would deem misleading, if not fraudulent. RBS (Royal Bank of Scotland, one of the largest financial institutions in the countries of Ireland and the UK) was effectively nationalized by the UK and a bad bank was formed to purchase bad debt/products from the Zombie Irish banks in exchange for government bonds, backed by a country that just simply couldn't afford it. Following my warning in February of 2008, Lehman filed bankruptcy in September sending an additional set of contagion shock through Ireland and its banking system, causing Ireland to issues bonds and further indebt itself to save its Zombie banks – again! This time through blanket bank guarantees backed by the full faith of the government. In September of 2010, a large swath of said government guarantees for the banks were about to expire. Reference this excerpt from the book “Zombie Banks: How Broken Banks and Debtor Nations Are Crippling the Global Economy”: In September 2010, some of Ireland's government guarantees for bank debts were about to expire, which put U.S. Treasury officials on edge. If the guarantee wasn't renewed, the banks would likely default on their bonds, triggering the next event in line: a slew of credit default swap (CDS) contracts on Irish banks' debt. U.S. Treasury officials had reason to worry - the names backing those contracts were the largest U .S. banks, and they could end up paying billions in case of default. Any more weight on U.S. banks could be a tipping point to collapse. Treasury officials made inquiries to their counterparts at the Irish finance ministry asking about the course of action the country was planning to take and indicated their concern about possible default and its CDS repercussions. A year after having issued blanket guarantees on the banks' liabilities the Irish government once again didn't dare let the bank fail. Instead it ended up asking for financial assistance from the European Union (EU) and the International Monetary Fund (IIMF): the country had been pushed to the brink of collapse. image002 The next few posts will document details the financial shenanigans played by several EU banks (Ireland included), among others, to the tune of over €40 billion. This money was essentially double counted, or to put more simply, at least one version of it simply doesn't exist on someone’s balance sheet. For now, let’s focus on Ireland and the Irish banks. Anglo Irish Bank Anglo Irish Bank which subsequently became Irish Bank Resolution Corporation (IBRC), was recently liquidated by the Irish Government. Included below are three documents executed by this bank. The first two are charge documents that the bank entered into on the 15th of February, 2008. These charges are in favor of the Central Bank and Financial Services Authority of Ireland (the ECB). They are floating charges over Secured Obligations (repo agreements) and the banks payment module account. Anglo Irish Bank Charge Doc no2 Page 1Anglo Irish Bank Charge Doc no2 Page 2Anglo Irish Bank charge doc Page 1Anglo Irish Bank charge doc Page 2   So, What's So Special About These Documents??? The reasons given for the floating charges are the banks participation in Target 2, which is a interbank, cross-border EU real-time payment system. A former Group Chief Auditor of one of Ireland’s largest banks who was part of the team who conducted the stress testing for the European Banking Authority was allegedly quite shocked to see the various charge documents herein. He informed BoomBustBlog consultants that these charge documents were not included in the stress testing. For those who don’t get the gravity of this statement – the previous encumbering of the Irish bank’s assets were ignored or not known by those who conducted the stress testing for the banks. What makes things even worse was despite the fact the bank’s assets were double counted, allowing them to pass the stress tests, they promptly started failing post stress test… And I do mean promptly, as in within months. The chief auditor was also allegedly able to inform that the reasons given for the purpose of the charges was a red herring. He allegedly advised that Target 2 is only a payment system and the description stated was a complete misrepresentation of the true reasons. The real reasons for the charges were because the bank was completely bust. The bank had already previously entered into repo transactions (secured obligations) with the Irish Central Bank (ECB) and had run out of money. The Irish Central Bank gave further funding using these charge documents. The share price of Anglo in February 2008 was still quite high but started to collapse over the coming months. These charge documents are not disclosed in the Annual Accounts (the EU version of an annual report) for the 31st of March, 2008. Questions also arise as to the validity of the asset transfer, the legality of Anglo Irish Bank and/or the ECB entering into repo agreements, and the activity of Anglo Irish Bank in regards to its trading activity… If a charge was given over ALL of Anglo Irish's assets, then exactly how did it legally engage in the MBS, derivative and trading activity? Underlying assets must be pledged to a trust in order to create many derivative structures, including MBS, but if there's a negative pledge clause in the charge and the charge covers nearly everything, then those assets don't truly belong to said trust, do they? You can imagine how far one can go with this line of thinking, no? If you were an investor, shareholder, bondholder or regulator the information above was critical information - EXTREMELY CRITICAL INFORMATION! Anglo ADR's were also traded through brokers in the USA. I am sure that ADR holders would have liked to have been aware of this information, as well as the SEC. I see a number of avenues which could be worth pursuing, including terms of recompense for junior bondholders who got hosed, equity shareholders who lost capital, counterparties, etc. This is, to my lay ears, tantamount to blatant fraud. Of course, I’m not an international banking lawyer, so what do I know??? Yet, I have only touched on some of the issues. There’s a lot more to come. In relation to Anglo Irish Bank (IBRC), the 2008 charge document states that the charge covers ‘all present and future liabilities whatsoever of the company, to the Central Bank of Ireland (ECB).’ But there is no disclosure of this in the Anglo 2008 accounts (annual report). This appears to illustrate concealment of the true facts. If these charge documents have not been overridden, then a massive amount of assets in the bank have been over-encumbered. Even if the charges have been overridden in some form or fashion, the mere omission of their existence is a misrepresentation of the banks financial condition, particularly in the stress testing of the banks and regulatory financial reporting (ex. SEC). If you believe that the information above actually identifies a gross misrepresentation of fact, omission or outright fraud, simply contact the SEC and let them know that Reggie Middleton suggested they look into it. You can actually use this form to convey my message.  As a reminder for those who wish to ignore my banking calls as a frivolous episode of Chicken Little, BoomBustBlog is the place that was the first to reveal: The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear?  The warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following BSC.  The collapse of the regional banks (32 of them, actually) in May 2008: As I see it, these 32 banks and thrifts are in deep doo-doo! as well as the fall of Countrywide and Washington Mutual The collapse of the monoline insurers, Ambac and MBIA in late 2007 & 2008: A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton, Welcome to the World of Dr. FrankenFinance! and Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion The ENTIRE Pan-European Sovereign Debt Crisis (potentially soon to be the Global Sovereign Debt Crisis) starting in January of 2009 and explicit detail as of January 2010: The Pan-European Sovereign Debt Crisis Ireland austerity and the disguised sink hole of debt and non-performing assets that is the Irish banking system: I Suggest Those That Dislike Hearing “I Told You So” Divest from Western and Southern European Debt, It’ll Get Worse Before It Get’s Better! The problems that plagued Cyprus banks plague banks in much larger nations within, and around the EU. From Overbanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe you see institutions that are literally too big to be handled safely... The Banks Are Bigger Than Many of the Sovereigns image015.png Definitions:  Charge The document evidencing mortgage security required by Crown Law (law derived from English law). A Fixed Charge refers to a defined set of assets and is usually registered. A Floating Charge refers to other assets which change from time to time (ie. cash, inventory, etc.), which become a Fixed Charge after a default. Repurchase Agreement A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate. The party that originally buys the securities effectively acts as a lender. The original seller is effectively acting as aborrower, using their security as collateral for a secured cash loan at a fixed rate of interest. A repo is equivalent to a spot sale combined with a forward contract. The spot sale results in transfer of money to the borrower in exchange for legal transfer of the security to the lender, while the forward contract ensures repayment of the loan to the lender and return of the collateral of the borrower. The difference between the forward price and the spot price is effectively the interest on the loan, while the settlement date of the forward contract is the maturity date of the loan. Target 2 TARGET 2 is an interbank payment system for the real-time processing of cross-border transfers throughout the European Union. TARGET2 replaced TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer System) in November 2007. Next up is a bank that is still steadily accepting deposits at a steady clip, paying ungodly low interest rates, and setting itself up to potentially get "Cyprus'd". Paying subscribers can download the report now, before capital controls are set in - see  EU Bank Capital Confusion, Potential Failure. Everybody else can subscribe or wait until either I make it public or the respective government does the Cyprus Thang! Yes it pays to be a BoomBustBlog member (click here to subscribe). I will start posting a list of definitive bank names that I have apparently caught in some amazingly duplicitous and misleading capital schemes, at least as it appears to me and my staff. I know I wouldn't have MY money in them, particularly after reading the info above. Follow me: Related posts of extreme interest: Mainstream Media Says Cyprus Salvaged By EU Deal, I Say Cyprus Is Sacrificed By Said Deal - Thrown Into Depression Liar, Liar Banking System On Fire! Watch As I Spit Fact That Burns Down The Sham Formerly Know As The EU Banking System Is The Cypriot Government Crazy Or Do They Really Fear Bankers That Much? The Anatomy of a European Bank Run! The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style Overbanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe Guest Post - Europe: An Intermediate Forecast Analysis

21 февраля 2013, 04:39

JPMorgan Being Probed Over Failed Bank's Role In Financial Crisis

By Karen Freifeld and Aruna Viswanatha (Reuters) - The U.S. Justice Department is investigating JPMorgan Chase & Co over allegations that Bear Stearns provided misleading information about its mortgage products during the lead-up to the financial crisis, according to people familiar with the matter. JPMorgan acquired Bear Stearns in a 2008 fire sale encouraged by the government, and has pushed back against various government suits that have sought to hold JPMorgan accountable for the failed investment bank's alleged mortgage-related misconduct. In this investigation, civil lawyers in the Justice Department are looking into whether Bear Stearns altered due diligence information that third parties provided about the quality of mortgage loans packaged into securities, said the people, who were not authorized to speak publicly about the probe. The investigation, which is in early stages, shows that enforcement authorities are still actively building cases amid criticism that institutions have not adequately been held to account for their role in causing the 2007-2009 financial crisis. Jennifer Zuccarelli, a spokeswoman for JPMorgan, declined to comment. DOJ spokeswoman Adora Andy also declined to comment. The Justice Department last year issued more than a dozen civil subpoenas to top financial institutions as part of an inquiry into the packaging and sale of home loans. Pending inquiries at the Justice Department are largely an outgrowth of a state-federal initiative known as the Residential Mortgage-Backed Securities Working Group, which President Barack Obama announced during his 2012 State of the Union speech. One of the co-chairs of the group, New York Attorney General Eric Schneiderman, already sued JPMorgan for fraud over Bear Stearns' packaging and sale of mortgage securities in the run up to the financial crisis. It is unclear whether the recent Justice Department investigation into JPMorgan will result in enforcement action or might merge with mortgage-related probes by other agencies. In a sign of how important the department appears to view these cases, the JPMorgan inquiry involves lawyers close to acting associate attorney general Tony West, according to people familiar with the matter. West led the department's civil division until last February when he was promoted to his current post as the agency's third in command. In another sign U.S. authorities are actively pursuing mortgage-related inquiries, the inspector general's office of the Federal Housing Finance Agency is hosting a training session this week with members of the RMBS working group, including federal prosecutors, members of the Federal Bureau of Investigation, special agents and others, a person familiar with the training said. The group has held several similar sessions in the past year, the person said. PRIVATE SUITS The DOJ inquiry into the due diligence performed for Bear Stearns tracks accusations detailed in private lawsuits against the bank. Bear Stearns hired Mortgage Data Management Corp to review a sample of loans in a 2006 mortgage securitization, according to a case filed against JPMorgan last year by bond insurer MBIA Inc . Reviewers concluded that around one-third of the loans had serious credit and compliance problems, the lawsuit said. But Bear Stearns altered the electronic spreadsheets to conceal the problems, according to the lawsuit, which was filed in New York State Supreme Court. Bear Stearns removed 50 columns of information from the spreadsheet that showed the issues and then sent the altered report to MBIA, the lawsuit said. In its answer to the MBIA complaint, JPMorgan denied the allegations that it had altered the spreadsheets. That case is pending. LATEST LEGAL HEADACHE JPMorgan has recently been hit by a wave of lawsuits over the conduct of Bear Stearns that appear to have some overlap. New York's case, filed in October, accuses Bear Stearns of causing some $22.5 billion in losses to investors of mortgage-backed securities by failing to ensure the quality of the underlying loans. In December, the U.S. credit union regulator sued the bank over $3.6 billion in securities sold by Bear Stearns. And in November, JPMorgan paid $296.9 million to settle a case with the U.S. Securities and Exchange Commission that accused Bear of failing to disclose it had arranged discounted cash settlements with originators that left investors stuck with problem loans. The SEC also accused JPMorgan itself of overstating the quality of home loans that backed a $1.8 billion residential mortgage-backed securities offering it underwrote in 2006. The bank's chief executive Jamie Dimon has said the bank is continuing to pay the price for doing "a favor" for the Federal Reserve in agreeing to rescue Bear Stearns. The inquires are the latest legal headache for JPMorgan, which also faces separate investigations from a trading loss of $6.2 billion that sprung from a botched hedging strategy carried out in its London office, and inquiries into whether its traders manipulated benchmark interest rates. (Reporting By Karen Freifeld in New York and Aruna Viswanatha in Washington; Editing by Karey Wutkowski and Tim Dobbyn)

21 февраля 2013, 04:39

JPMorgan Being Probed Over Failed Bank's Role In Financial Crisis

By Karen Freifeld and Aruna Viswanatha (Reuters) - The U.S. Justice Department is investigating JPMorgan Chase & Co over allegations that Bear Stearns provided misleading information about its mortgage products during the lead-up to the financial crisis, according to people familiar with the matter. JPMorgan acquired Bear Stearns in a 2008 fire sale encouraged by the government, and has pushed back against various government suits that have sought to hold JPMorgan accountable for the failed investment bank's alleged mortgage-related misconduct. In this investigation, civil lawyers in the Justice Department are looking into whether Bear Stearns altered due diligence information that third parties provided about the quality of mortgage loans packaged into securities, said the people, who were not authorized to speak publicly about the probe. The investigation, which is in early stages, shows that enforcement authorities are still actively building cases amid criticism that institutions have not adequately been held to account for their role in causing the 2007-2009 financial crisis. Jennifer Zuccarelli, a spokeswoman for JPMorgan, declined to comment. DOJ spokeswoman Adora Andy also declined to comment. The Justice Department last year issued more than a dozen civil subpoenas to top financial institutions as part of an inquiry into the packaging and sale of home loans. Pending inquiries at the Justice Department are largely an outgrowth of a state-federal initiative known as the Residential Mortgage-Backed Securities Working Group, which President Barack Obama announced during his 2012 State of the Union speech. One of the co-chairs of the group, New York Attorney General Eric Schneiderman, already sued JPMorgan for fraud over Bear Stearns' packaging and sale of mortgage securities in the run up to the financial crisis. It is unclear whether the recent Justice Department investigation into JPMorgan will result in enforcement action or might merge with mortgage-related probes by other agencies. In a sign of how important the department appears to view these cases, the JPMorgan inquiry involves lawyers close to acting associate attorney general Tony West, according to people familiar with the matter. West led the department's civil division until last February when he was promoted to his current post as the agency's third in command. In another sign U.S. authorities are actively pursuing mortgage-related inquiries, the inspector general's office of the Federal Housing Finance Agency is hosting a training session this week with members of the RMBS working group, including federal prosecutors, members of the Federal Bureau of Investigation, special agents and others, a person familiar with the training said. The group has held several similar sessions in the past year, the person said. PRIVATE SUITS The DOJ inquiry into the due diligence performed for Bear Stearns tracks accusations detailed in private lawsuits against the bank. Bear Stearns hired Mortgage Data Management Corp to review a sample of loans in a 2006 mortgage securitization, according to a case filed against JPMorgan last year by bond insurer MBIA Inc . Reviewers concluded that around one-third of the loans had serious credit and compliance problems, the lawsuit said. But Bear Stearns altered the electronic spreadsheets to conceal the problems, according to the lawsuit, which was filed in New York State Supreme Court. Bear Stearns removed 50 columns of information from the spreadsheet that showed the issues and then sent the altered report to MBIA, the lawsuit said. In its answer to the MBIA complaint, JPMorgan denied the allegations that it had altered the spreadsheets. That case is pending. LATEST LEGAL HEADACHE JPMorgan has recently been hit by a wave of lawsuits over the conduct of Bear Stearns that appear to have some overlap. New York's case, filed in October, accuses Bear Stearns of causing some $22.5 billion in losses to investors of mortgage-backed securities by failing to ensure the quality of the underlying loans. In December, the U.S. credit union regulator sued the bank over $3.6 billion in securities sold by Bear Stearns. And in November, JPMorgan paid $296.9 million to settle a case with the U.S. Securities and Exchange Commission that accused Bear of failing to disclose it had arranged discounted cash settlements with originators that left investors stuck with problem loans. The SEC also accused JPMorgan itself of overstating the quality of home loans that backed a $1.8 billion residential mortgage-backed securities offering it underwrote in 2006. The bank's chief executive Jamie Dimon has said the bank is continuing to pay the price for doing "a favor" for the Federal Reserve in agreeing to rescue Bear Stearns. The inquires are the latest legal headache for JPMorgan, which also faces separate investigations from a trading loss of $6.2 billion that sprung from a botched hedging strategy carried out in its London office, and inquiries into whether its traders manipulated benchmark interest rates. (Reporting By Karen Freifeld in New York and Aruna Viswanatha in Washington; Editing by Karey Wutkowski and Tim Dobbyn)

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15 февраля 2013, 21:09

Pres. Obama isn't a fan of patent trolls. "They are essentially trying to leverage and hijack somebody else's idea and see if they can extort some money," Obama stated during a Google+ hangout. He added, "Our efforts at patent reform are only about halfway to where we need to go." The remarks come as the DOJ and FTC hold hearings on patent trolls, and an appeals court debates whether software should be patentable. Some IP holders accused of being patent trolls: [[ACTG]], [[VRNG]], [[RMBS]], [[VHC]], [[IDCC]], [[WILN]].

Pres. Obama isn't a fan of patent trolls. "They are essentially trying to leverage and hijack somebody else's idea and see if they can extort some money," Obama stated during a Google+ hangout. He added, "Our efforts at patent reform are only about halfway to where we need to go." The remarks come as the DOJ and FTC hold hearings on patent trolls, and an appeals court debates whether software should be patentable. Some IP holders accused of being patent trolls: ACTG, VRNG, RMBS, VHC, IDCC, WILN. 13 comments!

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07 февраля 2013, 01:21

More on CYS Investments (CYS) Q4 earnings: Net asset value of $13.31/share falls from $14.46 in Q3, thanks to $0.52 special dividend and sliding RMBS prices. Company had a GAAP loss of $0.24/share thanks to the drop in RMBS prices. Net interest spread declines to 1.08% from 1.41%. 15-year fixed agency MBS continues to make up more than 50% of holdings. (PR)

More on CYS Investments (CYS) Q4 earnings: Net asset value of $13.31/share falls from $14.46 in Q3, thanks to $0.52 special dividend and sliding RMBS prices. Company had a GAAP loss of $0.24/share thanks to the drop in RMBS prices. Net interest spread declines to 1.08% from 1.41%. 15-year fixed agency MBS continues to make up more than 50% of holdings. (PR) Post your comment!

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06 февраля 2013, 01:38

More on Invesco Mortgage (IVR) Q4 earnings: Net interest spread slides 2 bps Q/Q to 1.62%. On a Y/Y basis, non-agency RMBS and CMBS exposure actually fell a hair to 26.9% of portfolio thanks to about a 50% jump in agency 30-year fixed holdings. (PR)

More on Invesco Mortgage (IVR) Q4 earnings: Net interest spread slides 2 bps Q/Q to 1.62%. On a Y/Y basis, non-agency RMBS and CMBS exposure actually fell a hair to 26.9% of portfolio thanks to about a 50% jump in agency 30-year fixed holdings. (PR) Post your comment!

14 января 2013, 19:24

Qualified Mortgages, Loan Credit Standards and Safe Harbors for Securities Fraud

  "Default, dear Brutus, is in our stars, not in ourselves……"      Paraphrase from Julius Caesar Cassius (pronounced "Cash Us")     The announcement last week of the new “qualified mortgage” regulations by the Consumer Financial Protection Bureau has generated a largely muted reaction from the industry, banks and non-banks alike.  The smaller specialized lenders and servicers in the world of distressed residential mortgage finance can easily live with the new normative standard.  Meanwhile, the large banks are exiting the capital intensive portions of the mortgage business stage right under pressure from Basel III and other regulations.  Under B III, mortgage servicing rights above 15% of tangible common equity will require 100% capital weighting.  And yet, when it comes to lending standards and risk, one could argue, that the new QM rule is more permissive than the bad old days of the subprime boom.   And some people do.  “The Qualified Residential Mortgage rule is meant to discourage "risky" mortgages,” opines our friend and risk manager Nom de Plumber.  “However, if risk is defined as value or cash flow volatility, please note how both real estate and personal incomes are far riskier than their associated mortgages----whose payments are typically static rather than volatile.”    He continues:  “During this crisis, borrowers generally defaulted not because their mortgage payments skyrocketed unexpectedly, but because their home prices and employment income collapsed.   The best solution for risky home prices and incomes is less mortgage leverage.  Yet, a 43% DTI is the official, post-crash threshold for "safe, affordable" mortgage payments, oddly far above the 30% to 35% DTI underwriting range of pre-bubble days.”   Once again, notes Nom de Plumber, the regulators are obfuscating.  “The QRM rule is barking up the wrong tree, sidestepping the core, persistent problem of excessive debt to purchase unaffordable homes.” Ed Pinto at AEI also is critical of the new rule for being too permissive, “CFPB’s new ‘qualified mortgage’ rule: The devil is in the details,”: “The rule is made pursuant to the Dodd-Frank Act’s provision calling for minimum mortgage standards. It is being touted as making sure “prime” loans will be made responsibly. Yet true to the government’s long history of promoting excessive leverage, it sets no minimum down payment, no minimum standard for credit worthiness, and no maximum debt-to-income ratio. Under its tortured definition of “prime”, a borrower can have no down payment, a credit score of 580, and a debt ratio over 50% as long as they are approved by a government-sanctioned underwriting system.” Pinto is critical of the fact that the CFPB has grandfathered the FHA and GSEs such as Fannie and Freddie for seven years.  He also echoes the criticism of Nom de Plumber by noting that “the CFPB has codified HUD’s view that the way to distinguish a prime loan from a subprime one is by the interest rate charged, not risk.” Of course one area where regulators, Congress, the White House and others are entirely silent is securities fraud.  With Attorney General Eric Holder busily destroying what remains of the Department of Justice, there is no agency in the US governance apparatus  to address fraud.  The degree of securities fraud seen in the Subprime boom was so large that it did threaten the US economy in a systemic way, thus leading to the bailout.  But the bailout also hid the bad deeds of a number of prominent officials in Washington and on Wall Street.  Just read the first 100 pages of Sheila Bair’s book, “Bull by the Horns.” "In a nutshell, the "real" point is shockingly simple,” notes one veteran bank attorney.  “We forgot a basic lesson of banking.  There is no such thing as an ‘off balance sheet liability’ of any financial intermediary on which the financial system depends.” As the crisis hit, he argues, we faced an inevitable need to "recognize as much as $67 trillion of ‘shadow banking’ unreported ‘off balance sheet’ liabilities.  Like a manufacturer that suddenly discovers that it's only product produces cancer and that the damages exceed its net worth, the banking system was flat broke and on course to destroy all the wealth ever accumulated within a year or so.”   “Absent the outstanding crisis management of Chm. Bernanke and others,” says the long serving securities counsel, “the ‘unreported’ $67 trillion liability represented a 67% ‘hit’ to the world's $100 trillion of ‘market value’ for equities,” thus explaining the stock market crash of 2008-9.  “If we had not taken steps to prevent deflation and drastically reduce the ‘carry’ cost of all debt, we were a mere 33% away from total worldwide bankruptcy and the inevitable WW III that would have followed,” he argues. “Sheila Bair got the FDIC to end ‘off  balance sheet liabilities’ of US insured banks on Sept. 27, 2011 (assuming bankers are unwilling to stoop to outright thefts that insiders are obligated to report under 18 USC Sec. 4).  If her position holds up, we should be past this problem and on a path to ultimate recovery in another year or so.” Maybe, but the battle in Washington over restraints on securities fraud rages on.  From the moment America’s leaders decided to dismantle depression era control of banking (the "level playing field commission" correctly made that a bi-partisan goal in 1969) we began experimenting with "how" and discovering problems that needed solution for the economy to function.  From then on, the power of unanticipated consequences led us to the doom we faced in 2008 and the economic gloom we now suffer. For example, it soon became clear to the likes of Bill Isaac (GOP) and Paul Volcker (Dem) that de-regulated banks needed capital requirements or the FDIC’s insurance fund would be decimated.  They discovered, however, that one area of finance, funding trade receivables for manufacturing, was both essential and functioning very well without capital backing, because the depression era lenders created a system based on the Scottish reserve model that was self-correcting.   That observation led Isaac, Volcker and his successor ( Alan Greenspan) to "bless" the notion that a "few very strong banks" should be allowed to do this "risk-free" form of lending in "conduits" that would not be included for capital purposes.  That, of course, soon blossomed into the entire $67 trillion "shadow banking" industry. When those "shadow" liabilities came due in 2006-8, recognition of the hidden liability (backed by assets which had no discernible value at the time) destroyed the net worth of just about everyone.  As one of the largest hedge fund managers in the world said to me in 2008, “for a few months we were all broke.” The illusion that conduits would only be used for low risk lending only lasted through for a few years in the 1980s.  The expansion of “off balance sheet liabilities” beyond funding of "risk free" trade receivables a few “trusted banks," along with the emergence of the private RMBS market, forced FASB to consider when receivables were "sold."  In 1982 it decided that the issue was whether the seller "purported" to sell the receivables (reliance on legal "form," ignoring such obvious issues as "recourse" that converts a "sale" into an "equitable mortgage").   FDIC, thinking that standard was phony, "opted out" of FASB’s rule and relied on "regulatory accounting" to allow only the "big safe bank conduits" and other "safe" off balance sheet deals it "liked."  The S&L crisis proved "regulatory accounting" was a calamity.  FSLIC's blessing of special rules to hide losses led, in the Winstar case, to the US having to cover the phony capital FSLIC created using regulatory accounting. FASB in the early 1990s studied its "purport to be a sale" test and correctly decided it was phony.  It adopted "legal isolation" (which recognizes that US law converts fraudulent transfers into secured debts--whereby money paid in exchange for assets a bank wants to hide from capital requirements must be repaid when the "seller's" receiver recovers assets fraudulently transferred).  Effective January 1, 1997, FDIC accepted FASB's legal isolation rule, dumping “regulatory accounting” on this issue. The next "OOPS" soon emerged.  ABS/MBS lawyers for banks had lobbied FASB for a looser "isolation" standard for banks by absurdly telling FASB that "trustees" in Bankruptcy (Article 1 "administrative" officers) have more power than FDIC as a bank "receiver" (appointed with Article III "judicial" power--giving receivers truly awesome authority).  FASB fell for the lie.  As a result, FASB's first "legal isolation" test was believed to be easier on banks than on others.  In this instance the permissive tendency of Washington in the FASB rule making combined with the bank lawyers’ mistaken reading of receivership law to create an impossible situation.  FASB falsely assumed receivers have less power, but it turned out that FDIC could overturn literally ALL pre-receivership deals.  The banks' lawyers had, in fact, negotiated a standard which allowed for NO financial asset “sales” by banks.   An accounting profession committee posed that very problem to FASB and FDIC and asked if "no sales" was what FDIC wanted.  That's resulted in FDIC’s adoption of a "safe harbor" rule for bank asset “sales” that ignored fraudulent transfer laws (which convert transfers for the purpose of leaving a selling bank with inadequate capital into secured borrowings). It is that rule which Sheila Bair dumped in September 2011, in favor of a rule that finally “levels the playing field,” giving banks the exact power of non-banks--an ability to "sell" assets when the transaction is not done as a fraudulent transfer. Lawyers that built careers writing the fraudulent transfer arrangements by which banks stripped themselves of assets and generated a large part of the $67 trillion “shadow banking” empire that imploded in 2007-8 are understandably “shocked.”  Unless they can find a new loophole, they will be required to opine on fraudulent transfer law in the same manner as has applied to non-bank lawyers since 1997.  Absent conformance with those laws, future transfers designed to retain “tail” risk while reducing the capital needed to protect FDIC against “tail” loss will be accounted for as secured borrowings—eliminating a major cause of the crisis. Like the “tax shelter” salesmen of the early 1980s (who found their business depleted when Congress decided to stop that trade), lawyers whose business it was to generate the $67 trillion “shadow banking” empire undoubtedly feel deprived of valuable “rights.”  Their problem, however, is shockingly simple.  It is a “fraudulent transfer” to transfer assets with intent to leave the transferor with inadequate capital.   This has been Anglo-American law since at least the 14th Century.  It is the foundation on which free-enterprise capitalism builds the leverage that permits accelerated growth for new value-added concepts.  All state laws reflect this standard.  Thus every bank “sale” done for the purpose of reducing regulatory capital is, by definition, fraud – a form of bank theft.  Only government can waive theft, as long as FDIC affirmatively "waived" the right to challenge these frauds, attorneys could not be required to opine that the transactions complied.  When FDIC stopped waiving this type of fraud in September of 2011, "misprision of felonies" (18 USC Sec. 4) mandates that attorneys disclose these matters to authorities.  Conversely, this may also mean that banks can't be prosecuted for transfers before made FDIC changed course in September 2011.  Will bank lawyers win a debate by saying "since we clearly cannot be caught having to reveal our clients' thefts, the accountants need to change their rules so we don't need to tell them when theft is occurring"?  Stay tuned.  www.rcwhalen.com  

07 января 2013, 20:52

How To Profit From The Impending Bursting Of The Education Bubble, pt 2 - "Knowledge How" & Diplomas As Fictitious Assets

This is part two of a multi-part series on how I plan to profit from the impending Burst of the Education Bubble in the US.  If you are easily offended, mired in academia, closed minded, or simply bad at simple math and critical thinking, this is not the article for you. There, I've proffered fair warning ahead of time. Thus far, we've covered the precursor to the series,  How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery, and part 1 - How To Profit From The Impending Bursting Of The Education Bubble, pt 1 - A Bubble Bigger Than Subprime & More Dangerous Than Sovereign Debt! I urge all to review those articles for the verbose nature of this topic lends to rampant cross referencing.  A Basic Illustration Of How The Blind Pursuit Of A Debt Funded Diploma Can Lead To Personal & Intellectual Insolvency In the previous installment of this series, I walked through the math that basically invalidates the pursuit of a 4 year degree for nearly everyone that needed to finance it through school loans at 6% or higher. The basis of this invalidation was the poor quality of the asset backing the loan, the degree itself. This installment will walk through the logic that dictates the quality of said asset, but before I delve into said diatribe, I want to illustrate for the non-finance types the relationship between assets and liabilities and the path to insolvency that ensues when you use debt to purchase inferior and/or depreciating assets - basically the crux behind the Asset securitization (subprime mortgage) and Pan-European sovereign debt crises. In the article How Greece Killed Its Own Banks!, I illustrated the danger and folly of Greece forcing its banks to use leverage to purchase rapidly depreciating assets with fictitious (allegedly "risk free") value.  The same hypothetical leveraged positions expressed as a percentage gain or loss... Many do not think of their education as an actual investment, but if you put time (opportunity costs) and capital (actual tuition) into the pursuit of a diploma, it is a pure investment, plain and simple. As you can see from the charts above, the losses taken on investments that use leverage to purchase assets that depreciate in price can be severe. Yes, the student loan/education crisis has many similarities to the current maladies facing Greece and the EU. It is not just balance sheet insolvency we I am referring too, either. Greece has a severely impaired ability to service its debt which is why this purveyor of cash "know how" insisted that Greece would default 3 years ago as the "know that" community openly declared other wise: Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! and The Ugly Truth About The Greek Situation That'sToo Difficult Broadcast Through Mainstream Media. As a matter of fact, I even went so far as to predict that Greece would default again before finishing defaulting the first time around, This Time Is Different As Icarus Blows Up & Burns The Birds Along The Way - Greece Is About To Default AGAIN! The reason why is the exact same malady that afflicts those who use leverage to pursue knowledge that (see descriptions and definitions below). Despite extensive, self-defeating, harsh and punitive austerity measures that have combined with a lack of true economic stimulus, Greece has (to date) failed to achieve Primary Balance. For the non-economists in the audience, primary balance is the elimination of a primary deficit, yet the absence of a primary surplus, ex. the midpoint between deficit and surplus before taking into consideration interest payments. The primary balance looks at the structural issues a country may have. Government expenditures have outstripped revenues ever since 2007 and have gotten worse nearly every year since, despite 3 bailouts a restructuring, austerity and a default! Part 1 of this series illustrated exactly how those who pursue levered "know that" can and likely will fall into the exact same structural insolvency by having their fixed expenses born from the pursuit of the diploma on a leveraged basis outstrip their income. Reference this excerpt from How To Profit From The Impending Bursting Of The Education Bubble, pt 1: ...assume a $40k per year tuition for a 4 year business management degree, purchased with money borrowed at 6% (from our dear government guaranteed lenders (SLM, et. al.), deferred for and average of 2 years. An oversimplified straight calculation puts you roughly $178,000 in debt upon graduation for a piece of paper that would fetch you roughly $43,000 per year. Reference ehow.com: In July 2009, people who hold a bachelor's of science (BS) in business management averaged $39,551 during their first year of employment and $43,022 for the first one to four years. A professional with a BS in business management typically averaged $78,669 once they reached 20 years of employment.Read more: Average Salaries for a Bachelor's Business Degree | eHow.com http://www.ehow.com/facts_5240719_average-salaries-bachelor_s-business-degree.html#ixzz2Gw6sriN5 Real wages have likely dropped since then, but even using the nominal assumptions above you would have been driven into the hole when factoring in real life expenses of: Taxes: Yes, you'd have to subtract local, state and federal taxes from said monies... At roughly 35% (bound to go up after we finish this cliff nonsense), we're now talking $27,964 average over four years. That puts you in the hole to the tune of roughly $12,035 per year you spent on that degree. Living expenses: Food, shelter (rent), clothing, transportation. In a NYC, even assuming the much less expensive outer boroughs, Combined, we're talking roughly $3,000 per month or so, assuming you won't take in roommates. If you do, you can drop that figure to about $2,500 per month. Using the lower bound of this assumption, you are underwater (structural deficit) to the tune of about $2,000 per year. Please keep in mind that primary balance calculations and structural deficits don't take into consideration interest payments (for the sake of comparison). The underwater comment does not take into consideration the actual paying back of your loan yet, either.  So, on the fifth year following your freshman orientation, assuming you studied well, you would have laid out $176,000 facing annual debt service of about $12,000 or so - offset by a net income stream of roughly $28,000 to cover roughly $30,000 of living expenses. The negative $2,000 per year cash flow would result in a chart that is very, very similar to the Greek charts featured above. So, why do these numbers look so bad? Well, the answer to that question lies in the value of the asset that knowledge seekers encumber themselves to acquire. The levered purchase of depreciating assets or assets with fictitiously high values is bound to lead to insolvency. Enter the....  Topic Of Knowledge Knowledge is a familiarity with someone or something. That familiarity can include facts, information, descriptions, or skills acquired through education, which also includes experience. Knowledge refers to both the theoretical and practical understanding of a subject. Knowledge can be implicit (as with practical skill or expertise) or explicit (as with the theoretical understanding of a subject). I am here to sell implicit knowledge, better known to the old school as know how, or more formerly known as "Knowledge How".... Knowledge that vs Knowledge How In academia, the kind of knowledge usually proffered is propositional knowledge, more colloquially described as "knowledge that." "Knowledge that" or "know that" is distinct and should be discerned from "knowledge how" (know how). The best way to describe this concept is to use simple real life examples. In mathematics, it is commonly known that (hence knowledge that, or know that) 1 +1 = 2, but there is also knowing how to add the numbers one plus one together and understanding what their sum (two) is.  In physics, we can take this concept even farther. It has been argued to by college age students of knowledge that (who are currently mired in academia) that a physics engineer cannot approach know how without being first well versed in know that. This is a mindset that is the result of today's modern academic group think. This concept is also easily enough disproved by using a common example known to most of us, and that is riding a bicycle. The theoretical knowledge of the physics involved in maintaining a state of balance on a bicycle (knowledge that, or know that) cannot substitute for the practical knowledge of how to ride (knowledge how, or know how). The importance of understanding how to ride a bike is obvious, established and grounded - at least to those interested in bike riding. There is absolutely no prerequisite of having the theoretical knowledge of the physics involved in maintaining the state of balance of the bicycle to learn to ride the bicycle, nor to ride it proficiently, nor to pass this knowledge on to others. Thus, it is obvious and clear that an engineer does not need to be versed in "know that" to move on to "know how". Any failure to acknowledge the distinction between knowledge that and knowledge how can lead to vicious regresses. In philosophy, an infinite regress in a series of propositions arises if the truth of proposition P1 requires the support of proposition P2, the truth of proposition P2 requires the support of proposition P3, ... , and the truth of proposition Pn-1 requires the support of proposition Pn and n approaches infinity. This is more commonly known as the circular argument, as explained in Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!   A distinction must be made between infinite regresses that are truly "vicious" and those that are comparatively benign. A truly vicious regress is an attempt to solve a problem that by and large re-introduced the initial problem in the (or as the) proposed solution. Examples of this can be found in today's global Ponzi scheme of using more debt to solve the debt dilemma of Greece, thus the ease of my predicting serial re-default. This is not truly a practical (or doable) solution, and as one continues along these lines, the initial problem will recur infinitely and will never be solved. Not all regresses are vicious, however the truly circular argument is. This is the crux behind the article, "How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery" and the reason why the Pan-European sovereign debt crisis is nowhere near being solved (again reference  Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!). Remember, failure to acknowledge the distinction between "know that" and "know how" leads to vicious regresses. With academia being a bastion of "know that" rooted in the rote memorization of facts and information bits, those well versed in know how can literally run circles around those immersed in said schools of thought once it comes to problems solving, value creation and getting things done (or undone) in the real world.    It is the reason why the legion's of ivy league academics failed to foresee following while I clearly articulated the risks and consequences well beforehand:  The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear? The warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following BSC. The fall of commercial real estate in general (September of 2007) and the collapse of General Growth Properties [nation's 2nd largest mall owner] in particular (November 2007): The Commercial Real Estate Crash Cometh, and I know who is leading the way! I have a rich history in seeing and benefiting from the things that the "know that" crowd cannot perceive. Reference Who is Reggie Middleton? for more about me. What Is This Really About? There is a very important and distinct difference between "knowing that" and "knowing how," with the crux of the distinction being the difference between this initiative and that vast swath of modern academia. "Know that" is a function of rote memorization of static information, passed down from the Prussian method of education implemented over 200 years ago and still common use today and "know how" is basically understanding of how to get things done... "Know how" is what has separated the labor intensive low margin industries of the far east from the Intellectual Property rich industries found in the US, at least until now. After decades of toiling in an antiquated teaching system producing a legions of leveraged "know that" recipients who then seek "know how" in the work force (basically asking employers to pay to learn on the job what they should have learned from school) to pay off or compensate for hundreds of thousands of dollars of tuition bills and debt, the US is finally paying the piper for its lackadaisical approach to real education. Asian companies such as Samsung are actually outperforming their sterling US counterparts such as Apple in both product capability, product quality and even market share. In order to stem this tide, true "know[ledge] how" must become - once again - the aim, goal and accomplishment of the education system, similar to the apprenticeships of old.   The basis of doing things and solving real world problems by thinking through them and value creation (making things) by applying a real, true skill. Academia is primarily interested in the first, Reggie Middleton is deeply ensconced in the latter.   The next installment will focus on a sampling of individual schools that peddle and push leveraged "know that" to the masses, ranging from the gleaming ivy league towers to the workshop tutoring courses down the street. This pandering of leveraged "know that" is to the dismay of all who relied on the so-called scholars from said schools to actually know what they were talking about in predicting crises, managing assets and conducting policy through said crises, and coming up with solutions for the same. I have already laid my "know[ledge] how" track record for all to see (reference Who is Reggie Middleton?) and it would be interesting to perform an apples to apples comparison to those purveyors of "leveraged know that" to see if this blogger cum entrepreneurial investor is on to something or not. I don't possess a masters degree, not to mention one from the ivy league, yet I feel I have run circles around many, if not the vast majority of those that have. You can view the data and judge for yourself - Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? It's not necessarily the raw intelligence, that has enabled this, but the ensconced approach to learning.    I currently have my analysts working on explicit ROIs for degrees (both cash and levered) from the following schools: Harvard, Yale, Wharton, Princeton, NYU, Capella, University of Pheonix, DeVry, CUNY, SUNY with explicit comparisons to investing borrowed funds in the NASADAQ and S&P 500 over the same time period(s) and interning for free at various institutions who hire from said schools. This installment will also review the business models of said schools and the following installment will illustrate my answer to this mess. In the mean time and in between time, subscribers can glean my view of one of the big private post secondary educators who is  having a problem with volatile earnings that are probably going to get worse. Education Co. 1-3-2013 Follow me: or see my social media stream.

03 января 2013, 22:55

How To Profit From The Impending Bursting Of The Education Bubble, pt 1 - A Bubble Bigger Than Subprime

  One of the most popular (although I feel not popular enough, considering the importance of the subject matter) articles of BoomBustBlog 2012 was my pieces on the near uselessness of the US education system - How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery. The accompanying graphic easily encapsulates a material portion of the piece, basically illustrating how the public school system serves as a mass indoctrination machine which has close to nothing in common with true education, knowledge dissemination, creativity or value creation.  The post secondary and private school systems are simply continuations of the same, but worse yet, charge exorbitant fees for said injustice. Many poor victim either saves up a half lifetime of savings or worse yet goes into insolvency skirting debt to purchase a so-called education (which as described above is nothing of the sort) that is represented buy a piece of paper known as a diploma that is literally not worth the paper it is written on.  For those who think that I'm exaggerating, assume a $40k per year tuition for a 4 year business management degree, purchased with money borrowed at 6% (from our dear government guaranteed lenders (SLM, et. al.), deferred for and average of 2 years. An oversimplified straight calculation puts you roughly $178,000 in debt upon graduation for a piece of paper that would fetch you roughly $43,000 per year. Reference ehow.com: In July 2009, people who hold a bachelor's of science (BS) in business management averaged $39,551 during their first year of employment and $43,022 for the first one to four years. A professional with a BS in business management typically averaged $78,669 once they reached 20 years of employment.Read more: Average Salaries for a Bachelor's Business Degree | eHow.com http://www.ehow.com/facts_5240719_average-salaries-bachelor_s-business-degree.html#ixzz2Gw6sriN5 If I'm not mistaken, wages have dropped on a inflation adjusted basis since then, but I digress. Using the figures above you would have just about broken even over an 8 year period, save a few common sense facts. Taxes: Yes, you'd have to subtract local, state and federal taxes from said monies... At roughly 35% (bound to go up after we finish this cliff nonsense), we're now talking $27,964 average over four years. That puts you in the hole to the tune of roughly $12,035 per year you spent on that degree. Debt service: Oh, yeah! Since you borrowed the money you'd probably would have to pay it back, but since you also have to work and pay rent (you can forget a mortgage at these income levels) you'd be paying back the minimum levels and scraping to do so. You'd better hope and pray you don't live in Manhattan or downtown Brooklyn too! Oppurtunity costs: Yes, you could have used those four years and $176,000 to do something else maybe a tad bit more productive. So, on the fifth year following your freshman orientation, assuming you studies well, you would have laid out $176,000 facing annual debt service of about $12,000 or so - offset by a net income stream of roughly $28,000. The $16,000 per year positive cash flow (assuming you didn't need food, shelter, clothing, transportation or anything else) would give you about 12 years or so to pay off the debt and break even. I'm not even goint to run the math on the ROI, so let's just pick something outrageously generous like 8% (remember, this is over a 16 year period). To wit, let's compare some other basic investments  - that is assuming someone besides your school and your lender actually consider your academic mis-education an actual investment. The NASDAQ composite returned 98% over the last for years. Dumping the money in the NAZ comp would have brought you close to doubling it - although you would not have had access to all of the funds at once for a lump sum investment, a roughly 50% gain looks likely. Now, you would have gained 4 years of simplistic (as in index watching) experience as compared to your competitor's fancy schmancy 4 year degree, yet you would had nearly a quarter million in cash, as well as roughly $70,000 in equity while he would have had $173,000 in debt, interest payments due immediately and the hope of finding a job with which his trusty diploma would surely help him, right? If you had a small financial business, who would you hire? The fool or the entrepreneurial investor??? Suppose you Interned for free with Apple, Google or Facebook while simply leaving the monies in the bank at .25% interest? You would have had a superior education and only been in the hole for $16,000, as well as having $160,000 in cash to play with. How about starting your own business? Invested in commercial real estae? Scalping Greek bonds post bailout? You see, there are so very few who compare getting a diploma or getting a loan for a diploma with other investments because they are brainwashed to believe this is the way to get ahead in life. It is not! It's the way to get educator entities and banks ahead in life, as you become a debt slave.  What makes this truly ironic is that anyone who truly received a real business admin, management or finance education would be able to run these rudimentary calculations and thought processes themselves which would result in the invalidation of the actual degree to which they are seeking, alas... I digress... Why the student loan bubble is worse than the subprime bubble  Zerohedge has run an interesting series of the student loan bubble in the recent past, hence I will not rehash what has already been done in such exquisite detail. For those who have not been following, this is the case in a nutshell... Student loan delinquencies break the 20% mark as total student debt tops a trillion dollars, rivaling and likely surpassing the subprime debt debacle. This is how the Fed described this "anomaly":  Outstanding student loan debt now stands at $956 billion, an increase of $42 billion since last quarter.  However, of the $42 billion, $23 billion is new debt while the remaining $19 billion is attributed to previously defaulted student loans that have been updated on credit reports this quarter. As a result, the percent of student loan balances 90+ days delinquent increased to 11 percent this quarter. oh and this from footnote 2:  As explained in a Liberty Street Economics blog post, these delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle delinquency rates are roughly twice as high. And more from ZH:Over $120B in student loans currently in default. For private private  institutions lead the way with a 22% default rate. Today's public school system diploma, post secondary diploma, and for the most part, many if not most graduate degrees and PhDs are a waste of good ink and (relatively) valuable paper. This paper is quite similar to the MBS and sovereign debt paper which I have written so presciently and accurately on over the last 6 years (see Asset securitization crisis and Pan-European Sovereign Debt Crisis). The crises from these essentially depreciating assets stemmed from the piling of excessive debt on top of assets with fictional value. Trust me, I can see these things clearly, as can anyone who takes an objective view. When have we had instances similar to this Student Loan Bubble (or Stubble)? When I made a small fortune shorting... The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear? The warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following BSC. The fall of commercial real estate in general (September of 2007) and the collapse of General Growth Properties [nation's 2nd largest mall owner] in particular (November 2007): The Commercial Real Estate Crash Cometh, and I know who is leading the way! I can go on for a while (particularly on RE and sovereign debt), but I feel you've got the point. The pattern is inevitable. There is a  true business opportunity here, for many college graduates couldn't earn their way out of a wet paper bag, and many of those that could are squandered by toiling away in a system of derivatives of derivatives based upon synthetic products (think of mortgage CDO cubed traders) which are merely shadows of social constructs, versus the inception, design, production and sales of real, value creating, tangible (as well as intangible) assets, products and services. My next article on this topic will show how I am positioning myself and others to capitalize on this education bubble burst on both the short side and the long side. In the mean time and in between time, subscribers can glean my view of one of the big private post secondary educators who is  having a problem with volatile earnings that are probably going to get worse. Education Co. 1-3-2013 Follow me: or see my social media stream.

29 ноября 2012, 11:59

Is Capital Flight Taking Place in China?

From the balance of payment perspective Despite a larger-than-expected amount of net exports this year, China’s capital accounts have printed negative numbers for several months, while in the past China always reported surpluses in both current account and capital account. Some analysts start arguing that China is facing tremendous amount of capital outflow implying that many people are losing confidence on China’s economy. Moreover, they say, Renminbi depreciation in the first three quarters support the view that capital is flowing out of China. Acknowledging capital flight a very important issue, we at the central banking seminar made an effort to find out the reasons for the Renminbi depreciation and the capital account deficit. Triggered by the worseness of the European debt crisis and concerns about China’s hard-landing, the Renminbi exchange rate has reversed from appreciation to depreciation in the domestic market for 12 months since September last year. As our last blog entry on China’s FX Flow Framework discussed, Chinese importers and exporters started to go long USD and short RMB, which affects the capital flow and capital account. As China's recent international balance of payments suggested that there is $56.1 billion capital account deficit from 2012Q1-Q3, subtracted $127.2 billion FDI, the remaining $183.3 billion should be the capital flowing out of China. However, instead of proposing so-called capital flight for this $183.3 billion, we argue that Chinese importers and exporters’ foreign exchange position plays a dominate role in this capital flow fluctuation. So, the question is how importers/exporters’ FX position affect the capital flow and, more importantly, how large their influence is. Here we try to explore these questions from two angles: one is the FX flow from current account activities; the other is correspondent capital account, which approximately tracks the real capital movement.                                                    Source: SAFE From our previous discussion and analysis (see previous blog entry), we used to introduce three sets of data: trade account balance for goods, cross-border receipt/payment balance for goods, and banks’ FX selling/buying balance for goods to track FX flow. From the chart 1 we can see that the relative position of the three sets of data reversed the trend from September 2011, matching the Renminbi expectation change from appreciation to depreciation. And if we further compare the change of relative position of either of the two lines, we detect that two vital drivers of the capital outflow resulted from importers/exporters’ speculation activities: when Renminbi is expected to depreciate, domestic importers tend to advance payment of USD, given the trade is settled in USD, reflecting on the foreign exchange settlement between importers and banks. Moreover, domestic exporters who receive the dollars from exports are inclined to hold USD asset rather than exchange it to RMB, reflecting on the foreign exchange settlement between exporters and banks. Through our analysis, these two drivers play a vital role in capital outflow. Source: SAFE Chart 2 shows the first driver: the difference between cross-border receipt/payment balance and trade balance, measuring advance or delayed payments of goods from both domestic and foreign companies. Before September 2011, monthly net receipt was usually larger than monthly net exports, as Chinese importers always delayed payments so that they could gain from Renminbi appreciation for a few more months before converting it to US dollar. After September 2011, however, monthly net receipt became less than net exports as Chinese importers speeded up the dollar payments and they even paid in advance as they no longer expected Renminbi to appreciate. From the Chart 1, we can also see that while net export remains quite strong this year, net receipt is comparatively weak, illustrating importer’s strong willingness to purchase USD from banks through advancing payment of the trades. Moreover, if we added up this difference from Q1-Q3 2012, approximately we get a negative 62 billion in total after adjustment (the February number is an outlier due to seasonal factors). The 62 billion should be related to a large amount of trade credits and thus contributing to capital outflow from capital account’s perspective. Not surprisingly, trade credits account shows a huge increase in international balance of payments, as is shown in table 1. In the first 6 months, it totaled 33.2 billion and it is expected to be larger in Q3. Source: SAFE Chart 3 shows the second driver: the difference between cross-border receipt/payment balance and banks’ net FX purchase balance, measuring Chinese companies’ net FX funding from domestic banks. This number usually stayed negative before October 2011, which means that Chinese companies sold more dollars to the banks than they received from international trades. How could they consistently sell more dollar than they receive from trades? The Sources & Uses of Funds of Financial Institutions (in Foreign Currency) by the PBOC shows that foreign currency loans kept increasing much faster than foreign currency deposits in the past few years (see Chart 4). The data suggests that in aggregate Chinese importers/exporters were borrowing dollar from banks and converted them to Renminbi. However, this long-lasted trend reversed in October 2011. The difference turned from large negative to slight positive. As Chinese companies reduced dollar liabilities and increased dollar assets, which resulted in a rise of outflow in the capital account. As is shown in the capital account, currency and deposit account item reported -96.7 billion in the first 6 months this year, almost doubling the number in the same period of last year. The preliminary data from SAFE showed a large capital account deficit and a rise in FDI in the third quarter, again suggesting a large outflow from “other investments” in which trade credit, loans, and deposits accounted a dominant share. Source: PBOC   Taking all into account, we believe the FX position change of Chinese companies was mainly responsible for the capital account deficit, which was not really any sign of losing confidence in Chinese economy. We agree with the SAFE that capital account deficits should not be regarded as capital flight. Remember that the sum of current account, capital account, and foreign reserves must equal to zero, and every dollar flowing in must flow out. In the past, both current account and capital account reported surplus, and dollars mainly flowed out from the government channel as the SAFE invested the foreign reserves into foreign assets in which US treasuries account for a large share. However, the mandatory sale of foreign exchange has already been deregulated in August 2007 and domestic companies and households can hold foreign currency as they want. Therefore, dollars can flow out from private channels which would result in a capital account deficit. It did not happen until last year because Chinese growth was rapid and Renminbi appreciation expectation was extremely strong before October 2011. By the end of June, China has $1.7 trillion net FX assets but the distribution is very imbalanced. The government has $3.3 trillion foreign reserve and the non-government sector has $1.6 trillion of net FX liabilities. Although the Renminbi depreciation trend seemed to have ended since October, we believe that this currency mismatch of government and private balance sheets is almost certainly to reverse again in the future, which will lead to larger capital account deficits and Renminbi depreciation pressure. More importantly, if private sector prefers holding foreign assets rather than selling to the banks, this preference will undermine the PBOC's ability to create Renminbi liquidity. We saw that outcome earlier this year as many commercial banks were extremely hungry for deposits.  Table 1: International Balance of Payments Source: SAFE   Central Banking Seminar Tan Shibo and Chen Long  

21 ноября 2012, 02:20

The DOJ and FTC may have patent trolls in their crosshairs: the agencies plan to hold informal hearings next month on whether such companies, which license IP (and often sue those who don't agree to a deal) but don't sell any tangible products do more harm than good. Also receiving scrutiny are patent holding companies created by tech giants, such as Rockstar. A crackdown could be a negative for IP licensing firms such as [[ACTG]], [[IDCC]], and [[RMBS]].

The DOJ and FTC may have patent trolls in their crosshairs: the agencies plan to hold informal hearings next month on whether such companies, which license IP (and often sue those who don't agree to a deal) but don't sell any tangible products do more harm than good. Also receiving scrutiny are patent holding companies created by tech giants, such as Rockstar. A crackdown could be a negative for IP licensing firms such as ACTG, IDCC, and RMBS. 2 comments!

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23 октября 2012, 01:19

Reality Check: Is the US Housing Market Really Recovering? Part II

  "Looking at an REO-to-rental strategy, and while a rental strategy is very important, we decided it wasn't the best solution for the FHA, servicers, borrowers and their communities." Carol Galante Federal Housing Administration Acting Commissioner  Housing Wire http://www.housingwire.com/news/galante-fha-will-not-participate-reo-ren...   This week in The Institutional Risk Analyst newsletter, we featured a comment on the housing sector, “Reality Check: Is the US Housing Market Really Recovering?” http://us1.irabankratings.com/pub/IRAStory.asp?tag=550  Below is a cross-post on Zero Hedge of some additional comments that need to be made given the amazing reports and opinions we keep seeing in the Big Media about the “housing recovery.”  As Paul Jackson, CEO at Housing Wire, said to me last night: “Just because we are all tired of the housing crisis does not mean that it is going away.”   Hold that thought, especially given the dearth of discussion of housing in the presidential campaign. The first point to make is that there are literally millions of homes in process of foreclosure that are not available for sale.  This is why the market seems “tight” in many areas.  The complaints from real estate agents about a dearth of supply are real, but these are not a positive indicator.  This situation reminds me of the transition period between new and old models of computer memory chips.  For a while, supply is tight.  Then comes a flood of product.  “There are 2 million plus foreclosed awaiting movement to sales category,” notes Professor Anthony Sanders at George Mason University.  “But there are still millions of borrowers who can no longer qualify. Count the number who went through foreclosures and add some percentage for people who avoided foreclosure, but went late.”   What many observers in the Big Media fail to appreciate is that the banks and the US government itself have deliberately create a supply squeeze in residential housing by slowing the foreclosure process.  By dragging their feet on foreclosure, banks delay the day of loss recognition and also keep supply off the market.  This is good for prices in the short-term, but does not solve the supply problem.   This is why, for example, that the FHA has refused to get into the REO-to rental market.  FHA also has strict limits on the number of vacant homes it will put on the market in a given neighborhood.  No more than 50% of the REO properties purchased from FHA, for example, can be put on the market for sale as a vacant foreclosure, FHA Acting Commissioner Galante said last month.  Instead, the buyer needs to put in place another solution, such as leaving the homeowner as a renter of the home. The second factor is buy-to-rent, a strategy that some banks and investors are using to divert foreclosed homes from involuntary sales.  The US government has also been moving foreclosed homes into the rental column, though is relatively small amounts.  Between the FDIC, FHA and the housing agencies such as Fannie Mae, Freddie Mac and other GSEs, there are literally millions more homes waiting to hit the market.  The only question is when.   While the rental boom is much discussed in investment circles, the reality is that there is only so much demand for rental housing.  The soft economy is the key factor here.  As Professor Sanders noted in an email today:  “Look at M2 Money Velocity. It kind of says it all.”   Thanks to Tony Sanders & Bloomberg The sharp decline in M2 nicely illustrates the contraction of credit that continues unabated in the US.  While the Fed believes that zero rates and purchases of agency RMBS are helping the economy, I respectfully disagree.  Zero rates are taking income out of the consumer economy in order to subsidize the biggest banks and levered investors.   And the Fed's reckless Fed market operations are eroding investor confidence, especially institutional investors unaccustomed to taking first loss risk on fixed income securities.  Professionals understand concepts like duration and interest rate risk, Chairman Bernanke. The Fed is actually driving deflation, not recovery, with zero rate policy.  The politics of this are particularly interesting, one reason why Mitt Romney should be more aggressive in criticizing the Obama Administration’s do nothing policy on housing as well as the Fed.  Consider the political geography of housing from the perspective of the American home owner. The Blue states tend to have high house prices, meaning that the dearth of non-jumbo financing hurts Democratic congressional districts most.  In most states, the urban congressional districts (mostly Blue) have the highest housing prices.  Lefties like Nancy Pelosi (D-CA), Henry Waxman (D-CA) and Maxine Waters (D-CA) should support issues like retaining the mortgage interest deduction and expanding the cap on conforming loans. Republicans like John Boehner (R-OH), Eric Cantor (R-VA), Paul Ryan (R-WI) and Kevin McCarthy (R-CA) should be opposed to the mortgage interest deduction.  Their constituents tend not to itemize on their taxes and get no benefit from the mortgage interest deduction.  They represent borrowers who are always performing borrowers and have not gotten refis due to the machinations of the GSE-bank cartel.  These borrowers live in the cheaper, Red districts, BTW.  Somebody remind Mitt Romney of that fact.  The final factor that most of us still do not yet grasp is the impact on home sales of the decline in prices, especially on consumer behavior.  Chris Mayer, Paul Milstein Professor of Real Estate and Finance and Economics at Columbia Business School, observes that the dynamics of the housing market supply and demand are more complex than most people imagine: “Part is foreclosures, but much of this is very tight credit and challenges in the trade up market. In a normal market we would have 5 million or more sales without distressed sales or purchases of new homes.  So from my perspective, the decline in home prices from peak and the mortgage market tightness are driving down sales from a normal market.” He adds:  "Obviously unemployment and poor labor market conditions also play a role, but the bulk of homeowners still have a job and have not seen their incomes appreciably decline in the crisis." So if you keep hearing the Big Media touting the recovery of the housing market, just remember that for every home listed for sale in your area there as many as two or more comparable homes waiting in the wings to come onto the market over the next several years.  This is both good news and bad.   Just remember that the net, net effect may be for prices to simply stabilize at current levels.  Or to put in another way, by Christmas we may very well see Case-Shiller and other indicators of home prices headed back down, erasing the gains made in housing during 1H 2012.   To read my earlier comment, go to: IRA Analyst - Reality Check: Is the US Housing Market Really Recovering? http://us1.irabankratings.com/pub/IRAStory.asp?tag=550    

19 октября 2012, 15:42

Frontrunning: October 19

Debt Fuels a Dividend Boom - Firms Collect Payouts, and Investors Get Yield; 'Reminiscent of the Bubble Era' (WSJ) Black Monday Echoes With Computers Failing to Restore Confidence (BBG) Poll: Obama Leads in Wisconsin, Iowa (WSJ) Gold Imports by India Seen Climbing First Time in Six Quarters (BBG) Europe pushes ahead towards ECB bank supervision (Reuters) ... And fails: Summit fails to agree timetable for aid to failing lenders (FT) Toyota Prius Dominates California as State’s No. 1 Model (BBG) Italy raises €18bn in huge bond sale (FT) Diplomacy inbox fills up as U.N. awaits U.S. presidential vote (Reuters) Goldman braced for more revelations (FT) China power brokers agree preferred leadership team (Reuters) EU, Japan Warn Against New US Swaps Rules (WSJ) Why VaR is the most meaningless contraption ever: Morgan Stanley shows the ‘flaky’ side of model (FT) Made in France Trumps Consumer Choice in Hollande Jobs Quest (BBG) North Korea threatens South over propaganda balloons (Reuters) Overnight Media Digest WSJ * President Barack Obama retains steady leads over Mitt Romney in Wisconsin and Iowa, two battlegrounds drawing increased attention in the final sprint to Election Day, according to new polls conducted just before and after Tuesday's presidential debate. * Google Inc's quarterly earnings report hit Wall Street more than three hours early on Thursday due to a glitch. The bigger glitch was what the Internet giant's results actually showed. * European leaders early Friday agreed to have a new supervisor for euro-zone banks up and running next year, a step that will pave the way for the bloc's bailout fund to pump capital directly into banks throughout the single-currency area. * Microsoft Corp's quarterly earnings dropped 22 percent amid weak demand for personal computers and slowing growth for its once-strong business software, underscoring the stakes for the company to successfully launch its dramatically overhauled Windows operating system next week. * Big bond auctions in Italy and Spain gave a surprising boost to the biggest countries reeling under Europe's debt crisis, with Italy selling a record 18 billion euros ($23.57 billion) worth - enough to satisfy its borrowing needs for the rest of the year in one unexpected stroke. * China said its economy continued to slow in the third quarter just weeks before it embarks on a once-a-decade change in leadership, compounding concerns about the outlook for one of the world's major engines of growth. * The board of Lowe's Cos Inc is looking for an heir apparent to Chief Executive Robert Niblock, as the home-improvement retailer struggles to compete with resurgent rival Home Depot Inc. * Chilean retail giant Cencosud SA agreed to acquire the Colombian business of French retailer Carrefour SA for 2 billion euros ($2.6 billion), in a move that shows how local companies are taking advantage of European counterparts weakened by the Continent's debt crisis.   FT BARCLAYS SETS ASIDE FURTHER FUNDS FOR PPI Barclays reported a spike in claims of unwanted insurance policies sold, forcing it to set aside a further 700 million pounds ($1.13 billion). OXFORD INVESTMENT CHIEF CRITICISES BUYOUTS Oxford University's investment chief accused private equity bosses of failing their clients by charging excessive fees and delivering lacklustre returns. GOOGLE TRADING HALTED AFTER EARNINGS ERROR Third-quarter earnings from Google were published several hours earlier than planned on Thursday, sparking a panic sell-off of the company's shares. ARCELORMITTAL EXPLORES IRON ORE STAKE SALE ArcelorMittal is exploring the sale of a stake in its $10 billion Canadian iron ore business, as the world's biggest steel company struggles to cope with the downturn. M STANLEY SHOW THE 'FLAKY' SIDE OF MODEL Morgan Stanley adjusted its own benchmark of potential losses in a move that boosted its reported capital buffers, sparking debate over banking measures. NEWSWEEK TO ABANDON PRINT EDITION Newsweek's print edition in to cease publication after 79 years, pinning their hopes on cost-cutting and an "all-digital" strategy. WALMART PROBED IN INDIA OVER INVESTMENT Walmart is being investigated in India over accusations that it secretly invested in supermarkets. SHELL IN US TALKS TO EXTEND ARCTIC LEASES Royal Dutch Shell, the European oil company, has been in talks with the U.S. government over extending its leases for oil development in the Arctic seas north of Alaska.   NYT * Sprint Nextel Corp has moved to protect one of its most valuable assets - access to a big chunk of spectrum - just as it is preparing to become a more aggressive force in wireless, with the backing of SoftBank Corp of Japan. * Google Inc released a disappointing earnings report on Thursday that sent its stock price plummeting and reflected the challenges the company faces as it tries to make money in a mobile world. * On Thursday, Newsweek buckled under the pressure afflicting the magazine industry in general and newsweeklies in particular, with their outdated print cycles that have been overtaken by the Internet. Tina Brown, editor-in-chief of Newsweek and The Daily Beast, announced that Newsweek would cease print publication at the end of the year and move to an all-digital format. * Microsoft Corp is on the verge of releasing Windows 8, its biggest software product in years - and the company's lackluster financial results on Thursday underscored how badly the company needs it to succeed. * Indian regulators have begun an informal inquiry into allegations that Wal-Mart Stores Inc violated rules restricting foreign investment in the country's fast-growing retailing industry. * Morgan Stanley earnings rebounded strongly in the third quarter as skittish clients returned to doing business with the company. * Verizon Communications reported on Thursday that its net income in the third quarter rose 15.5 percent, to $1.59 billion, from a year ago. The company said revenue climbed 3.9 percent to $29 billion, in line with a survey of analysts' expectations by FactSet. * Union Pacific Corp said Thursday that its third-quarter profit climbed 15 percent because price increases and more automotive and chemical shipments helped the railroad offset a 12 percent decline in coal shipments. * Southwest Airlines Co eked out a small third-quarter profit in spite of a September slowdown, the company said on Thursday. * After months of slowing growth, the Chinese economy may finally have bottomed out. But concerns remain about whether and when it can resume the rapid expansion of recent years. * Airtime, the much-hyped video chat site created by Sean Parker and Shawn Fanning, the two behind the music sharing service Napster, has turned out to be far from a sure thing. The site is just four months old, and the staff is tweaking its features to make it more appealing. So far, though, Airtime's traffic appears to be little more than a trickle. * Hoping to stave off a brewing trade war, Mexican tomato growers said on Thursday that they would agree to significant increases in the minimum price at which their products can enter the United States and to establish a system to bolster compliance and enforcement.   Canada THE GLOBE AND MAIL * Dalton McGuinty's decision to suspend all business at the Ontario legislature has created divisions within Liberal Party ranks, with some members of provincial parliament g r owing uneasy and one potential leadership candidate openly criticizing the move as a way to avoid scrutiny. * After escaping the largest human-trafficking ring in Canadian history, Tibor Baranyai could have quietly returned to his native Hungary. Instead, he chose to help police and prosecutors take down the criminal organization that forced him to work as a virtual slave on construction sites. Reports in the business section: * With one eye on the strong resource economy and the other on its chief rival, Air Canada is ramping up the frequency of its short regional flights in Western Canada. * The spat between Enbridge Inc and British Columbia is escalating, with each side accusing the other of being out of line regarding discussions - or more precisely, the lack of discussions - over explosive issues tied to the controversial oil sands pipeline the province currently opposes. NATIONAL POST * A retired city of Montreal engineer says he collected more than $600,000 in cash kickbacks from construction companies over nearly 20 years. FINANCIAL POST * Research In Motion Ltd Chief Executive Thorsten Heins fired back at a New York Times article on the apparent social embarrassment of being seen using a BlackBerry smartphone. * Canada's securities industry regulator is calling for tougher oversight of the Canadian version of Libor. In an emailed statement, a spokesperson for the Investment Industry Regulatory Organization of Canada said while it isn't aware of any problems with the Canadian Dealer Offered Rate, or CDOR, "(r)ecent experiences with Libor have pointed to a need for increased scrutiny of such survey-based reference rates."   Fly On The Wall 7:00 am Market Snapshot ANALYST RESEARCH Upgrades Abbott (ABT) upgraded to Outperform from Market Perform at Wells FargoAlliant Energy (LNT) upgraded to Buy from Hold at WunderlichCheniere Energy Partners (CQP) upgraded to Outperform from Neutral at Credit SuisseCummins (CMI) upgraded to Overweight from Neutral at Piper JaffrayHarley-Davidson (HOG) upgraded to Overweight from Neutral at JPMorganHome Loan Servicing (HLSS) upgraded to Overweight from Equal Weight at BarclaysHuntington Bancshares (HBAN) upgraded to Market Perform from Underperform at FBRIntuitive Surgical (ISRG) upgraded to Buy from Neutral at BofA/MerrillSanDisk (SNDK) upgraded to Overweight from Neutral at Piper JaffrayT. Rowe Price (TROW) upgraded to Overweight from Neutral at JPMorganVerizon (VZ) upgraded to Outperform from Sector Perform at Pacific Crest Downgrades AMD (AMD) downgraded to Market Perform from Outperform at FBR Capitalathenahealth (ATHN) downgraded to Underperform from Hold at JefferiesBarclays (BCS) downgraded to Hold from Buy at CanaccordFifth Third Bancorp (FITB) downgraded to Neutral from Buy at Compass PointGenco Shipping (GNK) downgraded to Sell from Hold at Deutsche BankGoogle (GOOG) downgraded to Neutral from Buy at BofA/MerrillGoogle (GOOG) downgraded to Perform from Outperform at OppenheimerJanus Capital (JNS) downgraded to Underweight from Neutral at JPMorganKeyCorp (KEY) downgraded to Neutral from Buy at CitigroupLloyds Banking (LYG) downgraded to Underweight from Neutral at JPMorganMarvell (MRVL) downgraded to Hold from Buy at Deutsche BankMarvell (MRVL) downgraded to Hold from Buy at JefferiesMarvell (MRVL) downgraded to Market Perform from Outperform at FBR CapitalMarvell (MRVL) downgraded to Neutral from Outperform at Credit SuisseMarvell (MRVL) downgraded to Neutral from Overweight at JPMorganMarvell (MRVL) downgraded to Underperform from Outperform at CLSAMeadowbrook (MIG) downgraded to Underperform from Sector Perform at RBC CapitalNVIDIA (NVDA) downgraded to Market Perform from Outperform at FBR CapitalNorthrop Grumman (NOC) downgraded to Perform from Outperform at OppenheimerSnap-On (SNA) downgraded to Neutral from Buy at Janney CapitalWESCO (WCC) downgraded to Neutral from Buy at Citigroup Initiations Celanese (CE) initiated with a Neutral at JPMorganClarcor (CLC) initiated with a Perform at OppenheimerDSW Inc. (DSW) initiated with a Neutral at CitigroupDonaldson (DCI) initiated with a Perform at OppenheimerGuess (GES) initiated with an Underweight at Morgan StanleyPegasystems (PEGA) initiated with a Neutral at WedbushSalesforce.com (CRM) initiated with an Outperform at Wedbush HOT STOCKS Microsoft (MSFT) reaffirmed FY13 operating expense guidance $30.3B-$30.9B Said rise of multi-screen consumer creating huge opportunitiesBurger King (BKW) launched specialty coffees with Nescafe Milano by Nestle (NSRGY) ING Groep (ING) to sell insurance units in Hong Kong, Macau, ThailandYahoo (YHOO) to close Korean businessAir Products (APD) CEO: starting our FY13 with weak economic momentum worldwideMeadWestvaco (MWV) to acquire Ruby Macons, terms not discloseBaker Hughes (BHI) CEO: Well positioned in growing and emerging marketsSchlumberger (SLB) still sees uncertainty surrounding global economy outlookUSB's (USB) Elavon and Banco Santander (SAN) form merchant services JV in SpainChipotle (CMG) sees flat to low-single digit comparable restaurant sales in 2013Sees 165-180 new restaurant openings next yearAMD (AMD) sees PC market under pressure for "several quarters" Said it must diversify beyond the traditional PC marketTo cut workforce by 15%Duff & Phelps (DUF) acquired CETERIS EARNINGS Companies that beat consensus earnings expectations last night and today include: Honeywell (HON), Schlumberger (SLB), Valmont (VMI), Western Alliance (WAL), Capital One (COF), Rambus (RMBS), Robert Half (RHI), SanDisk (SNDK), athenahealth (ATHN), NCR Corp. (NCR), B&G Foods (BGS), Cubist (CBST), Microsoft (MSFT) Companies that missed consensus earnings expectations include:Baker Hughes (BHI), Air Products (APD), Cytec Industries (CYT), AMD (AMD), E-Trade (ETFC), Chipotle (CMG), Acacia Research (ACTG) Companies that matched consensus earnings expectations include:General Electric (GE), People's United (PBCT) NEWSPAPERS/WEBSITES The Google (GOOG) filing was sent early due to human error and not a systems problem, R.R. Donnelley (RRD) CEO Tom Quinlan told the Wall Street JournalA series of failed deals is upsetting Chinese firms trying to invest in U.S. businesses and throwing fuel on an increasingly tense trade relationship between the two largest economies, the Wall Street Journal reportsArcher Daniels Midland (ADM), which bought a 10% stake in Australia’s GrainCorp, valuing the company at $2.8B, wants talks on a takeover that would give the U.S. agribusiness a stronger platform to supply Asia, Reuters reportsBP’s (BP) board will meet today to consider a cash and stock offer worth over $25B from Rosneft for its 50% stake in TNK-BP, Reuters reportsExpansion by tech companies from Amazon (AMZN) to Apple (AAPL) to Facebook (FB) is helping drive a rebound in U.S. office development from the lowest in more than five decades as default rates on construction mortgages decline from a 2010 peak, Bloomberg reportsForeign direct investment in China declined for the 10th time in 11 months, as companies reduced spending amid a slowdown in their economy. Investment fell 6.8% from a year earlier to $8.43B, according to the Ministry of Commerce, Bloomberg reports SYNDICATE Cleveland BioLabs (CBLI) files to sell common stock and warrantsCopano Energy (CPNO) files to sell 6M common unitsMarathon Petroleum (MPC) unit launches 15M share IPOPuma Biotechnology (PBYI) 6.5M share Secondary priced at $16.00Seadrill Partners (SDLP) 8.75M share IPO priced at $22.00

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19 октября 2012, 04:07

Some Context On Spain's 'Big' Week

Much is being made of the compression in Spanish bond spreads this week - the largest 3-day drop since Draghi's 'dream' speech. Four critical things come to mind: 1) increasing amounts of Spanish sovereign debt is now held by domestic banks, making the market less liquid (and far less transparent as any indication of 'reality'); 2) the ban on naked CDS (and Draghi's put) has created a hedging vacuum with CDS spreads collapsing and exposure slumping (technically dragging bond risk down); 3) Lower spreads reflexively mean lower probability of Rajoy saying "Si" - which is what is helping spreads compress (leaving event-risk high - as indicated by the outperformance of our legal arb trade); and perhaps most importantly 4) Recency bias is incredible - we have seen 100-plus percent rises in Spanish risk followed by 35-plus percent retracements a number of times and the current level of Spain risk is still above LTRO-inspired crisis levels. So let's not get all excited quite yet eh?   1) Domestic Bank holdings of Spanish bonds have surged... and dealers tied by Basel III RWAs will not inventory positions - leaving only fast money pinging risk around and self-referential domestic banks more than willing to load their boat with ECB collateral in a circular reach-around of glory (see CNBC ebulience every time an auction goes off!!)... once the fast-money leaves the building, and risk flares - who will save the precious domestic bank capital then? CDS traders? hhm, no...   2) Sovereign CDS markets no longer useful signals and arbitrage means technical drag on bond spreads... CDS (green) and bond spreads (orange) have tracked relatively well - but since the beginning of the CDS ban discussions, traders have reduced exposure en masse (enough to practically kill even the SovX index) leaving the basis between bonds and CDS wide enough to drive a truck through BUT noone willing to since proving the correlation required to hold sovereign CDS is too onerous (and as we warned here, there are unintended consequences). Managers are loathed to take on the SGB risk (as seen in point1 - leaving only the domestic banks to soak up their self-satisfying sovereign risk)... And withbasis traders gone from the equation, should we see a risk flare, there will be no-one to soak up the illiquidty premium in bonds (unintended consequence!)   [as a side note - one does have to wonder whether the compression in Spanish CDS is led by a swathe of self-referential CDS protection writing by Spanish banks? Its not quite as ridiculous as self-referential name CDS - but still thanks to LTRO, the banks and the sovereign are as agood as one and the same]   3) The strength in Spanish bonds is driven by compression in the front-end by 'hope's of OMT - which is conditioned on Rayoy's Request for aid. The lower spreads go - the less likely the Spanish are to ask for aid - given the conditionality - and the implied support becomes worth-less. What is fascinating is the outperformance of UK-Law bonds over local-Law bonds remains a huge margin - suggesting (rightly so) that hedge funds and fiduciaries are willing to pay up for legal protection over the inevitable subordination (no matter how many times we are told pari passu). The following chart shows the outperformance (A EUR6 compression from the EUR14 differential when we suggested the trade - quite an impressive unlevered return even if we say so ourselves) as the UK-law bond is up 10.6% (middle pane) and the local-law bond is up only 1.95% (lower pane)... Event Risk concerns remain high...   4) We've seen this pattern before...100%-plus up in risk, 35%-plus retracement, and repeat...   But apart from that (oh and record high and escalating Spanish bad loans and a 'bad bank' that will not be taking on RMBS), Spain is all good?

28 сентября 2012, 15:34

Frontrunning: September 28

China accuses Bo Xilai of multiple crimes, expels him from communist party (Reuters), China seals Bo's fate ahead of November 8 leadership congress (Reuters) "Dozens of phone calls on days, nights and weekends" - How Bernanke Pulled the Fed His Way - Hilsenrath (WSJ) Fed won't "enable" irresponsible fiscal policy-Bullard (Reuters) PBOC Adviser Says Easing Restrained by Concerns on Homes (Bloomberg) Data Point to Euro-Zone Recession (WSJ) Fiscal cliff dims business mood (FT) FSA to Oversee Libor in Streamlining of Tarnished Rates (Bloomberg) Monti Says ECB Conditions, IMF Role Hinder Bond Requests (Bloomberg) Japan Heads for GDP Contraction as South Korea Weakens (Bloomberg) Moody’s downgrades South Africa (FT) Madrid Struggles With Homage to Catalonia (WSJ) Overnight Media Digest WSJ * Mitt Romney and President Barack Obama are running neck and neck in the battleground states of North Carolina and Nevada, new polling shows, while Romney faces an uphill battle to win New Hampshire, a state he picked to launch his campaign and that has long served as a second home. * Israeli Prime Minister Benjamin Netanyahu said Iran was on track to build an atomic bomb by summer of 2013 and exhorted the U.S. and other global powers to set a strict limit on Tehran's nuclear fuel production as the clear "red line" that would trigger military strikes. * Spain unveiled a series of regulatory overhauls and $16.7 billion of spending cuts and tax increases, as mounting political turmoil heightened investor concerns over Prime Minister Rajoy's ability to stabilize the economy. * A proposed outlay of $200 million in retention bonuses appears to be threatening the $70 billion proposed combination of natural-resource giants Glencore International Plc and Xstrata Plc. * Research in Motion Ltd posted its third straight quarterly loss. But the BlackBerry maker's revenue and operating loss came in significantly better than expectations. * The European Union on Thursday asked the World Trade Organization for permission to impose $12 billion in annual trade penalties on U.S. companies, saying Washington hadn't ended subsidies to aerospace company Boeing Co that the WTO said last year violated international trade rules. * General Electric Co Chief Executive Jeff Immelt gave an upbeat outlook for sales in the company's industrial businesses, thanks to booming aircraft-engine sales, rising medical-device orders in emerging markets and a growing oil and gas business. * Google Inc on Thursday said it blocked a Brazilian political video from its YouTube site, a day after that country's Federal Police detained the head of the Internet giant's Brazilian operations for refusing a court order to do so.   FT LIBOR LENDING RATE TO GET FULL OVERHAUL The "broken" Libor interbank lending rate will get "a complete overhaul", according to Martin Wheatley, the Financial Services Authority managing director. SPAIN UNVEILS AUSTERITY BUDGET The Spanish government announced budget cuts and tax increases totalling 40 billion euros ($51.45 billion)for next year. CAR INSURERS FACE SHAKE-UP WITH PROBE INTO MARKET Regulators will launch a full-blown investigation into the motor insurance market on Friday. CHINA BUYS INTO UK STUDENT HOUSING A Chinese government fund is set to buy a 40 percent stake in the UK's largest developer of student housing. BANK EARNINGS FROM M&A DROP TO LEHMAN LOW Investment bank earnings from mergers and acquisitions and debt and equity capital markets has slowed to a low not seen since the collapse of Lehman Brothers. UK FEARS FRENCH PUSH FOR BAE-EADS STAKE The French government is pushing to hold a large stake in the group to be created by combining EADS and BAE . GOLDMAN IN $14 MLN FINE FOR CONTRIBUTIONS Goldman Sachs will pay about $12 million to settle charges it violated "pay-to-play" rules. US FARM DROUGHT HITS GROWTH The effects of drought across the U.S. farm belt resulted in revised estimates for second quarter down from 1.7 to 1.3 percent.   NYT * British authorities are set to announce significant changes to the interest rate at the heart of a recent manipulation scandal as they aim to improve the accuracy and reliability of the benchmark. * The Spanish government on Thursday presented a draft budget for 2013 with a package of tax increases and spending cuts that it said would guarantee the country could meet deficit-cutting targets agreed to with the rest of the euro zone. * The European Union inched closer to a trans-Atlantic trade war on Thursday, saying that it would ask the World Trade Organization for the right to impose up to $12 billion in annual trade sanctions against the United States in retaliation for subsidies to Boeing Co that Brussels says give the plane maker an unfair advantage over its European rival, Airbus. * A closely watched measure of consumer confidence surged to its highest level since February, even as job growth and the overall economy in the United States weakened. * Treasury Secretary Timothy Geithner on Thursday urged the regulatory team that he leads to push ahead with new rules aimed at money market funds, which manage $2.6 trillion. * Research in Motion Ltd, the troubled manufacturer of the once-dominant BlackBerry smartphone, reported another sizable quarterly loss on Thursday, but a smaller one than the previous quarter. However, the company continues to face a difficult future as it struggles to get a new phone out the door. * Nike Inc reported on Thursday that its fiscal first-quarter net income fell 12 percent as stronger sales of its clothing and footwear brands were offset by increased costs and advertising spending. * Greece, heavily in debt and desperate to track down money, is asking British authorities about investments by Greeks in expensive real estate. * The optimistic view at the Paris Motor Show on Thursday was that auto sales were so bad that they could not possibly get any worse. But even if there is a slight recovery in 2013, as some predict, it is dawning on industry executives that it could be years before sales return to the levels of 2007, when they peaked just before the financial crisis.   Canada THE GLOBE AND MAIL * The Conservative government is poised to adopt a sweeping new investment treaty between Canada and China without a single Parliamentary vote or debate. The text of the Foreign Investment Promotion and Protection Agreement was released for the first time this week and members of Parliament are just starting to work their way through the legal document. * The Supreme Court of Canada has joined the battle to eliminate bullying, clearing the way for a Nova Scotia girl to pursue her Facebook tormentors under a cloak of anonymity. The court said on Thursday that vulnerable minors cannot be expected to confront cyber bullies unless they can do so without exposing their full identities. * Canada's population is growing faster than any other G8 country, driven largely by immigration, Statistics Canada says. Saskatchewan has become a magnet for newcomers, with immigration fuelling a larger share of its population growth than any other province or territory. The country's population nudged closer to 35 million, sitting at an estimated 34,880,500 on July 1. The figure is up 1.1 per cent from a year earlier, making Canada's annual growth rate the highest among G8 countries. Reports in the business section: * Research in Motion Ltd is learning to be hungry again. Once the dominant force in the smartphone industry, the struggling BlackBerry maker is undertaking a company-wide plan to become smaller and leaner, slashing thousands of jobs to offset its tumbling sales. * Ontario Finance Minister Dwight Duncan is trying to make amends with Alberta, telling business leaders his government supports development in the oil sands despite previously saying the hot energy industry hurts manufacturing in eastern Canada. * Big investment decisions loom for auto makers and the federal and Ontario governments in the next four years as companies take advantage of a new contract that should stabilize their labour costs and possibly cut them. NATIONAL POST * NDP leader Adrian Dix says if he is elected premier, he will consider getting rid of British Columbia's balanced-budget legislation. Dix said Thursday he doesn't like the Liberal government's budget law, saying it's better to have the goal of balancing the budget rather than having a law that has to be repealed every time the books are inconveniently in the red. * By going against party wishes and voting to re-evaluate Canadian policy on where personhood begins, Rona Ambrose, minister of state for the status of women, has sparked not only a backlash, but a debate over whether women can both champion women's rights and yet have nuanced views about abortion. Ambrose faced calls for her resignation and a barrage of criticism Thursday after standing up in support of M-312, a private member's motion that would have struck a committee to study parts of the Criminal Code that establish when a fetus becomes a legal person. FINANCIAL POST * The impressive rally in commodities this past summer has lost steam in recent weeks despite another flood of liquidity from central banks, and slower emerging market growth may further weaken resource prices, says a new report from Capital Economics. "The prospects for economic growth in commodity-hungry emerging markets suggest the outlook remains challenging," said economists Mark Williams and Neil Shearing. * The scene has been set for a little diversification in the world of mutual fund trusts, a category of issuer available under Canada's Income Tax Act. Over the past 22 months, the category has been the home of oil and gas issuers who own properties in the U.S. and sell a piece of those properties to Canadian investors. So far three issuers - Eagle Energy Trust, Parallel Energy Trust and Argent Energy Trust - have tested the market and found willing buyers.   Fly on the Wall 7:00 am Market Snapshot ANALYST RESEARCH Upgrades Publicis (PUBGY) upgraded to Outperform from Neutral at Macquarie Syngenta (SYT) upgraded to Overweight from Neutral at HSBC Downgrades ArcelorMittal (MT) downgraded to Neutral from Outperform at MacquarieBox Ships (TEU) downgraded to Equal Weight from Overweight at Morgan StanleyCaterpillar (CAT) downgraded to Neutral from Buy at BofA/MerrillFMC Corporation (FMC) downgraded to Neutral from Buy at BofA/MerrillMcDonald's (MCD) downgraded to Neutral from Buy at Janney CapitalUnited Technologies (UTX) downgraded to Perform from Outperform at Oppenheimer Initiations American Capital Mortgage (MTGE) initiated with an Outperform at JMP SecuritiesAmerican Financial Group (AFG) initiated with a Buy at Janney CapitalAtlas Pipeline Partners (APL) initiated with an Overweight at StephensAvago (AVGO) initiated with a Buy at Brean MurrayBroadcom (BRCM) initiated with a Buy at Brean MurrayDevon Energy (DVN) initiated with an Outperform at Credit SuisseHCC Insurance (HCC) initiated with a Buy at Janney CapitalHalcon Resources (HK) initiated with a Buy at CanaccordMarkWest Energy (MWE) initiated with an Overweight at StephensMarvell (MRVL) initiated with a Hold at Brean MurrayNVIDIA (NVDA) initiated with a Hold at Brean MurrayQualcomm (QCOM) initiated with a Buy at Brean MurrayRF Micro Devices (RFMD) initiated with a Buy at Brean MurraySkyworks (SWKS) initiated with a Buy at Brean Murray HOT STOCKS CIT Group (CIT) CEO Thain told CNBC: "Absolutely not" shopping companyMedtronic (MDT) acquired China Kanghui (KH) for $30.75 per ADS, or $816M in cash Nike (NKE) sees Q2 revenue growth to be in the mid-high single digitsWill continue to make strategic investments Research in Motion (RIMM) sees continued pressure on operating results for FY13Said continues to hold talks with potential partnersPrudential (PRU) acquired Hartford’s (HIG) life Insurance business for $615M In cash Sealy (ZZ) shareholder H Partners said Tempur-Pedic (TPX) offer undervalues SealyAccenture (ACN) targeting FY13 new bookings $31B-$34BTata Starbucks Ltd. (SBUX) readies India market entry by end of October Ralcorp Holdings (RAH) announced sale of stake in Post Holdings (POST) Ecolab (ECL) purchased FEMSA (FMX) subsidiaryRambus (RMBS), Fujitsu Semiconductor signed patent license agreement FTI Consulting (FCN) to acquire KordaMentha, terms not disclosedAZZ Inc. (AZZ) to acquire Galvcast ManufacturingNavarre (NAVR) to acquire SpeedFC for $50M in cash and stock EARNINGS/GUIDANCE Companies that beat consensus earnings expectations last night and today include:AZZ Inc. (AZZ), Nike (NKE), Correction: Research in Motion (RIMM) Companies that missed consensus earnings expectations include:Micron (MU) Companies that matched consensus earnings expectations include:Accenture (ACN), Global Payments (GPN) NEWSPAPERS/WEBSITES Wal-Mart Stores (WMT) is expanding in Japan for the first time since 2008, as increases in the ranks of the working poor and pensioners on fixed incomes propel a trend toward thrift there. The retailer is planning 22 new stores in Japan in the next two years, the Wall Street Journal reportsSharp Corp. (SHCAY) reached a deal for a $4.64B syndicated loan, helping keep the struggling firm’s operations afloat amid an apparent standstill in talks with Taiwan's  Hon Hai Precision Industry over a previously agreed upon capital injection, the Wall Street Journal reportsChina's economy is expected to grow at a much slower pace of about 7% over the next decade, but its stock market still has the most attractive upside among "BRIC" countries, said Jim O'Neill, Chairman of Goldman Sachs (GS) Asset Management, Reuters reportsGermany will give France a list of proposals regarding the planned merger of European aerospace group EADS (EADSY) and BAE Systems (BAESY), sources say, Reuters reportsFacebook (FB) and Twitter Inc. have millions of users in China, where the social networking services are banned, according to the results of a GlobalWebIndex survey. Facebook grew to 63.5M in Q2 from 7.9M in 2009, while Twitter users tripled to 35.5M in the same period, Bloomberg reportsThe Justice Department, conducting a criminal probe of interest-rate manipulation, asked the U.K.’s Home Office for permission to interview London traders, sources say, Bloomberg reports SYNDICATE Clearwire (CLWR) to offer 46.4M shares of common stock by Time Warner Cable affiliatesDollar General (DG) 36M share Secondary priced at $51.75EMCORE (EMKR) intends to offer $8M of common stockEagle Materials (EXP) 3M share Secondary priced at $46.50Hercules Technology (HTGC) announces offering of 3.1M shares of common stockQualys (QLYS) 7.575M share IPO priced at $12Summit Hotel Properties (INN) 12M share Secondary priced at $8.15Summit Midstream (SMLP) Partners 12.5M share IPO priced at $20.00Wesco Aircraft (WAIR) files to sell 1.8M shares of common stock for holdersWestern Asset Mortgage (WMC) announces offering of 12M shares of common stock

18 сентября 2012, 14:03

QE3, Deflation and the Money Illusion

The announcement last week by the Federal Open Market Committee that the central bank would initiate additional, open-ended purchases of residential mortgage backed securities (RMBS) was more than a little sad.   Let us count the ways.  The first reason for sadness was the idea that people here in New York and elsewhere in the global financial community were actually surprised by the Fed’s move.  The FOMC is fighting deflation.  Credit continues to contract globally as much of the western world goes on a pure cash budget.  So while I would like to see the Fed raise short term rates, the fact is that the central bank has little choice but to support the markets.  But buying RMBS will neither help housing nor reverse the current deflationary spiral on which we all ride.  The second reason to be circumspect is the fact that the Fed’s leaders continue to pretend that driving down yields in the RMBS markets will have any impact on the housing sector or the economy.  The two thirds of the mortgage market that cannot refinance their homes will be unaffected by QE3.  In fact, the latest Fed purchases are a gift to Fannie Mae and Freddie Mac, the TBTF banks and the hedge fund community.  A fund on the floor of our offices in New York actually started dancing around like little children shouting “QE3” after the Bernanke press conference. “The entire move in MBS prices will go into profit margins,” one mortgage market veteran told the Berlin-New York-Los Angeles mortgage study group last week.  “FHFA has made sure that the mortgage market has oligopoly pricing and zero competition for the existing servicers.  QE3 is risk free profits for the unworthy.  And we wasted 40 years and Trillions of dollars fighting the USSR over the need for a free enterprise system?  Mussolini would be proud.” Unfortunately, since two thirds of the mortgage market cannot be refinanced, the effect of the Fed’s largesse will indeed go straight to the GSEs and Wall Street zombie banks.  This is the key, historical error being committed by Bernanke and the rest of the FOMC.  Instead of looking for ways to stoke consumer demand by restoring income and consumer demand, the Fed is simply feeding subsidies to Wall Street.  Since the Fed does not think that savers like grandparents and corporations spend money, the error is magnified several orders of magnitude.  The basic problem with the people on the FOMC today is that they are all Obama appointees who are by and large neo-Keynesian socialists in terms of economic outlook.  By spending all of their time trying to prevent the 50% drop in GDP which occurred in the 1930s, the Fed forgets or never knew that this catastrophe was the result of the disappearance of private sector capital – not a lack of government spending.  And why did this happen?  One word:  Fraud.  Bill Black has been talking about fraud for years,  So does Fred Feldkamp, the father of the good sale in RMBS.  And so have we at IRA and many others.   The third sadness is that people still don’t understand that fraud is the core problem in the market economies.  Until you deal with fraud and start to restructure the trillions of dollars in bad assets now choking the US economy, no amount of Fed ease will reverse the contraction in credit.  This is not so much a monetary problem as much as a political issue. Just as during the 1920s and 1930s it took years for our leaders to understand that securities fraud was the core issue menacing the US economy, today the same process of discovery and revelation grinds slowly forward.  Fear causes investors to withdraw from markets and save cash.  But because Chairman Bernanke and the Fed refuse to attack the source of the fraud – namely Bank of America and the other zombie banks – the US economy is destined for years of stagnation and eventual hyperinflation.   Economists at the Fed think that the rising propensity to save is a function of interest rates, but no amount of financial repression is going to convince investors to take first loss on a private label RMBS until they trust the representations of the issuer.  Trust me on this since I am in the bank channel right now marketing a non-conforming RMBS offering.   Just as the grey market banking sector collapsed from the peak of $25 billion starting in 2007, the confidence of the great market economies is collapsing under the weight of socialist economic prescriptions and cowardly advice coming from the legions of economists who work for large banks.  Most economists have figured out that the old linkages between savings, consumption and debt have broken asunder.  Yet none of these captive seers dares to suggest that the banks themselves need to be restructured. Jeff Zervos of Jeffries is one of the key Fed cheerleaders.  He writes in a research comment: “The bottom line is that the Fed is printing money, debasing the currency and devaluing debt. The policy is redistributive, regressive and reflationary. It’s a nasty business for sure, and the truth must be obfuscated from the public. But if we want to avoid a second great depression, it is the right thing to do. Good luck trading.” Good luck indeed.  So long as the Fed refuses to become an advocate for restructuring and merely keeps interest rates low, there will be no progress on the economy or jobs because aggregate credit continues to contract.  The Fed’s actions are not really growing the money supply much less credit, it is merely trying to slow the decline.  Whether we talk about the run-off of the private label mortgage market or the wasting effect of low rates on savers, the US economy is being put into a no leverage, pure cash model by the happy Keynesians who run the Fed.   The fourth sadness is that mainstream economists from Zervos to Bernanke to Richard Koo at Nomura refuse to even talk about rebuilding private sector wealth creation.  In a brilliant luncheon talk last week at the Bank Credit Analyst investment conference, Koo accurately described the breakdown in the relationships between major economic aggregates.  He also illustrated nicely the jump in savings in Japan and the other major industrial nations following market shocks.   But Koo, like most of our former colleagues at the Fed, thinks that only increased debt and public sector spending are the answer to the deflation threat.  But the key lesson of the Great Depression was that government must avoid actions and policies that cause private sector investors to flee the markets.  This is precisely the result we now see from the Fed’s actions.   Now you might argue that the Fed is merely following the advice of Irving Fisher, the great US economist, who wrote in 1933 that vigorous monetary policy is needed in the face of debt deflation.  One must wonder, though, if Fisher would not scold all of us today for failing to attack fraud and restructuring at the same time.  Like most Keynesians, Fisher believed that government could manipulate income and investment via monetary policy.  Yet even Fisher was guilty of embracing the same fallacy or "money illusion" that government can print money without affecting negatively consumer behavior.  As Ludwig Von Mises wrote in the new preface to his classic book, the Theory of Money and Credit: “There is need to realize the fact that the present state of the world and especially the present state of monetary affairs are the necessary consequences of the application of the doctrines that have got hold of the minds of our contemporaries. The great inflations of our age are not acts of God. They are man-made or, to say it bluntly, government-made. They are the off-shoots of doctrines that ascribe to governments the magic power of creating wealth out of nothing and of making people happy by raising the 'national income'.” Could it be that the monetary actions of the Fed and other monetary authorities around the world are scaring investors, eroding confidence in private markets and worsening deflation?  Most economists never consider that FDR’s anti-business rhetoric and policies helped to drive private capital formation to zero in the 1930s.  Likewise today, the Fed’s reckless and arguably illegal actions in terms of monetary policy are terrifying investors and members of the public around the world.  But all that Jeff Zervos, Richard Koo and their Keynesian/socialist pals that the Fed have to say is “good luck.”  We need to take a new direction if the economic catastrophe predicted by luminaries like Paul Krugman does not come to pass.  The core principles are two: fight the fraud and restructure bad assets.  If we hold responsible those who have committed fraud against investors and at the same time move quickly to restructure and break up banks such as Bank America, we can restore public confidence in markets and reverse the deflation which is even now gaining momentum in the US economy.  Contrary to the assertions of Zervos and others, there is no need to hide government policy from the public view. Restructuring is the necessary condition for credit expansion and job growth.  Without private sector credit growth there can be no jobs. Without justice for investors, pension funds and banks defrauded to the tune of hundreds of billions of dollars, there can be no investor confidence to support private finance.  And unless the Fed and other regulators in Washington break the cartel in the US housing sector led by Fannie Mae, Freddie Mac and the top four banks, there will be no meaningful economic recovery in the US for years. Instead we will face hyperinflation and social upheaval, both care of the well-intentioned economists on the FOMC.