And Now the Ghosts of Enron Past - VIE's

Goldman, Lehman May Not Have Dodged Credit Crisis
By Mark Pittman

Feb. 26 (Bloomberg) -- Even Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. may find they haven't dodged the credit crisis.

The new source of potential losses: so-called variable interest entities that allow financial firms to keep assets such as subprime-mortgage securities off their balance sheets. VIEs may contribute to another $88 billion in losses for banks roiled by the collapse of the housing market, according to bond research firm CreditSights Inc. Goldman, which hasn't had any of the industry's $163 billion in writedowns, said last month it may incur as much as $11.1 billion of losses from the instruments.

The potential for a fire-sale of the assets that would bring another round of charges has ``always been our greatest fear,'' said Gregory Peters, head of credit strategy at New York-based Morgan Stanley, the second-biggest securities firm behind Goldman in terms of market value.

VIEs, known as special purpose vehicles before Enron Corp.'s collapse in 2001, finance themselves by selling short-term debt backed by securities, some of which are insured against default.

Now that Ambac Financial Group Inc. and other guarantors have started to lose their AAA financial-strength ratings, Wall Street firms may be forced to return those assets to their books, recording the declining value as losses. MBIA Inc., the biggest insurer, said yesterday it plans to separate its municipal and asset-backed businesses, a move Peters said would likely result in a lower credit rating for the types of assets owned by VIEs.

`Significant Consequences'

Wall Street's writedowns stem from a surge in mortgage delinquencies among homeowners with the riskiest subprime-credit histories. The industry's VIEs, also known as conduits, had $784 billion in commercial paper outstanding as of last week, according to Moody's Investors Service and the Federal Reserve.

``There's a big number at work here and it will have significant consequences,'' said J. Paul Forrester, the Chicago- based head of the CDO practice at law firm Mayer Brown. ``The great fear is that a combination of subprime CDOs, SIVs and conduits result in a flood of assets into an already-stressed market and there's a price collapse.''

CreditSights has one of the highest projections for additional losses. Moody's says the fallout from VIEs, collateralized debt obligations, and other deteriorating assets may run to $30 billion. CDOS are packages of debt sliced into pieces with varying ratings.

`Lightning Rod'

One type of VIE that's already been forced to unwind or seek bank financing is the structured investment vehicle, or SIV. Like SIVs, VIEs often issue commercial paper to finance themselves and may have multiple outside owners that share in the profits and losses. Because banks agree to back VIEs with lines of credit, they have to buy commercial paper or notes when no one else will.

Ambac, the world's second-biggest bond insurer, and two smaller competitors lost a AAA rating from at least one of the three major ratings companies in recent months. Standard & Poor's yesterday affirmed the AAA ranking of MBIA, the largest ``monoline,'' though it said the outlook is ``negative.'' MBIA yesterday eliminated its quarterly dividend and said it won't write new guarantees on asset-backed securities for six months.

The more widespread the downgrades, the more likely the assets in the VIEs will be cut. Some buyers of the debt demand the highest ratings, giving banks a vested interest in helping the insurers salvage their ratings.

Ambac Financing

New York-based Ambac may get $3 billion in new capital with the help of Citigroup Inc. and Dresdner Bank AG as early as this week, the Wall Street Journal reported yesterday. MBIA raised money by selling common shares and warrants to private-equity firm Warburg Pincus LLC and issuing $1 billion of surplus notes.

``The lightning rod of the monoline fix is so important to so many banks,'' said Thomas Priore, chief executive officer of New York-based Institutional Credit Partners LLC, which manages $12 billion in CDOs.

Accounting rules allow financial firms to keep VIEs off their balance sheets as long as they're not the ones that stand to gain or lose the most from the entity's activities. A bank would also have to account for its portion of a VIE if prices for the debt owned by the fund fall too far or if the bank is forced to provide financing.

Goldman, Lehman

Goldman, the most profitable Wall Street firm, and Lehman, the biggest commercial-paper dealer, have avoided much of the pain so far.

Goldman, which earned a record $11.6 billion in the year ended in November 2007, said it avoided writedowns by setting up trades that would profit from a weaker housing market. Now the threat is $18.9 billion of CDOs in VIEs, the firm said in a regulatory filing on Jan. 29. Goldman spokesman Michael DuVally declined to comment.
Merrill Lynch & Co. analyst Guy Moszkowski today cut his estimate for Goldman's first-quarter earnings for the second time this month, citing growing losses from assets outside residential mortgages.

Lehman, which wrote down the net value of subprime securities by $1.5 billion, guaranteed $6.1 billion of investors' money in VIEs and $1.4 billion of clients' secured financing as of Nov. 30, according to a filing also made on Jan. 29.

``We believe our actual risk to be limited because our obligations are collateralized by the VIE's assets and contain significant constraints,'' Lehman said in the filing. Spokeswoman Kerrie Cohen wouldn't elaborate.

Citigroup Losses

Citigroup, which has incurred $22.1 billion in losses from the subprime crisis, has $320 billion in ``significant unconsolidated VIEs,'' according to a Feb. 22 filing by the New York-based bank. New York-based Merrill Lynch, which recorded $24.5 billion in subprime writedowns, has $22.6 billion in VIEs, according to CreditSights.

Merrill spokeswoman Jessica Oppenheim declined to comment, as did Citigroup's Danielle Romero-Apsilos.

The securities in the VIEs may be worth as little as 27 cents on the dollar once they're put back on balance sheets, according to David Hendler, an analyst at New York-based CreditSights. Hendler based his estimate on the recent sale of $800 million of bonds by E*Trade Financial Corp.

Predictions for losses vary widely because banks aren't required to specify the type of assets being held in the VIEs or how much they are worth, said Tanya Azarchs, managing director for financial institutions at S&P.

``The disclosure on VIEs is hopeless,'' Azarchs said. ``You have no idea of the structure or how that structure works. Until you know that you don't know anything. It's like every day you come into the office and another alphabet soup has run off the rails.''

To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net .

Last Updated: February 26, 2008 13:11 EST

Bernanke, Greenspan at Fault as U.S. Faces Slump

While Joe Stiglitz is right in much of his analysis, his prescription now is for the Fed to print money more aggressively. How is that different from what he criticizes Greenspan from having done?

We appreciate the glancing blow he strikes at US fiscal irresponsibility for taking on a 3 trillion dollar war with Iraq, trying to hide the cost, while cutting taxes for the wealthiest few. But his prescription for dealing with it by triggering inflation to prevent the recession is just as irresponsible, unless it is accompanied by some serious reform of the financial system and fiscal priorities.

He damns Greenspan for looking the other way while the Housing Bubble inflated, but where is Bernanke now supposed to look when he creates another bubble by printing money?

As you may recall, the moment in history that Greenspan turned his head and looked the other way was after a private visit paid to him by then Treasury Secretary Robert Rubin, about the time Greenspan made his famous 'irrational exuberance' speech. He then turned around and opened the spigots, and fueled the tech bubble in response to the Asian monetary and Russian default crises, and used the Y2K excuse for a second round.

It is for this that we called Greenspan 'the worst Federal Reserve chairman ever.' And he was coupled with one of the worst US presidents ever, a deadly combination. But we cannot help but think that they both are just pawns, as neither distinguished themselves in anything before they were given positions of trust, power, and stewardship, and willfully betrayed them.

The price of oil is rising because the US has triggered a worldwide bubble by inflating the world's reserve currency, and doing so for too long, with too much hubris. And like the subprime mortgage scandal, there were many enablers, and people who went along with it as an opportunity to gain personal advantages. And far too many who knew better but kept quiet, under the maxim 'go along to get along.'

Stiglitz himself put his finger on part of the problem in his piece, What I Learned at the World Economic Crisis, in The New Republic in April 17, 2000:

But bad economics was only a symptom of the real problem: secrecy. Smart people are more likely to do stupid things when they close themselves off from outside criticism and advice. If there's one thing I've learned in government, it's that openness is most essential in those realms where expertise seems to matter most.

Hey Joe, when are you going to speak up about the serial off balance sheet frauds perpetrated by the banks, who spent YEARS and many millions of dollars to get Glass-Steagall overturned? When are you going to speak about the manipulation of economic statistics and markets to mask what Greenspan turned away from? When are you going to talk about the outrageous lack of transparency being used to enrich the few again at the expense of the many as we speak today?

First they came for the workers, through outsourcing and globalization. Now they are going to be coming after the elderly and disabled, having squandered the monies they paid over many years into Social Security. Is this all part of a final overturning of the New Deal, and a return to Victorian Anglo-American oligarchy? Be careful how quickly you react, because a lot of would-be 'lord and ladies' are in reality just part of the hoi polloi.

We are in for one rough time. Greenspan, in his book and his words, is trying to rain on Bernanke's parade while absolving himself. Stiglitz is raining on both, while prescribing the 'hair of the dog that has bitten us' to cure the credit boom hangover that the US financial system has served up for the world. Well, we have a German shepherd sized dog that has bitten a chunk out of our hides, and we're still so drunk we have not quite realized it yet. And Joe doesn't help, except to trot out the same old snake oil.


Bernanke, Greenspan at Fault as U.S. Faces Slump, Stiglitz Says
By Mark Barton and Ben Sills

Feb. 26 (Bloomberg) -- Joseph Stiglitz, a Nobel-prize winning economist, said successive Federal Reserve chairmen have left the U.S. economy facing a ``very significant'' slowdown.

Current Fed chief Ben S. Bernanke was too slow to cut interest rates as the U.S. real-estate market deteriorated, while his predecessor, Alan Greenspan, ``actively looked the other way'' as the housing market inflated, Stiglitz said in a Bloomberg Television interview today in London.

The spillover from the biggest U.S. housing slump in 25 years, turmoil in financial markets and higher energy prices are curbing growth in the world's biggest economy. The financial- services industry is curtailing credit and conserving capital.

Greenspan ``is right that this downturn is going to be the worst downturn in a quarter century, but he's largely to blame,'' Stiglitz said. ``It's not just that he was asleep at the wheel, he actively looked the other way'' by dismissing the housing-price appreciation as ``froth.'' [Where was Stiglitz's voice when he was doing it? - Jesse]

Following mounting losses on past loans, banks have already taken writedowns of $163 billion since the beginning of 2007. President George W. Bush signed a $168 billion stimulus package that will deliver tax rebates to more than 100 million households.

Bernanke cut Fed interest rates twice last month, including an emergency reduction of 75 basis points between meetings, in a bid to prop up growth as the financial writedowns and the prospect of a further housing decline saw U.S. stocks slump. The S&P 500 index is down 6.6 percent this year.

`Too Late'

``Clearly they acted too late,'' Stiglitz said. ``The dramatic lowering of the main interest rate by 75 basis points was a panic not a prudent measure.''

The $3 trillion cost of the Iraq war, which diverted the country's resources from investment in economic productivity and sent the budget deficit higher, will continue to hold back growth in the U.S., Stiglitz said.

European monetary-policy makers may also be under- estimating the risks to economic growth, Stiglitz said. The European Central Bank's mandate, which sets price stability as the sole objective, is ``flawed'' because it prevents ECB President Jean-Claude Trichet from supporting job creation.

"He should not be focusing so much on inflation especially when so much of it is imported,'' Stiglitz said. ``Higher interest rates won't solve the problem of higher oil prices.'' [this guy is a "Nobel prize winning economist" and he says that? - J]

To contact the reporters on this story: Mark Barton in London at barton1@bloomberg.net ; Ben Sills in Madrid at bsills@bloomberg.net .

Last Updated: February 26, 2008 07:02 EST

FDIC Prepares as Bank Failures Loom - Wall Street Journal

FDIC to Add Staff as Bank Failures Loom
By Damian Paletta
Wall Street Journal


WASHINGTON -- The Federal Deposit Insurance Corp. is taking steps to brace for an increase in failed financial institutions as the nation's housing and credit markets continue to worsen.

The FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

FDIC spokesman Andrew Gray said the agency was looking to bulk up "for preparedness purposes." The division now has 223 employees, mostly based in Dallas.

The agency, which insures accounts at more than 8,000 financial institutions, is also seeking to hire an outside firm that would help manage mortgages and other assets at insolvent banks, according to a newspaper advertisement.

FDIC Chairman Sheila Bair, Comptroller of the Currency John Dugan and Office of Thrift Supervision Director John Reich have warned of a pickup in bank failures. Last week, Mr. Reich reported that the thrift industry lost a record $5.2 billion in the fourth quarter.

"Regulators are bracing for well over 100 bank failures in the next 12 to 24 months, with concentrations in Rust Belt states like Michigan and Ohio, and the states that are suffering severe housing-market problems like California, Florida, and Georgia," said Jaret Seiberg, Washington policy analyst for financial-services firm Stanford Group.

The FDIC was created by Congress in the 1930s after a series of bank runs during the Great Depression. At the end of 2007, it had $52.4 billion in its fund that backstops the nation's insured deposits.

FDIC to Add Staff as Bank Failures Loom - WSJ

Revisiting Our Gold Forecast from May 2007

"We were staring into an abyss as the price
of gold rose in September,1999."
Sir Edward George, Bank of England

The forecast we put out for Continuous Contract Gold in May 4, 2007
projected we would hit a high of 1,050 per ounce and end the year
roughly at 1,000 per ounce.


Here is the detailed forecast as we put it out almost a year ago.

Here is how things have actually turned out.

We are working on a new forecast and
hope to put it out here sometime in early March.

Theme for 2008: Back to the Abyss