This is Lloyd's Bank, one of Britain's largest, but it is not the same as Lloyd's of London, now known as Lloyd's International, the famous insurance firm.
Government may have to take full control of Lloyds
By James Kirkup
6:16PM GMT 13 Feb 2009
Ministers have been warned they will be forced to take full control of Lloyds Banking Group after its shares fell by a third amid huge losses.
Britain's biggest high street bank shocked the City by announcing almost £11 billion of losses last year, more than twice what banking analysts had expected.
The Government already holds a 43 per cent stake in Lloyds after injecting £17 billion into the bank last year.
The bank's shares closed down 32.5 per cent last night. The fall leaves taxpayers with a paper loss of nearly £10 billion on the government's investment.
Lloyds Banking Group was formed by the merger of Lloyds TSB and HBOS last year. In a government-brokered deal, Lloyds agreed to rescue the stricken HBOS after it came close to collapse.
That deal came under fresh scrutiny as it emerged that most of the enlarged bank's losses - some £7 billion - came from HBOS's lending business.
The HBOS loss is more than twice what the bank itself had forecast for 2008 and raised questions about Lloyds' financial health after the merger.
Eric Daniels, the Lloyds chief executive this week admitted to MPs that his bank had done only a fraction of normal "due diligence" analysis of HBOS before agreeing to buy it.
The loss also sparked predictions that the state will eventually have to buy the bank outright.
George Osborne, the Tory shadow chancellor, expressed fears for Lloyds' survival.
He said: "The scale of the losses at HBOS are staggering and now risk dragging down Lloyds too. The taxpayer money pumped in through the first bailout in October is all but wiped out by these losses."
Vince Cable, the Liberal Democrat Treasury spokesman, said Lloyds may no longer be viable as private company.
He said: "It looks increasingly as if Lloyds is being dragged under by the dead weight of HBOS. It looks increasingly as if Lloyds HBOS will now go into majority public ownership, followed inevitably by nationalization."
Mr Daniels insisted that his bank's long term prospects remain healthy.
He said: "Whilst we recognise that the short term outlook is more challenging Lloyds Banking Group has the largest UK financial services franchise with excellent long-term earnings potential."
13 February 2009
Lloyd's Bank May Fail, Be Nationalized
SP Futures Hourly Chart at Market Close
The short covering rally from yesterday failed at overhead resistance and fell back in a wobbly day that sold off harder into the close.
12 February 2009
The Next Phase: Looting Social Security, 401Ks, IRAs and Whatever Is Left?
After what we have seen in the last eight years in particular, why do we assume that there is any boundary to the venality of powerful men? That there is ever enough?
Crony capitalism gives way to coolie capitalism. The belief in the priority of the privileged few to possess the greatest share of the nation's wealth endures.
Where is the justice? Where is the reform?
"Greed is a fat demon with a small mouth and whatever you feed it is never enough."
Janwillem van de Wetering
“Experience demands that man is the only animal which devours his own kind, for I can apply no milder term to the general prey of the rich on the poor."
Thomas Jefferson
"The more we do to you, the less you seem to believe we are doing it."
Dr. Josef Mengele
The Nation
Looting Social Security
By William Greider
February 11, 2009
Governing elites in Washington and Wall Street have devised a fiendishly clever "grand bargain" they want President Obama to embrace in the name of "fiscal responsibility." The government, they argue, having spent billions on bailing out the banks, can recover its costs by looting the Social Security system. They are also targeting Medicare and Medicaid. The pitch sounds preposterous to millions of ordinary working people anxious about their economic security and worried about their retirement years. But an impressive armada is lined up to push the idea--Washington's leading think tanks, the prestige media, tax-exempt foundations, skillful propagandists posing as economic experts and a self-righteous billionaire spending his fortune to save the nation from the elderly.
These players are promoting a tricky way to whack Social Security benefits, but to do it behind closed doors so the public cannot see what's happening or figure out which politicians to blame. The essential transaction would amount to misappropriating the trillions in Social Security taxes that workers have paid to finance their retirement benefits. This swindle is portrayed as "fiscal reform." In fact, it's the political equivalent of bait-and-switch fraud....
Read the rest of the story here.
Discussion of this topic at Economist's View here.
Congress Removes Provisions to Limit Wall Street Bonuses "Behind Closed Doors"
The Democrats talk a good game, but their record of reform and renewal after winning the Congressional elections and then the Presidency is pathetic.
Nancy Pelosi is useless as House Speaker. Barney Frank is all talk and little action. The Democratic leadership should be replaced along with about half the remaining Republican congressmen.
Ok, Obama how about some transparency on this one. And better yet, can we see a single reform that improves the system, other than firedrills to shore up the status quo?
AP
Congress kills plan to recover Wall Street bonuses
By Matthew Daly
Thursday February 12, 2009, 5:19 pm EST
Congress kills plan, approved in Senate stimulus bill, to recover Wall Street bonuses
WASHINGTON (AP) -- Congressional leaders have killed a plan that would have forced financial institutions to compensate taxpayers if they paid their executives large bonuses after receiving federal bailout money.
The Senate had approved the repayment plan as part of an effort to crack down on Wall Street firms that paid huge bonuses -- some in the millions of dollars -- to their top executives even as they received taxpayer money in the federal bailout last fall.
The provision was removed as House and Senate negotiators hammered out final details of the $789 billion economic stimulus legislation this week.
A spokeswoman for Sen. Ron Wyden, D-Ore., said no one spoke against the amendment when Wyden introduced it on the Senate floor. "Somehow, it got stripped out behind closed doors," said the spokeswoman, Jennifer Hoelzer.
Wyden is looking for an opportunity to offer his amendment again to help taxpayers get their money back, Hoelzer said.
Sen. Olympia Snowe, R-Maine, co-sponsor of the amendment, issued a statement saying the financial bailout Congress approved last fall "left open an escape hatch of golden parachutes for top executives on Wall Street."
Many of the executives who got bonuses were the ones whose mistakes hurt the financial system and forced taxpayers to foot the bill in the first place, Snowe said.
The Wyden-Snowe amendment would have penalized companies that paid bonuses greater than $100,000 to executives after receiving government rescue funds last year. The companies would have had to repay within four months any portion of the bonus above $100,000 or face an excise tax of 35 percent on the portion of the bonus above $100,000.
Lawmakers removed the provision without explanation in closed-door talks this week. Hoelzer said several senators had questioned whether the provision was legal, since Congress had not limited the bonuses in approving the original legislation last October.
But Hoelzer said the measure was appropriate. She cited a letter from the Joint Committee on Taxation saying the measure "presents a strong case for constitutionality since it has only a modest look-back period."
Most of the bonuses in question were paid in the final two months of 2008.
The tax committee estimated that the Wyden-Snowe amendment would have raised as much as $3.2 billion. Financial institutions received more than $274 billion through the bailout program while paying out an estimated $18.4 billion in employee bonuses last year, the committee said.
SP Fututres Hourly at Market Close
The SP futures went down to the forecast support level of 806 and then we went into the last hour of the trading day with a short covering technical rally.
The bulls are not out of the woods yet, and must take that overhead resistance, formerly support, and stick it. It might not be easy to do into a three day holiday weekend.
The Big Picture
Hartford Insurance Loses Access to Government Lending After Ratings Downgrades
This news helped to take the US equity indices down to new lows when it came out.
Reuters
Hartford loses access to U.S. lending facility, shares plunge
Thursday February 12, 2:07 pm ET
NEW YORK (Reuters) - Hartford Financial Services Group Inc lost access to a U.S. commercial paper lending facility after recent debt rating downgrades, it said in a regulatory filing, and shares dropped 11 percent.
In the filing on Thursday with the U.S. Securities and Exchange Commission, Hartford (NYSE:HIG), a large life and property insurer, said it will have to repay the $375 million borrowed under a federal program.
That happened after its commercial paper ratings were downgraded by Moody's Investor Services on February 6, and by Standard & Poor's and Fitch on February 9.
As a result it will have to tap other sources of cash to repay the debt, a potential thorn as its capital had already eroded due to large losses over the past two quarters.
Also Thursday, Hartford said the Connecticut insurance department approved changes to the way it can account for some reserves. The decision effectively boosted its life insurance unit's capital by about $1 billion.
Analysts said the move was not enough to offset bigger capital concerns, and may not protect it from ratings downgrades, which could trigger the need to raise additional capital. Hartford raised $2.5 billion in capital from German insurer Allianz SE last October.
The regulatory relief is "better than nothing, but it doesn't necessarily follow that this will put it (Hartford) in a better position with the rating agencies," said Steven Schwartz, a life insurance analyst at Raymond James.
The Connecticut insurance department's decision to grant Hartford the regulatory relief came after a national group of insurance regulators voted on January 29 not to approve such changes for life insurers nationwide.
U.S. life insurers have lobbied for regulators to ease capital rules after heavy losses on investments, and on sales of variable annuities, a popular retirement product that accounts for much of the sector's business.
Hartford and others have also sought capital injections under the U.S. government's $700 billion financial services rescue plan.
Shares of the Connecticut-based company fell $1.51 to $12.11 in afternoon trade on the New York Stock Exchange. Shares are down more than 80 percent in the last 12 months.
11 February 2009
The Stock Index - Gold Ratios and a Brief Aside on Japan
The Stock Index - Gold Ratios are important in gauging significant stock market declines.
Stocks may go nominally lower or gold can increase to make the ratios go lower in their reversion to a more sustainable pre-bubble level. Gold is the anti-bubble which is why it is so detested by the bubblemaniacs.
A key question of course is when did the bubble begin? Many would say almost certainly with the advent of the Greenspan Fed Chairmanship in 1987. There is a case to be made for Reaganomics and supply side experimentation.
Estimates of nominal levels are probably not valid based on pre-1971 examples because of the constraints on monetary policy imposed by the gold standard.
As you know we dislike the facile comparisons with Japan because their recent economic experience was driven by some outrageous policy errors that could only occur in a kereitsu dominated economy with a heavily bureaucratic political structure. Japan has been essentially a one-party electoral system since their adoption of democracy, and remains widely misunderstood in the West, and perhaps even by themselves. Japan is in the process of becoming, which is why we prefer to think of its 'lost decades' as its cocoon years. It will be interesting to see what emerges.
Today's Congressional Hearing on the Banks - The 'Joe Pesci' Moment
Ackerman and Sherman were their usual feisty selves, with Sherman doing a nice job of nailing the facts down.
But for sheer catharsis the five minute statement by Michael E. Capuano (D-Mass) was the hands down winner.
I almost dropped my coffee when he said he could not believe the bankers weren't already under indictment, or words to that effect, for their action in SIVs.
When Oliver Stone makes the movie the obvious casting choice is Joe Pesci.
Jamie, John, do I AMUSE you? Get that money out on the streets you mutts!
European Bank Bailouts Could Precipitate a Government Crisis
There is talk that European banks may be sitting on £16.3 trillion of toxic assets and could suffer massive losses.
There is a business decision to be made as well as a policy decision.
The prescription for a cure must include the option to nationalize, liquidate, investigate, and prosecute. And above all to act not out of fear, or of vengance, but with a practical and comprehensive justice.
UK Telegraph
European bank bail-out could push EU into crisis
By Bruno Waterfield in Brussels
3:50PM GMT 11 Feb 2009
A bail-out of the toxic assets held by European banks' could plunge the European Union into crisis, according to a confidential Brussels document.
“Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states,” the EC document, seen by The Daily Telegraph, cautioned.
"It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems.”
The secret 17-page paper was discussed by finance ministers, including the Chancellor Alistair Darling on Tuesday.
National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.
The Commission figure is significant because of the role EU officials will play in devising rules to evaluate “toxic” bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries.
In line with the risk, and the weak performance of some EU economies compared to others, investors are demanding increasingly higher interest to lend to countries such as Italy instead of Germany. Ministers and officials fear that the process could lead to vicious spiral that threatens to tear both the euro and the EU apart.
“Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance,” the EC paper warned.
10 February 2009
The Gold Bull In Retrospect
"Last, the short-term strokes. You already knew this anyway. We’re just repeating it for drill. The technical areas of support and resistance are self-apparent. Gold is Mother Nature. Gold is Father Time. Parents who we believe will never let us down."
SP Hourly Chart Update II for 10 February
We broke the first level of short term support on the prior SP Futures Hourly chart and dropped quickly to the diagonal trendline around 828 where the bulls are trying to find a footing.
Although we still have some short positions for the 'daytrade' we have hedged them out now and are looking to buy weakness in the metals and oil.
Careful, since if we slip here we go down to test that support around 822 with some intermediate support and possibly the prior lows around 806.
Generally, we think the banks and traders are crabby that Tim didn't give them their fix, and are showing their displeasure. Therefore on 'context' and not the charts we'd look for 820 and even more probably 806 to hold. They are cranky but not yet openly self-destructive.
Do not rule out a snap back rally to stay within the trend, beartrap style.
If the Obama Administration would like to do something constructive in the markets Tim should announce some trading reforms like reinstatement of the uptick rule, a vigorous enforcement of the rules against naked shorting for all stocks, and aggregate position limits on commodities, But that is not the style of the compromiser. Something has to be done to restrain the blatant speculation while the banking system is sorted out and the investment banks die a slow death but are still capable of throwing their weight around. Recall that early in his Administration John F. Kennedy made a point of forcing Big Steel to very publicly roll back their price increases when they tested his resolve.
"They pull a knife, you pull a gun. They send one of yours to the hospital, you send one of theirs to the morgue."And presumably he would abstain or at least be very discreet with respect to high priced hookers crossing state lines.
Today's Non-Announcement From the Treasury
Unless we are missing something, The Plan (hereafter known as TP) does not disclose how the bad assets will be valued and the procedure by which they will be removed from the various banks' balance sheets.
Today's announcement appeared to be a Public Relations event in which the Obama Administration sought to distance TP from the tainted giveaway program for the banks which it was under Hank Paulson and the Bush Administration.
So again, we will have to wait, and the market has no resolution, and remains 'edgy.'
A noble endeavor perhaps, but this Administration risks being long on appearance and short on substance. We suspect there were no details because they are still being 'discussed' behind the scenes.
Again, from what we hear, it is the 'old guard' of Clintonistas versus the Obama inner circle. Larry Summers can be quite the hammer head, and Tim is just over his head. Perhaps he will grow into the job. Perhaps Larry will be fired (again) because of his political tin ear.
The Look of the SP Futures Hourly Ahead of Turbo Tim
Festina lente. (Make haste slowly.)
In other words, watch for fakeouts and do not be too quick to hit that buy or sell key. This can go either way.
If Timmy has done his homework the Working Group should be prepped to buy if the market doesn't. Hank would have done so.
Sometimes the right thing to do is absolutely nothing until the market tells you which way it will go.
This is one of those times.
It ought not to matter to the Obama Administration how the equity market reacts in the short term. That is like asking a new batch of crack addicts how they like their first week in rehab.
To elaborate in response to a question, I look at multiple markets for confirmations, not simply one chart like the SP futures. The NASDAQ 100 futures are a ctitical component of this mix for example.
UBS Reports Record Loss
Although the financial services sector made up a significant 15-17% of GDP, in recent years prior to the global financial crisis it had been driving almost 50% of Swiss GDP growth according to government reports.
As they have been known to say up Zurich way, "A greedy person and a pauper are practically one and the same."
AP
Swiss bank UBS reports 4Q loss of $7.57 billion
Tuesday February 10, 2:24 am ET
Swiss bank UBS AG reports fourth-quarter loss of $7.57 billion, exceeding analysts' fears
ZURICH (AP) -- Swiss bank UBS AG said Tuesday it lost 8.1 billion Swiss francs ($7.57 billion) in the fourth quarter and announced it would cut a further 2,000 jobs as it refocuses on its home market after a troubled year abroad.
The results exceeded the fears of analysts, who on average had predicted net losses of 6.2 billion francs ($5.79 billion).
A year earlier Switzerland's biggest bank had reported a net profit of 1.33 billion francs. The latest results bring its full-year loss to 19.7 billion francs for 2008.
UBS said it plans to refocus on its core activity in Switzerland, its international wealth management franchise, and its global onshore business. To this end it will create two new business units. Wealth management and Swiss bank will be led by Franco Morra and Juerg Zeltner, while wealth management Americas will be led by Marten Hoekstra.
UBS is also shedding 2,000 jobs at its loss-making investment banking unit, which has been blamed for many of the bad investment choices that have seen the bank write down tens of billions of francs (dollars) since mid-2007.
The Zurich-based bank said net new money outflows from its wealth and asset management businesses reached 85.8 billion francs during the fourth quarter...
09 February 2009
The Incontrovertible Truth About Debt, Deleveraging, Devaluation and Recovery
It is incomprehensible that any informed economist does not understand this difference between deflationary deleveraging and a cyclical recession.
And if they do, how could they possibly justify giving trillions of capital to the banks to support them in their excess so that they might freely make loans again, when it was their reckless lending and speculation that brought us to this point?
And the economists also know full well that the real cure lies in devaluing the currency and restoring the balance sheet of the individual households through an increase in the median wage and the debt relief of bankruptcy.
There must be reform, a change in the system that spawned these repeated bubbles and epoch of voodoo economics and malinvestment.
"Basically what happens is that after a period of time, economies go through a long-term debt cycle -- a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren't adequate to service the debt. The incomes aren't adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.
The process of bankruptcy or restructuring is necessary to its viability. One way or another, General Motors has to be restructured so that it is a self-sustaining, economically viable entity that people want to lend to again.
This has happened in Latin America regularly. Emerging countries default, and then restructure. It is an essential process to get them economically healthy.
We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes -- the cash flows that are being produced to service them -- or we are going to have to raise incomes by printing a lot of money.
It isn't complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue....
There will be substantial nationalization of banks. It is going on now and it will continue. But the same question will be asked even after nationalization: What will happen to the pile of bad stuff?... (More precisely, who will take the loss? If it is not those that took the profits, then you have injustice, transfer of wealth - Jesse)
The Federal Reserve is going to have to print money. The deficits will be greater than the savings. So you will see the Federal Reserve buy long-term Treasury bonds, as it did in the Great Depression. We are in a position where that will eventually create a problem for currencies and drive assets to gold....
Everything is timing. You print a lot of money, and then you have currency devaluation. The currency devaluation happens before bonds fall. Not much in the way of inflation is produced, because what you are doing actually is negating deflation. So, the first wave of currency depreciation will be very much like England in 1992, with its currency realignment, or the United States during the Great Depression, when they printed money and devalued the dollar a lot. Gold went up a whole lot and the bond market had a hiccup, and then long-term rates continued to decline because people still needed safety and liquidity. While the dollar is bad, it doesn't mean necessarily that the bond market is bad...
From the U.S. point of view, we want a devaluation. A devaluation gets your pricing in line. When there is a deflationary environment, you want your currency to go down. When you have a lot of foreign debt denominated in your currency, you want to create relief by having your currency go down. All major currency devaluations have triggered stock-market rallies throughout the world; one of the best ways to trigger a stock-market rally is to devalue your currency...
Buying equities and taking on those risks in late 2009, or more likely 2010, will be a great move because equities will be much cheaper than now. It is going to be a buying opportunity of the century."
Recession? No, It's a D-process, and It Will Be Long - Ray Dalio - Barrons
SP Futures Hourly Chart at Market Close
Tomorrow appears to be showtime for Turbo Tim, Zimbabwe Ben, and Leisure Suit Larry. The Yes We Can Man probably will get a few more chances if he throws one or all of them to the wolves if the plan fails which it probably will. We'll have to wait to see it.
If it is the "guarantee program" then it is only as good as the price floors of the guarantees. Too high and the banks are welfare queens. And to say that the 'market will set the price' with an implicit price guarantee from Treasury underpinning it sounds like the Son of Fannie and Freddie, and not even a remotely fair price for the taxpayers.
The most serious flaw in the solution, of course, is that bank lending is really not the problem. Easy money for lending was the solution Greenspan used the last five times we reached a point like this, a little worse on each revisit. We have probably reached the limit of the law of diminishing returns of hitting that old easy money for the banks booty call again.
Why? Because the consumers themselves have hit the wall. Years of suppressing the median wage and understating inflation as a matter of government industrial policy have left the consumer flat out busted.
Saving the banks so they can lend more is like fixing the holes and repairing the engines on the Titanic so it can ram the iceberg again. Can we please consider changing course?
How to Resolve the Mortgage Crisis
Chris Whalen, The Institutional Risk Analyst, is making more sense on a rational way of resolving the subprime mortgage crisis than Tim Geithner, Ben Bernanke, and Larry Summers rolled together.
This is a bit of a read. We're looking for a video of his interviews on Bloomberg the past few days, and today in particular. But his common sense approach makes more sense than anything we have heard from the Washington Whiz Kids.
On top of his recommendation, Obama needs to target the stimulus more precisely and concentrate on driving employment and the median wage in the short term with both money and policy changes.
In fact, it is from the policy changes that the greatest gains would be achieved. Obama and crew need to stop putting out fires ad hoc in the manner of Bush and start working on a serious and well thought plan that the market can understand, whether they may like it or not.
Much of the stimulus package looks like payoffs to constituents and special interests, a perennial problem in the Federal government. The Democrats have to stop playing 'Let's Make a Deal' and strike a vision, share it, and then go for it. That is what FDR did in his first hundred days. His crew made errors in implementation, but the vision was coherent.
Obama needs to find his footing and start thinking out of the box. And it is not likely he will obtain that from Geithner or Summers, and does not have time to wait for the Volcker Committee to weigh in with a compromised solution.
Its a tough spot for any manager. Crisis management shows the weakness of his managerial experience. Bush was dying on the vine on his own watch. It tests a person like nothing else.
Its also an opportunity for growth, and Obama has about three months of goodwill capital to spend, and some bright people on deck. Time to stop making deals, and listening to the vested interests of everyone, and get to work striking a vision that his team can implement towards. A good start would be to strike the note of reform and level with the people, and do something about it other than symbolic gestures and fine rhetoric. Its time to tell the truth.
Can We Fix the Banks, Help Homeowners, and Rebuild the Mortgage Markets? Can Do.
"Here's the basic approach:
* The US Treasury would tender for all of the private label CDO/MBS extending between a range of dates, say 2004 forward to year-end 2007, representing trillions of dollars in assets held by investors and banks globally. The pricing on this paper will reflect current market prices, but say the average price was 50% of face value. Only issues that actually have an enforceable legal claim to collateral will be eligible. Derivative structures without collateral will not be eligible.
* Treasury then transfers all of the purchased toxic paper to the FDIC Deposit Insurance Fund, which acting as receiver under 12 USC restructures the trusts that are the legal issuers of the bonds and recovers legal ownership of the underlying collateral. The FDIC arguably has the power to call in all bonds and related investment contracts, and extinguish the claims of those parties which do not respond to the Treasury tender. The legal finality of an FDIC-managed receivership under 12 USC is what is required to end the toxic asset issue once and for all. The bankruptcy courts could be used in a similar fashion, but the unique legal authority of the FDIC suggests to us that this agency should run the process as part of its larger asset sale operations.
* This now "clean" whole loan collateral will then be re-sold to solvent banks in the localities where the property is located, using zip codes and other means to identify eligible buyers, priced at say 90 cents on the dollar, with a full recourse guarantee from the FDIC and financing from the Federal Reserve Bank in the relevant district. The banks will initially be guaranteed a minimum net interest margin and servicing income, and immediately begin to service the loan and manage the credit locally. Indeed, the participating bank must agree to retain and service the loan so long as government financing is used. The bank has the option to repay the financing from Treasury and take full, non-recourse possession of the loan.
We don't pretend that this simple outline is sufficient treatment of this proposal, but we have heard several permutations of this approach from veteran bankers in the loan origination channel all over the US. We see several advantages to this "community bank" approach to the crisis, which might be combined with modest additional capital infusions to solvent community and regional banks like WABC, if they even need it.
* First, it puts the trillions of dollars in now illiquid mortgage loan collateral trapped inside thousands of securitization deals back into strong local hands, who are responsible and incentivized to both manage and service the loan.
* Second, it re-liquefies the balance sheets of the US banking industry and it will vastly improve the prospects for home owners and housing markets around the country. If we are going to further lever the balance sheets of the Treasury and Fed, let's do it for a real reason and with a clear purpose.
* Third, the approach outlined above provides the Obama Administration and the US Treasury with maximum bang for the buck in terms of both addressing the solvency problems facing the banks and also helping the economy and the housing industry.
One downside: This new market paradigm suggests that loan servicing as a standalone business may be at risk. Once community banks begin to accumulate significant local servicing portfolios, they may rediscover the benefits of keeping the credits that they originate. Sorry Wilbur!
And what about valuation? Well, as our friend Kyle Bass of Hayman Capital likes to remind us, all of these assets are valued and traded every day. It's just a matter of organizing the purchase process in a transparent and competent fashion. Starting with our friends at shops like Hayman, Black Rock and RW Pressprich, we know people who know how to trade illiquid assets."
When Will the Wall Street Money Center Banks Be Nationalized?
"Most of the big banks need to be put into some form of bankruptcy and recapitalized, and I think everybody understands that." Ken Rogoff
The major US money center banks will be nationalized. The only questions are when and how.
When is difficult. Rumours abound. A common rumour is for a bank holiday sometime around the President's day holiday in the US on February 16, or later in February.
This may be too early, but no matter. It is coming.
Its the how that is more interesting in terms of meaningful speculation and the impact on any intended recovery.
How will we nationalize the banks? How far will nationalization have to go?
With regard to nationalization the bank toadies and spin doctors say things like "Would you want the government running the banks?" Well, we think this is the usual deceptive rhetoric we get these days instead of serious discussion and hard news.
In a nationalization it is highly unlikely that the government will want to 'run the banks,' although it is hard to see how they could do a job that would be much worse than the overpaid princes of Wall Street who now stand exposed as having ruined the national economy through incredible dereliction of any standard of sound and responsible management.
Rather, there is a range the process which will be called nationalization.
If we hold the current course at some point the government will place enough capital and hold enough preferred stock in the banks to effectively own them, but passively. The problem with that is the mismanagement and losses will continue to deepen, and the government (public) will own the acid core of thirty years of white collar crime, burning a hole in the fabric of the national economy and monetary system.It will be a financial Vietnam, with Larry Summers playing Robert McNamara and Obama as LBJ. It will be a cascade of corruption and deception and will tear the country apart.
At the other end of the nationalization spectrum, he government will 'take over' the bad banks as they did in the S&L crisis, and restructure them.
There are between five to ten banks in the country that are hopelessly insolvent through mismanagement bordering on fraud. At the moment they are sucking up capital at a ferocious rate through bailouts, and crowding out constructive uses of capital.
They cannot precipitously fail, but they can and should be taken into receivership by the FDIC, their books opened, their assets sold, debts written off, and the remains either buried peacefully or allowed to emerge as new banks with different management if there is enough left to make it respectable.Who will lend? The regional banks. They are the bulwark of the banking system. It is in the money center banks where the contagion continually spawns.
To attempt to maintain the status quo is no longer possible, no matter how much money and influence and political power that the ten Wall Street banks may wield in Washington.
The shareholders will be effectively zeroed out as they should, the bondholders handed a steep haircut on the order of 40%, the creditors paid 70 cents on the dollar, if that.
Credit default swaps and other bets will be dealt with harshly. If a bank has a heavy interaction with a money center bank in Credit Default Swaps or other 'weapons of mass destruction' to the point where it places it insolvent guess what, it can join the restructuring club.
The depositors will be, MUST be, kept whole, to almost 100% on all private non-corporate deposits. Pensions must be kept whole above and beyond the limits of the Pension Benefit Guaranty Corporation.If the Congress, and this Administration, continued to bend the fate of this country to the bankers of Wall Street there will come a time when the people will simply say 'enough.' Of this we no longer have any doubt. And the pain from that will be much greater than the short term pain we will receive in restructuring the system now.
And it will be painful. But necessary. We do not have a cold. We do not have the flu or the sniffles, a temporary setback. We have a serious gangrenous infection that must be dealt with before it takes down the body politic.
We can choose to linger, to waste away in our corruption as Japan has done. But we do not think that the US public will accept the chains of servitude gracefully. They are too heavily equipped with options, thanks to the foresight of the founding fathers.
If this seems to harsh, too black and white, too unthinkable, here is a recent interview from Ken Rogoff with BBC Hardtalk to help punctuate the seriousness of the situation.
The simple truth is we no longer have any choice, any options. We elected the Obama Administration to reform Washington and the economic and political system in this country.
Ok guys. Reform.
The deeper we go down this rabbit hole the more difficult it will be to return to the light of day.
You may wish to take the time to listen to Ken Rogoff in this BBC interview on Hardtalk. Mr. Rogoff is a noted economist who is completing an intense study of financial crises.
We obviously do not agree with everything Ken Rogoff says. That would be improbable.
He starts from the assumption that we have free trade in the world today and should maintain it, whereas we believe that free trade went out the window with the devaluation and pegging of the Chinese renminbi in the 1990's, if not before that with aggressive Asian mercantilism supported by US multinationals and Wal-Mart.
But other than that, it sounds like the standard fare served at Le Café Américain for the past two years at least, and it is a happy and humbling experience to see someone express similar ideas with such gravitas.
It is clearly stated, it is well thought, and it is absolutely essential. It is what a substantive news program looks and sounds like. We rarely get anything like it except on the Web and on Public Television.
Rogoff on BBC HardTalk
GM to Invest $1 Billion of its US Rescue Package in Modernization - In Brazil
Here is a nice example of how investing in nationless corporations, without conditions, does very little for your use of capital and your good intentions. Because in fact the US rescue package was not an investment, but a grant. We do not investment our tax receipts in private corporations. We provide relief, grants, subsidization. If the investment was a good commercial arrangement it would not require your public assistance funds.
If General Motors wishes to upgrade its facilities in Brazil, it ought to seek the money from profit-seeking private investment, or from the government of Brazil.
And anyone who believes that General Motors should be able to do whatever they wish with a grant from the public treasury is a either a fool or a fraud. And that same measure applies doubly to the packages for the Wall Street banks which are as much bribe as bailout.
On a related topic, there is a significant amount of 'Smoot Hawley II,' anti-protectionist rubbish talk swilling around the webs. If free trade did exist as the norm then it would be a good thing to uphold it. As it is, rogue players have turned that into a farce.
The problem with the industrial policy of the US is that we do not have one, whereas several other powers do and follow it, aggressively.
We stand for 'free trade' where other countries manipulate their trade policies and currencies to advance mercantilism that happens to be favored by many US corporate powers in search of cheap labor and the circumvention of environmental, health, child labor, and assorted public reform policies.
Inevitably, and this is what the corporate spinmeisters do not wish you to know, is that unrestrained 'free trade' will conflict and be used to undermine domestic policy and civic standards to the lowest common denominator of human misery and exploitation in the world.
We are playing by the rules of soccer in a game of lacrosse.
Follow Up On February 10: GM has subsequently stated that the head of GM in Brazil was misquoted or mistaken, and that the billion dollars is coming from local sources.
GM Says Not Sending Any Money to Brazil
Latin American Herald Tribune
General Motors to Invest $1 Billion in Brazil Operations -- Money to Come from U.S. Rescue Program
By Russ Dallen
SAO PAULO -- General Motors plans to invest $1 billion in Brazil to avoid the kind of problems the U.S. automaker is facing in its home market, said the beleaguered car maker.
According to the president of GM Brazil-Mercosur, Jaime Ardila, the funding will come from the package of financial aid that the manufacturer will receive from the U.S. government and will be used to "complete the renovation of the line of products up to 2012."
"It wouldn't be logical to withdraw the investment from where we're growing, and our goal is to protect investments in emerging markets," he said in a statement published by the business daily Gazeta Mercantil.
Meanwhile, he cut the company's revenue forecast for this year by 14% to $9.5 billion from $11 billion, as the economic crisis began to cause rapid slowdowns in sales.
GM already announced three programs of paid leave, and Ardila added that GM Brazil "is going to wait and see how the market behaves in order to know what decision to take" with regard to possible layoffs.
For Ardila, the injection in Brazil's automobile sector of 8 billion reais ($3.51 billion) recently announced by the federal and state governments of Sao Paulo "has already begun to revive sales," which fell by 12% in October.
The executive said that the company will operate a "conservative" scenario in 2009 with an estimated production of 2.6 million units, and another more "optimistic" that contemplates sales of 2.9 million.
This year sales will reach 2.85 million vehicles, which represents a growth of 15% over last year.
07 February 2009
JP Morgan's Bonuses
This is an interesting essay from the Truth In Options blog. It raises issues of stealth bonuses to the JP Morgan executives and an interesting coincidence in stock price and option grants.
J.P. Morgan's Abusive Executive Bonuses
As readers will recall, J.P. Morgan received the first large bail-out from the New York FED of $55 Billion, guaranteed by Bear Stearns' worthless assets, to prop up its own liquidity position and buy Bear Stearns stock.
J.P. Morgan also recently received another $25 Billion in TARP payments from the Treasury.
This article is about how J.P. Morgan's executives , instead of receiving easy to detect cash bonuses, received very large bonuses in the form of Stock Appreciation Rights (SARs) and Restricted Stock Units. These equity compensation securities are not easy to understand or value by other than experts in the field....
Read the rest of this here: J.P. Morgan's Abusive Executive Bonuses
06 February 2009
SP Futures Hourly Chart at Market Close
The Street wants to bring IPOs to market next week so hide your women, children and small pets.
This can either be the top of a trading range, or the neckline of an inverse H&S bottom with a significant upside potential.
The markets will be looking for news on the stimulus package, but even more importantly, on a plan for the banks. There is significant disagreement in the Obama circles with regard to the banking bailout part two. Larry Sommers wants a 'bad bank' and Tim Geithner is promoting 'guarantees' but the crux of the matter is the valuation of the assets.
We are now at about day 20 in the Obama Administration, and there is a decided lack of serious reform backing up the rhetoric. 
Coming Next Week to an Imploding Economy Near You...
Without serious reform we will repeat the cycle of bubble, boom, and bust until the economy is shaken apart into civil disorder and re-emerges in proto-fascism.
A Closer Look at the Revisions to the Non-Farm Payrolls Numbers
"I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts."
--Abraham Lincoln
The 'actual' jobs loss number, before seasonal adjustments are applied, was significantly worse than expected. It was so bad that we had to adjust the lower boundary of the chart by an extra 500,000 jobs lower than the projected chart we showed yesterday. Jobs Number for January Could Be Much Worse than Expected
So why was the 'headline number' after seasonalization relatively benign and better than many had expected, or 'not as bad as feared?' A gas station pricing number that came in at -598,000 just below the psychologically important -600,000? Besides a liberal upgrade from seasonality, the revisions to the prior month, and months as it turns out, were interesting.
Revising job losses from prior months lower 'creates jobs' that can be moved forward on the statistical count. It would be like revising losses in the prior years of your income statement to allow you to show lower losses in the more current periods. Its kind of like shoving job losses around on a plate. Nothing really changes, but the data 'looks better.'
Further, we see the usual "current month - prior month" two-step wherein the current month is shown slightly better than the prior month. Then at the next reporting period, you revise the former current month lower, and show the new current month as slightly better.
We had a business unit direct report who liked to play those kinds of games to show 'better numbers' for their piece of the business. The fix was to lock them into rolling averages for results and not something more short term.
And so it is with the US jobs jockeys. The longer term trend does not lend itself so easily to data manipulation in the revisions and seasonality.
And it shows the economy is in a nose dive. But stocks are rallying today on the expectations that the bad numbers will insure that the Senate will pass the stimulus, and that Turbo Tim will announce a big giveaway for the banks next week.
The Obama Administration is doing nothing new. The Bush Administration's numbers were so hollow that we started calling the US a Potemkin Economy, or perhaps Ponzi Economy because it is built on ever increasingly unredeemable debt. Clinton was no better, merely more effective, more competent, more 'artful.'
This may not be new, but it is not reform either. Meet the new boss, same as the old boss.
05 February 2009
Update on New Hampshire HCR 6 - Jeffersonian Principles
Hi Jesse,
Went to Concord today to observe the testimony before the committee regarding the resolution HCR 6.
Quite impressive number of people, at least 60, which I'm told is above average.
The bill's sponsor said as a result of his work, he's aware of six other states moving ahead with similar resolutions designed to send a message to DC on limiting federal government.
Montana may vote this week. The bill's sponsor and co-sponsor are getting much publicity and calls from constituents.
About six state reps testified in favor of adoption. Another half dozen citizens spoke. Some were quite eloquent, they brought up the economic mess, the Federal Reserve, and their own understanding of our history and Constitution.
We will be following the bill's progress and hope they recommend it to the NH Legislature which may be as soon as later next week.
I'll keep you updated---
Bill
SP Futures Hourly Chart
The Congress will be voting on the stimulus package tonight. We think the market has this baked in. The action today *could* have been a front-running of this news, but it had all the look and feel of a simple short squeeze. The specs were getting short ahead of what looks to be a bad Non-Farm Payrolls number tomorrow.
Gross Says Government Stimulus Must Be in Trillions
We watched the interviews at PIMCO on Bloomberg TV.
He may be sincere but there should be little doubt that Bill Gross was 'talking his book.'
Maybe Obama will spike the Jobs Numbers tomorrow to shake loose the money tree. He is a fool if he doesn't because it will not take much to put out a horrific number, especially after the years of pollyanna sand-bagging that had built up under Bush II.
Bloomberg
U.S. Must Spend to Avoid Mini Depression, Bill Gross Says
By Kathleen Hays and Dakin Campbell
Feb. 5 (Bloomberg) -- Bill Gross, co-chief investment officer of Pacific Investment Management Co., said the U.S. may slump into a “mini depression” unless policy makers spend trillions of dollars to spur growth.
“This economy needs support from the government, a check from the government in the trillions,” Gross said today in a Bloomberg Television interview from Pimco’s headquarters in Newport Beach, California. “There is a potential catastrophe if the U.S. government continues to focus on billions of dollars.”
Gross manages the $132 billion Total Return Fund, the world’s biggest bond fund. The fund gained 4.8 percent last year and has outperformed 99 percent of its peers over the past five years, according to data compiled by Bloomberg. The average government and corporate bond fund lost 8 percent in 2008, Bloomberg data show.
Pimco is a unit of Munich-based Allianz SE, Europe’s largest insurer.
The Jobs Number for January Could be Quite Bad, Much Worse than Expected
The non-seasonally adjusted number could come in around -3,400,000 jobs.
Luckily for the BLS January is the worst month for actuals, and therefore has the largest seasonality factor.
The 'imaginary jobs' number will not be a significant factor, since January is also the month in which they adjust out many of the imaginary jobs they added in the last six months that are obviously non-existent.
Our standard projections show the headline number coming in about -650,000+ which is pretty severe, but it could be much higher depending on how they apply the seasonality, or lower depending on how much they choose to adjust the prior months and 'smooth the decline.' An outside number could be -900,000.
So, all in all, there may be a large downward adjustment to December which may help to absorb some of the single month impact, but the consenses loss of 540,000 jobs looks optimistic.
Let's see what happens. We are prepared for the worst. We have some confidence that even 'the reformers' will gild the lily a bit to 'inspire confidence.' All statists fudge the numbers because the individual and the truth are servants of the state and the 'greater good.'
Deutsche Bank Posts First Loss Since WW II
Breitbart
Deutsche Bank posts first loss since WWII, rejects state aid
Feb 5 09:12 AM
Germany's biggest lender, Deutsche Bank, on Thursday posted its first annual loss since World War II after a terrible fourth quarter but said it would survive the global meltdown without state aid.
Chairman Josef Ackermann said the bank did not require government assistance and would pull out of the financial crisis on its own.
Deutsche Bank reported a net loss of 3.9 billion euros (5.0 billion dollars) for 2008 after a massive loss of 4.8 billion euros in the fourth quarter alone. For 2007, Deutsche Bank have posted a record profit of 6.5 billion euros....
Ackermann added that he saw no "dramatic" risks in the bank's accounts.
In a statement earlier, he said "operating conditions in the (fourth) quarter were completely unprecedented and exposed some weaknesses in our business model.
He acknowledged being "very disappointed" at the quarterly figures but said that "since the trust and support of our shareholders is critical for us, we recommend a dividend for the year 2008 of 50 cents per share."
...Ackermann said he remained committed to the bank's business model, which is focused on investment banking, a once lucrative field in which Deutsche Bank is one of the global leaders.
The sector has suffered sustained turmoil since mid-2007 when the US subprime or higher risk home loan market collapsed, undercutting the derivative investment instruments which had been linked to it by the banks...
For the full year 2008, Deutsche Bank revised the total value of its assets lower by 7.0 billion euros, more than three times the 2007 write-downs of 2.3 billion euros.
In the fourth quarter alone, asset write-downs amounted to 5.3 billion euros.
04 February 2009
New Hampshire HCR 6 Status - Hearing in Committee Tomorrow
HCR6 Session Year 2009
Bill Text Title: Affirming States' Rights based on Jeffersonian principles.
G-Status: HOUSE
House Status: IN COMMITTEE
Senate Status:
Next/Last Comm: HOUSE STATE-FEDERAL RELATIONS AND VETERANS AFFAIRS
Next/Last Hearing: 02/05/2009 at 01:00 PM LOB 203
New Hampshire HCR 6 Text
SP Futures Hourly Chart at 2:45 PM
Cisco and Visa after the bell.
January Non-Farm Payrolls on Friday.
Goldman Sachs Would Like to Pay Back Their TARP Money ASAP
Apparently this new rule about caps on executive pay was a motivation to choose other venues.
There are plenty of other feedbags from the Fed for a newly christened commercial bank, and the Fed is more tolerant of highly paid management.
Bloomberg
Goldman Sachs Would Like to Pay Back TARP Money, Viniar Says
By Christine Harper
Feb. 4 (Bloomberg) -- Goldman Sachs Group Inc., which took $10 billion from the U.S. Treasury in October, would like to pay back the money from the so-called Troubled Asset Relief Program, or TARP, said David Viniar, the firm’s chief financial officer.
“It would send a very good signal” if the firm could repay the money, he said. The firm would only do so if it got “the blessing” of the Treasury and Federal Reserve, he said at a Credit Suisse conference in Naples, Florida today.
Under current rules, Goldman and other firms that received money under TARP are required to raise common or preferred equity to replace the government funds, Viniar said. The company will consider raising money “if the markets are good,” he said.
The government investment “is not really restricting the way we do business,” Viniar said.
Goldman will also be “very cautious” about considering any acquisitions because there’s a longer record of unsuccessful deals in the financial services industry than successful ones, Viniar said. He said the firm is likely to maintain its current business of focusing on corporate and institutional clients rather than entering the retail business.
“I would not pick up the Wall Street Journal every morning looking for the big Goldman Sachs acquisition because I think you will be disappointed,” he said. “We don’t really like or know the retail business and I don’t expect that to change too much.”
A Modest Proposal from Joe Stiglitz
"..."The government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice."
Joseph Stiglitz, the Nobel Prize-winning economist
This is the procedure, that is what we do with insolvent banks. That is what the FDIC is for.
We don't prop up the bad banks. The regulators help them become solvent through a resolution and restructuring of their bad debt, and then either sell them, sell their assets independently, or allow them to re-emerge as good banks once they are solvent
This is precisely what Le Café Américain has had on the menu for the banks over the past seven months, with some detail behind it, including systemic reforms.
We do not burden an entire national economy, we do not cripple an entire banking industry including many regional banks who have done no wrong, in propping up a few insolvent institutions who arrived at that state through outrageous bad management.
There is widespread suspicion that this exercise is designed to protect a handful of large money center banks from realizing their losses - JPM, C, Morgan Stanley, B of A, and Goldman Sachs.
Let the system work. Do not continue to privatize the gains and subsidize the losses.
And then let the criminal and civil investigations of the major actors in this modern tragedy begin, if we ever wish to 'restore confidence' in Wall Street in the public and the rest of the world.
Markopolos Delivers Multiple Bombshells in Congressional Testimony
"Government has coddled, accepted, and ignored white collar crime for too long.
It is time the nation woke up and realized that it's not the armed robbers or drug dealers who cause the most economic harm, it's the white collar criminals living in the most expensive homes who have the most impressive resumes who harm us the most.
They steal our pensions, bankrupt our companies, and destroy thousands of jobs, ruining countless lives."
Harry Markopolos in Congressional Testimony
Henry Markopolos, the Madoff Ponzi scheme whistleblower, is delivering bombshell testimony with few punches pulled before the US Congress this morning.
Among other things:
- There were 14 'feeder funds' operating with Madoff to channel investor to him. Only two have been publicly revealed. There are twelve more. Markopolos is going to be speaking with French and Swiss authorities to reveal others who have not yet acknowledged their role, and their losses.
- There are undisclosed investors in the Madoff scheme among prominent Europeans, and even royalty.
- Markopolos feared for his life because of the involvement of the Russian mob and South American drug cartels involved with Madoff, and because of the stonewall treatment his repeated and detailed disclosures received at the SEC.
- The SEC is overstaffed with young attorneys who do not understand the business they are regulating. They need to hire older hands with direct financial markets experience and accounting backgrounds and incent them.
- The SEC does not wish to pursue 'the big cases.' They prefer to act on small cases.
- The SEC has done little as compared to the State Attorneys General.
- The SEC has a problem described by others as 'deep capture' wherein the regulators look to jobs in their industry after a few years in the agency. Their management protects industry insiders from investigation.
- Madoff did not act alone. There were enablers who were willfully blind, and there were those who were directly involved with him in his deception.
- The SEC does not even have access to Bloomberg terminals or read the WSJ or Barrons
- The new head of the SEC, Mary Shapiro, needs to clean house with 'a wide broom' among the management of her new organization
- Markopolos was offered a job to head up a new super-agency several times by the Congressmen, only half in jest, but he demurred because of family commitments. Too bad because we have a hunch he'd soon be known on Wall Street as the "flagellum Dei" (Latin: "Scourge of God"),
Bad Bank Proposal is Bad Policy and a Symptom of Serious Problems in Obama Administration
Yves Smith nails this one.
Bringing in seasoned professionals has the upside of enabling quick action.
The significant downside is that you bring in old problems, old approaches, old conflict of interest, and old thinking.
As we have said previously, the challenge to Obama and his insiders will be one of leadership, to set coherent policy directives that will bring direction to the old hands consistent with a new reform government.
So far the Obama Administration is not succeeding. We have heard of conflicts of opinion between the old guard, Geithner and Summers, and the new circle under the president. This in part was the cause for the delay in announcing the bad bank this week.
The Obama Administration is still in the 100 day honeymoon period, but the constant stream of old guard appointments, and those with specific questionable personal tax payment records and performance in the Clinton Administration is grooming it for failure. They are spending precious political capital and goodwill senselessly.
We need them to succeed. Badly. They did not create this crisis, but it is their task to find a solution and prevent it from worsening.
But we ought not to kid ourselves or be quiet when they commit the kinds of gaffes which have characterized their first few weeks in office.
"The Obama Administration is as obviously and fully hostage to the interests of the financial services industry as the Bush crowd was.
We have no new thinking, no willingness to take measures that are completely defensible (in fact not doing them takes some creative positioning) like wiping out shareholders at obviously dud banks (Citi is top of the list), forcing bondholder haircuts and/or equity swaps, replacing management, writing off and/or restructuring bad loans, and deciding whether and how to reorganize and restructure the company.Instead, the banks are now getting the AIG treatment: every demand is being met, no tough questions asked, no probing of the accounts (or more important, the accounting)."
Bad Bank Assets Proposal: Even Worse than You Thought - Naked Capitalism
Very Long Term Dow Jones Industrial Average Chart
Projections are for a longer term bottom between 4900 and 5750.
This will likely set up a new bull market after a period of consolidation and recovery that will have a longer term objective in excess of 20,000 (in inflated dollars.)
There will probably be a false start recovery after the lows that will really be a significant rally followed by a fifty percent pullback before the bull market can start moving higher in a more steady and measured way supported by improving corporate earnings.
There will be significant skewing perhaps as a large number of Dow Index stocks are replaced by other viable companies.
03 February 2009
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SP Monthly Chart
If the bulls lose control of 765 we may see a fairly dramatic decline to set an intermediate bottom. There is potential to 545 but that seems rather extreme.
A measuring objective of 605 seems more likely, although it does seem a little early in the cycle for that in the first half of the year.
How Low Are US Home Prices Headed?
Obviously this is going to be a difficult question to answer since the housing markets in the US are not homogeneous. There are significant 'hot spots' on the coasts and in highly overbuilt areas.
Here is a chart based on the Shiller Home Price Index. It shows the geometric mean on US housing back to 1890. It has a growth rate of 3.4%.
So one might estimate that if housing prices revert to that very long term mean, depending on how fast they revert we might see them roll back all the way to 1995 pricing.
We would contend that the trend back to 1890 overlooks the significant price inflation that occurred since the US left the gold standard under Nixon, which is all too painfully evident on the chart.
We have drawn a very simple linear regression of that price change since 1970 rather than 1890 in red.
Based on that, our own estimate is that on average housing prices will revert to the levels which they were at in the year 2000 for a particular home or its comparables, the price at which its value is most likely to stabilize. We would tend to treat 1995 as a 'lower bound' which might be more valid for those areas which had appreciated the parabolic increases from the bubble period.
Here is a chart that shows the major Case-Shiller Home Price Indices since 1993.
There is quite a bit of data, but the point is to show just how unevenly parabolic the housing bubble became, and how it diverged significantly after 2000 when Greenspan unleashed the bubble economy with the repeal of Glass-Steagall.
It was more like a Ponzi scheme with certain areas most vigorously targeted when seen from this vantage point. Therefore we ought not to expect the declines to be of equal percents as well. Some made more, some will lose more.
The Case-Shiller US Housing Indices Since 1993
