[Skip to the end]

view article

jlbIII commented:

I know I, for one, hate having to continually get int that time machine to ship all those cars and computers back to 1945 in order to support my reckless grandparents who wracked up such huge debts to pay for WWII. It’s only somewhat helped my the regular arrival of my grandchildren with the aircars and Mr. Fusions… Oh, wait - that DOESN’T HAPPEN!

Current production supports current consumption. Notional financial values of debt are utterly irrelevant. You people, while well-meaning, are utterly clueless. It is the equivilant of worrying about a bowling alley running out of points to award.

http://www.moslereconomics.com/mandatory-readings/soft-currency-economics/

[top]

[Skip to the end]

Wrong time for tight fiscal from a macro perspective, and contributed to the subsequent slowdown, but as a credit sensitive entity they are compelled to go in that direction.

It’s one of those darned if you do and darned if you don’t.

German budget surplus seen at 7 bln eur in H1-report

by Dave Graham

(Reuters) Germany likely posted a budget surplus of some 7.3 billion euros ($10.85 billion) in the first half of 2008 according to the Kiel-based IfW economic research institute, business daily Handelsblatt reported on Sunday.

The IfW thinktank had calculated the combined surplus of federal, state and local governments in the first half equated to 0.6 percent of German gross domestic product, the paper said.

Germany’s Federal Statistics Office is due to publish a budget balance estimate for the January-to-June period on Tuesday. ($1=.6727 Euro)

[top]

[Skip to the end]

[written on Sunday]

While not a problem in the US for the Fed to do this and more (in fact it should be standard operating procedure), the eurozone has self imposed treaty issues that make it very problematic.

If there are defaults its the national governments that will probably be called on to repay the ECB for any losses, but given the national governments didn’t approve the transactions the result will be chaotic at best.

Without bank defaults it will probably all muddle through indefinitely.

As before, the systemic risk is in the eurozone.

Valve repair tomorrow, going to try to smuggle in a knife under my gown to even the odds…

Bank borrowing from ECB is out of control

by Ambrose Evans-Pritchard

The European Central Bank has issued the clearest warning to date that it cannot serve as a perpetual crutch for lenders caught off-guard by the severity of the credit crunch.

Not Wellink, the Dutch central bank chief and a major figure on the ECB council, said that banks were becoming addicted to the liquidity window in Frankfurt and were putting the authorities in an invidious position.

“There is a limit how long you can do this. There is a point where you take over the market,” he told Het Finacieele Dagblad, the Dutch financial daily.

“If we see banks becoming very dependent on central banks, then we must push them to tap other sources of funding,” he said.

While he did not name the chief culprits, there are growing concerns about the scale of ECB borrowing by small Spanish lenders and ‘cajas’ with heavy exposed to the country’s property crash. Dutch banks have also been hungry clients at the ECB window.

One ECB source told The Daily Telegraph that over-reliance on the ECB funds has become an increasingly bitter issue at the bank because the policy amounts to a covert bail-out of lenders in southern Europe.

“Nobody dares pinpoint the country involved because as soon as we do it will cause a market reaction and lead to a meltdown for the banks,” said the source.

This “soft bail-out” is largely underwritten by German and North European taxpayers, though it is occurring in a surreptitious way. It has become a neuralgic issue for the increasingly tense politics of EMU.

The latest data from the Bank of Spain shows that the country’s banks have increased their ECB borrowing to a record €49.6bn (£39bn). A number have been issuing mortgage securities for the sole purpose of drawing funds from Frankfurt.

These banks are heavily reliant on short-term and medium funding from the capital markets. This spigot of credit is now almost entirely closed, making it very hard to roll over loans as they expire.

The ECB has accepted a very wide range of mortgage collateral from the start of the credit crunch. This is a key reason why the eurozone has so far avoided a major crisis along the lines of Bear Stearns or Northern Rock.

While this policy buys time, it leaves the ECB holding large amounts of questionable debt and may be storing up problems for later.

The practice is also skirts legality and risks setting off a political storm. The Maastricht treaty prohibits long-term taxpayer support of this kind for the EMU banking system.

Few officials thought this problem would arise. It was widely presumed that the capital markets would recover quickly, allowing distressed lenders to return to normal sources of funding. Instead, the credit crunch has worsened in Europe.

Not to miss out, Nationwide recently announced that it was setting up operations in Ireland, partly in order to be able to take advantage of ECB liquidity if necessary. Any bank can tap ECB funds if they have a registered branch in the eurozone, although collateral must be denominated in euros.

Jean-Pierre Roth, head of the Swiss National Bank, complained this week that lenders were getting into the habit of shopping for funds from those authorities that offer the best terms. The practice is playing havoc monetary policy.

“What we should avoid is some kind of arbitrage by banks, which say they are going to go to central bank X, instead of central bank Y, because conditions are more attractive,” he said.

[top]

[Skip to the end]

Yes, inventory of existing homes looks high, but as suspected the desirable inventory is probably very thing.

Housing starts have been too low for too long for there not to be a shortage looming.

These homes for sale suck

Never before have there been so many squalid, dilapidated homes on the market - and they’re helping to exaggerate already-plummeting home prices.

by Les Christie

(CNNMoney.com) Mold, maggots and piles of festering trash - no wonder home prices are in freefall.

It’s not just the subprime mortgage crisis that’s to blame for plummeting home prices. A flood of squalid properties on the market is helping to exaggerate the post-bubble price declines.

“Part of the reason home prices are declining is a fundamental deterioration in the housing stock,” said Glenn Kelman, CEO of the online, discount broker Redfin. “During the boom, nine out of 10 houses for sale in many markets were in prime condition. Now, for every 10 houses, at least three are dogs.”

Most of these mutts are foreclosed properties that have been permitted to fall into disrepair by lenders overwhelmed with thousands of vacant homes. If these houses sell at all, they’re going for bargain basement prices that are hurting home values throughout the neighborhood.

[top]

[Skip to the end]

Cliff Viner writes:

This is important. We’ve mentioned it before. And although the article is about Japan, it applies to many of China’s other export markets.

Yes, the whole global backdrop shifted from a deflationary to an inflationary bias over the last couple of years.

Also, with all of our outsourcing, these imports costs or some extent replace what was unit labor costs in previous cycle.

So in that sense, labor costs are rising faster than our domestic labor numbers indicate.

China Switches From Deflation Exporter To Inflation Exporter

(Nikkei) The prices of Chinese goods are rising in Japan, with sharp increases hitting anything from clothing to audio equipment. If the rise persists, China, which has long underpinned Japan’s steady price structure with its inexpensive products, could become a factor in lifting Japan’s overall price level.

According to a Bank of Japan check on the July prices of imported products, of which more than 50% are supplied by China, polo shirts and gloves cost some 9% more than in July last year. Pajamas and sweat suits also were up 4%. As made-in-China items make up 80% of Japan’s total clothing imports, higher costs can translate into higher price tags at retailers down the road.

The price rise is not limited to clothing. Imports of toys, of which 90% come from China, shot up 10% in July on the year. The price tags on bags, 50% of which originate in China, also climbed 9%. Of audio and video equipment, with the Chinese import ratio of more than 50%, audio devices increased 3-4%. Among other items, China-made cotton cloth, used mainly for bedding and dress shirts, rose to nine-year highs indicating that rising prices of Chinese imports now run the gamut.

Running to a value of 15 trillion yen in fiscal 2007, Chinese products now account for some 20% of Japan’s total import bills. According to trade statistics compiled by the Ministry of Finance, the price index of Chinese imports, which had been falling, rebounded to positive territory in fiscal 2004 and climbed 7.7% on the year in fiscal 2007 with the uptick still continuing.

Increasing prices of Chinese imports are caused in large part by rising wages in that country. Average wages of China’s urban workers rose 18.7% during 2007 over the previous year. Moreover, labor costs in China are destined to rise further with the passage of the labor contract law in January this year which encourages employers to give employees longer contracts.

The substantial appreciation of the yuan is also to blame for increasing the costs of Chinese imports. The yuan’s value rose 20% against the dollar over the three years since Beijing revalued the currency’s exchange rate in July 2005.

So the Chinese factor is casting increasingly dark shadows over Japan’s price picture. “Attention tends to focus on soaring crude oil prices as the main culprit for the recent bout of inflationary pressure, but nearly 10% of the overall increase in imported products is attributable to the Chinese factor,” said Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute. This is perhaps why many Bank of Japan economists see China as switching, as far as Japan is concerned, from a deflation exporter to an inflation exporter.

[top]

[Skip to the end]

Seems the liquidation may be ending, but just guessing.

Vitol Reclassified by CFTC as `Non-Commercial’ Trader, WSJ Says

by Alexander Kwiatkowski

(Bloomberg) Vitol Group was reclassified by the Commodity Futures Trading Commission as a “non-commercial” trader, the Wall Street Journal reported, citing people it didn’t identify.

The U.S. regulator changed the status of “one of the largest traders” in July, without identifying the company, the newspaper said. People familiar with the matter have now named the trader as Vitol, according to the Journal.

The change meant that bets by non-commercial traders, or speculators, represented half or more of all outstanding crude oil futures contracts on the New York Mercantile Exchange, the newspaper said.

Vitol hasn’t been contacted by the CFTC or by Nymex with regard to its trading status, a Switzerland-based company official said today by phone, declining to be identified. Vitol remains classified as a commercial trader, the official said.

Vitol “is not in the business of taking large positions speculating on the rise or fall of market prices,” the company said in a May statement on its Web site.

[top]

[Skip to the end]

Seems Paulson is still blocking foreign CBs from accumulating USD financial assets. This is a negative for the USD and a negative for US real terms of trade.

It does support US exports and reduces the need to add to domestic demand, even as US consumption remains low.

Yuan Rises Most in 3 Weeks After Paulson Calls for Appreciation

by Kim Kyoungwha and Belinda Cao

(Bloomberg) The yuan climbed by the most in three weeks after U.S. Treasury Secretary Henry Paulson urged China to let its currency appreciate to curb inflation and deter Congress from introducing trade penalties. Bonds gained.

[top]

Prices stabilizing as volumes increase:

SoCal home prices fall in July, sales up

by Elliot Spagat

(AP) A research firm says Southern California home prices fell 31 percent in July from last year, while the number of homes sold hit its highest level since March 2007.

MDA DataQuick said in its report Monday that the median price for new and resale homes and condos dropped to $348,000 last month in the six-county region. That’s down from the market peak of $505,000 in July 2007 and down slightly from $355,000 in June.

The report says a total of 20,329 homes and condos were sold during the month, up 13.8 percent from July 2007 and up 16.7 percent from June.

It says foreclosures accounted for 43.6 percent of all resold properties last month, up from 7.9 percent in July 2007 and a revised 41.8 percent in June.

[Skip to the end]

They know how to keep it all going:

(Bloomberg) “Demand for investment is still the one to depend on for dealing with potential external shocks,” because local consumption is not enough to be the main engine of China’s growth, said the center, affiliated with the National Development and Reform Commission. “All levels of government should prepare a list of investment projects in urban transport and infrastructure so that they can be launched immediately once needed.”

[top]

[Skip to the end]

Hope they don’t dig it up and take it home!

Lost Sovereignity

Oil-rich Fund Eyeing Foreclosed US Homes

By Teri Buhl

There’s a new land grab starting in America.

Foreign money, which up to now has focused its attention on investing in iconic commercial real estate - like Barneys New York and the Chrysler Building - is now moving to scoop up tens of thousands of discounted foreclosed homes across the country.

One sovereign fund, said to have earmarked $29 billion to purchase foreclosed residential real estate, recently hired a West Coast mortgage broker and is starting to search for bargains, The Post has learned.

The search, which is being carried out, in part, by Field Check Group mortgage consultant Mark Hanson, who was retained by the broker, Steve Iversen, is concentrating on single- and multi-family REO (real estate owned) homes, or homes that have already been taken over by the mortgagee.

Neither Iversen nor Hanson would disclose the name of the client, but sources told The Post it’s a sovereign fund.

The unidentified fund joins individual US investors, hedge funds and Wall Street banks in kicking the tires of REO homes, which have fallen in value so much that they are now tempting investments.

A sovereign fund would have two distinct advantages over other investors - the depressed value of the US dollar makes the homes a bargain, and sovereign funds have deeper pockets.

The sovereign fund of Abu Dhabi, for example, has a reported $875 billion in assets, while Norway has $391 billion, Singapore has $303 billion and Kuwait has $264 billion in their sovereign funds, which are funded by proceeds from oil sales.

The Abu Dhabi Investment Authority is expected to announce next month what type of US distressed assets they will be investing in and real estate is at the top of the list, according to a report in Financial Times last week.

ADIA did not respond to an e-mail question about REO investments.

So far, prices on bulk sales of REO properties vary based on location and are selling from 60 cents to 80 cents on the dollar. Hanson started out offering 40 cents on the dollar for about $2.5 billion worth of California properties owned by IndyMac and Washington Mutual but was turned down. The banks refused to comment.

Hanson is now willing to pay 50 cents to 60 cents on the dollar for a collection of California REOs worth at least $500 million.

In fact, this week Hanson’s team negotiated a $2 billion package mixed with homes across the country for 31 cents on the dollar. While progress seems slow, Hanson reminds us this is only a nine-month old industry.

Some market experts think such deeply discounted REOs, like the deal Hanson just closed, are more fiction than fact.

“The size and discount of that type of deal isn’t the norm yet,” said Robert Pardes, with Recourse Recovery Management Services, a provider of mortgage advisory services.

“The critical mass of bulk REO is in well-capitalized institutions that don’t need to sell yet in bulk at a deep discount because they are better off not taking substantial hits to the capital just to get the assets off their books,”

This may change, should the market become more crowded with bank failures and distressed institutions, he said.

Enoch Lawrence, senior vice president of CB Richard Ellis, says “This type of bulk buy would make an impact on the market. They are in a unique position because they have a long time horizon to invest and a cheap cost of capital. It’s actually a perfect time for them to acquire these REO assets.”

[top]

Looks like a demand leakage if it goes through:

Highlights:

 
 
Article snip:

German Net Pay May Shrink on Social Insurance Changes, FAZ Says (Bloomberg) - Germany’s top wage earners may take home less pay next year because a larger portion of their wage may be subjected to social insurance contributions, the Frankfurter Allgemeine Zeitung said on its Internet site. A pension insurance panel has suggested in its regular annual review to raise the amount of gross monthly pay on which contributions have to be paid by 100 euros ($152) to 5,400 euros in western Germany and by 50 euros to 4,550 euros in the eastern half of the country, the newspaper said. Employees whose pay is above these thresholds will pay an extra 11.60 euros per month into pension and unemployment insurance coffers from the start of next year, the newspaper said. The panel’s proposals are generally approved, it said. Thresholds for health and nursing insurance contributions will also be raised, the FAZ said, without providing figures.

I could fix this in twenty minutes…

Money Market `Plagued’ by Libor That Fed Can’t Reduce

by Gavin Finch

(Bloomberg) A year after central banks started to pump trillions of dollars into the financial system to end a seizure in credit markets caused by subprime mortgages, cash is about as tight as it’s ever been.

The U.S. market for commercial paper, or short-term IOUs, backed by assets such as mortgages has shrunk 40 percent from its peak in July 2007. The amount borrowed in pounds between banks in the U.K. fell by 70 percent in June from a record in February 2007. The European Central Bank received $100 billion of bids for the $25 billion it offered to financial institutions on July 29, the most since the sales began in December.

Efforts by the Federal Reserve, ECB and Swiss National Bank to shore up the world’s biggest banks and promote lending have had limited success.

[Skip to the end]

Highlights:

 
 
 
Article snip:

ECB Leaves Interest Rates at Seven-Year High to Fight Inflation (Bloomberg) - The ECBkept interest rates at a seven-year high to fight inflation even as evidence of an economic slump mounts. ECB policy makers meeting in Frankfurt left the benchmark lending rate at 4.25 %, as predicted by all 60 economists in a Bloomberg News survey. The bank, which raised rates last month, will wait until the second quarter of next year to cut borrowing costs, a separate survey shows. The ECB is concerned that the fastest inflation in 16 years will help unions push through demands for higher wages and prompt companies to lift prices. At the same time, record energy costs and the stronger euro are strangling growth. Economic confidence dropped the most since the Sept. 11 terrorist attacks in July and Europe’s manufacturing and service industries contracted for a second month. ECB President Jean-Claude Trichet will hold a press conference 2:30 p.m. to explain today’s decision.

Same as UK, less costly to address inflation now rather than support growth and address inflation later if it gets worse.

It’s been said in the US that the Fed needs to firm up the economy first, and then address inflation. To most Central Bankers this makes no sense, as they use weakness to bring inflation down.

In their view that means the Fed wants to get the economy strong enough to then weaken it.

The Fed majority sees it differently.

They agree with the above.

However, for the last year they have been forecasting lower inflation and lower growth were willing to take the chance that supporting growth would not result in higher inflation.

Now, a year later, the FOMC is faced with higher inflation and more growth than the UK and Eurozone, and systemic ‘market functioning’ risk remains.

The FOMC continues to give the latter priority as they struggle with fundamental liquidity issues that stem from a continuing lack of understanding of monetary operations.

[top]

The mainstream view remains the cost of a near term recession in order to bring prices under control now is far less than the cost of a recession later if you support growth now and let prices continue higher.

Bank of England holds interest rate at 5%

by Gary Duncan, Grainne Gilmore

The Bank of England rebuffed mounting concerns over the rapidly weakening economy today and held interest rates at 5 per cent as it pursued its drive to quell soaring inflation.

The tough verdict from the Bank’s rate-setting Monetary Policy Committee (MPC) brushed aside pleas from business leaders and trade unions for a cut in base rates to shore up Britain’s growth, amid growing fears that the country is on the brink of recession.

The Bank’s decision came after headline consumer price inflation leapt to a 10-year high of 3.8 per cent in June, well above the Bank’s 2 per cent target, and amid expectations that it could hit 5 per cent over the summer, following swingeing increases in household gas and electricity bills imposed by utility companies.

The MPC had been widely expected to spurn pressure for a rate cut today in a bid to make clear its determination to bring inflation back to the target set by the Chancellor. The committee will almost certainly have discussed raising rates this morning, as it did last month, when Professor Tim Besley, voted for an immediate increase. He is expected to have done so again today, and may have been joined by other hawkish MPC members.

The Bank will set out its thinking more clearly next week when it publishes its latest forecasts for the economy in its quarterly Inflation Report. That is expected to emphasise the dilemma that the MPC confronts, with inflation set to soar far above target in the next few months, even as the economy slides towards a severe downturn.

The quandary facing the Bank was underlined yesterday as the International Monetary Fund sharply cut its forecasts for Britain’s growth this year and next, while issuing a warning that it saw “little scope” for interest rates to fall, although it also saw no need for an immediate rate rise.

Today’s no-change verdict by the MPC came despite bleak economic news in recent days, which have produced danger signs of recession.

Concern that Britain’s growth had ground to a virtual halt last month, and could even be in the grip of recession, were inflamed this week after bleak figures revealed growing frailty in the most critical parts of the economy.

These included shrinking activity in the services sector, the economy’s engine room that account for three quarters of the UK’s output, as well as in manufacturing.

The services sector, spanning businesses from cafes and leisure centres to accountancy and law firms, shrank for a third month in succession last month, according to the latest purchasing managers’ survey, regarded by the Bank as a key gauge of economic conditions.

Although services activity edged up from a seven-year low that was plumbed in June, the survey pointed to an even sharper slowdown ahead, with levels of outstanding business for the sector’s companies falling for a tenth month in a row, and inflows of new business dropping to a record low.

At the same time, it emerged that manufacturing is suffering its first sustained run of decline since 2001, after its output fell in June for a fourth month in a row, dropping by 0.5 per cent.

The figures were among the latest data confirming the dire plight of the economy, and came after official confirmation that the pace of Britain’s overall growth slowed to just 0.2 per cent in the second quarter, its weakest rate of expansion for three years.

The falling housing market remains a key source of economic anxiety, with the Nationwide Building Society reporting that house prices tumbled by a further 1.7 per cent last month, leaving them down 8.1 per cent on last year - their sharpest annual pace of decline since 1991.

The high street is also being badly hit by the downturn, with official figures showing that retail sales plunged by 3.9 per cent in June - their biggest monthly drop for 22 years.

Yesterday, the International Monetary Fund added to the mood of pessimism as it cut its forecast for Britain’s growth this year and next to only 1.4 per cent, and 1.1 per cent, respectively. The prediction of the UK’s worst performance since the end of the last recession raised the spectre of two years of economic misery.

In May, Mervyn King, Governor of the Bank, was forced to write an explanatory letter to the Chancellor, required by law, explaining why inflation had risen more than 1 point above its 2 per cent target, after it climbed to its then-high of 3.3 per cent. Mr King has admitted that he expects to write more such letters this year.

The Bank’s inflation headache has been further aggravated by signs of further severe price pressures in the pipeline to the consumer, Manufacturers’ costs rose at a record 30 per cent annual rate in June, and prices for goods leaving factories rose by a record 10 per cent. Inflation is being stoked by a sharp slide in the pound, by about 12 per cent over the past year, which lifts Britain’s bills for imported products.

However, there has been some let up in international food and energy costs, with oil prices tumbling by 13 per cent in a month, and prices for food products are also on the slide.

[Skip to the end]

(an email exchange)

>   
>   
>   On Wed, Aug 6, 2008 at 12:25 AM, Prof. P. Arestis wrote:
>   
>   Dear Warren,
>   
>   Just received the piece below. The situation over here is getting
>   worse but pretty much as expected.
>   
>   Recession signalled by key indicators of British economy
>   
>   
>   Best wishes, Philip
>   

Dear Philip,

Yes, seems tight fiscal has finally taken its toll and is now reversing the ugly way - falling revenues and rising transfer payments.

Without support from government deficit spending, consumer debt increases sufficient to support modest growth are unsustainable.

And with a foreign monopolist setting crude oil prices ‘inflation’ will persist until there is a large enough supply response,

It’s the BoE’s choice which to respond to, though ironically changing interest rates is for the most part ceremonial.

All the best,
Warren

[top]

[Skip to the end]

(an email exchange)

>   
>   On Mon, Aug 4, 2008 at 7:50 AM, Russell wrote:
>   
>   I am more and more convinced housing is not near a bottom.
>   Granted, I have no idea what the recent Housing Bill will do. But I
>   think housing problems are going to cover the entire swath of
>   America – not only Subprime, but also Alt A and even Prime.
>   
>   

could be, but would be very unusual in an economy with a growing gdp supported by what may now be endless fiscal packages.

the actual housing slump could be mostly old news unless/until gdp softens again as most are forecasting in q4.

[top]

[Skip to the end]

Government spending kicking in with 2007 spending that was delayed to 2008:

Topical article: The GOP’s December Surprise by James K. Galbraith

Durable Goods Orders Rise Unexpectedly

by Michael M. Grynbaum

A separate report showed that orders for big-ticket items rose last month, beating economists’ expectations. A surge in export orders and *investment in military-related products* sent durable goods orders up 0.8 percent in June from a revised 0.1 percent in May, the Commerce Department said. Excluding orders for military-related goods, orders were up only 0.1 percent.

[top]

[Skip to the end]

His monetary analysis is ridiculous but we agree on this point:

The Media Are Missing the Housing Bottom

by Larry Kudlow

Media reports painted a pessimistic picture of today’s release on existing home sales, which fell 15 percent from a year ago and recorded higher inventories. But inside the report was an awful lot of very good new news, which appear to be pointing to a bottom in the housing problem; in fact, maybe the tiniest beginnings of a recovery.

For example, the median existing home price has increased four consecutive months and is up 10 percent since February. Yes, it’s down 6 percent over the past year. But the monthly numbers show a gradual rebound. Actually, this median home price is $215,000 in June, compared to $196,000 last winter.

And there’s more. One of the hardest hit regions is the West, including California, Arizona, and Nevada. The other two bad states are Florida and Michigan. However, existing home sales in the western region are up four straight months, and are 17 percent above the low in October. At the same time, prices in the West have increased three straight months.

Meanwhile, overall national existing home sales are basically stabilizing at just under five million. And in the first and second quarters of 2008, these sales dropped slightly by 3 percent in each case, which is a whole lot better than the roughly 30 percent sales drops of the prior three quarters.

It’s a pity the mainstream media keeps searching for more and more pessimism. The reality is a possible upturn in the housing trend, and at the very least we are getting a bottom. Stocks sold off 165 points largely on media reports of terrible home sales and prices. But I am hoping the market comes to its senses and realizes the data are a whole lot better.

related content
Senate Set to Vote Saturday On Housing Rescue Bill
Existing Home Sales: A Look At Numbers That Weren’t There

And on top of all that, just as housing may be on the mend, Congress is about to ratify a huge FHA-based bailout that could total $42 billion. Congressional solons are putting up $300 billion to refinance and insure distressed loans through the Federal Housing Administration. But this dubious government agency, with a whole history of bad portfolio management, may wind up taking in the very worst loans on the books.

[top]

[Skip to the end]

I hadn’t noticed this back then, but Vince got it right: The Fed purchased the $30 billion of securities from JPM/Bear Stearns, with JPM agreeing that if there were any net losses it would be responsible for the first $1 billion.

It’s very odd that the Fed would call this a non-recourse loan, as they cut a better deal than that.

Unlike a non-recourse loan, if the securities turn out to be profitable, the Fed gets those funds.

So why would the Fed use language that implies the transaction was worse for the Fed than it actually was?

Perhaps there was a legal or some other restriction that prevented the Fed from purchasing the securities?

Seem there is a lot more to the story than has been revealed?

Press Release
Summary of Terms and Conditions Regarding the JPMorgan Chase Facility

March 24, 2008

The Federal Reserve Bank of New York (”New York Fed”) has agreed to lend $29 billion in connection with the acquisition of The Bear Stearns Companies Inc. by JPMorgan Chase & Co.

The loan will be against a portfolio of $30 billion in assets of Bear Stearns, based on the value of the portfolio as marked to market by Bear Stearns on March 14, 2008.

JPMorgan Chase has agreed to provide $1 billion in funding in the form of a note that will be subordinated to the Federal Reserve note. The JPMorgan Chase note will be the first to absorb losses, if any, on the liquidation of the portfolio of assets.

The New York Fed loan and the JPMorgan Chase subordinated note will be made to a Delaware limited liability company (”LLC”) established for the purpose of holding the Bear Stearns assets. Using a single entity (the LLC) will ease administration of the portfolio and will remove constraints on the money manager that might arise from retaining the assets on the books of Bear Stearns.

The loan from the New York Fed and the subordinated note from JPMorgan Chase will each be for a term of 10 years, renewable by the New York Fed.

The rate due on the loan from the New York Fed is the primary credit rate, which currently is 2.5 percent and fluctuates with the discount rate. The rate on the subordinated note from JPMorgan Chase is the primary credit rate plus 450* basis points (currently, a total of 7 percent).

BlackRock Financial Management Inc. has been retained by the New York Fed to manage and liquidate the assets.

The Federal Reserve loan is being provided under the authority granted by section 13(3) of the Federal Reserve Act. The Board authorized the New York Fed to enter into this loan and made the findings required by section 13(3) at a meeting on Sunday, March 16, 2008.

Repayment of the loans will begin on the second anniversary of the loan, unless the Reserve Bank determines to begin payments earlier. Payments from the liquidation of the assets in the LLC will be made in the following order (each category must be fully paid before proceeding to the next lower category):

• to pay the necessary operating expenses of the LLC incurred in managing and liquidating the assets as of the repayment date;
• to repay the entire $29 billion principal due to the New York Fed;
• to pay all interest due to the New York Fed on its loan;
• to repay the entire $1 billion subordinated note due to JPMorgan Chase;
• to pay all interest due to JPMorgan Chase on its subordinated note;
• to pay any other non-operating expenses of the LLC, if any.

Any remaining funds resulting from the liquidation of the assets will be paid to the New York Fed.

Where No Fed Has Gone Before

Why the Federal Reserve’s ‘loan’ for the Bear Stearns deal looks like an investment—and faces serious scrutiny

March 26, 2008

by Peter Coy

The Federal Reserve has stretched its mandate up, down, and sideways to prevent a financial market deluge. Now it appears to be stretching the English language a bit as well. What the Fed is calling a $29 billion “loan” to help finance JPMorgan Chase’s (JPM) purchase of Bear Stearns (BSC) looks much more like a $29 billion investment in securities owned by Bear. Although the Fed insists that it isn’t technically buying any assets, in practical terms it’s doing exactly that. All this adds up to a big and unacknowledged step up in the central bank’s financial intervention with Wall Street investment banks.

The Fed, of course, is the only part of government with the speed, power, and flexibility to arrest a bout of market panic. By rapidly intervening in mid-March to keep Bear from filing for bankruptcy, it may well have prevented a series of cascading failures that could have severely damaged the financial system and the economy. Many economists and analysts are happy that the Fed stepped into the breach. Nevertheless, now that things have quieted down a bit, the Fed is likely to face some tough questions about the precise nature of its actions as well as the legal justification for them.

The second-guessing has already begun. On Mar. 26, Senate Banking, Housing, and Urban Affairs Chairman Christopher Dodd (D-Conn.) announced an Apr. 3 hearing to explore the “unprecedented arrangement” between the Fed, JPMorgan, and Bear. Top officials from the Fed and other regulators, as well as Bear Stearns CEO Alan Schwartz and JPMorgan CEO Jamie Dimon, will likely be grilled about the details.

“That Looks Like Equity”
Meanwhile, Treasury Secretary Henry Paulson gave the Fed a gentle prod on Mar. 26 in a speech to the Chamber of Commerce. While saying he fully supported the Fed’s recent actions, Paulson stressed that “the process for obtaining funds by nonbanks must continue to be as transparent as possible.” He also urged the Fed to continue to work with other agencies to get the information necessary for “making informed lending decisions.”

So far, few people have focused on what exactly the Fed is getting in exchange for supplying $29 billion to JPMorgan Chase. That’s a bit surprising because whatever the deal is, it’s far from a standard loan. The strangest twist is that even though the money goes to JPMorgan, that firm isn’t the borrower. So the Fed can’t demand repayment from JPMorgan if the Bear assets turn out to be worth less than promised.

What’s also odd is that if there’s money left after loans are paid off, the Fed gets to keep the residual value for itself. That’s what one would expect if the Fed were buying the assets, not just treating them as collateral for a loan. Vincent R. Reinhart, a former director of the Fed’s Division of Monetary Affairs and now a resident scholar at the American Enterprise Institute, said in an interview on Mar. 26: “The New York Fed is the residual claimant. That doesn’t look to me like a loan. That looks like equity.”

[top]

[Skip to the end]

Looks like it was a likely substantial contributor to the last run up and the subsequent quick sell off. ‘Demand destruction’ isn’t yet anywhere near enough to dislodge the Saudis from setting price as swing producer:

REFILE-SemGroup a small factor in oil price drop -experts

by Matthew Robinson and Robert Campbell

(Reuters) SemGroup’s collapse from the 12th biggest U.S. private firm into bankruptcy was only a small factor in the $23 per barrel drop from oil’s record high over the past two weeks, energy experts said on Thursday.

The Tulsa-based company declared bankruptcy this week after racking up $2.4 billion in losses shorting crude oil futures on the New York Mercantile Exchange, including a $290 million loss owed to SemGroup by a trading firm affiliated with former Chief Executive and co-founder Thomas Kivisto.

[top]