Mother of All Bailouts

I don't claim authorship of this term, but the MOAB was originally coined by James Welsey Rawles over at www.survivalblog.com. Indeed, this is the most frightening turn of events, twin 500 point Dow drops, suspension of short selling, and now Helicopter Ben and that Thug Paulson are threatening congress with the Big "R" word to get their Wall Street buddies a $700 Billion bailout.

I could get snarky and vile about it, but I'm going to reprint the best blog every on the subject.

(Under Fair use:)

Mushroom Cloud over Wall Street as US Constitution Burns
Sep 22, 2008 - 10:36 AM

By: Mike_Whitney

These are dark times. While you were sleeping the cockroaches were busy about their work, rummaging through the US Constitution, and putting the finishing touches on a scheme to assert absolute power over the nation's financial markets and the country's economic future. Industry representative Henry Paulson has submitted legislation to congress that will finally end the pretense that Bush controls anything more than reading the lines from a 4' by 6' teleprompter situated just inches from his lifeless pupils. Paulson is in charge now, and the coronation is set for sometime early next week. He rose to power in a stealthily-executed Bankster's Coup in which he, and his coterie of dodgy friends, declared martial law on the US economy while elevating himself to supreme leader.


"All Hail Caesar!" The days of the republic are over.

Section 8 of the proposed legislation says it all:

"Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

Right; "non-reviewable" supremacy.

Congress, of course, is more than eager to abdicate whatever little authority they have left. They're infinitely grateful for their purely ceremonial role, the equivalent of Caligula's horse, albeit, with considerably less dignity. Has even one senator spoken out against this madness, which--according to informal internet polls--is resoundingly rejected by the voters? Does it concern the members of congress at all, that the present financial crisis was brought on by the proliferation and sale of trillions of dollars of mortgage-banked garbage which were fraudulently represented as Triple A rated bonds by the very same people who now claim to need unprecedented and dictatorial powers to fix the problem? Or are they more worried that the steady torrent of contributions which flows from Wall Street to congressional campaign coffers will be inconveniently disrupted if they fail to ratify this latest assault on democratic governance? The House of Representatives is one big steaming dungheap that should be leveled and turned into an amusement park instead of a taxpayer-funded knocking shop. What a pathetic collection of cowards and scumbags.

Bloomberg News: "

"The Bush administration sought unchecked power from Congress to buy $700 billion in bad mortgage investments from financial companies in what would be an unprecedented government intrusion into the markets. Through his plan, Treasury Secretary Henry Paulson aims to avert a credit freeze that would bring the financial system and the world's largest economy to a standstill. The bill would prevent courts from reviewing actions taken under its authority.

"He's asking for a huge amount of power,'' said Nouriel Roubini an economist at New York University. ``He's saying, `Trust me, I'm going to do it right if you give me absolute control.' This is not a monarchy." (Bloomberg)

The banksters own this country, always have; only now they've decided to strip away the curtain and reveal the ghoulish visage of the puppet-master. It ain't pretty.

Paulson decided that the financial markets needed an emergency trillion dollar face-lift just weeks before his former business partners at G-Sax were dragged off to the chopping block. Was that the reason? Everyone on Wall Street knew that the bulls-eye had already been ripped from Lehman's bloody back and was about to be fastened on Goldman's. Now, it looks like they will escape their day of reckoning due to Paulson's eleventh-hour reprieve. Nice touch, eh?

From the proposed legislation: LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETS

"(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them."


Market Ticker's Karl Denninger summed this up best: "This is the de facto nationalization of the entire banking, insurance and related financial system..That's right - every bank and other financial institution in the United States has just become a de-facto organ of the United States Government, if Hank Paulson thinks they should be, and he may order them to do virtually anything that he claims is in furtherance of this act.....The bill gives Paulson the ability to nationalize unlimited amount of private debt and force you and your children to pay for it."

Denninger again: "The claim is that this is intended to 'promote confidence and stability' in the financial markets.
It will do no such thing. It will instead strike terror into the hearts of investors worldwide who hold any sort of paper, whether it be preferred stock, common stock or debt, in any financial entity that happens to be domiciled in the United States, never mind the potential impact on Treasury yields and the United States sovereign credit rating.

I predict that if this passes it will precipitate the mother and father of all financial panics." (Market Ticker)


Amen. The transformation from a free market to a centralized, Soviet-style economy run by men whose judgment and credibility is already greatly in doubt; does not auger well for the markets or the country. Anyone with a lick of sense would cash in their chips first thing Monday and look for capital's Elysium Fields overseas or as far as possible from the circus sideshow now run by G-Sax ringleader, Colonel Klink.

Paulson's Chicken Little routine might might have soiled a few senatorial undergarments, but let's hope the American people are made of sterner stuff and will reject this charade. The conversation should be shifted from conceding more authority to hucksters in pin-stripes to indictments for securities fraud. Even the most economically-challenged nation ought to be able to afford a few sets of leg-irons and a couple hundred jail cells. That's all it will take. That, and a couple brisk dunks on the waterboard. Glub, glub.

Paulson's plan to revive the banking system by buying up hundreds of billions of dollars of illiquid mortgage-backed securities (MBS) and other equally poisonous debt-instruments; ignores the fact these complex bonds have already been "marked to market" in the recent firesale by Merrill Lynch. Just weeks ago, Merrill sold $31 billion of these CDOs for roughly $.20 on the dollar and provided 75 percent of the financing, which means that the CDOs were really worth approximately $.06 on the dollar. If this is the settlement that Paulson has in mind, than the taxpayer will be well served. But this will not recapitalize the banks balance sheets or mop up the ocean of red ink which is flooding the financial system. No, Paulson intends to hand out lavish treats to his banker buddies, while interest rates soar, pension funds collapse, the housing market crashes, and the dollar does a last, looping swan-dive into a pool of molten lava. Thanks, Hank.

Economist and author Henry Liu summarized the current maneuvering like this: "The Fed is merely trying to inject money to keep prices not supported by fundamentals from falling. It is a prescription for hyperinflation. The only way to keep price of worthless assets high is to lower the value of money. And that appears to be the Fed unspoken strategy."

Indeed. The Fed and Treasury have decided to backstop the entire global financial system (foreign banks can access the Fed's facilities, too!) with paper money which is rapidly losing its value. Watch the greenback tumble tomorrow in currency trading.

Congress is getting steamrolled and the American people are getting snookered. Consumer confidence--already at historic lows--is headed for the wood-chipper feet-first. Something has got to give.

One minute everything is hunky-dory; the subprime meltdown is "contained" and "the fundamentals of our economy are strong".(Paulson) And, less than a week later, congress is forced to surrender their constitutionally-mandated right to oversee spending in order to forestall economic Armageddon. Which is it? Or is the real objective just to keep the country on an emotional teeter-totter long enough for all state-power to be subsumed by the Wall Street Politburo?

No one knows what will happen next. We are in uncharted waters. And no one knows what the political landscape will look like after the dust settles from this outrageous power grab. According to Paulson, things are so dire, the entire nation will be reduced to smoldering rubble and twisted iron. But can we trust him this time after his long litany of lies?

Isn't it about time to send the cockroaches scuttling back to their hideouts and bring in the cleaning crew to hose the whole place down? It sounds like a job for Ralph Nader, a man of vision and unshakable integrity. Give Ralph a badge and let him deploy his Raiders to Wall Street armed with bullwhips and tasers. Let them post a guard in every CEOs and CFOs office and every boardroom on the Street---and if even one decimal is accidentally moved to the right or left on the corporate ledger; clap them in leg-irons and drag them off squealing to Guantanamo. That's how you clean up Wall Street!

Don't let the prospect of a national crisis trick you into giving up your freedom, America. The people behind this scam are the same landsharks and flim-flam men who polluted the global marketplace with their snake oil and toxic sludge. These are the fraudsters who manufactured the crisis to begin with. This is just the latest installment of the Shock Doctrine; engineer a crisis, and then, steal whatever is left behind. Same sh**, different day. Be resolute. Don't budge. Our economic foundations may be crumbling, but or determination is not. This is our country, not Goldman Sach's. The people who destroyed America must be held to account. Their time is coming. Justice first.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

The 12 steps, and a non-bank run.

Earlier I reported on the 12 steps to an economic disaster.

12 Steps towards economic collapse.

1. Housing recession.
2. The subprime mortgage loss continues.
3. Losses on unsecured debt: Credit cards, car loans, student loans.
4. Downgrading of monoline insurers' credit rating.
5. Meltdown in the commercial property market.
6. Bankruptcy of large regional or national banks.
7. Big losses on leveraged buyouts.
8. Wave of corporate defaults - insurers bankrupt.
9. Meltdown in shadow financial market: Hedge funds, margin calls and short sells.
10. Collapse in stock prices
11. Drying up of liquidity in financial markets, interbank loans, and money markets.
12. Vicious circle of losses, capital reduction, credit contraction, liquidation, and fire sales of assets.

Seems step 6 continues. Even with the dissolution of IndyMac, the bailout of Fannie Mae and Freddie Mac, the Feds are quietly shutting banks down and allowing consolidation of banks.

Take for instance the quiet closing and takeover by Mutual of Omaha of 1st National Bank of Nevada and First Heritage Bank. No fanfare, no lines, just closed on Friday, reopened on Monday under new management.

(Fair use rules apply).

By AMANDA LEE MYERS, Associated Press Writer

PHOENIX - Customers of two banks closed by federal regulators were assured that every penny of their money was protected, preventing lines of angry accountholders from forming Saturday.

The calm response was a stark contrast to the hundreds of angry customers who waited for hours earlier this month in Southern California to demand their money after IndyMac Bank's assets were seized.

The 28 branches of the 1st National Bank of Nevada and First Heritage Bank N.A. — owned by Scottsdale, Ariz.-based First National Bank Holding Co. — were closed Friday by the FDIC.

But Mutual of Omaha Bank bought all of the two banks' deposits, even those over the amount protected by FDIC insurance limits. IndyMac customers had to take a loss on whatever amount they had in the bank over the insurance limits.

One 1st National Bank of Nevada in downtown Phoenix didn't even have a note outside to tell customers about the trouble Saturday. But there were no customers outside to tell.

"I feel like the Maytag repairman — there's just not much to do on the customer side of things," Federal Deposit Insurance Corp. spokesman David Barr said. "There's going to be no impact on the depositors whatsoever, except basically a name change," Barr said.

Insurance limits are typically $100,000, but some accounts, such as joint accounts, can have more money protected, Barr said.

On Monday, Mutual of Omaha will open the banks as its own branches, Barr said. During the weekend, accountholders can access their funds by writing checks or using ATM or debit cards.

Jeff Schmid, chairman and CEO of Mutual of Omaha Bank, said the acquisition of the new accounts aligns with the company's growth strategy to get aggressive with banking.

"We're very optimistic about these markets," said Schmid, who was in Scottsdale on Saturday to speak with his new employees. "This could be our finest hour."

Mutual of Omaha Bank has $800 million in assets and operates 14 retail branches in Nebraska and Colorado. It's a subsidiary of Mutual of Omaha, a 99-year-old insurance and financial services company with more than $19 billion in total assets.

The Office of the Comptroller of the Currency said in a news release that 1st National was undercapitalized and had experienced substantial dissipation of assets and earnings "due to unsafe and unsound practices."

Those practices "also weakened the bank's condition and seriously prejudiced the interests of the bank's depositors and the deposit insurance fund."

Another news release said First Heritage was critically undercapitalized and was likely to incur losses that would deplete all or nearly all of its capital.

As of June 30, the closed banks had total assets of $3.6 billion. That's down from $4.1 billion six months earlier. Most of the assets are in 1st National, while First Heritage N.A. accounts for $254 million.

The FDIC said the takeover of the failed banks was the least costly resolution.

Calls to 1st National executive vice president Joe Martony were not returned Saturday. No one could be reached at the First Heritage N.A.

1st National has 10 branches in Nevada and 15 branches in Arizona. First Heritage N.A. has three branches in Southern California.

-----
And speaking of not looking at the man behind the curtain, Ford posted it's biggest loss EVER. Once again, the economy is strong, right?

From Business Week (under fair use).
Ford's Worst Quarter Ever
Problems at its credit arm and a writedown of assets, plus a poor economy and high gas prices, led to a second-quarter loss of $8.7 billion

by David Kiley

Ford Motor (F) reported a second-quarter loss of $8.7 billion, its worst single quarter in history.

Much of the loss was due to a writedown in the value of assets, and losses on falling values of SUVs coming off leases back to the automaker's Ford Motor Credit arm. But, like a kid who wrecks the family car and tries to distract his parents from the bad news by offering to paint the house, Ford unveiled a plan to make over its lineup with more small, fuel-efficient vehicles in the next two-and-a-half years—faster than Wall Street had expected.

Ford's plan to achieve a net profit in 2009 after losing $15.3 billion the past two years had already been thrown off track by the worse-than-expected housing meltdown and high gas prices. But the huge second-quarter loss was a setback Chief Executive Alan Mulally did not anticipate until a few months ago when SUVs like the Ford Explorer (BusinessWeek.com, 9/1/06), Ford Expedition (BusinessWeek.com, 2/19/07), and Lincoln Navigator (BusinessWeek.com, 4/2/07) started losing thousands of dollars in value in a matter of weeks at auctions where off-lease vehicles are sold. Skyrocketing gas prices have cratered demand for such vehicles.
Whipsawed Stock

Ford shares were trading down 9.5%, at 5.46, in midday trading on the New York Stock Exchange. Ford has been a volatile stock over the past two months, trading between 4.30 and 8 a share. The company has been whipsawed between a surprise first-quarter profit, subsequent changed forecasts in profitability and cash burn, and an investment in the automaker by financier Kirk Kerkorian, who paid 8 per share for a stake in Ford.

The second-quarter loss was $3.88 per share, compared with net profit of $750 million, or 31¢ a share, in the same quarter last year. The loss includes $8.03 billion worth of write-offs because of a decline in value of North American assets and Ford Motor Credit's lease portfolio. Even excluding those special items, Ford lost 62¢ a share, worse than Wall Street expected. Twelve analysts surveyed by Thomson Financial, on average, expected only a 27¢ loss. Ford's second-quarter revenue was $38.6 billion, down $5.6 billion from the year-ago period. Analysts expected $34.6 billion.

What Oil means to China.

Pardon my absence, part of the fun of self-employment is that the blog sometimes has to take a backseat to making money.

File this under the tinfoil-hat section, but what if the US wanted to wage an economic cold-war against China? What would it look like. In the past, the US waged an economic war against the Soviet Union, and did so by taxing the USSR's industrial production capacity through an arms race. Clearly, China's ability to fight that kind of war would be a no-brainer, so what is China's Achilles heel?

Energy. Cheap energy to be precise. As long as shipping is cheap, the Chinese have an economic advantage. But if oil suddenly became expensive, Western countries would find that it's better to do their finished goods at home, and save the cost of shipping. And even if it devalues the US dollar, that's OK, because it leaves the Chinese out of work and holding a bunch of worthless dollars. IOW, bankrupt.

Something to consider as you read the following.

From the Telegraph (UK)
Under fair use.
Oil price shock means China is at risk of blowing up
By Ambrose Evans-Pritchard
Last Updated: 12:33am BST 07/07/2008

The great oil shock of 2008 is bad enough for us. It poses a mortal threat to the whole economic strategy of emerging Asia.

The manufacturing revolution of China and her satellites has been built on cheap transport over the past decade. At a stroke, the trade model looks obsolete.

No surprise that Shanghai's bourse is down 56pc since October, one of the world's most spectacular bear markets in half a century.

Asia's intra-trade model is a Ricardian network where goods are shipped in a criss-cross pattern to exploit comparative advantage. Profit margins are wafer-thin.

Products are sent to China for final assembly, then shipped again to Western markets. The snag is obvious. The cost of a 40ft container from Shanghai to Rotterdam has risen threefold since the price of oil exploded.

"The monumental energy price increases will be a 'game-changer' for Asia," said Stephen Jen, currency chief at Morgan Stanley. The region's trade model is about to be "stress-tested".

Energy subsidies have disguised the damage. China has held down electricity prices, though global coal costs have tripled since early 2007. Loss-making industries are being propped up. This merely delays trouble.

More on energy
"The true impact of the shock will only be revealed over time, as subsidies are gradually rolled back," he said. Last week, China raised internal rail freight rates by 17pc.

BP 's Statistical Review says China's use of energy per unit of gross domestic product is three times that of the US, five times Japan's, and eight times Britain's.

China's factories "were not built with current energy levels in mind", said Mr Jen. The outcome will be "non-linear". My translation: China is at risk of blowing up.

Any low-tech product shipped in bulk - furniture, say, or shoes - is facing the ever-rising tariff of high freight costs. The Asian outsourcing game is over, says CIBC World Markets. "It's not just about labour costs any more: distance costs money," says chief economist Jeff Rubin.

Xinhua says that 2,331 shoe factories in Guangdong have shut down this year, half the total.

North Carolina's furniture industry is coming back from the dead as companies shut plant in China. "We're getting hit with increases up and down the system. It's changing the whole equation of where we produce," said Craftsmaster Furniture.

China is being crunched by the triple effects of commodity costs, 20pc wage inflation, and sagging import demand in the US, Canada, Britain, Spain, Italy, and France.

More on economics
Critics warn that Beijing has repeated the errors of Tokyo in the 1980s by over-investing in marginal plant. A Communist Party banking system has let rip with cheap credit - steeply negative real interest rates - to buy political time for the regime.

Whether or not this is fair, it is clear that Beijing's mercantilist policy of holding down the yuan to boost exports share has now hit the buffers.

Foreign reserves have reached $1.8 trillion, playing havoc with the money supply. Declared inflation is just 7.7pc, but that does not begin to capture the scale of repressed prices, from fuel to fertilisers. "There is a lot more bottled-up inflation in this economy than meets they eye," says Stephen Green, from Standard Chartered.

Inflation merely steals growth from the future. It defers monetary tightening until matters get out of hand, which is where we are now. Vietnam has already blown up at 30pc. India is on the cusp at 11pc, so is Indonesia (11pc), the Philippines (11pc), Thailand (9pc) - leaving aside the double-digit Gulf.

Of course, oil prices may fall again. They plunged to $50 a barrel in early 2007 after the Saudis raised production. The scissor effect of slowing global growth and extra crude later this year from Brazil, Azerbaijan, Africa, and the Gulf of Mexico may chill the super-boom.

The US Commodities Futures Trading Commission is on an "emergency" footing, under orders from the Democrats on Capitol Hill to smash speculators. If it is really true that investment funds have run amok, we will soon find out.

I suspect that the energy markets have fallen prey to their own version of the "shadow banking system" that so astonished regulators when the credit bubble burst.

I also suspect that Hank Paulson and his EU colleagues have a surprise up their sleeve for the late-cycle über-bulls. Those who claim that derivatives (crude futures) cannot drive spot prices have overlooked a key point. The Saudis and others use the IPE Brent Weighted Average of futures contracts as their pricing mechanism. Futures now set the spot price.

But even if oil comes down for a year or two, the mid-term outlook of the International Energy Agency warns that crude markets will be tighter than ever by 2012. Call it Peak Oil, or just Peak Non-Cooperation by the dictatorships that control most of the world's remaining 5 or 6 trillion barrels (Mankind has used one trillion so far).

Come what may, globalisation has passed its high-water mark. The pendulum will now swing back from China to America. The mercantilists will have to reinvent themselves.

``We're only about a third of the way through the writedowns''

Yes folks, you thought $4 a gallon was bad, the subprimes were bad, just hold on to your hats. Bloomberg is reporting that Global writedowns could top $1.3 Trillion. From Wikipedia's definition of what a writedown is:

Many of the consequences of the subprime crisis at financial institutions are referred to as a "write-down", which is synonymous with a write-off[1].

While a write-off in banking refers to a bad loan that is declared uncollectable, removing it from its balance sheet, a write-down, according to Investopedia, means:[2]

Reducing the book value of an asset because it is overvalued compared to the market value.

So while a "write-off" removes the loan from the balance sheet, a "write-down" reduces the value of the loan in the balance sheet. Despite this difference, both terms indicate that the loaned money in question has no chance of being recovered.

Yep, this is contraction of the money supply that mirrors the expansion of the money supply that fractional reserve banking creates.

(under fair use)

June 18 (Bloomberg) -- John Paulson, founder of the hedge fund company Paulson & Co., said global writedowns and losses from the credit crisis may reach $1.3 trillion, exceeding the International Monetary Fund's $945 billion estimate.

``We're only about a third of the way through the writedowns,'' Paulson, 52, told the GAIM International hedge fund conference in Monaco today. ``There are a lot of problems out there and it will continue to be felt through the year. We don't see any signs of stabilizing.''

Paulson, whose New York-based company manages about $33 billion, made bets last year that subprime-mortgage debt would fall after he noticed ``bubble like'' prices. His Paulson Partners fund rose 18 percent a year since it started in 1994, and his main subprime-debt fund rose 591 percent last year. Banks and securities firm worldwide posted more than $395 billion in losses and writedowns since the subprime crisis started last year.

The U.S. is heading into a recession as falling home prices weigh on consumer spending, Paulson said. The second half of this year will be worse than the first as the economic slowdown spills into 2009. Signs of stress are ``accelerating'' in the housing market, and he's betting on falling securities prices, he said.

``I don't consider myself a bull or a bear,'' he told the audience at Monaco's Grimaldi Forum. ``I'm a realist.''

A Royal Bank of Scotland Group Plc strategist agrees that stock and credit markets still face the worst in a slump that started almost eight months ago.

`Most Bearish Period'

``Mid-July through to October is likely to be the most bearish period we will experience in the bear market that began in the fourth quarter of last year,'' Bob Janjuah, a credit strategist at the bank in London, wrote in a report dated June 11.

The MSCI World Index has lost 13 percent since reaching a record in October. The index is down 4.1 percent this month after the Federal Reserve and the European Central Bank policy makers indicated interest rates may need to increase as the threat of inflation intensifies.

The economic slowdown and inflation have put central bankers ``into a dangerous corner'' where the chance of a ``major policy error has just super-spiked,'' Janjuah wrote.

Ambac Financial Group Inc., the second-biggest bond insurer, is ``the most leveraged, troubled company out there,'' Paulson said. It's at risk of being downgraded to non-investment grade, he said. Ambac spokeswoman Vandana Sharma declined to comment.

Ambac shares have lost 92 percent of their value this year after losses on subprime mortgage securities caused the company to lose its AAA credit rating at Fitch Ratings. Ambac, which said today it will terminate its ratings contract with Fitch, fell 7 cents, or 3.3 percent, to $2.07, in New York Stock Exchange composite trading.

`Deteriorate Significantly'

The housing and credit-market slump pushed Ambac to three straight quarterly losses after more than a decade of profit. It has written down $5.2 billion since the collapse of the U.S. subprime mortgage market last year.

Paulson's outlook is consistent with the view of hedge funds meeting in Monaco this week. More than 80 percent of the 1,300 fund managers, investors and service providers gathered in Monaco for the annual conference said they expect the credit crisis will continue, according to a GAIM survey. About 23 percent said the situation ``will deteriorate significantly.''

Bill Browder, founder and head of Hermitage Capital Management, said securities firms have a ``vested interest'' in claiming an early end to the crunch. ``If we're in the seventh or eighth inning, this is a 100-inning game,'' he said.

`$10 Trillion Opportunity'

Paulson's speech was the biggest draw at the event, which comes as the hedge fund industry endures some of its worst performance in nearly two decades, rising just 0.13 percent through May, according to Chicago-based Hedge Fund Research Inc.

``John Paulson has of course been very successful by making the right trade last year,'' said Manuel Echeverria, chief investment officer of Optimal Investment Services SA, a Geneva based investor with about $10 billion under management. ``We'll have to see what he's going to do now that the trade has run out of juice.''

Paulson said he's preparing to buy distressed securities such as bank loans, call them a ``potentially $10 trillion opportunity.'' While it is still ``premature'' to invest in many of them, he sees ``opportunities this year'' to buy mortgage backed debt, he said.

He hired employees this year to research securities firms such as Citigroup Inc. for long-term investment positions. ``We're trying to see the right entrance point,'' he said. ``If you invest too early, you lose money.''

Getting from bad to worse

So my brother the CPA sends me more stuff, and it seems the mortgage world is about to go supernova. Subprimes went first, now it looks like the prime market is about to implode as well.

I'll never understand, if he sees the storm coming, what the hell he's doing in NYC.

(Under fair use)

NEW YORK (CNNMoney.com) -- When Lehman Brothers reported a stunning $2.8 billion loss Monday, it was just the latest sign that bad mortgage loans continue to be a problem for the financial markets and the economy.

But subprime mortgages could only be the beginning. Many economists and market experts are worried that other problems are lurking that could cause a new credit crisis for consumers and businesses.

Meredith Whitney, the banking analyst for Oppenheimer & Co., estimates that the credit problems will continue to dog financial markets into 2009. She thinks future losses will dwarf the roughly $25 billion set aside by Wall Street firms so far to cover them -- perhaps reaching $170 billion by next year.

Other experts agree that the worst is not yet over.

There are several types of loans raising concerns, ranging from prime mortgage loans to credit cards. Much like subprime mortgages, many of these loans were packaged into securities traded on Wall Street. And many of these loans are beginning to see rising defaults and delinquencies, just as subprime mortgages were a year ago.

These defaults are nowhere near subprime loan levels and few think they will ever get that bad. But if defaults keep rising, this can cause the same kind of problems in the markets for those securities, leading to widespread losses for investors.

"There are plenty of additional problems on bank balance sheets," said Kevin Giddis, head of fixed income sales, trading and research for investment bank Morgan Keegan. "The bigger problem is we don't know how far it goes. Those problems remain well hidden for a reason."

But if they do eventually surface, it would mean higher costs and tighter credit for consumers. And that in turn could lead to an even longer slump for the economy than currently forecast.
Prime loans "the next shoe" to drop

Giddis worries most about prime mortgage loans, those made to borrowers with good credit histories.

A survey from the Mortgage Bankers Association showed that at the end of the first quarter, nearly 2% of prime loans were either 90 days or more past due, or already in foreclosure. That's more than twice the rate from a year ago, an even bigger spike than the jump in subprime delinquencies during that period.

"We've pretty much gone to the wall on subprime," said Giddis. "The problem that is going to face financial institutions now is the good borrower. It's the other shoe to drop."

Jay Brinkman, the MBA's vice president for research and economics, said the problem for prime loans isn't as much bad loans being made but a weakening economy causing job losses for borrowers. Making matters worse, many homeowners find it tough to sell because of a record drop in home values.

This unprecedented drop in home values is therefore likely to lead to record prime loan foreclosures, losses that were never forecast when the mortgages were written and then sold to Wall Street.
Will wheels come off of auto loans?

Prime mortgages aren't the only part of the credit market showing early signs of rising problems. Auto loan defaults are also increasing steadily, according to figures from the American Bankers Association.

The delinquencies on the most prevalent type of car loan rose to 3.13% at the end of the fourth quarter of last year, according to the ABA, the highest rate since 1990. Delinquencies were up 22% from a year earlier.

In addition, high gas prices have led to a continued decline in the resale value of many light trucks, such as SUVs and pickups. That's lead to a loan-to-value ratio of 94% for all autos in the most recent reading for April, up from 88% as recently as 2005.

John Silvia, chief economist with Wachovia, said this raises worries about consumers dumping vehicles they can no longer afford to drive in a period of $4 gas.

"If someone has a durable good that is inefficient, they're going to be more willing to walk away from it," he said.
Equity lines, credit card woes also rising

Credit cards and home equity line delinquencies are rising even faster than those of auto loans, according to the ABA figures. Nearly 1% of home equity lines of credit were delinquent in the fourth quarter, according to its report, up 68% from a year earlier. Delinquencies reached their highest level since 1991.

In addition, 4.5% of the money owed on credit cards was delinquent in the period, up from 3.54% a year earlier. James Chessen, ABA's chief economist, expects that delinquency rates for credit cards and home equity loans will continue to rise throughout the year.

"No relief for consumers is in sight as food and gas prices remain stubbornly high and income growth is anemic," Chessen said.

And while credit card delinquency rates are not high by historic standards, the Federal Reserve's most recent loan officer survey shows tighter credit standards for both those loans and home equity. That's a sign that lenders and investors are trying to back away from those markets as well, said Scott Hoyt, senior director of consumer economics at Moody's Economy.com.

Add all that up and it's just more bad news for consumers, and the economy that depends on their spending.

"This obviously impacts their ability to spend, their confidence, their ability to service their debt and it's going to continue even as the economy recovers," said Hoyt.

-----

I still contend stocking a goodly amount of food and water is always a good idea. So take a lesson from the Mormons, these folks know how to do it.

Credit Default Swaps, DMZ's in Washington.

So my brother the accountant points me to this article in Time dated 17 May 2008

(Used under Fair Use)

As Bear Stearns careened toward its eventual fire sale to JPMorgan Chase last weekend, the cost of protecting its debt, through an instrument called a credit default swap, began to rise rapidly as investors feared that Bear would not be good for the money it promised on its bonds. Not familiar with credit default swaps? Well, we didn't know much about collateralized debt obligations (CDOs) either — until they began to undermine the economy. Credit default swaps, once an obscure financial instrument for banks and bondholders, could soon become the eye of the credit hurricane. Fun, huh?The CDS market exploded over the past decade to more than $45 trillion in mid-2007, according to the International Swaps and Derivatives Association. This is roughly twice the size of the U.S. stock market (which is valued at about $22 trillion and falling) and far exceeds the $7.1 trillion mortgage market and $4.4 trillion U.S. treasuries market, notes Harvey Miller, senior partner at Weil, Gotshal & Manges. "It could be another — I hate to use the expression — nail in the coffin," said Miller, when referring to how this troubled CDS market could impact the country's credit crisis.

Credit default swaps are insurance-like contracts that promise to cover losses on certain securities in the event of a default. They typically apply to municipal bonds, corporate debt and mortgage securities and are sold by banks, hedge funds and others. The buyer of the credit default insurance pays premiums over a period of time in return for peace of mind, knowing that losses will be covered if a default happens. It's supposed to work similarly to someone taking out home insurance to protect against losses from fire and theft.

Except that it doesn't. Banks and insurance companies are regulated; the credit swaps market is not. As a result, contracts can be traded — or swapped — from investor to investor without anyone overseeing the trades to ensure the buyer has the resources to cover the losses if the security defaults. The instruments can be bought and sold from both ends — the insured and the insurer.

All of this makes it tough for banks to value the insurance contracts and the securities on their books. And it comes at a time when banks are already reeling from write-downs on mortgage-related securities. "These are the same institutions that themselves have either directly or through subsidiaries invested in the subprime market," said Andrea Pincus, partner at Reed Smith LLP. "They're suffering losses all over the place," and now they face potentially more losses from the CDS market.

Indeed, commercial banks are among the most active in this market, with the top 25 banks holding more than $13 trillion in credit default swaps — where they acted as either the insured or insurer — at the end of the third quarter of 2007, according to the Comptroller of the Currency, a federal banking regulator. JP Morgan Chase, Citibank, Bank of America and Wachovia were ranked among the top four most active, it said.

Credit default swaps were seen as easy money for banks when they were first launched more than a decade ago. Reason? The economy was booming and corporate defaults were few back then, making the swaps a low-risk way to collect premiums and earn extra cash. The swaps focused primarily on municipal bonds and corporate debt in the 1990s, not on structured finance securities. Investors flocked to the swaps in the belief that big corporations would seldom go bust in such flourishing economic times.

The CDS market then expanded into structured finance, such as CDOs, that contained pools of mortgages. It also exploded into the secondary market, where speculative investors, hedge funds and others would buy and sell CDS instruments from the sidelines without having any direct relationship with the underlying investment. "They're betting on whether the investments will succeed or fail," said Pincus. "It's like betting on a sports event. The game is being played and you're not playing in the game, but people all over the country are betting on the outcome."

But as the economy soured and the subprime credit crunch began expanding into other credit areas over the past year, CDS investors became jittery. They wondered if the parties holding the CDS insurance after multiple trades would have the financial wherewithal to pay up in the event of mass defaults. "In the past six to eight months, there's been a deterioration in market liquidity and the ability to get willing buyers for structured finance securities," causing the values of the securities to fall, said Glenn Arden, a partner at Jones Day who heads up the firm's worldwide securitization practice and New York derivative.

The situation is already taking a toll on insurers, who have been forced to write down the value of their CDS portfolios. American International Group, the world's largest insurer, recently reported the biggest loss in the company's history largely due to an $11 billion writedown on its CDS holdings. Even Swiss Reinsurance Co., the industry's largest reinsurer, took CDS writedowns in the fourth quarter and warned of more to come in the first quarter of 2008.

Monoline bond insurance companies, such as MBIA and Ambac Financial Group Inc., have been hit the hardest as they scramble to raise capital to cover possible defaults and to stave off a downgrade from the ratings agencies. It was this group's foray out of its traditional municipal bonds and into mortgage-backed securities that caused the turmoil. A rating downgrade of the monoline companies could be devastating for banks and others who bought insurance protection from them to cover their corporate bond exposure.

The situation is exacerbated by the heavy trading volume of the instruments, the secrecy surrounding the trades, and — most importantly — the lack of regulation in this insurance contract business. "An original CDS can go through 15 or 20 trades," said Miller. "So when a default occurs, the so-called insured party or hedged party doesn't know who's responsible for making up the default and if that end player has the resources to cure the default."

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I also ran across this: Seems the DC police have decided a little Warsaw Ghetto treatment is what we need. I'm so glad the DC police cheif said it was OK.
From the DCist.
(Under Fair Use)

June 4, 2008
Police to Seal Off D.C. Neighborhoods
Can you say Police State? The Examiner has the scoop on a controversial new program announced today that would create so-called "Neighborhood Safety Zones" which would serve to partially seal off certain parts of the city. D.C. Police would set-up checkpoints in targeted areas, demand to see ID and refuse admittance to people who don't live there, work there or have a “legitimate reason” to be there. Wow. Just, wow.

Some of the words used to describe such a plan by those quoted in the Examiner story include "breathtaking" and "cockamamie," but that hardly begins to scratch the surface. Interim Attorney General Peter Nickles actually said that measures of this sort have "been used in other cities.” Which cities are those, Mr. Nickles? Warsaw?

Today's proposal appears to be a desperate attempt by the city to tamp down recent violence that has ravaged the city, especially in Ward 5. The "Neighborhood Safety Zones" would last up to 10 days. It's a struggle to think of words to describe such a plan other than authoritarian or ghettoization.

The full description of this plan from the mayor's press release is below.

The Neighborhood Safety Zone initiative has been developed to help increase security for those who live in high-crime areas around the city and to help residents reclaim their communities. The program will authorize the Metropolitan Police Department to set up public safety checks to help safeguard community members and create safer neighborhoods in the District by increasing police presence aimed at deterring crime.

The safety zones will be established only upon request by a District Commander where there is evidence to support the existence of neighborhood violent crime, such as intelligence, violent crime data, police reports and feedback and concerns from the affected community.

Potential Neighborhood Safety Zones must be approved by the Chief of Police, and will be in effect for a maximum of 10 days. Public safety checks will be established along the main thoroughfares of the established neighborhoods. Anyone driving into a designated area may be asked to show valid identification with a home address in that neighborhood, or to provide an explanation for entering the NSZ, such as attending church, a doctor’s appointment or visiting friends or relatives. Pedestrians will not be subject to the public safety checks.

“The Neighborhood Safety Zones is just another tool MPD will employ to stop crime before it happens. The Neighborhood Safety Zone initiative will help residents terrorized by violent crime to take back their neighborhoods,” said Chief Lanier.

Initiatives such as the Neighborhood Safety Zones have been accepted by federal courts as a legitimate law enforcement practice in keeping with the Constitution’s Fourth Amendment. The constitutionality of the NSZ initiative has been reviewed by the D.C. Office of the Attorney General.

The NSZ will be launched next week in the Trinidad area.

Forgive my delay in posting, it seems real-life sometimes gets in the way of blogging.

It seems the cash-strapped Florida legislature is not going to hold a tax-free hurricane preparedness week, as in the pats. The Florida government used to offer a 1 week tax holiday on storm preparedness items, e.g. batteries, flashlights, camp stoves, coolers, etc. would be tax free for 1 week. This could be 6-7% savings depending upon which county one lives in.

Well, now it's time for the state to promote retail sales instead of reducing you tax burden.

May 30, 2008

Contact:

GOVERNOR'S PRESS OFFICE
850-488-5394

ST. PETERSBURG – Governor Charlie Crist today joined state and local emergency managers and the Florida Retail Federation to promote Florida Hurricane Preparedness Week, May 25-31, 2008. He announced that some Florida retailers will be hosting special sales on hurricane supplies, beginning Friday, May 30, and continuing through June 8. Governor Crist and officials also accompanied Sandra Jackson of St. Petersburg and three of her children to shop for hurricane supplies at the Home Depot in St. Petersburg.

“Florida retailers have stepped up to the plate during tough times to help Floridians get ready for this hurricane season,” said Governor Crist. “We applaud their commitment and partnership to the safety of all who call the Sunshine State home.”

The Governor announced that the Florida Lottery and the Florida Retail Federation have partnered with Emergency Management this year to increase public awareness efforts across the state. Emergency supply lists will be available in more than 13,000 Lottery retailers from the Panhandle to the Keys. The Florida Lottery will also work with its existing broadcast media partners to place preparedness messages in both English and Spanish during select television and radio events.

“The Florida Lottery is proud to play a part in preparing Floridians for the upcoming hurricane season,” said Florida Lottery Secretary Leo DiBenigno. “For 20 years, the Lottery has provided billions for education in the Sunshine State, and we are glad to support emergency managers statewide to help raise awareness and keep our residents and visitors safe.”

“Florida is a great place to live, work and play,” said Governor Crist. “However, with this paradise comes the responsibility for all who call the Sunshine State home to get a plan and prepare for the 2008 Hurricane Season.”

Rick McAllister, president and chief executive officer of the Florida Retail Federation, explained how retailers across the state have stocked their shelves with emergency supplies, and they encourage residents to visit stores in their local community to get prepared for the upcoming hurricane season.

“Floridians can use the emergency supply list as they prepare themselves and their families for any type of disaster, especially hurricanes,” said McAllister. “We encourage everyone to check and replenish their emergency supplies so they are ready before an event happens.”

All of the participating Florida retailers are actively engaged in hurricane and disaster preparedness. Some Florida retailers will make special savings available on common disaster-supply items during the 10-day event. Check your local newspapers for the sales and promotional prices that may be taking place in your area.

“All Floridians need to get a plan and prepare to the best of their ability,” said Craig Fugate, director of the Florida Division of Emergency Management. “Residents should stock up on emergency supplies for the hurricane season.”

Some of the items included on the emergency supply list include:
· Flashlights and portable, self-powered light sources
· Portable radios, two-way radios and NOAA weather-band radios
· Flexible waterproof sheeting (tarps)
· Gas or diesel fuel containers
· Batteries
· Medications
· Ice chests or other food storage coolers
· Portable generators
· Carbon monoxide detectors
· Storm shutter devices
· Pet carrier and supplies

Florida Hurricane Preparedness Week is running in conjunction with National Hurricane Preparedness Week activities being conducted across Florida and other coastal states. For more information go to www.FloridaDisaster.org or http://www.nhc.noaa.gov/HAW2/english/intro.shtml. The 2008 Atlantic Hurricane Season runs from June 1 through November 30, 2008.

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This past weekend I attended the Southern Classic Gun show in Miami. One of the lessons learned: shop carefully. Many dealers were asking FAR too much for weapons that were in crappy shape. AK47's going for $700, used Glocks for $500. Just awful stuff.

One nice find was a Ruger Speed Six in good condition for $400, which C, My Favorite Lesbian, got for $375 out the door.

One thing that is interesting is they were selling Mosin-Nagants for the $200 range. After some consideration, I decided to apply for my 03 C&R FFL license, which is $30 for 3 years. Just the savings alone on one Mosin justifies the license cost, and permits the shipping of C&R firearms without needing a an 01 dealer to process it.

Get your own 03 C&R:
http://www.surplusrifle.com/shooting2005/howtogetyourcurionrelicffl03/index.asp

http://www.atf.treas.gov/dcof/index.htm
The form is F7CR 5310.16 Application for License (Collector of Curios and Relics) Under 18 U.S.C. Chapter 44, Firearms

Update: The requested forms arrived in 4 days. I'll update on the processing time once I send them out.