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.

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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.