The Discount Window Non-Solution

In reference to discount window exceptions granted by the Fed and also to Bush's so called moves to aid homeowners (see Bush Moves to Aid Lenders) Minyanville's Mr. Practical offered practical ideas in The Discount Window Solution? Here is the Mr. Practical's reply to a reader question about the discount window:

The inevitable is beginning. The government, with its proven abilities to “manage” markets, is coming up with solutions. Those solutions are placebos at best and poison at worst.

Your implication is correct. Heavy borrowing at the discount window simply illustrates there are no other sources of liquidity to service current liabilities. Of course this does nothing to expand the credit base (it is trying to shrink, not expand), which is necessary to re-inflate growth. The forces of deflation are growing.

So the U.S. government is beginning to pull out all the stops. We now see Republicans bending over to bail out lenders (this has nothing to do with the borrowers) by reforming laws and using taxpayer money and foreign borrowing to bail them out. If I was a U.S. taxpayer who has been prudent with my money I would be furious. If I were a foreign lender I would pull my money out of the U.S. as fast as possible (lower dollar).

This is the beginning of the end. The markets will incorrectly rally on this last step by a Republican president to appease the banking industry. The more government control, the more inherent debt in society and the less future growth.

As markets rise this morning I would use the strength not to increase risk, but reduce it even more.

Mr. Practical

Systemic Risk And Exceptions to Fed Regulations

In point number three of Five Things on August 28th Minyanville's Prof. Kevin Depew offered his take on the discount window in A Strange and Terrible Comment on Potential Systemic Risk.

A little over a week ago the Federal Reserve suspended the limit on the percentage of capital that Citigroup (C) and Bank of America (BAC) can lend to their affiliated brokerage firms. What does that mean, and why should we care?

• The exemptions are from section 23A of the Federal Reserve Act and the Board's Regulation W.
• Section 23A and Regulation W limit the amount of "covered transaction" between a bank and any single affiliate to 10% of the bank's capital stock and surplus, and limit the amount of covered transactions between a bank and all affiliates to 20% of the bank's capital stock and surplus.
• Both Citigroup and Bank of America petitioned the Federal Reserve for the exemptions in order to extend short-term liquidity (in excess of these caps) to finance "certain mortgage loans" and related assets.
• Well, hey, that's' well within the Fed's mandate, right? After all, they are to provide liquidity and help ensure the stability of markets, right?
• Sure, after all the Fed must have some leeway in determining when to grant section 23A and Regulation W exemptions in order to fulfill those objectives.
• In researching this we stumbled across a Chicago Federal Reserve comment paper on Regulation W that discusses Reg W exemptions, among them this important paragraph:
• ....common sense warrants limiting matrix pricing for the (d)(6) exemption to relatively “plain vanilla” transactions such as investment-grade corporate bonds and commercial paper. This would effectively exclude most structured notes and mortgage-backed securities where the ultimate price is highly dependent on prepayment and rate volatility assumptions."
• So much for that suggestion.
  

Point number 4 in the above link is also worth a look. It discusses, the Fed's target interest rate level, currently at 5.25%, and how often it actually trades there.

My thoughts on Fed Exceptions for Citigroup (C) and Bank of America (BAC) can be found in Now we know who and why.

The socialization of America continues

Select Comments found on The Market Traders

"Karmaoption" offered this opinion:

The socialization of America continues! Bill Gross and Mozilo should be especially proud today! This is only going to assist in housing prices crashing harder, and more Americans not paying their mortgages. Why should I, if I am going to get bailed out will be the prevailing thought. Let's see, I don't have to pay for 90 days, then they will decide I am a risk factor. Then remember this is the gov't, so I probably won't have to pay for another year, while they guarantee my lender gets paid, and then I will get thrown to the curb. 15 months of free rent, then I am foreclosed upon, making sure new massive inventory hits the market. That is my prognostication, only making this whole thing drag out for much, much, longer and bankrupting our system. When will we learn?

"Rien" offered this prediction:

A prediction: The govt is going to own the houses, the occupants will pay a "realistic" (ie some commission will decide on the rent) rate, and somehow the whole thing will be financed through the banks so they can extract their part.

A Couple Select Comments On my Blog

"Tax Haven" writes:

I suspect a good number of the deadbeat home "owners" will simply walk away from the property no matter what little sweeteners are offered.

"Bubble Buster" writes:

This is not the America I came to live in. This is a socialist republic of America where Profits are enjoyed and Losses are socialized.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Bush Moves to Aid Lenders

The Wall Street Journal is reporting Bush Moves to Aid Lenders.

WASHINGTON -- President Bush, looking for ways to respond to the subprime-mortgage crisis, will outline a series of policy changes and recommendations today to help borrowers avoid default make sure lenders aren't defaulted on, senior administration officials said.

Among the moves will be an administrative change to allow the Federal Housing Administration, which insures mortgages for low and middle-income borrowers, to guarantee loans for delinquent borrowers payment to lenders.

The change is intended to help borrowers who are at least 90 days behind in payments but still living in their homes avoid foreclosure; make sure borrowers do not dump houses back on the FHA or Fannie Mae. The guarantees help homeowners by allowing them to refinance at more favorable rates by make sure lenders get paid.

And he will announce an initiative, to be led jointly by the Treasury and Housing and Urban Development departments, to identify people who are in danger of defaulting over the next two years and work with lenders, insurers and others to develop more favorable loan products for those borrowers lender guarantees.

With more than two million loans expected to adjust to higher rates over the next two years, possibly triggering many more defaults, the Bush administration is looking for ways to stem the damage the political fallout.

"The president wants to see as many homeowners who can stay in their homes with a little help be able to stay in their homes," a senior administration official said. "We're not looking for an industry bailout or a as well as a Wall Street bailout. The focus here is on the homeowner lender, right where it should be. And the best way to help lenders is to keep people in overpriced homes as perpetual debt slaves. Besides, Mozilo and Gross both were pleading for help. How could we possibly turn them down?"

Mr. Bush is instructing Treasury Secretary Henry Paulson to look into the subprime problem, figure out what happened and determine whether any regulatory or policy changes are needed to prevent a recurrence.

Bush went on to say: "Our original plan was to get someone who knew in advance this would blow sky high figuring they might have a better handle on the problem than those who did not see this coming. Instead we have decided to trust Paulson and Bernanke. It's a difficult mission but we are determined to make the problem the solution. And I'm the decider and that's what I decided."

By allowing the agency to back loans for delinquent borrowers, the FHA estimates it can help an additional 80,000 homeowners qualify for refinancing in 2008, bringing its total of refinancing guarantees to about 240,000, senior administration officials said. Mr. Bush also plans to announce that the FHA will begin charging "risk-based" premiums, a move that will enable the agency to help riskier borrowers since they can charge those individuals higher insurance rates.

"Charging higher premiums based on risk is such an innovative idea we were considering patenting it. Instead the Lord instructed me to give this brilliant idea away free to the good people of the USA. Praise the Lord. But given that 2,000,0000 homes are at risk, the Lord has more work to do. Don't worry, I talk to him every day and he's telling me just what to do, just like he did with Iraq."

In another move, Mr. Paulson and HUD Secretary Alphonso Jackson have instructed their staffs to begin working with mortgage lenders and others to identify borrowers who are in danger of defaulting. They also are trying to work with private lenders and mortgage giants Fannie Mae and Freddie Mac to develop loans for borrowers who will likely face default if they can't get more flexible terms additional programs for lenders who in no circumstances want those homes back. After all they aren't worth what you paid for them."

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Bernanke Proves he is a Complete Fool

There really should have been no doubt about this before, but there was and by someone whose opinion I highly respect as well. Just two days ago this person asked "Mish, what's your gripe with Bernanke?"

Bernanke Gripe List

• I think interest rate targeting to the CPI is complete foolishness.
• I think ignoring asset bubbles and dealing with them later is complete foolishness.
• I think he set very bad precedent about what the Fed is willing to hold as collateral.
• I think he is an extremely poor study of the causes and cures of the great depression.
• I think a policy of positive inflation is a policy of blatant theft that benefits those with first access to the money (banks and the wealthy) to the detriment of everyone else.

Other than that what's not to like?

Of course the big market participants like what he has done. Bailing out the markets on options expiry open.... What's not to like about that? Taking risky collateral and being willing to roll it over forever.... What's not to like about that? (For more on this topic please see Now we know who and why.)

But today we get to add to the list. Please consider New mortgage products could help, Bernanke says.

The private sector and Congress should create new, affordable mortgage products that would help some homeowners refinance their mortgages and keep their homes, Federal Reserve Chairman Ben Bernanke suggested in a letter released Wednesday.

In the letter to Sen. Charles Schumer, D-N.Y., Bernanke repeated that the Fed is closely monitoring markets and stands ready to act if needed. The Fed issued a statement with almost identical wording on Aug. 17 after it cut the discount lending rate to 5.75%. The letter from Bernanke was dated Aug. 27 and released by Schumer's office on Wednesday.

In his letter, Bernanke called for creative thinking to get the nation out of its subprime mess.
"It might be worth considering at this juncture whether the private and public sectors, separately or in collaboration, could help the situation by developing a broader range of mortgage products which are appropriate for low-and moderate-income borrowers, including those seeking to refinance," Bernanke wrote.
"Such products could be designed to avoid or mitigate the risk of payment shock and to be more transparent with respect to their terms," Bernanke wrote. "They might also contain features to improve affordability, such as variable maturities or shared-appreciation provisions for example."

Congress is considering legislation that would reform the Federal Housing Administration, which is a federal agency that provides mortgages to low-income buyers. FHA loans have been largely supplanted by subprime lending from the private-sector. But FHA loans, with tighter lending standards and less onerous terms, have not defaulted at the rates recently seen in subprime loans.
Under current law, the FHA cannot lend to those who are behind on their mortgage payments.

Bernanke cannot Distinguish Problem from Solution

With that proposed "solution" Bernanke proves he is a complete fool. Once again we see he is totally incapable of distinguishing the problem from the solution. That is why he is wrong about the great depression and that is why he is wrong again now.

The cause of the great depression was an enormous expansion of money supply and credit leading up to the economic collapse. Bernanke insists the solution was more monetary stimulus by the Fed. He is completely misguided.

He is now repeating the same mistake. The Housing bubble was created by too loose monetary policy by the Fed in conjunction with Congressional meddling.

Problem or Solution?

• Fannie Mae and Freddie Mac are the problem not the solution.
• Innovative lending products are the problem not the solution.
• 300+ Congressional bills to make housing affordable is the problem not the solution.
• Repeatedly bailing out the markets is the problem not the solution.
• Creative thinking sponsored by the Fed and embraced by both Greenspan and Bernanke is the problem not the solution.
• Greenspan embracing ARMs and derivatives is the problem not the solution.
  
• Being "Ready and Willing to Act" is the problem not the solution.
• The HUD is the problem not the solution.
  

No Mr. Bernanke, It's most assuredly NOT "worth considering at this juncture whether the private and public sectors, separately or in collaboration, could help the situation by developing a broader range of mortgage products which are appropriate for low-and moderate-income borrowers, including those seeking to refinance."

The Fed and this Congress and that general attitude are the problem not the solution. Every passing day, more and more government intervention is piled on top of government intervention on top of government intervention all in an effort to correct what went wrong with the last government intervention. No one ever bothers to figure out that it was the original government intervention that created the original problem.

The "Original Sin" in this case goes way back, all the way to 1913 when Congress created the Fed. With that in mind, it should be perfectly clear what the problem and the solution is.

THE problem is the Fed.
THE solution is Ron Paul.

It's time to abolish the Fed and restore fiscal and monetary sanity with money backed by hard assets such as gold. Ron Paul will do just that.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

ARM Interest Rates Jump Most on Record

Bloomberg is reporting MBA's Mortgage Applications Index Dropped 4% as rates climb.

The interest rate charged for one- year adjustable loans jumped last week by the most since the Mortgage Bankers Association began keeping records in 1996.

The report demonstrates the difficulty some home buyers face in securing affordable financing. Banks, forced to hold loans rather than resell them as securities because demand has dried up, are charging higher rates for riskier mortgages. The housing slump will worsen as banks restrict the availability of credit and falling real- estate prices prevent owners from tapping home equity for extra spending money, economists said.

"If rates go up and credit gets tighter, that is going to lead to a drop in demand on top of what we have already seen," said Abiel Reinhart, an economist at JPMorgan Chase & Co. in New York. "That is going to have an adverse impact" on the economy through the first half of 2008, he said.

The average rate on a one-year adjustable mortgage surged to 6.51 percent, the highest since January 2001, from 5.84 percent the prior week. The rate also surpassed the cost of a 30-year fixed loan for the first time.

The number of applications for adjustable-rate loans slumped 23 percent, while those for fixed-rate mortgages rose 0.2 percent. Adjustable-rate mortgages dropped to 15 percent of all applications, the fewest since July 2003.

Banks "are being very cautious in the volume of prime adjustables they are putting on their balance sheets," Douglas Duncan, the mortgage bankers group's chief economist, said in an interview. "The growth path for the economy has slowed significantly."

The one year ARM rate exceeds the 30 year fixed rate. That's pretty funny or do I mean scary?

There is no demand for junk. None. Nadda. Zip. And because there is no demand, the "pass the trash" play is over as well. Thus banks will have to keep mortgage loans themselves. In response, mortgage rates have soared. This is in spite of a rather sharp rally in treasuries.

The Punch Bowl Caucus Begs for Rate Cuts

So the Punch Bowl Caucus is begging the Fed to cut rates.

In the past week, a strange group has been pleading for the Federal Reserve to return the punch bowl to the toga party—to slash interest rates to restart the Wall Street party. The Punch Bowl Caucus, whose members hail from all over and hold different ideological views, share a common belief: [The Fed cut rates].

CNBC commentator James Cramer founded the caucus with his now-famous capitalist manifesto on Aug. 3. (He serves as honorary chairman of the Wall Street chapter.)

....
The Punch Bowl Caucus holds as an organizing principle that the Federal Reserve can provide a real and psychological boost to markets—and hence minimize or obviate entirely the fallout of natural economic occurrences such as asset bubbles and the business cycle. College students don't alleviate the after-effects of an evening spent at the punch bowl by returning to lap up the dregs. Just so, finance types should know that cheap money, credit on demand, and endless leverage aren't the cure for a hangover caused by too much cheap money, leverage, and credit on demand.

Punch Bowl Caucus Members

• James Cramer - Punch Bowl Caucus Founding Father
  
• Ford CEO Alan Mulally
• Chrysler CEO Robert Nardelli
• Wayne Angell, a former Fed governor wants a 75 basis point cut
• CNBC's Larry Kudlow seconded the motion by Angell
• Angelo Mozilo, CEO of Countrywide Financial
• Martin Wolf, chief economics commentator of the Financial Times, formed an international auxiliary

And no doubt the list is growing every passing day.

The 3 Month Treasury Discount Rate
Click on chart for a sharper image.



Look at the short end of the curve. For the last two weeks it has been ping-ponging between 2.4% and 4.5%. This is not normal action to say the least. The stock market may think things have stabilized but the bond market believes otherwise. It's best to believe the bond market.

One month ago the 1 year ARM rate was 5.52. Today it is 5.97.
One month ago the 15 year fixed rate was 5.93. Today it is 5.74.

10 Year Treasury Yield Daily Chart



Click on chart for a sharper image

Mortgage Rates have clearly disconnected from treasuries and the further one gets away from conforming prime with a huge down payment the bigger the disconnect. There is no demand for subprime ARM paper as stated earlier. So most of those who are trapped in ARMs about to reset will benefit minimally if at all from the first few rate cuts. For my response to Cramer's rant as well as more reasons and more charts on treasury and mortgage rates, please see Will Rate Cuts Save The Economy?

From Outer Space

While some are sipping too much punch, others are simply from outer space. Please consider Barack Obama's radical mortgage plan.

Unscrupulous lenders who deceptively sold subprime mortgages to millions of Americans should be fined and the proceeds used to help bail out borrowers facing a wave of foreclosures, according to Barack Obama, the Democratic senator running to be his party’s presidential candidate.

Mr Obama blamed lobbyists working on behalf of lenders for obstructing tougher regulation of the subprime industry, adding: “Our government failed to provide the regulatory scrutiny that could have prevented this crisis.

“While predatory lenders were driving low-income families into financial ruin, 10 of the country’s largest mortgage lenders were spending more than $185m (€136m, £92m) lobbying Washington to let them get away with it,” he wrote, citing figures from the Centre for Responsive Politics.

Wall Street banks have also stepped up their lobbying over the issue of subprime lending as their underwriting practices come under scrutiny. It emerged this week that Citigroup paid $160,000 in the first half of this year for lobbying services from Ogilvy Government Relations.

Mr Obama said the government needed to “stop the unlicensed, unregulated, fly-by-night mortgage brokers who are hoodwinking low-income borrowers into loans they can’t afford”.

Rather than fix the original problem: Government sponsorship of GSEs, the ownership society, tax breaks for homeowners, HUD, 300+ bills to make housing more affordable, etc, etc, Obama points the finger in the wrong direction and wants still more ridiculous legislation as his solution.

Nonsense like this will not end until someone like Ron Paul is elected or the system completely breaks down in a massive tangle of intertwined bureaucratic legislation that collapses the economy. I am hoping it does not take the latter to achieve the former but the odds appear to be against me.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

How to Energize Your Cash

Before we get to the How-To's let's first take a look at what's happening on State Street. The Houston Chronicle is reporting State Street Stock Falls on Credit Woes.

State Street Corp. has nearly $29 billion in exposure to a type of investment that has recently contributed to turmoil in world financial markets, according to a regulatory filing by the Boston-based trust bank.

An Aug. 3 quarterly filing with the Securities and Exchange Commission puts State Street's holdings in an investment known as asset-backed commercial paper conduits at $28.81 billion as of June 30, up from $25.25 billion at the end of last year

The State Street Limited Duration Bond Fund, which includes investments in mortgage debt, fell about 37 percent in a three-week period, the Globe said, citing an investor who received a client letter from State Street about the loss.

In Further fiasco, the Boston Globe is also writing about State Street.

The State Street Limited Duration Bond Fund, which managed $1.4 billion for institutional clients, lost about 37 percent of its value during the first three weeks of August, according to the investor. The fund, managed by State Street Global Advisors, had fallen 42 percent for the year by Aug. 21, the investor said.

The possible cause of the fund's big losses: investments in mortgage-related securities, and leverage that magnified the problems. Flannery's letter describes a fund that "increasingly focused on housing-related assets." Meanwhile, the fund borrowed to increase its portfolio to between two and three times the amount of money clients had given State Street to invest, according to one investor.

The State Street Limited Duration Bond Fund was created in 2002 as a way to generate better results than those of money-market funds with only slightly more risk. The fund was widely considered an "enhanced cash" product, an investment category usually considered very low risk. It was sold only to institutional clients, not individual investors.

Some of the State Street fund's investments may bounce back, given enough time. The real question is how State Street got their clients in this hole in the first place.

State Street Corp (STT) Weekly Trendline



(click on chart for a sharper image)
The weekly trendline on State Street is now busted no matter how one draws it.

Some inquiring minds might now be tired of hearing about State Street and wondering "How does one energize cash?"

How to Energize Cash

The formula for energizing cash is actually rather easy as Michael O'Hara explains:

1. Maintain Liquidity
2. Maximize Yield
3. Control Risk

Strategies can be "designed to provide investors with the liquidity that they require to earn incremental yield over core cash funds, and to employ a disciplined investment process that controls downside risk."

That answer just might spawn two additional questions:

1. Who is Michael O'Hara?
2. Exactly how does one execute that strategy?

The answer to those questions can be found in Energizing Your Cash.

Hi, my name is Mike O'Hara. I'm the portfolio manager for SSgA's [State Street's] Limited Duration Bond Strategy. We designed the Limited Duration Bond Strategy to maximize yield while controlling volatility. The Strategy's objective is to outperform 3 month LIBOR by 50 basis points over a one-year period.

Portfolio Composition

To maintain liquidity, approximately one third of the Strategy is invested in AAA and AA rated securities. To enhance yield, about another third of the portfolio invests in A and BBB rated structured products. The remainder of the portfolio takes advantage of SSgA's expertise in swaps and other derivatives to generate arbitrage opportunities. To respond to immediate liquidity needs, a small portion of the Strategy is invested in overnight funds.

The State Street Model

Here is a chart depicting the State Street Investment Model



At this juncture, inquiring minds might be interested to learn more about AAA vs. BBB Bond Ratings as referenced in the above chart.

Facts in hand, we now have the answer to the question posed by the Boston Globe: "The real question is how State Street got their clients in this hole in the first place." The graphical answer appears above. A textual answer to the question is by chasing yield, ignoring risk, and doing so with leverage while proclaiming "expertise in swaps and other derivatives".

Comparison of Strategies

PIMCO had a strategy of buying long duration AAA rated paper (Please see Bill Gross Wants PIMCO Bailout and A Gross Challenge for additional information) while the latter had a strategy of buying short duration paper next to pure junk. State Street's strategy has clearly blown sky high.

Let's assume (I do not have actual figures in hand) that State Street met its goal as follows: "The Strategy's objective is to outperform 3 month LIBOR by 50 basis points over a one-year period."

On second thought let's assume State Street exceeded their performance goal by 50%. With that in mind, here are the adjusted returns vs. 3 month libor (not compounded but including 50% outperformance vs. stated strategy) since 2003.

2004: +00.75%
2005: +00.75%
2006: +00.75%
2007: -37.00%

That folks is the folly of chasing minuscule returns over treasuries. Lawsuits are likely to fly over this.

And just to be sure that I had the correct Limited Duration Bond Fund (there are many funds with that name) I gave State Street a call yesterday. The operator confirmed that Michael O'Hara was an employee of State Street in the fixed income department. O'Hara was not available at the time I placed the call.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Housing "Strong" In 97 of 149 Markets

BusinessWeek is reporting Housing strong in many metro areas.

From Salem to Salt Lake, 97 of 149 markets saw an increase in median home prices in the second quarter of 2007.

As home sales slide, foreclosure rates rise and big lenders go bankrupt, it's hard to think of the glass being half-full, rather than half-empty, when it comes to real estate these days.

Unless, that is, you live in Salt Lake City. Or Binghamton, N.Y., Salem, Ore., or Allentown, Pa. In these U.S. metropolitan areas, and in 93 others, existing-single-family-home prices actually increased in the second quarter of 2007 from a year earlier, according to the National Association of Realtors. The national median home price, meanwhile, fell 1.5%, to $223,800, in the same period.

Despite the national decline, there are some bright spots out there, according to the NAR. "Although home prices are relatively flat, more metro areas are showing price gains with general improvement since bottoming out in the fourth quarter of 2006," NAR senior economist Lawrence Yun said in a statement.

A Serious Credibility Issue

I can see right now already that Lawrence Yun is going to have all the credibility that David Lereah had. None. I will get to my reasons in just a bit.

In the meantime let's consider the LA Times article Home prices fall 3.2% in nationwide index.

A much-watched report Tuesday showed U.S. home prices declining at their fastest pace in two decades, signaling that the nation's housing slump was worsening during what is normally the best time of year for residential real estate.

Home prices dropped 3.2% in the second quarter compared with the same period last year, according to the S&P/Case-Schiller quarterly index, which tracks existing single-family home price trends in major metropolitan areas.

It was the worst decline in the 20 years since the price barometer was inaugurated, said Robert Shiller, chief economist for MacroMarkets, a division of Standard & Poor's that calculates the index.

"The pullback in the U.S. residential real estate market is showing no signs of slowing down," said Shiller, who was among those who forecast the end of the late 1990s stock market boom.

The broad weakness evident in the nation's housing market is expected to intensify pressures on the U.S. economy.

Still, the accelerated rate of decline in the Case/Shiller report "was not a surprise, given the recent downward trends in existing home sales, rising inventories and tightening credit conditions through the end of the second quarter and in the month of July," said Brian Bethune, an economist with research firm Global Insight of Lexington, Mass.

Yet the rapid deceleration, he said, serves as a "sobering reminder that the nation's housing market was already on the ropes even before" world credit markets were thrown into a tailspin this month because of escalating mortgage delinquencies.

In June, 15 of the 20 U.S. markets tracked by the index fell, including declines of 4.1% in the Los Angeles region, 7.3% in San Diego and 4% in San Francisco. Other areas fared significantly worse, particularly Detroit, where prices plunged 11%. Phoenix suffered a 6.6% drop, and home values in Las Vegas were down 5.1% in June versus a year ago.

By comparison, the Pacific Northwest was strong, with prices rising 7.9% in Seattle and 4.5% in Portland.

Other regions posting gains were Charlotte, N.C., at 6.8% and Dallas and Atlanta at 1.6%.

In Southern California, the residential real estate market is skewed somewhat by stronger demand for higher-priced homes.

That's partly because people shopping for homes in Beverly Hills and Malibu are largely unaffected by tighter loan standards, and the neighborhoods where they purchase homes aren't sprinkled with lender foreclosures.

That phenomenon helped push up the region's overall median price to $505,000 in the second quarter, up 4.4% from the year before, even though sales fell 33%, according to DataQuick Information Systems, which compiles statistics based on all closed real estate transactions in a given period.

Let's stop right there but I encourage everyone to read the full article.

Those last couple of paragraphs in the preceding article explain the big flaw with median prices. That flaw is something the NAR is aware of but instead chooses to exploit: Sales are down 33% but high net worth individuals are willing to buy a house anyway. Prices then become skewed towards increasing median prices even though real prices may be falling like a rock.

While on the subject of skewed data, take a look at new home sales. New home sales are recorded when the agreement to buy is recorded. Cancellations are not subtracted. Homebuilders are reporting 20-40% cancellation rates.

Shiller is an Optimist

Let's now take a good look at the Shiller index. There are serious flaws in his methodology. For starters Shiller does not look at new home prices. If a homebuilder drops the price on a model from $400,000 to $280,000 that does not show up in the Shiller Index. Nor do incentives. There are other flaws too. I talked about Shiller and HPI (Home Price Index) flaws in Housing prices: Comparing Shiller and HPI.

Lawrence Yun at the NAR is well aware of these issues. He chooses to ignore them just as Lereah did. So is Housing "Strong" in 97 of 149 Markets? You can believe the NAR or you can believe an extremely conservative Shiller. My take is that Shiller is an optimist and home price declines nationally are seriously understated.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Margin Calls Mount

The Times Online is reporting Carlyle bails out its $20bn Dutch fund

Carlyle, the private equity group, has been forced to double the size of a loan to its Dutch-listed investment vehicle after the struggling fund embarked on a string of asset sales and admitted it had been unable to meet recent margin calls.

Carlyle has now provided Carlyle Capital Corporation with credit facilities worth $200 million over just one week. Last Tuesday, Carlyle Capital said it had drawn only $10 million of a $100 million loan offered by the private equity group.

Today, it said that loan was fully drawn and Carlyle had made a further $100 million available – for one year, at an interest rate of 7 per cent.

Carlyle also bought an unspecified amount of debt securities from the fund and released it from a $75 million funding commitment relating to a distressed debt investment fund.

Carlyle Capital added that it had sold assets worth about $900 million, including four sets of structured credit products known as collateralised loan obligations. It said the sales represented less than 5 per cent of its assets, estimated at about $20 billion.

It said losses on the sales will be $30 million to $40 million, roughly equivalent to its post-tax profits over the past six months of $33.4 million. Although net interest income would offset some of the losses, it means Carlyle Capital will fall into the red in the third quarter. The fund said it was "unlikely" to pay a dividend for the period.

Carlyle Letter of Apology

Here is the Carlyle Capital Corp. CEO Letter to Shareholders.

Recently, several of our shareholders have asked us for information about the current status of CCC's investment portfolio. Because CCC has publicly traded securities and is subject to various rules and regulations pertaining to selective disclosure, we relied on our press releases and our website instead of communicating directly with individual shareholders. We understand these efforts have been unsatisfactory and frustrating to many of you. We sincerely apologize for this lapse in communication. In an attempt to better communicate with our shareholders, I offer this brief view of the state of the credit markets and the impact of recent events on CCC.

We designed CCC's business model to withstand a liquidity event equal to the events of October 1998 when the demise of Long Term Capital Management threatened the financial markets. We believe the recent liquidity disruption is significantly worse than the events of 1998.

This environment produced two adverse consequences for CCC: (i) a modest decline in the fair value of AAA rated US Government agency issued mortgage-backed securities, and (ii) an increase in collateral (margin) required by our lenders. As the fair value of our MBS portfolio declined, our lenders made margin calls to ensure that the amount of CCC's indebtedness did not exceed the fair value of the underlying collateral.In addition, some of our lenders have recently decreased the amount they were willing to lend CCC to 97% of the fair value of the underlying securities, from the historical lending rate of 98% of fair value. Consequently, CCC's liquidity cushion has not been sufficient to meet recent margin calls.
...

John C. Stomber

CEO, President and CIO

The above apology misses the mark by a mile. The apology should be about the need to apologize rather then the delay in communications. Carlyle took on excessive risk. One has to be greedy to put 100% of 97% at risk. In simple terms, Carlyle borrowed money and bet it all. When one does that it's only a matter of time before one blows up no matter how good the "quality" of those investments.

The very same mistakes that sunk Long Term Capital Management in 1998 have been repeated by many others recently, except in far bigger size. For a recap of those mistakes and the size of those mistakes please see Genius Fails Again.

Basis Yield Alpha Fund Now Bankrupt

Reuters is reporting Basis Yield Alpha Fund files for bankruptcy.

Basis Yield Alpha Fund, a hedge fund specializing in corporate and structured credit, on Wednesday filed for bankruptcy protection in the United States amid mounting losses from U.S. subprime mortgage assets, court papers show.

The Cayman Islands-registered fund, run by the Australian firm Basis Capital, listed more than $100 million of assets and more than $100 million of liabilities in its filing with the U.S. bankruptcy court in Manhattan.

The fund firm managed nearly $1 billion earlier this year.

In court papers, Basis Yield said it had in June begun to suffer a "significant devaluation" in its asset portfolio, following market volatility related to U.S. subprime lending defaults.

It said the devaluation led to margin calls, which it was unable to meet, and the issuance of several default notices by counterparties seeking to close out trades or seize assets.

Basis said JP Morgan Chase Bank NA, Goldman Sachs International, Citigroup Global Markets Limited, Morgan Stanley, Lehman Brothers International (Europe) and Merrill Lynch International all issued default notices.

Poof. Basis Yield went from $1 billion to bankruptcy just like that. The who's who of who's likely to be charging off default notices includes JPM, GS, C, LEH, MER, and MS.

Cheyne Finance To Shut Down

The Financial Times is reporting Cheyne Finance to wind down after breach of funding clause.

A $6.6bn (£3.3bn) investment vehicle run by Cheyne Capital, a London hedge fund, yesterday became the latest victim of the crisis in short-term lending markets when it told investors it had breached funding restrictions, forcing an eventual wind-down.

The breach of valuation conditions by Cheyne Finance, a two year-old structured investment vehicle (SIV), triggers limits on its ability to invest or raise new debt.

Capital Fund Management

MSNBC is reporting CFM aims to recoup funds lost in Sentinel.

Capital Fund Management, the French hedge fund that has been caught up in the collapse of the US investment management firm, Sentinel, believes it could recoup up to half of the $407m believed lost as a result of an alleged fraud.

The good news: CFM is only expected to lose $203.5 million, not $407 million.

The "More Guts Than Brains" Department

Alphaville has an article on The Real Deal: The best risk arbitrage trading strategy is guts.

The best risk arbitrage trading strategy to use during this credit crunch is guts.For the first time in years, merger arbs have a chance of making money.

Before the market turmoil, it wasn’t worth placing a bet on a leveraged buy-out. Spreads were so tight that returns weren’t much better than banking the money.

Traders can now make a high double-digit return in a couple of months. Goldman Sachs estimates that buying 22 pending LBOs could generate an average annualised return of 36 per cent - if those deals go through. That’s alpha.

Take the battle for ABN Amro - the biggest deal going. Almost every hedge fund is playing it and some of the sums invested are staggering. One well-known City fund has at least $800m tied up in the deal. If it fails, hedge funds will be crucified.

But if the deal completes, it will be the biggest opportunity for arbs to profit since Vodafone’s hostile takeover of Mannesmann in 1999.

The spread on ABN - which widened to 20 per cent at the start of the crisis - is now about 11 per cent.

So why isn’t everyone doing it? Because they are terrified that three things could happen if credit markets become worse: a black hole in ABN; one of the investment banks underwriting the financing invokes a material adverse change clause; and regulatory intervention.

ABN was trading at about €34.50 on Friday - if these fears materialise and the bank bid collapses, the stock could halve. Losses would be catastrophic and the managers responsible will be pedalling to work on push bikes.

The genius that wrote that thinks all it takes is "guts" while stating "Losses would be catastrophic and the managers responsible will be pedalling to work on push bikes." Amazing thought processes are in play here.

The "What Are We Doing?" Department

Reuters is reporting Trading losses eat into Bank of Montreal profit.

Bank of Montreal (BMO.TO) reported a 7 percent drop in third-quarter earnings on Tuesday after it took further commodities trading losses, and its share price fell amid a broad market decline.

Canada's fourth-biggest bank said it earned C$660 million ($623 million), or C$1.28 a share, in the three months ended July 31, as its capital markets unit booked commodities trading losses of C$97 million, or 19 Canadian cents a share.

With three quarters completed in fiscal 2007, the bank has posted year-to-date commodities losses totaling C$424 million after tax, or 83 Canadian cents a share.

Is trading commodity futures now a core business function of banks? Let's hope not, especially with those losses. But then again why should it be any part of banking operations? At least it hasn't resulted in margin calls yet.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

A House of Credit Cards

Prof. Depew was writing about credit cards in Mondays' in five things point number two: Former Homeowners Desperately Working to Save House of Credit Cards. Here's a recap in case you missed it.

While foreclosures have spiked, the number of credit card loans in delinquency has been running steady, but why?

• Credit card delinquencies fell to 4.41% in the first quarter of 2007, from 4.56% at the end of 2006, according to the American Bankers Association.
• Meanwhile, foreclosures have soared, up
• Conventional wisdom has always held that a person would lose his or her credit cards long before risking losing the home.
• Of course, that old saw is probably grounded in the olden days, back before zero down payments for a house.
• Merrill Lynch's David Rosenberg recently noted that balances on credit cards surged at an 11% annual rate in May and June, the highest rate since 2000-2001.
• Why the jump?
• Simple. You can still spend your credit card, but you no longer can spend your home.
• Last week in Permabears! we looked at a Federal Reserve paper by Vice-Chairman Donald Kohn, with Fed economist Karen Dynan, arguing that the rise in home prices was the primary reason consumer borrowing has soared since 2001.
• With median home prices now poised for what could be the first yearly decline since federal housing agencies began tracking them, it's back to the credit cards.

Take Two on the House of Credit Cards

Just released data shows Credit-card defaults on rise in US.

Credit-card companies were forced to write off 4.58 per cent of payments as uncollectable in the first half of 2007, almost 30 per cent higher year-on-year. Late payments also rose, and the quarterly payment rate – a measure of cardholders' willingness and ability to repay their debt – fell for the first time in more than four years.

But Moody's said the rate of losses remained well below the 6.29 per cent average seen in 2004, a year before the US enacted a new law that made filing for personal bankruptcy more onerous.

Recent increases in credit card losses can in part be ascribed to a steady rise in personal bankruptcy filings since 2005. According to the Administrative Office of the US Courts, quarterly non-business bankruptcy filings have been rising since the first quarter of 2006.

It was good while it lasted but it's now time to kiss those steady delinquency rates goodbye.

And the spike high in bankruptcies and credit card writeoffs after the bankruptcy reform act was enacted will be taken out in due time. That law, which attempts to make consumers debt slaves forever, is simply going to backfire in additional ways still not seen as consumers find ways around the means test.

Let's consider the charts of MasterCard and American Express.

MasterCard (MA) Daily Chart



If the 200 EMA does not hold, look for the gap near 110 to close, with additional support at 100. That's a significant decline from here if it plays out that way.

American Express (AXP) Daily Chart



American Express is struggling to hold the 200 EMA and there is also a potential bearish cross under of the 50 EMA with the 200 EMA to be watching.

The Next Shoe to Drop

Now that steady delinquency rates are a thing of the past, inquiring minds just might be asking "what's the next shoe to drop?" Following are three possible answers:

• In Rising Reliance On Credit Cards David Rosenberg at Merrill Lynch was quoted as saying "The next shoe to drop from this subprime mortgage fiasco, which has already fed into the asset-backed market, is probably going to be the credit card business."
• Prof. Zucchi in Time to Watch Homebuilders' Debt is looking at corporate bonds.
• Previously I took a stab at commercial real estate in Foolish Concerns, Foolish Optimism, Foolish Logic.

Perhaps the next shoe has already hit the ground as Subprime woes infect commercial paper market.

"The turbulence in subprime mortgages has now spread to the commercial paper market -- a $2.2 trillion market in the USA that is the working capital lifeblood for the corporate sector," David Rosenberg, North American economist at Merrill Lynch wrote in a note to clients on [August 15]. "This is looking worse than just another credit cycle."

Rosenberg noted that more than half of the commercial paper market is backed by residential mortgages, credit card receivables, car loans and other bonds. "Now the rating agencies have warned that they might downgrade several issuers of commercial paper," he wrote.

It's Raining Shoes

Actually shoes are dropping so fast and those shoes are so interrelated that it's going to be difficult to say precisely which shoe hits the ground first.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Slope of Hope

For months we've been listening to bulls telling us how "cheap" stocks are. They are not cheap. In fact, barring 1929 and 2000 they are the most overpriced they have ever been. But bulls point to forward earnings estimates and use a Fed Model based on interest rates that has no long term correlation to the stock market.

Hussman call this process Knowing What Ain't True.

As Will Rogers once said, “it ain't what people don't know that hurts ‘em – it's what they do know that ain't true.” The fact is that many “new era” arguments have no provable basis even in the data of the past decade, much less in long-term historical data.

"Our empirical results show that a long-run relationship between stock indexes,
earnings and long-term government bond yields indeed exists for many countries
(including the United States and the United Kingdom) but that the long-term
government bond yield is not statistically significant in this relationship, i.e. the long term government bond yield does not affect the ‘equilibrium’ stock market valuation.

The Fed Model has no theoretical validity as a discounting model, is a statistical artifact, would never have been materially negative except in 1987 and the late 1990's (even in 1929 or 1972), yet views the generational 1982 lows as about "fairly valued," is garbage in data prior to 1980, and vastly underperforms proper discounted cash flow models and normalized P/E ratios. If investors still wish to follow the Fed Model, my conscience is clear, and my hands are clean.

Hussman offers charts to prove what he's been saying. Nonetheless the arguments persists and is likely to persist as it offers hope. Repeated often enough, hope turns in to misguided belief. But the slope of hope is a slippery one as Will Rogers seems to know.

Earnings Have Peaked

The other argument about cheapness of stocks has to do with forward earnings. Few have bothered to look at why earnings were high, the quality of those earnings, and or whether or not those earnings will be repeatable.

The reason earnings were high is that consumers kept spending money they did not have, buying things they did not need. In addition, leveraged buyouts and merger mania resulted in enormous fees for brokerage houses. Neither of those was remotely sustainable, and in fact Citigroup and other are stuck with commitments to fund LBOs right as demand for LBOs has fallen off the cliff.

Chuck Prince (Citigroup CEO) is doing a different kind of dancing now than he was a few short weeks ago (See Quotes of the Day / Top Call) for more on Chuck Prince's dancing style.

Soon to go if not gone already are debt funded stock buybacks. Those too added to profits for underwriters of debt deals.

Bear in mind that the financial sector makes up roughly 22% of the S&P by weight and where financials lead others follow. If banks are lending, and businesses unwilling to expand, where is job growth coming from? Corporate real estate? Forget about it. Overexpansion of of commercial properties is rampant. And without corporate hiring you can kiss consumer discretionary spending goodbye.

Credit card debt is soaring but so are defaults. Some see the credit card business as the next shoe to drop. I have more on "shoes to drop" coming up shortly. For now let's return to earnings.

Earnings Rating Game

MarketWatch is reporting Merrill Lynch lowers Bear Stearns, Lehman and Citigroup.

Merrill Lynch downgraded ratings Tuesday on Citigroup Inc., Lehman Brothers Holdings and Bear Stearns Cos., saying the trio are the most exposed among the big financial stocks to reverberations from the ongoing turbulence in credit markets.

All three saw their ratings lowered to neutral from buy, as Merrill becomes the latest to scale back expectations for big financial firms in recent days as they finetune their outlook for upcoming earnings reports.

On Monday, Goldman Sachs trimmed its outlook for the brokers.

For its part, Merrill said Bear Stearns (BSC), and Lehman (LEH) have a greater dependence on the debt markets than other firms and therefore their earnings are likely to suffer from a slowdown in the securitization and mortgage business.
Accordingly, Merrill cut its 2008 earnings forecast for Lehman by 22%, to $6.80 a share, and for Bear Stearns by 16%, to $12.07 a share.

Merrill also cut its earnings estimate for Citigroup (C) by 5%, to $4.91 a share, saying the blue chip's broader business mix meant that any earnings shortfall should be less dramatic than at Bear Stearns and Lehman.

Consider these cuts in earnings estimates the first of many to come. No doubt, Merrill attempted to lower the bar on earnings such that companies will "beat the street" simply because that is how the game is played. But beating the street is one thing and continually dropping earnings estimates (just like we saw in the housing sector) is another.

Misguided Optimism

Also today on MarketWatch today was this report: Analysts see reasons for optimism in comparing past and present cycles.

... some observers say that a widely expected rate cut should lift the sector over the short term, citing historical precedent as the rationale behind their bullishness.

Even Punk Ziegel & Co.'s Dick Bove, one of the most bearish analysts, sees a rally as possible. "An assessment of the liquidity in the financial system suggests that there could be a near-term rally in financial stocks," he wrote in a note on Monday.

What happened in 2001?

The article cited rate cuts in October 1987, June 1995, and September 1998 as examples of markets moving positive after rate cuts. But inquiring minds are asking "What happened after rate cuts starting in 2001?"

(click on either chart for a sharper image)



A closer look at what happened after the first rate cut.



So not only are investors misguided about the Fed Model, another long battle with the Slope of Hope seems likely to begin.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Is More Panic Coming?

In the blink of an eye, the yield curve is inverted once again.



The panic that drove 1 month treasury yields to 1.4% started to subside in the wake of many unusual statements made by major banks about the discount window (see Now we know who and why), and continued to subside in the wake of many rules changes by the Fed (See Mr. Practical's Buzz on "New Rules").

But the inversion never really went away if one measures it from the perspective of the official Fed Fund's Rate. With the FF rate sitting at 5.25% there is an inversion of 85+- basis points on the five year treasury note. Mortgage watchers will note an inversion of 65+- basis points on the 10 year treasury note by that measure.

Although the Fed may have calmed some nerves with options expiration shenanigans and by inventing "New Rules" on the fly, Countrywide (CFC) is once again trading back around $20 (having risen to as high as $26 after hours on the so called Bank of America Bailout of Countrywide Bailout). I also see that housing inventory has risen yet again, this time to levels not seen since 1991.

Calculated Risk has some stunning charts in his post July Existing Home Sales.

Meanwhile members of Curve Watchers Anonymous just might be asking "Is this calm before the big storm?" I think so, and one of the reasons can be found in Prof. Zucchi's buzz earlier today when he quipped "My sense is we are now approaching the point where price panic sets in".

The expected price panic in housing that Prof. Zucchi referred to, or price panic in the stock market, derivatives, and/or or general panic anywhere will likely incite more panic moves by the Fed in response. But whether or not more panic is coming, it's best to be prepared for it. And if you are going to panic, please remember the cardinal rule: Panic before everyone else does.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

The Secure Fence

The LA Times is reporting Border fence's slow progress panned.

Nearly a year after Congress passed legislation calling for the construction of 700 miles of new fencing along the U.S.-Mexico border, about 15 miles have been built, according to the Department of Homeland Security.

Some Republicans and anti-illegal immigration groups have recently criticized the lack of progress, but Homeland Security, which had committed to putting up 70 miles of fencing by Sept. 30, said the project was back on track after being slowed by environmental, hiring and design issues.

Rep. Duncan Hunter (R-El Cajon), a longtime fence supporter, said in a letter to President Bush last week: "This lack of progress is unacceptable, especially when adequate funding is available to earnestly proceed with fence construction."

Bush signed the Secure Fence Act last fall in hopes that bolstered enforcement would lead the then-Republican-led Congress to pass broader immigration overhaul.

The act calls for fencing in five areas along the 1,952-mile border. The longest stretch -- from east of Calexico, Calif., to Douglas, Ariz. -- would be about 300 miles long. Other large segments would be built along the Rio Grande in Texas. There are about 90 miles of fence, most of it in California.

Homeland Security set a timetable that calls for 300 miles of fencing and 150 miles of vehicle barriers to be built by the end of 2008. Congress allocated $1.2 billion for border improvements this year. The administration requested $1 billion for 2008.

But construction couldn't begin, officials said, until more effective fencing could be designed, contractors hired and environmental issues addressed. Outside Yuma, for instance, the fence is being built with small holes to allow movement by the horned lizard.

The Secure Fence

Let's take a peek at the "secure fence" with thanks to the Los Angeles Times.



Just judging from the name of the bill, one knew right from the start without even looking that the fence would be anything but secure. But this boondoggle is really far worse than even I expected.



But "great progress" is being made in spite of that darned that horned lizard. Why a full 15 of 700 miles of fence has already been built.

Oklahoma Illegal Alien News

KTUL News is reporting Hispanics Moving Out Of Oklahoma Before New Law Takes Effect.

Tulsa - Tens of thousands of Hispanics have left the Tulsa area. And, a law designed to crack down on illegal immigration hasn't even taken effect yet.

Francisco Trevino runs Tulsa's Hispanic Chamber of Commerce. He says the exodus hurts a lot of people working in a lot of fields. "I think restaurants, construction, lawn care they do everything we don't want to do," he says.

Arkansas is about to adopt a law like Oklahoma's. Kansas is considering the same thing.

Virginia Illegal Alien News

The Washington Times is reporting Hispanic lawmaker seeks end to 'sanctuary'

Virginia's only Hispanic state lawmaker is crafting legislation that would cut off state funding to any locality providing sanctuary to illegal aliens.

"Providing sanctuary to illegal immigrants in essence encourages illegal immigration, and makes Virginia a destination for illegals," said Jeffrey M. Frederick, Prince William County Republican.

The aim is to stop Virginia counties, cities and towns with policies that ignore a person's immigration status while providing public benefits and services. "Illegal immigration is costing taxpayers a fortune, and it is harming the quality of life of our citizens," Mr. Frederick said. "It's time we require our local governments to obey the law."

Arizona Illegal Alien News

The Daly Dispatch is reporting ID theft could rise with new law; high-quality fake documents expected

Hundreds of operations in the Phoenix metro area churn out fake green cards, Social Security cards and driver's licenses, and authorities say illegal immigrants are the chief customers.

But the new employer-sanctions law, which prohibits employers from knowingly hiring illegal immigrants and takes effect in January, is anticipated to increase the demand for fake documents, especially those that use authentic numbers. That would then create a need for more identity theft in Arizona, already the state with the highest identity-theft rate in the nation.

Authorities say customers can buy a fake green card and a Social Security card for as little as $70 on the street. Add a driver's license, and they can cost between $140 and $160. Those prices buy documents with randomly generated numbers. Buying fake documents made with government-issued ID numbers and a matching name stolen from someone else costs three to five times more.

Colorado and Texas Illegal Alien News

KJCT News is reporting Tancredo calls for removal of Laredo Border Patrol chief

Colorado Congressman Tom Tancredo, a strong critic of illegal immigration, says the director of the Border Patrol in Laredo, Texas, should be fired.

The Colorado Republican said Carlos X. Carillo's recent remarks in a town hall meeting "were diametrically opposed" to the Border Patrol's mission. On August 15th, Carillo, speaking in Laredo, said the patrol's mission is not to stop illegal immigrants or criminals but to focus on terrorists and keep them from entering the country.

U.S. Government Hires Illegal Aliens

The Deseret Morning News is reporting Use of illegal government workers assailed.

If President Bush is serious about getting tough on U.S. employers who hire illegal immigrants, he can start with his own administration, which employs thousands of unauthorized workers, says the top Republican on the House immigration subcommittee.

"Let's clean up our own house, let's especially clean up the federal employment of all those working for the federal government," said Rep. Steve King, R-Iowa, and ranking member of the House Judiciary Committee's immigration subcommittee.

According to the 2006 audit by the Social Security inspector general, 17 of the 100 worst employers using employees with non-work numbers were government agencies: seven federal agencies, seven state agencies and three local governments. That means the government knows who those employees are, but usually does not go after them.

Campaign Trail Illegal Alien News

SouthCoast Today is reporting Romney targets illegal immigration in new radio ad.

Presidential hopeful Mitt Romney criticizes "sanctuary cities" for illegal immigrants — and by implication Republican rival Rudy Giuliani — in a new radio ad that was launched Tuesday.

Romney and Giuliani have jabbed over illegal immigration in recent weeks. The former Massachusetts governor says Giuliani promoted New York as haven for illegal immigrants. Giuliani aggressively denies it, insisting that he cracked down on lawlessness of every kind. "Legal immigration is great," Romney says in the new ad. "But illegal immigration, that we've got to end. And amnesty is not the way to do it."

Immigration News Recap

All of those articles were in the news in just the past week. Here are the states mentioned or involved (some only peripherally)

• Oklahoma
• Arkansas
• Kansas
• Iowa
• Virginia
• Arizona
• Colorado
• California
• New York
• New Jersey
• New Hampshire
• Texas

Even if by some miracle the Secure Fence is completed on time and within budget, it is clearly a complete waste of $2.2 billion. So why then are so many senators, congressman behind this project? And why are so many states like Arizona, Oklahoma, Arkansas, Virginia, and Kansas passing or considering legislation to crack down on the hiring of illegal aliens?

The one word answer is "Jobs".

In spite of what anyone in this administration says or what the purported unemployment numbers are, jobs are not easy to come by. High paying jobs even less so. People are fearful over jobs and fearful over a recession as shown by a recent Wall Street Journal / NBC News Poll. The poll results shows America's Economic Mood:Gloomy.

"More than two-thirds of Americans believe the U.S. economy is either in recession now or will be in the next year .... concerns about health costs, job security and the gap between the rich and poor have left Americans downbeat about the road ahead."

Barry Ritholtz at the Big Picture Blog challenges the published unemployment rate in Real Income Fails to Rise for most of the 2000s.

So Congress and the Administration is striking back: by wasting billions building a fence that one look should be enough to convince anyone that it can't possibly work.

But the real story here is about rising protectionist sentiment not only in the U.S. Congress but at the state level as well. And the issue of the Renminbi (China's currency) as well as the trade deficit with China keeps festering. Tariffs, trade wars, currency disputes, and economic fences are all hallmarks of deflationary times.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Mr. T on Gold & Mr. Trump on Mortgages

It's time for some light hearted weekend news involving the letter "T". Here's a look at recent developments on Trump Mortgage as well as the Mr. T gold indicator invented by Kevin Depew on Minyanville.

Every Wednesday Minyanville posts a new video on some facet of the economy. This week's video was on the demise of Trump Mortgage.

Click here to play the Trump Video.



The above was poking fun at Trump Mortgage, ‘You’re foreclosed’.

Donald Trump has pulled the plug on Trump Mortgage less than two years after its launch. Plagued by bad timing and the disclosure that the firm’s chief executive had inflated his credentials, the mortgage brokerage never came close to reaching its financial goals.

Mr. Trump downplayed his role in Trump Mortgage. He said that he didn’t have an ownership stake in what amounted to a mere licensing deal. “The mortgage business is not a business I particularly liked or wanted to be part of in a very big way,” he said.

That’s a different tune than the one he was singing a year ago. After a quiet opening in late 2005 at Mr. Trump’s headquarters at 40 Wall St., he officially launched the company in April 2006 at a gala at Trump Tower. Also onstage was chief executive E.J. Ridings, an acquaintance of Donald Trump Jr. who came up with the idea for the company.

Shortly thereafter, Mr. Trump told CNBC’s Maria Bartiromo: “I think it’s a great time to start a mortgage company.… [And] who knows about financing better than I do?”

Even though Trump Mortgage is gone, the Trump name will continue to be tied to mortgages. Mr. Trump has licensed his name to First Meridian Mortgage, an established lender that is renaming itself Trump Financial and will be the preferred lender on Trump development projects.

Other entertaining videos can be found on OPEC, Wal-Mart (WMT), Bernanke, Starbucks (SBUX), and Mr. T. With that let's turn our attention to Mr. T as Kevin Depew spills the beans on this as of now vastly underutilized, yet astonishingly accurate measurement of gold sentiment.

Mr. T Gold Indicator 1975 - 1993




(click on chart for a much enhanced view)

Mr. T Gold Indicator 1993 - 2006



(click on chart for a much enhanced view)

Kevin unlocked his big secret about Mr. T in point number 4 of "Five Things" on July 25th 2007 in A Fractal-Based Look at the Mr. T Gold Indicator

As you can see, the Mr. T Gold Indicator is a robust tool for identifying high-probability price exhaustion points in gold, both on the upside and the downside. In the above charts we took a long-term view of gold, using the Mr. T Gold Indicator to identify price exhaustion points on a long-term monthly chart. In addition to the yellow metal, the indicator is also useful in identifying similar exhaustion points in the metals stocks themselves, such as Newmont Mining (NEM), Barrick Gold (ABX), Goldcorp (GG), AngloGold Ashanti (AU) and Gold Fields (GFI).

But what about weekly, daily, even hourly and minute-by-minute charts? Don't give me no back talk, sucka! Naturally, it stands to reason that if the Mr. T Gold Indicator is indeed a robust price exhaustion tool then it should apply to smaller time frames of gold price data. That is, because the gold market is a self-organizing complex system with self-similarity on different time scales, the Mr. T Gold Indicator should be just as useful in these self-similar and subdivided minute time frames as it is on a larger scale.

Unfortunately the Mr.T Gold Indicator turned negative on April 19, 2007 right as gold approached 700. Click on the above link to see the Snickers ad campaign involving Mr. T that gave off a sell signal on gold.

Thanks Kevin!

Here's the Mr. T Gold Indicator Video in case you missed it. Somehow I suspect goldbugs will not take this seriously. And not to be dissing Mr. T but 10 valid reasons to own gold can be found in A Safe Way to Own Gold and Silver. No, Mr. T is not one of them.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

A Gross Challenge

A reader comment to Bill Gross Wants PIMCO Bailout stated that I was being unfair to Bill Gross. I was challenged to debate the case on its merits.

I asked that reader what vested interest he had in the bailout Gross was asking for. I wanted to know if the reader was a real estate agent, homebuilder, in the mortgage business, etc. After waiting many hours I gave up. No reply came. I did not expect one.

Nonetheless, to be completely fair, I presented an Ad Hominem attack on Bill Gross.

So let's instead list reasons why the "Gross Bailout" is complete foolishness.

• It bails out irresponsible lenders at taxpayer expense.
• It bails out irresponsible borrowers at taxpayer expense.
• It bails out irresponsible homebuilders at taxpayer expense.
• It bails out irresponsible real estate agents at taxpayer expense.
• It encourages more irresponsible lending.
• It encourages more irresponsible borrowing.
• It encourages more irresponsible homebuilding.
• It encourages more real estate fraud.

The above is what is easily seen. The above is so easily seen that I am sort of amazed that it had to be spelled out.

The Seen
Let's sum up the "seen" in a single sentence: The bailout is socialist nonsense that benefits select groups at the expense of others.

The Unseen
I cannot possibly state the "unseen" any better than Paul Kasriel so I will not try. Kasriel presented a stunning rebuttal of Gross's proposal in There's No Such Thing as a Free Bailout.

Bill Gross is bright enough to understand both the seen and the unseen. That is why it should have been obvious how disingenuous Gross was when he stated "Write some checks, bail ‘em out, and prevent a destructive housing deflation that Ben Bernanke is unable to do."

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Now we know who and why

This story begins with "Unusual Statements by Major Banks" made August 22 so let's start there.

Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Wachovia Corp. (WB) each stressed they themselves have "substantial liquidity" and the ability to borrow money elsewhere.

In a joint statement, the latter three said they decided to borrow directly from the central bank to demonstrate "the potential value of the Fed's primary credit facility" and encourage its use by other banks.

"The companies believe it is important at this time to take a leadership role in demonstrating the potential value of the Fed's primary credit facility and to encourage its use by other financial institutions," their statement said. The three added that they hoped their actions would "promote broad acceptance of the use of the facility."

In Brave Face Masks Bold Lie I offered an opinion:

This is either blatant stupidity or a bold face lie. I believe the latter. How can one "restore liquidity" by borrowing money that one supposedly does not need? The statement makes no sense.

As for Citigroup, what exactly does borrowing money "on behalf of its clients" mean? What clients? Who is in trouble here?

By making this look like a respectable thing to do (it's not), it likely covers up the likely fact that someone is in trouble. Inquiring minds might no be saying "Mish, you are talking conspiracy". Of course I am. But like most conspiracies this one is in plain sight. We simply do not have all the i's dotted and t's crossed in regards to the details.

A well respected source whose opinion I respect offered this viewpoint anonymously: "Basically this is a PR move coordinated by Fed to hide the fact that going to window is emergency move. It hides the fact that some banks have to."

Now We Know Who And Why

Citygroup's "client" was Citigroup itself. It needed the money for Citigroup Global Markets, a brokerage subsidiary. And because of restrictions, Citigroup could not borrow from the discount window for that subsidiary. But those restrictions were lifted as the Fed bends rules to help two big banks as the following story shows.

If the Federal Reserve is waiving a fundamental principle in banking regulation, the credit crunch must still be sapping the strength of America's biggest banks. Fortune's Peter Eavis documents an unusual Fed move.

In a clear sign that the credit crunch is still affecting the nation's largest financial institutions, the Federal Reserve agreed this week to bend key banking regulations to help out Citigroup (C) and Bank of America (BAC), according to documents posted Friday on the Fed's web site.

The Aug. 20 letters from the Fed to Citigroup and Bank of America state that the Fed, which regulates large parts of the U.S. financial system, has agreed to exempt both banks from rules that effectively limit the amount of lending that their federally-insured banks can do with their brokerage affiliates. The exemption, which is temporary, means, for example, that Citigroup's Citibank entity can substantially increase funding to Citigroup Global Markets, its brokerage subsidiary. Citigroup and Bank of America requested the exemptions, according to the letters, to provide liquidity to those holding mortgage loans, mortgage-backed securities, and other securities.

So, how serious is this rule-bending? Very. One of the central tenets of banking regulation is that banks with federally insured deposits should never be over-exposed to brokerage subsidiaries; indeed, for decades financial institutions were legally required to keep the two units completely separate. This move by the Fed eats away at the principle.

Sure, the temporary nature of the move makes it look slightly less serious, but the Fed didn't give a date in the letter for when this exemption will end. In addition, the sheer size of the potential lending capacity at Citigroup and Bank of America - $25 billion each - is a cause for unease.

Indeed, this move to exempt Citigroup casts a whole new light on the discount window borrowing that was revealed earlier this week. At the time, the gloss put on the discount window advances was that they were orderly and almost symbolic in nature. But if that were the case, why the need to use these exemptions to rush the funds to the brokerages?

Don't forget: The Federal Reserve is in crisis management at the moment. However, it doesn't want to show any signs of panic. That means no rushed cuts in interest rates. It also means that it wants banks to quickly take the big charges that will inevitably come from holding toxic debt securities. And it will do all it can behind the scenes to work with the banks to help them get through this upheaval. But waiving one of the most important banking regulations can only add nervousness to the market. And that's what the Fed did Monday in these disturbing letters to the nation's two largest banks.

The above story was not released until 4:40 EDT on Friday (long after the market closed).

dotting some i's and crossing some t's

Flashback August 20, 2007.

The Fed Board of Governors wrote to Patrick S. Antrim, Assistant General Counsel Bank of America Corporation allowing an exemption from section 23A of the Federal Reserve Act Regulation W so that Citigroup could borrow money for Citigroup Global Markets.

Notes: the Fed servers have been blasted with people attempting to read that PDF and it can freeze up your system (it did mine) while attempting to get through. If it was a text doc I would snip it, but it is a big image scan of not tremendous resolution. Eventually I got through. Firefox users may want to try opening that in IE so you do not lose all Firefox windows.

Massive Exemptions

The Wall Street Journal article Citigroup Gets Fed Help on Using Discount Window has most of the information in easy to understand terms.

The Fed, in a letter sent to Citigroup Monday, exempted it from the limit on how much its bank unit, Citibank N.A., can lend to its affiliated broker-dealer, Citigroup Global Markets. In the letter, the Fed said it would permit Citibank to lend up to $25 billion to “market participants in need of short term liquidity to finance their holdings of certain mortgage loans and related assets,” and it could channel the transactions through Citigroup Global Markets in the form of offsetting repurchase agreements, which are short-term loans secured by financial assets.

On Wednesday Citi, J.P. Morgan Chase & Co., Bank of America Corp. and Wachovia Corp. each said they had borrowed $500 million from the discount window. A spokeswoman for Citigroup declined to comment on the bank’s request for the exemption and its approval. Both J.P. Morgan and Bank of America have received similar exemptions, people familiar with the matter said.

New Rules

Early Friday, long before this story was widely reported elsewhere Minyanville's Mr. Practical was commenting on the Fed's rule changes.

New Rules

The Fed is changing the rules of finance faster than the average man can think. The discount window in the past, borrowing directly from the Fed, has been like going to the emergency room. It has been a place of last resort for sick banks. Now the Fed wants (needs) to make it the place where everyone goes.

First, they lowered the [discount] rate. Then they changed the collateral they were willing to take from pristine treasuries to riskier assets, the assets that every bank now is stuffed with. Today they made a change that removes further restrictions in the source of collateral.

Essentially the Fed is trying various means to get credit (liquidity) to banks that are seizing up because the market does not want to give it to them. The more risky the assets the Fed is willing to accumulate, the more markets become nationalized: the government itself making credit decisions.

Stay tuned for more new rules as the Fed desperately plugs the holes in the dike that keep popping up.

Thanks Mr. Practical. But the cracks keep getting bigger and bigger and there is no way to contain them. I am still expecting the next big shoe to drop: Commercial Real Estate as discussed in the closing remarks of Foolish Concerns, Foolish Optimism, Foolish Logic. There is another big shoe to drop too, and that shoe is jobs.

Bernanke has his hands full and there are simply too many crack to plug. He will fail.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/