Bank Reserves Go Negative

I have been watching a chart of Borrowed Bank Reserves for several weeks. The action is unprecedented.

Borrowed Reserves of Depository Institutions



click on chart for sharper image.

The NFORBES Chart above is courtesy of St. Louis Fed.

Here's an interesting excerpt from the book Investing Public Funds by Girard Miller about borrowed reserves.

"Another useful indicator of the Federal Reserve's relative monetary policies can be found weekly in the Federal Reserve data. A key statistic is the net free reserves or net borrowed reserves line item. This statistic measures the degree to which depository institutions have found it necessary to obtain funds in the Fed Funds market and through the Fed discount window in order to obtain required reserves.

During periods of central bank credit-tightening operations, the depository sector might find it necessary to borrow funds to meet reserve requirements. This practice results in net borrowed reserves, which shows as a negative number. Conversely, if ample funds are available through the banking system to meet reserve requirements, banks can become net lenders of reserves through the Fed Funds markets"

Given that the Fed is not in a credit tightening mode, we must look for a better explanation. Here it is: Banks in aggregate have now burnt through all of their capital and are forced to borrow reserves from the Fed in order to keep lending.

Detail comes from the Federal Reserve H3 Release.

Table 2 Not Seasonally Adjusted Reserves in Millions of Dollars



Click on chart for sharper image.

Total Reserves for two weeks ending January 16th are $39.988 billion. Inquiring minds are no doubt wondering where $40 Billion came from. It's a good question. The answer is the Term Auction Facility. You can see that figure in Table 1 of the H3 release (not shown).

Were it not for the Term Auction Facility, banks would have had to raise $40 billion in capital by selling assets or some other means. We will look at "other means" in just a moment.

For now, the Fed is not disclosing who is borrowing under the Term Auction Facility, probably out of fear that people just might find out what banks are capital impaired and by how much.

January 29 TAF Auction

Forbes is reporting Fed's TAF auctions 30 bln usd 28-day loans at 3.123 pct.

The Federal Reserve's latest loan auction through its Term Auction Facility (TAF) produced the lowest interest rate, lowest bid-to-cover ratio and fewest bidders yet. The lower demand suggests an improved liquidity situation in financial markets.

Yesterday's auction of 30 bln usd 28-day loans came in at a 3.123 pct interest rate, a 1.25 bid-to-cover ratio and 52 bidders. This was the fourth auction under the new TAF program designed to relieve pressure in the short-term, inter-bank funding market.

The Role Of The Monolines

What Happens if Ambac (ABK) and MBIA (MBI) are downgraded? That too is a good question. Let's take a look.

MarketWatch is reporting Banks may need $143 billion in fresh capital.

If bond insurers are downgraded a lot, banks will need as much as $143 billion in fresh capital to absorb the impact, Barclays Capital estimated Friday. Citigroup Inc. (C), Merrill Lynch & Co. (MER) Bank of America Corp. (BAC), and Wachovia Corp. (WB) are among U.S. banks most exposed to bond insurers, or "monolines" as they're also known, Barclays Capital wrote to investors.

The Telegraph is reporting Banks 'face a further $300bn sub-prime hit'.

The world's financial institutions will have to write down a further $300bn (£152bn) of US sub-prime losses before the crisis is over, according to a study by consulting firm Oliver Wyman.

"While governments, central banks and regulators scramble to address the aftermath of the sub-prime fallout, several other crises are mounting."

Tumbling property prices - especially in the UK and Spain - a weakening dollar, a possible collapse in commodity prices, and a fall in Chinese and Indian stocks will "disrupt" the global economy, the report claimed.

As noted in Banks Attempt To Freeze Balance Sheets “Large money center banks have virtually frozen their balance sheets, reluctant to lend even to good credit,” according to Scott Anderson, a senior economist at Wells Fargo.

However, rising numbers of foreclosures are forcing assets on to bank balance sheets in spite of that desire to freeze. It's no wonder banks are spooked by those walking away from debt. See 60 Minutes Legitimizes Walking Away for details.

Banks Raise ATM Fees to $3.00

One method of raising capital is to increase fees. $3 ATM Fees are one such method.

"They're looking for ways to make up for the losses and nickel and diming appears to be the only way they can do it," Consumer Affairs analyst Joseph Enoch said. Today, the average ATM fee is $1.78, while five years ago it cost a little more than a $1 to retrieve money from a bank with which you didn't have an account.

In some areas, JP Morgan Chase, Bank of America and Wachovia fees have hit $3 for non-customers. Some banks now charge their own customers a fee for the convenience of using an ATM to the disdain of some.

Another way to raise cash (and a very expensive one at that) is to offer way above market rates on savings deposits and CDs. Let's take a look at some current offers on savings accounts.

Savings Deposit Rates



Click on chart for sharper image.
Chart courtesy of Bankrate.Com.

Any bank paying those rates on savings accounts is desperate for cash. Those looking for candidate banks liable to go under need only look at the price banks are willing to pay for capital.

I cannot stress this enough: If you accept these offers, please make sure you never go above the FDIC limit.

$3.00 ATM Fees Will Backfire

As for banks charging $3.00 ATM fees, I think the strategy will backfire in several ways.

• Some customers will stop using anything but their own bank's ATMs. Instead of getting $1.50 banks will get nothing.
  
  
• Some customers will opt to max out the cash they take on each transaction to minimize the number of transaction fees.
  
  
• Banks charging their own customers will find many switching banks out of resentment.

In the grand scheme of things, $30 Billion or $40 billion is not a lot of money. However, when lack of reserves would otherwise prevent lending, it certainly is a lot of money. Imagine a major bank telling customers: "We have no cash reserves so we can't give you a loan." With that in mind, banks are scrambling to raise cash.

Borrowing reserves is expensive, paying 5% on CDs and Savings Deposits is expensive, and in the end, attempting to extract more blood out of consumers by raising ATM fees to $3.00 is going to prove expensive. There are simply no good ways to raise capital. And the problem is going to get far worse before it gets better.

A deepening recession, a falling stock market, plunging commercial real estate, and social acceptance of walking away are all going to exacerbate the problems Bernanke and lending institutions face. A Crash Course For Bernanke on academic theory is coming. It will be interesting to watch how he reacts to it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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The Business of Walking Away

Previously I discussed the psychology of walking away in 60 Minutes Legitimizes Walking Away, Changing Social Attitudes About Debt, and a Crash Course For Bernanke.

This post will address the business of walking away. Professor Depew was talking about Business Decisions in point 3 of Monday's Five Things.

Last night, CBS' "60 Minutes" took a look at the "subprime loan crisis." You can find the full transcript here, but the following exchange between "60 Minutes" correspondent Steve Kroft and homeowner Stephanie Valdez is a highlight worth examining a bit closer; it's significant both from an economic and, more importantly, a socionomic point of view.

STEPHANIE VALDEZ: Why pay a $3,200 payment on a 1200-square-foot home? It makes no sense.

STEVE KROFT: That's what you agreed to do when you bought the house.

STEPHANIE VALDEZ: Fine. If the value is going up. But we're not going anywhere. The price or the value is going down. It makes no sense because we will never be able to refinance and get a lower payment. There's no way.

STEVE KROFT: You're saying, essentially, that you're going to stop making payments on it? You're just gonna let it go into foreclosure?

STEPHANIE VALDEZ: You know, that's the only advice we've gotten so far is walk away from the home. We don't want to do that to our credit. Why can't our mortgage company work with us?

Kevin Depew:
The issue Kroft is alluding to here is what one might call "the morality of contractual obligation." Without saying it explicitly, Kroft implies ("That's what you agreed to do when you bought the house,") that Valdez and her husband, by walking away from the house, are engaging in some vaguely immoral behavior. It's a promise. They are breaking their promise. Left dangling for the viewer to arrive at is the conclusion that people who break promises are immoral.

But Valdez is outlining a perfectly rational economic argument for exiting the mortgage contract and is willing to accept the full penalty - credit impairment - for her actions. Still, Kroft carries the vague morality objection a bit further in the segment.

"Nobody seems to be saying, 'Look, I made a contract with you. I borrowed money from you. I'm gonna do everything I can to pay off that obligation.' People just seem to be saying, 'Look, take the house. Good-bye. I'm leaving,'"

Kroft observes to real estate agent Kevin Moran. "There was a time, I think, when people felt really bad about not paying off a debt."

"Yeah, I think in those days, loans were made by your local banker or building and loan associations or savings and loan," Moran replies. "They were guys you saw in the grocery store. They were on the little league team with you, the PTA, the school. And I think as mortgages became securitized and Wall Street became involved, they became very transactional and there was no relationship built with the borrower and the lender. And I think that makes it easier for someone to see it as an anonymous party at the other end of the transaction and just walk away from it."

"Just a business decision," Kroft says.

Implicit in this segment is that families are not entitled to make "business decisions." But you know who is entitled? Why, businesses of course. When businesses laid off 1.5 million workers in 2007, it was purely a "business decision." When Wall Street banks "wrote down" more than $100 billion in losses in 2007, it was purely a "business decision."

Look for families to become more comfortable making "business decisions" of their own in 2008.

Banks vs. Consumers

If banks can make "business decisions" to ignore risks, to lend money with no down payment, and fire people at at the first sign of trouble without any remorse, why shouldn't consumers be able to do the same?

Take a look at previous values on homes now being auctioned. Did not lenders make a business decision to ignore insane valuations placed on those homes?

Indeed they did, and one reason was they could securitize the garbage and sell it to pension plans and foreign investors as far away as Norway (see Citibank SIVs Hit Norway Townships). Is Citigroup about to refund Norway townships for the mess it created?

Another reason banks ignored insane valuations is they thought lucrative fees would more than make up for losses on foreclosed properties. They thought wrong.

As a result, lenders became home owners and are now in hock with the auction business.

You Walk Away

There is an interesting new business that just started up January 1, 2008. The business is called You Walk Away.

Is Foreclosure Right For You?

• Are you stressed out about your mortgage payments?
• Do you have little or no equity in your home?
• Have you had trouble trying to sell your house?
• Is your home sinking under the waves of the real estate crash?
• What if you could live payment free for up to 8 months or more and walk away without owing a penny?

Unshackle yourself today from a losing investment and use our proven method to Walk Away.

I spoke with John Maddux a "senior advocate" with You Walk Away (YWA) about the business. As one might expect it is booming. For $995 one receives a half hour of legal counsel where individual strategies are mapped out and all the laws pertaining to recourse vs. non-recourse loans as well as judicial procedures are explained to the customer. YWA also files the necessary legal papers to stop mortgage companies from calling and informs you immediately of how many days you will be able to stay in the house for free. Should the lender take longer to process the documents, YWA will keep you informed of any extra time.

With the amount of money at stake, the fee seems reasonable for the services provided.

Maddux informed me that YWA is currently operating in the state of California only, but Nevada and Florida will soon be coming online. Eventually they expect to be nationwide.

Walking Away In Ohio

One in ten homes in Cleveland, Ohio had been repossessed. Deutsche Bank Trust, acting on behalf of bondholders, is the largest property owner in the city. I discussed this situation in a Beautiful Model For Fraud.

Cleveland is suing 21 of the nation’s largest banks and financial institutions, accusing them of knowingly plunging the city into a financial crisis by flooding the local housing market with subprime mortgage loans to people who could never repay.

City officials hope to recover hundreds of millions of dollars in damages, including lost taxes from devalued property and money spent demolishing and boarding up thousands of abandoned houses.

"To me, this is no different than organized crime or drugs," Jackson said in an interview with Plain Dealer reporters and editors. "It has the same effect as drug activity in neighborhoods. It's a form of organized crime that happens to be legal in many respects."

Will Deutsche Bank and the other 20 lenders attempt to walk away from this mess as a business decision? You bet. The business of walking away is going to be booming for a long time to come. This is yet another reason why Things That "Can't" Happen are about to.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Crash Course For Bernanke

I am reading an interesting article from October 2000 called A Crash Course for Central Bankers. The following excerpt seems strikingly pertinent.

There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat.

History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

The Japanese Experience

Here is another paragraph from the article.

The downturn following the collapse of Japan’s so-called bubble economy of the 1980s was not as severe as the Great Depression. However, in some crucial aspects, Japan in the 1990s was a slow-motion replay of the U.S. experience 60 years earlier. After effectively precipitating the crash in stock and real estate prices through sharp increases in interest rates (in much the same way that the Fed triggered the crash of 1929), the Bank of Japan seemed in no hurry to ease monetary policy and did not cut rates significantly until 1994. As a result, prices in Japan have fallen about 1 percent annually since 1992. And much like U.S. officials during the 1930s, Japanese policymakers were unconscionably slow in tackling the severe banking crisis that impaired the economy’s ability to function normally.

It's amazing that anyone could possibly think that if only Japan had started cutting rates in 1992 instead of 1994 that it would have made any difference. Unfortunately for the world, we now get to test out Bernanke's theories in real life.

The Great Fiscal Stimulus of 1929

Consider The great fiscal stimulus package ... of 1929

Herbert Hoover -- only nine months into his presidency -- assembled leaders from the public and private sectors to create an economic-stimulus package. Among the measures, Time magazine reported at the time, was a promise from Congress to offer bipartisan support for a tax-cut package. Also on the table was an assurance from the Federal Reserve that it would provide cheaper credit.

Of course, there were a litany of public-works projects, plans for new corporate investments, and even a promise by Henry Ford to raise wages at his auto plants.
None of this worked.

Certainly, our economy now has far more differences than similarities with the economy of 1929, and few expect a new depression for the decade ahead. But it's also worth remembering that the best laid plans of presidents, chief executives and senators can sometimes come to nothing.

Like the fiscal stimulus of 1929 the Fiscal "Stimulus" Of 2008 Is Doomed To Fail.

Yes, there are differences between 1929 and 2008. However, many similarities are striking.

Similarities Between 2008 and 1929

• In the 20's, there was a massive overexpansion of manufacturing capacity. Today there is a massive overexpansion of productive capacity in China and a massive overexpansion of retail stores in the US.
  
  
• In the late 1920s, bank credit propelled a massive real estate boom in New York City, in Florida, and throughout the country. We now have the biggest housing bubble in history.
  
  
• In late 20’s credit was expanding at a rapid pace but there was no need for additional productive capacity. Today GDP is rapidly falling but credit is still rising (for now).
  
  
• In 1929 there was no pent up demand for manufactured goods, especially autos. Today there is no pent up demand for homes, restaurants, retail stores, strip malls, autos, trucks, or anything else.
  

In 2008 as in 1929, the ability and willingness of consumers to borrow and banks to lend is under attack not only in the US but Europe as well. For more on the latter please see Financial Crisis Poised To Hit Europe.

Four Reasons Bernanke Will Fail

• Changing Social Attitudes About Debt (People willing to walk away from homes, save more and spend less)
  
• Commercial Real Estate Crash Underway
  
• Unemployment Soaring as Private Sector Jobs Contract
  
• Global wage arbitrage
  

For more on changing social attitudes please see 60 Minutes Legitimizes Walking Away From Homes.

Ludwig von Mises: "There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."

Final analysis will show that Bernanke can change interest rates but not attitudes, and attitudes are far more important. Indeed, changes in attitudes will render all of Bernanke's academic theories about the Great Depression meaningless.

Greenspan had the wind of consumers' willingness and ability to go deeper in debt at his back. Bernanke has the wind of boomers fearing retirement in the midst of falling home prices and impaired bank balance sheets blowing stiffly in his face. There is no cure for what ails us other than time and price. And with the aforementioned attitude changes, the biggest, most reckless, global credit expansion experiment the world has ever seen is coming to an end. Central banks are powerless to do anything about it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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60 Minutes Legitimizes Walking Away

There was a nice expose on CBS 60 Minutes this weekend called House Of Cards. I seldom watch TV but happened to catch it.

Steve Kroft reports on how the U.S. sub-prime mortgage meltdown, in which risky loans drove a housing boom that went bust, is now roiling capital markets worldwide.



Click here to play video.

Steve Kroft: "It sounds complicated but it's really very simple. Banks lent hundreds of billions of dollars to homebuyers that can't pay them back. Wall Street took the risky debt, dressed it up as fancy securities and sold them round the world as safe investments. If it sounds a little bit like a shell game or a ponzi scheme, in some ways it was".

...

"Matt and Stephanie Valdez say they knew exactly what they were doing when they bought this small two bedroom house for $355,000."



....They cannot refinance because the value of the house fell below the existing mortgage. They say they can afford the higher payments but see no point in making them.

Matt: The value of the house keeps going down and the payments keep going up. Where's the logic in that?

Stephanie: Why make a $3200 a month payment on a 1200 square foot home? It makes no sense.

Steve Kroft: But that's what you agreed to do when you bought the house.

Stephanie: Fine if the value was going up. The value is going down.

Steve Kroft: You are saying essentially you are going to stop making payments.

Stephanie: The only advice we've gotten so far is to walk away.

60 Minutes Legitimizes Walking Away

What 60 minutes described was a Beautiful Model For Fraud. That model is now imploding as all fraudulent schemes eventually do. And for those on the fence, 60 Minutes may just have legitimized it walking away.

The LA Times is writing A tipping point? "Foreclose me ... I'll save money"

A homeowner who can't sell his house tells the L.A.Times, "Foreclose me. ... I'll live in the house for free for 12 months, and I'll save my money and I'll move on."

Banks and lenders fear this kind of thinking -- that walking away from a house could be the smart economic move -- appears to be on the rise. Wachovia, in a conference call yesterday, warned investors that increasing numbers of homeowners are walking away from their homes by choice: "... people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they've lost equity, value in their properties..."

Intentional Foreclosure: The New Trend

CBS13 is talking about the New Trend in Sacramento: 'Intentional Foreclosure'.

This is how it works. Bob paid $420,000 for his home. Then he notices the house across the street, with more upgrades, and is selling for $315,000.

So Bob, who has pretty good credit, decides to buy the cheaper house. He can't afford both, so then he walks away from his original home, letting it fall into foreclosure. That will hurt his credit, but he's willing to take the hit for a more affordable home.

Changing Social Attitudes At Forefront Of Crisis

Changing Social Attitudes About Debt have clearly moved to the forefront of the housing crisis. Even those who can afford to pay are walking away with no regrets. And with people walking away in mass, Banks Attempt To Freeze Balance Sheets is destined to fail.

This is what happens when you give people free money. Unfortunately, Bernanke, Congress, and Paulson are intent on giving away more free money to fix the problem. On the surface this might appear inflationary. However, credit destruction and bank impairments are happening far faster than Bernanke and Congress are acting.

Welcome to Deflation American Style. At the current rate of progression, Deflation American Style figures to be far worse than anything Japan ever saw.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Financial Crisis Poised To Hit Europe

Three more nails in the were driven into the European decoupling myth coffin this past weekend. Let's take a look.

Reuters is reporting Financial crisis to hit 20,000 London jobs.

As many as 20,000 jobs in London's financial district are likely to be wiped out due to the financial crisis, a survey showed on Sunday.

The Sunday Telegraph reported that Experian, which provides data and forecasts to government and private bodies, had slashed its predictions for job growth in the City of London and Canary Wharf to a fall of up to 5 percent from its previous forecast of flat net employment this year.

Experian expects between 10,000 and 20,000 jobs to be lost over the year, with the majority going from the financial sector.

With up to 400,000 people employed in London's financial district, a fall of this scale could severely affect the economy, dragging commercial property prices down and hitting related industries such as IT and telecoms, it said.

European Hedge Funds Freeze Redemptions

The TimesOnline is reporting Crisis grips European hedge funds.

Up to 10 European hedge funds have suspended redemptions after investors clamoured for their cash when the managers made severe losses.

A London prime broker told The Sunday Times that even before last week’s extreme gyrations, nearly two-thirds of London-based hedge funds had lost between 4% and 10% of their value. A "significant number" had lost much more, he said.

The manager of one of Britain’s biggest hedge funds said: "It’s been an extraordinary week. Even in the crash of 1987 I don’t remember so much carnage."

The problems have been exacerbated by the fact that prime brokers, the arms of investment banks that finance hedge funds, have tightened lending policies.

One manager said: "Since market losses are magnified by leverage in a hedge fund, there can be a sudden need for a cash injection. But this time, the banks can’t lend as easily. Funds are then forced to sell, which causes even more problems."

Freezing Funds A Huge Mistake

I see European hedge funds have learned nothing from their US counterparts at Bear Stearns. Halting redemptions is a very poor decision. All it does is create a pent up demand for more investors to leave as net asset values sink.

I talked about the Redemption Trap in relation to Bear Stearns back in July. "An investor in Europe, who didn't want to be identified, says he's been trying to get his money out of the hedge fund since February."

The Bear Stearns High-Grade Structured Credit Strategies Enhanced Leveraged Fund eventually went to zero while the High-Grade Structured Credit Strategies Fund went for something like 12 cents on the dollar. Had redemptions been allowed in February, investors wanting out would have gotten more than that for sure.

More Subprime Bank Troubles In Germany

Reuters is reporting Landesbanks' subprime exposure 80 billion euros.

Four German state banks have a combined exposure of almost 80 billion euros ($117.2 billion) to risky assets and the state bank of Bavaria, BayernLB, could need an over 2 billion euro write-down, FOCUS magazine reported.

Germany's Landesbanks are financial institutions owned by regional government and local community savings banks.

The banks are considering whether to transfer their U.S. subprime debt-related instruments to a special-purpose vehicle, the weekly magazine reported without citing its sources.

SIV Madness

With everyone else trying to reduce SIV exposure, what the heck are Germany's Landesbanks doing considering creating a new SIV? Hasn't anyone learned anything from this mess yet?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Faith In System Erodes Brick By Brick

Bloomberg is reporting SEC to Rework Rules After Funds Struggled With Subprime Prices.

The U.S. Securities and Exchange Commission is updating rules for how mutual funds value holdings after they struggled to price mortgage-backed investments during the subprime-lending crisis.

"Funds seem to be relying on stale pricing on several occasions," Scheidt said in an interview today. "They were continuing to value the securities at prior levels" even though "facts would suggest that the price would have gone down."

The new rules, which will be binding for companies registered under the Investment Company Act, mark the agency's "first comprehensive" revision in four decades, Scheidt said.

When prices don't exist because an exchange is closed or an asset is infrequently traded, funds base valuations on prices for which they can reasonably expect to sell. In such cases, fund managers rely on quotes from brokers and pricing services.

Inaccurate asset prices may prompt mutual-fund managers to overestimate a fund's net value and overpay when shareholders sell back their stakes. That can shortchange long-term investors.

When demand for subprime-backed debt dried up last year, more than 80 percent of investment managers had difficulty obtaining prices for mortgage-related investments, according to a September survey by Greenwich Associates.

Brokers stopped providing quotes out of concern they might have to honor the prices and buy back securities that had plummeted in value, said Timothy Sangston, a managing director at Greenwich Associates, a financial-services consultant based in Greenwich, Connecticut.

To prevent investor losses, Baltimore-based Legg Mason has arranged $1.47 billion in financing for its money-market and cash funds since November. In December, Atlanta-based SunTrust injected $1.4 billion into two money funds, and Bank of America, the second-largest U.S. bank, said it would wind down a $12 billion cash fund. Cash funds, which are sold to institutions and wealthy individuals, offer higher yields by investing in riskier assets.

Within the $12.1 trillion U.S. mutual-fund industry, the biggest subprime-debt investors are taxable bond and money-market funds, which managed a combined $3.93 trillion of assets as of November, according to the Investment Company Institute.

In November GE's "enhanced" cash fund broke the buck. GE was an institutional money fund not a retail money market operation, and it is now closed.

In December, Bank of America shut its $12 billion cash fund.

The so-called enhanced-cash fund, which was only offered privately to institutional investors, saw its net asset value dip below $1 recently. Big investors that want to redeem are being paid "in kind," which means they get their share of the fund's assets put into a separately managed account, according to Jon Goldstein, a spokesman for Bank of America.

"It's in the best interests of the fund and investors to start unwinding," Goldstein said. "Unprecedented conditions in short-term debt markets have weakened the performance of private cash funds like this one."

Such disruptions have sparked concerns that money-market funds could drop into negative territory. These types of funds are supposed to return investors' principal -- so if they "break the buck," as it's called, that would be bad news.

However, the $12 billion Columbia fund that's shutting down is not a money-market fund, according to Goldstein. As an enhanced-cash fund, it was supposed to take more risk to generate higher returns.

More Cash Injections Needed

Not wanting to break the buck further, Bank of America decided to hand over securities to any pension plan or large investor and essentially said "It's your problem now". That cannot be too inspiring for future business relationships. One of the results of what has transpired so far is bound to be reduced trust in institutions peddling all kinds of products.

These new rules all but insure more cash infusions will be required by institutional money funds and other funds that still have not marked assets to market. Etrade was caught holding client cash in illadvised debt instruments, and it may yet result in bankruptcy.

Douglass National Bank, Kansas City, MO Goes Under

The Kansas City Star is reporting, Douglass National Bank Fails.

The bank's failure is the first in the nation this year and the first in the area since Superior National Bank failed in April 1994.

Douglass has struggled with mounting loan problems and operated under March 2006 orders from regulators to improve its dwindling capital strength. In the last two years, losses had reached $5.6 million, and more than 20 percent of the bank's remaining loans were still considered problems as of the end of December.

The Office of the Comptroller of the Currency, which regulates nationally chartered banks, closed Douglass after its regular business hours Friday and appointed the Federal Deposit Insurance Corp. to be receiver. The FDIC said it sold $55.7 million of Douglass' assets to Liberty Bank and Trust at book value, less a discount of $6.1 million.

Depositors' accounts transferred automatically to Liberty Bank and Trust. The FDIC said customers could access their money this weekend by writing checks and using debit or automated teller cards.

Faith in the system is slowly but surely eroding, brick by brick. Failing banks will add to the worry. Investors have every right to be wondering "What's Next?"

I am expecting many more bank failures coming up. This is a warning call to anyone over the FDIC limit at any bank anywhere.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Real Estate Auctions Booming

The real estate auction business is booming. Real Estate Disposition Corp is auctioning 2,000 homes in California and 575 in DC, Maryland, and Virginia. More states are coming up.



click on image for enhanced view.

Following is a random sampling of listings.
Some are "real beauties".

Item 247A



Item 252B


Item 240


Item 20


Item 249


Item 250


Item 272


Item 327


Item 600B


Item 604B


Item 664A


The only way some of those houses could have sold at the previous value is out and out fraud. Many of the opening bids are preposterous. Even still, there are going to be enormous losses if the homes go for the opening bid. Some won't sell for half the opening bid. They will be back on the auction block again, hopefully with more realistic opening bids.

FirstFed hit by delinquent loans

The LA Times is reporting First Federal Bank of California Net Income Plunges.

FirstFed Financial Corp., parent of First Federal Bank of California, reported that net income plunged 75% to $8.41 million in the fourth quarter because of delinquent home loans.

FirstFed shares slumped $2.93 to $36.07.

Net income was 61 cents a share, compared with $33.4 million, or $1.97, in the same period a year earlier, the Santa Monica-based company said.

Single-family home loan delinquencies led to an increase in the provision for losses to $21 million, compared with $3 million a year earlier. Adjustable-rate mortgages contributed to the higher level of delinquent loans, the company said.

California Defaults Soar



The above chart from DQNews.

California Foreclosure Activity Still Rising

The number of mortgage default notices filed against California homeowners jumped last quarter to its highest level in more than fifteen years, a real estate information service reported.

Lending institutions sent homeowners 81,550 default notices during the October-to-December period. That was up by 12.4 percent from 72,571 the previous quarter, and up 114.6 percent from 37,994 for fourth-quarter 2006, according to DataQuick Information Systems.

Last quarter's number of defaults was the highest in DataQuick's statistics, which go back to 1992.

"Foreclosure activity is closely tied to a decline in home values. With today's depreciation, an increasing number of homeowners find themselves owing more on a property than it's market value, setting the stage for default if there is mortgage payment shock, a job loss or the owner needs to move," said Marshall Prentice, DataQuick's president.

Of the homeowners in default, an estimated 41 percent emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe. A year ago it was about 71 percent. The increased portion of homes lost to foreclosure reflects the slow real estate market, as well as the number of homes bought during the height of the market with multiple-loan financing, which makes 'work-outs' difficult.

Bottom Fishers Beware

As go defaults so goes auctions. The auction business is going to be booming for a long time to come and prices have much further to drop.

Note: I am doing a live radio show every Wednesday on the Charles Goyette show KFNX. Those interested can click on the MP3 player on the upper right of the blog to hear an audio recording.

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