Ex-Fed Chief Greenspan Changes His Tune and Blasts the Housing Bubble He Helped Create The housing bubble was former U.S. Federal Reserve Chairman Alan Greenspan’s doing - plain and simple. He gave birth to it, nurtured it, protected it, and guided it during every stage of its development. In fact, if there were a deck of playing cards featuring the key players in this debacle, Alan Greenspan would be the ace of spades. So, it was strange to hear Greenspan, in an interview last week on CNBC, cast his eyes upon the charred landscape that was once the national real estate market and offer high-minded criticisms of the obvious excesses and irrationalities that brought on the devastation. Greenspan’s attitude was akin to a retired drug dealer lamenting the urban blight caused by rampant addiction. The former Fed chief noted that housing prices were still too high, that too many homeowners were upside down on their mortgages, and that Fannie Mae and Freddie Mac were accidents waiting to happen.
Mortgages Made in 2007 Go Bad at Rapid Clip $$ Delinquencies Worse Than 2006 Vintage; New Stress on Banks Mortgages issued in the first part of 2007 are going bad at a pace that far outstrips the 2006 vintage, suggesting that the blow to the financial system from U.S. housing woes will be deeper than many people earlier estimated. An analysis prepared for The Wall Street Journal by the Federal Deposit Insurance Corp. shows that 0.91% of prime mortgages from 2007 were seriously delinquent after 12 months, meaning they were in foreclosure or at least 90 days past due. The equivalent figure for 2006 prime mortgages was just 0.33% after 12 months. The data reflect delinquencies as of April 30.
U.S. retailers are grim as consumers appear squeezed The outlook for the back-to-school shopping season seemed grim Thursday, as retailers' July sales reports showed an increasing shift toward buying necessities at discounters and away from nonessentials like clothing. With the benefits of the government stimulus checks fading, the big worry is how much shoppers - squeezed by high gas and food prices - will retrench in the critical months ahead. Not Even 2% Fed Funds Help Munis Amid Record The Oakland, California, agency that runs toll bridges across the San Francisco Bay is proving that the era of cheap money for municipal borrowers is over. This week the Bay Area Toll Authority sold more than $700 million of bonds at rates as high as 5.34 percent to refinance debt that cost 4 percent last year. That leaves less money to finance projects, such as bridge improvements. "The cost of money just went way up," said Brian Mayhew, the agency's chief financial officer. "You may have projects on the cusp that are going to be difficult to do.'" Almost a year after the Federal Reserve began to cut its target rate for overnight loans between banks to 2 percent from 5.25 percent, borrowing costs for states, cities, hospitals and municipal authorities are going in the opposite direction.
Minimum-Wage Hike May Cost More Than It's Worth The recent minimum wage increase probably sounds great to the 13 million workers (10% of the workforce) affected, but the reality might not be as rosy for many of them. For some, it could even lead to job losses and reduced work hours. The second of a series of three minimum wage increases totaling $2.10 took effect on July 24 as part of Congress' Fair Minimum Wage Act of 2007. In 2007, the federal wage minimum was increased to $5.85, this year to $6.55; and in July 2009, it will be raised to $7.25. But to some business pundits, a salary raise mandated by the federal government, intended to help bring workers' income above the poverty line, will backfire. Thousands of young workers or mentally handicapped persons who depend on the unskilled, low wage, entry-level work, will lose their jobs, many believe.
AIG Plummets as Insurer Won't Rule Out Capital Raise American International Group Inc., the world's biggest insurer by assets, fell the most in a quarter-century of New York trading after saying it won't rule out raising more capital. "It's very hard to predict right now when and if we'll need more capital," Chief Executive Officer Robert Willumstad said today in a conference call with analysts. "Future losses can change that assumption and we're obviously dependent on the condition of the U.S. housing market."
Hank the Great? Paulson Copies Frederick With Bonds In 1769, short of funds to rebuild Prussia after attacks by Russia, Sweden and Austria, Frederick the Great let aristocrats, churches and monasteries raise money by pledging their estates as security to investors. From those beginnings emerged what today is Europe's $3 trillion market for covered bonds -- securities backed by assets such as mortgages as well as the seller's promise to pay. Now U.S. Treasury Secretary Henry Paulson, faced with carnage in the housing market that led to $480 billion of losses and writedowns at the world's top financial institutions, is using a similar strategy to help America's banks turn assets into cash. While the European market has grown for 250 years, Paulson's plan confronts obstacles Frederick never faced: Besides competition from the biggest U.S. housing-finance companies, the debt would be tied to mortgages and banks that are sliding in value with America's homes and economy.
Jobless claims rise to highest since March 2002 Jobless claims climb to highest point in more than 6 years as companies hunker down The number of newly laid off people signing up for jobless benefits last week unexpectedly climbed to its highest point in more than six years as the faltering economy forced companies to cut back. The Labor Department reported Thursday that new applications filed for unemployment insurance rose by a seasonally adjusted 7,000 to 455,000 for the week ending Aug. 2. The increase left claims at their highest level since late March 2002.
Chrysler, Nissan in Talks To Team Up on Key Cars $$ Chrysler LLC is in talks with Nissan Motor Co. about jointly producing midsize cars, a partnership that would move the U.S. auto maker toward a radical new business model. The two companies agreed earlier this year to team up on pickup trucks and subcompact cars. Since then, they have been discussing an agreement under which Nissan would produce midsize sedans that Chrysler would sell in the U.S. under its own name, people familiar with the matter say. A Chrysler spokesman said the company has "no new alliances" to announce, and declined to comment on any discussions it might be having.
Freddie Mac's Big Loss Dims Hopes of Turnaround The gloom over the nation’s housing market deepened on Wednesday as Freddie Mac, the big mortgage finance company, reported a gaping quarterly loss and predicted that home prices would fall further than previously projected. The announcement disappointed those hoping that the housing market might be bottoming out and heightened worries that the government could be forced to rescue Freddie Mac and the other mortgage finance giant, Fannie Mae. The news also signaled that mortgage rates were likely to rise. In filings with the Securities and Exchange Commission, Freddie Mac said that “there is a significant possibility that continued adverse developments” could cause the company to fall below government-mandated capital levels. In an interview, the company’s chief financial officer, Anthony S. Piszel, said that warning did not imply the company believed that risk was likely or imminent.
The downside of sovereign wealth funds Sovereign wealth funds are looking less eager to live up to their recent reputation as investors of last resort now that the huge investments they made in failed Western banks are turning sour one year into the credit crunch. The funds, which manage almost $3 trillion in assets, have grabbed the attention of global financial markets since last year, when they replaced hedge funds and private equity as the main driver of corporate takeover activity. Since 2007, sovereign wealth funds, mainly from emerging economies with excess reserves, have spent nearly $80 billion to buy stakes in major banks desperately needing cash to repair balance sheets damaged by losses on U.S. subprime mortgages.
China tightens currency controls to curb inflows C China has issued new controls on transfers of foreign currencies, moving to contain inflationary pressures by curbing the speculative inflows, or so-called hot money, that has been flooding into the country in recent years. The new rules, issued late Wednesday with immediate effect, call for penalties of up to 30 percent of the capital involved in any unauthorized inward or outward foreign currency transfers. They give authorities stronger control over such transactions and expand reporting requirements for financial institutions.
Top US official sees 'no alternative' to Doha A senior US trade official on Wednesday defended the World Trade Organisation and the multilateral trading system in the wake of the latest collapse of negotiations for a new round of tariff cuts in a broad range of industries. "Even if the WTO has become extremely unwieldy, it would be crazy to walk away from Doha unless there is something better," said Warren Maruyama, general counsel in the office of the US trade representative. “Right now, there is no plausible alternative.” Mr Maruyama was seeking to dispel fears that the failure of high-level talks would lead to a deterioration in international economic relations, with rising protectionism around the world and the WTO becoming increasingly irrelevant. Discussions among the WTO’s 150 member states over further trade liberalisation unravelled again last week after seven years of futile attempts to find a compromise.
The Big Freeze part 4: How to build a US recovery Macroeconomists, like medical scientists, use case studies to teach their students about the maladies to which the system is susceptible. For supply shocks and stagflation, the example is the 1970s. The financial dislocations that occur when bubbles burst are illustrated by the Great Depression and Japan’s problems in the 1990s. The importance of central bank credibility in resisting inflation emerges from discussion of the experience of the late 1960s and the 1970s. What is most remarkable and troubling about our current difficulties is that all these elements – supply shocks, financial dislocations and concern about rising underlying inflation – are present at once. Moreover, the crisis is global in scope. Concerns about recession are spreading from the US to much of the industrialised world. Significant slowdowns appear more likely in a number of emerging markets, with inflation concerns worldwide at their highest level in more than a decade. There is a growing consensus that the west is facing the most serious financial crisis since the second world war.
Big banks seek to limit their own risks Many of the world’s biggest banks are proposing reforms that would limit the size and scope of their businesses in one of the most dramatic responses to the credit crisis. The proposals would hold down the number of investors who can buy complex financial products, bring large swathes of the derivatives markets into regulators’ sights and call on banks to spend more on technology and risk management. The consequence would be that many of the securitisation businesses that helped fuel the boom on Wall Street and the City of London in the middle years of this decade could face tougher oversight and find far fewer opportunities for growth. Wall Street Report Tries to Dissect Financial Meltdown A group of Wall Street executives released a report on Wednesday that outlined how the industry failed to foresee the financial meltdown of the last year and what companies can do to improve risk management. The 172-page report, written by chief risk officers and senior executives at banks like Lehman Brothers, Merrill Lynch and Citigroup, also provides suggestions about technical issues at the same time as it offers a bit of a mea culpa.
Citigroup nears deal to buy back auction-rate securities Citigroup was nearing an agreement late Wednesday to buy back more than $7 billion of auction-rate securities from investors to settle claims that it misled clients about the dangers of the investments. The pact, with state and federal regulators, is expected to include a fine of as much as $100 million, according to several people involved in the talks. Also on Wednesday, in an unrelated case, STMicroelectronics, a semiconductor company, sued the Credit Suisse Group, saying that Credit Suisse had defrauded STMicroelectronics by investing its cash in unauthorized and unsuitable investments. Regulators are investigating at least a dozen Wall Street firms for their role in the sales and marketing of so-called auction-rate investments, and analysts expect a wave of settlements in the next few months.
Citi Talks With Regulators May Bring Billions in Buybacks $$ Citigroup Inc. is in negotiations with state and federal regulators to resolve allegations of wrongdoing in the auction-rate-securities market that could result in its buying back several billion dollars of the illiquid securities from investors and paying a sizable fine, according to people familiar with the matter. New York Attorney General Andrew Cuomo last week threatened to sue Citigroup for alleged fraud in the marketing and sales of auction-rate securities. Mr. Cuomo's office has said the firm wrongly told customers the securities were safe, liquid and cash-equivalent. It added that the firm failed to tell investors that, from August 2007 until earlier this year, the market was kept afloat primarily because the bank placed bids in auctions for the securities.
Treasury prices pull back after 10-year auction Treasury bond prices fell Wednesday, pressured by strong demand for the government's sale of new 10-year notes. The Treasury Department's auction of $17 billion in 10-year notes was well received, drawing an average yield of 4.075 percent. When the government issues new debt, the flood of supply in the market tends to drive prices for existing bonds lower.
SA strike hits some mines as others maintain production Anglo American , South Africa's top coal producer, said that some of its mines had been affected by a one-day workers' strike, but could not yet quantify the output lost...... Harmony, the world`d fifth biggest gold producer, said that all its South African mines had been hit by a one-day national workers strike, and it expected to lose up to 135kg of gold.
Trouble Out Of Africa Africa's tempting natural resources have attracted huge investment from mining companies and oil explorers, but the risks were evident on Wednesday as the military seized power in Mauritania and miners went on strike nationwide in South Africa. Investment in Africa, however, is unlikely to suffer.
Connecticut Joins States Suing Countrywide The Countrywide Financial Corporation was sued by Connecticut, which accused the company of steering customers into mortgages they could not afford, and charging excessive legal fees to borrowers in default. Connecticut joined California, Florida and Illinois among the states that have sued Countrywide, which as recently as last year made one in six mortgage loans. Washington State has separately announced plans to fine Countrywide and possibly revoke its lending license.
Tempest for a Bank That Bet on Risky Loans CORAL GABLES, Fla. — A cheerful sign outside the glistening offices of Bank United beckons consumers to tap into “Mortgage-ade.” Another promises a “59 Minute Mortgage.” But easy money, it turns out, has created enormous problems at Bank United, Florida’s biggest regional bank. By aggressively peddling a popular type of high-interest loan to risky borrowers, the bank tripled its profits in 2006 as real estate on Florida’s Gold Coast peaked, only to lose nearly $100 million in late 2007 and early 2008 as the market cratered. Now, its chief executive, Alfred R. Camner, is scrambling to raise $400 million in capital, an amount nearly eight times the bank’s shriveled value on the stock market. Analysts and a corporate governance group are monitoring the bank’s asset quality and asking why Mr. Camner was allowed, with board approval, to amass a pool of volatile loans that at one point represented 75 percent of the bank’s mortgage portfolio, despite what has since proved to be great risk
Arctic map flags up territorial disputes over oil British researchers have drawn up the first detailed map of areas in the Arctic that could spark border disputes over extensive oil and gas deposits, they said Wednesday. Experts from the International Boundaries Research Unit (IBRU) at Durham University in northeast England produced the map to illustrate current boundaries and possible future claims. Russia last year staked its disputed claim to a huge chunk of the frozen land when a submarine planted a flag on the ocean floor underneath the North Pole. Canada, the United States, Denmark, Iceland and Norway are also all embroiled in territorial disputes. Martin Pratt, director of research at IBRU, said: "We have attempted to show all known claims -- agreed boundaries and one thing that has not appeared on any other maps, which is the number of areas that could be claimed by Canada, Denmark and the US." The team used special software to construct the boundaries.
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