Former IMF Economist Predicts "Whopper" U.S. Bank Failure, Says Global Financial Crisis Set to Get Much Worse The global financial crisis is set to get much worse, with a large U.S. bank failure likely in the next few months, former International Monetary Fund (IMF) Chief Economist Kenneth Rogoff has warned. Speaking at a conference in Singapore, Rogoff, now an economics professor at Harvard University, said that despite hopes that the U.S. economy had turned the corner, the reality is that "the worst is to come." And that includes the probable collapse of a "whopper" U.S. bank or investment bank, he said. "We’re not just going to see mid-sized banks go under in the next few months," said Rogoff, who held the IMF role between 2001 and 2004. "We're going to see a whopper, we’re going to see a [failure of a] big one - one of the big investment banks or big banks." The Fannie and Freddie Trigger The bailout clock is ticking for the mortgage giants. What will it take for the government to step in finally and bail out Fannie Mae and Freddie Mac? The stock market has clearly indicated that a bailout is inevitable, as the share prices of the two mortgage giants continue to slide toward zero. On Tuesday, Freddie Mac had to pay an unusually rich premium to sell $3 billion of five-year notes. Dawn Kopecki of Bloomberg News reports that the test may be the ability of Fannie and Freddie to repay some $223 billion of bonds that come due by the end of next month. Fannie has about $120 billion of debt that matures through September 30, while Freddie has $103 billion, Bloomberg says. Recession may topple US banks, ex-IMF economist says Credit market turmoil has driven the US into a recession and may topple some of the nation's biggest banks, said Kenneth Rogoff, former chief economist at the International Monetary Fund. "The worst is yet to come in the US," Rogoff, a Harvard University professor of economics, said in an interview in Singapore. "The financial sector needs to shrink; I don't think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job." The US housing slump has triggered about $US500 billion in credit market losses for banks globally and led to the collapse and sale of Bear Stearns Cos., the fifth-largest US securities firm. Bonds of regional banks such as National City Corp. and Keycorp are under pressure on expectations of more fallout. Rogoff, 55, said the government should nationalize Fannie Mae and Freddie Mac, the nation's biggest mortgage-finance firms.
US bank 'to fail within months' The global financial crisis is set to get worse, with a large US bank likely to collapse in the next few months, a former IMF chief economist has warned. Kenneth Rogoff's comments came as shares in Fannie Mae and Freddie Mac sank on a report that the home lenders would, in effect, be nationalised. Despite hopes that the US economy had turned the corner, Mr Rogoff claimed it was "not out of the woods". "I would even go further to say 'the worst is to come'," he said. "We're not just going to see mid-sized banks go under in the next few months," said Mr Rogoff, who held the IMF role between 2001 and 2004. "We're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks." Bernstein cuts outlook on U.S. investment banks Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research, Stock Buzz) may post a third-quarter loss and incur fresh write-downs of about $3 billion, according to Sanford C. Bernstein & Co analyst Brad Hintz, who also cut his earnings estimates for Goldman Sachs Group Inc (GS.N: Quote, Profile, Research, Stock Buzz) and Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz). Weakening credit market conditions in the third quarter indicate that more write-downs and hedging failures will likely impact U.S. investment banks' performance for the period, the analyst said Wednesday. "We expect the quarter will again be characterized by mark-to-market valuation adjustments in mortgage-backed securities, commercial mortgage-backed securities and collateralized debt obligations holdings, as well as ineffective hedge performance," Hintz wrote in a note to clients.
Shoppers Across the Board Pulling Back in Weak Economy From affluent shoppers at Saks to bargain-hunters at Target, from Home Depot to office-supplier Staples, consumers are pulling back, and that's hurting retailers and raising more concerns about how they'll do the rest of the year. The latest quarterly reports show more signs of financial stress on shoppers, as Target's customers stick to necessities and have trouble making their credit card payments. Saks says it's now seeing its high-end designer consumer cut back, whereas previously it was only the aspirational customers who were retrenching. And while falling gas prices in recent weeks should provide some relief to consumers, economists say that won't be enough to offset all the other economic problems out there, from a housing slump and a weakening job market to soaring food prices and tighter credit. Long period of frugality needed for the U.S. economy Looking for the foundations for the next bull market in U.S. stocks? Wait until you see consumers who save much more, have a lighter debt load and can actually sell their houses. In other words, bring a book: it may be a bit of a wait. The S&P 500 is down about 12 percent this year and is at levels seen in both 2001 and 1999, leaving many investors sitting on paltry gains or losses for the past decade. On top of that, the United States is arguably in recession, a state of affairs that won't be helped by the rapid deterioration of economies in Europe and Japan. Fair enough, you say, but that information is a heck of a lot less useful than telling us when we might expect an improvement. David Rosenberg, the U.S. economist at Merrill Lynch in New York, has three conditions he is looking for before he becomes more positive on U.S. stocks: a rise in the personal savings rate to about 8 percent; a decline in the number of houses on the market to about eight months of supply; and a big drop in the amount that debt payments sap from American household budgets Gold Bulls 'Running for Cover' Signal Price Drop Gold, down 21 percent from a record $1,033.90 an ounce in March, may be headed down after open interest in New York futures contracts for the precious metal plunged to the lowest level in 11 months. The CHART OF THE DAY shows open interest, or the total number of contracts yet to be closed, liquidated or delivered. This reached 365,611 on Aug. 12, down 26 percent from a four- month high on July 18 and the lowest since Sept. 10. Open interest on the Comex division of the New York Mercantile Exchange reached 593,953 on Jan. 15 -- the highest since at least 1994 -- before gold rallied another 15 percent to a record on March 17.
Mortgage application volume hits multiyear low Mortgage applications drop to lowest level in more than 6 years, despite lower interest rates Mortgage application volume fell last week to its lowest levels in more than six years, the Mortgage Bankers Association said Wednesday. The fall in application volume is the latest sign of a struggling housing market. On Tuesday, a Commerce Department report showed construction of homes and apartments fell in July to the lowest level in more than 17 years. And while fewer new homes are being built, fewer customers are also refinancing existing mortgages. A sharp drop in refinance volume in recent weeks has been the leading driver of declining application volume.
Lehman couldn't secure Korean Funds Lehman Brothers Chief Executive Dick Fuld nearly struck a deal to raise almost $5 billion from South Korean wealth funds and institutions but the pact disintegrated, the New York Post said citing sources familiar with the matter. One source told the paper that Lehman was aiming to raise more capital than the Korean investor was willing to invest at the time. The precise terms of the deal could not be learned, the paper said. Lehman has more than $60 billion of mortgage and mortgage security exposure, where losses are creeping higher even on loans to the highest quality borrowers.
Slumping economy takes toll on US retailers The slumping US economy is taking its toll on retailers from luxury chain Saks to discounter Target, and everything in between. Saks reported its largest loss in two years after cutting prices on women's designer clothing, while profit dropped for a fourth straight quarter at Target. Office-supplies retailer Staples said second-quarter net income probably dropped, and Home Depot, the biggest home improvement chain, posted its seventh sales decline since 2006. Retailer earnings may worsen with the further deterioration of the US economy, as consumers rein in spending to cope with rising unemployment and inflation. The world's largest economy may grow at an average 0.7% annual pace in the last two quarters of the year, half the rate of the first six months. Jump in Wholesale Prices Shows That Inflation Remains High $$ Soaring U.S. producer prices, which last month rose at their sharpest rate in 27 years, show inflation is still running high even as the U.S. economy slows. Most Federal Reserve officials are betting inflation will moderate in the coming months as the economy cools and oil prices stabilize, but they are unlikely to act on that belief until they see evidence of sustained price stabilization. Many forecasters expect the U.S. central bank to keep its target for the federal-funds rate steady at 2% for the remainder of this year. But some policy makers remain uneasy about price increases spreading through the economy. Officials "must remain poised to act if slowing growth fails to contain inflationary pressures," Richard Fisher, president of the Federal Reserve Bank of Dallas, said in a speech Tuesday. Mr. Fisher has voted against most of his colleagues on the Fed's rate-setting committee this year, pushing for rate increases during recent Fed policy meetings.
Lehman braces for pain Lehman Brothers is considering selling at least a portion of its asset management unit, one of its best-performing assets, which should signal to investors that more write-downs or losses are looming. Investors are clearly bracing for more pain at Lehman: the fourth-largest investment bank's shares trade at less than half their book value, implying that the company's assets are likely to be marked down or sold at a loss. That in turn will likely force the bank to raise capital in some form, be it by issuing securities or selling valuable assets, analysts said.
Paulson Playing Chicken With Markets: Guess Who Will Win? James Carville, Clinton strategist, said, I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter, but now I want to come back as the bond market. You can intimidate everybody. If a politico like Carville recognized the fixed income market as an irresistible force, you'd think a Wall Street pro like Henry Paulson would give it the respect it deserves. But peculiarly, he has been acting as if he can bluster his way through a mushrooming crisis of confidence in Fannie and Freddie.
Record rise in foreclosures may be distorting housing data As if the housing market wasn't scary enough, the record-setting surge in foreclosures could be distorting some of the closely watched housing data used to gauge the market's health. The foreclosure glut is making listings of homes for sale a less reliable indicator, because much of the distressed inventory might be left out. In addition, fire-sale prices for such properties may also be skewing volume figures. Some real-estate analysts say this may indicate that housing conditions are worse than they now look, dampening hopes that the troubled market could soon be bottoming out. The combination of weak housing sales, falling home values, tighter credit conditions and a slowing economy have left financially strapped homeowners in a tough spot - some borrowers have no choice but to foreclose if they can't find a buyer for their home or pay or refinance their loans.
Fannie's Perilous Pursuit of Subprime Loans As It Tried to Increase Its Business, Company Gave Risks Short Shrift, Documents Show In January 2007, as years of loose mortgage lending were about to send the nation's housing market into devastating decline, Fannie Mae chief executive Daniel H. Mudd wrote a confidential memo to his board. Discussing the company's successes, Mudd said one of Fannie Mae's achievements in 2006 was expanding its involvement in the market for subprime and other nontraditional mortgages. He called it a step "toward optimizing our business." A month later, Fannie Mae outlined plans to further expand its activities in the subprime market. The company recognized the already weak performance of subprime loans but predicted that they would get better in 2007, according to another Fannie Mae document.
Deflating Mortgage Rates $$ Moves to Bolster Fannie, Freddie Could Lower Costs There is no shortage of market indicators predicting the government will soon intervene to steady Fannie Mae and Freddie Mac. But there is one number in particular that could push the Treasury into doing something drastic: the cost of a 30-year mortgage. The rate on a standard 30-year mortgage is currently 6.52%, almost exactly the same as a year ago. And that rate has risen sharply since the end of March, despite all that has been done to shore up the housing market. That includes massive mortgage purchases by Fannie and Freddie, expressions of government support for both companies and the passage of new housing legislation.
Some Investors Say U.S. Bailout of Housing Giants Is Inevitable Financial conditions are continuing to worsen at Fannie Mae and Freddie Mac, leading some investors to prepare for a government bailout of the housing giants even as the Treasury Department and the companies say such government intervention will not be necessary. Stock prices of both companies fell again on Tuesday, and some large overseas investors slowed their purchases of securities issued by the companies. Share prices at both Fannie and Freddie have plummeted by more than 24 percent in the last two days, and more than 85 percent since December. On Tuesday, Freddie Mac was forced to pay its steepest borrowing premium in 10 years. “The markets are acting like a bailout is inevitable,” said Sean Egan, managing director of Egan-Jones Ratings, an independent credit ratings firm. Mr. Egan said he believed the federal government would need to help pump about $20 billion into each company, possibly through a government guarantee rather than through a direct injection of capital. “We believe Treasury is going to be forced to act within the next couple of weeks,” he added. “Probably some time after Labor Day, when investors are back from vacations so that the bailout has the biggest possible positive impact.”
US rates may rise before growth quickens, Fed banker says Higher interest rates may be needed to bring down inflation even before growth and financial markets return to normal, Federal Reserve Bank of Richmond President Jeffrey Lacker said. "It is important to withdraw this monetary policy stimulus in a timely way,"Lacker said today in a Bloomberg Television interview. "That may require us to withdraw before we are certain all of the weakness is behind us and before we are completely certain that financial markets are as tranquil as we would like to see." US consumer prices rose at the fastest pace in 17 years, limiting the Fed's leeway to cut interest rates and revive faltering economic growth. Prices paid to US producers in July increased double the amount economists projected, a Labor Department report showed today. Central bank policy makers signaled two weeks ago that falling employment and persistent financial market turmoil would delay any increase in borrowing costs.
Monetary Policy in Uncertain Times Speech by Richard W. Fisher - President and Chief Executive Officer Federal Reserve Bank of Dallas ". . . . We are in the midst of a fierce correction from a prolonged period of indiscriminate behavior in the credit markets, a surfeit of home building, a global avalanche of cheap labor and correspondingly cheap imports, and other unsustainable financial and economic activity. If you were a yachtsman, you would say that we sailed the economy along in a following sea for a long time; now we are navigating force 10 seas. Everyone is battening down the hatches and reefing in their sails. Worldwide, creditors are tightening their standards and consumers and businesses are correcting their courses. The correction in the housing market has yet to find its bottom. Credit markets remain tempestuous. The price of the Chinese and other emerging-country labor we came to rely upon to hold costs down is rising; the cost of imported goods, and of goods and services overall, is rising too, driven in part by demand from the newly rich consumers in those emerging countries. U.S. consumers are being hammered by declining real income, U.S. savers and investors are being squeezed by negative real interest rates and U.S. companies’ business margins are under pressure. All these forces have conspired to constrain economic growth. My best guess is that our $14 trillion economy grew faster than the 1.9 percent annualized rate initially reported for the second quarter, thanks to exports and prudent inventory management. But I expect U.S. economic growth will decelerate to a snail’s pace, if not completely grind to a halt, in the second half of this year. Indeed, we may see the slowdown extend into 2009 as the excesses that drove the housing markets unwind before the economy can again gear up to cruising speed. Then, as 2009 unfolds, it is quite possible that the economy will resume a more normal growth trajectory. Congress charged the Federal Reserve with creating the monetary conditions for sustainable, noninflationary employment growth. We are sorely aware of the present risk to job growth. At the same time, we have to be keenly aware of the consequences of our actions for inflation. We have a dual mandate—the operative words modifying growth are “sustainable” and “noninflationary”—and we are duty bound to deliver upon it. . ."
Greenback Slides On U.S. Turmoil The dollar dropped for the second-straight day against a basket of currencies, while pressure intensified on Fannie and Freddie and economic data reported higher wholesale inflation in July. Comments from U.S. Treasury Secretary Henry Paulson couldn't keep the dollar from sliding, despite his optimism about appreciation of the Chinese currency. "To me, the biggest reason for China's currency to continue to appreciate is because that's key to opening up and reforming the economy," he said. Paulson added that the appreciation of China's currency against the dollar by more than 20% over the last three years has had "some impact" on the bilateral trade balance, but that the bigger factors affecting trade will be a market-driven currency regime in China. Massachusetts asks Fidelity to buy back securities Massachusetts' top securities regulator is asking Fidelity Investments to buy back auction rate securities it sold to customers. Secretary of State William Galvin told the Boston mutual fund company's chief executive, Edward Johnson III, by letter that he had "grave concern" about investors who have been unable to sell auction rate securities since the market dried up in February.
Cerberus gives executives time to fix Chrysler When the economy soured and gas prices soared, no auto company seemed in a worse position than Chrysler. The smallest of Detroit's Big Three, Chrysler — which also owns the Jeep and Dodge brands — is famous for its big V-8 Hemi engines and rugged sport utility vehicles, and was woefully short of the fuel-efficient cars that consumers wanted. As a result, its sales in the United States are down 23 percent this year, more than twice the industry average. And its market share, as high as 13 percent in 2007, fell below 9 percent last month. Adding to its difficulties, Chrysler is still recovering from a painful divorce a year ago from its German partner, Daimler, and is in the midst of a huge restructuring under its new owner, Cerberus Capital Management. With all Chrysler's problems, the industry has been rife with speculation about whether Cerberus would decide it had made an ill-timed bet and sell the company.
In Farm Country's Boom, Hints of a Bubble The trucks rumble down the main drag of this farm town all day long, the ones heading east brimming with grains of No. 2 Yellow Corn, the ones going west filled with Sweet Bran, a cattle feed that looks like breakfast cereal and smells like warm beer. That eighteen-wheeled evidence of prosperity shows why the Plains states are a bright spot in the otherwise gloomy national economic picture. Here, the housing market is holding up just fine, the banks are making plenty of loans, and employers keep adding jobs. The good times in farm country show the difficulty facing policymakers grappling with the nation's economic distress, underscored yesterday by data indicating the steepest rise in monthly wholesale prices in 27 years and a 17 year low for new housing construction.
RECESSATION: THE WORST OF BOTH ECONOMIC DIRECTIONS UNFORTUNATELY, it really is different this time. We got the bad news last Thursday that Wall Street was hoping to avoid: Inflation is out of control. And it shouldn't be because the economy is so weak that prices - by any traditional economic theory known to man - ought to be collapsing right now. You have probably noticed that gasoline has recently come down substantially in price. But that didn't count in the consumer inflation numbers that were released last week. Why? Because the government did some seasonal adjustments this past spring that made inflation look unreasonably good. And the way these stats work, it's now payback time. As I've been mentioning for several months now, inflation will continue to be elevated for the rest of the year because these seasonal adjustments are going to turn ugly.
U.S. businesses face economic dilemma Prices for goods purchased by American businesses surged more than expected in July and have jumped by nearly 10 percent over the last year — the sharpest increase since 1981. The data released on Tuesday by the Labor Department underscored how rising prices have seeped into much of the economy, led by higher costs for food and energy. Businesses have been absorbing some of the higher costs themselves while passing much of the increase to consumers, intensifying the strain on households just as joblessness expands and spending power shrinks. "There is virtually nothing that we have touched in the last six months that hasn't increased," said Gary O'Neal, a division manager at Central Plains Steel in Wichita, Kansas, which distributes steel to manufacturers of construction and farming equipment. "The prices have increased so rapidly and so high compared to historically where they've been. It's just been uncharted territory."
Fed's Lacker Says Rate Hike Should Come Sooner Rather than Later Speaking in an interview with Bloomberg TV, Richmond Fed President Jeffrey Lacker (non-voter) said the Federal Reserve should not wait too long for a rate hike. The Richmond Fed President called inflation a "risky situation," and said that keeping inflation in check requires a tight monetary policy.
Higher Costs Taking a Toll on Business Prices for goods purchased by American businesses surged more than expected in July and have jumped by nearly 10 percent over the last year — the sharpest increase since 1981. The data released on Tuesday by the Labor Department underscored how rising prices have seeped into much of the economy, led by higher costs for food and energy. Businesses have been absorbing some of the higher costs themselves while passing much of the increase to consumers, intensifying the strain on households just as joblessness expands and spending power shrinks. "There is virtually nothing that we have touched in the last six months that hasn't increased," said Gary O’Neal, a division manager at Central Plains Steel in Wichita, Kan., which distributes steel to manufacturers of construction and farming equipment. "The prices have increased so rapidly and so high compared to historically where they’ve been. It’s just been uncharted territory."
Hedge Fund Founder Ordered to Pay $300 Million A federal court in Philadelphia has ordered the former president and founder of a hedge fund to pay nearly $300 million for defrauding clients. Federal prosecutors indicted Paul Eustace, president and founder of the Philadelphia Alternative Asset Management Company, in November on two criminal counts of commodities fraud. The government said Mr. Eustace stole $200 million from clients from 2001 through 2005. The government accused Mr. Eustace, of Ontario, Canada, of creating false account statements, raising management fees based on false profits and transferring clients’ money to himself.
Fed's Fisher Says FOMC Cannot Risk Credibility, Must Act if Inflation Continues The Federal Reserve must be prepared to take action and curb inflation if slowing growth doesn't moderate prices as expected, said the most hawkish member of the FOMC on Tuesday. Dallas Fed President Richard Fisher (voter), who has dissented from keeping interest rates on hold at the last two FOMC meetings, said the Fed will put its credibility at risk if it fails to combat inflation. He said the Fed has fulfilled its mandate to promote growth by cutting rates rapidly and taking efforts to stabilize credit markets; and though GDP is expected slow to a "snail's pace" in the second half of 2008, rising inflation cannot be ignored.
Soft Freddie Mac 5-Year Auction Shows Credit Worries U.S. government-backed mortgage finance company Freddie Mac caused ripples through the debt market on Tuesday after weak results in a $3 billion, 5-year note auction. The reference note sold for 113.0 basis points above the 5-year Treasury benchmark. Before the auction, the 5-year spread was 105 bps. On Monday, shares of Freddie Mac were under assault, falling 25% after Barron's magazine reported a growing likelihood the U.S. government will have to bail out the government-sponsored agencies because of an inability to raise capital. Last week, the 5-year Treasury-Agency spread was at 96 basis points. Analysts say there's no reason to question the implicit government guarantee carried by senior Freddie Mac debt.
Saudi's economic cities under pressure to deliver JEDDAH, Saudi Arabia (Reuters) - An hour's drive north of Jeddah on the Red Sea coast, 8,000 workers toil under the relentless summer sun building what Saudi Arabia hopes will be the key to its social and economic future. If all goes to plan, the King Abdullah Economic City and three sister developments in Hail, Jizan and Medina will by at least 2020 be vibrant communities in a country with high unemployment and an over-reliance on oil.
U.S., Poland Sign Missile-Defense Deal $$ U.S. Secretary of State Condoleezza Rice and Polish Foreign Minister Radek Sikorski on Wednesday signed a deal that will put an American missile defense base in Poland. The formal signing comes six days after the two countries agreed to a deal that will see 10 U.S. interceptor missiles placed just 115 miles from Russia's westernmost frontier. The plan that has further strained Russian ties with the West already troubled by Moscow's conflict with Georgia, an ex-Soviet republic-turned-U.S. ally. Ms. Rice emphasized that the site isn't intended as a threat. "This is a system that is defensive and is not aimed at anyone," she said. "This is an agreement that will establish a missile defense site ... that will help us to deal with the new threats of the 21st century of a long-range missile threats from countries like Iran or from North Korea."
Russia Tightens Its Grip $$ Gains in Ossetia Look Permanent; NATO Calls for Withdrawal The most lasting result of the Caucasus conflict is likely to be the territorial expansion of the pro-Russian statelet of South Ossetia, and maybe of Russia proper. This town in South Ossetia is overwhelmingly ethnic Georgian, and once stood firmly under Georgian government authority. Tuesday, the Georgian flag no longer flew atop the police station, a squat concrete block with three Russian-made armored personnel carriers parked in the courtyard. Instead, flapping in the wind were the white, red and yellow colors of the South Ossetian banner. Although Russia has promised to pull out of Georgian areas that it has occupied in recent days, this withdrawal -- if it occurs -- almost certainly won't include places like Akhalgori and surrounding villages, just an hour's drive from the Georgian capital, Tbilisi.
Iran satellite launch a failure, U.S. officials say Iran's attempted satellite launch was a failure that fell far short of claimed successes, U.S. security officials said on Tuesday, but an analyst said the test still marked progress toward a potential weapon. "The attempted launch failed," a U.S. intelligence official told Reuters, speaking on condition of anonymity. "The vehicle failed shortly after liftoff and in no way reached its intended position," the official said. "It could be characterized as a dramatic failure." A U.S. defense official gave a similar characterization of the test as unsuccessful. But Charles Vick, a senior analyst for GlobalSecurity.org research group, said Iran appeared to have succeeded in igniting the second stage of its booster rocket and gained data that will help it perfect its launch system. The technology could also be used to develop a rocket capable of carrying nuclear weapons that could strike Europe or China, he said.
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