The median of Bloomberg’s analyst estimates is that US consumption will shrink by about 1 percent during 2009. To put this in context, this is the first time such a contraction is happening since Pearl Harbour. In other words, no one knows what kind of impact this will have on the global economy, let alone the domestic one.


By now it’s clear to most people that next year will be a nightmare for the US consumer. The Obama administration is planning total spending to the size of 3-4 billion over two years, but that amount is likely to be dwarfed by what the US economy will eventually need to stay afloat. And I doubt that the government will be willing or able to create anything else in this scale over the next few years.


The Federal government’s chosen path is indeed scary, but the danger that state governments and local authorities face is even greater. Unlike the Federal Government, which is still seen as a kind of safe heaven by fearful investors, the local governments are regarded as risky, unstable, partisan entities that can offer little guarantee for asset value during an economic crisis. They are unable to tap the international markets, and in most cases they will not be able to raise taxes to reorder the balance sheets. This will probably add anyother item to the list of federal government bailouts.


But the real danger is that the negative loop will be perpetuated by the continued deterioration of the Us economy. At this stage, all should be done to support the US consumer, but I’m afraid that the exponential deterioration in the status of the US consumer is only following a bubble, and it may therefore be irreversible in the medium term, and unstoppable.







Today the ECB has reduced its main refinancing rate (which is quivalent to the Fed funds rate)  by 75 percent points, the biggest amount in its short history. The Bank of England also cut its key rate by one percentage point to 2 percent and Sweden’s Riksbank lowered the same by the most since 1992. My attitude toward the ECB has been the same throughout this crisis. They’re more disciplined, because the financial state of the governments and citizens who they regulate is much better than that of their counterparts in the US. M. Trichet today showed some willingness to purchase some troubled paper directly, but whatever, and whenever this happens, its size and scope is likely to be far smaller than the Fed’s operations.

European Central Bank President Jean- Claude Trichet signaled he’s reluctant to cut interest rates so low that policy makers are “trapped” with few options to respond to a deepening recession.

“We have to beware of being trapped at nominal levels that would be much too low,” Trichet said at a press conference in Brussels today. The ECB earlier lowered its benchmark by three quarters of a percentage point to 2.5 percent, the biggest cut in its ten-year history.

Some of the ECB’s 21 policy makers have advocated a steady- hand approach to tackling the recession.

Council Split?

Luxembourg’s Yves Mersch told Luxembourg’s Tageblatt newspaper today that the bank is “entering calmer waters” with future rate changes more likely to be in the order of 25 basis points. Executive Board member Lorenzo Bini Smaghi said on Oct. 31 that “the present crisis is partially due to interest rates that remained at low levels for too long.”

“The council is split between those wanting to cut rates by only 50 basis points and those who wanted a more aggressive 100 basis-point cut,” said Juergen Michels, chief European economist at Citigroup Inc. in London. “So 75 basis points was a compromise and policy makers can keep their powder dry until February.”

Trichet said today’s decision was reached by “consensus,” and declined to divulge if there were calls for smaller or bigger cuts. ECB has reduced rates by 1.75 percentage points since October after the financial-market crisis intensified.

ECB forecasts published today show the euro-region economy will shrink about 0.5 percent next year, which would be its first full-year contraction since 1993. Inflation will average about 1.4 percent in 2009 and 1.8 percent in 2010, the new projections show, meeting the ECB’s price-stability goal of keeping the rate just below 2 percent.

“European policy makers, as we’ve seen in past global crises, continue to underestimate both the degree of the problem and their own part in its creation and solution,” Jim O’Neill, chief economist at Goldman Sachs Group Inc., said in a Bloomberg Television interview. “I prayed that the ECB would do 100. At least they didn’t do 50.”

Manufacturing and service industries contracted at the fastest pace on record in November and economic confidence plunged to a 15-year low. With oil prices collapsing, the inflation rate fell the most in almost 20 years last month, to 2.1 percent from 3.2 percent in October.


While “global and euro-area demand are likely to be dampened for a protracted period of time,” lower commodity prices may support a gradual recovery from the second half of next year, Trichet said.

As well as cutting rates, the bank has flooded money markets with cash and widened its collateral rules to unfreeze credit markets. Trichet said today it may be possible for the ECB to purchase assets and securities outright, while declining to say if it would.

With those who don’t receive unemployment payouts included, the total joblessnumber is close to 6 million now:

The number of people on unemployment benefit rolls rose to 4.09 million in the week ended Nov. 22, the most since December 1982. A separate report showed orders at U.S. factories tumbled in October by the most in eight years as demand collapsed at home and abroad.

AT&T Inc., DuPont Co. and Viacom Inc. today announced plans to eliminate more than 15,000 jobs as consumer spending falters and the recession deepens.

Figures from the Commerce Department showed factory orders dropped 5.1 percent, the biggest decline since July 2000. Excluding transportation gear, bookings decreased for a third consecutive month.

Fed Perspective

Dennis Lockhart, president of the Fed Bank of Atlanta, told a conference in New Orleans the economy was “in the midst of a long and very painful adjustment process.” Chicago Fed President Charles Evans, speaking in Dearborn, Michigan, said the U.S. faced a “very substantial downturn.”

Trending Up

The four-week moving average of initial claims, a less volatile measure, climbed to 524,500, the highest since 1982, from 518,250, today’s report showed.

The unemployment rate among people eligible for benefits, which tends to track the jobless rate, increased to 3.1 percent, the highest since 1992, from 3 percent. These data are reported with a one-week lag.

Forty-nine states and territories reported an increase in new claims, while 4 reported a decrease. The biggest increases were reported by California, Ohio and Michigan.

Longer Slump

What started as a housing slump has spread to manufacturing and services. The Institute for Supply Management’s factory index dropped last month to the lowest level since 1982, and its services gauge, which accounts for almost 90 percent of the economy, fell to the lowest level since records began in 1997.

Financial firms are among those making the biggest job cuts. JPMorgan Chase & Co., the largest U.S. bank by assets, said this week it will cut 9,200 jobs nationwide at Washington Mutual Inc. as it acquires the Seattle-based lender.

“We have seen a fairly significant dropoff in demand, starting in October,” Delta Airlines Inc. President Ed Bastian said on a Webcast of a Credit Suisse Group AG airline conference in New York this week. “The revenue environment is as cloudy as it’s ever been. We’ve never seen the level of demand destruction that some are forecasting for our business.”

Delta, the world’s largest carrier, said it will cut seating capacity by as much as 8 percent in 2009 and eliminate an unspecified number of jobs.

The SIV story is not entirely over yet, and Bloomberg today reports that the creditors of the failed SIV “Sigma” may not paid “in full or in part”. In other words, they may get zero cent(s) on the dollar…

Sigma, which held securities with a face value of $2 billion, according to Moody’s Investors Service, raised a total $306 million from a Dec. 2 auction as part of its liquidation, the SIV’s receivers Ernst & Young LLP said in a statement today. Sigma has $6.2 billion of secured debt outstanding, the receivers said.

“Short-term liabilities which fell due for payment after Oct. 23, 2008 will not be met either in full or in part out of these assets,” the statement said. The liquidation follows a judgment by the U.K. Court of Appeal and the receivers said their estimate may change should the case go before the House of Lords.

Sigma, created by London-based Gordian Knot Ltd., survived longer than other SIVs that defaulted after money markets shut down by borrowing from banks through collateralized loans known as repurchase agreements. Sigma stopped paying creditors at the end of September after failing margin calls, according to court documents.

Sigma pledged $25 billion of its assets to banks to cover $17.4 billion of borrowings, according to Moody’s, leaving just $2 billion of unencumbered assets to repay about $6 billion of outstanding bonds.

Senior creditors in Cheyne Finance Plc, the first SIV to collapse, recovered about 61 percent after the company was reorganized, according to an Aug. 12 statement.

Not only hedge funds suffer redemptios. Mutual funds are also facing something of a run by worried investors nowadays. One positive development is the return of investors to money market funds, which is for now preventing some investment grade companies from falling apart:

Investors fled from stock and bond mutual funds for the third straight month in November, removing $86.4 billion as signs of a worsening economy drove them out from all but the safest investments.

Shareholders removed $52 billion from stock funds and $34.4 billion from bond funds last month, said Conrad Gann, chief operating officer of TrimTabs Investment Research, citing preliminary data compiled by the Sausalito, California-based firm. While outflows were less than a record $111 billion in October, investors are still scared, he said.

“There’s still plenty of fear out there,” Gann said. “It’s more of a continuing drumbeat.”

Stock and bond mutual funds have lost $270 billion to investor withdrawals since September. Every bond-fund category has lost ground in 2008 except those that invest in U.S. Treasuries.

Cash has poured into money-market funds, considered the safest investments outside of bank deposits and government-backed bonds. Taxable money-market mutual fund assets surged to a record of $3.657 trillion in the week ended Dec. 2, according to IMoneyNet of Westborough, Massachusetts.

Drop Since May

Mutual funds had $9.6 trillion in assets as of Oct. 31, a 22 percent drop since May, according to data compiled by Washington, D.C.-based Investment Company Institute.

Merril Lynch says that oil may fall to $25 per barrel if China falls into a recession:

Crude oil fell below $44 a barrel to the lowest since January 2005 and gasoline dropped below $1 a gallon as the deepening recession in the U.S., Europe and Japan cuts fuel consumption.

Prices may dip below $25 a barrel next year if the recession spreads to China, Merrill Lynch & Co. said in a report today. “We’ve got the U.S, U.K., Europe and Japan all in recession for the first time since World War II, and the oil market is reacting,” said Chip Hodge, a managing director at MFC Global Investment Management in Boston, who oversees a $5 billion energy-company bond portfolio.

Oil prices have tumbled 70 percent since reaching a record $147.27 on July 11.

 “There is no sign where it will stop,” said Tom Bentz, senior energy analyst at BNP Paribas in New York. “We are now looking at $41.15, which was the pre-Gulf-War high and after that at the $40 and $37 level.”

Oil reached a then-record $41.15 in October 10, 1990, when Iraqi troops were occupying Kuwait. The milestone held until May 2004. Prices were last below $40 a barrel in July 2004.

“A temporary drop below $25 a barrel is possible if the global recession extends to China and significant non-OPEC cuts are required,” Merrill commodity strategist Francisco Blanch said in today’s report. “In the short run, global oil-demand growth will likely take a further beating as banks continue to cut credit to consumers and corporations.”

OPEC oil ministers agreed on Oct. 24 in Vienna that the 11 members with quotas would cut supply by 1.5 million barrels a day starting in November.

“Prices won’t rebound until either the financial crisis is fixed or oil-market fundamentals tighten,” said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts. “We will have to see substantial inventory reductions and OPEC cuts.”

Commercial mortgage delinquencies continued to rise in November, as would be expected. The highest-rated CMBS are right now paying about a massive 12 percentage points more than Treasuries, compared with with just 0.82 in January:

Commercial mortgage delinquencies rose in November and will climb as the economy slows and unemployment grows, according to Barclays Plc.

Payments more than 60 days late on commercial real estate loans that were bundled together and sold as bonds increased to 0.69 percent last month, compared with 0.57 percent in October and 0.51 percent in September, Barclays data show.

The “relative spike” in delinquent loans marks the “beginning of a sustained, upward trend,” Barclays analysts led by Aaron Bryson in New York said in a report yesterday. “We have repeatedly stressed that CMBS delinquencies are a lagging indicator of performance and tend to lag changes in employment by close to a year.”

Waning demand for the bonds, which are backed by pools of commercial mortgages, caused sales to slump to $12.2 billion this year, compared with a record $237 billion in 2007, according to JPMorgan Chase & Co. estimates.

Delinquent Retailers

Retailers are leading the rise in commercial mortgage delinquencies, according to Barclays. Late payments on retail space rose to 0.58 percent in November, compared with 0.43 percent in October, the data show.

 “The depth and length of this economic downturn looks to be materially worse than many investors initially expected and worse than that experienced during the last recession,” the analysts wrote in a Nov. 26 report.

Looser Underwriting

Underwriting standards on commercial real estate mortgages taken out between 2005 and 2007 were looser than those on loans in prior years, which will contribute to more delinquencies, the JPMorgan analysts said.

The impending default of two commercial mortgages sent spreads soaring to record highs last month. A $209 million loan to finance the Westin La Paloma Resort & Spa in Tucson, Arizona, and the Westin Hilton Head Island Resort & Spa in South Carolina, is near default after cancellations sapped revenue. In southern California, the owner of the Promenade Shops at Dos Lagos missed two payments on a $125 million loan.

The loans were among the largest in a $1.16 billion commercial mortgage debt offering sold by JPMorgan on April 30, Bloomberg data show.

Another hedge fund has frozen redemptions:

Fortress Investment Group LLC fell 25 percent to a record low after the private-equity and hedge-fund manager halted redemptions from its Drawbridge Global Macro fund, which had lost value this year.

Investors asked to withdraw $3.51 billion by year-end, including the $1.5 billion in redemption notices disclosed last month, the New York-based company said today in a filing with the U.S. Securities and Exchange Commission. Fortress spokeswoman Lilly Donohue declined to comment.

“The market essentially lost faith in Fortress as a franchise so that anything Fortress does is tainted by problems that it had in its private-equity portfolio,” said Jackson Turner, an analyst with Argus Research Co. in New York, who has a “sell” rating on the company.

More than 80 firms have liquidated funds, restricted redemptions or segregated assets following a stock-market decline and a credit freeze that started with a housing slump and rising defaults on U.S. subprime mortgages. Hedge funds have posted losses averaging 23 percent this year through Dec. 1, according to Chicago-based Hedge Fund Research Inc.’s HFRX Global Hedge Fund Index.

Fortress said in November its hedge-fund clients asked to pull more than $4.5 billion, or 25 percent of their money, as the company reported its first quarterly loss since going public. The Drawbridge fund had $8 billion as of Sept. 30, and the requested withdrawals amount to about 44 percent of the money pool, said Roger Smith, an analyst with Fox-Pitt Kelton Cochran Caronia Waller USA LLC in New York. Drawbridge lost 12 percent this year, he said.

The hedge-fund industry may shrink as much as 45 percent by the end of this month to $1.1 trillion from its peak of $1.9 trillion in June because of investor redemptions and market losses, Morgan Stanley analyst Huw van Steenis said in a Nov. 24 report.

Yields on speculative-grade bonds imply a default rate of 21 percent, which is higher than the record of the Great Depression. Moody’s forecasts the U.S. default rate to rise to 3.3 percent in October, to 4.9 percent in December 2008 and to 11.2 percent by November 2009. In other words, the US economy will face a period of consolidation and reorganisation, and the US economy of tomorrow will probably depend on exports and manufacturing to a far greater degree than the economy today does. In essence, we’re witnessing that much feared, and discussed, seldom understood unwinding of global imbalances: China is forced to shrink its export sector, as the US is forced to restrain its domestic spending habits. While in sum this is a healing process, the surgery is rather painful because the patient was a bit too late in seeking help for its illnesses:

The extra yield investors demand to own U.S. high-yield bonds was 19.19 percentage points on Dec. 1, according to Moody’s. Assuming a 20 percent recovery rate, the spread implies a default rate of 20.9 percent, John Lonski, chief economist at Moody’s Investors Service, said yesterday in a market commentary. That compares with a rate of 11 percent in January 2001, 12.1 percent in June 1991 and 15.4 percent in 1933.

Defaults and bankruptcies are accelerating as financing options for high-yield companies dwindle amid the longest U.S. economic recession in at least 26 years. The U.S. default rate rose to 3.3 percent in October, according to Moody’s, which forecasts the rate to increase to 4.9 percent in December and 11.2 percent by November 2009.

“The default rate is going to start rising quickly, soon enough it’s going to be breaking above 10 percent,” Lonski said in an interview. “Lack of access to financial capital is a very big problem for high-yield bonds.”

Hawaiian Telcom Communications Inc., a provider of local and long-distance telephone service, and Pilgrim’s Pride Corp., the largest U.S. chicken producer, sought bankruptcy protection on Dec. 1, as they struggled with too much debt taken on before the credit crisis.

Trump Entertainment

Trump Entertainment Resorts Inc., the casino company founded by Donald Trump, had its ratings cut by Moody’s on Dec. 1 after announcing last week it would forgo a $53 million interest payment to conserve cash. Moody’s lowered its probability of default rating to Ca from Caa2 and its rating on the company’s senior secured notes due 2015 to Ca from Caa2, with a negative outlook, suggesting the company is more likely to default.

Three companies have sold $2.7 billion of high-yield bonds this quarter, compared with $30 billion in the same period a year ago, according to data compiled by Bloomberg. Leveraged loans arranged this year total $301 billion, down more than a third from last year, Bloomberg data show.

“There’s a lot of forced selling of high-yield bonds by hedge funds owing to the need to de-lever as well as by mutual funds in response to redemptions,” Lonski said. “You’re looking at a market where the sellers well outnumber the buyers and the reluctance on the part of buyers makes sense if only because a bottom for economic activity is not yet in sight.”

High-yield, high-risk bonds are rated below Baa3 by Moody’s and BBB- by Standard & Poor’s.

Today Mr. Bernanke enlightened us further on his solution to the credit crisis. What they will be doing, in essence, is selling Treasuries to the market in order to accumulate the funds with which the bailouts are financed, and after that, as yields fall to very low levels, buying the same Treasury bonds, and thereby injecting liquidity to the markets. Thus it sound circular? It does, and it is another of the Federal Reserve’s much publicized but eventually useless financial trickery.  

Why were the Treasuries sold? Because the government wanted to assume the role of the financial intermediary, as banks were unable to undertake their usual duties in that capacity. Since liquidity didn’t flow through private financial channels, the government sucked it out, and splashed it on bankrupt firms, by virtue of its AAA credit rating, and sovereign status. So what makes the Federal Reserve expect that throwing that same liquidity back into the market through Treasury buybacks will cause any changes? In fact, it’s a declaration of bankruptcy. The more he tries to reduce the rates on treasury bonds, the more liquidity will be sucked from markets, since more attractive government paper will necessarily cause other asset classes to present  even less value to investors. We’re back to square one:

“Although further reductions from the current federal funds rate target of 1 percent are certainly feasible, at this point the scope for using conventional interest-rate policies to support the economy is obviously limited,” Bernanke said in remarks to the Austin Chamber of Commerce.

One option for reviving the economy is for the Fed to buy “longer-term Treasury or agency securities on the open market in substantial quantities,” Bernanke said. “This approach might influence the yields on these securities, thus helping to spur aggregate demand.”

While Bernanke was “pretty aggressive on the possibility of the Fed using its balance sheet aggressively through Treasury purchases,” he wasn’t specific about the policy path because he probably didn’t want to preempt the discussion at the FOMC meeting in two weeks, said Sack, a former Fed economist.

The Fed will “continue to explore ways” to keep the market federal funds rate closer to policy makers’ target, after paying 1 percent interest on banks’ reserves failed to stabilize the rate, Bernanke said. The average daily rate has been below the central bank’s target every day since Oct. 10.

That’s because Fannie Mae and Freddie Mac, which are “large suppliers of funds,” aren’t eligible to get interest from the Fed and thus lend below the Fed’s target, Bernanke said.

Last week, the Fed announced two new programs aimed at unfreezing credit for homebuyers, consumers and small businesses. Those include a commitment to buy as much as $600 billion of debt issued or backed by government-chartered housing-finance companies and a $200 billion initiative to support consumer and small-business loans.

 ‘Sustainable Level’

The Fed’s balance sheet “will eventually have to be brought back to a more sustainable level,” Bernanke said. “However, that is an issue for the future; for now, the goal of policy must be to support financial markets and the economy.”

US manufacturing contracted in November at the steepest rate in 26 years. Chinese manufacturing PMI aso contracted.

The Institute for Supply Management’s factory index dropped to 36.2, below economists’ forecasts, and its gauge of raw- material costs plunged to the least in six decades, intensifying concern over deflation. The Tempe, Arizona-based group’s report came as factory indexes in China, the U.K., euro area, and Russia all fell to record lows.

 “This downturn in the global economy is probably more synchronized than we have ever seen,” said Jonathan Basile, an economist at Credit Suisse Holdings in New York. Policy makers should “open the flood gates” for more action, he said.

Construction Spending

A report from the Commerce Department also showed construction spending fell 1.2 percent in October, a bigger drop than forecast, as a slump in homebuilding spread to non- residential projects such as power plants, churches and highways.

China’s purchasing managers’ index fell to a seasonally adjusted 38.8 from 44.6 in October, the China Federation of Logistics and Purchasing reported today. An index covering the 15 nations sharing the euro dropped to 35.6, the lowest since Markit Economics began the poll in 1998.

VTB Bank Europe’s index covering Russia fell to 39.8, and the U.K.’s Chartered Institute of Purchasing and Supply’s factory index was at 34.4, the least since the survey began in January 1992.

New Orders, Production

The U.S. ISM’s purchasing managers’ gauge of new orders for factories decreased to 27.9, the lowest since 1980, from 32.2 the prior month. The production measure fell to 31.5 from 34.1.

The index of prices paid dropped to 25.5, the lowest level in six decades, from 37. That adds to concern that the U.S. economy may be at risk of deflation, a sustained decline in prices and wages caused by scarce credit. Deflation can worsen a recession by making debts harder to pay and countering the effect of interest-rate cuts.

Orders from overseas continue to weaken as economies abroad contract. ISM’s export gauge was unchanged at 41, the lowest reading since records began in 1988.

 ‘Difficult Years’

We are all expecting the year 2009 to be a very low year in terms of demand, not only in the United States, but globally,” Carlos Ghosn, chief executive officer of Nissan Motor Co., said in a Nov. 19 interview on Bloomberg Television. “We may be facing a couple of difficult years, with very low demand.”

In anti-climactic moment, NBER has declared a recession in the US:

The U.S. economy entered a recession a year ago this month, the panel that dates American business cycles said today, making this contraction already the longest since 1982.

The declaration was made by a committee of the National Bureau of Economic Research, a private, nonprofit group of economists based in Cambridge, Massachusetts. The last time the U.S. was in a recession was from March through November 2001, according to NBER.

 “It is clearly not going to end in a few months,” Jeffrey Frankel, a member of the NBER committee and a professor at Harvard University, said in an interview. “We would be lucky to get done with it in the middle of next year.”

The loss of 1.2 million jobs so far this year was the biggest factor in determining the starting point of the U.S. recession, the NBER said. By that measure, the contraction probably deepened last month.

At 12 months, the current contraction is already the longest since the 16-month slump that ended in November 1982, and exceeds the postwar average of 10 months.

The contraction is the second under President George W. Bush’s watch, making him the first U.S. leader since Richard Nixon to preside over two recessions.

Summers, More Action

Lawrence Summers, President-elect Barack Obama’s pick for White House economic adviser, said the economy is getting worse and requires more legislative action.

“Recent economic evidence suggests that the pace of this downturn is accelerating,” Summers said in a statement. He said Obama wants to enact a recovery package “soon after taking office.”

The likely length of this downturn may cast doubt on economists’ view that the business cycle was moderating in recent decades.

“Everyone had thought long, deep recessions were a thing of the past,” Frankel said. “There was a lot of talk of the new economy.”

More than 80 hedge funds have liquidated, restricted redemptions or segregated assets during the credit crisis so far. The reader should remember that market-size contraction is the hallmark of this crisis. Another one did so today:

Tudor Investment Corp., the firm run by Paul Tudor Jones, temporarily suspended client redemptions from the $10 billion BVI Global Fund Ltd. as it plans to split the hedge fund into two.

Tudor is proposing to put hard-to-sell investments, mostly corporate bonds and loans from emerging markets, into a new fund called Legacy, Jones said in a Nov. 28 letter to investors. BVI Global, the flagship fund Tudor started in 1986, would focus on easier-to-trade stocks, bonds, commodities and currencies.

Investors asked to pull 14 percent of their money from BVI Global as it lost 5 percent this year through November, according to the letter. That compared with an 18 percent loss through October of the Multi-Strategy Index compiled by Hedge Fund Research Inc.

Tudor, which oversees $17 billion, is asking BVI Global investors to approve the plan to split the fund in the next two months. Clients would have their money allocated between BVI Global and Legacy based on the division of assets.

Legacy will account for about 29 percent of BVI’s assets as of March 31, 2009, according to the letter. It will include emerging-market corporate credit debt, which has “ceased to be tradable,” as well as investments in private equity and hedge funds.

Emerging-markets securities have fallen as commodity prices plunged and investors shunned riskier assets on concern the global economy is entering a recession. The MSCI Emerging Markets Index has dropped 58 percent this year.

Jones, 54, told clients in August that Jim Pallotta, head of equities, is leaving to start his own firm. Pallotta will keep the Raptor Global Fund that he runs out of Boston from January. The fund lost 16.5 percent this year through Nov. 19, according to investors.

Industry Contracts

The hedge-fund industry may shrink as much as 45 percent by the end of this month to $1.1 trillion from its peak of $1.9 trillion in June because of investor redemptions and market losses, Morgan Stanley analyst Huw van Steenis said in a Nov. 24 report.

Hedge funds have posted losses averaging 22 percent this year through Nov. 24, according to Chicago-based Hedge Fund Research’s HFRX Global Hedge Fund Index.

And another one:

Highbridge Capital Management LLC, the $20 billion investment firm run by Glenn Dubin and Henry Swieca, is limiting client withdrawal requests to avoid selling assets at distressed prices, according to a person familiar with the matter.

Investors who submit withdrawal requests to the $1.9 billion Asia Opportunities Fund this quarter will get half their money by the end of January. The fund, which lost 32 percent this year through October, will return the rest within 12 to 18 months.

Highbridge, based in New York, will segregate hard-to-sell assets and sell them off over time in the hope that prices recover and clients get more money back. Firms including Tudor Investment Corp. and GLG Partners Inc. have taken similar steps in the past month.

The fund gained 18.7 percent last year, 15.4 percent in 2006 and 6.88 percent in the previous year when it was started. JPMorgan Chase & Co., the largest U.S. bank by assets, bought a majority stake in New York-based Highbridge four years ago and increased its ownership to 78 percent in January.

Deleveraging, like most economical events, is a gradual process. It roughly begins at front-line financial actors, such as hedge funds, banks and speculators, moves to the real economy and the corporate sector at the second stage, and finally reaches the consumer. We have entered the first two phases of deleveraging already, and now it’s the third stage where the consumer has to shrink his balance sheet.


The Economist stated, on Nov20th 2008:


“An important reason why the American economy has been so resilient and recessions so mild since 1982 is the energy of consumers. Their spending has been remarkably stable, not only because drops in employment and income have been less severe than of old, but also because they have been willing and able to borrow. The long rise in asset prices—first of stocks, then of houses—raised consumers’ net worth and made saving seem less necessary. And borrowing became easier, thanks to financial innovation and lenders’ relaxed underwriting, which was itself based on the supposedly reliable collateral of ever-more-valuable houses. On average, consumers from 1950 to 1985 saved 9% of their disposable income. That saving rate then steadily declined, to around zero earlier this year (see chart). At the same time, consumer and mortgage debts rose to 127% of disposable income, from 77% in 1990.


Bruce Kasman and Joseph Lupton of JPMorgan predict that the saving rate will jump to around 4.5% by the end of next year, the sharpest jump in so short a time in the post-war period. This compulsory return to thrift will be deeply painful; consumer spending and housing are almost three-quarters of GDP. Of the 1.2 million, or 0.9%, decline in jobs since December, about 700,000 are directly related to consumers: retail trade, transportation manufacturing and home-building. The rise in unemployment, from 4.4% in 2006 to 6.5% in October, is nearing that of 2001-03 and is not over. Consumer prices plunged a record 1% in October from September, and by 0.1% excluding fuel and food, the first such decline since 1982. The Fed’s vice-chairman, Donald Kohn, said outright deflation “is a risk out there but it’s still small.


Until 1982 recessions were often induced by the Fed to weaken demand and reduce inflation. Declines in GDP were dominated by business inventories and interest-sensitive spending such as cars and houses. Once the Fed eased money, spending sprang back.

Since then inventories have become less important to the business cycle and deregulation and financial innovation mean higher interest rates take longer to affect spending. Expansions are marked by sizeable growth in assets and debt. When the cycle turns, falling asset values and debt reduction weaken the kick of lower rates, producing anaemic recoveries with rising unemployment. The Fed has already lowered its interest-rate target to 1%, but it is fighting gale-force headwinds as lenders reduce their loan portfolios. Citigroup recently told many of its credit-card holders that it was raising their interest rates by up to three percentage points.

Lenders once routinely pooled credit-card, student and car loans into securities and sold them to capital-markets investors. Joseph Astorina of Barclays Capital says no one wants to buy such securities now for fear that some overextended investor will dump its own holdings a week later, driving their values down sharply. The issuance of credit-card-backed securities, which averaged $8 billion a month in 2007, was zero in October, he says.

Alan Greenspan, the former Fed Chairman, told The Economist this week that banks were satisfied with capital equal to 10% of their assets in the past. Now, to soothe depositors and investors, they will need a much higher ratio—perhaps around 15%. Until they get there, through a combination of raising new capital, reducing dividends and share buybacks, and shedding assets, lending will be constrained.”



Comment: Most of the surge in the household debt ratio has occurred after 2000, roughly coinciding with the skyrocketing of US external deficit. Though well-known, it is still an important harbinger of the massive correction that US consumption will go through, because the rise had mostly been funded by Asian export money and petrodollars. With the collapse of global trade, this source of funding will dry out, leaving the US consumer’s excesses dependent on government handouts.

Nonetheless, the correction should be allowed to happen, as the opposite is impractical. US consumers have to learn to live like responsible individuals, and others in the world must learn to generate domestic demand to replace American profligacy.

Deflation fear will keep central banks reducing interest rates and pumping liquidity into the world economy.

Prices paid to U.S. producers plunged in October by the most on record as the faltering global economy caused demand for commodities to dry up.

The 2.8 percent drop was larger than forecast and followed a 0.4 percent decline in September. The figures from the Labor Department came after the U.K. reported the biggest decrease in its inflation rate in at least 11 years, signs that deflation may be added to the list of economic challenges facing President-elect Barack Obama in January.

A collapse in demand is forcing companies including Dow Chemical Co., the largest U.S. chemical maker, to charge lower prices and has brought automaker General Motors Corp. to the brink of bankruptcy. Central banks are likely to keep cutting interest rates, with some benchmarks approaching zero percent, as a global recession increases the threat of deflation.

“Fuel prices are falling like a stone and will continue to drop,” said Michael Gregory, a senior economist at BMO Capital Markets in Toronto, who had forecast a 2.5 percent decline in the PPI. “The drop in consumer spending is going to cause a ripple effect all along the supply chain in disinflationary pressures, if not deflationary pressures.”

Private reports today showed more deterioration in the U.S. housing market, where the financial crisis and the economic slump began. Home prices fell in 80 percent of U.S. cities in the third quarter, according to figures from the Chicago-based National Association of Realtors.

The U.K. inflation rate fell more than economists forecast in October, recording the steepest drop in at least 11 years, the Office for National Statistics said today in London. Consumer prices rose 4.5 percent from a year earlier, compared with 5.2 percent the previous month.

After contracting at a 0.3 percent annual pace in the third quarter, the U.S. economy may shrink again this quarter and the first three months of 2009, according to a Bloomberg survey conducted from Nov. 3 to Nov. 11. The slump would be the longest since 1974-75.

Europe and Japan slipped into a recession last quarter, and China’s economy, the biggest contributor to global growth in 2007, is slowing.

The prices Dow charges for two of the most-used plastics, polyethylene and polypropylene, fell as much as 40 percent since September, giving up gains achieved since June, the company said. Midland, Michigan-based Dow is closing more factories as sales decline.

“This is as bad as we have ever seen it in our lifetimes,” Chief Executive Officer Andrew Liveris said in a Nov. 13 interview. An increase in prices “is probably going to be near impossible in the next three to six months.”

Private equity will soon discover how bad it can get for leveraged buyouts in a deleveraging environment. Many of them are managed by seasoned, reliable individuals, but if I’m allowed to extrapolate from a statement by Cerberus during the earlier part of this year, private equity wasn’t expecting the economy to deteriorate this badly. No one can complain about a lack of warnings, however.   

Meanwhile, despite all the fears of an imminent collapse, the CDS market has been holding its own ground remarkably well since the collapse of Lehman. The oncoming tests are likely to be even severer, however, and the best outcome would be a contraction in this market, without contagion in peripheral areas, such as bank failures, and the like.

Masonite International Corp., taken over by Kohlberg, Kravis, Roberts & Co. three years ago, may file for bankruptcy unless the company’s lenders agree to ease the terms of its bank loans, people familiar with the matter said.

The door and fiberboard maker, which KKR bought for $1.9 billion, is negotiating with a group led by Scotia Capital for a reprieve of at least 30 days in exchange for higher interest payment and fees, according to the people, who declined to be identified because the talks are confidential. Masonite and lenders holding $1.5 billion of the debt postponed until tomorrow a call that was scheduled for this morning, two people who planned to participate said.

Private equity firms including Apollo Management LP and Madison Dearborn Partners LLC have seen companies they own succumb this year to the slowing economy and the worst housing and financial crisis since the Great Depression. KKR partner Paul Raether said on Nov. 3 that the New York-based buyout firm had marked down the value of its equity investment in Masonite to zero.

“Masonite had a lot of leverage going into a really bad housing market,” Paul Aran, analyst with Moody’s Investors Service in New York, said in a telephone interview. “Demand for doors decreased and that in itself is a big enough problem. Add in the leverage covenants and you get into major issues,” he said, referring to terms of the loans. Moody’s yesterday lowered the company’s debt one grade to Ca, the second-lowest junk rating.

In the second quarter, Masonite breached loan covenants prohibiting the company from incurring debt seven times greater than its earnings before interest, tax, depreciation and amortization, according to a filing. The ratio surged to 8.25 times as of June 30 after the earnings figure declined 44 percent to $56 million, the filing said. In September, Masonite arranged a bank-loan forbearance agreement that expired Nov. 13.

Credit Event

Lenders blocked an interest payment to bondholders on Oct. 15, according to Moody’s. The company failed to pay the interest within a 30-day grace period, Moody’s said.

Failure to make interest payments on its bonds triggered a so-called credit event in derivatives contracts linked to Masonite’s loans. Traders of credit-default swaps on loans linked to Masonite will settle contracts on the company in “the next few weeks,” the International Swaps & Derivatives Association said today in a statement. The auction will be administered by Markit Group Ltd. and Creditex Group Inc., the statement said. Masonite is one of 100 companies in the Markit LCDX index.

KKR’s Loans

Bondholders holding 92 percent of the company’s $412 million of notes due in 2015 agreed to not demand repayment of the securities Nov. 17 through Dec. 31, the statement said. The notes were quoted yesterday at 14.75 cents on the dollar to yield 68 percentage points, according to Trace data, the bond-price reporting system of the Financial Industry Regulatory Authority.

Holders of 53 percent of the $358 million notes issued by Masonite, also due in 2015, also agreed to hold off on demanding immediate payment.

More  and more commercial mortgages are defaulting:

Two commercial mortgage borrowers with $334 million of loans bundled into bonds are about to default on their debt, according to Credit Suisse Group AG.

The $209 million Westin Portfolio loan and the $125 million loan for Promenade Shops at Dos Lagos were among the 10 largest in debt offerings sold by JPMorgan Chase.

The threat of nonpayment caused the cost to protect top- rated commercial mortgage bonds from default to soar 130 basis points to 570 basis points on Markit Group Ltd’s CMBX credit default swap index as of 4:05 p.m. in New York, according to a note to clients from Goldman Sachs Group Inc.

They are big loans and they went bad fast,” said Kent Born, a senior managing director in the commercial lending group at PPM America Inc. in Chicago. “In the current market environment, any negative news is going to cause an outsize reaction.”

The potential failures are the latest signs of cracks in the commercial mortgage market where default rates are low compared with the subprime home-loan market. Sales of bonds backed by commercial mortgages slumped to $12.2 billion this year, compared with a record $237 billion in 2007.

Delinquencies on commercial real estate debt were at 0.78 in October, RBS Greenwich data show. About 35 percent of all subprime mortgages backing bonds are least 30 days late, according to data complied by Bloomberg.

Arizona, California

The Westin loan is backed by two hotels located in Tucson, Arizona, and Hilton Head, South Carolina. The slowing economy has led customers to curb travel, reducing revenue for companies in the hospitality industry. Bookings growth at Expedia Inc., the world’s biggest online travel agency, fell to 7 percent in the third quarter from 21 percent a year earlier.

The Promenade Shops are located in Corona, California, one of the regions hardest hit by the worst housing crisis since the Great Depression. Rising foreclosures in Southern California sent home prices down 33 percent in October from a year earlier, MDA Dataquick said today.

Loans made to be sold into the CMBS market were the predominant form of financing for commercial real estate buyers between 2004 and 2007, when U.S. commercial property prices rose almost 60 percent, according to the Moody’s/REAL Commercial Property Price Index. That index has fallen about 12 percent since peaking in October 2007, according to data compiled by Bloomberg.

How low can homebuilder confidence go? Apparently, zero…There were those who thought 19 was a the bottom. We’re now at 9.

Confidence among U.S. homebuilders in November dropped to the lowest level since record-keeping began in 1985, a sign that the deepening credit crisis is preventing prospective buyers from purchasing new homes.

The National Association of Home Builders/Wells Fargo index of builder confidence decreased to 9, lower than forecast, from 14 in October, the Washington-based association said today.

Prices Falling

Home prices fell in four out of every five U.S. cities in the third quarter, a record spurred by distressed foreclosure sales across the country, the Chicago-based National Association of Realtors also said today. The median price of a U.S. home fell 9 percent from a year earlier and sales of properties with mortgages in default accounted for at least a third of all transactions.

The builders’ confidence gauge, which was first published in January 1985, averaged 27 last year.

Sales, Traffic Slump

The group’s index of current single-family home sales fell to 8 this month from 14 in October. The index of buyer traffic decreased to 7 from 11. A measure of sales expectations for the next six months were unchanged at 19.

Confidence slipped in all four regions, led by a slump in the Midwest.

U.S. foreclosure filings in October rose 25 percent from a year earlier, compared with average monthly gains of about 50 percent so far in 2008, after California passed a law delaying foreclosures for some borrowers, according to RealtyTrac, a seller of foreclosure data. Filings increased 5 percent from September.

Record-Low Starts

 “It’s safe to say October was a significant drop from September, which was an awful month and an awful period for everyone,” Ara Hovnanian, chief executive of Hovnanian Enterprises, New Jersey’s largest homebuilder, said in a Bloomberg Television interview Nov. 13.

“When our sales drop, and when we see it in the public arena, that means the starts and the closings that are going to come in the next couple of months are going to be far worse than what’s out there today,” he added.

As I have mentioned here before, the Tarp is not enough to resolve anything, and Paulson himself seems to have acknowledged this fact today. In a move that is prudent and proper, the Treasury has decided to use half of the authorized funds for bank rescues in buying securitized consumer loans, such as credit cards, auto loans, and others. Of course the causes that necessitated the use of those funds for the previous purposes have not evaporated, and  I believe that the Tarp will have to multiplied a number of times, before it is in any way able to alleviate any of the problems in the economy.

What we now see is really nothing other that the actualization of a process which I outlined in a series of articles right after the collapse of Lehman. The cascade effect of the collapse of the US economy will hit every nation in the world. Note that the implosion of the US consumer’s spending is only now beginning. It’s therefore a certainty that we’re going to see a lot more national and international bankruptcies in the coming year and beyond.

And finally, the dream of getting private buyers back to the  securitized credit markets, or having them assume some of the risks of the troubled mortgage paper is a dream, nothing more. It’s simply unthinkable than any investor will dip his feet into that inferno, and the speculators who had have already evaporated .

U.S. Treasury Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets.

“Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,” Paulson said today in a speech at the Treasury in Washington. “This is creating a heavy burden on the American people and reducing the number of jobs in our economy.”

Paulson’s remarks are an acknowledgement that the pitch he made to Congress for the bailout hasn’t delivered what was promised.

Treasury and Federal Reserve officials are exploring a new “facility” to bolster the market for securities backed by assets, Paulson said, adding that the program would be “significant in size.” Officials are considering using a portion of the bailout money to “encourage private investors to come back to this troubled market,” he said.

Private Capital

The Treasury chief said the department is also considering having companies that accept new taxpayer funding get matching private capital. Buying “illiquid” mortgage-related assets — the reason the program was established a month ago — is no longer being considered, he said.

Paulson has committed all but $60 billion of the initial $350 billion allocated by Congress to take equity stakes in banks and in insurer American International Group Inc. Lawmakers, who could reject Treasury requests for the remaining $350 billion, are pushing for aid to automakers including General Motors Corp. Paulson is resisting.

Paulson said he has no timeline for notifying Congress of his intent to use the remaining TARP funds, and reiterated that he’s “comfortable” that $700 billion is “what we need” to stabilize the financial system.

Paulson’s change in plans sent U.S. home-loan bonds without government backing down to new lows, credit default swap indexes suggest.

The ABX-HE-PENAAA 07-2 index of swaps tied to subprime-loan bonds rated AAA when created in the first half of 2007 dropped about 8 percent to a mid-price of 42, according to a note to clients today from Goldman Sachs Group Inc. The level suggests the bonds might fetch about 42 cents for each dollar of unpaid balances.

More on the credit card and auto-loan markets:

Currently, there is $356.3 billion in credit card asset- backed debt outstanding, with $256.3 billion in student-loan securities and $199 billion in auto loan borrowing,

`Broad Impact’

In the CPFF, which began last month and purchased $244.6 billion of the short-term debt through Nov. 5, the Fed set up a limited-liability company to buy the assets. The Fed is funding the facility at the target federal funds rate, currently 1 percent, and Treasury provided a $50 billion deposit. It is thought that the new facility will have a similar structure.

Seize Assets

Paulson said lending through the new consumer credit bailout  program would be on a non-recourse basis, meaning the government wouldn’t have rights to seize other assets should a borrower default.

The Fed’s program that lends to banks to buy asset-based commercial paper from money-market mutual funds had $85.1 billion in non-recourse loans outstanding as of Nov. 5.

Credit-card companies were shut out of the market for bonds backed by customer payments in October for the first time in more than 15 years, Wachovia Corp. data showed. Issuers sold $17.1 billion of the debt in October 2007. Top-rated credit card-backed securities maturing in three years traded at a premium of 500 basis points over Libor, last week, up 25 basis points over the previous week,. The debt was trading at 50 basis points more than Libor in January.

`Dramatic Fall’

I doubt that this is going to have a big offset to the really dramatic fall in consumer spending that we’re going to see over the coming year,” in part because of a $10 trillion slump in home values, Feldstein said of the new lending program.

Ford Motor Co., GMAC LLC and Chrysler LLC were shut out of the market for bonds backed by auto loans for the fifth straight month in October. Sales of auto bonds slumped to $500 million, compared with $9 billion in October 2007, according to Merrill Lynch & Co. data.

More Aid

House Financial Services Committee Chairman Barney Frank proposed giving $25 billion in additional aid to GM, Ford and Chrysler. He told reporters today that legislation is needed to authorize the Treasury to put money into the automakers.

Distressed sales of commerical real estate are going to increase dramatically, this article from Bloomberg says. Of course, 2006 and to a lesser extent 2007 were some of the laxest years of commercial real estate loan standards. What this means is that there will be a lot more writedowns for what remains of the US banking system:

Distressed sales of commercial real estate may rise in 2009 as about $36 billion in securitized loans written in 2006 and 2007 come due, an executive of Grubb & Ellis Co. said today.

That figure will grow to $55 billion of commercial mortgage- backed security debt due in 2012, triggering delinquencies, defaults and forced sales, said Glen Esnard, president of capital markets for the Santa Ana, California-based real estate services firm., citing research by JPMorgan Chase & Co.

“A lot of that debt is not refinanceable at its current level or current rate,” Esnard said at a briefing for reporters today in New York.

Sales of commercial properties in the U.S. have fallen 72 percent this year through October, Real Capital Analytics Inc., a property research firm, said last week, as the global credit crisis made financing for acquisitions scarce.

Loans made to be sold into the CMBS market were the predominant form of financing for commercial real estate buyers between 2004 and 2007, when U.S. commercial property prices rose almost 60 percent, according to the Moody’s/REAL Commercial Property Price Index. That index has fallen 13 percent since peaking in November 2007.

Qualcomm says it won’t hire anyone else:

Qualcomm Inc. Chief Executive Officer Paul Jacobs said he’s stopped hiring and is eliminating some research projects after a “dramatic” contraction in chip orders from mobile-phone makers.

“We have basically shut off our new hiring growth,” Jacobs said in an interview in New York today. “Before it was, `Let’s let a thousand flowers bloom,’ now we’re going to do a bit of pruning. We’ve shut down some projects.”

Jacobs, who heads the biggest maker of mobile-phone chips, said orders dropped off in October because handset manufacturers cut back on their stockpiles of unused parts, a reduction that will last for about two quarters. Consumer demand for mobile phones with Qualcomm chips is holding up, he said.

“The end-user market, while it’s slowing a little bit, isn’t that dramatic,” said Jacobs, 46. Still, there is “some uncertainty” in the company’s earnings projections.

Revenue this quarter may fall as much as 6 percent from a year earlier, the first decline in seven years, Qualcomm said last week. Annual sales increased 22 percent on average in the past six years as Qualcomm benefited from increasing use of its chips in mobile phones that provide high-speed Internet access.

Qualcomm, based in San Diego, fell $2.50, or 7.1 percent, to $32.57 at 4 p.m. New York time on the Nasdaq Stock Market. The stock has declined 17 percent this year.

While Jamie Dimon, head of JPMorgan says that the recession may be worse than the credit crisis:

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the U.S. recession “could be worse” than the credit-market crisis that brought lending to a standstill.

Rising unemployment and the process of de-leveraging by financial companies may bring on a “deep” recession in the U.S., Dimon, 52, said today. “We are prepared for a difficult environment.”

JPMorgan, the largest U.S. bank by market value, will add about $2.4 billion in reserves to cover bad loans in the fourth quarter as losses on credit cards and home loans continue, Dimon said. The U.S. unemployment rate rose to 6.5 percent in October, the highest level since 1994, Auto sales plunged 32 percent, manufacturing contracted at its fastest pace in 26 years and consumer confidence fell by the most on record during the month.

Still, Dimon said there is reason for optimism about prospects for the economy. “We’re not running this company like we have a Great Depression,” he said. JPMorgan continues to invest in businesses that benefit clients, including advisory work and raising money for corporations, he said.

Shares Decline

Goldman Sachs Group Inc., where Paulson was CEO before joining the Bush administration, predicted the deepest economic contraction since 1982 for the fourth quarter. The New York- based firm said the jobless rate may jump to 8.5 percent by the end of next year.

Banks and securities firms worldwide have taken $929 billion in losses, writedowns and credit provisions since the beginning of 2007, according to Bloomberg data. Firms have raised $819 billion in capital to offset the losses.

“We think the economy could be worse than the capital- markets crisis,” Dimon said. “You really need to separate them because they have completely different effects on our businesses and on most businesses.”

Consumer Loans

Dimon said JPMorgan continues to lend money to consumers. Loans to some types of corporate clients and in the investment bank have increased by $8 billion since the end of the third quarter, he said. Loan balances across the business lines have climbed $24 billion.

The bank also expects to post a $500 million loss on private-equity investments during the quarter, Dimon said.

JPMorgan announced a plan last month to assist 400,000 families with $70 billion in troubled mortgages in the next two years. An additional 250,000 families with $40 billion in mortgages have already been helped under existing loan- modification programs.

JPMorgan is the third-largest mortgage originator in the country with 13.6 percent of the market as of Oct. 31, according to Inside Mortgage Finance data. The lender has reduced volume 17 percent compared with an industrywide contraction of 56 percent since the beginning of 2007.

Not even the so-called super-rich are immune anymore:

Exclusive ski and golf community Yellowstone Club, in Montana, has filed for bankruptcy protection, a sign that the financial crisis roiling the real estate and leisure industries is not limited to the low end of the market.

The club, in the pristine mountain area around Big Sky, Montana, not far from Yellowstone National Park, is part resort and part residential community for the super-rich.

It advertises housing lots on the sides of its ski slopes and golf course at prices ranging from $2 million to more than $6 million.

In a filing made in federal bankruptcy court in Montana on Monday, Yellowstone Mountain Club LLC filed for Chapter 11 bankruptcy protection, listing assets and liabilities in the range of $100 million to $500 million.


The news clips are from Bloomberg and Reuters



It is by now general wisdom that the commercial mortgage market is headed for massive defaults and shrinkage during next year and beyond, but if anyone needs confirmation, here’s the latest situation. What is most important is that 700 billion in Paulson’s TARP will almost certainly be about one-seventh to one tenth of what will eventually be needed to bail the financial system out, on the conservative assumption that the sorting out of this crisis will last a whole decade, and the greatest amount will be spent in the first two years, from now. This scenario is based on the comparatively less severe prognosis of the S&L crisis of the eighties. In any case, 700 billion is almost laughably small for this purpose. The Treasury has not even completed satisfying the increasing demands of institutions such as Morgan Stanley, Bank of America, AIG, etc  through its TARP, which are not even the most troubled firms that they have be to sorted out, by far (with the exception of AIG). The insurance industry is already clamoring for more public money.
Commercial real estate borrowers are running out of options as asset-backed markets dry up and alternative financing comes to an “abrupt halt,” RBS Greenwich Capital Markets Inc. analysts said.
Regional banks and insurance companies, which had become the primary source of financing since credit markets seized up, have stopped lending, the RBS analysts wrote in a report. Sales of CMBS slumped to $12.2 billion in 2008, compared with a record $237 billion last year, according to JPMorgan Chase & Co.

The government’s attempts to unlock credit markets is easing some borrowing costs in some markets, though won’t relieve the seizure in the commercial mortgage debt market, Pendergast said.

“The de-thawing of the shorter-term lending markets is a baby step and will have little effect on commercial real estate lending near term.”

Both regional banks and insurers are reigning in lending. The insurance industry is under review by ratings companies and may be downgraded, while not yet receiving permission to participate in the Treasury’s capital injection programs, she said. Regional banks remain “under significant pressure,” Pendergast said.

“Like life insurance companies, indications are that many of these banks have closed their books for the year and 2009 remains a big question mark,” Pendergast said.

Loans Coming Due

The dearth of financing options will make it challenging for borrowers with loans coming due in 2009. About $88 billion in commercial real estate loans will mature next year, RBS estimates. Between 2009 and 2011, $123 billion in loans that have been packaged into bonds will mature, which doesn’t include direct loans originated by banks or insurance companies, the analysts said.

Top-rated CMBS are trading at a record 633 basis points more than the benchmark swap rate, according to Bank of America Corp. data, compared with 318.8 basis points on Sept. 15, the day Lehman Brother Holdings Inc. filed for bankruptcy. The bonds were trading at about 70 basis points more than the benchmark a year ago, the data show.

Spreads on commercial mortgage-backed securities won’t narrow until late 2009 at the earliest, and more likely not until 2010, the analysts said.

Delinquencies on commercial real estate debt rose to 0.78 in October compared with 0.66 percent in September, RBS Greenwich data show.

Genworth the insurer, which is a recent spinoff of GM, will probably not survive this crisis without public money (I’m tempted to say “Paulson’s magic touch”, but he’s leaving soon.)

Genworth fell $2.03 to $2.67 at 4 p.m. in New York Stock Exchange composite trading, the lowest since the company first sold shares in 2004. It has lost $258 million in the third-quarter, equal to 60 cents a share, from a profit of $339 million a year earlier. The insurer is considering asset sales and may raise funds by selling private or public equity or debt.

Chief Executive Officer Michael Fraizer said during a conference call with analysts that Genworth is preparing for prolonged, deeper market disruptions and a “significant recession.” Fraizer also said that the company is participating in the Federal Reserve’s commercial paper program designed to unlock short-term credit markets. Genworth is eligible for about $223 million, he said.

The company was downgraded by Standard & Poor’s on concerns about “the company’s increased need for funding in mid-2009,” the ratings firm said in a statement today. The company has “limited access” to the capital markets.

The mortgage-insurance business of Genworth posted a $121 million deficit because of rising delinquencies and higher reserves.

CDS spreads on Genworth widened. Traders demanded 17.25 percentage points up front in addition to five percentage points a year, according to CMA Datavision. That means it would cost $1.73 million initially and $500,000 a year to protect $10 million of bonds from default for five years. Yesterday the up-front payment was 11 percent.

And finally, some good news from China. The government is going to spend about 600 billion dollars on infractructure investment as it tries to cushion the economy from the impact of the global crash. This will be good for the rest of the world, because China’s massive reserves, hopefully, will find some use in the process, although it is obvious that the financing will be through borrowing, not through the liquidation of the currency reserves. It would be much better if the Chinese had decided to tap their reserves. China is still a risky third world country, and throwing money around in such a heavy-handed manner, borrowing so much so early in this crisis  doesn’t appear to be the most prudent attitude in today’s circumstances. China’s immunity to speculative attacks and the resilience of its economy today is almost entirely dependent on its positive trade balance. However, given the attitude of the government, and its desire to increase domestic spending, while exports are curbed rapidly by falling global demand, means that the surplus is probably illusory, and much weaker fiscal and trade positions lie ahead. We’ll see if CCP’s gamble will pay off in the future.  

China pledged a 4 trillion yuan ($586 billion) stimulus plan to prop up growth in the fourth-largest economy as the world heads toward a recession. The funds, equivalent to almost a fifth of China’s gross domestic product last year, will be used by the end of 2010, the Beijing-based State Council said yesterday. Following a weekend meeting in Sao Paulo, finance ministers from the Group of 20 nations, of which China is a member, issued a joint statement saying they are ready to act “urgently” to tackle the economic slump.

“Over the past two months, the global financial crisis has been intensifying daily,” the State Council said in yesterday’s statement. “In expanding investment, we must be fast and heavy- handed,” it said, adding that the central bank will pursue a “moderately loose” monetary policy. The central bank has already cut interest rates three times in two months, reducing the one-year lending rate to 6.66 percent.

The stimulus package, of which 100 billion yuan is earmarked for this quarter, will go toward low-rent housing, infrastructure in rural areas, as well as roads, railways and airports, it said. The government will allow tax deductions for purchases of fixed assets such as machinery to stimulate investment, a move that will reduce companies’ costs by an estimated 120 billion yuan. In addition, grain purchase prices and subsidies for farmers will be raised, as will allowances for low-income urban households. The government also scrapped loan quotas to help boost lending to small businesses.

China accounted for 27 percent of global economic growth last year, more than any other nation, according to IMF estimates. Central bank Governor Zhou Xiaochuan said Nov. 8 that boosting spending at home is the best way China can help avert a prolonged world recession. UBS AG and Credit Suisse AG, before yesterday’s announcement, forecast GDP would rise no more than 7.5 percent next year, which would be the smallest increase in nearly two decades. Manufacturing contracted by the most since at least 2004 in October and export orders dropped to their lowest, according to CLSA Asia Pacific Markets. Home sales have plunged in major cities including Beijing and the stockpile of unsold new vehicles was at a four-year high in September.

“The golden years have shuddered to a dramatic halt,” said Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai.

Meanwhile, Taiwan, which counts China as its largest trading partner, late yesterday cut interest rates for the fourth time in two months after exports dropped in October by the most in three years.

All the news clips from Bloomberg.




Bankruptcies of shipping companies are highly likely to rise in the coming months, as their profit margins collapse with the collapsing price of commodities. Today crude settled around 60 dollars.

 DryShips Inc., a transporter of commodities including iron ore and coal, dropped $4 to $15.30 in Nasdaq Stock Market composite trading. The shares have fallen 80 percent this year, reducing its market value to $666 million, after saying that it may not be able to raise enough money to pay off loan commitments if low charter rates continue, The company said it may sell as much as 25 million shares from time to time to help raise capital.

The company had $2.9 billion in debt at the end of the third quarter, according to a Nov. 3 earnings release.

The Baltic Dry Index, a measure of shipping costs for commodities, has fallen 91 percent this year due to a global economic slowdown and slowing international trade amid tight credit markets.

“We are especially concerned about the company’s compliance under its debt covenants, specifically its value maintenance covenants, given the potential for a fall in secondhand asset values in this weak market environment,” Natasha Boyden, an analyst at Cantor Fitzgerald LLC in New York, said today in a note to investors. She cut her rating on the company to “hold” from “buy.”

The stock market keeps on with its collapse, as central banks keep slashing rates to calm the speculators. They will probably keep falling until the end of December. There may be a brief rally then, but there may be not. What is certain is that the stock markets will keep losing value next year, along with most other asset classes:

U.S. stocks slid, sending the market to its biggest two-day slump since 1987, after jobless claims jumped and the shrinking economy crushed earnings.

 “We’re a long way from the end of the economic challenges,” said Mike Morcos, who helps manage $1 billion at Old Second Wealth Management in Aurora, Illinois. “Earnings next year are going to be significantly lower and estimates are going to continue to come down.”

The Standard & Poor’s 500 Index fell 5 percent to 904.88, extending its two-day loss to 10 percent. Switzerland’s central bank and the European Central Bank reduced their main lending rates by 50 basis points.

The S&P 500 is down 38 percent this year, poised for the steepest annual retreat since 1937. The VIX, as the Chicago Board Options Exchange Volatility Index is known, climbed 17 percent to 63.68.

Worries about General Motors viability keep intensifying:

GM’s Survival

General Motors Corp. had the steepest decline in almost a month, tumbling 14 percent to $4.80. The largest U.S. automaker is focused on winning government aid to survive through 2009, not to help a merger with Chrysler LLC, as it uses cash faster than it forecast, people familiar with the plans said. GM plans to give an update on liquidity when it reports third-quarter results tomorrow.

Blackstone tumbled $1.05 to $7.55 after the financial crisis eroded the value of the businesses and real estate it has acquired, triggering a quarterly loss excluding items of $502.5 million. Blackstone had been expected to break even, based on the average estimate of seven analysts in a Bloomberg survey.

As analysts continue to expect profit growth from 2009:

Companies in the S&P 500 may see fourth-quarter earnings advance 15 percent, down from 42 percent projected at the end of August, according to a Bloomberg survey of analysts. Profits in 2009 may grow 13 percent, analysts say, compared with the 24 percent predicted two months ago.

Meanwhile hedge fund clients continue to withdraw their funds, forcing more firms to liquidate. Clients worldwide may pull as much 25 percent of their money from hedge funds by the end of the year, according to a Morgan Stanley report of Oct. 24.

Platinum Grove Asset Management LP, the hedge-fund firm co-founded by Nobel laureate Myron Scholes, temporarily stopped investor withdrawals from its biggest fund after it lost 29 percent in the first half of October. The decline left Platinum Grove Contingent Master fund with a 38 percent loss this year through Oct. 15, according to investors. It joins Blue Mountain Capital Management LLC and Deephaven Capital Management LLC which have also frozen freeze funds to stem the tide of withdrawals.

Scholes, 67, winner of the 1997 Nobel Prize in economics, was a founding partner in Long-Term Capital Management LP, the hedge fund that lost $4 billion a decade ago after a debt default by Russia.

Investors worldwide may pull as much 25 percent of their money from hedge funds by the end of the year, Morgan Stanley said in an Oct. 24 report. Combined with investment losses, industry assets may shrink to $1.3 trillion, a 32 percent drop from the peak in June, the New York-based bank said.

Brazilian hedge funds saw a record 14.3 billion reais ($6.7 billion) in withdrawals last month after returns trailed a fixed-income benchmark even while defying a 25 percent plunge in the Bovespa stock index.

Which all leave Fed as the most active financial player at the moment:

The Federal Reserve expanded its holdings of commercial paper issued by U.S. corporations by $98.9 billion, boosting its share of the $1.6 trillion market in short-term debt to 15 percent. It has incrased its holdings by 68 percent to $244.6 billion in the week ended yesterday.

Direct loans to commercial banks fell to $108.6 billion as of yesterday down from a previous record of $110.7 billion a week earlier, while cash borrowing by securities firms totaled $71.6 billion, down from $79.5 billion the previous Wednesday.

Interest rates on the highest-ranked 90-day commercial paper have dropped more than 1 percentage point since then to 2.24 percent, according to yields offered by companies and compiled by Bloomberg.

Central bankers are flooding financial institutions with temporary loans in an effort to overcome cash hoarding by banks. The loans have enlarged the Fed’s balance sheet to $2 trillion in total assets, $1.2 trillion from a year earlier.

In addition to the CPFF, the Fed started a separate program in September to lend to banks for purchases of asset-backed commercial paper from money-market mutual funds. Loans under that program totaled $85.1 billion as of yesterday, down from $96 billion a week earlier.

A third Fed program involving commercial-paper purchases, the Money Market Investor Funding Facility, will begin soon. Under that program, the Fed will lend up to $540 billion to five special funds to buy certificates of deposit, bank notes and commercial paper with a remaining maturity of 90 days or fewer.

But if you really want to see what will happen in the end, look no further than the California of today:

California Governor Arnold Schwarzenegger said his state’s finances have deteriorated so rapidly that a budget he signed just six weeks ago has already fallen into a $11.2 billion deficit and taxes must be raised.

Schwarzenegger ordered lawmakers into a special session to consider ways to close the gap. He proposed increasing the sales tax by 1.5 percentage points for three years as well as raising oil severance and alcoholic beverage taxes and motor vehicle fees. In all, taxes and fees would increase $4.7 billion while spending is cut $4.5 billion.

“We have a dramatic situation here and it will take dramatic solutions to solve it,” Schwarzenegger, a 61-year-old Republican, told reporters in Sacramento. “We must stop the bleeding.”

Let me first say that I am an economical pragmatist, and that I subscribe to no ideology. I believe that government intervention, and even state corporatism can have a role to play in certain circumstances, but I also believe that a nation should always aspire to be as free as possible, culturally, politically, and economically, simply because an efficient dictatorship is always harder to create. In general, people know and do their own business better, and survival and prosperity are the business of all human beings, wherever they live, whatever tongue they speak.


In this context, I’d like to emphasise that I have no grudge against the government, and even sympathise with their difficult situation. There’s no question, in my mind at least, that Mr. Paulson is a respectable and decent individual, that Mr. Bernanke is a brilliant economist, and that both of them have the best intentions in this very severe crisis.


But truth must be spoken. There’s a lot to be criticized about their actions, but time is limited, so I’ll only deal with the CPFF, and what it is doing for the economy, in this post, briefly, but hopefully also succinctly.


Now, we have recently seen the Fed intervening in the commercial paper market, and buying practically unlimited amounts of all sorts of CP (commercial paper), in accordance with the belief that panic in markets is causing an illogical and unjustifiable contraction in issuance. Numbers released by them show the commercial paper outstandings expanding in the last week, as the impact of the heavy hand of the government hits the market.


Let us consider this graphic, which shows data as of November 5th.






It  shows outstandings, that is, the total amount of commercial paper, in different categories. What do we see here? First of all, the yellow line, which shows asset-backed commercial paper including suprime and alt-A mortgage backed paper, has been collapsing since August 2007, and its precipitous contraction was the starting bell of this crisis. The red line shows financial commercial paper, which includes paper issued by investment banks, and others, and which rang the bells for the second, panic phase of this crisis in September, with the collapse of Lehman. The third, blue line shows the issuance of non-financial corporations, like automotive firms or computer manufacturers, in other words, it shows the real economy.


What do we notice here? And what do we discern with respect to Federal policy?


In a sense, this is a typical graphic which demonstrates increased correlation  across asset classes and convergence of risk perception for different classes financial assets. We see clearly how the panic of last year has been spreading across sectors of the economy, causing financial actors to treat all counterparties in a single category of risk, and eventually inhibiting activity, and preventing ever larger parts of the economy from functioning. We also see that the changes in attitude do not occur gradually, but with leaps and bounds. In other words, people often refuse to adjust their positions to account for changes in economical data and risk perception, but rather choose to be crushed by the data, following the stampeding crowd once panic forces everyone to adjust, regardless of whether they believe or understand the changes or not.


So much for the efficient market hypothesis…


And what does it tell us further about Fed policy, how efficient, prudent, or meaningful it is?


First of all, a careful analysis of the data shows that the recent rapid correction in outstandings of commercial paper should not be unwelcome. The graphic clearly shows that there was an enormous bubble in financial CP outstandings in the period of 2003- 2008, and ABCP issuance in the period 2004-2007. The burst of this bubble, and the subsequent contraction in issuance is not only natural, but it is also entirely natural, and should be welcomed by every prudent regulator. There was never any financial discovery, any economical development in the US in these periods to justify the massive expansion in commercial paper issuance. The financial sector had overexpanded by speculative activity in an easy money environment, and as it, so does it’s issuance of commericial paper.


If this is the case, what is the Federal Reserve gaining by inflating a market which, due to the most basic tenets of free market principles, should contract? What is the Federal Reserve achieving by irrationally sustaining a market which has been exceedingly overextended in the past years, and only has to contract so that it readjust and reform itself?


Of course the Fed is gaining nothing, and by trying to inflate a market, which should and undoubtedly will contract in the future,  is only throwing public money away into the gutter. What the experience of the Stock market bubble, and the housing bubble of the last ten years has thought us is that it is not possible to contain or prevent the bursting of a bubble. Attempts directed to toward sustaining a bubble are usually counterproductive, and eventually increase the severity of the crisis, rather than easing it.


The Fed justifies its actions by citing the blue line in the graphic, and the massive rise in spreads in the period that led to its interventions. While it is true that some intervention was necessary, the swooping scoop method that the Fed has used is so indiscriminate about what it saves that it will, in the end, almost undoubtedly cause much harm to the economy, and will probably prolong the healing process, if it at all works, and I don’t think it will. We will see more collapses and more panic in the coming weeks. It will last until some firms are allowed to go bankrupt.