Monday, December 31, 2007

NEW YORK, Aug 16 (Reuters) - National City Corp. (NCC.N: Quote, Profile, Research), one of the largest U.S. regional banks, on Thursday said it would fold its home equity business into National City Mortgage Co., a move designed to cut costs and respond to deteriorating mortgage markets.

Cleveland-based National City said some National Home Equity staff will join National City Mortgage's wholesale division, but many sales and support jobs will be eliminated.

"We are continuing to closely monitor the market and will continue to take steps to ensure originations are appropriately in line with market conditions," National City Chief Financial Officer Jeffrey Kelly said in a statement.

The move comes 10 days after National Home Equity, which originates loans and credit lines through mortgage brokers, suspended approvals as demand dried up in secondary mortgage markets.

National City said it will still offer mortgages, equity lines and loans through its branches, mortgage offices and a network of correspondents. The bank also said the mortgage unit will resume extending home equity lines when market conditions improve.

"We believe that the reduction in marketability of many mortgage products will continue for some time," Kelly said.

National City spokeswoman Kristen Baird Adams had no comment about the number of job cuts or the estimated financial impact of the move.

(Reporting by Joseph Giannone)

The Illegal Immigrant

He is at the heart of a great culture war in Texas - and the nation, credited with bringing us prosperity and blamed for abusing our resources. How should we deal with this stranger among us?
12:00 AM CST on Sunday, December 30, 2007

EDITORIAL He breaks the law by his very presence. He hustles to do hard work many Americans won't, at least not at the low wages he accepts. The American consumer economy depends on him. America as we have known it for generations may not survive him.

We can't seem to live with him and his family, and if we can live without him, nobody's figured out how.

He's the Illegal Immigrant, and he's the 2007 Dallas Morning News Texan of the Year – for better or for worse. Given the public mood, there seems to be little middle ground in debate over illegal immigrants. Spectacular fights over their presence broke out across Texas this year, adding to the national pressure cooker as only Texas can.

To their champions, illegal immigrants are decent, hardworking people who, like generations of European immigrants before them, just want to do better for their families and who contribute to America's prosperity. They must endure hatred and abuse by those of us who want the benefits of cheap labor but not the presence of illegal immigrants.

Especially here in Texas, his strong back and willing heart help form the cornerstone of our daily lives, in ways that many of us do not, or will not, see. The illegal immigrant is the waiter serving margaritas at our restaurant table, the cook preparing our enchiladas. He works grueling hours at a meatpacking plant, carving up carcasses of cattle for our barbecue (he also picks the lettuce for our burgers). He builds our houses and cuts our grass. She cleans our homes and takes care of our children.

Yet to those who want them sent home, illegal immigrants are essentially lawbreakers who violate the nation's borders. They use public resources – schools, hospitals – to which they aren't entitled and expect to be served in a foreign language. They're rapidly changing Texas neighborhoods, cities and culture, and not always for the better. Those who object get tagged as racists.

Whatever and whoever else the illegal immigrant is, everybody has felt the tidal wave of his presence. According to an analysis of government data by the Washington-based Center for Immigration Studies, Texas' immigrant population has jumped a whopping 32.7 percent since 2000, a period in which immigration to the United States has exceeded, in sheer numbers, all previous historical eras. Half the immigrants in the state – 7 percent of all Texans – are estimated to be here illegally.

Though many would agree that the status quo cannot be sustained – more illegal immigrants arrive each year than legal ones, a sure sign that the system is a joke – neither Texas nor the nation seemed nearer in 2007 to resolving this complex crisis. We can't deport 12 million people who already live here, but we can't leave our back door open indefinitely. Compromise comes hard because the issue is tangled up with the most basic aspects of everyday life, down to the core of what it means to be American.

This essay cannot put a name or a face to an illegal immigrant, because that would subject him to possible deportation. Because he lives underground, the illegal immigrant becomes, in our rancorous debate, less a complex human being and more a blank screen upon which both sides can project their hopes and fears.

If illegal immigration were an easy problem to fix, the nation wouldn't be at an impasse. In the current atmosphere, it seems, reason doesn't stand a chance of digging us out. Ask Irving Mayor Herb Gears, a man once denounced by anti-immigration activists for running what they called a "sanctuary city." He then found himself targeted by Hispanics because of the city's participation in a federal deportation program.

"One week I'm a traitor, the next week I'm a patriot," laments Mr. Gears.

The mayor says he just wants to respect both people, and the law. His exasperated manner seems to ask, Why can't you do both? Good question.

The economy

If there are jobs in America, Latino immigrants will come, no matter the risk. And why not? They may be at the bottom of the economic ladder here, but they're making about four times, on average, what they could back home.

Antonio, a waiter at a North Texas restaurant, was an accountant in Mexico. He and his wife thought they could make more money in Texas, so they came illegally.

"In the time I've been here, this country has been very good to me. I am a responsible person. I pay my taxes. I pay my bills on time – utilities, mortgage. I pay federal taxes, too," he says.

Antonio resented any suggestion that he should consider returning home or that illegal immigrants don't belong here. He seemed to regard his presence here as exercising a right.

Workers like him find support among business owners – especially in Texas industries dependent on unskilled immigrants, like agriculture and construction. They say that without those workers, they couldn't survive.

Marty owns a North Texas construction company. He has come to view American workers as undependable, lazy and arrogant, while he finds illegal immigrants motivated and reliable.

"I'd rather employ them than Americans," he confides. "In my line of work, I need the Mexicans, and I am for them being here. I need them because I can't find anybody else to do the work."

(Both Antonio and Marty asked that their last names not be disclosed to prevent repercussions.)

The importance of immigrant labor to Texas was underscored this year with formation of a new political alliance – big business and the Legislature's Mexican-American caucus. They threatened to cripple the lawmaking machinery if legislative leaders allowed a slate of "anti-immigrant" bills to advance. The tactic worked.

It's unclear from the data whether illegal immigration is a plus or minus for the nation's economy overall. Harvard economist George Borjas reports that it's more or less a wash. On close inspection, Dr. Borjas, a leading expert in the field, found that immigration's financial benefits accrue to those at the upper end of the economic scale, who can buy labor and its fruits at a lower cost, at the expense of those Americans at the lower end, whose wages go down.

"There is no such thing as a job that natives won't do," Dr. Borjas, an immigrant from Cuba, wrote last year. "Instead, there are jobs that natives aren't willing to do at the going wage."

The state comptroller's office had a different take on Texas, reporting in 2005 that illegal immigrants provided a net economic boost of nearly $18 billion that year. While the state government took in more taxes from illegal immigrants than it paid out in services for them, the comptroller said, the opposite was true for Texas' local governments.

Nationally, a Congressional Budget Office report released this month said illegal immigrants cost more in tax dollars than they provide, especially in the areas of education, law enforcement and health. Indeed, 70 percent of babies born in Dallas' Parkland Hospital in the first three months of 2006 were to illegal-immigrant mothers. Taxpayers spend tens of millions of dollars annually subsidizing births in that one hospital.

Texas schools are filling up with students classified as having limited-English proficiency, many of whose parents came here illegally. The number has reached more than 30 percent of Dallas students, 36 percent in Irving and 16 percent statewide.

Hispanic immigrants are more likely to be poor, but they don't stay that way. The Hispanic poverty rate has dropped 30 percent since 1994, census data show. At 20.6 percent, that's significantly above the national average of 12.8 percent. But Latinos are undeniably upwardly mobile. Besides, if you want to see what happens when Latinos leave, look at the business losses in Irving since the city's role in the federal deportation program sent a chill through the Hispanic community.


Earlier this year, U.S. Rep. Jeb Hensarling of Dallas, when asked what his constituents were talking about, said, "Immigration, immigration, immigration." GOP presidential contender Mike Huckabee, born again as an immigration hard-liner, told The New Yorker this month that wherever he campaigns, immigration is the first thing voters ask about. "It's just red hot," he says, "and I don't fully understand it."

John McCain does. Voters are worried, he told the magazine, that illegal immigrants make a mockery of law and the idea of sovereign borders, as well as upset social norms.

"They see this as an assault on their culture, what they view as an impact on what have been their traditions," Mr. McCain says. "It's become larger than just the fact that we need to enforce our borders."

Once the GOP favorite to win the nomination, the Arizona senator set back his campaign this summer by supporting President Bush's call for comprehensive immigration reform. A revolt at the grassroots scuttled that plan in Congress.

Democrats have felt the political whiplash, too. Hillary Clinton, for one, abandoned her support of a New York proposal to issue driver's licenses to illegal immigrants. Most other Democratic presidential candidates fell in line with her.

The political tap dance is trickier in Texas, owing to the 1,300-mile border with Mexico and community ties across the divide. Many local officials bitterly objected to Congress'plan to fence off long stretches of the Rio Grande. Gov. Rick Perry ultimately said "boots on the ground" and not a hard barrier was the answer to keeping out illegal immigrants. Sens. Kay Bailey Hutchison and John Cornyn put forth a measure to ease up on mandatory double fencing if locals have better options.

At the local level, Farmers Branch voters this year approved a local ban on renting to illegal aliens, a move later blocked in court. Despite accusations of racism ("They are so prejudiced, but they don't want to face it," local business owner Elizabeth Villafranca says), and despite the judge's order, City Council member Tim O'Hare was defiant at year's end. Says Mr. O'Hare, "I only wish we had done this earlier."


It's easy to say, as many immigrant advocates do, that opposition to illegal immigration derives from racist sentiment, because that's undeniably part of the mix. But the culture clash is a lot more complicated.

Illegal Hispanic immigrants are usually Third World peasants who have moved to the First World. They go from a country with sharp class divisions to a middle-class society.

In earlier waves of immigrants, millions of new arrivals left processing at New York's Ellis Island with the expectation that they would adapt fully and deliberately to American norms – the melting pot, rather than the salad bowl. The post-1960s movement toward multiculturalism has made the nation more tolerant of ethnic and cultural differences, but it has also lessened the impetus for immigrants to conform.

"Mexico is radically, substantively, ferociously different from the United States," Jorge Castañeda, formerly Mexico's foreign minister, observed in 1995. It was a period of turmoil, with NAFTA newly inaugurated, a rural uprising in Chiapas and a growing gulf between social classes.

He described Mexicans trying to embrace an American-style work ethic, while others remained glued to a "mañana" view of life, reinforced by low pay, low self-esteem and an inability to penetrate Mexico's rigid class system. Many Mexicans lost hope and sought a better life in America.

Rural Mexicans have dominated the migrant wave, bringing a country-style sense of time and priorities. For Americans, a transfer of Mexican rural culture to our neighborhoods leaves many feeling overwhelmed. The fear of cultural overload is manifested in sights like Spanish-language billboards or large quinceañera parties in public parks. Schoolteachers find it incomprehensible that, for some reason, immigrant students often disappear for days and suddenly return with the expectation that the teacher should catch them up.

"Certain Mexicans can subscribe to a series of rules, from traffic regulations to work discipline and punctuality; others can decide, consciously or otherwise, that they prefer not to," Dr. Castañeda wrote.

Illegal immigration exacerbates the natural tension in American society by injecting more change than can be absorbed – and by defying laws designed to control the rate of change. When immigration restrictionists protest defiance of "law and order," they reveal anger at the cultural revolution Latino immigrants bring – a revolution many U.S. citizens feel powerless to stop.


Harvard's Samuel Huntington, one of America's most eminent political scientists – and a liberal one – has argued that the immigration wave stands as "the single most immediate and most serious challenge to America's traditional identity."

In his 2004 book Who Are We?, Dr. Huntington identified several factors that set current Hispanic immigration apart from previous episodes in U.S. history.

Most immigrants are Latino and come over a border, not an ocean. Roughly half of these are illegal. Assimilation is slower, writes Dr. Huntington, because the immigrants "remain in intimate contact with their families, friends and home localities in Mexico as no other immigrants have been able to do."

The scale is unmatched, he argues. Since 2000, more immigrants (10.3 million) have arrived in America than in any other seven-year period, according to the Center for Immigration Studies' recent analysis of census data. And in contrast to previous waves of immigration, this one shows no signs of letting up, according to Dr. Huntington.

Not everyone agrees with this assessment. Some of Dr. Huntington's critics point out that the rate of immigration (as distinct from sheer numbers) is not as high now as in previous eras, which ended with successful assimilation of foreign-born populations. Besides, though the current immigration flow shows no signs of abating, the Mexican GDP is growing and the national fertility rate has plummeted by almost two-thirds since 1970. That birth rate is nearing the level at which Mexico would need to retain workers for its own economy, thereby shutting off the spigot of immigration into the U.S.

As for assimilation, Roberto Suro, director of the Pew Hispanic Center, points to social-science data indicating that Hispanic immigrants are, in fact, assimilating as fast as immigrants of previous generations. They learn English quickly, and, once they acquire proficiency, they adopt American cultural attitudes.

One other observation of Dr. Huntington's has particular resonance in Texas: The current wave of immigrants has had disproportionate impact on the Southwest. And as the majority of them are from Mexico, they are now settled in areas that used to belong to their ancestors.

Attempts to draw a sharp line between mainstream "Anglo" (for lack of a better term) culture and Hispanic culture is a distortion of the reality we live with in much of Texas, and always have. The border between the two Texan cultures is as porous as the border between Texas and Mexico, which is one reason why our experience with immigration differs from much of America's.

Texas culture reflects the long list of towns with Spanish names. What's more, in a great swath along the border, most cities are run by those with Spanish surnames, too. Today's immigration wave has carried a different version of Hispanic culture to Dallas and other major population centers. And in this increasingly urbanized state, the dominant Anglo culture has felt a rub like never before.

Though towns and cities nationwide have felt the rub, too, it hasn't been on the Texas scale. Leaders in Farmers Branch and Irving were reacting to complaints of runaway community transformation brought on by illegal arrivals.

As 2007 began, the isolated Texas Panhandle town of Cactus was still reeling from the arrests of nearly 300 people at the local Swift & Co. meat-processing plant, the community's economic lifeblood. Dozens of Mexicans and Guatemalans were prosecuted this year for using stolen Social Security numbers to work at the plant.

The town had come to resemble a kind of renegade outpost of illegal immigrants that wouldn't exist in nonborder states.

The future

Everything's bigger in Texas, and history and geography guarantee that the immigration problem is no different. And many issues are flaring sooner here. What Cactus, Irving and Farmers Branch are dealing with today, the rest of America may be dealing with tomorrow. Texas, which will be majority Hispanic by 2020, and the nation face an unprecedented challenge that we can't dismiss with gauzy platitudes, nor defer meeting indefinitely.

How Texas – and, by extension, the rest of America – reacts will be unlike how previous generations handled immigration, given how the nation has changed since the 1960s. Fair or not, core American culture and values have become a popular punching bag. Some have cheered that as refining the American character by embracing diversity, inclusiveness and empowerment of ethnic and other minorities. Others worry that America risks losing itself in the process, especially if it gives up on securing the borders.

Historians say that the distinctly American democratic and middle-class ideals grew out of a specific cultural tradition – the Anglo-Protestant. Changed slowly over time by immigrants from the world over, it's now challenged by a strong competing culture.

If critics are correct, we could be seeing the advent of the kind of fractiousness that bedevils public life in Canada and other nations where peoples who speak different languages, and come from different cultural backgrounds, live together only with mutual suspicion and unease.

On the other hand, perhaps the alarmists are wrong. Maybe these ambitious, hard-working immigrants, whatever their documentation, will write the next great chapter of a story that's still deeply American, though with a different accent. If the optimists are right, much work remains to be done to incorporate all immigrants fully into new cultural traditions.

We end 2007 no closer to compromise on the issue than when the year began. People waging a culture war – and that's what the struggle over illegal immigration is – don't give up easily. What you think of the illegal immigrant says a lot about what you think of America, and what vision of her you are willing to defend. How we deal with the stranger among us says not only who we Americans are today but determines who we will become tomorrow.

Sunday, December 30, 2007

December 30, 2007 Sunday Zilhaj 19, 1428

KARACHI: And out came the wolves

By Qasim A. Moini

KARACHI, Dec 29: Over the past several months, various events have amply demonstrated the depths to which we have sunk as a society. May 12, Oct 18 and most recently the assassination of Benazir Bhutto on Dec 27 in Rawalpindi and the ensuing orgy of hate it has spawned are all portents of our headlong plunge into the bottomless pit of barbarity.

Yet one particular event – [b]buried between the headlines detailing the acts of murder, looting, arson and general terror that swept across the country and the city – was so shocking that it not only seemed to dwarf the other, equally devastating acts of brutality, it clearly demonstrated that in this society, the weak, defenceless and infirm are prime targets for the wolves that prowl our streets, particular in times of trouble.

Around noon on Friday, the day after Ms Bhutto’s tragic death, 150 or so unidentified armed hooligans stormed the Edhi Foundation’s village off Karachi’s Super Highway and started thrashing the inmates as well as vandalising equipment.

“There are 1,500 people who reside in the Edhi Village, 300 of whom are children, mostly orphans, while 1,200 or so are mentally challenged individuals. The attackers torched 16 of our ambulances destined for the interior of Sindh and then proceeded to smash the equipment. They did not even spare the children and mental patients and beat them mercilessly. They did not demand anything, nor did they identify themselves. They just resorted to wanton violence,” Rizwan Edhi told Dawn when contacted.

The Edhi Foundation – acclaimed for its non-partisan humanitarian services, especially during emergencies – also attracted the wrath of criminal elements when, during the bedlam of May 12, Faizur Rehman, an Edhi ambulance driver, fell in the line of duty caught in the crossfire in Malir, while the foundation’s ambulances were reportedly prevented from transporting the injured during the violence.

When Dr Syed Ali Wasif, a psychiatrist, was approached for comment on the situation, he said that if human beings are not controlled during such episodes, they can be capable of anything.

“They attacked the most vulnerable people – psychiatric patients, lost kids, retarded children and derelicts – those who were not capable of doing anything. People are in a state of shock because of the tragedy in Rawalpindi. They cannot focus on right or wrong. Maybe the issue was ignited by emotion. Human beings need social control, which has to come from society. Who should establish this control is a question that needs to be answered.

“Humans are the most ruthless social animals. They are capable of anything. The human species is most prone to aggression. When law and order breaks down opportunist elements exploit the situation. It’s a state of anarchy as anti-social elements are currently in control of society. The saner elements of society cannot say anything as they are not listened to and are not tolerated,” he said.

Friday, December 28, 2007

What is the world coming to???

Macy's to Close Nine Underperforming Stores
By Reuters
| 28 Dec 2007 | 03:03 PM ET

Retailer Macy's said on Friday it would close nine underperforming stores in Indiana, Ohio, Louisiana, Oklahoma, Utah and Texas.

Macy's said the closings would affect 899 employees, who would be offered positions in nearby stores where possible. It said employees laid off in the process would be provided severance benefits and outplacement assistance.

``While the decision to close stores is difficult, it is necessary that we do so selectively in locations with declining sales and where we have been unable to identify sufficient growth opportunities,'' Macy's Chief Executive Terry Lundgren said in a statement.

The company also said it expects to open five stores next year, with another six to eight stores currently planned for 2009.


Just messin around at O'Riley's a few weeks ago...

New-Home Sales Plunge by 9 Percent
Friday December 28, 10:07 am ET
By Jeannine Aversa, AP Economics Writer

New-Home Sales Plunge to Lowest Level in More Than 12 Years
WASHINGTON (AP) -- Sales of new homes plunged last month to their lowest level in more than 12 years, a grim testament to the problems plaguing the housing sector.
The Commerce Department reported Friday that new-home sales tumbled by 9 percent in November from October to a seasonally adjusted annual rate of 647,000. That was the worst showing since April 1995, when the pace of sales was 621,000.

Thursday, December 27, 2007

U.S. Ruling Backs Benefit Cut at 65 in Retiree Plans

WASHINGTON — The Equal Employment Opportunity Commission said Wednesday that employers could reduce or eliminate health benefits for retirees when they turn 65 and become eligible for Medicare.

The policy, set forth in a new regulation, allows employers to establish two classes of retirees, with more comprehensive benefits for those under 65 and more limited benefits — or none at all — for those older.

More than 10 million retirees rely on employer-sponsored health plans as a primary source of coverage or as a supplement to Medicare, and Naomi C. Earp, the commission’s chairwoman, said, “This rule will help employers continue to voluntarily provide and maintain these critically important health benefits.”

Premiums for employer-sponsored health insurance rose an average of 6.1 percent this year and have increased 78 percent since 2001, according to surveys by the Kaiser Family Foundation. Because of the rising cost of health care and the increased life expectancy of workers, the commission said, many employers refuse to provide retiree health benefits or even to negotiate on the issue.

In general, the commission observed, employers are not required by federal law to provide health benefits to either active or retired workers.

Dianna B. Johnston, a lawyer for the commission, said many employers and labor unions had told it that “if they had to provide identical benefits for retirees under 65 and over 65, they would just drop retiree health benefits altogether for both groups.”

In a preamble to the new regulation, published Wednesday in the Federal Register, the commission said, “The final rule is not intended to encourage employers to eliminate any retiree health benefits they may currently provide.”

But AARP and other advocates for older Americans attacked the rule. “This rule gives employers free rein to use age as a basis for reducing or eliminating health care benefits for retirees 65 and older,” said Christopher G. Mackaronis, a lawyer for AARP, which represents millions of people age 50 or above and which had sued in an effort to block issuance of the final regulation. “Ten million people could be affected — adversely affected — by the rule.”

The new policy creates an explicit exemption from age-discrimination laws for employers that scale back benefits of retirees 65 and over. Mr. Mackaronis asserted that the exemption was “in direct conflict” with the Age Discrimination in Employment Act of 1967.

The commission, by contrast, said that under that law, it could establish “such reasonable exemptions” as it might find “necessary and proper in the public interest.” The United States Court of Appeals for the Third Circuit, in Philadelphia, upheld this claim in June, in the case filed by AARP, which has asked the Supreme Court to review the decision.

In its ruling, the appeals court said, “We recognize with some dismay that the proposed exemption may allow employers to reduce health benefits to retirees over the age of 65 while maintaining greater benefits for younger retirees.” But the court said the commission had shown that the exemption was “a reasonable, necessary and proper exercise” of its authority.

Under the new rule, employers may, if they choose, provide retiree health benefits “only to those retirees who are not yet eligible for Medicare.” Likewise, the rule says, retiree health benefits can be “altered, reduced or eliminated” when a retiree becomes eligible for Medicare.

Further, employers will be able to reduce or eliminate health benefits provided to the spouse or dependents of a retired worker 65 or over, regardless of whether benefits for the retiree are changed.

Employers and some unions contend that retirees under 65 have a greater need for employer-sponsored health benefits because they are generally not Medicare-eligible. Large employers have often provided some health benefits to retirees 65 and older, to help cover costs not paid by Medicare. But employers have for years been trying to reduce retiree benefits or to shift more of the cost to retirees.

Lawyers for the commission said the new Medicare drug benefit, now nearing the end of its second year, had strengthened the case for the regulation because it guaranteed that retirees 65 and older would have access to drug coverage. Younger retirees have no such guarantee, so employers may want to provide drug coverage to them in particular, the lawyers said.

Helen Darling, president of the National Business Group on Health, which represents large employers, welcomed the rule.

“If employers could not coordinate with Medicare, they would be far less likely to provide health coverage” to retirees, Ms. Darling said. “They could not afford to.”

A study by the Government Accountability Office in 2001 estimated that one-third of large employers and fewer than one-tenth of small employers offered health benefits to retirees. Ms. Darling said newer retirees often received not comprehensive coverage but instead a fixed amount of money, based on years of service, to help them with their medical costs.

James A. Klein, president of the American Benefits Council, a lobby for large employers, said: “The new rule is a victory for common sense and for retirees. Retiree health coverage has been declining for many years. Without this rule, many more retirees, especially early retirees, could find themselves without employer-sponsored coverage.”

Gerald M. Shea, assistant to the president of the A.F.L.-C.I.O., also saw merit in the new rule.

“Given the enormous cost pressures on employer-sponsored health benefits,” Mr. Shea said, “we support the flexibility reflected in the rule as a way to maximize our ability to maintain comprehensive coverage for active and retired workers.”

Schoolteachers, like many other public employees, often retire early and rely on employer-provided health benefits until they become eligible for Medicare. At a Congressional hearing in 2005, the National Education Association and Representative John A. Boehner of Ohio, who is now the House Republican leader, supported the proposed rule. The teachers union said it feared that employers would cut health benefits for early retirees if they had to provide identical benefits to those over 65 and those under.
Red alert in Pakistan

Islamabad/Karachi/Lahore, Dec 27 (ANI):
A red alert has been sounded in entire Pakistan after the assassination of former Prime Minister Benazir Bhutto in a suicide bomb and sniper gun attack in Rawalpindi on Thursday evening.

The shocking and tragic development here has sent a shockwave of grief and anger, with her supporters going on rampages in cities of Karachi and Lahore.

Sounds of gunshots were reportedly heard in Karachi with some terming it as a bomb blast.

Banks and Government buildings, including a post office, were set on fire by a mob here. Most of the roads have been blocked with burning tyres.

Parts of Sindh faced blackout and mobile network were jammed following the news of Bhutto's assassination.

In Hyderabad, another city in Sindh, dozens of vehicles were torched by angry mob.

In Peshawar police had to use tear gas and batons after angry demonstrators blocked the main highway and torched billboards and posters of the former ruling party.

Furious protesters took to the streets in groups, some of them opening fire in the air and screaming.

One local police station was pelted with stones, reported The News.

Incidents of rioting have also been reported from Lahore.

Noted human rights activist Asma Jehnagir blamed Musharraf and the army for today's tragic incident, and urged the world leaders to 'wake up' to the happenings in Pakistan. Meanwhile, the government in Pakistan's Punjab Province today declared 18 districts of the region as the most sensitive in view of terrorism hazards and confirmed the reports that army will be called in these districts.

Geo News quoted Punjab Home Secretary Khusro Pervaiz Khan as saying that the provincial government has called in the army and contingents of the Rangers to help the police maintain the law and order in these districts.

The armed forces would undertake flag marches through the districts, which include Lahore, Multan, Rawalpindi, Dera Ghazi Khan, Faisalabad and Bahawalpur.

In a brief televised address to the nation, Pakistan President Pervez Musharraf said that terrorists were responsible for the suicide attack on Bhutto's rally in Rawalpindi that left 30 people dead and close to 50 others injured.

He also urged people to maintain peace and calm. (ANI)

This is the look of a man with many questions, and not many answers! As we leave 2007, and move forward towards 2008 its easy to have a lot of questions...considering what we have witnessed over the last few months...

Its clear now that the Sub-prime mortgage debacle was not confined...hell it was never confined from the start...not a day goes by that you do not read about another large bank or investment bank getting cash infusions from either the FED or some foreign entity...and the question of solvency rather than liquidity keeps getting asked abroad...Central Banks worldwide seem to feel as if flooding the markets with cash will "get us out of this one", but watching telltale signs in the LIBOR and other key indicators these infusions would seem to be far to little far to late...the banks have money...they are just afraid to let go of it...even to each other...because what they may have to take as collateral may be worthless...and until there is some degree of "transparency" about the value of the collateral things may not change...

We live in a world where "perception" is everything...and although the figures coming out of this and that government agency every month are spinned as positive somehow if you are an average American you just can't make that jive with the price of gasoline at the pump or the tape at the grocery store...those two measures of what it cost you to live don't lie, and can't be argued with...

Today we hear that ex Prime Minister Bhutto was assassinated last night after giving a speech, this was a tragedy waiting to happen...but sad none the less...and the incident will surely cause instability in an area that needs no more instability...

I could go on and on...the headlines all tell the story if you take the time to read them...and don't bet the farm on it all turning out OK...and the way things look right now all we can really do is to try and do whatever we can individually to lessen the pain down the line...

Some would say this to pessimistic an outlook...OK fine...maybe it is...but its way more realistic than the crap the pump monkeys will feed you on TV...I have lived overseas for extended periods of time...I have seen first hand how things can spiral out of control overnight...I was a young man in the oil embargo of the early 70's (during the days of gas rationing), and a newlywed during the Carter years...not looking forward to going back to anything remotely akin to either of those times...but we are headed that direction...history always repeats itself...

For now I will leave you with
a quote from the book, The Great Reckoning:

"There is, to be sure, a singularity about 1929-33, when the lessons of the past were deliberately ignored. The wise advice of Andrew Mellon, Secretary to the Treasury, that the policy should be to liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate" and so "purge the rottenness from the economy"-in other words, let recession rip-was disregarded. First Herbert Hoover, then Franklin Roosevelt tinkered with the economy, and so prolonged the sickness. On the other hand, the kind of stock-market malpractices which allowed the build-up to 1929 were outlawed. We have learned a good deal more since, especially from the crises of 1973-74 and 1987. All these convulsions can be studied and the danger signals they exhibit extrapolated and put to use. That is why, when I lecture to senior executives in various parts of the world, I always tell them: "Do not bother with economics. You will learn nothing from it. Read economic history, and think about it."

Heed these words.....history does repeat itself, since human nature is pretty much the same over the ages...

2008 could turn out to be one of the most important years in our nations history...and by extension the bears watching! CLOSELY!~

Pakistan's Bhutto assassinated at rally

By SADAQAT JAN and ZARAR KHAN, Associated Press Writers 7 minutes ago

Pakistan opposition leader Benazir Bhutto was assassinated Thursday in a suicide attack that also killed at least 20 others at a campaign rally, aides said.

The death of the 54-year-old charismatic former prime minister threw the campaign for the Jan. 8 parliamentary elections into chaos and created fears of mass protests and violence across the nuclear-armed nation, an important U.S. ally in the war on terrorism.

The attacker struck just minutes after Bhutto addressed thousands of supporters in the garrison city of Rawalpindi, 8 miles south of Islamabad. She was shot in the neck and chest by the attacker, who then blew himself up, said Rehman Malik, Bhutto's security adviser.

At least 20 others were killed in the attack.

Bhutto was rushed to the hospital and taken into emergency surgery.

"At 6:16 p.m., she expired," said Wasif Ali Khan, a member of Bhutto's party who was at Rawalpindi General Hospital.

"The surgeons confirmed that she has been martyred," Bhutto's lawyer Babar Awan said.

Bhutto's supporters at the hospital exploded in anger, smashing the glass door at the main entrance of the emergency unit. Others burst into tears. One man with a flag of Bhutto's Pakistan People's Party tied around his head was beating his chest.

No one claimed responsibility for the attack. But some of Bhutto's supporters at the hospital began chanting, "Killer, Killer, Musharraf," referring to Pakistani President Pervez Musharraf, Bhutto's main political opponent. A few began stoning cars outside.

"We repeatedly informed the government to provide her proper security and appropriate equipment including jammers, but they paid no heed to our requests," Malik said.

Nawaz Sharif, another former premier and opposition leader, arrived at the hospital and sat silently next to Bhutto's body.

Hours earlier, four people were killed at a rally for Sharif when his supporters clashed with backers of Musharraf near Rawalpindi.

Bhutto's death will leave a void at the top of her party, the largest political group in the country, as it heads into the parliamentary elections. It also fueled fears that the crucial vote could descend into violence.

Pakistan is considered a vital U.S. ally in the fight against al-Qaida and other Islamic extremists including the Taliban. Osama bin Laden and his inner circle are believed to be hiding in lawless northwest Pakistan along the border with Afghanistan.

In Washington, the State Department condemned the attack.

"It demonstrates that there are still those in Pakistan who want to subvert reconciliation and efforts to advance democracy," deputy spokesman Tom Casey said.

The United States has for months been encouraging Musharraf to reach an accommodation with the opposition, particularly Bhutto, who was seen as having a wide base of support in Pakistan. Her party had been widely expected to do well in next month's elections.

Educated at Harvard and Oxford universities, Bhutto served twice as Pakistan's prime minister between 1988 and 1996. Her father, who also served as prime minister, was executed in 1979 two years after his ouster in a military coup.

Bhutto had returned to Pakistan from an eight-year exile on Oct. 18. On the same day, she narrowly escaped injury when her homecoming parade in Karachi was targeted in a suicide attack that killed more than 140 people.

At the scene of Thursday's bombing, an Associated Press reporter saw body parts and flesh scattered at the back gate of the Liaqat Bagh park, where Bhutto had spoken. He counted about 20 bodies, including police, and could see many other wounded people.

Party supporter Chaudry Mohammed Nazir said two gunshots rang out when Bhutto's vehicle pulled into the main street. Then there was a big blast next to her car.

Police cordoned off the street with white and red tape, and rescuers rushed to put victims in ambulances as people wailed nearby.

The clothing of some victims was shredded and people put party flags over their bodies. Police caps and shoes littered the asphalt.

Hundreds of riot police had manned security checkpoints around the venue. It was Bhutto's first public meeting in Rawalpindi since she came back to the country.

In November, Bhutto had also planned a rally in the city, but Musharraf forced her to cancel it, citing security fears.

In recent weeks, suicide bombers have repeatedly targeted security forces in Rawalpindi, where Musharraf stays and the Pakistan army has its headquarters.

Wednesday, December 26, 2007

The Christmas holiday is lets wait and see if there is any really bad news that was conveniently "bypassed" in lieu of holiday cheer comes forward...

We already know the retail season "sucked"...we already know that consumer discretionary spending has slowed lets wait and see what other surprises are in store...
Stocks Slip After Weak Holiday Sales
Wednesday December 26, 9:53 am ET
By Lauren Villagran, AP Business Writer

Stocks Open Moderately Lower Amid Concerns About Weak Holiday Sales; Target Warns of Decline
NEW YORK (AP) -- Stocks opened moderately lower Wednesday as investors returned from the holiday to news of weaker-than-expected retail sales.

The International Council of Shopping Centers said its index of retail chain store sales rose 2.8 percent last week, rounding out a sluggish December performance that puts retailers on track for a smaller sales gain than the trade group originally expected. Still, there is some hope sales will rebound as shoppers start spending with holiday gift cards.

Other reports released Christmas Day were disappointing. Target Corp. indicated its sales may have fallen in December. The nation's No. 2 retailer scaled back sales projections, saying same-store sales for the five weeks through Jan. 5 would range from a 1 percent increase to a 1 percent decrease versus earlier expectations for a gain of between 3 percent and 5 percent.

MasterCard Inc. said holiday spending -- including credit, cash and checks -- climbed a modest 2.4 percent between Thanksgiving and Christmas, weighed by a slowdown in sales of women's apparel. That compares with a rise of 6.6 percent over the same period last year.

The news could raise concerns about the strength of consumer spending and in turn the economy. However, it was widely expected that holiday sales would be slower than in years past.

In the first hour of trading, the Dow Jones industrial average fell 28.69, or 0.21 percent, to 13,520.64.

Broader stock indicators also fell. The Standard & Poor's 500 index declined 5.77, or 0.39 percent, to 1,490.68, and the Nasdaq composite index fell 11.77, or 0.43 percent, to 2,701.73.

Major stock indicators advanced in an abbreviated trading session Monday on news that Merrill Lynch & Co. will get a cash infusion from two investment groups, including Singapore's government-controlled fund Temasek Holdings. The money is expected to cushion the brokerage's mortgage-related writedowns in the fourth quarter.

The stock, bond and commodities markets were closed Tuesday for Christmas.

Bond prices fell Wednesday. The yield on the 10-year Treasury note, which moves opposite its yield, rose to 4.23 percent from 4.21 percent late Monday.

Oil and gold prices edged higher as the dollar retreated against other major currencies.

A barrel of light, sweet crude gained $1.58 to $95.71 in electronic trading on the New York Mercantile Exchange.

The holidays were on investors' minds as they looked for signals about the consumer but also insights about the broader economy.

Costco Wholesale Corp.'s chief financial officer told The Wall Street Journal it had "pretty good" holiday-season results so far. CFO Richard Galanti said the mass merchandiser largely avoided inventory gluts that would necessitate hefty markdowns. Costco slipped 60 cents to $70.16.

Acquisition appeared to help investor sentiment. Warren Buffett's Berkshire Hathaway Inc. on Tuesday agreed to pay $4.5 billion to buy 60 percent of Marmon Holdings Inc., a privately held company with more than 125 manufacturing and service businesses.

Overseas, Japan's Nikkei stock average closed up 0.65 percent. European stock markets were closed for an extended holiday.

New York Stock Exchange:

Nasdaq Stock Market:

Wednesday, December 19, 2007

Staring into the Abyss

The Collapse Of The Modern Day Banking System
By Mike Whitney

“In past financial crises... the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn’t working. Why not? Because the problem with the markets isn’t just a lack of liquidity — there’s also a fundamental problem of solvency.” Paul Krugman

12/17/07 "ICH" -- -- -Stocks fell sharply last week on news of accelerating inflation which will limit the Federal Reserves ability to continue cutting interest rates. On Tuesday the Dow Jones Industrials tumbled 294 points following the Fed's announcement of a quarter point cut to the Fed Funds rate. On Friday, the Dow dipped another 178 points when government figures showed consumer prices had risen 0.8% last month after a 0.3% gain in October. The stock market is now lurching downward into a “primary bear market”. There has been a steady deterioration in retail sales, commercial real estate, and the transports. The financial industry is going through a major retrenchment losing more than 25% in aggregate capitalization since July. The real estate market is collapsing. California Gov. Arnold Schwarzenegger announced on Friday that he will declare a "fiscal emergency" in January and ask for more power to deal with the $14 billion budget shortfall from the meltdown in subprime lending. Economists are beginning to publicly acknowledge what many market analysts have suspected for months; the nation's economy is going into a tailspin which will inevitably end in a hard landing.

Morgan Stanley's Asia Chairman, Stephen Roach, made this observation in a New York Times op-ed on Sunday:

“This recession will be deeper than the shallow contraction earlier in this decade. The dot-com-led downturn was set off by a collapse in business capital spending, which at its peak in 2000 accounted for only 13 percent of the country’s gross domestic product. The current recession is all about the coming capitulation of the American consumer — whose spending now accounts for a record 72 percent of G.D.P.”

Most people have no idea how grave the present situation is or the disaster the country will face if trillions of dollars of over-leveraged bonds and equities begin to unwind. There's a widespread belief that the stewards of the system—Bernanke and Paulson—can somehow steer the economy through this “rough patch” into calm waters. But they cannot, and the presumption shows a basic misunderstanding of how markets work. The Fed has no magical powers and will it allow itself to be crushed by standing in the path of a market-avalanche. As foreclosures and bankruptcies increase; stocks will crash and the fed will step aside to safety. That much is certain.

In the last few weeks, Bernanke and Paulson have tried a number of strategies that have failed miserably. Paulson concocted a plan to help the major investment banks consolidate and repackage their nonperforming mortgage-backed junk into a “Super SIV” to give them another chance to unload their bad investments on the public. The plan was nothing more than a public relations ploy which has already been abandoned by most of the key participants. Paulson's involvement is a real black eye for the Dept of the Treasury. It makes it look like he's willing to dupe investors as long as it helps his well-heeled Wall Street buddies.

Paulson also put together an “industry friendly” rate freeze that is supposed to help struggling homeowners avoid foreclosure. But the plan falls well short of providing any meaningful aid to the estimated 3.5 million homeowners who are facing the prospect of defaulting on their loans if they don't get government assistance. Recent estimates by industry experts say that Paulson's plan will only help a meager 140,000 mortgage holders, leaving millions of others to fend for themselves. Paulson has proved over and over that he is just not up to the task of confronting an economic challenge of this magnitude head-on.

Fed chief Bernanke hasn't done much better than Paulson. His three-quarter point cut to the Fed's Funds rate hasn't lowered interest rates on mortgages, stimulated greater home sales, stabilized the stock market or helped banks deal with their massive debt-load. It's been a flop from start to finish. All its done is weaken the dollar and trigger a wave of inflation. In fact, government figures now show energy prices are rising at a whopping 18.1% annually. Bernanke is apparently following Lenin's injunction that “The best way to destroy the Capitalist System is to debauch the currency.”

On Wednesday, the Federal Reserve initiated a “coordinated effort” with the Bank of Canada, the Bank of England, the European Central Bank, the and the Swiss National Bank to address the “elevated pressures in short-term funding of the markets.” The Fed issued a statement that “it will make up to $24 billion available to the European Central Bank (ECB) and Swiss National Bank to increase the supply of dollars in Europe.” (Bloomberg) The Fed will also add as much as $40 billion, via auctions, to increase cash in the U.S. Bernanke is trying to loosen the knot that has tightened Libor rates in England and reduced lending between banks. The slowdown is hobbling growth and could send the world into a recessionary spiral. Bernanke's “master plan” is little more than a cash giveaway to sinking banks. It has no chance of succeeding. The Fed is offering $.85 on the dollar for mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) that sold last week in the E*Trade liquidation for $.27 on the dollar. At the same time, the Fed has promised to keep the identities of the banks that are borrowing these emergency funds secret from the public. Thus, accountability and transparency have been both been shattered by one shortsighted action. The Fed is conducting its business like a bookie.

Unfortunately, the Fed bailout has achieved nothing. Libor rates---which are presently at seven-year highs---have not come down at all. This is causing growing concern among the leaders of the Central Banks around the world, but there's really nothing they can do about it. The banks are hoarding cash to meet their capital requirements. They are trying to compensate for the loss of value to their (mortgage-backed) assets by increasing their reserves. At the same time, the system is clogged with trillions of dollars of bad paper which has brought lending to a grinding halt. The massive injections of liquidity from the Fed have done nothing to improve lending or lower interbank rates. It's been a complete flop. Bernanke has lost control of the system. The market is driving interest rates now. If the situation persists, the stock market will crash.


One of Britain's leading economists, Peter Spencer, issued a warning on Saturday:

“The Government must suspend a set of key banking regulations at the heart of the current financial crisis or risk seeing the economy spiral towards a future that could make 1929 look like a walk in the park".

Spencer is right. The banks don't have the money to loan to businesses or consumers because they're desperately trying to raise more cash to meet their capital requirements on assets that continue to be downgraded. (The Fed may pay $.85 on the dollar, but investors are unwilling to pay anything at all.)Spencer correctly assumes that the reason the banks have stopped lending is not because they “distrust” other banks, but because they are capital-strapped from all their “off balance” sheets shenanigans. If the Basel regulations aren't modified, money markets will remain frozen, GDP will shrink, and there'll be a wave of bank closings.

Spencer said:

"The Bank is staring into the abyss. The Financial Services Authority must go round and check that all banks are solvent, and then it should cut the Basel capital requirement level from 8pc to about 6pc.” (“Call to Relax Basel Banking Rules, UK Telegraph)
Spencer confirms what we already knew; the banks are seriously under-capitalized and will come under growing pressure as hundreds of billions of dollars of mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) continue to lose value and have to be propped up with additional capital. The banks simply don't have the resources and there's going to be a day of reckoning.

Pimco's Bill Gross put it like this:

“What we are witnessing is essentially the breakdown of our modern day banking system.” Gross is right, but he only covers a small portion of the problem.

Economist Ludwig von Mises is more succinct in his analysis:

“There is no means of avoiding the final collapse of a boom brought on by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

The basic problem originated with the Federal Reserve when former Fed chief Alan Greenspan lowered interest rates below the rate of inflation for 31 months straight which pumped trillions of dollars of low interest credit into the financial system and ignited a speculative frenzy in real estate. Greenspan has spent a great deal of time lately trying to avoid any blame for the catastrophe he created. He is a first-rate “buck passer”. In Wednesday's Wall Street Journal, Greenspan scribbled out a 1,500 defense of his actions as head of the Federal Reserve pointing the finger at everything from China's “low cost workforce” to “the fall of the Berlin Wall”. The essay was typical Greenspan gibberish. In his trademark opaque language; Greenspan tiptoes through the well-documented facts of his tenure as Fed chief to absolve himself of any personal responsibility for the ensuing disaster.

Greenspan's polemic is a masterpiece of circuitous logic, deliberate evasion and utter denial of reality. He says:

“I do not doubt that a low U.S. federal-funds rate in response to the dot-com crash, and especially the 1% rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages (ARMs) and may have contributed to the rise in U.S. home prices. In my judgment, however, the impact on demand for homes financed with ARMs was not major.”

“Not major”? 3.5 million potential foreclosures, 11 month inventory backlog, plummeting home prices, an entire industry in terminal distress pulling down the global economy is not major?

But Greenspan is partially correct. The troubles in housing cannot be entirely attributed to the Fed's “cheap credit” monetary policies. They were also nursed along by a Doctrine of Deregulation which has permeated US capital markets since the Reagan era. Greenspan's views on how markets should function were--to great extent--shaped by this non-interventionist/non-supervisory ideology which has created enormous equity bubbles and horrendous imbalances. The former-Fed chief's support for adjustable-rate mortgages (ARMs) and subprime lending; shows that Greenspan thought of himself as more as a cheerleader for the big market-players than an impartial referee whose job was to monitor reckless or unethical behavior.

Greenspan also adds this revealing bit of information in his article:

“The value of equities traded on the world's major stock exchanges has risen to more than $50 trillion, double what it was in 2002. Sharply rising home prices erupted into major housing bubbles world-wide, Japan and Germany (for differing reasons) being the only principal exceptions.” (“The Roots of the Mortgage Crisis”, Alan Greenspan, WS Journal)

This admission proves Greenspan's culpability. If he knew that stock prices had doubled their value in just 3 years, then he also knew that equities had not risen due to increases in productivity or demand.(market forces) The only reasonable explanation for the asset inflation, therefore, was monetary policy. As his own mentor, Milton Friedman famously stated, “Inflation is always and everywhere a monetary phenomenon”. Any capable economist would have known that the explosion in housing and equities prices was a sign of uneven inflation. Now that the bubble has popped, inflation is spreading like mad through the entire economy.

Greenspan is a very sharp man. It is crazy to think he didn't know what was going on. This is basic economic theory. Of course he knew why stocks and housing prices were skyrocketing. He was the one who put the dominoes in motion with the help of his well-oiled printing press.

But Greenspan's low interest credit is only part of the equation. The other part has to do with way that the markets have been transformed by “structured finance”.

What's so destructive about structured finance is that it allows the banks to create credit “out of thin air”, stripping the Fed of its role as controller of the money supply. Author David Roache explains how this works in an excerpt from his book “New Monetarism” which appeared in the Wall Street Journal:

“The reason for the exponential growth in credit, but not in broad money, WAS SIMPLY THAT BANKS DIDN'T KEEP THEIR LOANS ON THEIR BOOKS ANY MORE—AND ONLY LOANS ON BANK BALANCE SHEETS GET COUNTED AS MONEY. Now, as soon as banks made a loan, they "securitized" it and moved it off their balance sheet.

There were two ways of doing this. One was to sell the securitized loan as a bond. The other was "synthetic" securitization: for example, using derivatives to get rid of the default risk (with credit default swaps) and lock in the interest rate due on the loan (with interest-rate swaps). Both forms of securitization meant that the lending bank was free to make new loans without using up any of its lending capacity once its existing loans had been "securitized."

So, to redefine liquidity under what I call New Monetarism, one must add, to the traditional definition of broad money, all the credit being created and moved off banks' balance sheets and onto the balance sheets of nonbank financial intermediaries. This new form of liquidity changed the very nature of the credit beast. What now determined credit growth was risk appetite: the readiness of companies and individuals to run their businesses with higher levels of debt.” (Wall Street Journal)

This is truly mind-boggling.

The banks have been creating trillions of dollars of credit (by originating mortgage-backed securities, collateralized debt obligations and asset-backed commercial paper) without maintaining the proportional capital reserves to back them up. That explains why the banks were so eager to provide mortgages to millions of loan applicants who had no documentation, no income, no collateral and a bad credit history. They believed their was no risk, because they were making enormous profits without tying up any of their capital. It was, quite literally, money for nothing.

Now, unfortunately, the mechanism for generating new loans (and fees) has broken down. The main sources of bank revenue have either been seriously curtailed or dried up entirely. (Mortgage-backed) Commercial paper (ABCP) one such source of revenue, has decreased by a full-third (or $400 billion) in just 17 weeks. Also, the securitization of mortgage-backed securities is DOA. The market for MBSs and CDOs and other complex bonds has followed the Pterodactyl into the history books. The same is true of structured investment vehicles (SIVs) and other “off balance-sheet” swindles which have either gone under entirely or are presently withering with every savage downgrade in mortgage-backed bonds. The mighty gear that was grinding out the hefty profits (“structured investments”) has suddenly reversed and---like a millstone that breaks free from its support-axle--is crushing everything in its path.

The banks don't have the reserves to cover their downgraded assets and the Federal Reserve cannot simply “monetize” their bad bets. There's no way out. There are bound to be bankruptcies and bank runs. “Structured finance” has usurped the Fed's authority to create new credit and handed it over to the banks. Now everyone will pay the price.

Wary investors have lost their appetite for risk and are steering-clear of anything connected to real estate or mortgage-backed bonds. That means that an estimated $3 trillion of securitized debt (CDOs, MBSs and ASCP) will come crashing to earth delivering a withering blow to the economy.

And it's not just the banks that will take a beating either. As Professor Nouriel Roubini points out, the broker dealers, the investment banks, money market funds, hedge funds and mortgage lenders are in the crosshairs as well.

Nouriel Roubini:

“Non-bank institutions do not have direct access to the Fed and other central banks liquidity support and they ARE NOW AT RISK OF A LIQUIDITY RUN as their liabilities are short term while many of their assets are longer term and illiquid; so the risk of something equivalent to a bank run for non-bank financial institutions is now rising. And there is no chance that depository institutions will re-lend to these to these non-banks the funds borrowed by central banks as these banks have severe liquidity problems themselves and they do not trust their non-bank counterparties. SO NOW MONETARY POLICY IS TOTALLY IMPOTENT IN DEALING WITH THE LIQUIDITY PROBLEMS AND THE RISKS OF RUNS ON LIQUID LIABILITIES OF A LARGE FRACTION OF THE FINANCIAL SYSTEM.” (Nouriel Roubini's Global EconoMonitor)

As the downgrades on CDOs and MBSs continue to accelerate, there'll likely be a frantic “flight to cash” by investors, just like the recent surge into US Treasuries. This will be followed by a series of spectacular bank and non-bank defaults. The trillions of dollars of “virtual capital” that was miraculously created through securitzation when the market was buoyed-along by optimism; will vanish in a flash when the market is driven by fear. In fact, the equity bubble has already been punctured and the process is well underway.

Tuesday, December 18, 2007

by Dr. Chris Martenson
The End of Money
December 17, 2007

Super Executive Summary:

Q: “Has the housing market bottomed, soon to bottom, or in the process of bottoming?”
A: No, nope, and no.

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

~ Ludwig Von Mises

Executive summary:

A series of government bailouts attack the symptoms, utterly fail to address the root cause

The bailouts were for the big banks, not you

House prices need to decline in price by 30% to 50%, and they will.

Trillions of dollars of losses lurk…in ultra-safe pension bond funds, small Norwegian towns, as well as in some unlikely places.

The current crisis is one of solvency not liquidity

In order to get at the question of “just how bad is the current housing crisis?” we need to understand the dimensions of the problem. It’s a complicated mess if one considers all the scenery in detail, but is startlingly simple when viewed from a distance.

The threat to our banking system is described by the extent of the mortgage losses and those will depend on how far (and how fast) house prices fall together with the impact of outright fraud. Below we shall explore the (very) simple reasons that explain why house prices must fall by 30% to 50%. Each one can be lumped into a category of fraud, reducing demand or boosting supply.

* House prices rose far above income gains. Too far. They became unaffordable, and now they are in the process of correcting back to affordable levels. What goes up must come down. Simple as that.

* Mortgage lending standards are tightening up which means fewer people will qualify for loans. Fewer qualified buyers means demand will drop and prices will fall. Simple as that.

* From 2000 to 2007 regulatory oversight of lending practices was so lax that there was effectively none. This means that lots of fraud was committed (a fantastic summary of types of real estate fraud can be found here), and an even larger pile of bad loans are held by people who will never be able to pay them back. That money is gone, gone, gone and somebody is going to have to eat those losses. Simple as that.

* More than one out of every four homes sold in 2005 and 2006 were sold to speculators and now house prices are at or below 2005 levels. This means that many a speculator has been wiped out (and then some considering transaction costs). Speculator demand is gone, and will not return for many years. Less demand equal lower prices. Simple as that.

* Developers overbuilt the national housing stock by a very large amount in part to meet the false speculator demand. I calculate somewhere in the vicinity of two to three million excess units. We have too much housing stock and it will be a minimum of 3 years before population gains naturally work it off. All things housing-related will be in recession until that oversupply is worked off. Simple as that.

* Even though the subprime foreclosure crisis is much closer to the beginning than the end, already hundreds of billions of dollars of losses have been recorded by small towns in Norway in state and municipal investment funds and by institutional money market funds . While big banks have managed to stuff all these investment channels with dodgy mortgage paper, they themselves remain as exposed to real estate loans as they’ve ever been. Truly there is no historical precedent to inform us as to how bad this could get. I estimate somewhere between $1 trillion and $2 trillion of losses which means that the entire capital of the entire US banking system could be wiped out. This is an issue of solvency, not liquidity and therefore this is a major crisis that goes far beyond the official actions and statements to date. Simple as that.

In summary, real estate supply, demand and price are severely out of whack and can only ‘be fixed’ by a significant decline in prices, which means that a whole lot of individuals and financial institutions are in trouble as a consequence. It all adds up to one simple conclusion; banks, pensions, hedge funds, & money market funds all will have to dispose of a whole lot of bad paper. Possibly up to $2 trillion dollars worth if my calculations are correct, meaning that the potential exists for literally all of the capital of the entire US banking system to be wiped out.

You now have all the information you need to understand why there really are no policy fixes to this mess (e.g. ‘freezing interest rates’), only an inevitable date with lower house prices. If you care to continue, below I provide my supporting data for the above statements.

From a purely theoretical standpoint, house prices need to fall to match those at the start of the bubble in 2000. Why? Because otherwise we have to believe in The Free Lunch. For The Free Lunch to be true it must be possible for a person to buy a house, do nothing except sit on a couch drinking beer for the next 5 years and get rich in the process. Examining 70 past examples of asset bubbles we find that The Free Lunch has never worked before and it’s very unlikely to work this time either.

So how much could/should house prices fall? It’s important to remember that one of the most important long-term factors for house prices is income gain. Which makes sense, right? A house is a fairly hefty cash drain that needs a good, steady job to support it. Since 2000 house prices have vastly outstripped income gains, which is why I am expecting pretty hefty declines in house prices.

To illustrate I put together the chart below by combining data from two government sources, the Census Bureau for income and the OFHEO for housing price gains.

What is immediately obvious is that house prices and income gains have historically tracked each other very, very closely through the entire data series until about 2000 where house prices pull significantly away from income gains. I have marked two historical housing bubbles (1979 and 1989) with arrows, which are noteworthy because they were well supported by income gains and therefore seem insignificant when viewed on this graph. But that in itself is noteworthy because as both homebuilders and house sellers during those periods can attest, it means that even a very slight departure between the blue and the red lines can be quite painful. It also means that we have no historical precedent for the territory in which we currently find ourselves.

So, onto the primary question, “what would be required to bring house prices and income gains back in line?”

The answer to that is either:

1) An income gain of 51%
2) Or a decline in house prices of 34%

Of the two, income gains or house price declines, which seems more likely? Before you answer that, you should know that the average income gain over the past 6 years has been 2.3% per year (not inflation adjusted). At that rate it would take 21 years, or until 2028, to close the gap. In the meantime, house prices would have to remain frozen at today’s prices. In a normal world, we would see a bit of both with house prices falling and incomes rising to meet somewhere down the road.

However, this is not a normal bubble and I expect house prices to do most of the work. Because of the correlated set of job losses that will result from the housing wipeout I am expecting a decline of even more than 34%, possibly as much as 50%. Remember, an outsized proportion of the meager job gains recorded since the recession of 2001 were in some way linked to housing. The ripple effect of job losses will extend far beyond realtors and mortgage brokers and into window manufacturing, lumber, plumbing fixtures, nail salons, BMW detailing services, and so forth.

My calculations are in alignment with those at :

NEW YORK (Reuters) - Housing markets from Punta Gorda, Florida, to Stockton, California, will crash and suffer price drops of more than 30 percent before the housing crisis is over, a report from Moody's said on Thursday.

On a national level, the housing market recession will continue through early 2009, said the report, co-authored by Mark Zandi, chief economist, and Celia Chen, director of housing economics.

At this particular moment in time, banks are about as heavily exposed to mortgages (as a total percent of assets) as they have ever been. Further, banks are holding an enormous quantity of commercial real estate loans, especially in the rah-rah areas such as Florida, the Southwest, and in California. The FDIC reported last year that more than 50% of all the banks in the southeast and west regions had exposure to commercial real estate loans that exceeded their total capital by 300% or more. Holey smokes!

Here’s how that happens. As the housing bubble takes off, people get in a buying frenzy while builders get in a building frenzy. Soon enough the commercial builders get all excited and say to themselves “Saaaaaaay, would you lookit all these houses going up, we better build a few more malls and condos out this way”. They then go to a local or regional bank who also can't see any possible downside to building more shopping areas and condos and so they loan huge, reckless amounts of money to these developers. When the inevitable bust comes everybody acts surprised and the banks go to the FDIC for a bailout. At least, that’s how it usually works. This time, because the amount of excessive building was so over the top and the banks so unfavorably leveraged, I fully expect the FDIC to be inadequate for the job and some larger source of bailout funds will be required (hint, hint taxpayers).

To put it in the simplest of terms, the total amount of bank capital in the entire country is a little over $1.1 trillion while more than $11 trillion in real estate loans exist meaning that a 10% to 15% loss on those loans would translate into the complete bankruptcy of the US banking system. What this all means is that we have a crisis of solvency, not liquidity. Currently the Federal Reserve has teamed up with a few European central banks to provide vast new sources (unlimited really) of liquidity to the banking system. The central banks will allow specific institutions (big banks) to trade in their piles of dodgy loans for electronic piles of cash for a specified period of time. After a period of time the banks will have to buy those dodgy loans back, at par and with cash, at some point in the future. If those loans are bad (‘bad’ like a $500,000 mortgage on a $300,000 condo) then this maneuver by the Fed simply won’t work. Instead, we need to quickly recognize that the loans are simply going to permanently underperform or enter default. This means we will probably lose a financial intuition or two (or thirty) along the way, but delaying the inevitable does not change the outcome, only the length of time you spend in pain.

It is against this relatively simple backdrop of overly expensive, overbuilt housing that the government recently launched an awful, poorly conceived and even more poorly named subprime bailout plan named the New Hope Alliance. “Hope”? Well, I suppose since “hope” is what got us into this mess it makes sense that the government might choose to use “hope” to get us back out of it. “Hope” is not a sound strategy, which makes it a natural fit for the current housing crisis.

Since this new plan of Hope will not prevent house prices from falling it is pretty much dead on arrival at least as far as actually helping to solve the primary problem. The primary problem is how a lack of housing affordability will lead to a decline in prices as brilliantly captured by this industry insider:

One final thought. How can any of this get repaired unless home values stabilize? And how will that happen? In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million $ home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million-dollar home. A home seller had a vast pool of available buyers.

Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible.

Wow. A tenfold reduction in buyers and a five fold increase in house supply. Only one way for that to resolve and that is through (vastly) reduced prices.

As presented, the purpose of the alliance of hope was to help prevent or delay foreclosures as if they were the problem. Unfortunately, foreclosures are merely the symptom while the cause is the fact that people bought overpriced houses they couldn’t afford while hoping that rising house prices would provide a ready source of cashout mortgage money. House prices are no longer rising, they are falling, and that is the root of the current crisis and this most recent government ‘fix’ does absolutely nothing about that. So we can score the plan a zero on that front. Where the New Hope Alliance really breaks down and becomes a solid negative is how it serves to undermine confidence in the sanctity of US contract law.

Dec. 7 (Bloomberg) -- President George W. Bush's plan to freeze interest rates on some subprime mortgages may prove to be a cure that breeds another disease.

“If the government goes in and changes contracts it will definitely have a chilling effect on the securitization of mortgages,” said Milton Ezrati, senior economist and market strategist at Lord Abbett & Co. in Jersey City, New Jersey, which oversees $120 billion in assets. “When the government comes in and says you have contracted to have this arrangement and you can no longer have it, I think it opens the door for lawsuits.”

What’s being said here is that enforceable contracts are a vital component of the US financial industry. Without the trust that a given contract will be collectible, then those contracts will either get written at a much higher price to compensate for the risk of not being paid or they will not get written at all.

This is an important concept because a huge prop to our economy over the past decade has been the flood of foreign funds that allowed us to enjoy low interest rates even as our trade deficit plumbed new depths. Part of the reason foreigners felt comfortable, if not confident, investing in the US is that our contract laws and supporting legal infrastructure are exceptionally strong at recognizing and protecting investor’s claims. Foreign investors bought many packaged mortgage products from Wall Street banks at a price based on expected returns that included future rate adjustments. The New Hope Alliance calls all of that into question. This would be no different than your boss telling you that next year’s 5% raise, which you are counting on and have in writing, is actually going to be 0% but could you please loan him another few hundred bucks?

So what was the purpose of the New Hope deal? Simple. It is intended to bail out big banks and mortgage companies who simply do not wish to recognize the actual value of the mortgages they hold at current market prices. When houses enter foreclosure and then get sold, a price discovery event happens that ‘hits the books’ of the financial institution involved.

Here’s the best explanation of the real purpose of the government program of hope, courtesy of the San Francisco Gate:

Now, just unveiled Thursday, comes the "freeze," the brainchild of Treasury Secretary Henry Paulson. It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of "teaser" subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.

But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.

The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.

The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it.

So we can see that the program of hope is primarily the hope that foreign and domestic won’t be able to demand that banks take back the bad paper they shoveled out and thereby prevent the banks from having to publicly recognize the fact that they are now severely damaged or even insolvent.

However, this 'mortgage freeze’ was actually the third bailout/remedy attempt by the government. The two past bailouts were simply not well publicized and those are the ones you should be paying attention to because they involve vast gobs of public money.

The first was this eye-popping ‘advance’ by the Federal Home Loan Bank system (FHLB) to the overall mortgage market in October:

NEW YORK (Fortune) -- As the credit crunch hit hard in the third quarter, most banks were forced to cut back their lending. But one group of banks increased lending by an incredible $182 billion. Who were these deep-pocketed lenders -- and are they capable of handling such a large rise in loans, especially at a time when credit markets are unsettled and mortgage defaults on the rise?

The lenders in question were the 12 Federal Home Loan Banks, set up under a government charter during the Great Depression to provide support to the housing market by advancing funds to over 8000 member banks that make mortgages. In the third quarter, loans to member banks, also called 'advances," totaled $822 billion, a 28% leap from $640 billion at the end of June.

This is a staggering amount of mortgage buying activity. Where did this $182 billion come from? Did the FHLB just happen to have $182 billion lying around? Since this is utterly improbable, how did the FHLB manage to find buyers for mortgage paper at a time when the mortgage markets were more or less frozen? What sorts of mortgages were purchased? Were they high grade or the subbiest of the subprime?

This was a bailout plain and simple. Public monies were used to buy debt instruments that were otherwise unsaleable in the vaunted "free market economy". It is an egregious use of public monies that was not voted on but is guaranteed by the public. But the FHLB fiduciary stewards did not stop there. They went further by advancing a stunning $51 billion to Countrywide Financial Corp, recently voted as most likely to fail by its classmates, How bad does this move smell? Bad enough for a US senator to notice.

In a letter to the regulator of the Federal Home Loan Bank system, Sen. Charles Schumer said Countrywide, the largest U.S. mortgage lender, may be abusing the program.

At the end of September, Countrywide had borrowed $51.1 billion from the Federal Home Loan Bank system -- a government-sponsored program.

”Countrywide is treating the Federal Home Loan Bank system like its personal ATM,” Schumer, a New York Democrat who heads the housing panel of the Senate Banking Committee, said in the letter. “At a time when Countrywide's mortgage portfolio is deteriorating drastically, FHLB's exposure to Countrywide poses an unreasonable risk.”

The only way I can interpret these moves is that our fiscal and monetary authorities are desperate and panicking. They are shoving enormous amounts of money (and hasty, badly named policies) into a very stressed and ultimately not savable situation. On a personal level these actions bother me a great deal, partly because they send the wrong message and add to the moral hazard ("Hey! Go ahead and live beyond your means and we'll reward you!"), but mostly because big bailouts doubly punish us all first by the inevitable inflation that will result and second because our future will be diminished by debt.

What needs to happen is very clear. The bad debts need to be wiped out. The malinvestments need to be written off. The people and institutions that behaved recklessly deserve to lose their money while the rest of us should not be asked to pay for their mistakes.

So now that we know this thing is going to implode the only relevant part left is ask the questions “how am I exposed and how can I avoid having the bag passed to me?”

Here I will revert to my past recommendations.

1. Get out of debt.

2. Be very careful about where you keep your money. Already several high profile money market funds have suffered losses and closed down returning less than the deposit amount to their clients. Expect this to get worse.

3. The dollar is in a precarious situation especially now that the fed and the FHLB have begun exchanging paper money for bad debt. Gold. Silver. Top off your oil tank at home. Do whatever you can to reduce your exposure to the dollar.

4. Be aware that pensions, municipal investment accounts, and even your bank are all highly likely to be exposed to the leveraged losses that are now upon us. If you are exposed here, figure out how not to be. Should a major banking crisis erupt, please consider how you'll conduct your daily affairs if your bank 'goes on holiday'. Cash in a safe place is one form of insurance.

5. If you are a citizen of a country whose central bank insists on bailing out the monied elite (big banks) with your current and/or future tax dollars, use every possible avenue available to legally apply pressure upon your political representatives to prevent this from happening.

Now, go back to the very top and re-read the quote by Ludwig Von Mises. It neatly describes everything you need to know. The preceding 20 paragraphs were my way of illustrating that there will be no voluntary abandonment of credit expansion. In fact, the data shows that our fiscal and monetary authorities are fighting that possible outcome tooth and nail. And of course they have to because unless credit continually expands our entire monetary system writhes about in agony. According to the Austrian economics view that leaves the dollar exposed to the risk of becoming an international pariah and losing its reserve currency status. Not that there’s anything wrong with that. Unless you think we might, someday, possibly need to import oil, or something made out of plastic, or electronics, or underwear or …

All the best,
Chris Martenson

© 2007 Dr. Chris Martenson

Dr. Chris Martenson
The End of Money
Bernardston, MA USA