Staring into the Abyss
The Collapse Of The Modern Day Banking System
By Mike Whitney
http://www.informationclearinghouse.info/article18913.htm
“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.
STARING INTO THE ABYSS
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
HOUSING - SIMPLE AS THAT
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 economy.com :
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 Economy.com 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
CONTACT INFORMATION
Dr. Chris Martenson
The End of Money
http://theendofmoney.com
Bernardston, MA USA
http://www.financialsense.com/fsu/editorials/martenson/2007/1217.html
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 economy.com :
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 Economy.com 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
CONTACT INFORMATION
Dr. Chris Martenson
The End of Money
http://theendofmoney.com
Bernardston, MA USA
http://www.financialsense.com/fsu/editorials/martenson/2007/1217.html
Monday, December 17, 2007
What Bankers Fear
By David Ignatius
Sunday, December 16, 2007; Page B07
When airport rescue crews are worried that a damaged plane may have a crash landing, they sometimes spread the runway with foam to reduce the probability of fire on impact. That's what the Federal Reserve and other central banks are doing in pumping liquidity into severely damaged financial markets.
Make no mistake: The central bankers' announcement Wednesday of a new coordinated effort to pump cash into the global financial system is a sign of their nervousness. The global credit squeeze that began last summer still hasn't run its course, and the central bankers fear that the stressed financial system could pull the world economy into a deep recession.
Thus the bankers' decision to shower the system with money, through a new system of auctions that will allow banks to borrow more cheaply than they can through the commercial interbank market. What's unusual is that five leading central banks agreed to act as a joint rescue committee.
The aim isn't so much to prevent a downturn -- the bankers aren't sure that's possible, or even desirable -- as to mitigate its effects. Fed officials have decided that they need to let the adjustment happen in financial markets, with prices of mortgage-backed securities and other assets falling to levels that will allow the markets to clear.
"Helicopters start dropping bundles of cash," read the headline on a column by Martin Wolf in Thursday's Financial Times. This image of free money recalls the facetious prescription of John Maynard Keynes that to get money in circulation again during the Great Depression, the government could simply bury it underground and encourage unemployed workers to dig it up. This time the bankers won't even have to dig.
Fed officials want to avoid two mistakes made in past financial crises. They don't want to be overly harsh, as banking authorities were after the real estate collapse that hit New England in the early 1990s. Back then, regulators forced banks to clean up their balance sheets by selling off assets in a falling market, which made the downward cycle even worse.
The Fed also wants to avoid being overly tolerant, as Japanese authorities were during that country's long-running financial crisis. The Japanese banks were allowed to keep bad loans on their books, in the hope that they could gradually grow their way out of the crisis. Instead, this lenient policy simply delayed the day of reckoning.
What scares the central bankers now is the evaporation of trust from the system. Banks don't believe each other's numbers; since nobody knows the real value of some of the mortgage-backed securities everyone is holding, they assume the worst. They start hoarding cash as a buffer against their own losses and because they're nervous about lending to anyone else.
That's what bankers mean when they talk about lack of liquidity. It isn't so much a shortage of cash as an unwillingness to make it available to others. It was Keynes, again, who coined the term "liquidity preference" to describe a situation in which even high rates of return couldn't persuade frightened investors to commit their cash.
"The basic problem is that banks don't trust each other. They can't get financing, so they don't lend, and this can cause spillover into the larger economy," explains Ted Truman, a senior fellow at the Peterson Institute in Washington and the Fed's former top international economist.
A fresh portrait of this stressed system appeared last week in the latest quarterly report by the Bank of International Settlements. The report noted that net issuance of certain mortgage-backed securities fell to $3 billion in September, compared with $30 billion or more a month in 2005 and 2006. Borrowing in general declined sharply, with the net issuance of bonds and notes in the third quarter less than half that of the previous quarter.
What does this market feel like for players at ground zero? I asked the head of one of the leading hedge funds how he had traded his portfolio Wednesday, the day the joint rescue package was announced. He answered that he had stayed out of the market because he wasn't sure what to do. Trades that looked sensible at 10 a.m. would have turned out to be mistakes by noon.
"If someone would take me out of all my positions, long and short, I'd do it," he said. This is the financial market equivalent of saying you want to start over. Six months into the credit crunch, that's the way many exhausted players are feeling. The markets will have to sink a good deal more, alas, before the vultures arrive to carry off the debris and the process of rebuilding can start.
By David Ignatius
Sunday, December 16, 2007; Page B07
When airport rescue crews are worried that a damaged plane may have a crash landing, they sometimes spread the runway with foam to reduce the probability of fire on impact. That's what the Federal Reserve and other central banks are doing in pumping liquidity into severely damaged financial markets.
Make no mistake: The central bankers' announcement Wednesday of a new coordinated effort to pump cash into the global financial system is a sign of their nervousness. The global credit squeeze that began last summer still hasn't run its course, and the central bankers fear that the stressed financial system could pull the world economy into a deep recession.
Thus the bankers' decision to shower the system with money, through a new system of auctions that will allow banks to borrow more cheaply than they can through the commercial interbank market. What's unusual is that five leading central banks agreed to act as a joint rescue committee.
The aim isn't so much to prevent a downturn -- the bankers aren't sure that's possible, or even desirable -- as to mitigate its effects. Fed officials have decided that they need to let the adjustment happen in financial markets, with prices of mortgage-backed securities and other assets falling to levels that will allow the markets to clear.
"Helicopters start dropping bundles of cash," read the headline on a column by Martin Wolf in Thursday's Financial Times. This image of free money recalls the facetious prescription of John Maynard Keynes that to get money in circulation again during the Great Depression, the government could simply bury it underground and encourage unemployed workers to dig it up. This time the bankers won't even have to dig.
Fed officials want to avoid two mistakes made in past financial crises. They don't want to be overly harsh, as banking authorities were after the real estate collapse that hit New England in the early 1990s. Back then, regulators forced banks to clean up their balance sheets by selling off assets in a falling market, which made the downward cycle even worse.
The Fed also wants to avoid being overly tolerant, as Japanese authorities were during that country's long-running financial crisis. The Japanese banks were allowed to keep bad loans on their books, in the hope that they could gradually grow their way out of the crisis. Instead, this lenient policy simply delayed the day of reckoning.
What scares the central bankers now is the evaporation of trust from the system. Banks don't believe each other's numbers; since nobody knows the real value of some of the mortgage-backed securities everyone is holding, they assume the worst. They start hoarding cash as a buffer against their own losses and because they're nervous about lending to anyone else.
That's what bankers mean when they talk about lack of liquidity. It isn't so much a shortage of cash as an unwillingness to make it available to others. It was Keynes, again, who coined the term "liquidity preference" to describe a situation in which even high rates of return couldn't persuade frightened investors to commit their cash.
"The basic problem is that banks don't trust each other. They can't get financing, so they don't lend, and this can cause spillover into the larger economy," explains Ted Truman, a senior fellow at the Peterson Institute in Washington and the Fed's former top international economist.
A fresh portrait of this stressed system appeared last week in the latest quarterly report by the Bank of International Settlements. The report noted that net issuance of certain mortgage-backed securities fell to $3 billion in September, compared with $30 billion or more a month in 2005 and 2006. Borrowing in general declined sharply, with the net issuance of bonds and notes in the third quarter less than half that of the previous quarter.
What does this market feel like for players at ground zero? I asked the head of one of the leading hedge funds how he had traded his portfolio Wednesday, the day the joint rescue package was announced. He answered that he had stayed out of the market because he wasn't sure what to do. Trades that looked sensible at 10 a.m. would have turned out to be mistakes by noon.
"If someone would take me out of all my positions, long and short, I'd do it," he said. This is the financial market equivalent of saying you want to start over. Six months into the credit crunch, that's the way many exhausted players are feeling. The markets will have to sink a good deal more, alas, before the vultures arrive to carry off the debris and the process of rebuilding can start.
Emergency help for financial markets entered new territory on Monday night as the European Central Bank announced it would on Tuesday offer unlimited funds at below market interest rates in a special operation to head off a year-end liquidity crisis.
The surprise move, which follows last week's co-ordinated barrage of measures by the world's central banks to increase market liquidity, suggests the ECB is still frustrated at the failure to ease market tensions.
The ECB had already announced that Tuesday's regular weekly money market operation would mature on January 4 - covering the year-end when financial institutions will be under pressure to show strong liquidity on their books.
But on Monday night it said in addition that it would satisfy all bids offering 4.21 per cent or more. Prior to the announcement, the cost of borrowing two-week money had soared to 4.9 per cent but fell sharply afterwards as the ECB's move in effect put a cap on market interest rates.
The move could trigger a surge in demand for ECB liquidity. In last week's regular seven-day auction, the ECB allocated EU218.5bn at an average rate of 4.21 per cent - the rate chosen as the cap for Tuesday's operation.
The ECB offered little explanation for its move beyond saying that it was "fully consistent" with its aim of keeping interest rates close to its main policy rate of 4 per cent.
The latest move underlines the limited impact of last week's co-ordinated intervention which included a new liquidity facility at the US Federal Reserve.
http://news.yahoo.com/s/ft/20071217/bs_ft/fto121720071425318....
Note:
When banks have no money coming in from private sector investors, there is no money available to roll over, originate or service existing debt, that is what these emergency loans are being used for, without a loan, from the CBs, they are insolvent.
They are buying time that has run out.
There is no way these CB drops in the bucket can replace the amount of private sector money that is no longer available or the amounts that are flowing out due to default and redemptions.
The surprise move, which follows last week's co-ordinated barrage of measures by the world's central banks to increase market liquidity, suggests the ECB is still frustrated at the failure to ease market tensions.
The ECB had already announced that Tuesday's regular weekly money market operation would mature on January 4 - covering the year-end when financial institutions will be under pressure to show strong liquidity on their books.
But on Monday night it said in addition that it would satisfy all bids offering 4.21 per cent or more. Prior to the announcement, the cost of borrowing two-week money had soared to 4.9 per cent but fell sharply afterwards as the ECB's move in effect put a cap on market interest rates.
The move could trigger a surge in demand for ECB liquidity. In last week's regular seven-day auction, the ECB allocated EU218.5bn at an average rate of 4.21 per cent - the rate chosen as the cap for Tuesday's operation.
The ECB offered little explanation for its move beyond saying that it was "fully consistent" with its aim of keeping interest rates close to its main policy rate of 4 per cent.
The latest move underlines the limited impact of last week's co-ordinated intervention which included a new liquidity facility at the US Federal Reserve.
http://news.yahoo.com/s/ft/20071217/bs_ft/fto121720071425318....
Note:
When banks have no money coming in from private sector investors, there is no money available to roll over, originate or service existing debt, that is what these emergency loans are being used for, without a loan, from the CBs, they are insolvent.
They are buying time that has run out.
There is no way these CB drops in the bucket can replace the amount of private sector money that is no longer available or the amounts that are flowing out due to default and redemptions.
Thursday, December 13, 2007
Dec. 13 (Bloomberg) -- The interest rates banks charge each other for short-term loans in Europe failed to decline from the highest levels in seven years a day after central banks joined forces to break a logjam in money markets.
The cost to borrow for three months remained at 4.95 percent, the British Bankers' Association said today. That's 95 basis points, or 0.95 percentage point, more than the European Central Bank's benchmark interest rate, compared with 57 basis points a month ago. The difference averaged 25 basis points in the first half of the year, before losses on securities linked to U.S. subprime mortgages contaminated credit markets.
The highest short-term rates since December 2000 suggest that the first coordinated central bank action since the Sept. 11, 2001, terrorist attacks may not be enough to revive interbank lending. The cost of borrowing dollars fell 7 basis points to 4.99 percent, about half what was anticipated, based on prices of Libor futures contracts.
``It's not going to help us find an exit to this crisis,'' said Cyril Beuzit, head of interest-rate strategy at BNP Paribas SA in London. ``These measures aren't going to address the root cause of the crisis. Banks are still reluctant to lend money to each other because there are serious concerns about potential further bad news.''
Reacting to Losses
Central banks in the U.S., U.K., Canada, Switzerland and the euro region agreed yesterday to coordinate efforts to promote lending and restore confidence in money markets. Policy makers are reacting to more than $66 billion of losses announced by banks this year and estimates of about $300 billion more on securities linked to subprime mortgages, collateralized-debt obligations and structured investment vehicles, or SIVs.
Futures trading in Europe is signaling the measures won't succeed in bringing down borrowing rates into next year.
Implied yields on Euribor futures contracts expiring this month through June 2009 rose today, with the December contract climbing 6 basis points to 4.915 percent. The implied yield on the March 2008 contract gained 6 basis points to 4.6 percent.
``The markets don't expect spreads to go down,'' said Alexander Titsch-Rivero, head of derivatives and structured products in Frankfurt at BHF-Bank AG, a German private bank. ``The actions by the central banks were just a placebo, a tranquilizer that doesn't solve the problem of the mistrust among banks on one hand and the potential for more losses in credit on the other.''
Stocks, Bonds
The interest rate for euros compiled by the European Banking Federation was little changed at a seven-year high of 4.95 percent, compared with 4.18 percent at the start of July.
Stocks extended declines, with the Euro Stoxx 600 index falling 2 percent. Yields on three-month Treasury bills, regarded as a haven for investors in times of turmoil, held at 2.87 percent, close to the lowest since Aug. 20.
The difference between the interest banks and the government pay for three-month loans, called the TED spread, rose to 2.21 percentage points yesterday from 1.59 percentage point on Sept. 18, when the Fed began lowering rates.
``It's a very disturbing sign,'' said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. ``I'm alarmed by the impact this is having, which underscores that the funding difficulties out there are enormous.''
The Fed plans four auctions, including two this month that will add as much as $40 billion, to increase cash in the U.S. The Bank of England said it would widen the range of collateral it will accept on three-month loans.
Seized Up
Short-term credit markets seized up in August, raising concern that the lack of capital flow between banks will hurt the economy. Goldman Sachs Group Inc. in a report a month ago estimated losses related to record home foreclosures may be as high as $400 billion for financial companies. If accurate, banks, brokerages and hedge funds would need to cut lending by $2 trillion, triggering a ``substantial recession,'' the firm said.
Borrowing costs have soared over the past four weeks as banks sought loans that will cover their commitments through to the start of next year.
``We're coming up to a real end of the year liquidity squeeze,'' said Stewart Taylor, who trades Treasuries in Boston at Eaton Vance Management, which oversees about $4 billion of taxable bonds. ``A lot of people are just pumping into bills rather than lending. Why loan money over the end of the year if you don't have to.''
Brown, Geithner
U.K. Prime Minister Gordon Brown said the surge in credit costs should spur increased transparency in the banking industry and change the way credit-rating companies work.
``It's a wake-up call for the global economy,'' Brown told lawmakers in Parliament in London today. ``The existing institutions aren't good enough.''
Fed Bank of New York President Timothy Geithner said today central bankers are looking at ``additional instruments'' to provide funds to banks in times of stress.
``The market is underestimating the significance of the move by the central banks,'' said Ciaran O'Hagan, head of interest-rate research in Paris at Societe Generale SA. ``It's a strong action that will tide us safely over year-end and hopefully restore confidence to the money markets early in the new year.''
Turmoil in the credit markets has caused losses for everyone from shareholders of New York-based Citigroup Inc., the largest U.S. bank, to Florida schools and towns invested in a state-run fund that owned downgraded and defaulted securities issued by SIVs. Citigroup, which said its mortgage-related writedowns may reach $11 billion this quarter, has fallen 39 percent since June on the New York Stock Exchange.
The one-week rate for euros was unchanged at 4.13 percent, the EBF said today. The rate for three-month credit in U.K. pounds dropped 12 basis points to 6.51 percent, the BBA said.
To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net
Wednesday, December 12, 2007
PORT WASHINGTON, N.Y. (MarketWatch) -- You can lead a horse to water, but you can't make it drink.
We learned this in the 1930s, when, after first shrinking the money supply enough to pull prices down by about 25%, the Federal Reserve of that era tried to force-feed liquidity into the economy with the hopes of pushing it out of its slump.
It didn't work. Lenders were reluctant to lend, while potential borrowers did not want to borrow.
Banks were struggling under mountains of loans gone sour and were in no frame of mind to throw good money after bad. For their part, most firms were not willing to assume new debts, since falling sales and earnings led them to conclude that there was little productive use they could make out of these borrowed funds.
The great economist John Maynard Keynes dubbed this phenomenon a "liquidity trap." It was perhaps the first realization that the Fed's powers were not as great as previously thought.
This was most disconcerting, since the main reason behind the creation of the Fed back in 1913 was to ensure that panics, such as the one in 1907 that was caused by insufficient liquidity in the economy, could be nipped in the bud - if not prevented altogether by a generous dollop of liquidity from the central bank.
The Panic of 1907, like others before it, led to a recession. The liquidity trap of the 1930s was part and parcel of what came to be known as the Great Depression.
Today there are some similarities to the liquidity trap of the 1930s. The credit crunch is clearly one of them. No matter what the Fed does on Tuesday, it will not be able to thaw out the frosty financial markets.
This is because the markets lack confidence. As I wrote two weeks ago, "fear, and not a lack of liquidity, is what's freezing up the credit markets ... and ... it's going to take a lot more than infusions of liquidity to thaw them." See Nov. 26 column
You know that fear is stronger than greed these days when banks refuse to lend to each other - never mind to businesses or to consumers.
A good indication of this is the three-month LIBOR spread against comparable maturity Treasuries. It's over 200 basis points (2 percentage points) today versus an average of about 25 bps between 2003 and this past spring.
What's driving this fear is uncertainty over the underlying value of securities backed by home mortgages.
Treasury Secretary Henry Paulson's offer to freeze interest rates for as long as five years for some subprime borrowers raises more questions than it answers - not the least of which is setting a precedent of government intervention changing the rules of the game for investors.
The value of these mortgage-backed securities will also be determined by what happens to housing prices, and as I wrote last week, nationally, median home prices will have to fall at least another 20% before families can afford to buy. See Dec. 3 column
There's little the Fed can do at this point other than injecting liquidity to push rates lower while persuading lenders to make credit more readily available.
However at some point the Fed will have to draw the line, lest it create not only a new moral hazard, but the groundwork for a new round of inflation as well. 
Why Your Camera Doesn't Matter
Why is it that with over 60 years of improvements in cameras, lens sharpness and film grain, resolution and dynamic range that no one has been able to equal what Ansel Adams did back in the 1940s?
Ansel didn't even have Photoshop! How did he do it? Most attempts fall short, some are as good but different like Jack Dykinga, but no one is the same.
Why is it that photographers loaded with the most extraordinary gear who use the internet to get the exact GPS coordinates of Jack's or Ansel's photo locations and hike out there with the image in hand to ensure an exact copy (illegal by US copyright laws and common decency), that they get something that might look similar, but lacks all the impact and emotion of the original they thought they copied?
I'm not kidding. A bunch of these turkeys used university astronomers to predict the one time in almost two decades that the conditions would match and had 300 of the clueless converge at just the right spot. They still didn't get the clouds, snow or shadows right. This makes Ansel or any other creative artist cringe. Of course they didn't get anything like what they wanted. Art is a lot more.
Compelling photographs come from inspiration, not duplication.
Why is it that even though everyone knows that Photoshop can be used to take any bad image and turn it into a masterpiece, that even after hours of massaging these images look worse than when one started?
Maybe because it's entirely an artist's eye, patience and skill that makes an image and not his tools. Even Ansel said "The single most important component
of a camera is the twelve inches behind it."
A camera catches your imagination. No imagination, no photo - just crap. The word "image" comes from the word "imagination." It doesn't come come from "lens sharpness" or "noise levels." David LaChapelle's work is all about his imagination, not his camera. Setting up these crazy shots is the hard part. Once set up, any camera could catch them. Give me David LaChapelle's camera and I won't get anything like he does, even if you give me the same star performers.
The only reason I have a huge lens in my photo on my home page is so I don't have to say "photographer" or "photography." The lens makes it obvious much quicker than words. That's what visual communication is all about: thinking long and hard to make your point clearly and quickly. I haven't used that huge lens in years.
Just about any camera, regardless of how good or bad it is, can be used to create outstanding photographs for magazine covers, winning photo contests and hanging in art galleries. The quality of a lens or camera has almost nothing do with the quality of images it can be used to produce.
Joe Holmes' limited-edition 13 x 19" prints of his American Museum of Natural History series sell at Manhattan's Jen Bekman Gallery for $650 each. They're made on a D70.
Another San Diego pro, Kirsten Gallon earns her living using Nikon's two very cheapest lenses, the 18-55 and 70-300 G.
There are plenty of shows selling shots from Holgas for a lot more money, just that those folks don't tell me about it. Holgas sell for $14.95, brand new, here. You can see an award-winning shot made with a Holga hanging in Washington, D.C.'s Hemicycle Gallery of the Corcoran Museum of Art in their 2006 Eyes of History competition of the White House News Photographers Association here.
Walker Evans once said "People always ask me what camera I use. It's not the camera, it's - - - " and he tapped his temple with his index finger.
Jesus Christ's dad Joseph built a masterpiece of a wooden staircase in a church in New Mexico in 1873, and does anyone care what tools he used? Search all you want, you'll find plenty of scholarly discussion but never of the tools.
Your equipment DOES NOT affect the quality of your image. The less time and effort you spend worrying about your equipment the more time and effort you can spend creating great images. The right equipment just makes it easier, faster or more convenient for you to get the results you need.
"Any good modern lens is corrected for maximum definition at the larger stops. Using a small stop only increases depth..." Ansel Adams, June 3, 1937, in a reply to Edward Weston asking for lens suggestions, page 244 of Ansel's autobiography. Ansel made fantastically sharp images seventy years ago without wasting time worrying about how sharp his lenses were. With seventy years of improvement we're far better off concentrating on making stunning photos than photographing test charts. Of course these large format lenses of the 1930s and today are slow, about f/5.6 typically. Small format and digital lenses work best at about 2 stops down.
Buying new gear will NOT improve your photography. For decades I thought "if I only had that new lens" that all my photo wants would be satisfied. Nope. I still want that "one more lens," and I've been shooting for over 30 years. There is always one more lens. Get over it. See "The Station" for a better explanation.
The camera's only job is to get out of the way of making photographs.
Ernst Haas commented on this in a workshop in 1985:
Two laddies from Nova Scotia had made a huge effort to be there and were great Leica fans, worked in a camera store, saved to have them and held Ernst on high for being a Leica user (although he used Nikons on his Marlboro shoots, when the chips were down).
About four days into the workshop, he finally maxxed out on the Leica adoration these kids displayed, and in the midst of a discussion, when one of them asked one more question aimed at establishing the superiority of Wetzlar, Ernst said, "Leica, schmeica. The camera doesn't make a bit of difference. All of them can record what you are seeing. But, you have to SEE."
Nobody talked about Leica, Nikon, Canon or any other brand of camera equipment for the rest of the workshop.
He also said, "Best wide-angle lens? 'Two steps backward' and 'look for the ah-ha'."
(This Haas anecdote comes from Murad Saÿen, the famous photographer from Oxford, Maine over whom people are all abuzz. Many say he emerged from the back woods as a cross between Eliot Porter and Henri Cartier Bresson. I found at least three websites claiming to be Haas' official one here and here.)
You can see some of the world's best photography here by a fellow who says the same thing here. Here's another load of data which also confirms why owning more lenses just makes worse photos. I made these B/W photos here with a 50 year old $3 box camera more primitive than today's disposables.
Andreas Feininger (French, b. 1905 - d. 1999), said "Photographers — idiots, of which there are so many — say, “Oh, if only I had a Nikon or a Leica, I could make great photographs.” That’s the dumbest thing I ever heard in my life. It’s nothing but a matter of seeing, thinking, and interest. That’s what makes a good photograph. And then rejecting anything that would be bad for the picture. The wrong light, the wrong background, time and so on. Just don’t do it, not matter how beautiful the subject is."
People know cars don't drive themselves, typewriters don't write novels by themselves and that Rembrandt's brushes didn't paint by themselves. So why do some otherwise intelligent people think cameras drive around and make pictures all by themselves? The most advanced, exotic and expensive car can't even stay in the same lane on the freeway by itself, much less drive you home. No matter how advanced your camera you still need to be responsible for getting it to the right place at the right time and pointing it in the right direction to get the photo you want. Every camera requires you to make manual adjustments now and then as well, regardless of how advanced it is. Never blame a camera for not knowing everything or making a wrong exposure or fuzzy image.
Even a good driver in a crummy car like a Geo Metro can escape from multi-car police chases in broad daylight. It's the driver, not the car. Read that one here.
Here's how I came to discover this:
When it comes to the arts, be it music, photography, surfing or anything, there is a mountain to be overcome. What happens is that for the first 20 years or so that you study any art you just know that if you had a better instrument, camera or surfboard that you would be just as good as the pros. You waste a lot of time worrying about your equipment and trying to afford better. After that first 20 years you finally get as good as all the other world-renowned artists, and one day when someone comes up to you asking for advice you have an epiphany where you realize that it's never been the equipment at all.
You finally realize that the right gear you've spent so much time accumulating just makes it easier to get your sound or your look or your moves, but that you could get them, albeit with a little more effort, on the same garbage with which you started. You realize the most important thing for the gear to do is just get out of your way. You then also realize that if you had spent all the time you wasted worrying about acquiring better gear woodshedding, making photos or catching more rides that you would have gotten where you wanted to be much sooner.
I met Phil Collins at a screening in December 2003. It came out that people always recognize his sound when they hear it. Some folks decided to play his drums when he walked away during a session, and guess what? It didn't sound like him. Likewise, on a hired kit (or "rented drum set" as we say in the USA) Phil still sounds like Phil. So do you still think it's his drums that give him his sound?
A fan from Michigan teaches auto racing at a large circuit. The daughter of one of his students wanted to come learn. She flew out and showed up at the track in an rented Chevy Cavalier. She outran the other students, middle aged balding guys with Corvettes and 911s. Why? Simple: she paid attention to the instructor and was smooth and steady and took the right lines, not posing while ham-fisting a lot of horsepower to try to make up for patience and skill. The dudes were really ticked, especially that they were outrun by a GIRL, and a 16 year old one at that.
Sure, if you're a pro driver you're good enough to elicit every ounce of performance from a car and will be limited by its performance, but if you're like most people the car, camera, running shoes or whatever have little to nothing to do with your performance since you are always the defining factor, not the tools.
Catch any virtuoso who's a complete master of their tools away from his or her sponsors and they'll share this with you.
So why do the artists whose works you admire tend to use fancy, expensive tools if the quality of the work is the same? Simple:
1.) Good tools just get out of the way and make it easier to get the results you want. Lesser tools may take more work.
2.) They add durability for people who use these tools hard all day, every day.
3.) Advanced users may find some of the minor extra features convenient. These conveniences make the photographer's life easier, but they don't make the photos any better.
4.) Hey, there's nothing wrong with the best tools, and if you have the money to blow why not? Just don't ever start thinking that the fancy tools are what created the work.
So why do I show snaps of myself with a huge lens on my pages? Simple: it saves me from having to say "Ken Rockwell Photography," which sounds lame and takes up more space. The big camera gets the message across much better and faster so I can just say "Ken Rockwell."
Here are photos made by a guy in the Philipines - with a cell phone camera!
One last example: I bought a used camera that wouldn't focus properly. It went back to the dealer a couple of times for repair, each time coming back the same way. As an artist I knew how to compensate for this error, which was a pain because I always had to apply a manual offset to the focus setting. In any case, I made one of my very favorite images of all time while testing it. This image here has won me all sorts of awards and even hung in a Los Angeles gallery where an original Ansel Adams came down and this image was hung. When my image came down Ansel went right up again. Remember, this was made with a camera that was returned to the dealer which they agreed was unrepairable.
The important part of that image is that I stayed around after my friends all blew off for dinner, while I suspected we were going to have an extraordinary sky event (the magenta sky, just like the photo shows.) I made a 4 minute exposure with a normal lens. I could have made it on the same $3 box camera that made the B/W images here and it would have looked the same.
Likewise, I occasionally get hate mail and phone calls from guys (never women) who disagree with my personal choice of tools. They take it personally just because I prefer something different than they do. Like anyone cares? These folks mean well, they probably just haven't made it past that mountain and still think that every tool has some absolute level of goodness, regardless of the application. They consider tools as physical extensions of their body so of course they take it personally if I poke fun of a certain tool as not being good for what I'm doing. For instance, the Leica collectors here have a real problem with this page. All gear has different values depending on what you want to do with it. What's great for you may not be for me, and vice-versa.
Just about any camera, regardless of how good or bad it is, can be used to create outstanding photographs for magazine covers, winning photo contests and hanging in art galleries. The quality of a lens or camera has almost nothing do with the quality of images it can be used to produce.
You probably already have all the equipment you need, if you'd just learn to make the best of it. Better gear will not make you any better photos, since the gear can't make you a better photographer.
Photographers make photos, not cameras.
It's sad how few people realize any of this, and spend all their time blaming poor results on their equipment, instead of spending that time learning how to see and learning how to manipulate and interpret light.
Buying newer cameras will ensure you get the same results you always have. Education is the way to better images, not more cameras.
Don't blame anything lacking in your photos on your equipment. If you doubt this, go to a good photo museum or photo history book and see the splendid technical quality people got 50 or 100 years ago. The advantage of modern equipment is convenience, NOT image quality. Go look at the B/W images in my Death Valley Gallery. Look sharp to you? They were made on a 50 year old fixed-focus, fixed exposure box camera for which I paid $3. This camera is more primitive than today's disposables.
I have made technically and artistically wonderful images on a $10 camera I bought at Goodwill, and have turned out a lot of crap with a $10,000 lens on my motor driven Nikon.
The great Edward Steichen photographed Isadora Duncan at the Acropolis, Athens in 1921. He used a Kodak borrowed from the head waiter at his hotel. The images are, of course, brilliant. Steichen had not taken his own camera because the original plan had been to work only with movie equipment. This image was on display at The Whitney in 2000 - 2001.
You need to learn to see and compose. The more time you waste worrying about your equipment the less time you'll have to put into creating great images. Worry about your images, not your equipment.
Everyone knows that the brand of typewriter (or the ability to fix that typewriter) has nothing to do with the ability to compose a compelling novel, although a better typewriter may make typing a little more pleasant. So why do so many otherwise reasonable people think that what sort of camera one has, or the intimate knowledge of shutter speeds, lens design or camera technology has anything do with the ability to create an interesting photo other than catering to the convenience of the photographer?
Just as one needs to know how to use a typewriter to compose a script, one does need to know how to operate a camera to make photos, but that's only a tiny part of the process. Do you have any idea what brand of computer or software I used to create what you're reading right now? Of course not, unless you read my about page. It matters to me, but not to you, the viewer. Likewise, no one who looks at your pictures can tell or cares about what camera you used. It just doesn't matter.
Knowing how to do something is entirely different from being able to do it at all, much less do it well.
We all know how to play the piano: you just press the keys and step on the pedals now and then. The ability to play it, much less the ability to stir emotion in those who hear your playing, is an entirely different matter.
Don't presume the most expensive gear is the best. Having too much camera equipment is the best way to get the worst photos.
© 2006 Ken Rockwell
Why is it that with over 60 years of improvements in cameras, lens sharpness and film grain, resolution and dynamic range that no one has been able to equal what Ansel Adams did back in the 1940s?
Ansel didn't even have Photoshop! How did he do it? Most attempts fall short, some are as good but different like Jack Dykinga, but no one is the same.
Why is it that photographers loaded with the most extraordinary gear who use the internet to get the exact GPS coordinates of Jack's or Ansel's photo locations and hike out there with the image in hand to ensure an exact copy (illegal by US copyright laws and common decency), that they get something that might look similar, but lacks all the impact and emotion of the original they thought they copied?
I'm not kidding. A bunch of these turkeys used university astronomers to predict the one time in almost two decades that the conditions would match and had 300 of the clueless converge at just the right spot. They still didn't get the clouds, snow or shadows right. This makes Ansel or any other creative artist cringe. Of course they didn't get anything like what they wanted. Art is a lot more.
Compelling photographs come from inspiration, not duplication.
Why is it that even though everyone knows that Photoshop can be used to take any bad image and turn it into a masterpiece, that even after hours of massaging these images look worse than when one started?
Maybe because it's entirely an artist's eye, patience and skill that makes an image and not his tools. Even Ansel said "The single most important component
of a camera is the twelve inches behind it."
A camera catches your imagination. No imagination, no photo - just crap. The word "image" comes from the word "imagination." It doesn't come come from "lens sharpness" or "noise levels." David LaChapelle's work is all about his imagination, not his camera. Setting up these crazy shots is the hard part. Once set up, any camera could catch them. Give me David LaChapelle's camera and I won't get anything like he does, even if you give me the same star performers.
The only reason I have a huge lens in my photo on my home page is so I don't have to say "photographer" or "photography." The lens makes it obvious much quicker than words. That's what visual communication is all about: thinking long and hard to make your point clearly and quickly. I haven't used that huge lens in years.
Just about any camera, regardless of how good or bad it is, can be used to create outstanding photographs for magazine covers, winning photo contests and hanging in art galleries. The quality of a lens or camera has almost nothing do with the quality of images it can be used to produce.
Joe Holmes' limited-edition 13 x 19" prints of his American Museum of Natural History series sell at Manhattan's Jen Bekman Gallery for $650 each. They're made on a D70.
Another San Diego pro, Kirsten Gallon earns her living using Nikon's two very cheapest lenses, the 18-55 and 70-300 G.
There are plenty of shows selling shots from Holgas for a lot more money, just that those folks don't tell me about it. Holgas sell for $14.95, brand new, here. You can see an award-winning shot made with a Holga hanging in Washington, D.C.'s Hemicycle Gallery of the Corcoran Museum of Art in their 2006 Eyes of History competition of the White House News Photographers Association here.
Walker Evans once said "People always ask me what camera I use. It's not the camera, it's - - - " and he tapped his temple with his index finger.
Jesus Christ's dad Joseph built a masterpiece of a wooden staircase in a church in New Mexico in 1873, and does anyone care what tools he used? Search all you want, you'll find plenty of scholarly discussion but never of the tools.
Your equipment DOES NOT affect the quality of your image. The less time and effort you spend worrying about your equipment the more time and effort you can spend creating great images. The right equipment just makes it easier, faster or more convenient for you to get the results you need.
"Any good modern lens is corrected for maximum definition at the larger stops. Using a small stop only increases depth..." Ansel Adams, June 3, 1937, in a reply to Edward Weston asking for lens suggestions, page 244 of Ansel's autobiography. Ansel made fantastically sharp images seventy years ago without wasting time worrying about how sharp his lenses were. With seventy years of improvement we're far better off concentrating on making stunning photos than photographing test charts. Of course these large format lenses of the 1930s and today are slow, about f/5.6 typically. Small format and digital lenses work best at about 2 stops down.
Buying new gear will NOT improve your photography. For decades I thought "if I only had that new lens" that all my photo wants would be satisfied. Nope. I still want that "one more lens," and I've been shooting for over 30 years. There is always one more lens. Get over it. See "The Station" for a better explanation.
The camera's only job is to get out of the way of making photographs.
Ernst Haas commented on this in a workshop in 1985:
Two laddies from Nova Scotia had made a huge effort to be there and were great Leica fans, worked in a camera store, saved to have them and held Ernst on high for being a Leica user (although he used Nikons on his Marlboro shoots, when the chips were down).
About four days into the workshop, he finally maxxed out on the Leica adoration these kids displayed, and in the midst of a discussion, when one of them asked one more question aimed at establishing the superiority of Wetzlar, Ernst said, "Leica, schmeica. The camera doesn't make a bit of difference. All of them can record what you are seeing. But, you have to SEE."
Nobody talked about Leica, Nikon, Canon or any other brand of camera equipment for the rest of the workshop.
He also said, "Best wide-angle lens? 'Two steps backward' and 'look for the ah-ha'."
(This Haas anecdote comes from Murad Saÿen, the famous photographer from Oxford, Maine over whom people are all abuzz. Many say he emerged from the back woods as a cross between Eliot Porter and Henri Cartier Bresson. I found at least three websites claiming to be Haas' official one here and here.)
You can see some of the world's best photography here by a fellow who says the same thing here. Here's another load of data which also confirms why owning more lenses just makes worse photos. I made these B/W photos here with a 50 year old $3 box camera more primitive than today's disposables.
Andreas Feininger (French, b. 1905 - d. 1999), said "Photographers — idiots, of which there are so many — say, “Oh, if only I had a Nikon or a Leica, I could make great photographs.” That’s the dumbest thing I ever heard in my life. It’s nothing but a matter of seeing, thinking, and interest. That’s what makes a good photograph. And then rejecting anything that would be bad for the picture. The wrong light, the wrong background, time and so on. Just don’t do it, not matter how beautiful the subject is."
People know cars don't drive themselves, typewriters don't write novels by themselves and that Rembrandt's brushes didn't paint by themselves. So why do some otherwise intelligent people think cameras drive around and make pictures all by themselves? The most advanced, exotic and expensive car can't even stay in the same lane on the freeway by itself, much less drive you home. No matter how advanced your camera you still need to be responsible for getting it to the right place at the right time and pointing it in the right direction to get the photo you want. Every camera requires you to make manual adjustments now and then as well, regardless of how advanced it is. Never blame a camera for not knowing everything or making a wrong exposure or fuzzy image.
Even a good driver in a crummy car like a Geo Metro can escape from multi-car police chases in broad daylight. It's the driver, not the car. Read that one here.
Here's how I came to discover this:
When it comes to the arts, be it music, photography, surfing or anything, there is a mountain to be overcome. What happens is that for the first 20 years or so that you study any art you just know that if you had a better instrument, camera or surfboard that you would be just as good as the pros. You waste a lot of time worrying about your equipment and trying to afford better. After that first 20 years you finally get as good as all the other world-renowned artists, and one day when someone comes up to you asking for advice you have an epiphany where you realize that it's never been the equipment at all.
You finally realize that the right gear you've spent so much time accumulating just makes it easier to get your sound or your look or your moves, but that you could get them, albeit with a little more effort, on the same garbage with which you started. You realize the most important thing for the gear to do is just get out of your way. You then also realize that if you had spent all the time you wasted worrying about acquiring better gear woodshedding, making photos or catching more rides that you would have gotten where you wanted to be much sooner.
I met Phil Collins at a screening in December 2003. It came out that people always recognize his sound when they hear it. Some folks decided to play his drums when he walked away during a session, and guess what? It didn't sound like him. Likewise, on a hired kit (or "rented drum set" as we say in the USA) Phil still sounds like Phil. So do you still think it's his drums that give him his sound?
A fan from Michigan teaches auto racing at a large circuit. The daughter of one of his students wanted to come learn. She flew out and showed up at the track in an rented Chevy Cavalier. She outran the other students, middle aged balding guys with Corvettes and 911s. Why? Simple: she paid attention to the instructor and was smooth and steady and took the right lines, not posing while ham-fisting a lot of horsepower to try to make up for patience and skill. The dudes were really ticked, especially that they were outrun by a GIRL, and a 16 year old one at that.
Sure, if you're a pro driver you're good enough to elicit every ounce of performance from a car and will be limited by its performance, but if you're like most people the car, camera, running shoes or whatever have little to nothing to do with your performance since you are always the defining factor, not the tools.
Catch any virtuoso who's a complete master of their tools away from his or her sponsors and they'll share this with you.
So why do the artists whose works you admire tend to use fancy, expensive tools if the quality of the work is the same? Simple:
1.) Good tools just get out of the way and make it easier to get the results you want. Lesser tools may take more work.
2.) They add durability for people who use these tools hard all day, every day.
3.) Advanced users may find some of the minor extra features convenient. These conveniences make the photographer's life easier, but they don't make the photos any better.
4.) Hey, there's nothing wrong with the best tools, and if you have the money to blow why not? Just don't ever start thinking that the fancy tools are what created the work.
So why do I show snaps of myself with a huge lens on my pages? Simple: it saves me from having to say "Ken Rockwell Photography," which sounds lame and takes up more space. The big camera gets the message across much better and faster so I can just say "Ken Rockwell."
Here are photos made by a guy in the Philipines - with a cell phone camera!
One last example: I bought a used camera that wouldn't focus properly. It went back to the dealer a couple of times for repair, each time coming back the same way. As an artist I knew how to compensate for this error, which was a pain because I always had to apply a manual offset to the focus setting. In any case, I made one of my very favorite images of all time while testing it. This image here has won me all sorts of awards and even hung in a Los Angeles gallery where an original Ansel Adams came down and this image was hung. When my image came down Ansel went right up again. Remember, this was made with a camera that was returned to the dealer which they agreed was unrepairable.
The important part of that image is that I stayed around after my friends all blew off for dinner, while I suspected we were going to have an extraordinary sky event (the magenta sky, just like the photo shows.) I made a 4 minute exposure with a normal lens. I could have made it on the same $3 box camera that made the B/W images here and it would have looked the same.
Likewise, I occasionally get hate mail and phone calls from guys (never women) who disagree with my personal choice of tools. They take it personally just because I prefer something different than they do. Like anyone cares? These folks mean well, they probably just haven't made it past that mountain and still think that every tool has some absolute level of goodness, regardless of the application. They consider tools as physical extensions of their body so of course they take it personally if I poke fun of a certain tool as not being good for what I'm doing. For instance, the Leica collectors here have a real problem with this page. All gear has different values depending on what you want to do with it. What's great for you may not be for me, and vice-versa.
Just about any camera, regardless of how good or bad it is, can be used to create outstanding photographs for magazine covers, winning photo contests and hanging in art galleries. The quality of a lens or camera has almost nothing do with the quality of images it can be used to produce.
You probably already have all the equipment you need, if you'd just learn to make the best of it. Better gear will not make you any better photos, since the gear can't make you a better photographer.
Photographers make photos, not cameras.
It's sad how few people realize any of this, and spend all their time blaming poor results on their equipment, instead of spending that time learning how to see and learning how to manipulate and interpret light.
Buying newer cameras will ensure you get the same results you always have. Education is the way to better images, not more cameras.
Don't blame anything lacking in your photos on your equipment. If you doubt this, go to a good photo museum or photo history book and see the splendid technical quality people got 50 or 100 years ago. The advantage of modern equipment is convenience, NOT image quality. Go look at the B/W images in my Death Valley Gallery. Look sharp to you? They were made on a 50 year old fixed-focus, fixed exposure box camera for which I paid $3. This camera is more primitive than today's disposables.
I have made technically and artistically wonderful images on a $10 camera I bought at Goodwill, and have turned out a lot of crap with a $10,000 lens on my motor driven Nikon.
The great Edward Steichen photographed Isadora Duncan at the Acropolis, Athens in 1921. He used a Kodak borrowed from the head waiter at his hotel. The images are, of course, brilliant. Steichen had not taken his own camera because the original plan had been to work only with movie equipment. This image was on display at The Whitney in 2000 - 2001.
You need to learn to see and compose. The more time you waste worrying about your equipment the less time you'll have to put into creating great images. Worry about your images, not your equipment.
Everyone knows that the brand of typewriter (or the ability to fix that typewriter) has nothing to do with the ability to compose a compelling novel, although a better typewriter may make typing a little more pleasant. So why do so many otherwise reasonable people think that what sort of camera one has, or the intimate knowledge of shutter speeds, lens design or camera technology has anything do with the ability to create an interesting photo other than catering to the convenience of the photographer?
Just as one needs to know how to use a typewriter to compose a script, one does need to know how to operate a camera to make photos, but that's only a tiny part of the process. Do you have any idea what brand of computer or software I used to create what you're reading right now? Of course not, unless you read my about page. It matters to me, but not to you, the viewer. Likewise, no one who looks at your pictures can tell or cares about what camera you used. It just doesn't matter.
Knowing how to do something is entirely different from being able to do it at all, much less do it well.
We all know how to play the piano: you just press the keys and step on the pedals now and then. The ability to play it, much less the ability to stir emotion in those who hear your playing, is an entirely different matter.
Don't presume the most expensive gear is the best. Having too much camera equipment is the best way to get the worst photos.
© 2006 Ken Rockwell
http://www.marketwatch.com/News/Story/us-foreclosures-up-318-november/story.aspx?guid=%7BDC9123A6%2D7276%2D456D%2D9865%2D1D641FDD7628%7D
U.S. foreclosures up 31.8% in November from previous month
LONDON (MarketWatch) -- U.S. home repossessions in November totalled 72,101, up 31.8% from the previous month, according to data from Foreclosures.com. For the first 11 months of the year, around 527,000 homes ended up back in the hands of lenders, up 41% from the same time last year. The report noted that there had been areas where the number of foreclosures and pre-foreclosure filings had actually fallen from a year ago.
U.S. foreclosures up 31.8% in November from previous month
LONDON (MarketWatch) -- U.S. home repossessions in November totalled 72,101, up 31.8% from the previous month, according to data from Foreclosures.com. For the first 11 months of the year, around 527,000 homes ended up back in the hands of lenders, up 41% from the same time last year. The report noted that there had been areas where the number of foreclosures and pre-foreclosure filings had actually fallen from a year ago.
Tuesday, December 11, 2007
Washington Mutual to lay off more than 3,000
Due to mortgage problems savings and loan will also shut down offices
updated 8:30 a.m. ET, Tues., Dec. 11, 2007
SEATTLE - Washington Mutual Inc., the nation’s largest savings and loan, said Monday that problems in the mortgage and credit markets are forcing it to close offices, lay off more than 3,000 workers and set aside up to $1.6 billion for loan losses in the fourth quarter.
WaMu is also slashing its quarterly dividend 73 percent and plans a $2.5 billion offering of preferred stock that is convertible to common shares. WaMu has not yet priced the offering, but increasing the total number of company shares will dilute their value for existing stockholders. In after-hours trading, WaMu shares fell $1.76, or nearly 9 percent, to $18.12 following the company’s announcement.
The offering follows recent announcements by other big banks and mortgage-related companies to sell special stock to shore up their finances.
Story continues below ↓advertisement
“These actions ... should ensure that it has the financial strength to address difficult conditions in the credit and housing markets in 2008,” the company said in a statement.
After dismantling much of its subprime mortgage operation in September, Seattle-based WaMu will now get out of the business entirely. The company said it will close about 190 of its 335 home loan centers and sales offices, shut down nine call centers and eliminate 2,600 home loan workers and 550 corporate and support jobs.
It had already cut 1,000 jobs related to the sale of home loans to people with questionable credit.
The company also said it will shutter WaMu Capital Corp. and rely on third party broker-dealers to sell mortgage-backed securities.
These changes, meant to address what WaMu called “unprecedented challenges in the mortgage and credit markets,” will save the thrift $140 million in the fourth quarter. But the company still expects to post a loss, due in part to a $1.6 billion charge for the writedown of goodwill associated with the shrinking home loans business.
On top of that, WaMu now expects to set aside between $1.5 billion and $1.6 billion for loan losses in the fourth quarter, from the $1.1 billion to $1.3 billion predicted by executives in early November.
For the first quarter of 2008, the company said it expects loan losses to total $1.8 billion to $2 billion. Loan losses will remain high throughout the year, WaMu added.
Word of WaMu’s convertible preferred stock offering came just hours after Switzerland-based UBS AG said it would sell $11.5 billion in shares to Government of Singapore Investment Corp., a sovereign-wealth fund, and to an unidentified investor in the Middle East. And last month, Citigroup Inc. took a $7.5 billion investment from the Abu Dhabi Investment Authority in exchange for up to 4.9 percent of Citigroup’s equity.
Government-sponsored mortgage finance companies Freddie Mac and Fannie Mae both recently announced plans to sell preferred stock totaling $6 billion and $7 billion, respectively.
WaMu has not yet priced its offering, and it may have to settle for less-than-favorable terms if the other recent deals are any indication. In exchange for its cash, the Abu Dhabi fund will get an 11 percent annual yield from Citigroup. The Freddie Mac offering have a fixed dividend rate of 8.375 percent, almost 2 percentage points higher than its last sale of preferred stock, in September.
WaMu also slashed its quarterly dividend to 15 cents per share from its most recent dividend of 56 cents per share, for savings of more than $1 billion.
Moody’s Investors Service downgraded several long-term and short-term ratings for WaMu and said in a statement that the move “was based on its view that credit losses from WaMu’s mortgage operations will be noticeably higher than previously estimated.” The credit rating agency said it doesn’t expect WaMu’s profitability to begin to recover until 2010.
Fitch Ratings also downgraded WaMu’s credit ratings.
http://www.msnbc.msn.com/id/22189126/
Due to mortgage problems savings and loan will also shut down offices
updated 8:30 a.m. ET, Tues., Dec. 11, 2007
SEATTLE - Washington Mutual Inc., the nation’s largest savings and loan, said Monday that problems in the mortgage and credit markets are forcing it to close offices, lay off more than 3,000 workers and set aside up to $1.6 billion for loan losses in the fourth quarter.
WaMu is also slashing its quarterly dividend 73 percent and plans a $2.5 billion offering of preferred stock that is convertible to common shares. WaMu has not yet priced the offering, but increasing the total number of company shares will dilute their value for existing stockholders. In after-hours trading, WaMu shares fell $1.76, or nearly 9 percent, to $18.12 following the company’s announcement.
The offering follows recent announcements by other big banks and mortgage-related companies to sell special stock to shore up their finances.
Story continues below ↓advertisement
“These actions ... should ensure that it has the financial strength to address difficult conditions in the credit and housing markets in 2008,” the company said in a statement.
After dismantling much of its subprime mortgage operation in September, Seattle-based WaMu will now get out of the business entirely. The company said it will close about 190 of its 335 home loan centers and sales offices, shut down nine call centers and eliminate 2,600 home loan workers and 550 corporate and support jobs.
It had already cut 1,000 jobs related to the sale of home loans to people with questionable credit.
The company also said it will shutter WaMu Capital Corp. and rely on third party broker-dealers to sell mortgage-backed securities.
These changes, meant to address what WaMu called “unprecedented challenges in the mortgage and credit markets,” will save the thrift $140 million in the fourth quarter. But the company still expects to post a loss, due in part to a $1.6 billion charge for the writedown of goodwill associated with the shrinking home loans business.
On top of that, WaMu now expects to set aside between $1.5 billion and $1.6 billion for loan losses in the fourth quarter, from the $1.1 billion to $1.3 billion predicted by executives in early November.
For the first quarter of 2008, the company said it expects loan losses to total $1.8 billion to $2 billion. Loan losses will remain high throughout the year, WaMu added.
Word of WaMu’s convertible preferred stock offering came just hours after Switzerland-based UBS AG said it would sell $11.5 billion in shares to Government of Singapore Investment Corp., a sovereign-wealth fund, and to an unidentified investor in the Middle East. And last month, Citigroup Inc. took a $7.5 billion investment from the Abu Dhabi Investment Authority in exchange for up to 4.9 percent of Citigroup’s equity.
Government-sponsored mortgage finance companies Freddie Mac and Fannie Mae both recently announced plans to sell preferred stock totaling $6 billion and $7 billion, respectively.
WaMu has not yet priced its offering, and it may have to settle for less-than-favorable terms if the other recent deals are any indication. In exchange for its cash, the Abu Dhabi fund will get an 11 percent annual yield from Citigroup. The Freddie Mac offering have a fixed dividend rate of 8.375 percent, almost 2 percentage points higher than its last sale of preferred stock, in September.
WaMu also slashed its quarterly dividend to 15 cents per share from its most recent dividend of 56 cents per share, for savings of more than $1 billion.
Moody’s Investors Service downgraded several long-term and short-term ratings for WaMu and said in a statement that the move “was based on its view that credit losses from WaMu’s mortgage operations will be noticeably higher than previously estimated.” The credit rating agency said it doesn’t expect WaMu’s profitability to begin to recover until 2010.
Fitch Ratings also downgraded WaMu’s credit ratings.
http://www.msnbc.msn.com/id/22189126/
http://money.cnn.com/2007/12/11/news/economy/mall_traffic/index.htm?cnn=yes
Holiday shopping hits the skids
Mall traffic drops dramatically in the final run-up to Christmas, and chain stores see only modest sales increase.
By Parija B. Kavilanz, CNNMoney.com senior writer
December 11 2007: 10:24 AM EST
NEW YORK (CNNMoney.com) -- After getting off to a fast start last month, holiday sales at some of the nation's largest retailers have slowed to an excruciatingly slow pace and mall traffic has dropped dramatically.
The results, coming two weeks before Christmas, jeopardize an already weak holiday sales period.
Chain-store sales rose a mere 0.2 percent for the week ended Dec. 8, following a disappointing 2 percent sales decline in the prior week, according to a report released Tuesday by the International Council of Shopping Centers.
"Consumers continue to be slow in finishing their holiday shopping," said Michael Niemira, the council's chief economist. "As such, we will be watching the next few weeks to determine how successful this holiday shopping season will be for retailers."
Niemira said he expects total December sales to increase a modest 1.5 percent unless retailers get a much-needed "surge in demand" over the next few days.
Meanwhile, mall traffic has also hit the skids.
According to ShopperTrak, which monitors shopping activity at 50,000 malls and other retail sites in the United States, traffic for the week that ended Dec. 1 was 4.7 percent less than the same week last year.
Compared to the previous week this year, which included the heavy Black Friday and Thanksgiving weekend shopping periods, last week's traffic plunged 22.3 percent.
"Many consumers might be waiting until the last minute to wrap up their holiday spending," said Bill Martin, co-founder of ShopperTrak.
Separately, Britt Beemer, president of America's Research Group, said his research showed that mall traffic was down between 8 and 14 percent since late November. He attributed the decline to more value-conscious consumers were shopping for better prices at discounters like Wal-Mart (Charts, Fortune 500) and Costco (Charts, Fortune 500) instead of specialty stores that haven't slashed prices as aggressively this holiday season.
"Our consumer surveys tell us that more people think malls are inefficient," Beemer said. "They can't park near the stores where they want to shop and they can't get in and out [of malls] quickly."
Beemer added that the next two weekends - especially the Saturday before Christmas, which is typically the biggest shopping day of the year - will be crucial for retailers.
"More than 50 percent of consumers still have to complete their holiday shopping," Beemer said. "There's always a final shopping surge right before Christmas but will it be enough to make up for the early December [sales] shortfall?"
The National Retail Federation, the industry's largest trade group, has forecast that holiday sales in November and December will increase 4 percent, or the smallest holiday sales growth since 2002.
The two-month period accounts for as much as 50 percent of retailers' annual profits and sales.
The retail federation blamed the housing downturn, credit market crunch and higher gas prices for eating away at the discretionary incomes of many low- to mid-income American households.
Since consumer spending also fuels two-thirds of the nation's economy, weaker-than-holiday sales will raise fresh concerns that the resilience of American consumers may be waning, leading to slower economic growth in 2008.
Marshal Cohen, a retail analyst at NPD Group, said stores are partly to blame for the tepid shopping pace.
"Retailers have to be careful what they wish for," said Cohen. "Many wanted a big start to the season so they discounted heavily very early. A lot of people have already finished their gift shopping."
"When you extend the season by doing that, it's more difficult to keep the sales momentum going. Shopping fatigue sets in," Cohen added. "That could be why we're seeing this lull now."
Holiday shopping hits the skids
Mall traffic drops dramatically in the final run-up to Christmas, and chain stores see only modest sales increase.
By Parija B. Kavilanz, CNNMoney.com senior writer
December 11 2007: 10:24 AM EST
NEW YORK (CNNMoney.com) -- After getting off to a fast start last month, holiday sales at some of the nation's largest retailers have slowed to an excruciatingly slow pace and mall traffic has dropped dramatically.
The results, coming two weeks before Christmas, jeopardize an already weak holiday sales period.
Chain-store sales rose a mere 0.2 percent for the week ended Dec. 8, following a disappointing 2 percent sales decline in the prior week, according to a report released Tuesday by the International Council of Shopping Centers.
"Consumers continue to be slow in finishing their holiday shopping," said Michael Niemira, the council's chief economist. "As such, we will be watching the next few weeks to determine how successful this holiday shopping season will be for retailers."
Niemira said he expects total December sales to increase a modest 1.5 percent unless retailers get a much-needed "surge in demand" over the next few days.
Meanwhile, mall traffic has also hit the skids.
According to ShopperTrak, which monitors shopping activity at 50,000 malls and other retail sites in the United States, traffic for the week that ended Dec. 1 was 4.7 percent less than the same week last year.
Compared to the previous week this year, which included the heavy Black Friday and Thanksgiving weekend shopping periods, last week's traffic plunged 22.3 percent.
"Many consumers might be waiting until the last minute to wrap up their holiday spending," said Bill Martin, co-founder of ShopperTrak.
Separately, Britt Beemer, president of America's Research Group, said his research showed that mall traffic was down between 8 and 14 percent since late November. He attributed the decline to more value-conscious consumers were shopping for better prices at discounters like Wal-Mart (Charts, Fortune 500) and Costco (Charts, Fortune 500) instead of specialty stores that haven't slashed prices as aggressively this holiday season.
"Our consumer surveys tell us that more people think malls are inefficient," Beemer said. "They can't park near the stores where they want to shop and they can't get in and out [of malls] quickly."
Beemer added that the next two weekends - especially the Saturday before Christmas, which is typically the biggest shopping day of the year - will be crucial for retailers.
"More than 50 percent of consumers still have to complete their holiday shopping," Beemer said. "There's always a final shopping surge right before Christmas but will it be enough to make up for the early December [sales] shortfall?"
The National Retail Federation, the industry's largest trade group, has forecast that holiday sales in November and December will increase 4 percent, or the smallest holiday sales growth since 2002.
The two-month period accounts for as much as 50 percent of retailers' annual profits and sales.
The retail federation blamed the housing downturn, credit market crunch and higher gas prices for eating away at the discretionary incomes of many low- to mid-income American households.
Since consumer spending also fuels two-thirds of the nation's economy, weaker-than-holiday sales will raise fresh concerns that the resilience of American consumers may be waning, leading to slower economic growth in 2008.
Marshal Cohen, a retail analyst at NPD Group, said stores are partly to blame for the tepid shopping pace.
"Retailers have to be careful what they wish for," said Cohen. "Many wanted a big start to the season so they discounted heavily very early. A lot of people have already finished their gift shopping."
"When you extend the season by doing that, it's more difficult to keep the sales momentum going. Shopping fatigue sets in," Cohen added. "That could be why we're seeing this lull now."
Dec. 11 (Bloomberg) -- U.S. economic growth will slow to 1 percent in the fourth quarter as consumer spending cools and the housing slump enters its third year, a survey showed.
Economists cut their estimates for the expansion this quarter from November's 1.5 percent forecast, according to the median of 63 estimates in a Bloomberg News survey taken Dec. 3 to Dec. 10. Gross domestic product in the first three months of next year will also be less than previously projected.
Spending, which accounts for more than two-thirds of the economy, will grow in 2008 at the slowest pace in 17 years as higher fuel costs and falling home values limit consumers' buying power. The Federal Reserve will probably lower interest rates today and again early next year to fend off recession, the survey said.
``Everything is going against the consumer,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who lowered his growth forecast to 0.5 percent for this quarter. ``Confidence is off quite a bit, and gasoline is going to take a toll. We're very, very close to a recession.''
http://www.bloomberg.com/apps/news?pid=20601087&sid=axc2icqL....
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Here is one blogger's take:
http://suddendebt.blogspot.com/2007/12/hand-to-mouth-factor.....
The mechanism that kept consumer spending high and rising over the years, was quite simple: less saving and more borrowing. Starting in the mid-1980's the saving rate (the portion of disposable income not spent) moved lower, eventually reaching zero, and household debt rose sharply from 65% to 135% of disposable income. Not to mince words, Americans live hand-to-mouth and are in debt up to their eyeballs. Under these circumstances, it is little wonder that consumer spending is kept aloft. But what's lurking down below?
Economists cut their estimates for the expansion this quarter from November's 1.5 percent forecast, according to the median of 63 estimates in a Bloomberg News survey taken Dec. 3 to Dec. 10. Gross domestic product in the first three months of next year will also be less than previously projected.
Spending, which accounts for more than two-thirds of the economy, will grow in 2008 at the slowest pace in 17 years as higher fuel costs and falling home values limit consumers' buying power. The Federal Reserve will probably lower interest rates today and again early next year to fend off recession, the survey said.
``Everything is going against the consumer,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who lowered his growth forecast to 0.5 percent for this quarter. ``Confidence is off quite a bit, and gasoline is going to take a toll. We're very, very close to a recession.''
http://www.bloomberg.com/apps/news?pid=20601087&sid=axc2icqL....
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Here is one blogger's take:
http://suddendebt.blogspot.com/2007/12/hand-to-mouth-factor.....
The mechanism that kept consumer spending high and rising over the years, was quite simple: less saving and more borrowing. Starting in the mid-1980's the saving rate (the portion of disposable income not spent) moved lower, eventually reaching zero, and household debt rose sharply from 65% to 135% of disposable income. Not to mince words, Americans live hand-to-mouth and are in debt up to their eyeballs. Under these circumstances, it is little wonder that consumer spending is kept aloft. But what's lurking down below?
Friday, December 07, 2007
Second Saturday in historic downtown McKinney is a great reason to enjoy some of the local flavor of the town. This particular Second Saturday, December 8th, will mark the last show of the art galleries in the historic old Collin County Prison, and I will am both pleased and honored to be able to show selected black and white prints of my own on the second floor in Studio Duende...please join us if you can, anytime after 4PM, to give these galleries a great sendoff and wish them well in their new endevours. Since moving into the old prison Carrie Cameron's Galleria d'Arte, and more recently Studio Duende and Aristeia Gallery have become one of the main focal points of the Second Saturday events in downtown McKinney - and the loss of these great venues will be deeply felt in the months to come here. Unfortunately the only constant in life is change, and the new owner of the old prison has different plans for the building...so all these galleries have to find a new home. Some of the galleries will move on, and some will close permanently, or at least for the foreseeable future, creating a huge vacuum in McKinney's bid to continue to be "the place for art" in Collin County. As a consequence, the best thing that those of us who have enjoyed this great venue can do for these artists is to show up and show our support for their efforts, drink some good booze in their honor, and maybe even buy some art.
Second Saturday in 2008 will just not be the same without them!
A reminder:
“The Grinch Presents Justin Hunt” - at Carrie Cameron Garner’s Galleria d’Arte
Justin Hunt, one of Galleria d’Arte’s most successful and popular artists, will be the last featured artist in “The Grinch Presents Justin Hunt.” Hunt is a master of the ancient technique of reverse glass painting. His newest works will be on exhibit from December 8 to December 24, 2007, at Carrie Cameron Garner’s Galleria d’Arte at 115 South Kentucky Street in downtown McKinney.
You are cordially invited to join us for our final Second Saturday celebration on Saturday, December 8 beginning early at 4:00, with an artist’s reception. We would like to extend our thanks to our patrons of the last 2 ½ years. We have made so many wonderful friends and acquaintances it is with a heavy heart that we will permanently close our doors on December 24, 2007. The downtown area of McKinney has become a cultural destination with the McKinney Performing Arts Center, art galleries, a multitude of restaurants and music venues. Our hope is that it continues to build on that in spite of our closing. In other words, Second Saturday's will continue without us.
We have loved being “in prison” for the past six months, so to celebrate appropriately, Galleria d’Arte will be hosting the “After Party” immediately following the artist’s reception on December 8. At 7PM, DJ Crocodile will be spinning the tunes in the cellblocks on the third floor, and we will dance the night away. This may be your last opportunity to see the old Collin County Prison, so be sure and make time to join our duo celebrations on December 8.
MeSo Lounge is currently located on the first floor of Galleria d’Arte, and will be closing on December 24 in conjunction the art gallery’s closing. As an added appreciation to all our male patrons, MeSo Lounge will host “Gentlemen’s Night” on December 20. A manly feast of barbeque will be served along with scotch and bourbon tastings. Hand rolled cigars will be availble to enjoy by the fireplace on our patio. Our sales staff will be happy to help you select the perfect gifts for the ladies in your life…or a special something for yourself! For more information, please call the gallery or MeSo Lounge at 469-742-9509.
Wednesday, December 05, 2007
PAULSON VS. THE FREE MARKET
by Michael Pento
Delta Global Advisors, Inc.
December 5, 2007
Joining the Fed's effort to meddle with the free market is Treasury Secretary Hank Paulson and his plan to rescue the housing market. The essence of his plan is to convince the owners of sub- prime adjustable mortgage debt to freeze the interest rate resets for a period of about five years, a proposal which is supposedly only to be available to those who will become indigent once the higher rates become effective. Ostensibly, this will ameliorate the anticipated surge in mortgage foreclosures and prevent a further decline in home prices.
The first reason to eschew Mr. Paulson's plan is that his deal, if successful, may serve to protract the issues with housing for years to come. Offering to freeze the rate for only those who cannot afford higher rates is silly and we will certainly see claims of indigence from many who can actually pay. Unfair speculation on my part? Just read this article on the amount of fraudulent Katrina aid relief claims.
After all, who would voluntarily pay the higher rate when they can keep their existing rate by pleading poverty? The result will be an even further decline in CDO prices and even less availability of credit, not more. At this time it is projected by HUD's Secretary Alphonso Jackson that no more than 25% of consumers will foreclose on their sub-prime loans. Which is better financially for the holders of these mortgage products, to have 75% pay the higher rate or to have nearly all sub-prime mortgage holders pay the introductory rate for five years or longer? I know which one is moral.
Another consequence of the Paulson plan will be that future loans will carry a much higher interest rate. Underwriters in the primary market and buyers in the secondary market must be compensated for the increased risk of having the government intervening in a private contract. If the government forces the abrogation of these contracts it will cause tremendous long term damage to the housing market. If it merely acts as a facilitator between the two parties the damage may be less but the impact will be negligible. Since the holders of the debt are no longer local banks but foreign buyers, I have my doubts as to Treasury's ability to bring any far-flung parties together. In addition, there is nothing currently preventing the parties from getting together if they both so desired--making Treasury's role a public relations move, at best, unspoken coercion, at worst.
Most importantly, Paulson's anti-capitalist plan serves to reward those who behaved irresponsibly and punish those who lived within their means. It will act as a disincentive for consumers who, during the housing bubble, either rented or purchased a more modest home while simultaneously rewarding consumers that spent recklessly! Not only is it morally bankrupt but is also detrimental to the economy in the long term because after the period of abeyance expires, the adjustable rate mortgages would theoretically reset. Therefore, all that is accomplished will be to prolong the inevitable crisis-does anyone truly expect those who got the free lunch to begin paying for it after five years? Those sloppy financial habits will only be more deeply ingrained by then.
In an attempt to aid the real estate market, the Treasury and Fed are actually serving to exacerbate the problems associated with housing. If they would allow the free market to work, home prices would fall, allowing solid buyers to enter the market at lower prices. Would it be a pain-free process? Certainly not-we're well past that point-but by keeping unqualified consumers as home owners they foster an artificial environment of unfairness and inflation. Mr. Paulson's scheme is thus destined to fail, and it will likely make today's housing-related problems even worse in the process.
by Michael Pento
Delta Global Advisors, Inc.
December 5, 2007
Joining the Fed's effort to meddle with the free market is Treasury Secretary Hank Paulson and his plan to rescue the housing market. The essence of his plan is to convince the owners of sub- prime adjustable mortgage debt to freeze the interest rate resets for a period of about five years, a proposal which is supposedly only to be available to those who will become indigent once the higher rates become effective. Ostensibly, this will ameliorate the anticipated surge in mortgage foreclosures and prevent a further decline in home prices.
The first reason to eschew Mr. Paulson's plan is that his deal, if successful, may serve to protract the issues with housing for years to come. Offering to freeze the rate for only those who cannot afford higher rates is silly and we will certainly see claims of indigence from many who can actually pay. Unfair speculation on my part? Just read this article on the amount of fraudulent Katrina aid relief claims.
After all, who would voluntarily pay the higher rate when they can keep their existing rate by pleading poverty? The result will be an even further decline in CDO prices and even less availability of credit, not more. At this time it is projected by HUD's Secretary Alphonso Jackson that no more than 25% of consumers will foreclose on their sub-prime loans. Which is better financially for the holders of these mortgage products, to have 75% pay the higher rate or to have nearly all sub-prime mortgage holders pay the introductory rate for five years or longer? I know which one is moral.
Another consequence of the Paulson plan will be that future loans will carry a much higher interest rate. Underwriters in the primary market and buyers in the secondary market must be compensated for the increased risk of having the government intervening in a private contract. If the government forces the abrogation of these contracts it will cause tremendous long term damage to the housing market. If it merely acts as a facilitator between the two parties the damage may be less but the impact will be negligible. Since the holders of the debt are no longer local banks but foreign buyers, I have my doubts as to Treasury's ability to bring any far-flung parties together. In addition, there is nothing currently preventing the parties from getting together if they both so desired--making Treasury's role a public relations move, at best, unspoken coercion, at worst.
Most importantly, Paulson's anti-capitalist plan serves to reward those who behaved irresponsibly and punish those who lived within their means. It will act as a disincentive for consumers who, during the housing bubble, either rented or purchased a more modest home while simultaneously rewarding consumers that spent recklessly! Not only is it morally bankrupt but is also detrimental to the economy in the long term because after the period of abeyance expires, the adjustable rate mortgages would theoretically reset. Therefore, all that is accomplished will be to prolong the inevitable crisis-does anyone truly expect those who got the free lunch to begin paying for it after five years? Those sloppy financial habits will only be more deeply ingrained by then.
In an attempt to aid the real estate market, the Treasury and Fed are actually serving to exacerbate the problems associated with housing. If they would allow the free market to work, home prices would fall, allowing solid buyers to enter the market at lower prices. Would it be a pain-free process? Certainly not-we're well past that point-but by keeping unqualified consumers as home owners they foster an artificial environment of unfairness and inflation. Mr. Paulson's scheme is thus destined to fail, and it will likely make today's housing-related problems even worse in the process.
Tuesday, December 04, 2007
http://money.cnn.com/news/newsfeeds/articles/djf500/200712021916DOWJONESDJONLINE000344_FORTUNE5.htm
Banks Urge UK Clients To Stop Borrowing
"Banks have asked top U.K. corporate clients not to draw on lending facilities to which they are entitled in order to preserve their balance sheets as they approach the financial year end.
The banks are urging some of their biggest clients not to draw on standby credit facilities as the sub-prime crisis and squeeze on interbank lending have affected banks' ability to fund themselves.
The problems started with the closure of the commercial paper market as a means of cheap funding for companies in the summer. Banks have to provide standby financing of up to 100% to backstop commercial paper programs. With banks struggling for their sources of financing through the interbank market, the drawdowns are having a direct effect on their balance sheets.
Several bankers have said Citigroup (C) is one of those most affected and that the bank was asking some clients not to use standby facilities, which are part of the normal relationship banking arrangements made between banks and companies.
A Citigroup spokesman said: "Citigroup honors its commitments to its clients but, as part of our normal business, we discuss with clients the potential use of our balance sheet. This is standard industry practice."
Simon Allocca, head of non-French corporate origination at BNP Paribas ( 13110.FR), said: "By the end of the summer, the principal problem facing banks was not U.S. sub-prime or collateralized debt obligation exposure but the drawing down of standby loans and bilaterals. In some cases banks are seeking to avoid further balance sheet capital pressure by asking clients not to use their standby facilities."
Standby financing is typically for 364 days and when undrawn has a zero risk weighting. When it is drawn, the risk weighting goes to 100%. This makes the sums involved significant. If a company is unable to tap the markets for commercial paper to the tune of, say, GBP4 billion (EUR5.6 billion), banks may have to provide that amount in standby financing."
Banks Urge UK Clients To Stop Borrowing
"Banks have asked top U.K. corporate clients not to draw on lending facilities to which they are entitled in order to preserve their balance sheets as they approach the financial year end.
The banks are urging some of their biggest clients not to draw on standby credit facilities as the sub-prime crisis and squeeze on interbank lending have affected banks' ability to fund themselves.
The problems started with the closure of the commercial paper market as a means of cheap funding for companies in the summer. Banks have to provide standby financing of up to 100% to backstop commercial paper programs. With banks struggling for their sources of financing through the interbank market, the drawdowns are having a direct effect on their balance sheets.
Several bankers have said Citigroup (C) is one of those most affected and that the bank was asking some clients not to use standby facilities, which are part of the normal relationship banking arrangements made between banks and companies.
A Citigroup spokesman said: "Citigroup honors its commitments to its clients but, as part of our normal business, we discuss with clients the potential use of our balance sheet. This is standard industry practice."
Simon Allocca, head of non-French corporate origination at BNP Paribas ( 13110.FR), said: "By the end of the summer, the principal problem facing banks was not U.S. sub-prime or collateralized debt obligation exposure but the drawing down of standby loans and bilaterals. In some cases banks are seeking to avoid further balance sheet capital pressure by asking clients not to use their standby facilities."
Standby financing is typically for 364 days and when undrawn has a zero risk weighting. When it is drawn, the risk weighting goes to 100%. This makes the sums involved significant. If a company is unable to tap the markets for commercial paper to the tune of, say, GBP4 billion (EUR5.6 billion), banks may have to provide that amount in standby financing."
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