The first time around, the three-headed federal serpent – the Bush administration, the Treasury Department and the U.S. Federal Reserve – used Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) to “legitimize” trillions of dollars worth of toxic financial waste known as subprime mortgages.

The result was the worst financial crisis since the Great Depression – a mess that was global in nature.

And we’re now headed for a repeat performance.

Some of the players may have changed since the first subprime-mortgage crisis, but the game apparently remains the same. With banks currently unwilling to lend, the new federal triumvirate of the Obama administration, the Treasury and the Fed are trying to inflate the moribund U.S. housing market. This time around, however, the FHA is the weapon of choice.

Obama & Co. are making an all-or-nothing bet that the U.S. economy will recover and bail out the housing market before the final bill for this ill-advised gambit comes due.

When this bubble bursts – and it will – U.S. taxpayers will be on the hook for more than $1 trillion in government-guaranteed debt.

Ginnie Mae: Fannie and Freddie’s Once-Quiet Cousin

As a direct result of the real-estate meltdown, U.S. banks have become reluctant lenders. And they’ve raised their loan standards considerably. Federal officials knew they had to keep the mortgage spigot open, especially to suspect borrowers, so they turned to their new “secret weapon” – the FHA.

The FHA has been cranking out new government-insured subprime loans, which it packages into government guaranteed securities for sale to banks. This frightening reflation of the subprime bubble is being engineered for two key reasons:

• To put a floor under falling house prices.
• And to let banks swap toxic Fannie and Freddie securities for new toxic debt that is 100% guaranteed by U.S. taxpayers.

The almost inevitable insolvency of the FHA could rapidly undermine the fragile recovery of the U.S. economy. And it could plunge stock prices and bank viability to new lows.

Why the FHA?

That’s simple. In an era of increasingly stringent lending standards, the FHA’s standards are laughably lax.

Created by the National Housing Act of 1934, the FHA insures private mortgage lenders against borrower default on residential real estate loans. But its current allure is that it opens the door to prospective homebuyers who almost certainly wouldn’t qualify for a conventional home mortgage. These are buyers with no credit history, a history of credit problems, or not enough cash to cover the down payment and closing costs.

The FHA has quadrupled its insurance guarantees on mortgages in just the last three years, with the bulk of that growth coming in the past two years. Currently, the FHA insures $560 billion of mortgages.

Loans that are FHA-insured are pooled and packaged into mortgage-backed securities (MBS) by the Government National Mortgage Association, more commonly known as Ginnie Mae. Ginnie Mae insures the actual MBS pools composed of FHA loans. Ginnie Mae securities are the only mortgage-backed securities backed by the full faith and credit of the U.S. government.

Two weeks ago, Ginnie Mae proudly announced that it had issued a monthly record $43 billion in FHA mortgage-backed securities, and through the end of July held guaranteed securities with a value of $680 billion. It is on track to exceed $1 trillion worth of guaranteed securities by the end of calendar year 2010.

Ginnie Mae is a cousin of its better-known siblings Fannie Mae and Freddie Mac. Those two mortgage giants are technically insolvent, and were forced into government conservatorship at the height of the financial crisis – ostensibly due to concerns that foreign central banks in China, Japan, Europe, the Middle East and Russia might stop buying our bonds. As “government-sponsored enterprises,” or GSEs, Fannie and Freddie were only supposed to have the “implicit” backing of the U.S. government. But recent events have shown these to be fully backed by taxpayers.

The implosion of Fannie and Freddie severely threatened the mortgage market. It essentially shut down the two giant repositories that bought the loans banks and mortgage originators didn’t want to hold as assets on their own balance sheets.

The FHA and its mortgage-backed securities “factory” – Ginnie Mae – have taken up where Fannie and Freddie left off, and are now the dumping ground for toxic mortgages. Using the FHA is the core strategy in the administration’s misguided effort to prop up mortgage origination and modifications, real estate prices and insolvent banks.

Warning Signals?

Administration officials might want to take heed of some eerie parallels between the current situation and the one involving Fannie and Freddie. They could serve as an early warning system.

First and foremost, the FHA has already started to acknowledge systemic fraud in its business. In the earlier subprime crisis, similar circumstances led to the revelation of massive fraud in the issuance, packaging, ratings and sale of subprime toxic mortgage-backed securities.

On Aug. 4, the FHA suspended Taylor, Bean & Whitaker Mortgage Corp., one of its largest approved independent mortgage originators, from making anymore FHA-backed loans. The suspension came one day after federal investigators raided Taylor Bean’s Ocala, Fla., headquarters.

Since 2007, the value of FHA-backed loan originations underwritten by Taylor, Bean had soared 117%. By contrast, the origination of conventional loans by the firm dropped 34% over the same period. Taylor, Bean subsequently filed for bankruptcy.

Earlier this summer, the U.S. Department of Housing and Urban Development (HUD), which oversees the FHA, raised concerns about FHA practices. On June 18, HUD released an internal inspector general’s report that revealed that the FHA’s default rate exceeded 7% and that more than 13% of its insured loans were delinquent by more than 30 days.

In a “Review and Outlook” piece, The Wall Street Journal reported that the FHA’s reserve fund dropped from 6.4% in 2007 to about 3% today, putting it dangerously close to its mandated 2% minimum. That translates to a “33-to-one leverage ratio, which is into Bear Stearns territory,” the newspaper report stated, referring to the now-failed investment bank that had been a central player in the original subprime mortgage crisis.

Bear Stearns is now owned by JPMorgan Chase & Co. (NYSE: JPM).

The HUD inspector general’s report stated that the agency’s growth makes it “vulnerable to exploitation by fraud schemes” and that it may need “Congressional appropriation intervention.”

In a recent article – “FHA Disputes Whispers of Capital Reserve Problems” – on the Mortgage News Daily Web site, HUD Secretary Shaun Donovan said in June that “there’s a better than even chance that we will stay above the two percent reserve threshold. That suggests, not just for the 2010 business, but overall for the portfolio, that we’ll more than likely to stay out of a broader need for any taxpayer funding.”

It may be more than a little disheartening to know that in a very uncertain economic environment, precisely due to fraud in mortgage lending and increasing borrower defaults, that our government is stretching a 50/50 wager on the backs of taxpayers.

That’s only part I of the FHA dilemma story.

Part II is even more frightening.

A Look Ahead

Banks are dumping Fannie and Freddie-backed securities onto the Fed’s balance sheet and replacing them on their own balance sheets with FHA-insured loans packaged into government-insured securities issued by Ginnie Mae. Banks aren’t reducing their net assets, they are aggressively swapping acknowledged toxic securities that no-one wants for a new variety that no one will want in the future. Why?

It’s not just that Ginnie Maes are fully backed by the U.S. taxpayers and Fannie and Freddie’s securities are only implicitly backed. All of them will be covered by taxpayers.

The devil is in the details.

Because Fannie and Freddie securities are only implicitly guaranteed, banks that hold these securities as assets on their balance sheets must “haircut,” or set aside reserves, based on a 20% risk-weighting assigned to the value of those holdings.

Because Ginnie Maes are explicitly 100% guaranteed, they are considered “risk free,” and on par with U.S. Treasury bonds, notes and bills. There is no reserve requirement, or haircut, on Ginnie Mae securities.

By replacing their asset mix and holding Ginnie Maes, banks don’t have to set aside reserves. They can use the money they otherwise would have to set aside to actually leverage-up their balance sheets. And guess what they’re buying?

More Ginnie Maes, naturally.

The effect of the asset swap – basically one toxic pool for a replacement that’s not much better – creates the illusion that banks have healthier balance sheets and that they are meeting their reserve requirements. It’s such a good deal for the banks and actively promoted by the Fed and Treasury, that banks are using Troubled Assets Relief Program (TARP) money to buy Ginnie Maes.

But it’s all a façade.

Capital ratios are being manipulated and insolvent banks are being propped up.

The danger of relying on the FHA to prop up the shaky housing market by facilitating mortgage origination, modifications and refinancing to less-than-stellar borrowers will only result in more subprime loans being stockpiled on the Federal Reserve balance sheet.

Eventually, defaults will overwhelm the FHA. And the hoped-for floor in residential real estate pricing will be pulled out from under us all. The next down-round in real-estate values will expose bank balance sheets for what they really are: Over-leveraged and over-stuffed with junk. Already on the ropes, banks will lose capital and will have to tighten the credit screws on consumer borrowers even more.

We may be headed for another bruising round of real-estate and MBS-related depreciation. Even a mild financial-markets setback could put the economy and the stock market onto the canvas for a 10-count. Further pummelling of shaky consumer confidence accompanied by a couple of major bank failures could easily send the U.S. market down for the financial-system equivalent of a TKO.

Taxpayers, always the lowly cornermen holding the spit buckets, are already in place with the safety nets. We will catch the FHA loans because we insure private lenders against subprime borrowers with no skin in the game. We then will have to catch the buyers of Ginnie Maes, because we guarantee those MBS securities. And we will be forced to catch the falling banks, because we already insure depositors through the Federal Deposit Insurance Corp. (FDIC).

Perhaps our ultimate fate is that of the permanently punchdrunk veteran boxer, who rues his decision to stay in the game, realizing that he fought “one bout too many.” If that’s the case, that “one bout too many” could be Subprime Crisis II, arranged by the very market referees whose job it was to protect us from such beatings.

Source: How the Government is Setting Us Up for a Second Subprime Crisis

Good day… And a Wonderful Wednesday to you! Well… The currencies, for the most part, kept the heat on the dollar throughout the day and in the overnight markets. The euro, did rise to 1.45 and change yesterday, while it is hovering right at that figure this morning, so it did give a little bit back.

There were no big announcements last night like we saw on Monday, so the currencies didn’t have anything to push them further. In fact, there may be a “letting the dust settle” period of time, with the Big Dog, euro, before we see any further advancement, given the euro’s huge gains yesterday…

We did have “Mr. Yen” Sakakibara, tell a crowd of people that he believed the dollar would remain the world’s reserve currency for 20 years… Hmmm… Apparently, the IMF and UN haven’t let him in on the news that they desperately want to do something about the dollar! Not to mention the BRIC countries of Brazil, Russia, India and China, of whom, have already stated their case for a change!

Chinese stocks were up again last night, so that could lead the way to further gains by stocks here in the U.S., which would bring even more risk takers out of the walls… That is, of course as long as the trading pattern that has existed for 9 months remains in place!

I did read something last night about a complete collapse of Consumer Borrowing here in the U.S…. Hmmm… Well, on one hand, if that’s true, that would mean that Consumer spending is down, and saving has replaced it, and that would be a good thing! On the other hand… Consumer Spending is like 70% of our economy… Or was 70% of our economy I guess I should say! And if we’re going to see a further slowing of spending, then you can kiss the thought of a “V” shaped recession good-bye! Bye now… Don’t go away mad… Just go away!

Gold was unable to hold $1,000 yesterday and last night… I was talking to my Publisher for the Currency Capitalist letter yesterday, and I was telling her, that while I’m a firm believer that this stock market rally is going to crash and burn, bringing all risk assets along to the fire, which would adversely affect the prices of currencies, and commodities, including Gold… There’s no mistaking the appearance of a rush to Gold in the past week… And why did the rush occur? Well, to me, as I explained yesterday, it’s simply an understanding that inflation is on the other side of what we are now experiencing, and if you can pick Gold up now at those levels that existed last week (sub $1,000), why not, before it takes off?

So… I was assigned to write a piece on Gold… See how that works in the Publishing biz? You mouth off with your thoughts, and the next thing you know, you’re doing research for a piece that has to be done in 3 days or so! UGH! But… The thing I thought of was simply this… We may, and I’m not sure yet, but we may be getting to a new level, where I used to say I thought it was good to buy Gold when it dipped below $900… That might have to be changed to $1,000… That is, if we don’t have the crash and burn…

Getting back to the crash and burn thing… I know, I know, I’ve been talking about this for a couple of months now… And no sign of crashing or burning… Yet! But, then maybe there won’t be any crashing and burning as long as the markets are manipulated… I was doing some research the other day, and came across something that plays well with my manipulated theory… The stocks of Fannie (NYSE:FNM), Freddie (NYSE:FRE), AIG, and… Oh shoot! I’ve forgotten the 4th one… It’s a Gov’t owned company… SHOOT! Oh well, it doesn’t matter, these 4 stocks were accounting for over 40% of the volume each day in the stock market… Usually these 4 account for about .3%… What’s going on here folks? I’ve got a boat load of conspiracy theories about what’s going on… But I’ll leave that up to your imagination!

The Commodity currencies, that were so strong yesterday, have given some ground back VS the dollar overnight. The only thing that makes sense to me here, is that it is profit taking… For, these Commodity Currencies, (except Canadian loonies) have yield advantage over the dollar… Shoot Rudy, they have yield advantage over all the major currencies… Euro, yen, sterling and dollars! And for the most part, interest rates in these countries will be the first to rise beginning later this year… So, it had to be profit taking!

But, what do I always say, when there’s profit taking? That’s right! It gives us a chance to buy at cheaper levels!

One currency that continues to baffle me and probably many others with its rise from the ashes, is pound sterling… (cable, as currency traders call it) I’ve had quite a few readers send me notes asking me about sterling’s strength, given the fact that the U.K. is probably in more dookie than the U.S…. There are two things I can think of that probably explain it… But even these don’t do that good of a job explaining this rise in sterling…

1. the talk of using SDR’s… SDR’s currently consist of: euro, yen, sterling and dollars. So, if SDR’s get wider use, then more sterling will have to be bought by the IMF (who issues the SDR’s)
2. The crosses… Because most of the currencies are rallying and have been rallying against the dollar since March, sterling gets dragged higher in the crosses…

I’ve explained these crosses many times in the past, so I’ll just touch on it here… Whenever you buy a currency, you have to sell a currency… So the two currencies that make up that trade are called a “pair”… These are also called “crosses”… Here in the U.S. we only think of dollar VS a currency… But all over the world, people are crossing euros for yen, and vice versa, Swiss francs for Aussie dollars, etc. A lot of those crosses, have sterling in them, and therefore, sterling gets dragged higher… Not a fundamental thing…

But we’ve seen this over the years, especially with yen… And the dollar of course!

Well… You might have missed this news yesterday… But the U.S. Senate is going to have to raise the federal debt limit beyond $12.1 Trillion by mid-October! Hmmm… Anyone have a guess as to who blocked the raising of the debt ceiling in 2006 and said… “Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren”? It’s the same person that is now that same person is asking Congress to raise the debt ceiling to $13 Trillion…

But, the reality of this is that our Budget Deficit this year will be $1.6 Trillion, by Gov’t accounting standards… By Chuck standards, it will be $2.5 Trillion when it’s all said and done… And we just keep finding more ways to spend money we don’t have, don’t we? I’m going to stop here, because this all just ticks me off, and I don’t want to say something that will fill my email box with name calling emails…

Did you see the story in the Washington Post regarding the resetting of ARM’s? and I’m not talking about the arms that get broken on the playground and have to be reset… I’m talking about Adjustable Rate Mortgages… Here’s the skinny from the Washington Post story…

“Between now and 2011, roughly 70% of option ARMs, with a total value of about $189 billion, will reset.” The rating agency, Fitch, put together the numbers and did the research… And none of spells good times for home owners that are already stretched to make mortgage payments.

Here’s how I believe they work… Option ARMs, also called pick-a-pay loans, allow borrowers to choose how much to pay each month. Nearly all the borrowers who took out this type of loan from 2004 to 2007 chose to pay less than the interest due. Sometimes they paid as little as 1 percent interest. But the loans eventually require the borrowers to start paying the principal and full interest rate, so the payments shoot up.

So… This mortgage meltdown will continue to remain in the news, eh? $134 Billion of these ARMs will reset in the next two years, and the monthly payments are expected to jump 63% on average, or $1,053 per month, for loans adjusting this year and next… Can you imagine getting that letter in the mail? Dear Homeowner, your next mortgage payment will be xxxxxx…

That’s a really sad thing… Very sad…
But… Another reason why I say this is a depression and not a recession! It’s going to carry on, and on, and on…

There was more Happy Days (NOT!) news in the Washington Post yesterday… “There is little chance U.S. taxpayers will recover all of the billion spent on rescuing Chrysler and General Motors, according to a report by the Congressional Oversight Panel.”

Great! But in reality, we didn’t expect to recover it did we? I know I didn’t! The Gov’t doesn’t have a good track record of preventing losses much less recovering them.. And I’m not just talking about the current brand of Gov’t… It goes back many years…

My friend, David Galland, gave a quick history lesson in his letter this past weekend… While this may be depressing, it does give what I said above, credence…

A Quick History Lesson

The U.S. Post Service was established in 1775. So they’ve had 234 years to make it work. It is broke.

Social Security was established in 1935. They’ve had 74 years to make it work. It is broke.

Fannie Mae was established in 1938. They’ve had 71 years to make it work. It is broke.

Freddie Mac was established in 1970. They’ve had 39 years to make it work. It is broke.

The War on Poverty started in 1964. They’ve had 45 years to make it work. About $1 trillion of taxpayer money is confiscated each year and transferred to “the poor.” It hasn’t worked.

Medicare and Medicaid were established in 1965. They’ve had 44 years to make it work. They are both broke.

AMTRAK was established in 1970. They’ve had 39 years to make it work. Last year it had to be bailed out and today continues running at a loss.

$700 billion bailout of 2008. It has yet to create a single new private-sector job.
Cash for Clunkers in 2009 went broke after 80% of the cars purchased turned out to be produced by foreign companies.

Now that it’s put like that in black and white, it sure doesn’t look good does it?

I really got on a roll today regarding the goings on in the U.S. and didn’t pay much attention to the currencies… But, that’s because they are trading in yesterday’s clothes this morning… With no data to talk about yesterday, and so on…

The data cupboard only yields the Fed’s Beige Book for us this afternoon… For those of you who don’t know what this entails… The Fed’s Beige Book is a summary of Commentary on Current Economic Conditions by each Federal Reserve District. It’s printed 8 times per year, and usually about two weeks before a FOMC meeting. (Federal Open Market Committee) It was once believed that the Fed Heads would use the findings in the Beige Book to help them make their decisions on monetary and fiscal policies…

I say, “It was once believed” because… After reading Bill Fleckenstein’s great book about Ignorance at the Fed Reserve, Greenspan’s Bubbles, I was scratching my head asking, but I thought the Beige Book was used to help make those decisions that Big Al Greenspan made?

So… Again, no real data today… So the currencies will get their direction once again from stocks… And like I said above, the Chinese stock markets was good to go overnight…

OK… So… Before I go to the Big Finish, let me recap today… The currencies held onto gains, albeit giving back small amounts in what appears to be profit taking. The Senate needs to raise the $12.1 Trillion debt ceiling. $189 Billion in Option ARMs are coming due in the next three years, and no data today should leave currencies to be directed by stocks, that is if the trading pattern holds.

Currencies today 9/9/09: A$ .8615, kiwi .6969, C$ .9245, euro 1.45, sterling 1.6505, Swiss .9560, rand 7.5525, krone 5.9375, SEK 7.0575, forint 186.70, zloty 2.84, koruna 17.60, RUB 31.18, yen 92.40, sing 1.4260, HKD 7.75, INR 48.50, China 6.8285, pesos 13.35, BRL 1.8290, dollar index 77.29, Oil $70.90, 10-year 3.48%, Silver $16.36, and Gold… $996.35

That’s it for today

Chuck Butler

Source: Currencies Hold Their Gains…

The downturn took $12 trillion off Americans’ net worth. The feds have pledged about $12 trillion to fix the problem.

But wait, where does government get any money?

Hey, they borrow it, just like consumers did. And besides, it’s ultimately the same money – taxpayers’ money. So what’s the big diff?

The big diff is the subject of today’s Daily Reckoning.

The first big diff is that the feds don’t spend your money the way you would. Private citizens spend money they don’t have on things they want but don’t need. The feds spend money that doesn’t belong to them on things that the rightful owners don’t even want.

Wait a minute. US markets were closed yesterday for Labor Day. With no figures to report, we should talk about something important. What’s important about macro-economics? Nothing. It’s 95% claptrap. The other 5% is pure fraud.

At least as practiced by the leading macro-economists of our time – such as Ben Bernanke, Tim Geithner and Larry Summers. It’s just a show-off sport… the idea is to impress the world with some fancy data-heavy formula… win the Nobel Prize and save the world. That way, you get what all men crave… money and power. Why do men (and women) want money and power? Aw c’mon… we explained it already. Because it improves their chances of survival and procreation. In a DNA study, for example, they found that Genghis Khan, today, has something like 6 million male descendants. Is that success, or what?

The great Khans of today are no longer the steppe warriors on horseback. They’re basketball players, rock ‘n’ roll stars, actors, and hedge fund managers. And, oh yes, occasionally, economists.

The link between economic theory and procreation is probably very weak; but that doesn’t stop economists from wanting to strut around and show off. And the way for an economist to show off is to get himself appointed to the President’s Council of Economic Advisors… or to the central bank… or get a professorial post at Princeton… etc. etc. This you do by producing tomes, formulae and hypotheses. And, don’t forget to write a piece for the Wall Street Journal from time to time.

Another important hint: your work has to suggest that you can manipulate the business cycle, control the credit cycle, or generally make things turn out the way people want.

If you are a Daily Reckoning-type economist, you can forget fame and fortune completely. Who wants to hear from a macro-economist who tells people to leave well enough alone… and to let the forces of natural economics sort out their own problems? No one… at least no one who is running for public office. Instead, they want someone who will promise to “Save the World.”

Save the world from what? Why… from the damage done by other economists!

Two generations of American economists thought the way to bring prosperity was to encourage consumption. On the face of it, the idea is absurd. Classical economists… and Daily Reckoning commentators… laugh at the idea. You don’t really get rich by consuming; you get rich by saving and investing.

But they had their charts and graphs… their theories and their jobs teaching economics at prestigious universities. Naturally, they had the feds’ ears too – since every politician wants to promise more consumption. The feds favoured home ownership, for example… even by people who were bad credit risks. They set up Fannie (NYSE:FNM) and Freddie (NYSE:FRE) to make it easy for people to buy houses. They even passed a law requiring banks to lend to people who weren’t likely to pay them back; that was the origin of the sub-prime mortgage market! They kept interest rates low, too, so people could borrow at affordable rates. And they inflated the currency, so consumers would want to spend their money rather than save it. They also opened the world to free trade, so Americans could buy more, cheaper stuff made by foreigners. For 50 years, they cultivated consumption and let production go to seed.

And now… wouldn’t you know it… Americans have over-consumed. Personal expenditures per capital rose 25% between 2003-2005. Personal debt soared to over $13 trillion… about $124,000 per household. Total debt/GDP tripled since 1980.

And now it’s pay-back time. The private sector has cut back. Consumers need to under-consume to make up for the over-consumption of the bubble years. Savings rates are rising. Spending is falling (see below)…

And so what do the simpletons do? Private citizens are unwilling to consume… so they push the government to consume their money for them!

“Frugality is the new normal,” says an Associated Press report. One study suggests that consumer will spend 14% less – even AFTER the recession is over.

Boomers are out of time. Out of money. And they’ll be out of luck unless they trim expenses and begin saving.

They’ve figured it out. Personal spending has fallen in 4 of the last 6 quarters. It hasn’t done that since 1947 – when they first began tracking it.

Consumers’ net worth has taken a big hit – down $15 trillion, from $65 trillion to $50 trillion.

And so, the simpletons think the government has to rush in where fools foundered… that is, rush in with more money.

But where do the feds get any money? They have to borrow it… or print it. There’s a big difference between federal borrowing and private borrowing. When the private sector borrows the risk is that people won’t be able to pay back their loans. That is a risk that lenders live with. They know the risk; they factor it into their decision-making. Sometimes they’re right. Sometimes – such as when economists mislead them with a lot of gibberish numbers – they’re wrong. And when they’re wrong, borrowers default… and lenders lose money.

The feds, on the other hand, can’t default. At least, not when their debts are calibrated in money they control. But there’s the risk right there. And it is a different kind of risk. It’s the risk that the feds may choose to pay back the loan in much cheaper currency. Or merely make a mistake that results in much cheaper currency.

Imagine a private borrower who could print up a few extra bills in his basement to pay his monthly mortgage. He may not do so… perhaps his sense of honour would prevent him. Or maybe he would fear that he wouldn’t be allowed to borrow again. But if his back were to the wall, there is little doubt that he’d soon be in the print shop.

The feds are in the print shop already. They’re printing up more dollars intentionally – to try to get inflation rates up… and to finance federal borrowing. It will be a miraculous thing if their new dollars don’t eventually cause inflation. But the macro-economists who run the print shop tell us not to worry. They’ve got it all under control. They’re already talking about when and how to withdraw the dollars they so helpfully provided during the crisis period.

The simpletons – who had no idea that the crisis would come… and then thought it could be easily contained… and then mistook it for a monetary, banking crisis… and then judged it over before it had really started…

…these same simpletons still do not understand that the problem is not a lack of money, it’s a surplus of debt…

…they now reassure us that they know just how much money to put into the system… and just when to take it out.

If you believe them… you might want to stay in stocks and US bonds. If not, you should head for cover.

The country is being run “by a gang of clueless bozos,” says Lee Iacocco, in his new book.

Source: Head for Cover

“Banks recover to their levels before the fall of Lehman,” is a headline in this Monday’s El Pais from Madrid.

“Public assistance enables the world’s largest 15 financial firms to return to the capitalization they had in September 2008,” the article continues. The largest of the largest, HSBC, is now judged to be worth $186 billion, according to the stock market. China’s ICBC is on its heels, with a market cap of $178 billion. BNP Paribas is 7th at $87 billion.

We will overlook the compromising detail that banks actually lost money in the last quarter – more than $3 billion. And let’s forget that China’s major banks are sitting on mega-losses from more than eight years ago (to say nothing of the more recent losses). Western banks, too, still have billions in assets whose real worth is an open question…and subject to quick reconsideration…

El Pais goes on to report something intriguing: “The two big Spanish banks leave the crisis stronger.”

Ah. What doesn’t kill you makes you stronger. The world economy is recovering, or so people believe. Stocks are going up – led by the banks. But are the undead of the banking world really stronger?

Ha ha…don’t make us laugh.

But the world seems to believe it. The Wall Street Journal reports that just five big financial stocks are behind the stock market’s rally. Fannie Mae (NYSE:FNM), Citigroup (NYSE:C), Freddie Mac (NYSE:FRE), Bank of America (NYSE:BAC) and AIG account for nearly a third of market’s daily turnover. Seems everyone is speculating on the banks…and moving them higher.

You will recall, dear reader, the banks made a fortune during the bubble years. You may also recall that they made so much money that when the bubble years came to a close, that they were almost all broke. Without hasty action from the feds, it would have been the end of the road for every major bank on Wall Street. As it was, even with government help, none of them survived intact. They all either went bankrupt, were sold off, or got bailouts with strings attached.

What busted the banks was too much of a bad thing. They made their money by peddling debt. In order to move the stuff, they convinced clients that their products were good safe investments – even leveraged derivatives backed by subprime mortgages! Such good salesmen were they that they even convinced themselves. When the crisis came, they realized that they had been buyers of the debt…as well as sellers of it. What could they do with it…except sell it to the feds?

But the whole financial industry is coming back to life. According to El Pais, it’s back…and it’s better than ever.

But wait? How could that be? Hasn’t the world entered the worst recession since the great depression? How could lending money be such a good business? People don’t borrow in a recession.

Strategic Short Report’s Dan Amoss is just as skeptical. “The banking system has no experience managing through the current ‘negative home equity’ environment,” he tells us. “This is an environment in which mortgage rates are already about as low as they can get and consumer balance sheets are as stressed as ever. Due to the nonrecourse nature of mortgages, most borrowers have no financial incentive to keep paying. Many are choosing to mail the keys back to the lender.

“This problem will cap the upside of bank stocks for years to come, so the sector will offer lots of short selling opportunities.”

Borrowing by households has fallen off a cliff. Instead of borrowing, they’re paying back debt at the fastest rate since the ’50s. No money to be made there.

How about commercial and business loans? Are you kidding? Businesses are cutting back too. Businesses borrow to expand…and there is no expansion going on. This is a contraction. Credit is contracting along with everything else.

Then, how could the banks make money? Let’s refer to that news item again. Oh…there are the magic words: “Public assistance enables…”

The banks are making money the same way Detroit is making money…dishonestly and temporarily. Instead of doing honest deals with willing and able counterparties, the banks are pulling a fast one. Their money comes, ultimately, from the poor taxpayer…the poor sap who funds all the government’s giveaways. The private sector lived far beyond its means during the bubble years. People wasted their money they didn’t have on things they didn’t need. Now, they try to save their money. But now the government wastes their money for them.

Speaking of which…a quick note on the Cash for Clunkers program. Numbers to be released today are expected to show a peak in sales in August caused by the feds’ incentives. President Obama calls the program a showcase, proving how effective government can be at getting the economy back on the road.

But let’s go back to basics. It’s a sham when people waste their own money. It’s a crime when they waste other peoples’ money. Prosperity comes from accumulating (saving) capital…and using it to increase productive capacity. The formula is pretty simple: Save your money. Invest it in productive business. The Clunkers program encouraged people to do the opposite – consume capital, other peoples’ capital.

’Nuff said.

We were going to let Ted Kennedy go to his grave without mention here at The Daily Reckoning. The newspapers, television and radio shows have mentioned it enough. Even the foreign press has taken note of the event.

We might have let it go, but we have taken an oath: whenever we see a bubble we must pop it. And there is a bubble in Kennedy worship so big it threatens to blot out the sun. Today, we approach with a needle.

No writer has failed to mention that Mr. Kennedy was not the first of the clan die. The press cannot resist hero worship – especially when its heroes die young.

The Kennedy brothers could have lived comfortably all their lives on their father’s liquor money. Instead, they took up the banner of ‘public service’ and wrapped themselves in it so tightly it suffocated them all. The oldest of the band was killed in WWII. Ted Kennedy’s grave lies only 100 feet from his brother, Robert, killed in 1968 while running for president. And only another 100 feet from another brother who was shot down five years earlier. With that kind of curse on a family, you’d think the younger bro would have gone back into the liquor business. Instead, the younger held his head up…headed for glory…and drove off a bridge. The bridge probably saved him. Had he made it beyond the primaries, some nutcase would have certainly taken a shot at him.

The bridge incident would have sunk a lesser man – that is, one who lacked the name, family connections, lawyers, and money of Ted Kennedy. It probably would have sunk a more reflective, more sensitive man too. A man with a sharper conscience might have seen the girl’s face in his dreams and have been driven to drink…eventually drowning himself in his own guilt, like a character from a Russian novel. But Kennedy had the ability to rise above shame and put scandal behind him, with some helpful amnesia from the press. Chappaquiddick is reported in today’s press as though it were a personal triumph. A lesser man would have gone to jail for manslaughter; Kennedy went on to become the ‘lion of the Senate.’ He merely gave up his presidential aspirations and buckled down to the life of a Senate hack. The eulogies tell us that driving off the bridge, drunk, made him what he was: “the greatest legislator of all time,” as the President put it.

No, we never shared the conservatives’ loathing for the man. We never met him. Had we known him personally, we probably would have found him as agreeable a drinking companion as anyone else. But we come neither to bury Ted Kennedy, nor to praise him…we merely poke fun at the world that idolizes him.

The fact that the Kennedys committed themselves to ‘public service’ seemed to make them part of the furniture of public life. Everywhere you looked, there they were. The newspapers loved them. Everyone knew what they looked like. Hairdressers knew their private lives. Taxi drivers suffered their personal tragedies as if they were one of the family.

But the Kennedys were more than just furniture. First, because they were not particularly useful…you couldn’t sit on them or dine on them. More importantly, when it came to decorating the republic, they were the ones who wanted to arrange the furniture.

All the obituaries hammered this point as if they were hardening steel: “He devote his life to public causes…” says one. “He fought for the poor and the downtrodden…” says another.

He said so himself. In a letter to Pope Benedict XVI, Kennedy seemed to write his own obituary. He allowed as how he had “done his best to champion the rights of the poor and to open doors of economic opportunity. I’ve worked to welcome the immigrant, fight discrimination and expand access to health care and education…”

USA Today provides a typical illustration of the Senator’s magnanimity and generosity.

A woman with an autistic son asked the government for help. “The Haitian immigrant wrote to her senator, ‘the only one who can understand what it takes to raise a child with disabilities.’” (Kennedy’s son lost a leg and his sister, Rosemary, was mentally disabled. This, according to USA Today, gave him “a connection with the public’s private pain.”)

“Within three weeks,” the news item continues, “they secured vocational and life skills training [for the son]…that allowed his mother to finally earn a college degree last year at age 58.

“I have my life back and my son is no longer under by my care 24 hours a day…”

No…now he’s under someone else’s care! Kennedy redecorated. He moved the cost of caring for the poor fellow on to someone else.

And what does the mother do with her free time? She’s now a “community organizer.” You can bet she’s organizing more transfers…of money from the people who earned it to the people who didn’t.

“He was always reaching out,” said Democratic strategist Donna Brazile. Yes, he was always re-arranging the furniture. And USA Today told us that he inspired a whole race of redecorators – people infected by a desire for ‘public service.’

“Hundreds of lesser-known former Kennedy staffers and campaign volunteers…followed him into public service…The alumni of his office pepper the government…”

But what is the consequence of all this meddling? Is the nation better off for it? None of the obituaries we saw even raised the question. How do you know if something is genuinely a public service? Is it a public service when you take money from one person and give it to another? The press seems to think so. Is it a public service when you load up the nation with hundreds of billions worth of programs and pet projects?

Kennedy was a prolific proposer…a serial legislator…a Tom Friedman with a Senate seat. Surely some conservative think tank has totted up the cost of all his legislation. And surely it is in the hundreds of billions of dollars. Where did the money come from? It had to come from somewhere. It has to come from people who had ideas and plans of their own…people who had put the couch under the window and the TV in front of the easy chair, just the way they wanted it. Were they really any better off when Kennedy moved things around? Was the republic stronger, healthier, more prosperous and more honest after the Kennedy brothers got through with it?

We leave you with the question.

As for Ted Kennedy, the man was a scalawag. But he was God’s scalawag; and all His creatures deserve our respect. And now that he’s in the dirt, God will do with him as He chooses. RIP.

Until tomorrow,

Bill Bonner

Source: The Undead of the Banking World

New home sales jumped almost 10% in July, while the Case-Shiller home price index rose for the second successive month. Yet luxury homebuilder Toll Brothers lost $493 million in the quarter ending July 31, considerably worse than analysts had expected.

Housing stocks are certainly acting as if a recovery must be on the way. Pulte Homes Inc. (NYSE: PHM) has more than doubled from its low. Toll Brothers Inc. (NYSE: TOL) is up around 70% from its bottom. D.R. Horton Enterprises (NYSE: DHI) is up almost four times from its bottom. Lennar Corp. (NYSE: LEN) is up about 4½ times from its low. Finally, Hovnanian Enterprises Inc. (NYSE: HOV) is up almost tenfold from its low after a flirtation with bankruptcy. Yet all of these companies are still racking up quarterly losses, according to their most recently released earnings reports.

In terms of house prices, it would seem unlikely that a bear market bottom has been reached. Yes, the average house price is now back down around its long-term average of about 3.2 times average earnings, or only a little above it. But history suggests that markets don’t bottom at their average valuation: In fact, after such a huge excess to the upside, they overshoot on the downside.

The Case-Shiller 20-cities index is still 42% above its January 2000 level, having outpaced inflation during the last 9½ years. Yet January 2000 was not the bottom of a housing depression – far from it, in fact. That was actually close to the top of the dot-com bubble, when valuations of all assets were at all-time highs. So an average price over the whole country that – even now – remains 42% above the average price recorded at the very top of a huge economic boom does not seem like a market bottom to me.

You also have to remember that the U.S. federal government is hugely subsidizing the market. Interest rates are artificially low, and the U.S. Federal Reserve has bought more than $1 trillion worth of housing debt. Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) have been rescued by the government, and provided with more than $100 billion of taxpayer capital. And Ginnie Mae (the Government National Mortgage Association), directly a government agency, has provided almost $1 trillion of mortgages that require a 3% down payment.

And that’s not all.

The government is spending additional billions helping homeowners avoid foreclosure. First-time buyers are given a tax credit of $8,000 towards the down payment on their house – this credit currently runs out on December 1. So the current overall market bottom is propped up artificially. Even if the proposed tax-credit extension is approved, at some point, those props will be removed.

In individual cities, the picture is somewhat brighter. Phoenix and Las Vegas prices are less than 10% above their 2000 levels, having been halved from their respective peaks. In those markets, house prices may truly be reaching a bottom, although the overhang of foreclosures after such a huge drop may make recovery slow. At the other extreme, Detroit housing is 30% cheaper than in 2000, a testimony to the awful economic environment there, with the bankruptcies of General Motors Corp. (NYSE:GRM) and Chrysler Group LLC.

Again, with the government bailouts of both companies, there may be something of a recovery in the local housing market.

Probably the best prospects, however, are in Denver and Dallas, where prices are about 20% above their 2000 level, roughly in line with the increase in consumer prices during that same period. However, the local economies are strongly based on natural resources, particularly oil, whose price is triple its 2000 level. With prices in Dallas and Denver down only about 10% from their 2000 peaks, a true recovery in those cities may be near.

At the opposite extreme are the metropolitan “Big Three” of Los Angeles, New York and Washington, where prices are 61%, 71% and 74% above their 2000 levels, respectively.

Washington will be fine, of course: The Obama administration’s spending-and-legislation plans have attracted yet another huge influx of bureaucrats, lobbyists and lawyers, all of which will boost the housing market to new highs. With New York you have to worry about all the financial-services jobs being lost as a result of the worst financial crisis since the Great Depression.

From a nationwide standpoint, the most likely path for the housing market is for a modest recovery, with some later slippage as subsidies are removed. Housing is likely destined to once again become a highly regional market, as it always was prior to the 2001-2006 market boom, with the cycles in each market being very different.

As for homebuilding stocks, they appear to already be discounting a recovery in their businesses that may well be years away. Selling at well above net asset value (NAV), with Price/Earnings (P/E) ratios that are infinite because the companies continue to lose money, shares of homebuilders represent a very poor value, indeed.

Source: The U.S. Housing Market’s False Dawn

Three of the financial institutions that were key catalysts to the global financial crisis – and that owe the federal government billions of dollars as a direct result of those problems – have seen their shares triple in price so far this month.

That could signal that a big rebound in bank-sector earnings is just around the corner. Or it could be merely a speculative “short squeeze” that all but confirms that these stocks are basically worthless.

Shares of busted insurer American International Group Inc. (NYSE:AIG) have soared from $13.14 to $50.23, as of Friday’s close, a gain of 282.3% so far this month. Shares of mortgage giants Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM) posted similar gains,MarketWatch.com reported. Fannie’s shares advanced from 58 cents to $2.04, an increase of 251.7%. Freddie’s shares zoomed from 62 cents to $2.40 each, a gain of 287.1%.

AIG actually gained for a ninth straight day Friday, reaching a 10-month high, as short-shelling speculators got squeezed and were forced to buy back the shares they’d sold short, traders told MarketWatch. AIG has 21% of its “float” – shares available to the public sold short, the sixth-highest proportion in the Standard & Poor’s 500 Index, according toBloomberg News.

But the gains might also sign that the banking sector is poised for a major profit rebound, according to some new analyst research.

“Dating back to 1995, bank-sector outperformance has typically preceded [earnings-per-share] growth outperformance by one to two quarters,” Stifel Nicolaus & Co. (NYSE: SN) analysts wrote in a market-research note last week. “With sector earnings growth expected to exceed that of the general market in mid-2010, we question whether we will see another leg down in this rally before year-end. On the other hand, perhaps we should question the current growth expectations for the sector?”

Trading in financial-services stocks has dominated the stock-market volume this month. So-called “day traders” have gravitated to once-questionable financial stocks and helped fuel those stunning gains – and huge volumes.

Citigroup Inc. (NYSE: C), for instance, has seen daily trading volume topping 1 billion shares this week. The stock closed above $5.05 on Thursday and $5.23 on Friday. That represents a 439% gain from its 52-week low of 97 cents a share.

Financial stocks have led the market’s slingshot higher from the early March lows. Trading has been fierce in beaten-down shares of some companies that participated in the bailout, such as AIG, Citi and Bank of America Corp. (NYSE: BAC).

The New York-based AIG is trying to sell assets to repay government loans after accepting $182.5 billion in U.S. bailout money. AIG recently reported a profit for its second quarter – after having posted six straight quarters in the red. It engineered a so-called “reverse stock split,” in which AIG gave investors one new share for every 20 they turned in. The company did this to avoid a delisting action. That enhanced the short squeeze, since there were fewer shares available to for short-sellers to repurchase and “cover” their bets.

Despite the torrid run that AIG’s shares have been on, the insurance company’s bonds still trade at levels indicating the company’s shares may be worthless, Peter Boockvar, an equity strategist at Miller Tabak & Co., told Bloomberg.

“The value of the company is still the same,” Boockvar said. “AIG bonds tell you that the equity is possibly worth nothing and that they may not be able to pay back the government.”

AIG’s $3.24 billion of 8.25% bonds due in 2018 are quoted at 79 cents on the dollar, to yield 12.2%, Bloomberg reported. The insurer’s $4 billion of 8.175% percent bonds due in 2058 are quoted at 49.5 cents on the dollar to yield 16.7% Bloomberg said.

The Financial Select Sector SPDR Fund (NYSE: XLF), an ETF tracking the financial stocks in the Standard & Poor’s 500 Index, has rallied nearly 30% over the past three months and handily outpaced the market.

Market Matters

While the past few months have been anything but dull for the markets (euphoric may be more appropriate), investors enjoyed a few slow days of peace and quiet.

Another stimulus program came to a close as “Cash for Clunkers” ended with a last-minute flurry of activity.  Analysts claimed that more than 700,000 cars were bought over the past month and August auto sales should rise on a year-over-year basis for the first time since mid-2007.

While dealerships enjoyed a nice rebound in activity (even if just temporarily), banks continued to experience challenges as the Federal Deposit Insurance Corp. (FDIC)reported that 416 institutions were on its “problem” list at the end of the second quarter, up from 305 on March 31, and also conceded that its insurance-fund reserves were dwindling.

Goldman Sachs Group Inc. (NYSE: GS) was in the news again as controversy has continued to surround the investment giant since the AIG bailout and LehmanBrothers Holdings Inc. (OTC: LEHMQ) failures.  Regulators are investigating its weekly “trading huddles,” where its analysts allegedly gave short-term stock tips to select clients and traders, though most other customers were not privy to such insight.

Dell Corp. (Nasdaq: DELL) posted lower quarterly profits, though
the result still beat Street expectations and management projected stronger performance in 2010 when businesses get back in technology buying mode.  Intel Corp. (Nasdaq: INTC) boosted its revenue projections for the next few months, another sign that chip demand is increasing and the business climate continues to improve.

The Dow Jones Industrial Average roared to eight straight days of higher closes, before hitting a stumbling block on Friday (though no one may have noticed as volume was so light) and the days of triple-digit moves ended (for a week at least).

The other indexes traded relatively flat during the week and even the positive news from Intel did little to generate any investor enthusiasm in the tech-heavy Nasdaq Composite Index. Fixed income fared better than most would have expected, considering another $109 billion in government debt hit the street.

Oil surged to a 10-month high before a larger-than-expected inventory report indicated that crude demand remained weak despite expectations of an economic recovery just around the corner.  In fact, natural gas plunged to a seven-year low.

Economically Speaking

In perhaps the biggest news of the week, U.S. Federal Reserve Chairman Ben S. Bernanke will manage to avoid becoming a part of the so-called “jobless recovery” when he was nominated for another term as central bank chair by U.S. President Barack Obama.

While Bernanke certainly has his critics among grandstanding politicos from both sides of the aisle, few Fed watchers expect Congress to hold up his confirmation.  For now, continuity seems to be the best thing.

The economic data of the week was relatively favorable with signs of renewed strength in both housing and manufacturing.  New home sales jumped for the fourth consecutive month and the S&P Case-Shiller Index even depicted higher home prices last quarter for the first time since 2006.  Durable good orders surged in July on increased demand within the transportation sector as both General Motors Co. (OTC: MTLQQ) and Chrysler Group LLC put bankruptcy in their rearview mirrors and boosted production, while other companies also benefited from the “Cash for Clunkers” program.

When second-quarter gross domestic product (GDP) was announced as a decline of 1%, many analysts expected a downward revision (perhaps significant) in the months that followed.  Well, the initial revision again showed a 1% decline, a negative showing, but one that many economists believe will be the last contraction in overall activity for a while.

The U.S. consumer remains one big wildcard for the strength of the economy moving forward.  Though the Conference Board reported a better-than-expected increase in its August consumer confidence report, the Reuters/U of Michigan sentiment index offered a contrasting view as it fell to its lowest level in four months.  Personal spending in July got a nice boost from the increase auto sales (“Cash for Clunkers” strikes again), though the income component of the release was unchanged and concerns about the labor picture continued to hinder consumer activity.

Weekly Economic Calendar

Source: Soaring Prices for AIG, Fannie and Other Financial Stocks Sending Mixed Messages to Investors ]]> http://www.contrarianprofits.com/articles/soaring-prices-for-aig-fannie-and-other-financial-stocks-sending-mixed-messages-to-investors/20240/feed 0 http://www.contrarianprofits.com/articles/how-over-regulating-goldman-sachs-will-lead-to-higher-oil-and-commodity-prices/20063 http://www.contrarianprofits.com/articles/how-over-regulating-goldman-sachs-will-lead-to-higher-oil-and-commodity-prices/20063#comments Fri, 21 Aug 2009 20:19:19 +0000 Peter Krauth http://www.contrarianprofits.com/?p=20063 After earning hefty profits on its commodities trading for nearly 18 years, heavyweight trader Goldman Sachs Group Inc. (NYSE: GS) now finds itself on the hot seat, defending this crucial source of revenue. And while that may not be good for Goldman, it’s also bad for investors.  Let me explain…

It all started back in 1991, when J. Aron & Co., Goldman’s commodities-trading division, recommended that a large institutional client invest about $100 million in commodities.  The vehicle “du-jour” was Goldman’s own investment vehicle, the Goldman Sachs Commodity Index (now the S&P GSCI Commodity Index).

The GSCI is a 24-commodity dollar-weighted index, comprised of 70% energy (oil and natural gas), 8% industrial metals (aluminum, copper, lead, nickel and zinc), 3% precious metals…

• The special inspector general for the Treasury’s Troubled Asset Relief Program (TARP) said U.S. taxpayers could be on the hook for as much as $23.7 trillion to bolster the economy and bail out financial companies, Bloomberg News reported.  In testimony prepared for a hearing before the House Committee on Oversight and Government Reform, Neil Barofsky said the Treasury’s $700 billion bank-investment program represents only a fraction of all federal bailouts to resuscitate the U.S. financial system. “TARP has evolved into a program of unprecedented scope, scale and complexity,” he said. Costs include $6.8 trillion in Federal Reserve guarantees, $2.3 trillion in programs offered by the Federal Deposit Insurance Corp., $7.4 trillion in TARP and other aid from the Treasury and $7.2 trillion in federal money for Fannie Mae (NYSE:FNM), Freddie Mac (NYSE: FRE), and other federal programs, he said.

• A survey of economists released yesterday (Monday) said the U.S. recession’s hold on the economy appears to be easing but likely has not yet ended, Reuters reported. The National Association for Business Economics’ (NABE) quarterly industry survey found that demand is stabilizing, but a small majority of the 102 respondents said their firms had not yet seen the bottom. The survey “provides new evidence that the U.S. recession is abating, but few signs of an immediate recovery,” said Sara Johnson, managing director of global macroeconomics for IHS Global Insight, who helped analyze the report for the NABE.  “Industry demand was still declining in the second quarter of 2009, but the breadth of decline had narrowed considerably since late 2008, raising prospects for stabilization in the second half” of the year, she said.

• General Motors Corp. (NYSE: MTLQQ) garnered three final offers for its Opel unit in Europe, with Germany’s preferred bidder,Magna International Inc. (NYSE: MGA), planning to take a bigger stake from its Russian partner, Bloomberg News reported. RHJ International SA (EBR: RHJI) and Beijing Automotive Industry Holding Co. also submitted offers. Magna, the largest Canadian car-parts manufacturer, would buy 27.5% of Opel compared with 20% in an earlier proposal, said a GM spokesman.  Germany selected Magna as preferred bidder on May 30. Detroit-based GM, seeking to salvage its European operations afteremerging from bankruptcy, set today as the deadline for taking final offers for Opel, which includes the Vauxhall brand in the U.K.  “The final bids will now be analyzed and compared by GM,” GM Europe said in a statement.

• Mortgages on commercial property held by U.S. banks have been failing at the fastest rate in nearly 20 years, the Wall Street Journal said.  Losses on loans used to finance commercial spaces would possibly reach about $30 billion by the end of 2009 at the current rate.  The $30 billion estimate is based on financial reports filed by more than 8,000 banks for the first quarter, The Journalsaid. The commercial real-estate market, valued at about $6.7 trillion, represents 13% of the United States’ gross domestic product.

• Shares of Human Genome Sciences Inc. (Nasdaq: HGSI) skyrocketed 276.81% after the Rockville, Md.-based company’s Benlysta drug reduced symptoms in patients inflicted with lupus, a disease that is notoriously difficult to treat. The company tested 865 patients in a one-year study with the drug, which is co-produced with GlaxoSmithKline PLC. Leerink Swann LLC analyst Joseph Schwartz expects the drug to launch next year andgenerate $1.2 billion in sales for HGSI in 2013 and $2.4 billion in 2015, according to a report by Dow Jones Newswires. HGSI closed at $12.51 yesterday (Monday), up $9.19.

• A potential tax liability as well as growing tensions betweenVolkswagen AG (OTC ADR: VLKAY) and Porsche Automobil Holding put a speed bump in the way of a potential Volkswagen acquisition of Porsche’s sportscar division, The Wall Street Journal reported, citing people familiar with the matter. Both companies unsuccessfully attempted last weekend to find a way around a tax payment that could be triggered by the sale Porsche’s division. Volkswagen contested the significance of the issue, with a spokesperson telling The Journal “a transparent maneuver to torpedo a sensible business idea.” Porsche is also in negotiations with Qatar to give the emirate a substantial stake in the German automaker.

• The Conference Board’s Leading Economic Index (LEI) rose slightly in June, up 0.7% following a 1.3% gain in May and a 1% rise the month before. “The recession has been losing steam since the spring, although very large job losses continue. Nevertheless, confidence is slowly rebuilding. Financial markets are less volatile. Even the housing market is stabilizing. If these trends continue, expect a slow recovery this autumn,” said Conference Board economist Ken Goldstein.  The LEI has improved 4.1% in the past six months.

• New AOL LLC Chief Executive Officer Tim Armstrong revealed his plans to overhaul the troubled Time Warner Inc. (NYSE: TWX) division’s advertising and develop more localized websites in an effort to resuscitate falling revenues. The former Google Inc.(Nasdaq: GOOG) executive says sites with city guides can help fill a void of community information on the Internet, which in turn will bring in visitors and advertisers. “AOL still has a really large opportunity in front of it,” Armstrong said in a July 16 interview with Bloomberg News. “It comes with a very difficult path, but if we can navigate the path and navigate what needs to be done here and do it transparently, quickly and deliberately, I think AOL can be a successful company, and that’s why I came.” Time Warner will spin off AOL later this year.

Source: Investment News Briefs Tuesday, July 21, 2009

Ask U.S. Rep. Maxine Waters, D-CA, about credit default swaps and she’ll offer this warning: Ban them now or expect a reprise of the ongoing global financial crisis – which the derivative securities helped create. When it comes to elected officials, Congresswoman Waters is not one I would typically feel that I have a lot in agreement with.

A representative of a low-income district in Los Angeles, Waters is a senior member of the House Committee on Financial Services and has distinguished herself in the past by her sharp attacks on the financial sector and capitalism in general – what her own Web site describes as her “no-holds-barred style of politics.”

However, Congresswoman Waters’ bill to prohibit credit default swaps – introduced last Friday (July 10) – is strangely appealing, even for a crusty old capitalist like myself.

If you want a more pro-capitalist confirmation of Waters’ view (andGeorge Soros doesn’t count) try Warren Buffett’s sidekick Charles T. Munger, who has called the CDS prohibition the best solution, and said “it isn’t as though the economic world didn’t function quite well without it, and it isn’t as though what has happened has been so wonderfully desirable that we should logically want more of it.”

Waters has also pointed out – quite reasonably – that unless credit default swaps are banned outright, “the industry will find a way to loosen standards and widen exemptions for customized contracts and we will be right back to where we are today.”

When There’s No “Free” in Free Market

As a free-market enthusiast, my natural instinct is to resist such calls. But I have to recognize that, as we speak, we’re actually not operating in a free market. Key U.S. banks were bailed out by the U.S. government last fall, after which such financial institutions as Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE) and Citigroup Inc. (NYSE:C) have been permitted to carry on as though nothing bad ever happened.

Furthermore, a number of big players in the CDS market – most notably Goldman Sachs Group Inc. (NYSE: GS) – were bailed out through the rescue of busted insurer American International Group Inc. (NYSE: AIG). In that case, the government injected $180 billion into AIG, largely to allow it to make good on the CDS contracts it had written – $13 billion of which were with Goldman Sachs.

If Citi, Fannie, and Freddie had gone bankrupt – as they would have done in a free market – and Goldman had lost the best part of $13 billion (which might well have sent it bankrupt in turn) the financial market today would look very different. The financial industry would be rife with unemployment and apple-selling ex-Citibankers would be on the streets of New York keeping bankers’ salaries and bonuses way down from their pre-crash levels.

But such as it is, Goldman Sachs is said to be heading for record profits in 2009, and its partners are expecting record bonuses. The investment-banking firm reported stellar second-quarter profits of $3.44 billion yesterday (Tuesday). [For a related story on Goldman Sachs’ quarterly financial report that appears in today’s issue of Money Morning, please click here.]

If U.S. taxpayers are going to be called on to subsidize the very banks that got us into this mess – just so these institutions can continue to carry on as if it was still 2007 – then another expensive and damaging financial crash is almost certainly in the making.

There are a number of product areas in which such a crash might occur, but for my money, credit default swaps top the list. That makes it crucial for us to at least rein in the derivative securities with the utmost urgency. And Congresswoman Waters makes an excellent point when she says that it may prove impossible to rein in credit default swaps without actually banning them altogether.

If You Can’t Beat ‘Em, Ban ‘Em

Indeed, there are two fundamental problems with CDS securities, neither of which appears easy to solve:

• First, there is no watertight way of settling credit default swaps in case of default. The current method is by a mini-auction of the obligations on which the swaps are written to determine a settlement price. But this doesn’t work because the mini-auction relates to only a few million dollars of paper, whereas the credit default swaps in question may have a nominal value of billions – hence it’s in the interest of holders to play games at the auction and distort prices. This might not be a problem for non-participants in the CDS market, but it causes huge risks to the financial system – which in extreme cases, must be bailed out by taxpayers, as was the case with AIG.

• The second problem is that holders of credit default swaps have an incentive to push companies into bankruptcy. In the 1930s, short sales of stock (except on an “uptick”) were prohibited to prevent speculators from driving companies into bankruptcy. Well, the leverage available on CDS securities is much greater than on stock, and in the case of financial institutions, the amount of CDS outstanding is also much greater. That means speculators have correspondingly more incentive to load up on CDS and push a company into bankruptcy.

And it doesn’t end there: Since CDS holders also hold a company’s debt, their position in bankruptcy negotiations is a completely false one. This has already been a problem in the bankruptcies of the Canadian paper company Abitibi-Bowater and the shopping centre developer General Growth; it also caused problems in the massive General Motors Corp. (NYSE: GMGMQ) reorganization.

The stellar bonus prospects of the lucky employees at Goldman Sachs, in a year that has been thoroughly lousy for legitimate financial business, are an indication that we are not currently operating in a free market. Credit default swaps provide a means whereby Wall Street insiders can make huge amounts of money on corporate bankruptcies and disrupt the U.S. economy while doing so.

Until we can be absolutely sure that the poisons of the most-recent global financial bubble have been fully eradicated from the financial system, the safest measure is to ban those financial products like CDS that seem likely to cause the most trouble.

Congresswoman Waters may go too far in wishing to ban credit default swaps altogether. However, I see no reason not to impose a five-year moratorium on the securities.

If, by 2014, the poisons of speculation have been removed from the world’s financial system, and a newly sober Wall Street can convince us that credit default swaps are both useful and sound, the derivative securities can then be reinstituted on a controlled basis, most likely restricted as swaps on “indices” of credit representing an entire sector or country, rather than on single companies alone. That would make it more difficult for CDS dealers to engage in their dangerous bankruptcy games.

Perhaps Goldman Sachs employees can do without that third Porsche – at least or now …

Source: Here’s Why It’s Time to Ban Credit Default Swaps ]]> http://www.contrarianprofits.com/articles/here%e2%80%99s-why-it%e2%80%99s-time-to-ban-credit-default-swaps/19101/feed 1 http://www.contrarianprofits.com/articles/the-silver-market-some-call-it-crimex/18313 http://www.contrarianprofits.com/articles/the-silver-market-some-call-it-crimex/18313#comments Wed, 24 Jun 2009 19:24:53 +0000 Russell McDougal http://www.contrarianprofits.com/?p=18313 The silver market is showing signs of bullish strain and an incredible opportunity is being presented to you. I’m a staunch silver advocate and it’s time for an update right now. Silver stands to outperform gold as the long term precious metal bull market continues to unfold.The price of silver, along with gold, is kept under wraps by officials of the New York COMEX market, aka CRIMEX. The old boy network which runs CRIMEX have whipsawed the market in their desired direction for decades and profited accordingly. These actions are government sanctioned because precious metals are competition to un-backed fiat money. State mandated fiat is so weak and poorly designed that it cannot stand competitors.

I wrote a silver article 4½…