Gold hits record near $1,150/oz as dollar slips

November 18, 2009

Wed Nov 18, 2009 5:13am EST

By Jan Harvey

LONDON (Reuters) – Gold hit a fresh record high near $1,150 an ounce on Wednesday, boosting precious metals across the board, as a dip in the dollar index added to momentum buying as prices broke through key technical resistance levels.

In non-U.S. dollar terms, gold also climbed, hitting multi-month highs when priced in the euro, sterling and the Australian dollar.

Spot gold hit a high of $1,147.45 and was at $1,146.05 an ounce at 0948 GMT, against $1,141.50 late in New York on Tuesday.

U.S. gold futures for December delivery on the COMEX division of the New York Mercantile Exchange also hit a record $1,148.10 and were later up $7.10 at $1,146.40 an ounce.

“Yesterday the market took a breather and tested below $1,130 very quickly, (but) a few physical related bargain hunters were lined up to grab the dip,” said Afshin Nabavi, head of trading at MKS Finance in Geneva.

The market is being underpinned by fresh interest in gold from the official sector, he said, after a recent major bullion acquisition from India and smaller buys by the central banks of Mauritius and Sri Lanka.

The acquisitions underlined gold’s appeal as a portfolio diversifier, especially in an environment where further dollar weakness was expected, analysts said.

The dollar eased back on Wednesday from its biggest rise in three weeks in the previous session, as traders awaited U.S. inflation data due at 1330 GMT.

The dollar index, which measures the U.S. currency’s performance against a basket of six others, was down 0.37 percent, while the euro/dollar exchange rate firmed.

Other commodities also climbed, with oil rising back toward $80 a barrel and copper to 13-1/3 month highs near $7,000 a tonne. Both are being lifted by the weak dollar.

Read the rest of this entry »


Greenlight’s Einhorn holds gold, says U.S. policies poor

October 19, 2009

Mon Oct 19, 2009 2:25pm EDT

By Jennifer Ablan and Joseph A. Giannone

NEW YORK (Reuters) – Hedge-fund manager David Einhorn, who warned about Lehman Brothers’ (LEH) precarious finances before it collapsed, said on Monday he’s betting on rising interest rates and holding gold as a hedge for what he described as unsound U.S. policies.

“If monetary and fiscal policies go awry” investors should buy physical gold and gold stocks, Einhorn said at the fifth Annual Value Investing Congress in New York. “Gold does well when monetary and fiscal policies are poor and does poorly when they are sensible.”

Einhorn is president of Greenlight Capital, with more than $5 billion in assets under management.

“Over the last couple of years, we have adopted a policy of private profits and socialized risks — you are transferring many private obligations onto the national ledger,” he said.

Einhorn said, “Although our leaders ought to be making some serious choices, they appear too trapped in the short term and special interests to make them.”

According to a joint analysis by the Center on Budget and Policy Priorities, the Committee for Economic Development and the Concord Coalition, the projected U.S. budget deficit between 2004 and 2013 could grow from $1.4 trillion to $5 trillion.

Last week when Federal Reserve Chairman Ben Bernanke, U.S. Treasury Secretary Timothy Geithner and White House economic adviser Larry Summers spoke in interviews and on panel discussions, Einhorn said, “my instinct was to want to short the dollar but then I looked at other major currencies — euro, yen and British pound — and they might be worse.”

Einhorn added, “Picking these currencies is like choosing my favorite dental procedure. And I decided holding gold is better than holding cash, especially now that both offer no yield.”

(Reporting by Jennifer Ablan and Joseph A. Giannone; Editing by Kenneth Barry)


Bailed-out bankers to get options windfall: study

September 2, 2009

Wed Sep 2, 2009 11:14am EDT
By Steve Eder

NEW YORK (Reuters) – As shares of bailed-out banks bottomed out earlier this year, stock options were awarded to their top executives, setting them up for millions of dollars in profit as prices rebounded, according to a report released on Wednesday.

The top five executives at 10 financial institutions that took some of the biggest taxpayer bailouts have seen a combined increase in the value of their stock options of nearly $90 million, the report by the Washington-based Institute for Policy Studies said.

“Not only are these executives not hurting very much from the crisis, but they might get big windfalls because of the surge in the value of some of their shares,” said Sarah Anderson, lead author of the report, “America’s Bailout Barons,” the 16th in an annual series on executive excess.

The report — which highlights executive compensation at such firms as Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), Bank of America Corp. (BAC) and Citigroup Inc. (C) — comes at a time when Wall Street is facing criticism for failing to scale back outsized bonuses after borrowing billions from taxpayers amid last year’s financial crisis. Goldman, JPMorgan and Morgan Stanley have paid back the money they borrowed, but Bank of America and Citigroup are still in the U.S. Treasury’s program.

It’s also the latest in a string of studies showing that despite tough talk by politicians, little has been done by regulators to rein in the bonus culture that many believe contributed to the near-collapse of the financial sector.

The report includes eight pages of legislative proposals to address executive pay, but concludes that officials have “not moved forward into law or regulation any measure that would actually deflate the executive pay bubble that has expanded so hugely over the last three decades.”

“We see these little flurries of activities in Congress, where it looked like it was going to happen,” Anderson said. “Then they would just peter out.”

The report found that while executives continued to rake in tens of millions of dollars in compensation, 160,000 employees were laid off at the top 20 financial industry firms that received bailouts.

The CEOs of those 20 companies were paid, on average, 85 times more than the regulators who direct the Securities and Exchange Commission and the Federal Deposit Insurance Corp, according to the report.

(Reporting by Steve Eder; editing by John Wallace)


FOMC Statement – “economic activity is leveling out”

August 12, 2009

Release Date: August 12, 2009

For immediate release

Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

2009 Monetary Policy Releases


SEC makes emergency rule targeting ‘naked’ short-selling permanent

July 27, 2009

By Marcy Gordon, AP Business Writer
Monday July 27, 2009, 8:03 pm EDT

WASHINGTON (AP) — Federal regulators on Monday made permanent an emergency rule put in at the height of last fall’s market turmoil that aims to reduce abusive short-selling.

The Securities and Exchange Commission announced that it took the action on the rule targeting so-called “naked” short-selling, which was due to expire Friday.

Short-sellers bet against a stock. They generally borrow a company’s shares, sell them, and then buy them when the stock falls and return them to the lender — pocketing the difference in price.

“Naked” short-selling occurs when sellers don’t even borrow the shares before selling them, and then look to cover positions sometime after the sale.

The SEC rule includes a requirement that brokers must promptly buy or borrow securities to deliver on a short sale.

Brokers acting for short sellers must find a party believed to be able to deliver the shares within three days after the short-sale trade. If the shares aren’t delivered within that time, there is deemed to be a “failure to deliver.” Brokers can be subject to penalties if the failure to deliver isn’t resolved by the start of trading on the following day.

At the same time, the SEC has been considering several new approaches to reining in rushes of regular short-selling that also can cause dramatic plunges in stock prices.

Investors and lawmakers have been clamoring for the SEC to put new brakes on trading moves they say worsened the market’s downturn starting last fall. SEC Chairman Mary Schapiro has said she is making the issue a priority.

Some securities industry officials, however, have maintained that the SEC’s emergency order on “naked” short-selling brought unintended negative consequences, such as wilder price swings and turbulence in the market.

The five SEC commissioners voted in April to put forward for public comment five alternative short-selling plans. One option is restoring a Depression-era rule that prohibits short sellers from making their trades until a stock ticks at least one penny above its previous trading price. The goal of the so-called uptick rule is to prevent selling sprees that feed upon themselves — actions that battered the stocks of banks and other companies over the last year.

Another approach would ban short-selling for the rest of the trading session in a stock that declines by 10 percent or more.

Schapiro said last week the SEC could decide on a final course of action in “the next several weeks or several months.”

Read the rest of this entry »


Private rescue of CIT marks shift in crisis

July 21, 2009

Denied federal bailout, CIT taps $3B private rescue; may be strategy for other troubled banks

By Daniel Wagner and Stevenson Jacobs, AP Business Writers
Tuesday July 21, 2009, 12:44 am EDT

WASHINGTON (AP) — With bondholders coming to the rescue of troubled commercial lender CIT Group Inc. (CIT), and not the government, a new reality is setting in for investors.

With federal bailouts drying up and the economy still in distress, many more financial firms could face bankruptcy. When they do, it will be major private lenders that will have to decide whether to rescue the companies or allow them to fail.

It signals a return to the traditional path for financially troubled firms after nearly a year of government aid.

“It wasn’t clear that Treasury wanted this to be a turning point, but that’s the way it’s worked out,” said Simon Johnson, a former chief economist with the International Monetary Fund, now a professor at the Massachusetts Institute of Technology’s Sloan School of Management.

Johnson said the markets took so kindly to CIT’s quest for private-sector cash that the government “would feel pretty comfortable about” threatening bankruptcy for firms with less than $100 billion in assets.

Bondholders’ $3 billion rescue of CIT marks the first time since the banking crisis erupted that private investors have stepped in to save a big financial firm without federal help or oversight.

The lifeline for CIT, whose clients include Dunkin’ Donuts franchises and clothing maker Eddie Bauer, aims to sustain the company long enough for it to rework its heavy debt load, which includes $7.4 billion due in the first quarter of next year. It does not guarantee CIT will avoid bankruptcy.

CIT said late Monday that the rescue includes a $3 billion secured term loan with a 2.5-year maturity, which will ensure that its small and midsized business customers continue to have access to credit. Term loan proceeds of $2 billion are committed and available immediately, with an additional $1 billion expected to be committed and available within 10 days.

The short-term financing comes at a high price — an interest rate of about 10.5 percent, said a person close to the negotiations who was not authorized to discuss the matter publicly.

Read the rest of this entry »


U.S. clears 10 big banks to repay bailout funds

June 9, 2009

Tue Jun 9, 2009 6:09pm EDT
By Glenn Somerville

WASHINGTON (Reuters) – JPMorgan (JPM), Goldman Sachs (GS) and eight other top U.S. banks won clearance on Tuesday to repay $68 billion in taxpayer money given to them during the credit crisis, a step that may help them escape government curbs on executive pay.

Many banks had chafed at restrictions on pay that accompanied the capital injections. The U.S. Treasury Department’s announcement that some will be permitted to repay funds from the Troubled Asset Relief Program, or TARP, begins to separate the stronger banks from weaker ones as the financial sector heals.

Treasury didn’t name the banks, but all quickly stepped forward to say they were cleared to return money the government had pumped into them to try to ensure the banking system was well capitalized

Stock prices gained initially after the Treasury announcement but later shed most of the gains on concern the money could be better used for lending to boost the economy rather than paying it back to Treasury.

“If they were more concerned about the public, they would keep the cash and start loaning out money,” said Carl Birkelbach, chairman and chief executive of Birkelbach Investment Securities in Chicago.

Treasury Secretary Timothy Geithner told reporters the repayments were an encouraging sign of financial repair but said the United States and other key Group of Eight economies had to stay focused on instituting measures to boost recovery.

MUST KEEP LENDING

Earlier this year U.S. regulators put the 19 largest U.S. banks through “stress tests” to determine how much capital they might need to withstand a worsening recession. Ten of those banks were told to raise more capital, and regulators waited for their plans to do so before approving any bailout repayments.

As a condition of being allowed to repay, banks had to show they could raise money on their own from the private sector both by selling stock and by issuing debt without the help of Federal Deposit Insurance Corp guarantees. The Federal Reserve also had to agree that their capital levels were adequate to support continued lending.

American Express Co (AXP), Bank of New York Mellon Corp (BK), BB&T Corp (BBT), Capital One Financial Corp (COF), Goldman Sachs Group Inc, JPMorgan Chase & Co, Morgan Stanley (MS), Northern Trust Corp (NTRS), State Street Corp (STT) and U.S. Bancorp (USB) all said they had won approval to repay the bailout funds.

In contrast, neither Bank of America Corp (BAC) or Citigroup Inc (C), which each took $45 billion from the government, received a green light to pay back bailout money.

Read the rest of this entry »


Stress test results lift cloud of uncertainty

May 8, 2009

Results show 10 big banks need $75 billion in new capital; hope rises for economy’s recovery

Daniel Wagner and Jeannine Aversa, AP Business Writers
Friday May 8, 2009, 1:09 am EDT

WASHINGTON (AP) — Government exams of the biggest U.S. banks have helped lift a cloud of uncertainty that has hung over the economy.

The so-called stress tests — a key Obama administration effort to boost confidence in the financial system — showed nine of the 19 biggest banks have enough capital to withstand a deeper recession. Ten must raise a total of $75 billion in new capital to withstand possible future losses.

“The publication of the stress tests simply cleared the air of uncertainty,” said Allen Sinai, chief global economist at Decision Economics. “The results were not scary at all.”

He said it will take a long time for the banks to resume normal lending. But the test results didn’t alter his prediction that economy is headed for a recovery in October or November.

A key indicator of economic health will be released Friday morning, when the government announces how many more jobs were lost in April and how high the unemployment rate rose.

The stress tests have been criticized as a confidence-building exercise whose relatively rosy outcome was inevitable. But the information, which leaked out all week, was enough to cheer investors. They pushed bank stocks higher Wednesday, and rallied again in after-hours trading late Thursday once the results had been released.

Among the 10 banks that need to raise more capital, Bank of America Corp. (BAC) needs by far the most — $33.9 billion. Wells Fargo & Co. (WFC) needs $13.7 billion, GMAC LLC $11.5 billion, Citigroup Inc. (C) $5.5 billion and Morgan Stanley (MS) $1.8 billion.

The five other firms found to need more of a capital cushion are all regional banks — Regions Financial Corp. (RF) of Birmingham, Alabama; SunTrust Banks Inc. (STI) of Atlanta; KeyCorp (KEY) of Cleveland; Fifth Third Bancorp (FITB) of Cincinnati; and PNC Financial Services Group Inc. (PNC) of Pittsburgh.

The banks will have until June 8 to develop a plan and have it approved by their regulators. If they can’t raise the money on their own, the government said it’s prepared to dip further into its bailout fund.

The stress tests are a big part of the Obama administration’s plan to fortify the financial system. As home prices fell and foreclosures increased, banks took huge hits on mortgages and mortgage-related securities they were holding.

The government hopes the stress tests will restore investors’ confidence that not all banks are weak, and that even those that are can be strengthened. They have said none of the banks will be allowed to fail.

Read the rest of this entry »


GM details plans to wipe out current shareholders

May 5, 2009

Tue May 5, 2009 8:01pm EDT

By Kevin Krolicki

DETROIT (Reuters) – General Motors Corp (GM) on Tuesday detailed plans to all but wipe out the holdings of remaining shareholders by issuing up to 60 billion new shares in a bid to pay off debt to the U.S. government, bondholders and the United Auto Workers union.

The unusual plan, which was detailed in a filing with U.S. securities regulators, would only need the approval of the U.S. Treasury to proceed since the U.S. government would be the majority shareholder of a new GM, the company said.

The flood of new stock issuance that could be unleashed has been widely expected by analysts who have long warned that GM’s shares could be worthless whether the company restructures out of court or in bankruptcy.

The debt-for-equity exchanges detailed in the filing with the Securities and Exchange Commission would leave GM’s stock investors with just 1 percent of the equity in a restructured automaker, ending a long run when the Dow component was seen as a bellwether for the strength of the broader U.S. economy.

GM shares closed on Tuesday at $1.85 on the New York Stock Exchange. The stock would be worth just over 1 cent if the first phase of GM’s restructuring moves forward as described.

Once GM has issued new shares to pay off its debt to the U.S. government, bondholders and its major union, it said it would then undertake a 1-for-100 reverse stock split.

Such a move would take the nominal value of the stock back to near where it had been before the flood of new shares. But in the process, GM’s existing shareholders would see their stake in the 100-year-old automaker all but wiped out.

Read the rest of this entry »


How will U.S. asset cleanup plan work?

March 23, 2009

Mon Mar 23, 2009 4:04pm EDT

WASHINGTON, March 23 (Reuters) – U.S. Treasury Secretary Timothy Geithner on Tuesday unveiled his long-awaited plan to cleanse toxic assets from bank balance sheets.

Here are some questions and answers about the plan.

Q: What is the problem the Treasury is trying to solve?

A: The bursting of the U.S. housing bubble caused mortgage failures to skyrocket and triggered massive losses for banks on complex mortgage-related securities. The excessive discounts now embedded on these hard-to-trade assets is weighing down bank balance sheets, choking off lending and worsening an already deep recession.

Q: What is the objective of the Treasury’s plan?

A: The plan aims to bring in private investors to help jump-start the markets for these assets. By providing attractive government financing, the Treasury hopes private investment firms can afford to pay prices for the assets at levels at which banks are willing to sell. With these assets off their books, banks would have capacity to resume lending again, and will be better able to attract private capital. Fears over their potential losses would be greatly reduced.

Q. How much will this cost the government?

A: The Treasury will initially contribute $75 billion to $100 billion from the $700 billion financial bailout fund approved by Congress last fall. It will be able to stretch these funds by combining them with private capital and leveraging them with loans from the Federal Reserve and the Federal Deposit Insurance Corp. Losses for taxpayers could be much larger than the amount the Treasury is using to seed the program, since the FDIC and Fed are extending loans. The Treasury estimates that $500 billion of assets can be bought through the plan, and this could grow to up to $1 trillion. Geithner said he is not ready to decide whether to ask Congress for more bailout money.

Q. How is the plan structured?

A. There are three basic programs. The largest one will enable investors, partnered with the government, to buy whole loans from banks with FDIC financing in an auction process run by the banking regulator. The second would expand a securities loan program run by the Fed to enable firms holding certain mortgage- and asset-backed securities to pledge them as collateral for new loans to invest in these markets. In the third part, the Treasury would hire at least five asset managers to raise capital to buy distressed mortgage- and asset-backed securities. The Treasury would then match the private capital dollar-for-dollar and provide additional debt financing to boost buying power. The funds would compete in the open market to buy legacy securities.

Read the rest of this entry »


Phases of fear and elation in the VIX

March 18, 2009

Here we show a nice relationship between the VIX and the SPX.  While this is a commonly referenced pairing, many still challenge the value of using the VIX as a market indicator.  There are numerous ways too use the VIX and almost everyone has their own tweaks.  This chart shows a very clear inverse relationship with several distinct “phases” discernible in the value of the VIX.  These “phases” correlate well with the action in the SPX.  We have labled these phases “euphoria”, “fear” and “panic”.  We also included the 400 day moving average (equivalent to the 80 week) which we discussed previously in The Significance of the 400 day (80 week) moving average.  This bull/bear market reference point matches up very well with the action in the VIX, as the VIX moves into the “fear phase” just as the 400 day is coming under assault, before eventually breaking.  A final test of the 400 day from below, which we highlighted in late April 2008, was accompanied by one last dip into the “euphoria” zone for the VIX.  That was the “last chance” to get out before the drop gathered steam as the SPX then dropped over 50% in less than 12 months.

We added the notes on Bear Stearns and Citigroup for a consensus of the “expert” opinion at the time.

vixspx031809


Fed to purchase long term Treasuries

March 18, 2009

Release Date: March 18, 2009

For immediate release

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract.  Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending.  Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment.  U.S. exports have slumped as a number of major trading partners have also fallen into recession.  Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued.  Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.  Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.  The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets.  The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of evolving financial and economic developments.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.


Mortgage woes no longer just a “subprime thing”

March 5, 2009

Thursday March 5, 6:37 pm ET
By J.W. Elphinstone, AP Real Estate Writer

Delinquencies, foreclosures climb to almost 12 percent of US home loans in 4th quarter

NEW YORK (AP) — Foreclosures are spreading by epidemic proportions, expanding beyond a handful of problem states and now affecting almost 1 in every 8 American homeowners.

It’s an economic role-reversal: The economy, driven down by the collapse of the housing bubble, is causing the housing crisis to spread.

Figures released Thursday show that nearly 12 percent of all Americans with a mortgage — a record 5.4 million homeowners — were at least one month late or in foreclosure at the end of last year.

That’s up from 10 percent at the end of the third quarter, and up from 8 percent at the end of 2007. In addition, the numbers now include many once-qualified borrowers who took out fixed-rate loans.

Data from the Mortgage Bankers Association also showed that a stunning 48 percent of homeowners who have subprime, adjustable-rate mortgages are behind on their payments or in foreclosure.

The reckless lending and borrowing practices in states like Florida, California and Nevada that were the epicenter of the problem are no longer driving up the nation’s delinquency rate.

Instead, foreclosures are being fueled by a spike in defaults in places such as Louisiana, New York, Georgia and Texas, where the economy is rapidly deteriorating and unemployment is climbing.

“It’s jobs. People are losing their jobs left and right,” said Houston real estate agent Michael Weaster.

Read the rest of this entry »


How About a Stimulus for Financial Advice?

February 26, 2009

By ROBERT J. SHILLER
Published: January 17, 2009

In evaluating the causes of the financial crisis, don’t forget the countless fundamental mistakes made by millions of people who were caught up in the excitement of the real estate bubble, taking on debt they could ill afford.

Many errors in personal finance can be prevented. But first, people need to understand what they ought to do. The government’s various bailout plans need to take this into account — by starting a major program to subsidize personal financial advice for everyone.

A number of government agencies already have begun small-scale financial literacy programs. For example, the Treasury announced the creation of an Office of Financial Education in 2002, and President Bush started an Advisory Council on Financial Literacy a year ago. These initiatives are involved in outreach to schools with suggested curriculums, and online financial tips. But a much more ambitious effort is needed.

The government programs that are already under way are akin to distributing computer manuals. But when something goes wrong with a computer, most people need to talk to a real person who can zero in on the problem. They need an expert to guide them through the repair process, in a way that conveys patience and confidence that the problem can be solved. The same is certainly true for issues of personal finance.

The significance of this was clear at the annual meeting of the American Economic Association this month in San Francisco, where several new research papers showed the seriousness of consumer financial errors and the exploitation of them by sophisticated financial service providers.

A paper by Kris Gerardi of the Federal Reserve Bank of Atlanta, Lorenz Goette of the University of Geneva and Stephan Meier of Columbia University asked a battery of simple financial literacy questions of recent homebuyers. Many of the respondents could not correctly answer even simple questions, like this one: What will a $300 item cost after it goes on a “50 percent off” sale? (The answer is $150.) They found that people who scored poorly on the financial literacy test also tended to make serious investment mistakes, like borrowing too much, and failing to collect information and shop for a mortgage.

A paper by Liran Einav and Jonathan Levin, both of Stanford, reporting on work with William Adams of Citigroup, shows how sophisticated automobile lenders can be in their loan technology. They use complicated statistical models not only to approve people for credit, but also to fine-tune the down payment and even to suggest what kind of car individuals can buy. This suggests to me that many borrowers can’t match the expertise of lenders.

And another paper, by Paige Marta Skiba of Vanderbilt University and Jeremy Tobacman of the University of Pennsylvania, showed that payday loans — advanced to people who run out of cash before their next paycheck — exploit people’s overoptimism and typically succeed in charging annual rates of interest that may amount to more than 7,000 percent.

One wishes that all this financial cleverness could be focused a bit more on improving the customers’ welfare!

Read the rest of this entry »


Housing fix leans on troubled firms

February 24, 2009

Obama is relying even more heavily on mortgage finance agencies Fannie and Freddie to help troubled borrowers and keep the housing market afloat.

By Tami Luhby, CNNMoney.com senior writer
Last Updated: February 24, 2009: 3:19 PM ET

NEW YORK(CNNMoney.com) — Fannie Mae (FNM) and Freddie Mac (FRE) won’t be leaving the federal government’s nest anytime soon.

President Obama is leaning heavily on the teetering mortgage finance titans to help stabilize the housing market, even as it pumps hundreds of billions of dollars into them to keep them afloat.

As the housing crisis deepens, the question of the companies’ long-term future has been set aside.

“The Obama administration has indicated that Fannie and Freddie will continue having a key role in the nation’s economy as we go forward,” James Lockhart, director of the Federal Housing Finance Agency, which regulates the companies, said in a speech last week. “At this point, our primary focus has to be getting through the present crisis.”

Fannie and Freddie, which long straddled the line between private companies and government agencies, were taken into conservatorship last September to prevent their collapse. Each were given a lifeline of $100 billion.

Their importance to homebuyers and lenders is clear – they accounted for more than 75% of mortgage originations at the end of last year, injecting much-needed financing into the lending arena. They own or guarantee almost 31 million mortgages worth $5.3 trillion.
Crucial to foreclosure rescue plan

And they are playing an pivotal role in Obama’s foreclosure prevention program, which was announced Wednesday.

Under the plan, Fannie and Freddie will provide access to low-cost refinancing to borrowers with little or no equity in their home. The administration expects this will help up to 5 million borrowers avoid foreclosure.

The companies are also contributing more than $20 billion to subsidize struggling borrowers’ interest rate reductions as part of Obama’s $75 billion loan modification program. This is expected to prevent up to 4 million foreclosures.

The administration, realizing it needs to boost confidence in the struggling companies, has agreed to double its level of support for the firms to $200 billion each, as well as boost the amount of mortgages they can own or guarantee to $900 billion, up from $850 billion.

Read the rest of this entry »


Obama sets aside $75 billion to slow foreclosures

February 18, 2009

Program would seek to bring mortgage payments down to 31% of income

By Ronald D. Orol, MarketWatch
Last update: 2:38 p.m. EST Feb. 18, 2009

WASHINGTON (MarketWatch) — The White House unveiled a plan Wednesday to help 9 million “at risk” homeowners modify their mortgages, committing $75 billion of taxpayer money to back the initiative.

The plan contains two separate programs. One program is aimed at 4 million to 5 million homeowners struggling with loans owned or guaranteed by Fannie Mae (FNM) or Freddie Mac (FRE) to help them refinance their mortgages through the two institutions.

The Obama mortgage plan

Below is a list of key elements of the plan outlined Wednesday by President Obama that aims to aid as many as 9 million households in fending off foreclosures:

* Allows 4 million–5 million homeowners to refinance via government-sponsored mortgage giants Fannie Mae and Freddie Mac.
* Establishes $75 billion fund to reduce homeowners’ monthly payments.
* Develops uniform rules for loan modifications across the mortgage industry.
* Bolsters Fannie and Freddie by buying more of their shares.
* Allows Fannie and Freddie to hold $900 billion in mortgage-backed securities — a $50 billion increase.

A separate program would potentially help 3 million to 4 million additional homeowners by allowing them to modify their mortgages to lower monthly interest rates through any participating lender. Under this plan, the lender would voluntarily lower the interest rate, and the government would provide subsidies to the lender.

“The plan I’m announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it; by modifying loans for families stuck in subprime mortgages they can’t afford as a result of skyrocketing interest rates or personal misfortune; and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments,” President Barack Obama said.

Homeowners that have Fannie Mae or Freddie Mac loans, who are having a difficult time refinancing and owe more than 80% of the value of their homes, would be eligible to refinance with this program. Even if homeowners with Fannie or Freddie loans have negative equity on their mortgages, they can qualify for this refinancing program. The program would only help homeowners occupying the property, not individuals who own property as investors.

Read the rest of this entry »


Gold Demand Pushed Through $US100 Billion Barrier as Investors Turned to Recognized Store of Value

February 18, 2009

Wednesday February 18, 2:00 am ET

NEW YORK & LONDON–(BUSINESS WIRE)–Sustained investor interest in gold over the course of 2008 against a backdrop of the worst year on record for global stock markets and many other asset classes, helped push dollar demand for the safe haven asset to $102bn, a 29% increase on year earlier levels. According to World Gold Council’s (“WGC”) Gold Demand Trends, identifiable gold demand in tonnage terms rose 4% on previous year levels to 3,659 tonnes.

As shares on stock markets around the world lost an estimated $14 trillion in value, identifiable investment demand for gold, which incorporates exchange traded funds (ETFs), and bars and coins, was 64% higher in 2008 than in 2007, equivalent to an additional inflow of $US15bn. Over the year as a whole, the gold price averaged $872, up 25% from $695 in 2007.

The most striking trend across the year was the reawakening of investor interest in the holding of physical gold. Demand for bars and coins rose 87% over the year with shortages reported across many parts of the globe.

The figures compiled independently for WGC by GFMS Limited, showed jewelry demand up 11% in dollar terms at almost $US60bn for the whole year, but down 11% in tonnage terms at 2,138 tonnes. The adverse economic conditions across the globe paired with a high and volatile price impacted jewelry buying in key markets, but resilient spending on gold jewelry indicated the strength of underlying demand when the market offered attractive price points.

Industrial demand in 2008 was another casualty of the global economic turmoil, down 7% to 430 tonnes from 461 tonnes in 2007. With the electronics sector the main source of industrial demand, reduced consumer spending on items such as laptops and mobile phones had a direct impact on gold demand.

Aram Shishmanian, Chief Executive Officer of World Gold Council, said:

“These figures confirm that investors around the world recognize the benefits of holding gold during this time of unprecedented global financial crisis, recession and concerns regarding future inflation. Gold has again proven its core investment qualities as a store of value, safe haven and portfolio diversifier and this has struck a chord with uneasy investors.

“While current market conditions have impacted consumer spending on jewelry, purchasers in many of the key gold markets understand gold’s intrinsic investment value and continue to buy.

“The economic downturn and uncertainty in the global markets that has affected us all is unlikely to abate in the short term. Consequently, we anticipate that gold, as a unique asset class, will continue to play a vital role in providing stability to both household and professional investors around the world.”

Total demand remained very strong in the fourth quarter of 2008, up 26% on the same period last year at 1036 tonnes or $26.5bn in value terms.

The biggest source of growth in demand for gold in Q4 was investment. Identifiable investment demand reached 399 tonnes, up from 141 tonnes in Q4 2007, a rise of 182%. The main source of this increase was net retail investment, which rose 396% from 61 tonnes in Q4 2007 to 304 tonnes in Q4 2008. The most dramatic surge was in Europe, where bar and coin demand increased from just 9 tonnes in Q4 2007 to 114 tonnes in Q4 2008, a 1,170% increase. ETF holdings broke new records during the quarter. Although the net quarterly inflow was down from the level of the previous quarter, the growth rate on Q4 2007 was a strong 18%.

Read the rest of this entry »


Obama signs $787 billion stimulus into law

February 17, 2009

Ceremony setting highlights investment in ‘green’ technology

By Robert Schroeder, MarketWatch
3:39 p.m. EST Feb. 17, 2009

WASHINGTON (MarketWatch) — President Barack Obama signed the sprawling $787 billion economic stimulus package into law on Tuesday, saying it will help the struggling U.S. economy but warning that the recovery process will be challenging.

“Today does not mark the end of our economic troubles,” Obama said before signing the bill in Denver, Colo. “Nor does it constitute all of what we must do to turn our economy around.”

But, said Obama “it does mark the beginning of the end” of what the U.S. needs to do to create jobs, provide relief to families and pave the way for long-term growth.

Obama signed the bill on Tuesday afternoon in a ceremony in Denver after touring a solar panel installation project at the Denver Museum of Nature and Science. Among other things, the bill funnels money to alternative energy projects, provides tax cuts for individuals and businesses and gives aid to states.

Congress approved the bill on Feb. 13. Democrats voted overwhelmingly in the House and Senate to back the bill, but no Republicans voted for it in the House and only three voted for it in the Senate.

Obama has repeatedly described the stimulus as the first in a multi-part strategy to hasten an economic recovery. Read a summary of the stimulus.

On Wednesday, the administration plans to announce details about a $50 billion program to modify mortgages for troubled homeowners. The Treasury Department plans to use $50 billion of the remaining $350 billion in a bank-bailout fund for a program to help troubled homeowners avoid defaulting on their loans by subsidizing mortgage payments.

Read the rest of this entry »


Deal struck on economic stimulus package

February 11, 2009

Congressional sources say lawmakers have resolved key differences over school construction spending that had threatened to derail an earlier compromise.

WASHINGTON (CNN) — Democratic leadership sources say they have worked out a way around the disagreement between the Senate and House over education funding in the economic stimulus bill.

Details on how they worked it out are not yet available, but a Democratic source said they have come up with an agreement now that everyone – House Democrats and moderate Senate Republicans – can live with.

Senators had slashed direct funding for school construction – a top priority for Democrats – and instead set aside money for governors to use on school modernization and rehabilitation. House Democrats did not believe that would ultimately be targeted enough to school districts in need.

“I want to thank the Democrats and Republicans in Congress who came together around a hard-fought compromise,” said President Barack Obama in a statement.

Obama said the plan will save or create more than 3.5 million jobs and will provide immediate tax relief to families and businesses.

“I’m grateful to the House Democrats for starting this process, and for members in the House and Senate for moving it along with the urgency that this moment demands,” said President Obama.

The deal comes after a drawn-out debate on Capitol Hill that culminated in a last-minute holdup related to the school construction issue.

Senate Majority Leader Harry Reid announced that a deal had been struck earlier Wednesday afternoon. But House Speaker Nancy Pelosi was not on hand when Reid said that the differences between the House and Senate versions of the bill had been resolved.

Aides to both Pelosi, D-Calif., and Reid, D-Nev., told CNN she had given Reid the green light to make the announcement, but she apparently then heard complaints from some rank-and-file Democrats.

After Reid announced the compromise bill, Sen. Max Baucus of Montana, a fellow Democrat, said it could be taken up by the two houses as early as Friday, meeting President Barack Obama’s timetable of having the bill on his desk by Presidents Day, which is Monday.

Read the rest of this entry »


Elements of overhaul of bailout program

February 10, 2009

Tuesday February 10, 6:58 pm ET

Key elements in Obama administration’s overhaul of $700 billion financial rescue program

Here are the major elements in the Obama administration’s overhaul of the $700 billion financial rescue program:

–Capital injections to bolster banks will continue. This was the core of former Treasury Secretary Henry Paulson’s approach; it accounted for $250 billion of the first $350 billion of the program. Treasury Secretary Timothy Geithner pledged to continue the injections but with more stringent rules on use of the money. Banks with assets of $100 billion or more will face “stress tests” by regulators to see if they’re healthy. The administration didn’t say how much of the second $350 billion would go toward capital injections.

–An expansion of a Treasury-Federal Reserve program to try to unclog lending in such areas as credit card debt, auto loans and student loans. The program will now also back loans involving commercial real estate. The administration will provide up to $100 billion in bailout money, up from an initial $20 billion. It will support up to $1 trillion in Fed lending to bolster consumer and business loan markets. The initial Fed commitment had been for $200 billion in support.

–Creation of a public-private investment fund to back the purchase of banks’ toxic assets. Details on how this program will operate remain unclear. Officials estimated the program could use bailout money to attract up to $500 billion in purchases of toxic assets initially and $1 trillion eventually.

–Mitigation of mortgage foreclosures with use of $50 billion in bailout funds. No details were provided. Officials said the mortgage programs would be unveiled soon, possibly as early as next week.


For a nasty looking market, try UGL why?

February 9, 2009

What shines more than gold in a paper currency print-off?

How about double gold?

A new ETF from Proshares is designed to return twice (200%) the daily performance, before fees and expenses, of gold bullion as measured by the U.S. Dollar fixing price for delivery in London. This ETF is structured as a partnership and it uses a combination of forward and futures contracts.

It just started trading in early December and has already moved from 23 to 33 for a more than 43% gain.

ugl020909

Also available in silver sporting almost a double.

agq020909


Low rates defuse ‘exploding’ ARMs

February 6, 2009

Thanks to low interest rates, resetting ARMs are no longer posing the dire threat to homeowners that many thought they would.

By Les Christie, CNNMoney.com staff writer
Last Updated: February 6, 2009: 4:28 PM ET

NEW YORK (CNNMoney.com) — A wave of resetting adjustable rate mortgages had been poised to add to the flood of foreclosures as their rates jumped.

Some 420,000 hybrid ARMs are scheduled to reset in 2009, according to the Treasury Department. A year or so ago, it seemed that many of these loans were going to see their interest rates reset to as high as 12% or more.

But then interest rates started falling, hitting lows they hadn’t seen in 37 years.

“Many people are actually seeing their adjustable rates fall,” said Barry Glassman, a financial adviser with Cassady & Company. “Some loans are resetting even lower than some fixed-rate loans.”

A ticking time bomb. Adjustable rate mortgages start out with a two or three year period of low introductory rates, sometimes called “teaser rates.” After that, the interest rates start to adjust according to a set schedule – sometimes as often as monthly or as little as once a year – until the mortgage is paid off.

For the most part, this was a recipe for disaster. Many homeowners took out ARMs because they couldn’t afford the monthly payments that came with a 30 year fixed-rate loan. They were counting on having the value of their homes appreciate and then refinancing. Instead, home prices have plunged a record 18.2% according to the S&P/Case-Shiller index.

But as the economy soured, interest rates dipped.

“We thought that the 8% interest loans would reset to about 12%,” said Alan White, a law professor at Valparaiso University who has studied the lending industry’s mortgage modification efforts, “but they only went to 9% or less.”

The adjustments are calculated by adding what’s called a margin, which is a number of percentage points agreed to when the mortgage is first issued, to an index.

The index that most hybrid ARMs are tied to is the London Interbank Offered Rate (Libor). So, homeowners whose loans are resetting will get new interest rates equal to their margins, which range from about three percentage points for the lowest risk borrowers to six percentage points for those who at higher risk, plus the current Libor rate.

Read the rest of this entry »


The Kondratieff Cycle

February 2, 2009

kondratieff-cycle

Graphic compliments of The Long Wave Analyst.

Professor Nickolai Kondratieff (pronounced “Kon-DRA-tee-eff”)

Shortly after the Russian Revolution of 1917, he helped develop the first Soviet Five-Year Plan, for which he analyzed factors that would stimulate Soviet economic growth.  In 1926, Kondratieff published his findings in a report entitled, “Long Waves in Economic Life”.  Based upon Kondratieff’s conclusions, his report was viewed as a criticism of Joseph Stalin’s stated intentions for the total collectivization of agriculture.  Soon after, he was dismissed from his post as director of the Institute for the Study of Business Activity in 1928.  He was arrested in 1930 and sentenced to the Russian Gulag (prison); his sentence was reviewed in 1938, and he received the death penalty, which it is speculated was carried out that same year.  Kondratieff’s major premise was that capitalist economies displayed long wave cycles of boom and bust ranging between 40-60 years in duration.  Kondratieff’s study covered the period 1789 to 1926 and was centered on prices and interest rates.

Kondratiev waves — also called Supercycles, surges, long waves or K-waves — are described as regular, sinusoidal cycles in the modern (capitalist) world economy.  Averaging fifty and ranging from approximately forty to sixty years in length, the cycles consist of alternating periods between high sectoral growth and periods of slower growth.  The Kondratieff wave cycle goes through four distinct phases of beneficial inflation (spring), stagflation (summer), beneficial deflation (autumn), and deflation (winter).

The phases of Kondratieff’s waves also carry with them social shifts and changes in the public mood.  The first stage of expansion and growth, the “Spring” stage, encompasses a social shift in which the wealth, accumulation, and innovation that are present in this first period of the cycle create upheavals and displacements in society.  The economic changes result in redefining work and the role of participants in society.  In the next phase, the “Summer” stagflation, there is a mood of affluence from the previous growth stage that changes the attitude towards work in society, creating inefficiencies.  After this stage comes the season of deflationary growth, or the plateau period. The popular mood changes during this period as well.  It shifts toward stability, normalcy, and isolationism after the policies and economics during unpopular excesses of war.  Finally, the “Winter” stage, that of severe depression, includes the integration of previous social shifts and changes into the social fabric of society, supported by the shifts in innovation and technology.


Huge stimulus bill passes House

January 28, 2009

WASHINGTON (AP) — In a swift victory for President Barack Obama, the Democratic-controlled House approved a historically huge $819 billion stimulus bill Wednesday night with spending increases and tax cuts at the heart of the young administration’s plan to revive a badly ailing economy.

The vote was 244-188, with Republicans unanimous in opposition despite Obama’s frequent pleas for bipartisan support.

“This recovery plan will save or create more than three million new jobs over the next few years,” the president said in a written statement released moments after the House voted.

The vote sent the bill to the Senate, where debate could begin as early as Monday on a companion measure already taking shape. Democratic leaders have pledged to have legislation ready for Obama’s signature by mid-February.

With unemployment at its highest level in a quarter-century, the banking industry wobbling despite the infusion of staggering sums of bailout money and states struggling with budget crises, Democrats said the legislation was desperately needed.

Republicans said the bill was short on tax cuts and contained too much spending, much of it wasteful, and would fall far short of administration’s predictions of job creation.

On the final vote, the legislation drew the support of all but 11 Democrats, while all Republicans opposed it.

The White House-backed legislation includes an estimated $544 billion in federal spending and $275 billion in tax cuts for individuals and businesses. The totals remained in flux nearly until the final vote, due to official re-estimates and a last-minute addition of $3 billion for mass transit.

Read the rest of this entry »


FDIC May Run ‘Bad Bank’ in Plan to Purge Toxic Assets

January 28, 2009

By Robert Schmidt and Alison Vekshin

Jan. 28 (Bloomberg) — The Obama administration is moving closer to setting up a so-called bad bank in its effort to break the back of the credit crisis and may use the Federal Deposit Insurance Corp. to manage it, two people familiar with the matter said.

U.S. stocks gained, extending a global rally, on optimism the bad-bank plan will help shore up the economy. The Standard & Poor’s 500 Stock Index (SPX) rose 3.1 percent to 871.70 at 2:40 p.m. in New York. Bank of America Corp. (BAC), down 54 percent this year before today, rose 84 cents, or 13 percent, to $7.34. Citigroup Inc. (C), which had fallen 47 percent this year, climbed 17 percent.

FDIC Chairman Sheila Bair is pushing to run the operation, which would buy the toxic assets clogging banks’ balance sheets, one of the people said. Bair is arguing that her agency has expertise and could help finance the effort by issuing bonds guaranteed by the FDIC, a second person said. President Barack Obama’s team may announce the outlines of its financial-rescue plan as early as next week, an administration official said.

“It doesn’t make sense to give the authority to anybody else but the FDIC,” said John Douglas, a former general counsel at the agency who now is a partner in Atlanta at the law firm Paul, Hastings, Janofsky & Walker. “That’s what the FDIC does, it takes bad assets out of banks and manages and sells them.”

Bank Management

The bad-bank initiative may allow the government to rewrite some of the mortgages that underpin banks’ bad debt, in the hopes of stemming a crisis that has stripped more than 1.3 million Americans of their homes. Some lenders may be taken over by regulators and some management teams could be ousted as the government seeks to provide a shield to taxpayers.

Bank seizures are “going to happen,” Senator Bob Corker, a Tennessee Republican, said in an interview after a meeting between Obama and Republican lawmakers in Washington yesterday. “I know it. They know it. The banks know it.”

Laura Tyson, an adviser to Obama during his campaign, said banks need to be recapitalized “with different management” so they start lending again. “You find some new sophisticated management unlike the failed management of the past,” Tyson, a University of California, Berkeley, professor, said today at the World Economic Forum conference in Davos, Switzerland.

Still, nationalization of a swath of the banking industry is unlikely. House Financial Services Chairman Barney Frank said yesterday “the government should not take over all the banks.” Bair said earlier this month she would be “very surprised if that happened.”

Read the rest of this entry »


%d bloggers like this: