WASHINGTON - The Federal Reserve repeats its pledge to hold interest rates at record lows to foster the economic recovery and ease high unemployment. But its decision draws one dissent. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, for the second meeting in a row opposes keeping the yearlong pledge.
WASHINGTON - The Federal Reserve repeats its pledge to hold interest rates at record lows to foster the economic recovery and ease high unemployment.
But its decision draws one dissent. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, for the second meeting in a row opposes keeping the yearlong pledge.
More than half a million UK pensioners living overseas will continue to have their pensions frozen after a European court decision.Pensioners who moved to countries such as Australia and Canada only receive the level of pension paid at retirement - which might be only £6 per week. The European Court of Human Rights rejected an appeal from a group of pensioners by an 11 to 6 majority. The group wanted to receive increases in line with inflation. The decision has saved at least £500m a year for the government, which said that its first responsibility was with pensioners living in the UK.
More than half a million UK pensioners living overseas will continue to have their pensions frozen after a European court decision.
Pensioners who moved to countries such as Australia and Canada only receive the level of pension paid at retirement - which might be only £6 per week.
The European Court of Human Rights rejected an appeal from a group of pensioners by an 11 to 6 majority.
The group wanted to receive increases in line with inflation.
The decision has saved at least £500m a year for the government, which said that its first responsibility was with pensioners living in the UK.
An unpublished report into a community regeneration scheme makes "disturbing reading," says a Welsh Assembly Government minister.Carl Sargeant told AMs an audit report on Plas Madoc Communities First in Wrexham identifies "serious weaknesses in financial control and governance." The social justice minister said public funds had been "diverted" from the purpose of the programme. But he dismissed speculation about ending funding of the whole scheme. However, he said his department would require additional assurance from Communities First partnerships that their financial management and governance arrangements were robust before committing further substantial funding.
An unpublished report into a community regeneration scheme makes "disturbing reading," says a Welsh Assembly Government minister.
Carl Sargeant told AMs an audit report on Plas Madoc Communities First in Wrexham identifies "serious weaknesses in financial control and governance."
The social justice minister said public funds had been "diverted" from the purpose of the programme.
But he dismissed speculation about ending funding of the whole scheme.
However, he said his department would require additional assurance from Communities First partnerships that their financial management and governance arrangements were robust before committing further substantial funding.
Ernst & Young's attempts to brush aside criticism of its role in the collapse of Lehman Brothers has failed to deter critics of the profession. If anything, the accountancy firm has forged an alliance of disparate and usually antagonistic groups disturbed by the role it played alongside law firm Linklaters in providing "window dressing" for Lehman's risky financial structures.Tory shadow chancellor George Osborne said yesterday he wants reform as much as Liberal Democrat treasury spokesman Vince Cable and Prem Sikka, the radical academic Prem Sikka, who has spent more than 20 years arguing that accountancy firms appear, like the Woody Allen character Zelig, in the foreground at every major corporate crash, only to fade from view when difficult questions are asked.In their sights are the Big Four accountancy firms, Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers (PwC), which stand accused of charging excessive fees for work that appears to make little difference when things go wrong.
Ernst & Young's attempts to brush aside criticism of its role in the collapse of Lehman Brothers has failed to deter critics of the profession. If anything, the accountancy firm has forged an alliance of disparate and usually antagonistic groups disturbed by the role it played alongside law firm Linklaters in providing "window dressing" for Lehman's risky financial structures.
Tory shadow chancellor George Osborne said yesterday he wants reform as much as Liberal Democrat treasury spokesman Vince Cable and Prem Sikka, the radical academic Prem Sikka, who has spent more than 20 years arguing that accountancy firms appear, like the Woody Allen character Zelig, in the foreground at every major corporate crash, only to fade from view when difficult questions are asked.
In their sights are the Big Four accountancy firms, Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers (PwC), which stand accused of charging excessive fees for work that appears to make little difference when things go wrong.
It's just before opening time on bonus day at John Lewis and, boy, are we excited. Up and down the country, the 69,000 people who work for the nation's favourite retailer are gathered, impatient. At head office in London's Victoria, in 28 John Lewis department stores from Southampton to Aberdeen, 223 Waitrose supermarkets from Plymouth to Norwich, the ritual's the same: a specially chosen staff member ("partner" in JL-speak) opens an envelope, and reads out a number. The number will be a percentage. Over the last decade or so, it has ranged from 9% to 22%. It's the percentage of their salary that each John Lewis employee, from executive chairman to checkout operative, takes home as that year's bonus. If the number is 8%, they're looking at an extra month's pay; 16% is two months. So what's in the envelope is pretty important, and in the partnership's flagship Oxford Street store, partners, nearly 2,500 of them, are everywhere: crowded dozens-deep in beauty on the ground floor, lined up on the escalators, hanging over the balconies in the atrium.
The number will be a percentage. Over the last decade or so, it has ranged from 9% to 22%. It's the percentage of their salary that each John Lewis employee, from executive chairman to checkout operative, takes home as that year's bonus. If the number is 8%, they're looking at an extra month's pay; 16% is two months. So what's in the envelope is pretty important, and in the partnership's flagship Oxford Street store, partners, nearly 2,500 of them, are everywhere: crowded dozens-deep in beauty on the ground floor, lined up on the escalators, hanging over the balconies in the atrium.
Tyler casts the predictions of SocGen's Albert Edwards as a meal. First there is the appetizer, US consumer leverage trends:
Last week?s Flow of Funds report from the Fed showed that US total credit continued to disappear down the plughole, despite the government?s best efforts to inflate us back to prosperity (see chart below). The current recovery, based in very large part on the end of de-stocking, simply cannot be sustained while credit is disappearing at this debilitating dehydrating rate. Last week?s Flow of Funds report from the Fed showed that US total credit continued to disappear down the plughole, despite the government?s best efforts to inflate us back to prosperity (see chart below). The current recovery, based in very large part on the end of de-stocking, simply cannot be sustained while credit is disappearing at this debilitating dehydrating rate. The recently released Q4 Flow of Funds data allowed economists to get a full view of the 2009 data. It was ugly. Most shockingly, the household sector shrank its borrowing for the seventh quarter in a row - with minimal signs of any abatement to the process. Combined with continued rapid balance sheet shrinkage in both the corporate and financial sectors, total domestic debt contracted for the fourth quarter in a row (see front page chart). Now, we might be getting used to such news, but it is always worth remembering that, prior to the global meltdown, even one quarter of total domestic debt shrinkage was like seeing a black swan with some pink dots thrown in for good measure.
Last week?s Flow of Funds report from the Fed showed that US total credit continued to disappear down the plughole, despite the government?s best efforts to inflate us back to prosperity (see chart below). The current recovery, based in very large part on the end of de-stocking, simply cannot be sustained while credit is disappearing at this debilitating dehydrating rate.
The recently released Q4 Flow of Funds data allowed economists to get a full view of the 2009 data. It was ugly. Most shockingly, the household sector shrank its borrowing for the seventh quarter in a row - with minimal signs of any abatement to the process. Combined with continued rapid balance sheet shrinkage in both the corporate and financial sectors, total domestic debt contracted for the fourth quarter in a row (see front page chart). Now, we might be getting used to such news, but it is always worth remembering that, prior to the global meltdown, even one quarter of total domestic debt shrinkage was like seeing a black swan with some pink dots thrown in for good measure.
Then we get the entre: Japenese "Ice-Age" Melange.
Many clients ask how we will know when the deleveraging process is over or whether there is a ?right? debt/income ratio. We will know when the deleveraging process has ended when we see an end to the unprecedented pace of decline in bank lending (see chart below). This process took three years in the early 1990s. Expect at least a decade of Japan-like Ice-Age pain.
For desert: Sovereign Debt Flambe.
Ultimately, as my colleague Dylan Grice writes, I think we head back to double-digit inflation rates as governments opt to default. I certainly again expect to see CPI inflation above 25% in the UK and indeed in most developed nations in my lifetime ? I have happy memories of the three-day week and doing my homework by candlelight. In the near term, however, the deflationary quicksand will suck us ever lower until we suffocate. A key driver for underlying inflation remains unit labour costs. While unit labour costs decline at an unprecedented rate, they are sucking us inevitably into a Fisherian, debt-deflation spiral. Only then will we see how far policymakers are willing to go to debauch the currency. Last year saw them cross the Rubicon. Monetisation is now the policy lever of first resort. (Emphasis from source.)
John Hussman notes that the very large non-subprime Alt-A and Option ARM cohort interest-rate resets lie ahead of us and not behind us in his latest weekly market commentary. In my view, this is a very big problem for the US banking sector and economy because of the credit writedowns these resets will generate. For his part, Hussman says: I should note parenthetically that as you read reports about the mortgage and credit markets during the next few months, it will be extremely important to pay attention to the time period being discussed. For example, we are seeing articles with very recent datelines that are drawing conclusions based on relatively pleasant data from the fourth quarter of last year, which reflects the end of the reset lull that was completed with the low in September. To reiterate what the reset curve looks like here, the 2010 peak doesn't really get going until July-Sep (with delinquencies likely to peak about 3 months later, and foreclosures about 3 months after that). A larger peak will occur the second half of 2011. I remain concerned that we could quickly accumulate hundreds of billions of dollars of loan resets in the coming months, and in that case, would expect to see about 40% of those go delinquent based on the sub-prime curve and the delinquency rate on earlier Alt-A loans. Notably, by 2005, the credit score allowed on Alt-A loans fell to about 620, which is consistent with sub-prime. And not surprisingly, the later in the housing bubble the loan was made, the higher the delinquency rate has been right out of the gate. The earliest data we will observe in terms of Alt-A and Option-ARM loans will be driven by the relatively small initial round of resets that began in November of last year. That implies that any data prior to February is relatively clean of these effects. What we are interested in is the extent to which we observe a spike in 30-day delinquencies in data beginning about the February-March time frame. The size of the delinquency effects is likely to increase through the year, back off in the first half of 2011, and then reach their final peak in late 2011. Emphatically, we do not need to work through the whole reset cycle in order to accept market risk. But significant damage in the stock market is often taken in the "recognition phase" where troubling reality departs from optimistic expectations. On that front, I am doubly concerned here because on the basis of an ensemble of fundamental measures (normalized earnings, revenues, book values, dividends), the only points between the pre-Depression period and the late-1990's when the market has been so richly valued were November-December 1972 (before a 2-year market loss of about 50%), and August-September 1987. The hostile yield trends I noted last week (The Rubber Hits the Road) only amplify that concern. .... when prices stopped rising, homeowners defaulted on a massive scale. The carnage spread in the financial sector most quickly via huge losses in marked-to-market mortgage backed-securities (MBS) and collateralised debt obligations (CDOs). However, when the mark-to-market rules allowed for greater `discretion' in designating these derivatives as hold-to-maturity assets, financial institutions got a free pass and are now hiding hundreds of billions in writedowns this way. This was a huge boon for financial shares, which have increased markedly ever since. See Wells profit forecast is a clear bullish sign. The difference going forward has to do with strategic defaults. When a delinquent mortgagee runs into problems, a bank servicer has a lot of discretion in the way it can deal with this situation. Inevitably, this leads mortgage lenders to extending and pretending the delinquency is temporary. However there is a growing divide between delinquencies and foreclosures, which suggests that foreclosure data understate the mortgage distress and delinquencies now building in the U.S. residential housing market. delinquencies-vs-foreclosures When Option-ARM and Alt-A interest rates re-set higher, payments will increase dramatically for many borrowers who are hopelessly underwater on their mortgages. This will be a significant driver of defaults in 2010 and 2011. delinquencies-vs-foreclosures/coming-mortgage-resets Moreover, a recent article in the New York Times demonstrates that borrowers with high FICO scores are still at risk of default, opting to pay credit cards off instead of mortgages. This is all pointing to a coming wave of strategic defaults. Borrowers whose homes are significantly underwater could be looking at losses at sale for up to 6 years. Therefore, many are opting to default strategically. When a borrower defaults and walks away, the loss becomes unrecoverable and the value of the asset must be written down. So while holding MBS paper to maturity has cushioned banks to date, a large wave of strategic defaults would pressure lenders who are under-provisioning for future losses.
For his part, Hussman says:
I should note parenthetically that as you read reports about the mortgage and credit markets during the next few months, it will be extremely important to pay attention to the time period being discussed. For example, we are seeing articles with very recent datelines that are drawing conclusions based on relatively pleasant data from the fourth quarter of last year, which reflects the end of the reset lull that was completed with the low in September. To reiterate what the reset curve looks like here, the 2010 peak doesn't really get going until July-Sep (with delinquencies likely to peak about 3 months later, and foreclosures about 3 months after that). A larger peak will occur the second half of 2011. I remain concerned that we could quickly accumulate hundreds of billions of dollars of loan resets in the coming months, and in that case, would expect to see about 40% of those go delinquent based on the sub-prime curve and the delinquency rate on earlier Alt-A loans. Notably, by 2005, the credit score allowed on Alt-A loans fell to about 620, which is consistent with sub-prime. And not surprisingly, the later in the housing bubble the loan was made, the higher the delinquency rate has been right out of the gate. The earliest data we will observe in terms of Alt-A and Option-ARM loans will be driven by the relatively small initial round of resets that began in November of last year. That implies that any data prior to February is relatively clean of these effects. What we are interested in is the extent to which we observe a spike in 30-day delinquencies in data beginning about the February-March time frame. The size of the delinquency effects is likely to increase through the year, back off in the first half of 2011, and then reach their final peak in late 2011. Emphatically, we do not need to work through the whole reset cycle in order to accept market risk. But significant damage in the stock market is often taken in the "recognition phase" where troubling reality departs from optimistic expectations. On that front, I am doubly concerned here because on the basis of an ensemble of fundamental measures (normalized earnings, revenues, book values, dividends), the only points between the pre-Depression period and the late-1990's when the market has been so richly valued were November-December 1972 (before a 2-year market loss of about 50%), and August-September 1987. The hostile yield trends I noted last week (The Rubber Hits the Road) only amplify that concern.
To reiterate what the reset curve looks like here, the 2010 peak doesn't really get going until July-Sep (with delinquencies likely to peak about 3 months later, and foreclosures about 3 months after that). A larger peak will occur the second half of 2011. I remain concerned that we could quickly accumulate hundreds of billions of dollars of loan resets in the coming months, and in that case, would expect to see about 40% of those go delinquent based on the sub-prime curve and the delinquency rate on earlier Alt-A loans. Notably, by 2005, the credit score allowed on Alt-A loans fell to about 620, which is consistent with sub-prime. And not surprisingly, the later in the housing bubble the loan was made, the higher the delinquency rate has been right out of the gate.
The earliest data we will observe in terms of Alt-A and Option-ARM loans will be driven by the relatively small initial round of resets that began in November of last year. That implies that any data prior to February is relatively clean of these effects. What we are interested in is the extent to which we observe a spike in 30-day delinquencies in data beginning about the February-March time frame. The size of the delinquency effects is likely to increase through the year, back off in the first half of 2011, and then reach their final peak in late 2011.
Emphatically, we do not need to work through the whole reset cycle in order to accept market risk. But significant damage in the stock market is often taken in the "recognition phase" where troubling reality departs from optimistic expectations. On that front, I am doubly concerned here because on the basis of an ensemble of fundamental measures (normalized earnings, revenues, book values, dividends), the only points between the pre-Depression period and the late-1990's when the market has been so richly valued were November-December 1972 (before a 2-year market loss of about 50%), and August-September 1987. The hostile yield trends I noted last week (The Rubber Hits the Road) only amplify that concern.
....
when prices stopped rising, homeowners defaulted on a massive scale. The carnage spread in the financial sector most quickly via huge losses in marked-to-market mortgage backed-securities (MBS) and collateralised debt obligations (CDOs). However, when the mark-to-market rules allowed for greater `discretion' in designating these derivatives as hold-to-maturity assets, financial institutions got a free pass and are now hiding hundreds of billions in writedowns this way. This was a huge boon for financial shares, which have increased markedly ever since. See Wells profit forecast is a clear bullish sign.
The difference going forward has to do with strategic defaults. When a delinquent mortgagee runs into problems, a bank servicer has a lot of discretion in the way it can deal with this situation. Inevitably, this leads mortgage lenders to extending and pretending the delinquency is temporary. However there is a growing divide between delinquencies and foreclosures, which suggests that foreclosure data understate the mortgage distress and delinquencies now building in the U.S. residential housing market.
delinquencies-vs-foreclosures
When Option-ARM and Alt-A interest rates re-set higher, payments will increase dramatically for many borrowers who are hopelessly underwater on their mortgages. This will be a significant driver of defaults in 2010 and 2011.
delinquencies-vs-foreclosures/coming-mortgage-resets
Moreover, a recent article in the New York Times demonstrates that borrowers with high FICO scores are still at risk of default, opting to pay credit cards off instead of mortgages.
This is all pointing to a coming wave of strategic defaults. Borrowers whose homes are significantly underwater could be looking at losses at sale for up to 6 years. Therefore, many are opting to default strategically. When a borrower defaults and walks away, the loss becomes unrecoverable and the value of the asset must be written down. So while holding MBS paper to maturity has cushioned banks to date, a large wave of strategic defaults would pressure lenders who are under-provisioning for future losses.
Why do I suspect that Larry, Ben and Tim will try to get the taxpayer to bail out the holders or issuers of option ARM Mortgages? This will not be Timmy's stress test coming up. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
If a bunch of <expletive deleted> bankers have a large amount of "assets" on their Balance Sheets that are worth less than they lent to purchase 'em ... tough noogies. To paraphrase Keynes, "Life's a bitch and then you die."
The 'downside' I see to this is that the fools are going to take the rest of us with 'em.
An Italian judge has ordered four foreign banks to stand trial for aggravated fraud stemming from a 2005 derivatives swap for a 1.68 billion euro ($2.32 billion) bond issued by Milan, legal sources said. ... Almost 500 small and large Italian cities are facing mark-to-market losses of 2.5 billion euros on the contracts, according to the Bank of Italy. Analysts say that figure will balloon when interest rates go up. ... In the southern region of Puglia, prosecutors also are seeking to bar Merrill Lynch, a unit of Bank of America Corp (BAC.N), from government contracts for two years. The move stems from derivatives losses from 870 million euros in regional bonds.
...
Almost 500 small and large Italian cities are facing mark-to-market losses of 2.5 billion euros on the contracts, according to the Bank of Italy. Analysts say that figure will balloon when interest rates go up.
In the southern region of Puglia, prosecutors also are seeking to bar Merrill Lynch, a unit of Bank of America Corp (BAC.N), from government contracts for two years. The move stems from derivatives losses from 870 million euros in regional bonds.
