FASB to Fold on Mark to Market

A board member at the FASB, Lawrence Smith, gave an interview with Reuters on the status of US accounting standards moving toward greater transparency. According to Smith this import change is not going to happen.

Why? Because the folks who have the most to lose by forced transparency have complained! What a stupid reason to fold by the FASB.

"Thus far, I think the count is up to about 1,500 or so comment letters," said Lawrence Smith, a board member of FASB, which sets U.S. accounting rules. "I think I've read one that supports what we propose."

So what if the letters are 1,500 to 1? That the banks and finance companies are writing all these letters is probably the best evidence that MTM is desperately needed.

Smith added that board members will probably be influenced by the opposition.

"If I were a betting person, I would bet on some type of hybrid model being adopted".

Well I am a betting person and I will bet that there will be no MTM from FASB. They will crater to their own constituency and do the wrong thing for the investing public, again.

This makes a joke of:

-The FASB
-The companies who wrote the letters
-The SEC
-The accounting profession
-FinReg, as it is proving to be a toothless set of regulations
-The US Treasury. (they did not write a letter)
-The Federal Reserve (who also did not write a letter) the Fed has been pushing on this issue and will not step up to the plate when necessary.

The banks are all afraid of MTM. They want to be able to hide an asset on their books that is worth 50 cents on the dollar and maintain it at 100 cents. When FASB blesses this insanity the banks will just abuse the rule to hide more junk.

So when you are out there buying bank stocks know that the assets you think are there have nothing to do with the fair value of those assets. That the financial statements you read are just a charade. You can draw no conclusions on the health of the company you are investing in. And that the FASB has blessed it and wants it that way. Caveat Emptor.

Where's the Bottom in RE?

The Case-Shiller index showed a YoY gain of 3.2% in July. I think things have changed quite a bit since the summer. I have an eye on just a few parts of the country. From my perspective there has been a markdown of prices of late. The sign “Just Reduced” is now being replaced with, “Reduced Again”.

The story is the same. Too many distressed sellers (REO) and a total shortage of buyers. Sure rates are low, but not many contracts are getting signed. Liquidity has dried up. This is especially true for high-end homes. There are many owners that have been looking for a bid for two years now. Case had this to say:

“I don’t think anybody is predicting that it’s going to go up very much in the next couple of years unless we see a resurgence of economic growth,”

That’s just polite talk. Case knows full well that there is a “0”% chance of a resurgence in economic growth. We will be lucky if growth stays positive at all. So what Case really meant was: “There is no upside”. And that is why we have a buyers strike.

A question to ask is, “Where might the rock solid bottom of housing be?” If you could answer that question you could ask, “How far from the bottom are we?”

I will put a number out that I think will hold for house values. My number is 10X’s annual rent. At that number you will find financial buyers. My bottom side estimate assumes we do not fall off a cliff into a deep recession. If that happens my bet is off. Some numbers that express rents and values at the 10Xs ratio:

Looking at it the other way:

Question: Are single-family properties priced higher than 10Xs where you live? (Be fair on your rent estimates)

From what I see the lower numbers in the charts are in the ballpark. But there appears to be a disconnect at the higher levels. For example; north of NYC you can buy a home for $1mm or you can rent it for $5,000 a month (implied value of $600K). The suggestion is that high end RE has farther to fall. That would take us back to price levels of around 2000.

There are quite a few areas around the US where RE values have fallen by 40%. But I am quite sure that property values have not fallen to anywhere near 10X’s rent. Many areas in the country (California) have values close to 20X’s rent. My guess is the average is about 15x’s.

10Xs is a worst case number. It would probably be a good deal for a buyer. But absent any other class of buyers stepping up, the market will probably gravitate to where the demand is.

Ireland the Dollar and Ben

Ireland is high on the list of, “Things that Could Go Wrong Big Time”. The numbers are so scary that they are encouraging. Ireland is a TBTF. If there were to be a problem it would cripple the rest of Europe’s banks. Therefore they can’t let if go.


Robert Peston (BBC) wrote a blog about his conversation with Irish finance minister Brian Lenihan. He spells out the death grip of debt that Ireland is in. A good read. Some cut and pastes:

Total foreign bank exposure to Ireland's economy is $844bn, or five times the value of Ireland's GDP or economic output.

BK: By way of comparison the CIA puts total external debt of Germany at 1.5X’s GDP. The US is 1:1 Canada has a ratio of 0.7. And Ireland is 5X’s? How did they get so deep into hock? (That same ratio for Russia, India and Brazil: 0.4X, 0.2X and 0.2X respectively. Ahem....)

German and UK banks are Ireland's biggest creditors, with €206bn and €224bn of exposure respectively.

BK: About $600b. Just the UK and Germany. What’s a good “haircut” estimate on this? My answer is it starts with 20% and could be as high as 30%. That would come to $150b. This would be a lights out event for the banks.

The Irish economy is hideously and perilously balanced between recovery and Armageddon.

Mr. Lenihan didn't rule out in his interview with me that the Irish government might eventually be obliged to ask for financial support from the European Financial Stability Facility.

BK: When any Finance Minister says, “I wouldn’t rule that out”, he is really saying, “We are trying to kick the can down the road a bit longer, but really the lines have crossed and we are going to need help.”

The Ireland story has been popping up in the press and with folks who trade CDS and Bund swaps of late. It has not hit the EURDLR. A few short months ago if Ireland was in the spotlight as it is today the dollar would have been soaring. Today it is ho hum. The reason for the change in sentiment is Ben Bernanke and his obsession to devalue the currency. The idea out tonight (From Ben to the WSJ) is that the Fed is planning to buy $100b a month of Treasuries.  For as long as Ben likes. We are now completely without limits. What central bank or foreign investor will willingly accept that policy? Why should they? They will vote with their feet.

Europe is in deep trouble. America wants to destroy itself. America will prevail in the race to the bottom thanks to the mindless persistence of Bernanke. And in the process we will all lose. Things are getting downright silly. The price of gold could too.

On the Yen Intervention, plus: Bonus Question!

I have not seen a “hard” number for the amount of intervention by the BoJ on September 15th. The talk was that about Yen 2 trillion ($24b) was sold for dollars. My own checking around confirms this range of numbers. If anything, I think it could have been less than $20b. I would appreciate any better estimates if people have them.

$20b sounds like a big number. On 15/9 it was. The BoJ got a big bang for their buck. 2 big figures in a short time. The even better news was that the 85.5 level held for two whole days!

Phooey! $20b is chump change in the FX market. By way of comparison consider what the Swiss National Bank has done just this year. They increased Euro reserves by ~$75b worth in an effort to contain the rising CHF. The intervention failed miserably. The SNB threw in the towel. The EURCHF collapsed as soon as the “We Quit” sign went up. The Swiss intervened to the tune of nearly 20% of their annual GDP in this busted effort. The market ate them alive and made a fortune in the process.

I am not sure that comparing GDP and currency intervention leads to any firm conclusions. But it is worth noting that the Swiss economy is about a ½ trillion while the Japanese GDP is 5 trillion. Does that mean that the BoJ will be forced to intervene to the extent of $1T (20%) before they realize the effort is futile and they too throw in the towel? I think not. I think the threshold of pain on this is a much smaller number. My guess is that when/if intervention approaches $200b they will be forced to quit.

$200b is an amount that could be positioned by just the big hedge funds and market makers. The real significant supply would have to come from global reserve holders. Specs alone will not bust the BoJ. Real money movements could.

At some point in the not too distant future the following could happen:

The BoJ will advise the interbank players in Tokyo that they are willing to buy $5b against the Yen as public intervention.

The central banks of Brazil, Korea, Mexico, Russia, Saudi Arabia, (etc.) could all say, “Hey! That sounds good. Bernanke's trying his best to put the buck in the crapper. We have $5b to sell at that price”.

We have seen that when a central bank becomes a size buyer of an asset that is in very large supply (and that no one really wants) the demand that they create is overwhelmed by the supply that is revealed.

The BoJ is well aware what happened to Switzerland. They know their “ammo” is limited. They must use their intervention dollars wisely. They must play defense. They have to defend a given level and then back off to defend a new lower level. They can’t say, “We will buy as many dollars at it takes at 84”. If they did something dumb like that the market would call their bluff, and eat their lunch.

Bonus Question

I am not wise enough on matters of Japanese politics to answer this. But I will pose the question in the hope that someone has a thought. Some background:

-A read of the weekend Japanese newspapers confirms that the release of the Chinese fishing boat captain was (and still is) a very big story. Japan Inc. seems pissed.

-There has been no tit for tit reversal by China of its decision to end exports of rare earth metals to Japan. Keep in mind you can’t make a Prius without this stuff.

-The diplomatic issues between China and Japan are not to be scoffed at. This is the big leagues. It is hard to see the outcome. But it is easy to see that China will win and Japan will lose. China has all the chips.

-Japan has lost (or is losing) a friend. In this matter they need the help of their “true” friends. It is unlikely they will take hostile actions against their “friends” while they are fighting a war of words with China.

Connect this to FX

-Intervention is a hostile act. It is base protectionism. It is a beggar thy neighbor policy. If the BoJ continues to intervene to support a weaker Yen it is a certainty that some Congressperson and or Senators is going to cry foul. This is even more likely to happen given that we are six weeks away from an election and protectionism is selling well this year in America.

-The BoJ can intervene as they wish. But I do not believe they would do it in a vacuum. The decision to intervene is highly political. Active and continued intervention would require a broad base of consensus. There is no evidence that such a consensus exists on any issue in Japan today.

-Japanese leaders are well aware that the US does not condone currency manipulation. Especially when that manipulation hurts the US domestically. Look how far we have gone to push the Chinese on this issue. In a different, but ultimately similar way, the Japanese are doing to the US what the Chinese are. Manipulating terms of trade. The fact that the US Treasury has refused to participate in any Yen intervention speaks for itself. This policy is not in the US best interests.

-Japanese leaders (and most importantly Shirakawa at the BoJ) are well aware of the risk of bad press and a backlash from the US on the currency issue. They know they do not want to wage that battle while things are so unstable with China.

The Question(s)  (finally)

Given the foregoing thoughts, will the BoJ risk a political blowup with its closest ally over the currency market? Or will they back off and make an orderly retreat until the China issue blows over and DLRYEN is a lot lower?

Answer that one correctly and you will get a bonus….

Shirakawa’s words from this weekend.  Does this sound like he is drawing a line in the sand? I think not.

We are ready to implement appropriate action in a timely manner if judged necessary.

LEI LIES

The Leading Economic Indicator (“LEI”) came in at +.2% in the most recent read. There was a time that I looked at this data set pretty seriously. Not any more. I think it produces a false read. A key component comes from the Interest Rate Spread. Drawing any conclusions about the current economic status quo and or predicting future economic activity based on the LEI read is a mistake in my opinion.

The following graph tracks the components of the LEI. It is rather messy. I want you to focus on just the green line at the top of the graph. This measures the yield curve (“YC”). It is consistently the highest numeric component in the index.

To be sure a positive and steep yield curve has historically been a good indicator of an expanding economy. The steeper the slope, the better the prospects. Similarly a negative or flat yield curve is a sign a slowdown is coming. The folks who came up with the LEI index were wise to include the shape of the yield curve in their index. It has been a reliable barometer for many years. Up till now.

We are now two years into ZIRP. There can be no doubt but that this policy will last a minimum of another 12-18 months. We have gone through 1.75 Trillion of QE-1. The QE-2 that Bernanke wants to bring us will probably double that.

We are living through a period where the credit markets are a dirty float. From overnight to thirty-years it is all managed by the Fed. The magnitude of Fed POMO purchases distorts supply and demand. Short rates at zero are a joke. The objective is to devalue savings and force consumption. There has never been a time in history where this level of intervention in the capital markets has been undertaken.

The NBER says the recession ended 15 months ago. Short-term rates would normally be rising at this point in the cycle. But the Fed still has the cost of money set at zero. A more reasonable level for Fed Funds would be 2%. On paper that would eliminate most of the steepness we currently see.

With this in mind it is a mistake to study the entrails of the credit market and draw conclusions about the future.

The LEI is not going to change. The shape of the YC will continue to support the index. The question is, “How much should one discount the impact of YC when evaluating the LEI?”

-If you were on talking head on TV you wouldn’t consider any change. If you were a bullish pundit you would be touting the result as an excuse to buy more.

-On the other hand if you were a guy like me you would just ignore YC altogether. There is a strong case to be made that in 2010 it is just noise, not reliable data.

-Others might just haircut the YC by 50% and see what the index is saying based on that.

This is a graph of the LEI from the Conference Board that tracks the index.

This is my graph of the data from August 2009 on. It assumes (1) YC unchanged, (2) YC cut by 50% and (3) YC is excluded from the index.

That YC is overstating the LEI is not a new observation. But I think it is interesting that the index trajectory has turns flat in the 50% YC adjustment and has gone decidedly negative for the past four months if YC is excluded.

Make what you like of this, but here is a bet. At the all-important next Fed meeting the only sane reasonable person in the room, Thomas M. Hoenig will say:

“The LEIs are still pointing up. Do we really need to take this extraordinary step (QE-2) at this time?”

And Bernanke will pull out a slide that looks something like mine and he will say:

“Yeah, but….”

The end result will be a very big "QE-2 Celebration Bash" on November 5th for Bernanke and the other “deciders” at the Fed.

Hat tip: JH

Tim’s Bank Looking at 20% Haircut

The Federal Financing Bank makes loans to Government Agencies. FFB is owned by Treasury and Tim Geithner is the Chairman of this outfit, As of the end of August this bank had a balance sheet of $54b of dodgy loans. A good chunk was out to the Post Office. Another big slug was out to the National Credit Union Administration. This balance sheet shows it:

Put that together with the news after the close that Tim Geithner has done another bailout. Guess who? The National Credit Union Administration of course. The early terms of the deal from the WSJ. A few highlights:

Friday's moves include the seizure of three wholesale credit unions and an unusual plan by government officials to manage $50 billion of troubled assets inherited from failed institutions.

BK: Should be good news for the boys over at Blackrock.

National Credit Union Administration plans to issue $30 billion to $35 billion in government-guaranteed bonds, backed by the shaky mortgage-related assets.

BK: Why would they secure the new bonds with junk assets? The deal will be “Full Faith and Credit” paper. The answer is simple. If there are “assets” behind the bonds the newly issued paper does not have to go on the Federal balance sheet.We can't admit to taking a loss.

Officials said the plan won't cost taxpayers any money.

BK: Baloney. After the second bailout in so many years some losses HAVE to be recognized. The loans on FFB’s books are not money good. Tim says, “no losses” on this. He is fibbing.

Convergence on Ben

I was looking at old charts from June. Remember when the stock market was correlated with movements in the 10-year Treasury bond? Compare the results in the following graph. The 5/3 – 6/10 numbers versus the 6/11 – 9/24 results is day to night.

The level was 96% back then. That’s a hell of a number. More or less it means that things were lining up nearly perfectly. As of late the correlation has fallen to 3%. Some random thoughts:

-My conclusion is there is a lot of risk involved with correlation trading. What is here today is gone tomorrow. Reliable predictors do not have much shelf life any longer.

-What is the source of the disconnect? Strong stocks and strong bonds in this time period coincide with the emergence of QE-2 talk from Ben Bernanke. Back in May the thinking was that the next move by the Fed would be a gradual withdrawal of monetary stimulus. Today the betting is that Ben is going to throw another $2 trillion on the fire. This turn around in thinking by the Fed and the market disconnect is not a coincidence. It is cause and effect.

-Is there an inverse relationship between the movement in the stock market and the probability of QE-2? I am willing to bet big that IF stocks were to fall by 10% between now and the next Fed meeting QE-2 would be a done deal. But what if stocks rise by another 10%? Can Bernanke throw gas on the fire if that were to be the case? I have to think not. So the question is, “Is Ben wishing for higher stocks today or not?’ I think he wants a downdraft so he can justify another QE early in November.

-Clearly the 96% was not sustainable. The inverse (3%) is probably not either. Should the old relationship start to re-appear it would imply that rates have to go much higher or stocks much lower. Place your bets.

Market to Push BOJ?

It is getting interesting. We have a dollar “issue” in the making. I think it may play out at some time in the near future. Markets are hard to predict when they get near the edge. It is possible that an important ramp up in the action could take place as early as Friday in NYC. One way it could play out:

The money flow is against the dollar. It seems to be moving from everywhere. As Zero Hedge pointed out even the Brazilians are seeing money move to their currency. We have two closings for the USDCHF below par. So we’re in some dangerous territory there. This has happened before. It was short lived and below the big figure did not hold. It feels different to me this time.

The market is pushing the Euro and the Pound as well. So what could happen next?

To me it has to be a break in the USDYEN. The market HAS to resolve what is out there. The BOJ said “NO Mas” when the dollar was about 83.50. We are about 1 big figure away as I write. That is a lot of ground to cover. Unless there is a buyers strike. If the Japanese market trades the yen to the low 84s tonight the door gets open for a move below 83.99. With another 24 hours of trading in the week. Below 84 is when something must break. Either we see the BOJ or we don’t. I think there is a decent chance the Friday NYC close could be at levels where there would be a question mark as to what the hell the BOJ will do on Monday morning.

I think this will happen sooner or later. The timing seems ripe short term as everything is leaning against the dollar right now. (thanks to "whispers" of QE-2) The Yen has always been a “go to” currency when the dollar is looking shaky. Except that the BOJ has put its foot down. And pretty soon they will have to do so again. Only two options:

When/if the USDYEN gets to the mid 83.50’s the BOJ shows up and buys sufficient dollars to bring the rate to above 84.50.

Should that happen I would expect that the Yen crosses will react strongly in favor of the CHF, EUR and Pound. When that happens it will create demand that will be reflected in the dollar. The Euro currencies are all going to rise. The dollar will have to get cheaper as a result. Certainly this would make Ben Bernanke happy. I doubt the Swiss National Bank will be too pleased with this result.

The other possibility is that the BOJ is a no show. We see them again at 82.90. The intervention results in the DLRYEN bouncing to only 83.50. And it trades lower than that outside of the Japanese time zone.

Cha-ching on that result. This would mean that the BOJ has no intention of drawing a line in the sand. That they, “Only want to slow an inevitable adjustment”. Should that be the case I would conclude that the DLRYEN is going to 80. It will happen in fits and starts for the next three months. It will drag the dollar lower versus all the European currencies.

My problem is that either of these outcomes brings more instability. And both of them point to a lower dollar. Precisely what D.C. would like to see happen. Of course this would put the stiff-arm on all those holders of our bonds. It’s hard to predict where that goes.

This could all be a head fake. The dollar could be oversold and find a bid. I would put that in the “Least Likely” column.

Note:
I think we are (once again) at one of those nexus points. Take that to mean that all FX positions have high risk attached to them. Don’t take my words as a trading recommendation. My recommendation on FX trading is to not to trade FX for the time being unless you do it for a living. I am not forecasting an FX rate. I am forecasting instability. The key will be what the BOJ does when if they are pushed.

Postal at the Bank

Minor altercation at the bank today. I was in a long line looking to cash some checks. I happened to notice a lady talking to a loan guy in a cubicle across the way. It was clear, even from a distance, she was not happy with the way the conversation was going. She gets up and the banker comes out with her. She turns to him and says in a voice that was deliberately loud enough for all to hear:

“I wanna know. Just who’s dick do I have to suck to get a loan? Can you tell me that?”

You could’ve heard a pin drop for a second or two. The banker looked like he’d been hit with a shovel. A red-faced manager comes out of a hole and leads the lady out. It’s over in seconds.

Half the people start laughing. The other half don’t know what to make of it. I am watching this bit of drama and I am thinking of shorting bank stocks and what a bizarre world we live in.

Banks aren’t really making any loans. They are doing their very best to avoid that pitfall. It is much easier for them to buy securities with a fixed coupon from big cap multinationals, bankrupt government guaranteed agencies and of course the Treasury Department. The banks are having an easy time of it. With ZIRP as their ally they can just ride the yield curve. No need for complicated loans. No wonder America is hating its banks.

-The equity markets are soaring and so is gold. An unlikely outcome. One market is the measure of optimism the other is the best "smell test" of the collective fear of the future.

-Banks aren’t lending, but they are making a bundle.

-The economy has recovered to a significant extent. We will not get back to the growth and 5% unemployment we had three years ago. The emergency is clearly over both in the US and overseas. But the Federal Reserve is about to start a meeting that will set in motion another multi-trillion monetization program.

None of these things (including people going postal at the bank) make sense to me. The sum of all of these pieces takes me one place. Instability.

Extreme La Nina

If you are a technical/chart-watcher type of person you might appreciate this graph and the following NOAA discussion. If this was about a stock or a commodity the financial players would be freaking out. A biblical rate/pace of change:

The most recent (July-August) MEI value shows a continued drop from earlier this year, reaching -1.81, or 0.64 sigma below last month's value, and 2.35 standard deviations below April-May, both record-fast drops for this time of year. In fact, the three-month drop set a new all-time record for any time of year, beating a 2.33 sigma drop in 1998.

The most recent MEI rank (2nd lowest) is clearly below the 10%-tile threshold for strong La Niña MEI rankings for this season. One has to go back to 1955 to find stronger La Niña conditions for this time of year in the MEI record, and back to September-October 1975 for lower MEI values at any time of year.

Conclusion: We have one heck of big La Nina that has formed very quickly. We have not seen conditions like this in 55 years. What might it mean for the US:

-Above-average precipitation in the Pacific Northwest.

-Below-average precipitation in the Southwest and in portions of the middle and lower Mississippi Valley and Tennessee Valley. 

-Increased Atlantic hurricane activity by decreasing the vertical wind shear over the Caribbean Sea.


BK Conclusion: If you are planning on a ski tri this winter avoid Colorado and consider Whistler. Nice weather (drought conditions) will continue in the NE. There is a very high risk of a major storm developing in the Western Caribbean in the next three weeks. Hurricane Karl was a good example. It just knocked Veracruz hard. There were winds as high as 115mph and the storm brought 8 inches of rain in 90 minutes. Eight deaths.

If a storm of this magnitude were to hit the northern GoM it would shut in the oil/gas production for some time. Depending where (if) it makes landfall there could be significant impacts.

La Nina brings warm water to the western Pacific. This will result in big storm after big storm hitting into China/Indonesia. So far there have been 11 typhoons to hit Asia this season. The most recent is Fanapi. It is about to make a mess of southern Taiwan. Then off to China.

Why is this La Nina cycle so strong? I have no clue. Nor do the people who study global weather. There are many records being reached this year. The most significant (to me) is the rapid increase in global ocean temperatures that have occurred. The strength of this ENSO cycle is no doubt related to that phenomenon. This powerful La Nina will continue for at least four more months. It is likely that it will end as quickly as it appeared. That transition will bring us violent storms. I would delay plans for a holiday to coastal China until next year.

The Fed Talks Too Much

Another interesting week in the markets. We saw some records broken. It is worth asking the question, “Why did this happen early in the week, and why did it reverse as the week progressed?” I have a theory. I’ll leave it to you to see if it adds up. The early week highlights I thought were important:

(1) The dollar hit a new all time low versus the Japanese Yen. This prompted the BOJ to intervene. The first time in six years.

(2) The CHF fell below parity versus the dollar (for only a half-day).

(3) Gold went on a tear.

(4) The dollar got weaker across the board.

(5) The 10’s – 30’s Treasury spread widened while the 2’s – 10’s spread narrowed.

What prompted these moves? I think it was the threat of QE-2. The market was full of rumors that the Fed was going to initiate a $1 trillion POMO buy to re-grease the economic wheels. The talk was that this very significant step could come as early as next week. This rumor had legs. It was repeated by the TV talking heads and also by some ‘white spats’ boys from Wall Street. The following was the opening line to an article written by Morgan Stanley early on Tuesday the 14th.

Let's start with policy and economic uncertainty – the Fed may open the door to QE2 at the September 21 FOMC meeting.

You can bet that if MS was writing this on Tuesday they were telling their clients well before this was published. As that talk spread, market players made bets. The bets were against the dollar and in favor of anything that was not paper money (gold). The long end of the Treasury curve suffered while the near end benefited. The market conclusion: “We hate QE”.

But then came the most amazing thing. A reversal by Morgan Stanley on the timing of QE-2. I was floored by this retraction:

"we now believe the likelihood of additional easing being announced at the Sept FOMC meeting is quite low (perhaps 10% to 20%)."

This type of flip flop does not happen very often. One has to ask the question, “Why?” For MS to turn on a dime like this means to me that someone whispered in the ears of MS: “You have the story wrong, There is no chance that we will introduce a major QE program in September. November is the earliest that could happen.”

There is only one source that could convince MS that they had to reverse their published position. It had to be the Fed doing the talking, In my opinion the Fed must have been talking to more than just MS. I think the Fed must have talked to most of the Street. As the concerns of an imminent QE eased, so did the tensions in the market. Save for gold, all of the early week “I’m afraid of QE” trades were reversed.

You could argue that I am reading too much into the MS flip-flop. I did not come to the conclusion re MS right away. My initial thought was that it was just laughable. Not nefarious. But then there was an article by Neil Irwin at the Washington Post. This article first appeared on Wednesday the 15th. This means that it was written based on information received on Tuesday (the same day as the MS flip-flop). This article was clearly written with input from Fed officials. Consider some of the phrases used in the article:

Fed analysts are exploring whether new bond purchases can do much to lower interest rates.

Fed officials are also looking for unintended consequences of new measures.

Top Fed officials will be preparing formal forecasts for the economy over the coming years in advance of their meeting Nov. 2 and 3.

Fed officials are also weighing whether lower rates would spur business investment.

Economists at the central bank are undertaking a new round of analysis on the likely impact of such moves.

The WaPo does not say things like this unless they have in fact gotten some clarity from Fed officials on what is the thinking and what is the timing. The paper ran an important article with no attribution for the quotes from “Fed officials” and "Top Fed Officials" (Bernanke is the only Top Official). They describe what "Fed Economists" and "Fed Analysts" are currently doing. Irwin has no idea what the Fed economists and analysts are currently working on. And I assure you that those economists and analysts do not speak with the press unless they are specifically told who to talk to and what to say.

The critical conclusion that one gets from the WaPo article is that nothing will happen at next week's Fed meeting.

No action is likely at the policy meeting scheduled for Tuesday.

The use of the word “likely” is just press talk. The actual words from the Fed “Officials” to Irwin were probably:

“As of today it is 95% sure we are not doing anything on QE next week. Please get that message out. The market thinks we are rushing into things too fast. We want to use the WaPo to change this thinking. We don’t want the markets to get ahead of us on this. It has having negative consequences in the markets and we are taking flack from the Japanese and Swiss CBs”

If you believe in my interpretation of these facts then you have to draw some troubling (and dangerous) conclusions.

(I) The Fed is using the press to shape public perception on what and when it will do things.

(II) The Fed is providing guidance to major Wall Street firms so they too can spread the message that the Fed wants. In the process they give those same firms a significant trading edge.

(III) The Fed was made acutely aware of the market’s dissatisfaction of a new major round of QE. They responded with sub rosa “Official Guidance” to redirect the market. This is intervention. It uses words not cash. But the result (this time) is the same.


In my opinion the Fed has provided information to the press on numerous occasions this year. Articles from the WSJ, NYTs and the FT have all contained information that had to have come from Bernanke’s lips. But there was never a confirmation that he was the actual source. It was always “Senior Fed Officials”. Editors of these big papers do not run stories like this without first confirming that the quotes are solid. They were solid. They were whispers from Ben.

I am troubled by the Fed’s attempts to use the media like this. If the Fed has anything to say they should make it public. If they want to talk to the media they should do it for attribution. Hints and disinformation are no way to run an open monetary policy.

I am quite comfortable about my assertion that the Fed is using the media. I am not alone in that observation. I am less confident regarding my conclusion that MS got a call from someone and as a result they quickly published a clarifying comment that reversed their opinion publish only hours before. To me, that would be more than just disinformation. That would be inside information that was very trade-able. The markets backed and filled for the rest of the week. The talk of an imminent QE died as of Tuesday. Big money was made in the process.

Tyler Durden at Zero Hedge got me thinking on this. He wrote about the MS flip-flop on Tuesday. From the article:

False Alarm: Morgan Stanley Recants From Its Expectation Of A QE2 Event In One Week

Today's peculiar stock trading action was exclusively due to Morgan Stanley's previously highlighted expectation that the Fed would announce QE 2 in one week.

The Fed talk is moving the bond, stock currency and gold markets. I would say that it worked rather well this time. But it is a losing strategy. To me it shows a weak hand.

The market showed Bernanke and Co. that it does not like the prospect of QE-2. That does not mean it will not happen. It means that when it does happen in November (conveniently one day after key elections) the markets will react accordingly. We are not done with the weak dollar, strong gold, scared 30-year and generally “risk off” markets. Ben just hid them in the closet for a few more weeks.

FHFA’s DeMarco – TARP Banks are Pikers!

The FHFA’s Acting Director, Edward DeMarco, gave a status report on the nation’s mortgage mess to the House Committee on Capital Markets. He addressed a number of key issues. There was a recital of the steps being taken to mitigate losses to the taxpayers. A sub set of that was a discussion of the status quo on the matter of the banks having to repurchase billions of loans from Fannie and Freddie. These loans never met the Agency's guidelines and of course, went bust. This is an old news story. It has been widely reported that the banks were baulking on their obligations to do the buybacks. DeMarco did not leave much wiggle room on this issue. Some cut and pastes from the testimony:

I have been clear that the Enterprises should actively enforce lender compliance with their contractual obligations, which includes pursuing repurchases from those institutions whose loans did not meet the Enterprises’ underwriting and eligibility guidelines.

As of the end of the second quarter 2010, Fannie Mae had $4.7 billion in outstanding repurchase requests, and Freddie Mac had $6.4 billion in outstanding repurchase requests.

More than one-third of these repurchase requests have been outstanding for more than 90 days.

Many of the lenders with aged, outstanding repurchase requests are among the largest financial institutions in the United States.

FHFA may look to its supervisory and conservatorship authorities provided under the statute to resolve the situation.

I love it when they talk tough like this. DeMarco is saying that he sitting on $11b of IOUs from the same banks who got the biggest chunks of the TARP money. He calls them “the largest in the US”. Okay, we know that list. Pikers.

DeMarco says this matter is under discussion. But he leaves little room for what the outcome will be. The banks will pay. Or he will sue them and they will pay.

$12 billion is nothing to these banks. If that were all there was to this there would not be any nasty Congressional testimony. They would have written the check(s) and said that they now had a clean book with D.C. Clearly that is not the case.


Based on his bio I guess that DeMarco is in his early 40’s. So no gray hair. Possibly that is the reason why he has not yet been appointed as the Director of the FHFA (vs acting). That’s too bad. My guess is if this guy had the title and the backing he could kick some butt. He’s the only one who has a vision of what housing finance in the US should be, and what role government support should play.

These big issues will be up for discussion in 2011. As of now the only plans have come from Barney Frank and the Mortgage Bankers Association. Barney does not really have a plan. But his primary objective will be to use credit as an elixir rather than a right. The Mortgage Bankers want to break Fannie and Freddie into small pieces. They want to own the stock of these pieces. They want the government to guarantee all of the debts of the new pieces. With these plans we would repeat both sins of the past. We need a better voice and a different plan. This is too important to screw up again.

Something else DeMarco said on the Hill that I thought was significant. This stuff doesn’t win votes. But the idea that someone is trying to save the taxpayer some bucks is welcome:

I am very supportive of the efforts to discourage borrowers who can otherwise make their mortgage payments from walking away from their obligations. So-called “strategic defaults” not only result in increased losses for taxpayers, but also have a deleterious effect on neighborhoods.

Swiss Trade Unions: We Want Two-Tiered Franc!!

The Japanese have finally stepped up to the plate in support of a weaker Yen. They spent $10+ billion buying dollars and got two big figures in the FX rate for their effort. I doubt that it will last for a week.

With the Japanese hand being played out the market will be looking at the other “Strong” currency, the CHF. If the market can’t make money selling dollars (and Euros) for Yen then it is likely that the market will turn its full attention on the Swissie.

The 1.30 exchange rate for the EURCHF is already hurting Swiss exporters, farmers and tourism. It is likely to get worse before it gets better. With that in mind I thought it was interesting to see that the Swiss Trade Union, “SGB” is calling for the Swiss National Bank to either step up its intervention efforts or establish a two tier exchange rate system. From NZZ today:

The monetary authorities should intervene directly in the foreign exchange market, SGB representatives demanded on Wednesday before the media. Export companies should also switch to a special rate euro against Swiss francs.

This kind of talk will make the SNB chief Philipp Hildebrand quake. He knows that he/the SNB is functionally powerless to stop the appreciation of the Franc. In the biggest days of intervention they were doing 1-2 billion of sales. How big is the market? The SNB estimates it is 250b a day. Conclusion? The SNB does not stand a chance.

The SNB reserves are in dollars, Euros and gold. At this point they are taking big losses on their currency holdings. The numbers to be announced soon could push another 8 billion Francs for the quarter. There is a limit to what the SNB can absorb. And the market knows it.

With this in mind the notion of a two-tiered FX rate makes some sense. The free rate would be allowed to float wherever the markets might take it. Exporters would have access to a subsidized rate from the SNB and thus would be largely insulated from market gyrations. The SNB would have losses to be sure. But those losses would go directly to the exporters and not the speculators in the FX markets. In that sense it is not a hard sale to the Swiss people. The flip side is that a lot of the Swiss want a stronger franc. They can travel outside the country and shop at a much cheaper cost.

To me the idea of a two-tiered franc is crazy. If implemented it would be a modern day “Smoot-Hawley” type of event. The EU would go nuts and retaliate. Half a dozen other countries would copy the Swiss move and we would be looking at a major breakdown in global trading. From these types of steps global recessions are born.

But the flip side is will tiny Switzerland roll over and let the global markets dictate their economy? That would seem unlikely as well. So something has to give. The most unlikely outcome is that the Swissie weakens against the dollar and the major crosses.

We are going to hear more protectionist talk in the coming days. The Japanese have said (through last night’s intervention) that they do no want to import more global deflation. So they have teed this up. Where it goes is anyone’s guess. But there are very few soft landing scenarios out there that I can think of.

If (when) the EURCHF gets to around 1.25 there will be some action. If it is first renewed intervention and that proves both costly and a failure the talk of a two-tiered franc will come on the table. I doubt the Swiss are just going to sit there and get rolled over. The Great Sucking Noise will get much louder if that should be the result.

Visible Supply – Non Event?

If you believe the press you would think that John Boehner (R.OH. ) and the White House are having a love-fest over the debate on what to do with the Bush Tax cuts that are expiring in 3+ months. Rubbish. This is going to be a slug-fest. Take Boehner on his word that he was willing to consider a deal where those over $250k get stiffed while those under that mark get a break. That still leaves two very big issues to be resolved. (I) The AMT and (II) BABS (Build America Bond program).

Focus on BABS. This is an ARRA subsidy for municipal borrowers. It allows them to borrow in the taxable market (at higher rates) but Treasury reimburses the borrower for 35% on the interest cost. It was supposed to be ‘revenue neutral’ as the interest gets taxed. The reality is that most of this has gotten into tax-protected hands and therefore it is not neutral. BABS has been up for a renewal for months. The Republicans hate it. Even the WH was willing to water it down. They wanted to drop the subsidy to 30% and reduce it further over a period of years. (Classic)

The Republicans are not going to roll over. And the Dems are not in love with BABs either. It is just another fee generator for Wall Street. So I think BABs is dead. At a minimum the subsidy will fall significantly below the 30% proposal by the WH. Either way the window of opportunity is closing.

Now consider this article from Bloomberg. A description of the latest BABS deal:

Borrower: Ohio State University
Amount: $655 mm
Maturity: 30 years
Coupon*: 5%
*(Deal’s not priced yet-my estimate)

In this deal the FEDs pay OSU $11.5mm a year for a total of $340mm over the 30 year term. That is a sweet-heart. Everyone wants that. And it is going away.

The CFO for a big Muni project has these deep thoughts:

“I need to borrow mega bucks sometime in the next 24 months. Yields are at dirt levels today. Plus that BABS ‘bonus money’ may be going away. I would look stupid if I did not try to capitalize on that. Hmmm. I am going to call Merrill right now and pull a deal off the shelf for a 'half-yard'!”

From the Bloomberg article:

Both the University of Texas and University of California have Build America offerings of more than $500 million scheduled in the next two weeks.

The 30-day visible supply of municipal bonds reached $11.97 billion today, the highest since July 23.

If BABs does get gutted (as it should) then the window will close in a few months. Everyone with a deal that is ‘ready to go’ will try to close it by year-end. Wall Street will moan with the big flow. That means they will charge bigger fees and higher spreads and with that incentive they will push out every deal that they can.

BABs issuance is $131b year to date. That is a “chunky” number. It will ramp up. It is all long duration paper. That will be small compared to what Tim Geithner has on offer. Then there are the corporates who can’t believe how cheap they can raise money. The regular Muni’s and the dollar-based sovereigns have bonds for sale too. It will add up to big numbers in the next three months. We might see some old-fashioned supply and demand stuff impacting bond prices. That would be a hoot.

Note:
Half of Wall Street and most of the TV talking heads are saying the Fed is going to launch a trillion dollar QE POMO buy any day now. I don’t see that happening. There is no emergency today. The S&P is at 1120, the economy is still growing. No need for more emergency measures at this time. Better to keep that powder dry.

Bernanke reads screens too. He saw what happened in gold and the $ today. Those markets made big gap moves to record levels in part on the expectation that a big QE is coming. I doubt Ben will gamble a blowup in gold and the dollar at this time. I don’t think that scenario is priced into the credit market.

Fast markets to come.

“In Your Face” Market

Think about it. We have a gagiillion of money going into fixed income over the past three months. A big chunk of that comes from equity mutual fund redemptions. Seventeen weeks of outflows. What happens? Stocks catch a bid and bonds take a tumble. Two observations come to mind. (1) Retail is dumb money and (2) the buy and hold is just a dead concept.

The “Risk On” trade was a convergence of a number of forces. Stocks were oversold, bonds overbought and as it turns out the economy was doing a tad better in August than was expected on a number of fronts. So once again the market flushes out weak hands. It must be tough on the folks managing their own 401k’s. No sooner than they get invested in long term fixed income (at the lowest yield in 40 years) it starts to look like a bad idea. A lot of money is now tied up in yields that after taxes and inflation are just going to produce losses. Oh well. That is the ‘In your face’ market (AKA the FU market) we have.

For me this could be just a head fake. So what if the odds for a double dip have fallen from 40% to 30% in the last month? That whole debate has been a waste of time. That may be a good excuse for a snap back reaction to an oversold/bought market. But it is a dumb reason to get excited that stocks will never have another down day for the rest of the year. There are plenty of down days in front of us.

Absent something very big from DC the economy is going to slow. We are going to see GDP in Q3 at around 1.5% it will be lower than that in Q4. That is a given folks. And that is the good news. All of 2011 will be a struggle to get GDP over 1.5% on average. That forecast assumes there are no downside shocks or upside surprises. As it stacks up I think the bet is better for downside news than upside. We shall see.

I look at a number of barometers for evaluating where we are in the risk on/risk off cycle. I like the DLR/YEN and the EUR/CHF. When they are trading lower I am very suspicious of the Risk On trade. Both those rates are down big from Friday’s close.

As I write the DLR/YEN is breaking down based on some political news. If Mr. Kan is the winner tonight then the Yen has to be stronger. The EUR/CHF is going to take a dip should the Yen break to new to new highs.

My secondary sources to confirm Risk Off are the DLR/CHF, Gold and of course the bonds. To me it looks like a sure thing that $/Swissie is going to break par some day soon. That will make for negative headlines. Gold swooned a bit as the Risk On appetite rose. But have you noticed that for all of the “noise” from the pundits we are only $10 bucks under an all time high? That is nothing if we get a hiccup in DLR/YEN. More headlines.

I am not sure that watching the bond market for correlation trades is such a wise thing to do any longer. The question I have been pondering is, “When does the current correlation (Weak Bonds – Strong Equities) change to Weak Bonds – Weak Equities?” If the pendulum of the correlation is to swing, it is likely to produce some bad “reads” along the way. “Old Reliable” may not be so relevant.

So If you believe in the FU market theory watch for the next leg to be ‘risk off’ for equities for a bit and we could still see bonds pushing against the critical 2.85 level. DLR/CHF could break below parity. We could see new lows for DLR/YEN and EUR/CHF. The one thing I would not expect? That the market(s) close where they were in NY today on this Friday. Vol up, belts on.

China Flexes Its Muscles

I got a laugh from this Bloomberg story. The US-China Business Council whose membership includes the likes of Caterpillar, IBM, Citicorp and Boeing (a total of 200 US multinationals) is lobbying D.C. to fend off U.S. legislation aimed at forcing the Chinese to raise the value of their currency.

Hello? China’s global trade surplus has narrowed somewhat of late. But the most recent reading showed a $20 billion surplus. Guess what? 90% of that surplus is a result of the trade surplus with the good old USA. And our major corporations are spending big bucks lobbying Washington to ease up the pressure on China to accelerate the revaluation of their currency. Go Figure. From the article:

The legislation, sponsored by Representatives Tim Ryan, an Ohio Democrat, and Tim Murphy, a Pennsylvania Republican, would let companies petition for higher duties on imports from China to compensate for the effect of a weak currency.

The measure “is totally counterproductive,” William Lane, government relations director for Caterpillar, the largest maker of construction and mining equipment, said in an interview. “Some in Congress want to start a trade war and undermine our efforts to sell to our fastest-growing export market.”

Here’s how I think this went down:

China to Citi:

If you want to expand your branches and business in our country you will lean on Congress not to pass this bill.

China to Boeing:

We can buy aircraft from Embraer in Brazil, or Airbus. If you want us to buy some from you, you must appose this law.

China to Caterpillar:

If you want to open a manufacturing facility in our country you have to do as we say. And we say you must tell your Congress to drop their effort.

The US-China Business Council to China:

我会做你想 (We will do as you wish)

The only reason that these global heavyweights are using their muscle to pressure Congress is that China Inc. has used their muscle on the elite of US corporations.

This development makes the Administration (in particular Treasury Secretary Geithner) look pretty stupid. They have been pushing China on the FX issue since they took over. Now, the big shots that line campaign coffers are pushing in the opposite direction. Only in America could this happen.

The year to date trade deficit with China is 145 billion. The article had this to say on that big number:

“In 2010, the trade deficit with China reduces U.S. GDP by more than $400 billion,” Peter Morici, an economist at the University of Maryland in College Park, wrote this month in a report. “Unemployment would be falling and the U.S. economy recovering more rapidly, but for the trade imbalance with China and Beijing’s protectionist policies.”

I am in the camp of Mr. Morici. China is not a partner. They are a predator. The have wracked up a nearly $1 trillion reserve position with the US because they are predators. They are moving whole factories to their land. They recently announced a massive cutback in rare earth metals exports (they are 97% of the market, they cut exports by 72%). Unemployment is higher than it should be and the economy is weaker than it might have been were it not for the continued imbalance of trade.

Watch for this proposed legislation to die. There are hearings on 9/15 and our boy Timmy G. is set to talk about this to Congress on the 16th. As the election is near, expect to hear some rhetoric from Tim. Looking like one is ‘tough on China’ is a vote getter. But beyond the talk there will be no action.

Just to confirm. The small guy in America does not stand a chance. The ‘big interests’ are not aligned with their interests.

NYT’s “Bold Idea” – Pass the Trash

As a writer who tries to contribute to the business/economic stories of the day I can tell you that I often sit in front of a laptop and say to myself, “I have nothing worth writing about”. When that happens I go through the list of past articles and look for something that I can update. Gretchen Morgenson at the NYT must have had a similar state of mind this week. She dredged up some junk from a year ago in her piece for the Sunday Times.

Housing Doesn’t Need a Crash. It Needs Bold Ideas.

Ms. Morgenson wrote an article a year ago that proposed a “solution” to all those underwater borrowers. The solution was elegant and simple. The plan was for all borrowers (including underwater borrowers) to get an automatic refi from Washington. This would allow all of the private holders of junk mortgages to be paid off at par. Those borrowers who were underwater would get low interest refi’s. The result would have been to socialize the losses to all taxpayers. The community banks, the big regional’s, the money center banks, insurance companies and of course Wall Street would be very big winners if this were to have happened.

This would have been a $1 Trillion (minimum) pass the trash to the taxpayers. I thought it was a terrible idea a year ago. I think it is even dumber today. Ms. Morgenson wrote:

If Fannie and Freddie bought these loans out of the pools at par and reduced their interest rates, additional foreclosures might be avoided. The only downside to the government would be if some loans it purchased went bad.

The "only" downside would be more losses for Fannie and Freddie? Don’t we have enough imbedded losses in these two dogs already? The Times describes the loans to be considered, there are big losses in this:

Two-thirds of the 1.6 million loans in those pools were 60 days or more delinquent.

The CBO already puts a number of $400b for the losses at F/F. And the NYT wants to add to that? From the original article on this:

Voilà: Investors who own the underlying interests in the mortgages would be fully repaid and the securitizations would be closed out.

Voila? Where does this brilliant suggestion come from? Two guys who have an axe to grind:

Conceived by two Wall Street veterans, Thomas H. Patrick, a co-founder of New Vernon Capital, and Macauley Taylor, principal at Verum Capital, the plan calls for refinancing all the nonprime, performing loans held in privately issued mortgage pools.

The NYT article is advocating that we take another giant leap toward socializing the financial system. Ms. Morgenson wants Fannie and Freddie to get bigger and to take more losses. This plan would be another bailout of the lenders and those who hold the underlying debt. Why in heavens name would the Times want that? The last thing we should be doing is aiding all the banks and “Wall Street Veterans”. We have done too much of that already.

About Those Tax Increases for the “Rich”

I listened to Obama the other day. He was pretty clear on the issue of taxes. He said that marginal tax rates on those making $250,000 or more would go up if he got his way. It is a fair bet that this is the way it will work out. The Bush tax cuts for those under 250K will be retained for a few more years and taxes are going up for the fat cats making over $250k. That sounds reasonable. After all, we are broke and have to raise taxes someplace.

But I did not hear word one from the Big O about AMT taxes. That is another set of tax laws that is subject to a sunset at the end of the year. This is a screwy tax (that I have been subject to for years). If one is subject to the AMT you lose deductibility of a number of things. Charitable contributions, property taxes and child-care deductions are lost. It is also dependent on the ratio of earned versus unearned income. It is an ugly tax that everyone will hate.

This a big deal. Congress has been putting a patch on this every year for the past five. The 2010 patch cost Treasury $70billion. According to the CBO, if the AMT is allowed to sunset it will increase the number of individuals that are subject to this tax from 4.5mm to 27mm in 2011. This would result in nearly every individual or family with income of $100k+ to pay more tax. The CBO estimate is for an increased tax bill of $3,900 per filer. That would come to $90 billion of additional tax. The vast majority of those making $250k or higher are already stuck in the AMT trap. Therefore the bulk of this increased tax burden would fall on those making between $100k and $250k.

Watch as this evolves over the next few months. Should we see the “Great Compromise” from D.C. where marginal taxes go up for the wealthy but no action is taken to address the AMT problem a significant percentage of the population will be screwed. When and if that happens you will hear that great sucking noise from the economy. When 30 odd million people get hit with another 4k in taxes the economy will stall, again.

Of course it could go the other way. We could extend the Bush tax cuts and “patch up” the AMT for a few more years. That would get the deficits north of 10% of GDP. Depending on the economy we would be looking at annual deficits pushing $2t. Debt would explode. I can’t see the upside in that either.

GE Sued – Phony Accounting Charged

Funny accounting at GECC? Can’t be. I would just ignore this one. At your risk….

GE Capital overstated Momentive's value in December 2008 to improve its own balance sheet, he said. Valuing the asset correctly would have reduced “GE Capital's earnings 100 percent,” in the fourth quarter that year, according to the complaint.

“Mr. Gormbley refused to play GE's game and just ‘get along,” according to the filing. “GE and GE Capital's response was direct, unmistakable and as subtle as a hangman's noose.”

I am sure there is nothing to this..... Why would GE have overstated it’s income? The goal was to "manage" the income statement according to the law suit. That would never happen at GE. Right?? If something like that did happen it would not have been material. Nothing like the 100% claimed. Right? The folks at GECC in Stamford are fighting this one tooth and nails. Their view:

“The allegations in Mr. Gormbley's complaint are meritless,” Russell Wilkerson, a spokesman for Fairfield, Connecticut-based GE, said in an e-mailed statement. “The company will vigorously defend itself against these baseless assertions.”

GE’s lawyers are going to crush Mr. Gormbley I suspect. Why shouldn’t they? They have never played fast and lose with accounting have they? Heaven help us (and GE’s stock) if Mr. Gormbley prevails.

FDIC Keeps Selling

This advertisement does not mention the FDIC. But I’m pretty sure the FDIC (or the banks they control) are in fact the sellers.

The selling outfit is called Prescient. Here is what they have to say about their relationship with the FDIC.

Here is an overview of the assets being offered:

There are some dogs in this portfolio:

I know (more or less) where these two lots are. There was a time that these would have sold for a nice price. Now they will go for pennies on the dollar.

At the bottom of this I will provide the details on the loans that are for sale. It is a long list. There is a $27mm note on an office complex in Coconut Grove and on the other extreme is a $4,362 first mortgage on a 3/2 townhouse in Miami. One that caught my eye was a $125,000 loan secured by a 32’ Boston Whaler. Depending on condition this boat is worth north of 100K. It will be sold for $1 in the package of other loans.

$200mm of bad loans and REO is no big deal. But this is mostly in S. Florida. If anyone was looking for a break in the unending slide of RE in the Sunshine State they should be pushing that timeframe farther (with lower prices) into the future. There are plenty of more “packages” like this to come. Hundreds of billions is yet to get settled. A very big chunk of it will go like the Prescient auction. Cheap.

In the process homes, apartments, office buildings commercial locations and even boats are going to be devalued. This is price discovery and we probably have to go through this. But it is going to hurt. I am still not convinced that the FDIC should be the price leader. In the end they will hurt more borrowers who in turn will hurt more banks and ultimately the FDIC. A vicious circle that would appear to be unavoidable.

There is so much talk today whether deflation is a risk and could it happen. Folks, we’ve got deflation. And with every fire sale of assets it will spread.