Wednesday, March 26, 2008

House price slump in US dashes hope of end to credit crisis

Wednesday, 26 March 2008By Stephen Foley in New York

Declines in US house prices are continuing to accelerate, according to surveys that signal there will be no quick end to the credit crisis.

The price of the average home was 11 per cent lower than a year ago, the S&P Case-Shiller index showed yesterday, as repossessed homes flood the market – and economists predict that the price adjustment may belittle more than half over.

The Case-Shiller index has become one of the most widely followed measures of the US economy because American homes are the collateral that supports hundreds of billions of dollars of mortgage-backed securities and other credit derivatives.

The latest figures cover house prices in 20 metropolitan areas in January, and show that price declines have spread far beyond the once-hot speculative property markets in Florida and the South-west and crumbling industrial towns. Now, Charlotte, North Carolina, is the sole region showing year-on-year gains.

The year-on-year decline of 10.7 per cent in the average house price is worse than anything seen in the last downturn in the early Nineties. Prices fell 2.4 per cent in just one month.

"It does not look like early 2008 is marking any turnaround in the housing market,," said David Blitzer, S&P index committee chairman. "Home prices continue to fall, decelerate and reach record lows across the nation. No markets seem to be immune from the housing crisis."

A second measure of the housing market, by the mortgage regulator Ofheo, showed a 3 per cent year-on-year decline in January. It excludes many pricier homes.

Falling property values are now feeding through into weaker consumer confidence. The monthly Conference Board survey set a new five-year low in March, the reading of 64.5 coming in well below Wall Street expectations of 73. It was the third sharp decline in as many months.

The disappointing data came a day after sales figures for February had raised hopes that a bottom might be near for the beleaguered housing market. An estate agents' survey showed a modest increase in activity, suggesting that falling prices have lured bargain-hunters into the market.

Many economists, though, said the picture will not become clear until the spring selling season.

Kevin Logan, senior US economist at Dresdner Kleinwort, said he expected house prices would eventually reset to 2004 levels – about a 20 per cent decline from their peak in 2006. "The number of sales is still about 20 per cent below their year-ago levels, and we are still in a down trend. The housing market is in a slump and it is not coming out of a slump this year."

There are already large numbers of unsold homes and an expected wave of repossessed properties still to hit the market, Mr Logan added, while mortgage lenders are demanding bigger deposits and more financial checks on borrowers. "The background is pretty grim."

His comments were echoed by David Stubbs, senior economist at Rics in London. "Prices on the Case-Shiller index have at least a further 10 per cent to fall before they stabilise," he said. "The existing homes sales figures for February which showed a modest bounce are likely to be reversed in coming months as the pressure on the US economy intensifies, and the labour market continues to weaken. Any lasting stabilisation in sales activity appears to be at least six months in front of us, if not more."

Yesterday's economic data brought a halt to a two-session rally by the Dow Jones Industrial Average, which closed 0.1 per cent lower at 12,532.6. Asian and European stock markets – playing catch-up with Wall Street's strong showing late last Thursday and on Easter Monday – were all higher yesterday.

Wall Street firms have written off more than $120bn (£60bn) of their investments in mortgage-backed securities and more complex derivatives that include US home loans, but the ultimate level of their losses will depend on where house prices settle and on how many borrowers fail to keep up payments.

US Moves Towards Engaging Iran

By M K Bhadrakumar

26/03/08 "
Asia Times" -- -- The coming few weeks are going to be critical in the standoff between the United States and Iran as the upheaval in the Middle East reaches a turning point. And all options do remain on the table, as the George W Bush administration likes to say, from military conflict to a de facto acceptance of Iran's standing as the region's dominant power.

One thing is clear. The time for oratorical exercises is ending. A phase of subtle, reciprocal, conceptual diplomatic actions may be beginning. An indication of this is available in the two radio interviews given by Bush last weekend and beamed into Iran, exclusively aimed at reaching out to the Iranian public on the Persian New Year Nauroz.

Significantly, ahead of Bush's interviews, former secretary of state Henry Kissinger spoke. Kissinger, incidentally, is a foreign policy advisor to the Republican Party's presidential nominee, Senator John McCain. For the first time, Kissinger called for unconditional talks with Iran. That is a remarkable shift in his position. Kissinger used to maintain that the legacy of the hostage crisis during the Iranian revolution in 1979 and "the messianic aspect of the Iranian regime" represented huge obstacles to diplomacy, and combining with "Persian imperial tradition" and "contemporary Islamic fervor", a collision with the US became almost unavoidable. Interestingly, Kissinger's call was also echoed by Dennis Ross, who used to be a key negotiator in the Middle East, and carries much respect in Israel.

Bush's interviews with the government-supported Voice of America and Radio Farda, especially the latter, were a masterly piece in political overture. He held out none of the customary threats against Iran. This time, there was not even the trademark insistence that "all options are on the table". There were no barbs aimed at President Mahmud Ahmadinejad. Least of all, there were no calls for a regime change in Tehran. Bush simply said something that he might as well have said about Saudi Arabia or Egypt. As he put it, "So this is a regime and a society that's got a long way to go [in reform]."

Bush spoke of the evolution of the Iranian regime's character rather than its overthrow. The criticism, if any, of Iranian government policies approached nowhere near the diatribes of the past. There was none of the boastful claims that the US would work toward isolating Iran in its region and beyond. In fact, Bush acknowledged, "There's a chance that the US and Iran can reconcile their differences, but the [Iranian] government is going to have to make different choices. And one [such choice] is to verifiably suspend the enrichment of uranium, at which time there is a way forward."

Bush assured that in return the US would be "reasonable in our desire to see to it that you have civilian nuclear power without enabling the government to enrich [uranium]". Here again, he pointed out that the problem is that "they [Iranian governments] have not told the truth in the past, and therefore it's very difficult for the United States and the rest of the world - or much of the rest of the world - to trust the Iranian government when it comes to telling the truth".

Bush elaborated, "Well, one thing is to reiterate my belief that the Iranians should have a civilian nuclear-power program. It's in their right to have it. The problem is that the government cannot be trusted to enrich the uranium because, one, they've hidden programs in the past and they may be hiding one now - who knows? And, secondly, they've declared they want to have a nuclear program to destroy people - some - in the Middle East. And that's unacceptable and it's unacceptable in the world. But what is acceptable to me is to work with a nation like Russia to provide the fuel so that the plant can go forward. Which therefore shows that the Iranian government doesn't need to learn to enrich."

Arguably, Bush's interviews signify that "unconditional talks" may have begun with Iran. Everything - almost everything - he said indeed had a caveat. But then, isn't that how negotiations commence without loss of face between any two stubborn adversaries?

Any number of reasons could be attributed to the Bush administration finally jettisoning a war strategy toward Iran. First and foremost comes the unbearable financial cost of waging a war with Iran, which would have to be underwritten by China, Saudi Arabia and Japan. As Nobel Laureate and US economist Joseph Stiglitz stated last week, the impact of the subprime crisis in the US will persist for two to three years, and only after that time could the US economy hope to recover. Stiglitz blamed the Iraq war for dragging down the US economy. "It has proven to be an enormous error," he said, stressing that the Iraq war has been "a disaster in every way".

If in 2001 the US spent about US$4.4 billion a month on military operations in Iraq, the figure had jumped to $8.4 billion by 2007. By the end of the current year, the financial costs of the Iraq war could rise above $650 billion. The human costs have been equally unacceptable. The number of US troops fallen in Iraq now exceeds 4,000. Over 29,000 soldiers have been wounded. The brand "America" has taken a beating that will take years to repair. The horrific images of Guantanamo Bay, Abu Ghraib, Fallujah, Haditha, Mahmudiya and Bagram will linger in memory for a long time.

An ABC News/Washington Post poll in March shows that 63% of Americans feel the Iraq war was not worth fighting and only a slight majority of Americans believe now that the war will one day succeed. Clearly, there is no stomach for yet another war in the remaining term of the Bush presidency.

Equally, everything is up in the air on the warfronts in Afghanistan and Iraq. The Bush administration has its hands full. The sudden visit of US Deputy Secretary of State John Negroponte, accompanied by Assistant Secretary of State for South and Central Asian Affairs Richard Boucher, to Islamabad on Tuesday, no sooner than the newly elected Pakistani government assumed office, underscores the gravity of the crisis facing the Bush administration in Afghanistan.

What is at stake now is Pakistan's willingness to continue as an ally in the "war on terror". At the very minimum, the terms of engagement will have to be renegotiated, which, of course, is going to take time and a lot of patience and give-and-take. That is, assuming the Pakistani leadership will show the grace to take the Bush administration as anything other than a lame duck.

This became apparent when soon after meeting the US officials in Islamabad on Tuesday, former prime minister Nawaz Sharif - who is emerging as Pakistan's number one politician - alleged publicly that the people of Pakistan are being "mercilessly" killed in the name of the "war on terror".

"We should not kill our own people for the sake of others," he said. He sought a review of the entire war strategy. "The basic issue is that just as the US wants to be safe from terrorism, we don't want to see bombs and missiles flying in our villages, we want our people to be safe and we don't want blood to flow in our streets," Sharif insisted.

He was virtually endorsing a call by the Pashtun nationalist Awami National Party, which is forming the government in the sensitive North-West Frontier Province bordering Afghanistan, for a negotiated solution to the alienation in Pakistan's tribal areas. Clearly, with hardly a week to go for the 60th anniversary summit of the North Atlantic Treaty Organization summit in Bucharest, Romania, the agenda of the Afghan war has become much more than an issue of the alliance's force levels.

The status of the Iraq war, too, hangs in balance. After what appeared to be a descending calm, the security situation is showing signs of fragility. Sunday's mortar strikes on Baghdad's fortified Green Zone, which is home to the Iraqi government and the US Embassy, underline the pretence behind the Bush administration's claims of "success" of the so-called "surge" strategy. It does seem as if someone just thought of shaking up the dream world that Washington sought to create.

Again, the southern Basra region has gone under curfew following fighting among Shi'ite political parties and their militias. Most ominous, the Mahdi Army, loyal to Muqtada al-Sadr, is showing signs of becoming restive. Its self-imposed ceasefire was one main reason why the graph of violence had dipped in recent months.

The Bush administration's priority will be to leave it to the next president in the White House to decide on any major reduction of troops in Iraq. But that means the Iraqi situation will remain in focus all through the period of the presidential campaign till November. The Bush administration needs to count on Tehran's tacit cooperation with the US to use its formidable influence with Iraqi groups. Belligerence toward Iran is hardly the way the Bush administration can realize this objective.

But after a recent visit to Iran, prominent US author and commentator Selig Harrison wrote in The Boston Globe newspaper, "Tehran is seething over what it sees as a new 'divide and rule' US strategy designed to make Iraq a permanent US protectorate". He was referring to the current US strategy of building up rival Sunni militias - euphemistically called the "Sunni Awakening" - so as to fence in the Shi'ite-dominated government in Baghdad.

The Sunni militias presently number some 90,000 US-equipped fighters, each paid $300 per month. But, as Harrison recounted his conversations in Iran, "The message was clear: Unless [US General David] Petraeus drastically cuts back the Sunni militias, Tehran will unleash the Shi'ite militias against US forces again."

Sunday's violence, conceivably, may be a harbinger of things to come unless the US accommodates Iranian interests. It may have displayed that Iran has the will and the capacity to remain the dominant influence in Iraq with or without a stable government in Baghdad and with or without US acquiescence. The Bush administration has no real choice in the matter. Conversely, what the Bush administration could do is to build on the convergence of interests with Tehran in keeping the Iraqi security situation from degenerating in the critical months ahead in US domestic politics.
Harrison sums up his impressions following talks with interlocutors in the Iranian government: "Iran and the US have a common interest in a stable Iraq ... Before cooperating to stabilize Iraq, however, Iran wants assurances that the US will not use it as a base for covert action and military attacks against the Islamic Republic and will gradually phase out its combat troops. Cooperation will endure only if Washington lets the Shi'ites enforce the terms for the new ethnic equation in Iraq and, above all, if it recognizes Iran's right by virtue of geography and history to have a bigger say in Iraq's destiny than its other immediate neighbors, not to mention the faraway United States."

Evidently, the crucial ingredient henceforth of the Bush administration's Iraq policy is no longer a withdrawal schedule but a political and diplomatic underpinning for a military strategy. Hence the importance of US Vice President Dick Cheney's current tour of the Middle East. Quite uncharacteristically, Cheney eschewed any strident anti-Iran rhetoric during his tour. (The Iranians, on their part, reciprocated by ignoring Cheney's presence in the region.)

But what multiplies the "Iranian challenge" is the grim reality that Tehran may have withstood all attempts by the Bush administration to create dissensions within the Iranian regime. Following the recent parliamentary elections in Iran on March 14, the regime has greatly consolidated. The Iranian Revolutionary Guards Corps (IRGC), custodians of the Iranian revolution of 1979, are finally on the threshold of consolidating their political power in addition to the considerable economic and administrative power they already enjoy.

The so-called "reformist" platform - comprising 21 moderate parties that included the allies of former presidents Mohammad Khatami and Akbar Hashemi Rafsanjani and former parliament speaker Mehdi Karroubi - could together muster only less than 20% of seats in the new Parliament. The "reformist" coalition was the Bush administration's best hope.

In effect, the "reformist' coalition has become a spent force and is now likely to disintegrate. Already by end-February, Rafsanjani seems to have sensed this defeat of "black Shi'ism" by "red Shi'ism". He quickly changed tack and made up with Ahmadinejad. The ultimate clincher, of course, was the extraordinary gesture of Supreme Leader Ayatollah Ali Khamenei to publicly voice support of Ahmadinejad. Addressing the powerful Assembly of Experts (headed by Rafsanjani) on February 26, Khamenei praised the role of Ahmadinejad for "great success" on the nuclear issue. Later in the evening on the same day, Rafsanjani visited Ahmadinejad.

The IRGC has cadres numbering 10 million. Late spiritual leader ayatollah Ruhollah Khomeini had envisaged the IRGC to be the core of the Iranian revolution. The parliamentary elections have created a new power calculus devolving on the IRGC. The high turnout at the elections - over 60% - lends unquestionable legitimacy to this extraordinary political transformation of the Iranian regime, returning it, as it were, to its revolutionary moorings.

But it has not been the kind of "regime change" the Bush administration sought. Khamenei has emerged more powerful than ever and Ahmadinejad has considerably strengthened his political standing. Khamenei has risen above nitpicking by senior clerical conservatives. Thus, from Washington's perspective, the new Iranian Parliament will have a preponderant share of "hardliners" and will be more radical and more "loyal" to the regime - to use Western cliches. Bush's interviews on the occasion of Nauroz are a grudging admission of the emergent political alignment in Tehran. The Bush administration is pragmatic enough to estimate the need to engage Iran.

The real issue now is whether the emboldened leadership in Tehran shares the Bush administration's sense of urgency. It will carefully weigh its options. Foreign Minister Manouchehr Mottaki announced on Monday that Tehran "recently requested for membership" of the Shanghai Cooperation Organization (SCO). Ahmadinejad will be attending the SCO's summit in Dushanbe, Tajikistan. Meanwhile, Iran's proposal to Russia to form a gas cartel is set to take off at a meeting of gas-producing countries in Moscow in June.

Tehran will surely estimate that Russia-US disputes are hard to settle; that Russia has major commercial interests in Iran; that Moscow needs Iran's endorsement of a multinational arrangement to exploit the Caspian Sea's energy resources. At the same time, Tehran estimates that a viable US exit from Iraq is still a long way off and in the run-up to the US presidential election, the Iraq war looms as a contentious domestic issue.

Besides, Tehran remains on the lookout for a shift in the US stance on the Nabucco gas pipeline sourcing Iranian gas via Turkey for the European market. Last week, Switzerland's Elektrizitaetshesellschaft Laufenburg signed a 25-year deal with the National Iranian Gas Export Company for the delivery of 5.5 billion cubic meters of Iranian gas annually. The agreement was signed during the visit of the Swiss Foreign Minister Micheline Calmy-Rey to Tehran.

Without Nabucco, the US strategy to reduce Europe's dependence on Russian gas supplies will remain a pipedream, and without Iranian gas, Nabucco itself makes little sense, while Nabucco will be Iran's passport to integration with Europe.

Conceivably, Cheney, who takes a keen interest in energy diplomacy, would have kept Nabucco at the back of his mind in Ankara on Monday during his Middle East tour, on a day when Turkmenistan President Gurbangulu Berdimuhammedov also happened to be visiting the Turkish capital. An unnamed Turkmen official had earlier mentioned that Nabucco would be on the agenda of Berdimuhammedov's talks.

M K Bhadrakumar served as a career diplomat in the Indian Foreign Service for over 29 years, with postings including India's ambassador to Uzbekistan (1995-1998) and to Turkey (1998-2001).

The Subprime Crisis is Just Starting

by Daniel R. Amerman, CFA | March 20, 2008


As the author of three books on mortgage finance and related derivative securities, and speaking as someone who first turned mortgages into rated securities in 1983, I’m going to let you in on an unfortunate little secret – the real subprime mortgage securitization crisis may not have even started yet. But, there is a good chance the real crisis will arrive soon.

This assertion that the crisis could just be getting started may seem absurd and extraordinarily out of touch. What about the approximately 45,000 homeowners losing their homes to foreclosure in the United States every month? What about the 8.9% plunge in nominal housing prices in 2007, the largest decline in over 20 years? What about Bear Stearns losing 94% of the value of its stock in 2 days, with even the remaining 6% in value being based on an unprecedented loan from the Fed before JP Morgan would agree to the acquisition? How much worse could it get?

To understand the full extent of the danger requires moving beyond current headlines to take a brief and simple look at how mortgage securitizations actually work. These securitizations are based on what are known as “stress tests”, or the ability of a security to withstand an adverse economic change and still pay principal and interest on schedule. The heart of the subprime problem is that no major stress tests happened in 2007 – and the market still blew up. Which brings up the question of what will happen to subprime and other mortgage derivative securities in 2008 if actual stress tests do occur in such possible forms as recession, increases in interest rates, or a further plunge in housing values? Given that the safety margins have already been stripped bare? As we will explore, should one of those stress tests occur – or worse, if two or three occur together – then we may look back at 2007 as being a mere stroll in the park in comparison.

The Lack Of A Problem

To explain what I mean about nothing going wrong, let’s review a bit of ancient history, and talk about how ratings and securitized mortgages used to work. You started with a creditworthy borrower, and a significant piece of equity invested in the property. The assessment of “creditworthy” was not a guess or an experiment, but rather the result of decades of underwriting experience on a national basis, through good times and bad. With single family mortgages, you had a large pool of such creditworthy borrowers, each having equity in their properties.

Then, you applied what are known as “stress tests”. A stress test is the assumption that something goes wrong. For instance, you might assume that there was a recession that would lead to homeowners losing their jobs, and then their homes. If rising interest rates hurt the security, you would check out some rising interest rate scenarios, and if falling interest rates hurt the security, you would check out some falling interest rate scenarios. Essentially you would push on the security until it fell over (using financial modeling).

The rating was simply a description of how hard you had to “push” before the security fell over and was unable to make contractual principal and interest payments to investors. If the ability to make payments was a bit shaky under the current economic environment, then the rating was junk. If the ability to repay investors was pretty good with a decent economy, but possibly grew problematic with a mild recession – then maybe you got the lowest investment grade rating, that of “BBB”. The highest rating, “AAA”, was reserved for those securities that had such powerful coverage and reserves built into them that they could withstand another Great Depression, and still make investor payments in full and on schedule. (Or so the theory went until Wall Street got collectively “brilliant” a few years ago.)

The Theory Of Turning Subprime Mortgages Into Wealth

To understand how the subprime debacle came about, we need to understand the reasons why supposedly prudent lenders would lend money to people wanting to buy houses, who, unlike our examples above, had neither equity nor a good credit history. The essence of the theory is that you charge a high enough interest rate, then you can cover the losses, and still walk away with way more money than if you had been doing ye olde traditional and boring strategy of lending to credit worthy borrowers with actual equity in their homes. A simple version of the numbers is something like what is illustrated in Scenario A, “The Way It Was Supposed To Work”:

The theory was that if you lend to people who don’t have particularly good credit, and who didn't put much equity (if any) into their homes, then sure, foreclosures were going to happen, and at rates well in excess of national averages. In this case, for illustration purposes (there were many kinds of subprime mortgages securitized over the years, this is just one round number example), we are assuming that 8% of the mortgages go into foreclosure every year, and we assume that the loss per foreclosure is 30%, so there is an annual loss of 2.4% on a large pool of mortgages. If you were lending at the same low rates that a highly creditworthy borrower can get, then this 2.4% annual loss would be a bad thing. But, if you are lending at a rate that is much higher than the market for "good" loans, and through securitization, you can get most of your funding at “good” loan rates, (the 4.8% for “AAA rates” plus expenses in our example) – then that 2.4% annual loss is no big deal, and in fact leaves a lucrative amount of money for you and others to keep.

In our example of how things were supposed to work, that 2.8% annual incentive with a $1.2 trillion market worked out to over $33 billion a year in incentives to securitize subprime mortgages. This was money that would be split many different ways: mortgage banking fees, investment banking fees, high yields on junior classes for hedge funds and other aggressive investors, bond insurance payments, and some of the most lucrative rating agency fees (to assure investors the whole thing would work) that have ever been seen in the capital markets. Multiply times seven for an average mortgage life, and we're looking at almost a quarter of a trillion dollars to be split, much of it just for massaging some numbers on a computer.

That was the theory, but there proved to be some complications in practice. The sources of these problems were myriad, including: underwriting people who could barely qualify for the teaser rate (while ignoring whether they could handle the full rate when the reset occurred); taking the thinnest of statistical histories, and creating a huge new market from the selective interpretations that allowed the deals to get done; ignoring the due diligence reports if you didn’t like them, and a number of other reasons that could all be summed up as the intersection of hubris and greed. The reasons are not our focus in this article, but a simple illustration of a general result is included below (this is an illustration, and does not purport to be an accurate statistical summary of the current market):

As illustrated in Scenario B, if it turns out that foreclosures are 15% instead of 8% for a particular grade of subprime, and foreclosure losses rise to 50% from 30% because so many people are getting foreclosed upon that it drives home prices downwards – then instead of splitting 2.8% of the excess profits in each mortgage pool, the big financial players are splitting a 2.3% loss. Meaning $27 billion in annual losses instead of $33 billion in profits (in this illustration, which does not purport to be an industry summary). While bad enough on its own, the losses showed that the securitization didn’t work, the ratings didn’t work, and the bond insurance might not work either. Which then collapsed the prices in the market to a far greater extent than mere foreclosure losses to date would justify alone, as discussed in the “Leveraging Up The Losses” section of this article.

The higher than expected losses did something else as well, something that truly made sophisticated investors nervous. Because the system failed with no genuine stress tests, and the layers of protection that were intended to insulate investors against adverse economic changes melted down – investors were left naked and exposed. Vulnerable to any adverse changes, as we illustrate in the next four charts below.

In Scenario C above we assume that a recession hits, something that is almost certainly already happening. People in marginal economic circumstances tend to be the most vulnerable to recessions, and there are already a surplus of properties on the market. So if we assume that a recession doubles subprime foreclosure rates, from 15% to 30%, and increases the loss per property from 50% to 60% as still more homes hit the market, (banks lose far more money in a foreclosure than just the decline in overall property values would indicate), then because we have no safety layers left, all the negative results go straight to the bottom line. Meaning that losses just went up by a factor of five, with over $154 billion in losses in the first year. In other words, what we saw in 2007 was nothing compared to what 2008 may hold for investors if a recession hits the nation. (Please note these are illustrations rather than precise predictions, a mild recession might inflict less losses – and a severe recession much worse.)

Recession is not the only danger. We just experienced the highest inflation rates in 17 years with an official annual CPI rate of 4.1% in 2007, and a 12 month PPI rate of 7.4% through January of 2008. Substantial inflationary dangers remain, and the Fed has effectively abandoned its (already weak) defense of the dollar, in order to try to avert recession. In Scenario D we look at what happens if recession is (miraculously) averted – but the price is a surge in inflation and rapidly increasing interest rates. Let’s say that indexed subprime mortgage rates jump from 10% to 13% -- and the result, for a group of people who barely qualified at 6% interest rates, is that the foreclosure rate doubles, going from 15% to 30%. With this scenario, rising inflation alleviates the fall in property values, so we assume that the average loss declines from 50% to 40%. Nonetheless, our bottom line is that our overall losses from subprime mortgages have tripled, from $27 billion up to $81 billion. The very effort of avoiding or minimizing a recession (if possible at all), may trigger a loss that is almost as bad as the recession driven loss would have been.

OK, let’s be optimists. Let’s say that the Fed somehow balances on the tightrope and dodges major recession through pumping the system full of new money, without triggering higher levels of inflation. This will be amazing if they can pull it off – but stranger things have happened. However, there is the separate issue of another powerful economic force at work, and that is housing prices that probably got way too high in a number of areas, and which many economists think might be in for a prolonged fall. If this happens, then two major problems occur for subprime mortgage collateralized securities investors: the foreclosure rate rises, because the more negative home equity becomes for someone who is struggling to make payments, the more likely they are to say “forget it” and walk away from their property; and, following that (of course), the greater the losses per foreclosure for investors. As illustrated in Scenario E above, if we say that the foreclosure rate rises from 15% to 20%, and in a market of falling values where few want to buy, the average foreclosure loss rises from 50% to 70%, then our annual total losses increase to $105 billion, or almost four times the current loss level under current conditions.

So, recession pushed our losses up by five times in our recession illustration (Scenario C), rising interest rates pushed up our losses by three times in Scenario D, and falling home prices pushed up our losses by four times in Scenario E. What if all three scenarios happen at the same time? What happens if: 1) a significant recession does hit despite the Fed pumping the system full of money; 2) inflation does increase thanks to the Fed’s recession fighting efforts, meaning we now have stagflation; and 3) the drop in property values accelerates with the double whammy of people losing their jobs even while mortgages grow less affordable in markets that are still falling?

Or, if we want to look on an individual level, what happens to the chances of someone making their mortgage payments, when: 1) they lose their job; 2) their mortgage payments more than double in two years (since the initial teaser rate); and 3) they owe $50,000 more on their mortgage than the market value of their home?

Troubles can arrive in threes, and the triple whammy of recession, rising interest rates and falling property values can indeed come ashore one after another, like three great tsunamis hitting a beach, as illustrated above in Scenario F. Let’s assume this three way combination means that foreclosure rates triple from 15% to 45% -- which may be a bit conservative for subprime borrowers, none of whom ever really had the money for the home in the first place, under conventional lending standards. Let’s further say that the glut of distressed homes on the market, even as unemployment is spiking upwards and mortgages are growing both less affordable and less available, means that the fall in property values accelerates, and average investor foreclosure losses rise from 50% to 70%. As shown in Scenario F – just making those two (reasonable) changes to our assumptions means that subprime losses climb from $27 billion to $315 billion, an increase of almost twelve times!

Should stagflation slam into an overpriced housing market after investor safety layers have already been stripped away, then we haven’t even begun to see the full extent of the damage to investors, to the housing market, and to the financial system as a whole.

Leveraging Up The Losses (Banking Dominos)

The scenarios shown herein may seem overly optimistic, particularly when compared to such numbers as the $600 billion in industry losses which UBS is predicting, or the $160 billion in losses which they estimate to have already occurred. The reason for the discrepancy is that we have been sticking to just the mortgages and mortgage securities – and these securities are generally not bought with cash, rather they are bought with borrowed cash. Highly volatile, short term borrowings which carry major risks of their own. As an example, when Bear Stearns fell 94% in 2 (weekend) days, there was no change in the mortgage market that precipitated the fall – it was the fear that Bear Stearns would lose their ability to borrow. An event that can make the capital of just about any seemingly solid looking major bank or investment bank disappear in a flash.

The bigger issue is that all the big financial players are highly leveraged. Now, just for round numbers, let’s say that a big financial firm has $100 billion in assets, $94 billion in liabilities and $6 billion in capital. We will assume that it owns $6 billion in questionable mortgage securities directly, with another $6 billion in loans to highly leveraged hedge funds that have their own questionable mortgage security holdings. Something drops the value of questionable mortgage securities by 25%. So the big financial firm takes a $1.5 billion hit directly – and a 50% hit on the hedge fund loans when the hedge funds collapse and the creditors are left with illiquid and distressed collateral that they don’t dare sell. The big financial firm just lost $4.5 billion, and the key number isn’t that it lost 4.5% of the value of its assets – but that it lost 75% of the value of its $6 billion capital base. With the remaining 25% being considered highly questionable.

Meaning the financial firm now has to unload $75 billion in assets to maintain its 6% capital ratio (assuming it can survive at all), or else be recapitalized by a foreign investor, with the Fed possibly propping it up in the meantime, when no one else will lend to it. In a market where everyone else has their own problems, and don’t have the money to buy the assets. Which drops the prices of everything. Which multiplies the losses upwards. Which brings us to the real problem.

If real subprime losses climb by 6 times or 12 times – then system wide financial losses likely climb by 24 times, or 36 times, or more. Because everything is linked, and the math that links all the dominos is multiplication, not addition. If you want a mental picture of how banking dominos work, don’t think of one domino hitting another domino, hitting another domino in a long line. Rather, think of one domino hitting two dominos, hitting four dominos, and so forth. Understand this, and you will understand the desperation in the current moves by the Federal Reserve.

Will This Happen?

Will this disaster scenario that we've just outlined actually happen? I sure hope not, for all of our sakes. Perhaps the easiest thing to do is to write off this article as being some wildly pessimistic fantasy. Hopefully it is. Except, we have to face some inconvenient facts. The subprime market really did melt down in 2007. The so-called financial masters of the universe really did make some spectacularly stupid moves, really did nearly go broke and are having to turn to foreign investors and Federal Reserve interventions in order to survive. Those rocks of stability and security in the financial system, the bond insurance firms and rating agencies, really did turn out to have foundations of sand rather than foundations of stone.

Most people agree we really are entering a recession. Inflation really was at its highest level in 17 years in 2007, which could also easily turn into much higher interest rates. The word stagflation really is being spoken by increasing numbers of people. Housing values really are dropping in a number of major markets. The safety margins that protected subprime mortgage derivatives investors really did collapse, even without any major economic stress test – and up to three major stress tests may actually hit this already badly wounded market in 2008. Is what we are describing here really paranoia – or is it what is happening all around us?

When we put all these unfortunate facts together, we may not know for sure whether any disaster scenario is going to happen -- but I think we all have to agree that there is a significant chance that it just… might happen. Now let's further stipulate that the very essence of financial prudence, of wisdom, of protecting your savings is to be prepared for very real possibilities. If you’re not sure, but you think something just might happen in the next year which could devastate your life savings – I think most of us feel a responsibility to try to protect ourselves, if we can. Which takes us to perhaps the most important part of this article -- how can we be prepared?

Taking Actions

First, you need to very seriously think about cutting your ownership of financial assets. The type of disaster scenario we are talking about could devastate stock and bond markets for a generation. If you are investing for retirement and your portfolio gets taken down by just such a scenario, then you may never have the chance to replace it. For these reasons, there is a powerful, powerful case for moving a substantial portion of your assets into tangible assets. Good examples of tangible assets include gold, silver, commodities, real estate, farmland and energy.

The next thing you should very seriously think about is whether crisis leads to opportunity, in ways that go well beyond a simple strategy of only buying tangible assets. John Paulson saw the crisis that was coming in subprime mortgages, researched and educated himself on this area (which had not been his field of expertise), and he turned the crisis into a $3-$4 billion personal payday in 2007. If you're not a hedge fund manager like Paulson, you may not have the tools that he used to turn a market crisis into personal billions. That’s OK, because Paulson didn’t start with the tools either. He started with educating himself, learning about a new area, until he came up with a novel way to profit from disaster. A method that wasn’t in the financial textbooks, and that he didn’t find by reading a financial columnist in the paper.

You have more tools than you may think, some of which may surprise you. Tools which can give you the opportunity to turn financial disaster into personal net worth. There are ways you can use those tools to turn the destruction of the currency into perhaps the greatest real wealth-building opportunity of your life, on a long-term and tax-advantaged basis. But, if you want this to happen --you will need to start with learning. You are going to have to educate yourself, and work to not just understand, but to master some of the financial forces and methods in play here. You will have to learn how to turn the destruction of paper wealth into real wealth. With Turning Inflation Into Wealth being the first key step. My best wishes to you for turning this challenge into an extraordinary personal opportunity.

U.S. Fed auctions another $50 bln to banks

WASHINGTON, March 25 (Xinhua) -- The U.S. Federal Reserve said Tuesday it auctioned 50 billion U.S. dollars in short-term loans to cash-strapped banks on Monday to combat a persistent credit crunch.

This was the central bank's eighth auction aimed at injecting more money into the U.S. banking system since mid-December 2007, when the Fed established its Term Auction Facility to deliver short-term funds to banks in need of liquidity.

The series of auctions so far have pumped 260 billion U.S. dollars into the banking system.

The latest auction produced an interest rate of 2.615 percent, lower than the 2.80 percent generated in the previous one, which was held on March 11 and also provided 50 billion U.S. dollars to banks.

There were 88 bidders for a slice of the latest 50 billion U.S. dollars in 28-day loans. Demand was high, with the Fed receiving bids for 88.9 billion U.S. dollars worth of loans.

Although the Fed had taken steps such as rate cuts to add liquidity to the banking system, commercial banks had avoided borrowing money from the central bank through its discount window, which makes loans to banks, out of concern that investors would see the move as an indication of the banks' underlying financial problems.

Tuesday, March 25, 2008

If the bailout comes, watch for a dollar dive

By James Saft

LONDON (Reuters) - If the United States bails out the financial system by buying mortgage debt directly, the price just might be surging inflation and a dollar crisis.

Calls are increasing for the government, either directly or via the Federal Reserve, to cut the knot of the credit crisis at a stroke by buying up mortgages that banks and investment banks are finding difficult to finance.

If the United States bought mortgage debt at or very near 100 cents on the dollar, despite the fact that much of it is trading well below that, it would allow banks to pay back loans used to finance these holdings.

If done in sufficient size, say $800 billion (400 billion pounds) or $1 trillion, it would relieve the terrible pressure on bank balance sheets and allow other credit markets, like those for corporate loans, to return to something approaching equilibrium.

That in turn would make Fed monetary policy more effective in the sense that banks would be able to increase lending and pass on interest rate reductions.

Of course this is a radical step, and way beyond the Fed's already extraordinary policy of swapping mortgages held by banks and some investment banks for easy to finance Treasuries.

It is also hugely risky in terms of the Fed's obligation to maintain stable prices. Putting aside moral hazard -- many foolish borrowers and lenders would thus be given a free ride -- and depending on how such a bailout was done, it could stoke inflation to levels intolerable to foreign creditors, provoking a sharp fall in the dollar as they sought safety elsewhere.

Such a bailout would either have to be paid for by taxes, which seems unlikely, or would involve issuing more government debt or effectively expanding the money supply.

"There would be an inflationary impact because of the huge introduction of credit," said Philip Gisdakis, strategist at Unicredit in Munich.

"It's not $50 billion; we are talking about more like $1 trillion. This injection of capital you need will have consequences for the U.S. economy."

A bailout of that size is very likely to stoke inflation, which is already uncomfortably high, by effectively creating more dollars and putting them into circulation.

"If it's too big there will have to be an element of monetisation, with the Fed financing it," said Tim Drayson, economist at ABN AMRO in London.

"Monetisation is rising from what was a small likelihood to what is now an increasing risk."

To be sure, there is no political consensus for a major bailout, which is openly opposed by the Bush administration and would face serious difficulties gaining agreement in an election year. The U.S. Treasury said on Wednesday that proposals it had seen would do more harm then good.

That is partly why there has been such a startling turn around on allowing Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) to take on more risk and buy more mortgages. While their debt has an implicit government guarantee, they are shareholder owned.

But the $200 billion in new lending allowed to Fannie and Freddie by their regulator, The Office of Federal Housing Enterprise Oversight, might not prove enough.


The Fed's current policy of financing mortgage bonds, involving another $200 billion, has its limits as well. When that sum is exhausted, analysts estimate that it will have $300-400 billion of balance sheet capacity left before it either has to issue debt or purchases become inflationary.

If that happens, it would undoubtedly be with explicit approval of the Treasury.

"That would be a big expansion in the monetary base, which would have serious inflation consequences, not least foreigners' perception of the U.S. and the credibility of the Fed," said Drayson.

"You could see widespread dumping of dollar assets which would make the inflation self-fulfilling."

The question of how deep a dollar fall that implies is really in the hands of the United States' foreign creditors, like China and the Gulf states. Because they peg their own currencies to the dollar, exporting more to the United States than they import, they are regular dollar buyers.

A falling dollar causes inflation for them, a price thus far they have been willing to bear as a cost of a profitable trading relationship.

But eventually, if inflation and a dollar fall interact toxically, support from abroad might just dry up.

"If (foreign creditors) decide that they are not going to accept the inflationary policies of the Fed, you could see a pretty disorderly collapse," said Drayson.

"If we are talking a trillion dollars plus (bailout), it will be quite hard to avoid inflation as a consequence of that."

There are, of course, also consequences to the alternative course, which may lead to a round of failures by financial institutions.

In either event, the stakes are high.

(James Saft is a Reuters columnist. The opinions expressed are his own. At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.

Massive ice shelf on verge of breakup

  • A large chunk of the Wilkins ice shelf in Antarctica broke away last month
  • Only a narrow strip of ice is protecting the shelf from further breakup
  • "I didn't expect to see things happen this quickly," scientist says
  • Ice shelves are floating ice sheets attached to the coast

(CNN) -- Some 220 square miles of ice has collapsed in Antarctica and an ice shelf about the size of Connecticut is "hanging by a thread," the British Antarctic Survey said Tuesday, blaming global warming.

"We are in for a lot more events like this," said professor Ted Scambos, a glaciologist at the National Snow and Ice Data Center at the University of Colorado at Boulder.

Scambos alerted the British Antarctic Survey after he noticed part of the Wilkins ice shelf disintegrating on February 28, when he was looking at NASA satellite images.

Late February marks the end of summer at the South Pole and is the time when such events are most likely, he said. VideoWatch aerial footage of the area »

"The amazing thing was, we saw it within hours of it beginning, in between the morning and the afternoon pictures of that day," Scambos said of the large chunk that broke away on February 28.

The Wilkins ice shelf lost about 6 percent of its surface a decade ago, the British Antarctic Survey said in a statement on its Web site

Another 220 square miles -- including the chunk that Scambos spotted -- had splintered from the ice shelf as of March 8, the group said.

"As of mid-March, only a narrow strip of shelf ice was protecting several thousand kilometers of potential further breakup," the group said.

Scambos' center put the size of the threatened shelf at about 5,282 square miles, comparable to the state of Connecticut, or about half the area of Scotland. See a map and photos as the collapse progressed »

Once Scambos called the British Antarctic Survey, the group sent an aircraft on a reconnaissance mission to examine the extent of the breakout.

"We flew along the main crack and observed the sheer scale of movement from the breakage," said Jim Elliott, according to the group's Web site.

"Big hefty chunks of ice, the size of small houses, look as though they've been thrown around like rubble -- it's like an explosion," he said.

"Wilkins is the largest ice shelf on the Antarctic Peninsula yet to be threatened," David Vaughan of the British Antarctic Survey said, according to the Web site.

"I didn't expect to see things happen this quickly. The ice shelf is hanging by a thread -- we'll know in the next few days or weeks what its fate will be."

But with Antarctica's summer ending, Scambos said the "unusual show is over for this season."

Ice shelves are floating ice sheets attached to the coast. Because they are already floating, their collapse does not have any effect on sea levels, according to the Cambridge-based British Antarctic Survey.

Scambos said the ice shelf is not currently on the path of the increasingly popular tourist ships that travel from South America to Antarctica. But some plants and animals may have to adapt to the collapse.

"Wildlife will be impacted, but they are pretty adept at dealing with a topsy-turvy world," he said. "The ecosystem is pretty resilient."

Several ice shelves -- Prince Gustav Channel, Larsen Inlet, Larsen A, Larsen B, Wordie, Muller and Jones -- have collapsed in the past three decades, the British Antarctic Survey said.

Larsen B, a 1,254-square-mile ice shelf, comparable in size to the U.S. state of Rhode Island, collapsed in 2002, the group said.

Scientists say the western Antarctic peninsula -- the piece of the continent that stretches toward South America -- has warmed more than any other place on Earth over the past 50 years, rising by 0.9 degrees Fahrenheit each decade.

Scambos said the poles will be the leading edge of what's happening in the rest of the world as global warming continues.

"Even though they seem far away, changes in the polar regions could have an impact on both hemispheres, with sea level rise and changes in climate patterns," he said.

News of the Wilkins ice shelf's impending breakup came less than two weeks after the United Nations Environment Program reported that the world's glaciers are melting away and that they show "record" losses.

"Data from close to 30 reference glaciers in nine mountain ranges indicate that between the years 2004-2005 and 2005-2006 the average rate of melting and thinning more than doubled," the UNEP said March 16.

The most severe glacial shrinking occurred in Europe, with Norway's Breidalblikkbrea glacier, UNEP said. That glacier thinned by about 10 feet in 2006, compared with less than a foot the year before, it said.

CNN's Marsha Walton contributed to this report.

All AboutGlobal Climate ChangeAntarctica

Find this article at:

Vast Antarctic Ice Shelf on Verge of Collapse

Andrea Thompson
LiveScience Staff Writer
Tue Mar 25, 6:11 PM ET

A vast ice shelf hanging on by a thin strip looks to be the next chunk to break off from the Antarctic Peninsula, the latest sign of global warming's impact on Earth's southernmost continent.

Scientists are shocked by the rapid change of events.

Glaciologist Ted Scambos of the University of Colorado was monitoring satellite images of the Wilkins Ice Shelf and spotted a huge iceberg measuring 25 miles by 1.5 miles (41 kilometers by 2.5 kilometers) that appeared to have broken away from the shelf.

Scambos alerted colleagues at the British Antarctic Survey (BAS) that it looked like the entire ice shelf - about 6,180 square miles (16,000 square kilometers - about the size of Northern Ireland)- was at risk of collapsing.

David Vaughan of the BAS had predicted in 1993 that the northern part of the Wilkins Ice Shelf was likely to be lost within 30 years if warming on the Peninsula continued at the same rate.

"Wilkins is the largest ice shelf on the Antarctic Peninsula yet to be threatened," he said. "I didn't expect to see things happen this quickly. The ice shelf is hanging by a thread - we'll know in the next few days and weeks what its fate will be."

Aircraft reconnaissance

The BAS scientists sent an aircraft out on a reconnaissance mission to survey the extent of damage to the ice shelf.

Jim Elliot, who captured video of the breakout said, "I've never seen anything like this before - it was awesome. We flew along the main crack and observed the sheer scale of movement from the breakage. Big hefty chunks of ice, the size of small houses, look as though they've been thrown around like rubble - it's like an explosion."

An initial iceberg calved away from the Wilkins Ice Shelf on Feb. 28. A series of images shows the edge of the ice shelf proceeding to crumble and disintegrate in a pattern characteristic of climate-caused ice shelf retreats throughout the northern Antarctic Peninsula. The disintegration left a sky-blue patch of hundreds of large blocks of exposed old glacier ice floating across the ocean surface.

Though these broken chunks of ice have spread into the sea, they won't raise sea levels because the ice shelf was already floating on the water.

By March 8, the ice shelf had lost just over 160 square miles (414 square kilometers) of ice, and the disintegrated ice had spread over 540 square miles (1,400 square kilometers). As of mid-March only a narrow strip of shelf ice between Charcot and Latady islands was protecting several thousand more kilometers of the ice shelf from potentially breaking up.

The region where the Wilkins Ice Shelf lies has experienced unprecedented warming in the past 50 years, with several ice shelves retreating in the past 30 years. Six of these ice shelves have collapsed completely: Prince Gustav Channel, Larsen Inlet, Larsen A, Larsen B, Wordie, Muller and the Jones Ice Shelf.

Antarctic warming

The Wilkins Ice Shelf was stable for most of the last century until it began retreating in the 1990s. A previous major breakout occurred there in 1998 when 390 square miles (1,000 square kilometers) of ice was lost in just a few months.

"We believe the Wilkins has been in place for at least a few hundred years, but warm air and exposure to ocean waves are causing it to break up," Scambos said.

The Antarctic Peninsula has warmed faster than anywhere else in the Southern Hemisphere; temperature records show that the region has warmed by nearly 3 degrees Celsius during the past 50 years - several times the global average and only matched in Alaska.

Other parts of Antarctica, including the East Antarctic Ice Sheet, seem to be more stable, though areas of melt have been observed in recent years.

Melting in the Antarctic is different than the recent record melt in the Arctic. Antarctica is composed of ice sheets, or huge masses of ice up to 2.5 miles (4 kilometers) thick that lie on top of bedrock and flow toward the coast, and ice shelves, the floating extensions of ice sheets. Arctic ice is primarily sea ice, some of which persists year-round and some of which melts in the summer and freezes again in the winter.

Video: Antarctic Ice Shelf Disintegration North vs. South Poles: 10 Wild Differences Images: Ice of the Antarctic

Original Story: Vast Antarctic Ice Shelf on Verge of Collapse

Visit for more daily news, views and scientific inquiry with an original, provocative point of view. LiveScience reports amazing, real world breakthroughs, made simple and stimulating for people on the go. Check out our collection of Science, Animal and Dinosaur Pictures, Science Videos, Hot Topics, Trivia, Top 10s, Voting, Amazing Images, Reader Favorites, and more. Get cool gadgets at the new LiveScience Store, sign up for our free daily email newsletter and check out our RSS feeds today!

Ron Paul on CNBC's Kudlow & Company 3-20-08 7pm est discusses why we should abolish the Federal Reserve:

Report: Iranian, Syrian missiles to pound Israel in next war

Secret report paints grim picture: Thousands of casualties, nationwide power outages
Itamar Eichner

Hundreds of dead, thousands of injured, missile barrages on central Israel , full paralysis at Ben-Gurion Airport, constantly bombed roads, nationwide power outages that last for long hours, and whole regions' water supply being cut off – this is what the next war could look like.

A secret report recently distributed among government ministries and local municipalities details various wartime scenarios. The report deals with very harsh possibilities, including some that are downright horrifying, formulated as part of the lessons drawn in the wake of the Second Lebanon War .

Notably, the document does not aim to predict future developments with certainty, but rather, only aims to serve as a guideline for civilian war preparations. The above assessment is characterized as a "severe reasonable scenario" – that is, it is not the gravest scenario, but also not the most favorable.

Air Force to be called upon to protect Israel's airspace (Photo: AP)

According to this scenario, the war will last for about a month and will include the participation of Syria (military operations on the Golan Heights front and the firing of many Scud missiles at the home front,) Lebanon (the firing of thousands of Hizbullah rockets at the Galilee and Haifa as well long-range missiles at central Israel,) and the Palestinian Authority (relatively limited conflict that would include short-range rockets fired from Gaza and the West Bank as well as terror attacks such as suicide bombings within Israel.)

Mass evacuation in case of chemical attack

According to this scenario, Iran will also get involved in the war, but will only fire a limited number of missiles rather than non-conventional weapons. In addition to missile barrages, the scenario includes aerial strikes on military and strategic targets, attacks on infrastructure facilities, and attempted abductions of civilians and soldiers.

Such hypothetical war, according to the assessment, will leave 100-230 civilians dead, and 1,900-3,200 Israelis wounded. However, should Israel be attacked with chemical weapons, the number of killed and wounded Israelis would skyrocket to 16,000.

Under such circumstances, as a result of missile damage, chemical contamination, and the razing of homes the State would have to evacuate as many as 227,000 Israelis from their homes. According to the assessment, about 100,000 people would seek to leave the country should such scenario materialize.

Israel's PM and Cheney meeting shrouded in mystery

US Vice President Dick Cheney's second meeting with Prime Minister Ehud Olmert Monday morning, like their first meeting Saturday night, was shrouded in mystery, leading to speculation among diplomatic officials that the focus was on how to stop Iran's nuclear program.

The Prime Minister's Office, which generally puts out a statement or briefs the press after Olmert meets with a world figure of Cheney's stature, was mum about the content of both meetings. Olmert's spokesman, Mark Regev, would only say that Monday's meeting was a "good" one, and that the two men "discussed a range of issues, including the peace process, terrorism and threats to regional security."

While Cheney's public statements during his two days here dealt primarily with the diplomatic process with the Palestinians, one diplomatic source said that in Cheney's private meeting with Olmert, it was clear that Iran was the central issue.

After a breakfast meeting with Olmert, Cheney told reporters that Hamas, aided by Syria and Iran, were trying to "torpedo" the diplomatic talks.

"It is clearly a difficult situation, in part, because - I think it's true - there's evidence that Hamas is supported by Iran and Syria and that they're doing everything they can to torpedo the peace process," Cheney said.

Referring to Yemeni efforts to broker negotiations between Hamas and Fatah, Cheney said that after meeting with Fatah's leadership, his impression was that "they have established some preconditions before they would ever consider a reconciliation, including a complete reversal of the Hamas takeover of Gaza."

No sooner had Cheney boarded his plane for Turkey, the final leg of a 10-day Middle East trip, than Israeli diplomatic officials began preparing for the next wave of high-level visits of American officials.

Hawaii Senator Daniel Inouye, a long-time staunch supporter of Israel, is scheduled to arrive on a fact-finding visit on Tuesday, followed by Gen. William Fraser, the US's road map monitor, on Wednesday; Secretary of Homeland Security Michael Chertoff on Thursday; and US Secretary of State Condoleezza Rice on Saturday night.

Apparently timed to coincide with the upcoming visit of Fraser and Rice, Defense Minister Ehud Barak said Israel would begin making life easier for Palestinians in the West Bank, but would not remove checkpoints for now.

Barak, during a visit to the Tarkumiya checkpoint near Hebron, said Israel was working on making crossing through checkpoints easier and facilitating new industrial zones to create thousands of jobs for Palestinians.

He is scheduled to meet PA Prime Minister Salaam Fayad on Wednesday and is mulling a number of gestures, including opening a VIP lane at checkpoints and exempting Palestinian businessmen who are approved by the Shin Bet (Israel Security Agency) from inspections.

Rice reportedly expressed impatience with Barak during her visit here earlier this month, saying that he could do more to facilitate Palestinian movement and make their everyday lives easier.

Meanwhile, in line with the policy of improving the quality of life in the West Bank, the Civil Administration will inaugurate a new power station near Jenin on Tuesday to provide electricity to four villages that until now have been powered by generators.

The villages - Rummama, Tanah, Hirbat a-Tiba and Zbuba - will receive electricity from Israel Electric for the first time in history. In addition, a water reservoir near Zbuba will be connected to the grid, a step that will significantly lower the price of water - by NIS 8 - for the residents of 11 Palestinian villages in the area.

The construction of the power station, as well as the new power lines, was made possible by a €11.5 million donation from France and included the construction of power lines in 27 villages throughout northern Samaria. A ceremony will be held on Tuesday at the new power station, attended by Jenin Governor Kadura Mussa and Civil Administration chief in Jenin Lt.-Col. Fares Atilla.

Defense officials said that the new power station was part of a list of projects the Civil Administration was overseeing in conjunction with international organizations.

Castles in the Sand

By Joel Bowman

As a little kid growing up on the Gold Coast of Australia, my mates and I would often build sand castles. Even though we built lots and lots of castles, we never tried to equip any of them with electricity, fresh water and cable TV. But that's exactly what's happening along Dubai's coastline...and the infrastructure requirements will be enormous.

Dubai has constructed the world's most extravagant sand castles. With names like Palm Jumeirah, Palm Jebel Ali and Palm Deira, these massive manmade islands owe their existence to ostentatious ambitions and spectacular engineering feats. The three gargantuan accomplishments, made up of 100 million cubic meters of sand and rock are visible from space. In total, master developer, Nakheel, has manufactured 180 kilometers of coastline, increasing the United Arab Emirate's beachfront by an astounding 166%.

Impressive as this may seem, the crown jewel of Dubai's manmade archipelagoes must be Nakheel's "The World" – a 300-island development in the shape of the world map, featuring 232 kilometers of new coastland and built from a mind-boggling 386 million tones of rock and sand.

The press over here in the Middle East has been drowning in ink dedicated to the sheer magnitude of Dubai's construction wonders. The sandcastles, the Burj Dubai – currently the world's tallest tower – and Dubailand, the $65 billion, seven theme park mega-development, are just a few of the projects making headlines.

But not everyone is happy with how things are progressing. Investors in The World, for example, were shocked a few weeks ago when Nakheel, not content with earthly inspirations, announced plans to build another reclaimed land project, The Universe. While it is difficult for us mere mortals to empathize with the plight of millionaire island-owners, one can only imagine the discomfort that news of an even more exclusive property opportunity must have wrought for investors. Honestly, who cares about being king of the world when your neighbor is the master of the universe?

Owners of The World, however, may have larger concerns than simply an acute case of "Universe-envy." Dubai's construction boom is at the mercy of a plethora of tipping-point variables that could sink even the most ostentatious of plans.

It seems the usual culprits of serious underinvestment in sustainable infrastructure and with runaway government spending have again colluded to thwart the best intentioned plans.

According to the Middle East Economic Digest (MEED), Dubai will require an additional 60,000MW in power capacity by 2015 to satisfy anticipated demand for electricity. That figure would nearly double the currently installed capacity.

"The report shows that the GCC utility sector is entering a critical phase," says Angus Hindley, research editor at MEED and author of the report.

With oil revenue continuing to flood the collective Gulf Cooperation Council's (GCC) coffers, there would appear to be little or no prospect of regional economic slowdown. Consequently, the GCC has embarked on an unprecedented building program and Dubai, at the epicenter, may be in the most precarious position of all if the supply problem is not soon addressed.

"Combining with a distinct lack of investment in the first half of the decade," notes Hindley, "the reserve power capacity has fallen significantly across the Gulf, with the single exception of Abu Dhabi. This raises the spectre of power shortages across the region, and in particular in Dubai, Kuwait and parts of Saudi Arabia – despite the fact that the region has substantial oil & gas reserves."

Striking (and ironic) as the reality might sound, the actual new capacity requirements are expected to be even higher than this given that utilities departments will need to start decommissioning old installations.

Based on 2007 unit costs, the GCC power sector will require about $50bn of investment in new power generating capacity – no small drop in the bucket.

That brings us, of course, to the annoying little fact that Dubai is located in the middle of a desert. You could be forgiven for forgetting this while playing a round of golf at the lush Dubai International Golf Course...but if you happen to take a deep divot on any fairway, you'd soon realize that the entire course rests atop one big sandy dessert.

Not that this inconvenient geographical reality has curbed the enthusiasm of Dubai's master developers. The Palm developments alone, for example, require irrigation for 12,000 palm trees that are being grown in a nursery just down the road from your editor's apartment in Jumeirah Beach and readied for transplant into the middle of the Gulf.

And that's just the trees on a few offshore islands.

According to official figures, demand for desalination capacity - the predominant method of purifying water here in Dubai - grows around 8% per year. That's just a shade under the rate of population growth the city is experiencing. To service this swelling demand, Dubai will have to triple its current desalination capacity to around 800 million gallons per day by 2015.

GCC-wide cost projections for desalination projects alone – to which the thirsty city of Dubai contributes largely – run in the vicinity of $20 billion.

MEED sums up its rather alarming outlook for the city of sandcastles' infrastructure demands by declaring that "utilities are facing the most challenging time in their history."

The increase in competition for the feedstock is forcing utilities to consider new technology and alternative energy production, such as coal, nuclear and solar for the first time.

Just last month, for example, the UAE signed an agreement with France to cooperate on the development of nuclear energy for the emirates. French companies Total, Suez and Areva have all expressed interest in joining forces to develop plans for two new-generation nuclear reactors in the UAE. But the most ambitious plans put the start-up date for the new reactors sometime around 2016, giving Dubai plenty of time to shrivel up in the dark before then.

Even if Dubai does manage to keep the lights on and the taps running, the city must also contend with the very clear and present danger of tightening supply chains for raw construction materials.

[Rude Endnote: So while the real estate market goes ballistic in Dubai, there are some worrying signs of unsustainability. Sound familiar?

As always, we welcome your feedback. Please send emails to the address below.


Joel Bowman
Rude Awakening

Monday, March 24, 2008

Take a free dollar...

The Financial Destruction of the Average Man

By Jim Sinclair
This weekend's meeting of four heads of central banks communicates the size of the OTC derivative disaster. It is a system that is broken. A bailout will require the printing of trillions of dollars worth of monetary stimulation making Bernanke's helicopter drop look like chump change.
The dollar number of pending derivative bankruptcies is the size of the mountain of garbage paper issued by just those who are to be bailed out. That number is greater than the total world economies.
There simply isn't enough money in the world for central banks to buy up the mountain of worthless paper sold by those who need bailouts; all of which made fortunes for their directors, officers and key people.
When an OTC derivative fails to perform, notional value becomes real value.
The notional value of all OTC derivatives exceeds $500 trillion.
Credit default swaps (OTC derivatives) alone account for over $20 trillion dollars of notional value and are failing. Major dealers in these items, Lehman and JP Morgan, had their debt downgraded last week.
Maintaining the AAA rating on debt of public companies primarily issuing default swaps as credit guarantees is a sick JOKE of fabrication. This is a JOKE that in all probability will lead to litigation that destroys the rating companies.
You can be absolutely sure that all the biggies have their money out.
No one mentions these firms being bailed out are the ones who created this disaster, making billions for their economic sin. You can be sure the big boys have their money out of the now on-the-rocks international institutions.
No one mentions that bailing out the bankers will leave the average man victimized and paying for the pleasure of the economic rape.
Meanwhile Derivative Traders (salesmen of perdition, not traders) and their hedge fund managers are all in Greenwich Connecticut with their hundreds of millions and billions, now retired playing tennis on their indoor courts at their waterfront mansions as the mess deepens.
Litigation against the officers and directors of these international banking firms, both against the biggies personally as well as the company, will make the biggies occupation one of defending against litigation for the rest of their lives.
For those biggies in these companies who trust no one and therefore have wives with no money will lose everything. Some of them I know. What goes around certainly comes around.
Litigation against OTC derivatives are slam-dunk victories for the injured plaintiffs. The biggies will pay.
This is the greatest act in history of "Public Be Damned" and "Let them Eat Cake." It will not come about because in the USA it is already the hottest political potato.
The problem is that the plan of the US legislative is down right STUPID. It is an embarrassment that legislators are so publicly moronic when it comes to economics.
The problem that no one is focusing on right now is the tracking of the mortgage itself to the structured product, which has broken down. That means in these items many can't connect the underlying mortgage to the structured investment product (derivative).
So far courts have held that the only entity that can foreclose is the entity that actually lent the money. The average guy does not know that with an attorney to protect him he has a free house!
The entity that actually lent the money has sold the mortgage and been paid. Therefore where is the incentive for original lender to foreclose? The answer is there is none. Bankers do not help bankers in the same way that sharks do not help sharks.
Because of the unthinkable size of the problem it is impossible to construct a Resurrection Trust to buy all these worthless and never to be anything but worthless items.
Should any item surface to do this it will destroy all the National currency of the central banks that participate.
If there were an attempt to construct such an entity with the cooperation of the USA, the US dollar would go much lower than .5200. Gold would go to many thousands of US dollars.
Anyone who last week assumed the problem was over and we would be improving from there on out is simply nuts. ****

Fed's rescue halted a derivatives Chernobyl

Page 1 of 3
When the Federal Reserve stepped in to save Bear Stearns, most people had no idea what was at stake, writes Ambrose Evans-Pritchard

We may never know for sure whether the Federal Reserve's rescue of Bear Stearns averted a seizure of the $516 trillion derivatives system, the ultimate Chernobyl for global finance.

  • The financial crisis in full
  • Read more by Ambrose Evans Pritchard
  • Roger Bootle: This is a crisis but not The Great Depression

  • "If the Fed had not stepped in, we would have had pandemonium," said James Melcher, president of the New York hedge fund Balestra Capital.

    "There was the risk of a total meltdown at the beginning of last week. I don't think most people have any idea how bad this chain could have been, and I am still not sure the Fed can maintain the solvency of the US banking system."

    All through early March the frontline players had watched in horror as Bear Stearns came under assault and then shrivelled into nothing as its $17bn reserve cushion vanished.

    Melcher was already prepared - true to form for a man who made a fabulous return last year betting on the collapse of US mortgage securities. He is now turning his sights on Eastern Europe, the next shoe to drop.


    "We've been worried for a long time there would be nobody to pay on the other side of our contracts, so we took profits early and got out of everything. The Greenspan policies that led to this have been the most irresponsible episode the world has ever seen," he said.

    Fed chairman Ben Bernanke has moved with breathtaking speed to contain the crisis. Last Sunday night, he resorted to the "nuclear option", invoking a Depression-era clause - Article 13 (3) of the Federal Reserve Act - to be used in "unusual and exigent circumstances".

    The emergency vote by five governors allows the Fed to shoulder $30bn of direct credit risk from the Bear Stearns carcass. By taking this course, the Fed has crossed the Rubicon of central banking.

  • Liam Halligan: UK house prices will escape America's crash
  • News and analysis from the banking sector
  • To understand why it has torn up the rule book, take a look at the latest Security and Exchange Commission filing by Bear Stearns. It contains a short table listing the broker's holding of derivatives contracts as of November 30 2007.

    Bear Stearns had total positions of $13.4 trillion. This is greater than the US national income, or equal to a quarter of world GDP - at least in "notional" terms. The contracts were described as "swaps", "swaptions", "caps", "collars" and "floors". This heady edifice of new-fangled instruments was built on an asset base of $80bn at best.

    On the other side of these contracts are banks, brokers, and hedge funds, linked in destiny by a nexus of interlocking claims. This is counterparty spaghetti. To make matters worse, Lehman Brothers, UBS, and Citigroup were all wobbling on the back foot as the hurricane hit.

    "Twenty years ago the Fed would have let Bear Stearns go bust," said Willem Sels, a credit specialist at Dresdner Kleinwort. "Now it is too interlinked to fail."

    The International Swaps and Derivatives Association says the vast headline figures in the contracts are meaningless. Positions are off-setting. The actual risk is magnitudes lower.

    The Bank for International Settlements uses a concept of "gross market value" to weight the real exposure. This is roughly 2 per cent of the notional level. For Bear Stearns this would be $270bn, or so.

    "There is no real way to gauge the market risk," said an official

    ...the rest of the story....