Monday, January 31, 2011

Today's links

1--Banks get the green-light to cook the books, Wall Street Journal

Excerpt: The banks got what they wanted. Accounting rule makers on Tuesday dropped a plan to require banks to value loans using market prices.

That means investors will remain reliant on banks' own views of the worth of their assets. Those judgments proved seriously flawed during the financial crisis and left many with insufficient capital. Taxpayers, who as a result were called upon to bail out numerous institutions, also are left more vulnerable.

The Financial Accounting Standards Board's original proposal, put forward last spring, had called for banks to reflect market values in the total worth of their assets, which would affect their equity....Banks generally oppose the use of market prices because, they say, it makes their results more volatile. Their intense lobbying efforts against the proposal likely got a leg up after FASB Chairman Robert Herz, who had supported the plan, unexpectedly departed in August. FASB cited strong opposition it received in public comments in changing course.

Its decision means banks largely will continue to value loans as they do today, basing values on their original cost less a reserve to reflect the possibility of loss. FASB has yet to decide if the market value for loans will be disclosed on the balance sheet or buried in the footnotes, as they are now.

2--Banks grip on prime shadow inventory growing: Morgan Stanley, Housingwire

Excerpt: Whether they like it or not, the nation's banks control most of the country's shadow inventory, according to a report Friday from Morgan Stanley.

Even more, properties in imminent default are typically cheaper homes with prime mortgages. ...The shadow inventory, they say, is the biggest problem for average Americans living in the nation's major cities.

And, what's more, the homes are more and more being controlled by the banks, as opposed to Fannie Mae, Freddie Mac or private securitization trusts....

Of the shadow inventory, 75% are valued below $250,000, showing that McMansions have a small share of delinquencies....Further, the shadow inventory is growing across all of the United States. The analyst expect that more than 8 million liquidations are in order over the next five years before housing stabilizes.

"While hard-hit cities represent a more than fair share of shadow inventory, its distribution broadly encompasses all corners of the country," said the analysts.

3--Hedge Fund Guy's New Best Friend Is Water, Mark Gilbert, Bloomberg

Excerpt: Water is set to become hedge-fund guy’s new best friend forever....More than 100 executives, including national presidents, gathered at the World Economic Forum’s annual meeting in Davos, Switzerland, yesterday to discuss water. There are enough hedge- fund hangers-on at the conference to suspect that at least some wangled an invite.

“Water is going to shape the path of economic growth in the countries in which we work,” says Rachel Kyte, a vice- president at the International Finance Corp., the World Bank’s private-investment arm. The IFC is embarked on “a data-driven exercise which can put investable propositions in front of private-sector leaders.” ...

“A rapidly rising global population and growing prosperity are putting unsustainable pressures on resources,” the WEF said in its 2011 report on global risks. “Demand for water, food and energy is expected to rise by 30 to 50 percent in the next two decades, while economic disparities incentivize short-term responses in production and consumption that undermine long-term sustainability. Shortages could cause social and political instability, geopolitical conflict and irreparable environmental damage.”

I asked Kyte of the IFC whether she was concerned about speculators getting involved in the nascent water industry. Her response didn’t exactly fill me with confidence.

“We see increased interest across the full spectrum of financiers, from commercial banks to private equity,” she replied. “There are the normal barriers to investment: country risk, foreign exchange risk, technology risk. Most investors need instruments and intermediation to get into the business. So we have to provide tools, finding ways to share risk to get private finance involved.”

4--Conservative Austerity Idea Is Failing, David Blanchflower, Bloomberg

Excerpt: Sorry, fiscal austerity doesn’t work. For evidence, look no further than the U.K....There is little historical precedent in the real world, though lots of fantasizing in the made-up world of economic theorists, to suggest that fiscal austerity works. The best example of austerity’s failure is the double-dip that occurred in the late 1930s in the U.S., when spending was reduced too soon in a nascent recovery. In contrast, the U.K. didn’t have a double-dip because it was engaging in classic Keynesian spending as it began re- arming.

Claims are often made that there are examples where fiscal austerity has worked. But it turns out that this is generally due to the monetary stimulus that accompanied it, as in the U.K. under Margaret Thatcher in the 1980s. The most frequently cited example is Canada, but it was able to cut interest rates while at the same time benefiting from the Clinton boom of the 1990s....

Fiscal austerity has already been started in Greece, Ireland, Spain and Portugal, and this seems to be pushing all of them back into recession. Over the last four quarters, growth in Greece was negative and falling, and bond investors are once more demanding sky-high returns to compensate their risk. The excuse in these countries was that they have little choice because they are stuck in the European monetary union and don’t have the ability to depreciate their exchange rate.

5----Residential Investment near record low as Percent of GDP, Calculated risk

Excerpt: Residential Investment (RI) increased slightly in Q4, but as a percent of GDP, RI is near a post-war low at 2.24% - essentially unchanged from Q3.

Some people have asked how a sector that only accounts for 2.2% of GDP could be so important? The answer is that usually RI accounts for a large percentage of the employment and GDP growth in the first year or so of a recovery (and increases in RI have a positive impact on other areas like furniture, etc). Not this time because of the huge overhang of existing vacant units.

6--National Average: 492 Days From Default to Foreclosure, The Wall Street Journal

Excerpt: 492: The number of days since the average borrower in foreclosure last made a mortgage payment.

Banks can’t foreclose fast enough to keep up with all the people defaulting on their mortgage loans. That’s a problem, because it could make stiffing the bank even more attractive to struggling borrowers.

In recent months, the number of borrowers entering severe delinquency — meaning they missed their third monthly mortgage payment — has been on the decline, falling to about 700,000 in October, according to mortgage-data provider LPS Applied Analytics. But it’s still more than double the number of foreclosure processes started.

As a result, banks are taking progressively longer to foreclose. The average borrower in the foreclosure process hadn’t made a payment in 492 days as of the end of October, according to LPS. That compares to 382 days a year ago and a low of 244 days in August 2007.

7--Inside Obamanomics, Ismael Hossein-Zadeh, Counterpunch

Excerpt: Since there was no compelling grassroots pressure in response to either the First Great Depression of 1873-97 or the long recession of the 1970s, crisis management policies in both instances were decisively of the Neoliberal, supply-side type: suppression of trade unions and curtailment of wages and benefits; promotion of mergers, concentrated industries and big business; extensive deregulations and generous corporate welfare plans; in short, huge transfers of income from labor to capital. Likewise, a glaring lack of grassroots resistance in the face of the current long recession has allowed the ruling kleptocracy (both in the US and beyond) to adopt similarly brutal austerity policies that are gradually reviving financial/corporate profitability at the expense of the poor and working people. (Somethings never change)

8--The truth about the Palesitinian-Israeli peace talks revealed by Wikileaks, Aljazeera

Excerpt: After days of furiously shooting the messenger, (in truth, simply making public a privately held belief), the Palestinian Authority may, finally, be seeing the real value of the Palestinian Papers.

Talking to the Guardian, the P.A.'s Saeb Erekat nails the key issue:

"What should be taken from these documents is that Palestinian negotiators have consistently come to the table in complete seriousness and in good faith, and that we have only been met by rejection on the other end,"

No denying there are still serious questions to be asked about the whole process and the way the PA has dealt with the negotiations, (and indeed with their own constituents,) but the bottom line is surely this:

"Conventional wisdom, supported by the press, has allowed Israel to promote the idea that it has always lacked a partner. If it has not been before, it should now be painfully obvious that the very opposite is true. It is Palestinians who have lacked, and who continue to lack, a serious partner for peace."

Until now, the media has uniformly interpreted these papers as evidence of failure on the Palestinian side; perhaps that focus might now switch to what the paper's reveal about Israel's role in all of this.

Particularly revealing in the whole process has been this one quote from Tzipi Livni, that seems to sum up the past few decades:

“Israel takes more land [so] that the Palestinian state will be impossible . . . the Israel policy is to take more and more land day after day and that at the end of the day we’ll say that is impossible, we already have the land and we cannot create the state”. She conceded that it had been “the policy of the government for a really long time”.

9--Immelt, GE Capital, and the Financialization of Manufacturing, Rortybomb

Excerpt: GE Capital, the major subsidiary of GE, is a major shadow bank. It used GE’s high-quality credit rating to become a major player in the capital markets, much in the same way AIG FP used the boring insurance high credit rating. GE Capital was the single largest issuer of commercial paper going into the financial crisis.

GE Capital received major bailouts during the crisis, including having the FDIC guarantee more than $50 billion dollars of unsecured debt that was issued. To put that in perspective, only about $24 billion of GE Capital’s funding comes through deposits, allowing a shadow bank with massive unsecured debt obligations and only a small depository base to be carried through the financial panic....

GE has been at the forefront of blurring a “financial services”-centric model of business onto the remains of a hollowed out manufacturing base, one kept in a minimal state just strong enough to qualify for high credit scoring. Marcy Wheeler has written about how that manufacturing part of the company is driven by outsourcing. In his recent, excellent book Cornered, Barry Lynn talks about how GE’s manufacturing business model becomes focus on business lines with government buyers (defense) and with government regulators and industry standard setters that can be worked (health care). They use the ratings agencies to only look at those business lines when determining the ratings they get, and lever up in the shadow banking network off that. Success!

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