Wednesday, May 11, 2011

Today's links

1--Bank of America Billions in Losses at Stake on Moynihan Outlook, Bloomberg

Excerpt: Bank of America, based in Charlotte, North Carolina, holds $408 billion of mortgages and home-equity lines. Its home-loan division has lost more than $15 billion since the 2008 acquisition of Countrywide Financial Corp., the biggest mortgage lender during the housing bubble.

Regulators later found its growth was fueled by lax lending standards, with loans marred by false or missing data about borrowers and properties. That entitled mortgage buyers Fannie Mae and Freddie Mac and bond insurers including Assured Guaranty Ltd. to demand refunds. The takeover also saddled Bank of America with $41.7 billion in troubled Countrywide loans....

Falling home prices often lead to more defaults, which in turn causes claims from mortgage investors and insurers. The company acknowledged in January and again in April that it had underestimated the severity of home-price declines....

The impact of lower home prices helped drive a 36 percent decline in first-quarter profit at Bank of America to $2.05 billion. The bank set aside another $1 billion to cover new demands for mortgage refunds and didn’t cut its $10 billion upper estimate of possible payments to claimants other than Fannie Mae and Freddie Mac, even after the Assured settlement reduced the pool of disputes. In both cases, the company cited falling home prices.
‘Being Overwhelmed’

The added expenses “give the impression that their assumptions around housing prices are not as conservative as they could be,” John McDonald, a Sanford C. Bernstein & Co. analyst in New York, said in an interview.

2--Republicans Rule Out Tax Increases in Debate Over Debt Cap, Bloomberg

Excerpt: Republican congressional leaders are ruling out tax increases or a wider revenue base in talks on extending the U.S. government’s borrowing authority, creating a conflict with Democrats who would raise more money as well as cut spending.

House Speaker John Boehner staked out the Republican position by telling the Economic Club of New York that “raising taxes is off the table” because “it will have a devastating impact on our economy.” Boehner predicted that Congress would act on a broader revision of the tax code in the next two years, though he said that Republicans wouldn’t support it “as a way of increasing taxes on the American people or enterprises.”...

Addressing an audience of Wall Street leaders, Boehner said that “without significant spending cuts and reforms to reduce our debt, there will be no debt limit increase.” Spending cuts “should be greater” than the amount of the “increase in debt authority” given to President Barack Obama, he said.

3--Bernanke’s QE2 Averts Deflation, Spurs Rally, Expands Credit, Bloomberg

Excerpt: Ben S. Bernanke’s $600 billion strike against deflation is paying off, as stock and debt markets rise, bank lending grows and economists forecast faster growth.

The Standard & Poor’s 500 Index has gained 13.5 percent since the Federal Reserve chairman announced on Nov. 3 the plan to buy Treasuries through its so-called quantitative easing policy. Government bond yields show investors expect consumer prices to rise in line with historical averages. The riskiest companies are obtaining credit at the cheapest borrowing costs ever and Fed data show that commercial and industrial loans outstanding are rising for the first time since 2008.

“Looking at market indicators, you have to be convinced it’s been a success,” said Bradley Tank, chief investment officer for fixed-income in Chicago at Neuberger Berman Fixed Income LLC, which oversees about $83 billion. “When you get into periods of aggressive central bank easing, and we’re clearly in the most aggressive period of easing that we’ve ever seen, the markets tend to lead the real economy.” ...

QE2 has contributed to an 11.9 percent decline since August in the dollar based on Bloomberg Correlation-Weighted Indexes, which measure its performance against nine of the most-traded currencies in the world, including the euro, yen and pound...

QE2 “slowed the pace of deleveraging, and it clearly helped to mitigate the risk of deflation,” said William Cunningham, co-head of global active fixed income in Boston at State Street Global Advisors, which oversees $2.1 trillion. “It had a positive impact on net.”

4--Housing crash is getting worse, Marketwatch

Excerpt: If you thought the housing crisis was bad, think again. It’s worse.

New data just out from Zillow, the real-estate information company, show house prices are falling at their fastest rate since the Lehman collapse.

Average home prices are down 8% from a year ago, 3% over the quarter, and are falling at about 1% every month, according to Zillow.

And the percentage of homeowners in negative-equity positions — with a home worth less than its mortgage — has rocketed to 28%, a new crisis high.

Zillow now predicts prices will fall about 8% this year and says it no longer expects the market to bottom before 2012.

“There’s no way we can get to flat, from these depreciation levels, in the last nine months of the year,” says Zillow economist Stan Humphries. “Demand is a lot more anemic than we had previously thought.”

5--Debt Ceiling May Come Crashing Down on Treasury, Bruce Bartlett, Capital Gains and Games

Excerpt: On Monday, Treasury Secretary Tim Geithner notified Congress that the public debt limit will become binding within two weeks and Treasury will no longer be able to borrow additional funds. Nevertheless, Congress is taking its time on raising the debt limit, with some lawmakers still saying they will not vote for an increase under any circumstances. This is a clear shirking of their responsibilities, the nation’s finances, and the well-being of every American.....

How the Treasury will decide who gets paid and who doesn’t is a complete mystery and a problem that no conservative to my knowledge has given a second’s thought to. There is no law allowing it to prioritize payments except in a couple of very limited cases, which it will begin using shortly. In any event, it is a very bad idea to give the Treasury secretary the unilateral power to decide who and when those who are owed money by the federal government will get it.

Although some people argue that Social Security benefits are not jeopardized as long as there are sufficient assets in the Social Security trust fund, they don’t understand that securities held by the trust fund are not marketable, and if Treasury can’t borrow it won’t have the cash to redeem them. That is why Congress had to pass a special law back in 1996 allowing the debt limit to be increased by the amount needed to pay Social Security benefits during an earlier debt limit impasse.

The real issue with the debt limit isn’t whether the government should run a budget deficit or if the deficit is too large. It’s about cash flow and making sure that the Treasury has enough on a daily basis to pay its bills and neither inconvenience nor break faith with those who sold goods and services to the government, loaned it money, or depend on federal programs for life and health. The word “irresponsible” is inadequate to describe those in Congress who use doubletalk to justify refusing to raise the debt limit.

6--The Battle for the Soul of the GOP, Robert Reich's Blog

Excerpt: The real battle for the soul of the GOP started today with a speech on Wall Street by Speaker of the House John Boehner.

Wall Street and big business fear Tea Partiers won’t allow House Republicans to raise the debt ceiling without major spending cuts – and without tax increases on the wealthy. Wall Street and big business know this would be unacceptable to the White House and congressional Democrats.

The Street and big business want to tame the budget deficit but they don’t want to play games with the debt ceiling. Credit markets are fine at the moment, but if the debt ceiling isn’t not raised within the month – weeks before August 2, when the Treasury predicts the nation will run out of money to pay its creditors and its other bills – credit markets could go into free fall. The full faith and credit of the United States would be jeopardized. Interest rates would skyrocket. The dollar could plummet.....

Boehner knows the only way to get cuts of this magnitude without increasing taxes on the rich (or cutting defense — something else the GOP wouldn’t think of) is to make mincemeat out of Medicare and Medicaid, slash education and infrastructure, and kill off most of everything else people of moderate means depend on.

In other words, Boehner’s conditions are just another version of the Paul Ryan plan House Republicans approved last month – the same plan that brought howls at recent Republican town meetings. Democrats will never agree to it, nor should they. Nor will the rest of America.

And that means no agreement to increase the debt ceiling.

7--Small-Business Pessimism Deepens, Wall Street Journal

Excerpt: Small-business owner pessimism worsened in April for a second consecutive month, even though current sales performance was the best in 40 months, according to data released Tuesday.

The National Federation of Independent Business‘s small-business optimism index dropped 0.7 point to 91.2 in April. That followed a 2.6-point decline to 91.9 in March.

The NFIB called the April index “a disappointing outcome following the March decline.”

The report said the weak economy and political uncertainty were dimming the outlook. The drags mentioned by NFIB members included the government deficit, a potential inflation threat, and rising gas prices. The subindex of expected business conditions in the next six months fell 3 percentage points to -8%, and the expected higher real sales index slipped 1 point to 5%.

8--Euro Zone’s Fundamental Flaws Must Be Addressed, Wall Street Journal

Excerpt: Fundamental flaws within the euro zone must be addressed or else the euro could “end up in smithereens,” said a managing director at Roubini Global Economics Tuesday.

Arnab Das, a managing director at Roubini, said that the flaws include a system in which transfer payments from stronger to weaker countries have become politically unsustainable, as well as rigid labor markets that do not allow, for example, the unemployed in Spain to take advantage of factory jobs in Germany.

“In practice, there is very little labor mobility,” he said.

In the near term, Mr. Das said struggling peripheral European countries such as Greece will end up having to reschedule debt payements because cutting their deficits will result in downward pressure on wages and eventual deflation — exacerbating the debt burden.

Next time a crisis flares, he said, there is “an even chance that the euro could go,” he said.

9-- Has consumer/household deleveraging ended, Pragmatic Capitalism

Excerpt: The NY Fed has released their quarterly report on household debt and it is showing the first quarterly improvement in 9 quarters. They report:

“Aggregate consumer debt held essentially steady in the first quarter, ending a string of nine consecutive declining quarters. As of March 31, 2011, total consumer indebtedness was $11.5 trillion, a reduction of $1.03trillion (8.2%) from its peak level at the close of 2008Q3, and $33 billion (0.3%) above its December 31, 2010 level. Behind the leveling off of total consumer debt, was a small increase in mortgage balances shown on consumer credit reports. (see chart)

At first glance, this might sound like a net positive. I would argue, however, that aggregate debt levels remain unsustainable as seen in the continuing high levels of debt:income ratios. The fact that debt is on the rise again is merely a sign that the Fed’s perverse policies have done just enough to convince consumers that it’s wise for them to increase their debt levels. This is another good sign for the economy in the near-term as increased debt is a sign of increased economic activity, however, I think it calls into question the sustainability of any recovery. After all, this looks like another sign that the government’s policies have merely kicked the boom bust cycle back into full gear. And that works until it doesn’t….

10--Norway's controversial 'cushy prison' experiment - could it catch on in the UK?, Daily Mail UK

Excerpt: Can a prison possibly justify treating its inmates with saunas, sunbeds and deckchairs if that prison has the lowest reo ffending rate in Europe? Live reports from Norway on the penal system that runs contrary to all our instincts - but achieves everything we could wish for....

A recent opinion poll showed the British public wants harsher prison conditions; they don't agree with the Government's response to over-population and reoffending by pushing through far-reaching reforms which emphasise shorter sentences while placing prisoners in a working environment.

And yet, an extensive new study undertaken by researchers across all the Nordic countries reveals that the reoffending average across Europe is about 70-75 per cent. In Denmark, Sweden and Finland, the average is 30 per cent. In Norway it is 20 per cent. Thus Bastoy, at just 16 per cent, has the lowest reoffending rate in Europe....

There are no cells, bars, guns, truncheons or CCTV cameras here. Bearing in mind that among those housed here are murderers and other violent offenders, it's slightly unnerving that they have access to knives, axes and even chainsaws for their various jobs on what is trumpeted as the world's first self-sustaining 'Ecological Prison.'

'I have not had one violent incident here,' the governor continues. 'One inmate did manage to escape by stealing a fishing boat one night, and his punishment was to be sent back to a closed prison.'

Downstairs it's time for midday lunch - chicken risotto (from Bastoy's expansive chicken shed), cold meats and cheese and a wide variety of salads.

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