US / World Economy in Trouble

LionLoves420 · Aug 5, 2008

As I am sometimes in a libertarian mindset, what all those closers and market fuck ups say to me is: Maybe the capitalist system is working, this is the market adjusting it's self. Fuck you ass holes for getting so big and building a non-sustainable infrastructure in which you operate. Fuck you stupid asses for thinking the government would be your friend, and the same on the flip side to you dumb ass politicians who thought big business wanted more than just your money.

It may not be the end of the world, as I always say, but your local hardware store (if such a thing exist in your area anymore) may be the hero yet.

Administrator · Aug 5, 2008

The U.S. economy and bad government policies

“I think the [uS financial] system is basically sound, I truly do.” --George W. Bush, July 15, 2008
“Since 1951, the budget of the Department of Defense each year exceeds the net profits of all U.S. corporations. So, in finance capital terms, that means that the management of that budget controls the largest single block of finance capital resources.” --Seymour Melman (1917–2004)

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” --Ernest Hemingway (1899-1961), (September 1932)
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Administrator · Aug 5, 2008

LionLoves420 said:

It may not be the end of the world, as I always say, but your local hardware store (if such a thing exist in your area anymore) may be the hero yet.
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No doubt man...no doubt.

Administrator · Aug 5, 2008

This one is a DAMN good read!

Thar she blows: The last hurrah for the banking system

Most people are unaware of the fact that the new Fannie Mae and Freddie Mac bailout package that was passed into law on Saturday, provides Paulson with $300 billion of taxpayer dollars to shore up the faltering mortgage behemoths. In order to accomplish this, the congress increased the national debt by a whopping $800 billion sending it over the $10 trillion mark for the first time in history. Naturally, the congress buried this little tidbit of information deep in the 600 pages of legislation. It’s clear that the administration is about Fannie and Freddie. They’ll need much more than the $25 billion infusion that Paulson is predicting. That’s why the national debt is ballooning. This is the biggest boondoggle of all time and it’s spearheaded by the “dueling windbags,” Chris Dodd and Barney Frank, both Democrats. Dodd’s lengthy oratory on the floor of the House on Friday nearly earned him a citation from the EPA for releasing massive levels of toxic gas into the jet stream and accelerating the rate of global warming.
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Administrator · Aug 5, 2008

More good reading....I like this guy's writing style.

Towards a populist economics

As book titles go, The Shock Doctrine is arguably the most evocative in recent years. Naomi Klein’s reflection on the predatory behavior of the Neanderthal economics preached by the late Milton Friedman at the University of Chicago is certainly timely as we enter a period of economic shock and awe. As conditions worsen, we may become suggestible in our distress and willing to adopt solutions proposed by those who have dropped the economic bombs in the first place.
In truth, we suffer from economic Stockholm syndrome because we tend to identify with those who have abducted us and held us in debt peonage. Take for example the bail out of the Bear Stearns bucket shop on Wall Street. Numb and mesmerized, we stare slack jawed at Ben Bernanke and repeat the mantra: “Bail out the rich. Save the financial system. Bail out the rich. Save the financial system.”

It’s the equivalent of those in steerage and squalor voting to give those on the upper decks first crack at the lifeboats. And it’s the best thing to do under the circumstances! After all, they’re the smart ones, right? They’re the ones who understand the system, and if they go belly up, well . . . we’re all screwed, too, aren’t we? Realistically now, if we didn’t bail out Bear Stearns and other bucket shops, and banks, and Fannie and her brother, Freddie, the whole house of cards would come tumbling down and we’d all be selling apples on street corners, wouldn’t we?
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Administrator · Aug 6, 2008

At Freddie Mac, Chief Discarded Warning Signs

The chief executive of the mortgage giant Freddie Mac rejected internal warnings that could have protected the company from some of the financial crises now engulfing it, according to more than two dozen current and former high-ranking executives and others.
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Administrator · Aug 6, 2008

Since it seems to that news agencies are pulling news stories that may be 'damaging' due to public awareness I've decided to post this entire story rather than just post a link with a snippet. Kinda pisses me off when they do that so I want to have a record of what's being reported.

Freddie posts 4th-straight loss, to slash dividend

NEW YORK (Reuters) - Freddie Mac on Wednesday posted its fourth straight quarterly loss as it braced for a prolonged housing crisis by setting aside twice as much money for bad loans and setting plans to slash its dividend by at least 80 percent.
The worse-than-expected results come just three weeks after U.S. authorities orchestrated a sweeping effort to prop up the second-biggest provider of U.S. residential mortgage funding and its rival Fannie Mae, Freddie Mac affirmed a commitment to raise fresh capital.

Freddie Mac's chief financial officer repeated that it continues to maintain a surplus over regulatory capital requirements, and said the company can wait for "choppy" market conditions to improve before raising capital, which could exceed $5.5 billion.

For the second quarter, McLean, Virginia-based Freddie Mac reported a loss of $821 million, or $1.63 cents per share, compared with a profit of $729 million, or 96 cents per share, a year earlier.

That included the first loss from its holdings of subprime and other risky loans, which formed a significant part of its $2.8 billion in realized and anticipated losses stemming from the steepest U.S. housing downturn since the Great Depression.

"Credit-related expenses were far higher than what guidance had been," said Rajiv Setia, a strategist at Barclays Capital in New York. Barclays was expecting about $2 billion, "and that was on the high side" of analyst estimates, he said.

It was not immediately clear whether the loss was directly comparable with the average estimate among Wall Street analysts for a loss of 28 cents per share, according to Reuters Estimates.

FOURTH STRAIGHT LOSS

The second-quarter loss follows a $151 million loss in the first quarter and brings its cumulative loss over the past four quarters to more than $4.6 billion.

"While we expect continued housing and economic weakness will affect our overall performance this year, we continue to maintain a surplus over all regulatory capital requirements," Chairman and Chief Executive Richard Syron said in a statement. "We remain committed to raising $5.5 billion of new capital and will evaluate raising capital beyond this amount depending on our needs and as market conditions mandate."

Chief Financial Officer Buddy Piszel told Reuters it was still reasonable to expect a housing market recovery by early 2009, but "we have to prepare for a stress condition that looks worse than that."

Freddie Mac shares plummeted by more than 17 percent from yesterday's closing price of $8.04.

Freddie Mac and rival Fannie Mae (FNM.N) faced a storm of stock selling last month as investors speculated the companies would fall short of the capital needed to offset losses sustained from delinquent mortgages.

The turmoil led U.S. Treasury Secretary Henry Paulson, in concert with U.S. Federal Reserve Chairman Ben Bernanke, to arrange emergency measures that bolstered government backing for the companies.

DIVIDEND SLASH

To help preserve capital, Freddie Mac said it would slash its quarterly dividend, pending board approval, by at least 80 percent to 5 cents a share or less from 25 cents a share. On an annualized basis, that will save Freddie Mac more than $500 million based on current shares outstanding.

It will also halt the rapid growth in its $792 billion portfolio as it becomes more conservative with capital, Chief Financial Officer Buddy Piszel told Reuters. The company will still make purchases to replace loans matured or refinanced from its portfolio, he said.

Freddie Mac, along with its larger rival Fannie Mae, owns or guarantees more than $5 trillion in mortgages, or nearly half of all U.S. home loans.

Freddie said revenue rose by more than 10 percent from the first quarter to $1.69 billion, including a increase of 92 percent in net interest income to $1.5 billion.

But the company more than doubled its provisions for loan losses to $2.5 billion since the end of the first quarter. All credit-related expenses surged to $2.8 billion in the quarter from $1.4 billion in the previous quarter and $463 million a year earlier.

Total credit losses rose to $810 million from $528 million in the first quarter.

Freddie Mac shares closed Tuesday at $8.04, up 6.9 percent on the session amid the biggest one-day gain for the benchmark Standard & Poor's 500 (.SPX) in four months. While the stock has more than doubled from its early-July low of $3.89, it remains nearly 90 percent below its 52-week high of $66.65 set last August.
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Administrator · Aug 8, 2008

Yet another full post....

Fannie Mae loses $2.3B in quarter as defaults rise

I'm not running the risk of losing more of these Fannie/Freddie stories to the corporate 'story slayers' so here's another just out today in ALL it's glory. This is a powerful story if you really think about it's implications. I've placed in BOLD italics the part I found compelling.

WASHINGTON - Fannie Mae is making bold cutbacks that will send shock waves through the mortgage market, after posting a quarterly loss Friday that was three-times larger than Wall Street expected.
To slow its financial decline, the mortgage finance giant slashed its dividend to 5 cents a share from 35 cents a share and said it will eliminate loans for borrowers with solid credit scores, but little proof of income or small or no down payments.

The company also is raising its mortgage fees, which will be passed onto borrowers as higher interest rates or closing costs.

With Fannie Mae and its sibling company Freddie Mac becoming more risk-averse, fears are building that mortgage rates will keep climbing, making it harder for people to afford a mortgage or refinance their home, and spur even more foreclosures.

"We are already in that spiral," said Chris Mayer, real estate professor at Columbia Business School.

Volatility and disruptions in the capital markets worsened in July. And though Fannie Mae's losses should still peak this year, said Chief Executive Daniel Mudd, he couldn't predict how long the housing recession will last or how low prices will fall.

"The housing market has returned to earth fast and hard," Mudd said.

Disappointed stockholders sent Fannie Mae's shares down 8.9 percent, or 89 cents, to $9.06 in late trading Friday.

Investors continue to worry that Fannie and Freddie will be overwhelmed by losses and require government aid. Fannie Mae and Freddie Mac, are the biggest buyers of U.S. home loans from banks and other lenders. Together they own or guarantee nearly half of outstanding U.S. mortgage debt.

Under the housing bill signed by President Bush last week, the government may boost lines of credit to the companies or buy their stock.

Mudd, however, said the company has no plans to use that financial lifeline. "We're going to manage our way through it," he said.

While Fannie and Freddie generally had higher standards for lenders than the subprime mortgage companies that started going belly-up at the end of 2006, the duo lowered their standards during the housing boom and bought securities linked to riskier loans.

Even as the subprime mortgage market collapsed, the industry — backed by Fannie and Freddie — kept making risky so-called Alt-A loans. They made up about 15 percent of all loans in the first half of 2007, up from 13 percent in all of 2006, according to trade publication Inside Mortgage Finance.

For Fannie and Freddie, these Alt-A loans made up roughly 10 percent of their portfolios but accounted for more than half of their losses in the second quarter. The souring loans were concentrated in California, Florida, Nevada and Arizona, where speculation was rampant, prices soared and homeowners stretched to the financial limit to afford a home.

If Freddie Mac follows Fannie Mae and stops buying Alt-A loans, "it means that market is not going to exist at all. It's barely hanging on now," said Guy Cecala, publisher of Inside Mortgage Finance.

For homebuyers who don't have stellar credit and a big down payment, there are few options these days but loans insured by the Federal Housing Administration. Those loans require a minimum of 3.5 percent down and full proof of income.

What's more, Fannie Mae's new fees will price more borrowers out of the market. For a borrower with less-than-perfect credit, such fees could hike closing costs by $3,000 for a borrower with a $300,000 mortgage, or raise payments by $50 per month, said Patrick Cunningham, a vice president with Home Savings & Trust Mortgage in Fairfax, Va.

To avoid such fees, "paying attention to your credit is going to be paramount for people," he said.

But Fannie Mae didn't have much choice.

The Washington-based company lost $2.3 billion, or $2.54 a share, for the quarter that ended June 30. The loss, the company's fourth-consecutive quarter of red ink, compares with profit of $1.95 billion, or $1.86 a share, in the period last year.

Analysts surveyed by Thomson Financial had expected a loss of just 68 cents a share.

While revenue rose to $3.97 billion from $1.42 billion a year earlier, Fannie Mae's losses from defaulting mortgages skyrocketed.

Fannie Mae booked $5.3 billion in credit expenses, including a $3.7 billion addition to its loss reserves. Loans three-months past due or more than doubled last year's level to 1.36 percent.

The company said it is boosting efforts to recover money from lenders who committed fraud in loans that were sold to the company.

To speed up the sale of foreclosed properties, Fannie Mae is opening offices in California and Florida and said it would consider selling those properties in bulk to investors. "I do not think this is a time to be holding onto (foreclosed properties) hoping for a better day," Mudd said.
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TheFomorian · Aug 8, 2008

So I keep seeing the stories, but not ever owning a home, let me see if I have the right idea. I do have an understanding of accounting/finance, so...

If Fannie/Freddie go bankrupt, then they must liquidate their holdings to pay on their debts. Since they hold liens on all these houses, they will call for full payment on those loans and force foreclosure. Am I close?

Administrator · Aug 8, 2008

SeraphimZeta said:

So I keep seeing the stories, but not ever owning a home, let me see if I have the right idea. I do have an understanding of accounting/finance, so...
If Fannie/Freddie go bankrupt, then they must liquidate their holdings to pay on their debts. Since they hold liens on all these houses, they will call for full payment on those loans and force foreclosure. Am I close?
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I'm not so sure it's that simple. The way I understand it is like this.....Fannie and Freddie don't actually make loans to people...they purchase loans from other banks effectively freeing up more capital within those banks that can now be loaned to more borrowers. Many times these 'loans' that are purchased are bundled together so it's not just an individual loan, but many clustered as a CDO (Consolidated Debt Obligation). This is where it all gets fuzzy because these new financial 'devices' are somewhat vague in how they actually play out because they never have done so and are yet unproven. That's the problem. These CDO's are sometimes bought and sold between investors/banks for profit as well. Fannie and Freddie just happen to be the two biggest players in this market. If they fail...there's no telling how it will all play out...most likely the whole mess will implode. Who's to say what the outcome will be or even how it plays out....I don't know and many experts don't either. Most likely....Fannie and Freddie WILL try to collect on those debts in order to liquidate. Where it goes from there is anyone's guess.

AverageJoe · Aug 9, 2008

Herbsparky said:

Where it goes from there is anyone's guess.
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Administrator · Aug 9, 2008

No shit Joe......

Administrator · Aug 19, 2008

Fannie, Freddie shares battered

NEW YORK (CNN.com) -- Shares of mortgage finance giants Fannie Mae and Freddie Mac, suffering their worst day since a mid-July free fall, plunged Monday to their lowest points in nearly two decades.
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Gotta love this article.....shows ya just how bad they want this kept quiet.

Media coverage of the economy lags, study finds

The Project for Excellence in Journalism analyzed more than 5,000 economic stories in 2007 and the first half of 2008. The stories, by 48 different news outlets, were delivered by cable news channels, network television, radio, newspapers and the Internet.
The study found that reliance on government data to track the economy is leading to scattershot coverage that, at times, lags months behind actual economic conditions
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Administrator · Aug 19, 2008

This is a good read if you don't quite understand inflation....

Inflation Is a Clear and Present Danger

Today's problems began seven years ago in 2001, when the Federal Reserve overreacted to the deflationary mistake it made in the late 1990s. The Fed vigorously pumped money into the economy in order to drive interest rates down rapidly.
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Administrator · Aug 19, 2008

2Q profit reports from retailers show more strain

The latest round of second-quarter reports show more signs of financial stress on shoppers, as Target's customers stick to necessities and have trouble making their credit card payments. Saks says it's now seeing its high-end designer consumer cut back, whereas previously it was only the aspirational customers who were the ones retrenching.
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Stocks fall on inflation data, financial worries

Wall Street fell sharply for a second straight session Tuesday after a hefty jump in wholesale inflation and a drop in new home construction gave investors more reason to believe an economic recovery is far off. The Dow Jones industrial average dropped 130 points.
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AverageJoe · Aug 19, 2008

Isn't there any good news :roulette:

Administrator · Aug 19, 2008

Average Joe said:

Isn't there any good news :roulette:
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Sure...gas prices have dropped.

Administrator · Aug 20, 2008

Fannie, Freddie shares dive on bailout fears, bonds up

NEW YORK (Reuters) - Fannie Mae (FNM.N) and Freddie Mac (FRE.N) shares plunged to their lowest levels in almost 20 years on Wednesday, while the mortgage companies' bonds rallied on the belief that an increasingly likely government bailout would wipe out shareholders but secure their massive debt.
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Fannie Mae, Freddie Mac shares plummet

Armando Falcon, who served for six years as Fannie and Freddie's chief government regulator, expects a full-fledged government takeover before year-end. The companies' financial picture is far worse than they have acknowledged, he said, particularly for riskier loans they purchased as investments.
"They can't keep playing games with the accounting rules to avoid taking their losses," Falcon said.
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Administrator · Aug 21, 2008

The greenback blues: Something’s gotta give

The UK Telegraph’s Ambrose Evans-Pritchard sums up Europe’s woes in last week’s article ECB Slammed as Europe Crumbles: “The economies of Germany, France and Italy all contracted in the first quarter and may now be in full recession, shattering assumptions that Europe would prove able to shrug off the effects of the credit crunch. . . . The picture is darkening so fast in Spain that Prime Minister Jose Luis Zapatero canceled holidays and called his cabinet back to Madrid yesterday for the first emergency session of its kind since the Franco dictatorship.
“Growth has turned negative in Ireland, Denmark, Latvia, and Estonia, while grinding to a halt in Sweden and The Netherlands. Iceland contracted by a staggering 3.7pc. The grim data from Eurostat follows a recession warning in Britain, and shock news that the Japanese economy had shrunk 0.6pc in the second quarter. Almost the entire bloc of rich Organization for Economic Co-operation and Development (OECD) countries -- still two thirds of the world economy -- are now in the grip of a major downturn.”
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Administrator · Aug 21, 2008

For two days now I've tried to access this article. For some reason the page just wouldn't load for me.....maybe it was being bombarded with excess bandwidth...I dunno. In any case I finally got it to load, but in order to preserve the story (who KNOWS when 'they' will take it offline) I will post it in it's entirety here. Again.....the people speaking here are not dummies. These people know the inside of finance like no others and if they're worried then we ALL should be worried. :icon_confused:

Large U.S. bank collapse ahead, says ex-IMF economist

Tue Aug 19, 2008 5:59pm EDT
By Jan Dahinten

SINGAPORE (Reuters) - The worst of the global financial crisis is yet to come and a large U.S. bank will fail in the next few months as the world's biggest economy hits further troubles, former IMF chief economist Kenneth Rogoff said on Tuesday.

"The U.S. is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say 'the worst is to come'," he told a financial conference.

"We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks," said Rogoff, who is an economics professor at Harvard University and was the International Monetary Fund's chief economist from 2001 to 2004.

"We have to see more consolidation in the financial sector before this is over," he said, when asked for early signs of an end to the crisis.

"Probably Fannie Mae and Freddie Mac -- despite what U.S. Treasury Secretary Hank Paulson said -- these giant mortgage guarantee agencies are not going to exist in their present form in a few years."

Rogoff's comments come as investors dumped shares of the largest U.S. home funding companies Fannie Mae and Freddie Mac on Monday after a newspaper report said government officials may have no choice but to effectively nationalize the U.S. housing finance titans.

A government move to recapitalize the two companies by injecting funds could wipe out existing common stock holders, the weekend Barron's story said. Preferred shareholders and even holders of the two government-sponsored entities' $19 billion of subordinated debt would also suffer losses.

Rogoff said multi-billion dollar investments by sovereign wealth funds from Asia and the Middle East in western financial firms may not necessarily result in large profits because they had not taken into account the broader market conditions that the industry faces.

"There was this view early on in the crisis that sovereign wealth funds could save everybody. Investment banks did something stupid, they lost money in the sub-prime, they're great buys, sovereign wealth funds come in and make a lot of money by buying them.

"That view neglects the point that the financial system has become very bloated in size and needed to shrink," Rogoff told the conference in Singapore, whose wealth funds GIC and Temasek have invested billions in Merrill Lynch and Citigroup.

In response to the sharp U.S. housing retrenchment and turmoil in credit markets, the U.S. Federal Reserve has reduced interest rates by a cumulative 3.25 percentage points to 2 percent since mid-September.

Rogoff said the U.S. Federal Reserve was wrong to cut interest rates as "dramatically" as it did.

"Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States."

(Editing by Neil Chatterjee)
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Note: Neil's editing sucks.

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