Social Consequences of an economic meltdown?

Back in Jan 08, I pondered aloud several questions related to the potential Social Implications of (what was then) a looming economic crisis. Turns out, many readers were wondering the same and this was one of my highest traffic posts ever.

If you haven't already done so, read the info at the following link then come back to read the rest of this post.

SOCIAL IMPLICATIONS of a SIGNIFICANT ECONOMIC DOWNTURN



Well, nine months have passed since those words were written and there can now be no doubt (1) that this crisis is one of the most significant economic downturns in history and (2) the Massive bailout package being worked is just a bandaid to slow the controlled financial implosion. Even John McCain realizes this and recently stated in his debate with Obama: "This is not the beginning of the end, but the end of the beginning - if we come out with a package that will keep these institutions stable..

With that digested and the knowledge things are likely to get far worse, what can we anticipate for our future - just how bad could things get for the little guy living in the suburbs - trying to raise a family?

I'll refrain from trying to list all possible consequences, as there are far too many potential outcomes, but I would like to highlight several major consequences that could be initiated by a worst-case financial panic...

Note: I'm not trying to scare anyone here, but merely trying to create an awareness and food for thought - so that you can use the information to better prepare your family (in the event the worse-case scenario actually happens).

Let us hypothetically propose the economic crisis intensifies:

Hundreds more banks/financial institutions implode and the FDIC runs out of money - a nationwide run on the banks ensue; consumer credit has consistently gotten worse and available credit-card credit-lines have finally been turned off/reeled in - unemployment skyrockets due to the lack of new credit/spending; inflation rages as the dollar falls sharply; the economic crisis deepens and trillions in unpayable derivative contracts unwind quickly - stock markets collapse around the globe and the crushing pressure is exacerbated by foreign holders of US Debt who finally rush to the exit doors.

The Gvt panics and Stock Markets are closed indefinitely while ATM machines, banks and electronic commerce are shut down across the nation (as the government tries to figure out what to do). People grow anxious as their credit cards and debit cards don't work, and with no cash on hand, they can't buy food or gas... Those who do have cash rush to fill up their gas tanks and empty the shelves at their local grocery stores. The real economy comes to a screeching halt as deliveries of food, gas, etc can no longer make it to market.

Social unrest and general panic set in as our just-in-time economy breaks down. People are confused and scared while the government repetitively tries to reassure that they have everything under control. Hysteria eventually sets in as social chaos, looting, and roving gangs terrorize the masses (taking what they need from the unprepared). Similar situations take place across the nation as people who were on the fringes of society become hungry/desperate and/or take advantage of the lawless situation.

Martial law is ultimately declared and National Guard troops are deployed to major cities around the nation - to help restore order, distribute food, etc.

So many unknowns

Could this actually happen? I don't know - you be the judge; but it's probably better to be a prepared alarmist than an unprepared victim... Think about it.

If you've watched Paulson, Bernanke, Bush and the rest of our worried leaders over the last couple of week, you've probably been able to sense their state of alarm - Yes, they truly realize how big this crisis is...

What can you do to prepare?

I could list a thousand things here from generators, flashlights, etc, but the most important (I believe) are:

1) Have at LEAST a couple of weeks worth of non-perishable food/water on hand
2) Have enough cash on hand to make it through a possible electronic commerce shutdown
3) Maintain close relationships with friends/neighbors (help each other out)
4) If you have a gun, know how to use it - to protect your family, friends and valuable assets (cash/food).


Closing:

Yes folks this could be bad, but we Americans are an industrious/resolute bunch and (though it will take some time) we will find a way to pull out of it.

However, be aware: regardless of the ultimate significance of this downturn, America is likely to forever change as the US Dollar loses it's reserve currency status in the not too distant future.

At a MINIMUM, this economic crisis will cause our standard of living to fall and our cost of living to increase significantly.

Bottom Line:

Our future is uncertain, and we're definitely in for some difficult times ahead, but the world will NOT end - and we will survive.

Again, this post was no meant to scare, but to inform by thinking outside the mainstream box. Use this information as you may, but it's probably not a bad idea to prepare for whatever the outcome.

Best regards

Randy

Max Keiser on Goldman Sachs & Toilet Paper

Hat tip Virgo

Afshin Rattansi in Tehran talks to Max Keiser in Paris about the end of Wall Street, dollars and toilet paper - and Morgan Stanley and Goldman Sachs no longer being investment banks.

Will the MASSIVE Gvt bailout plan work?

Our Global economy is currently teetering on the edge of a cliff - caused by a complete collapse of the American Debt bubble and unwinding of the global derivatives complex.

Had American financial policymakers allowed us to take our medicine earlier, we probably could have gotten through this mess, but Alan Greenspan and the Boyz instead decided to follow a consistent policy of delaying our day of reckoning. By lowering rates/increasing liquidity at any inkling of global economic stress (see some of the examples below), they merely covered up the economic problem of the day with more easy credit/debt - which successfully delayed, but significantly increased the size of the problem...

- US Stock Market Crash of 1987
- Japan's Economic Crash of 1990's
- LTCM Hedge Fund Collapse 1994
- Asian Currency Crisis 1997
- Russian Bond Default 1998
- NASDAQ Bubble/Bust

The latest example was the Housing Bubble

Most uninformed Americans actually think the housing bubble created all of our current economic ills, but what they don't realize is: the housing bubble was merely the delayed symptom of easy monetary policies and laxed lending standards - created in large part by Alan Greenspan and his cronies by not wanting to take the harsh economic medicine after the dot-com implosion and 9/11 crisis. Therefore, they delayed the much needed/necessary hardship by lowering/holding rates at 1% (40 year low) - providing the volatile fuel mixture used to inflate the housing bubble.

So, here we are today, sitting on the MASSIVE cumulative effect of all these corrective delays and the problems are GARGANTUAN.

Thus far, in an attempt to save our crumbling foundation of debt, Gvt financial experts (AKA: Plunge Protection Team) have tried three different mortgage work-out plans, pushed through a massive economic stimulus package and simultaneously resorted to a myriad of unprecedented Fed Reserve lending facilities. That wasn't enough, so Bear Stearns was bailed out with your taxpayer dollars, followed by Fannie Mae/Freddie Mac and most recently AIG. Each of these attempt to stop the systemic debt implosion has been more drastic than the previous and each attempt has failed.

It's now being said the proposed $700 Billion Bailout package (a new taxpayer funded Government structure used to buy up the bad debts of sinking US and International banks) will save the day.

So, will it work?

Before answering this question, ask yourself: How many times during this developing economic crisis have our appointed financial wizards told you the crisis is contained - and have they been right even once?

NOT!

Much to Greenspan's despair (because his legacy will now forever change) our inevitable day of reckoning has finally arrived! The problems we now have are far too big for any repair effort - Deleveraging of debt must happen and there is nothing, aside from delaying the inevitable, that Paulson, Bernanke, Cox, Lukken and the rest of this lying band of taxpayer pirates can do about it.

Our system is Hemorrhaging badly and the band aids will slow, but will not stop the massive bloodletting to come.

If you'd like to know more about how we got here and what our future is likely to hold - see link: US Economic Outlook 2008-11+

Lastly, we should never discount the negative implications these bailouts create for the US Dollar - as the World's Reserve: Dollar: Faltering Foundation of US Economic Strength

Regards

Randy

Bailout Plan - What's in store?

Scanned the news this AM - A few links of interest on the MASSIVE Bailout Plan:

Financial Crisis: Washington Pulls Out the Stops

The federal government is embarking on a sweeping approach to fixing the country's rapidly unraveling financial system, offering few details but warning that failing to act could further endanger the economy. At the same time, regulators unveiled several narrower measures on Sept. 19 that are intended to reassure investors and protect financial stocks from being driven down by short-selling, coordinating their actions with governments overseas.

Paulson said: "We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses." He acknowledged the plan would likely prove costly. "We're talking hundreds of billions of dollars—this needs to be big enough to make a real difference," Paulson said. "Until we get stability in the housing market, we're not going to get stability in the financial markets."

In the meantime, to keep the financial markets fluid, Fannie Mae and Freddie Mac would begin buying more mortgage-backed securities, the investments underlying much of the current turmoil. The Treasury would do the same. When the government assumed control of the two mortgage giants, it said both would continue increasing their portfolios for a time, and it announced a program by the Treasury to buy up securities directly from the market.

The Treasury also said it would insure money-market mutual funds—low-risk funds that many consumers and businesses view as equivalent to cash—making available up to $50 billion to prevent losses in the funds in return for fees from the funds. Investors in one prominent fund saw their investments decline this week after Lehman Brothers failed, and at least one other fund's investment manager said it would provide cash to prevent similar losses.

Atop those developments, the Securities & Exchange Commission said it would completely ban short sales—or bets that share prices will fall—of 799 financial companies, following a similar move by British financial regulators on Thursday. The move goes well beyond restrictions adopted Thursday to limit a kind of abusive short-selling called "naked shorting," and some securities experts had warned that such a move could actually harm the market.

In recent days, policymakers have increasingly debated the need for a government-run entity—perhaps modeled on the Resolution Trust Corp. established amid the savings-and-loan crisis of the 1980s—that would take problem securities out of the market to improve liquidity, restore confidence, and prevent a wave of corporate collapses that could have far-reaching effects on the U.S. and world economy. "Lesson No. 1 from that era is: move quickly," says Richard Breeden, the RTC's architect and a former SEC chairman. "Troubled assets don't become more valuable over time; they become less valuable."


Paulson sends mortgage plan to Capitol Hill, Bush calls crisis 'pivotal moment' for America's economy


WASHINGTON (MarketWatch) -- Treasury Secretary Henry Paulson has presented his historic mortgage rescue plan to Congress and the two sides will meet throughout the day on Saturday on the details.

Treasury presented the plan to Congress late Friday, a Treasury spokesman said.
In an unprecedented action, Paulson said Friday that he wants to spend "hundreds of billions" of dollars take unsellable mortgage assets off the balance sheets of financial firms. The hope is that this will unclog the financial system and allow banks to lend funds to each other and clients.

The failure of banks to lend is considered a big risk to the economic outlook. Without access to funds, businesses and consumers will cut back spending. On Saturday, President Bush called the crisis "a pivotal moment for America's economy," in his weekly radio address.

The measures being taken by the administration, the Treasury and the Securities Exchange Commission "require us to put a significant amount of taxpayer dollars on the line," Bush said. "But I'm convinced that this bold approach will cost American families far less than the alternative. Further stress on our financial markets would cause massive job losses, devastate retirement accounts, further erode housing values, and dry up new loans for homes, cars, and college tuitions," he said.

The New York Times reported that Federal Reserve chairman Ben Bernanke warned members of Congress of the risk of a deep and extended recession unless action was taken to clear the toxic mortgage assets from bank balance sheets.

Few details of Paulson's plan have emerged.


Treasury Sends to Congress Proposal to Buy Assets

Sept. 20 (Bloomberg) -- The Bush administration has sent to Congress a $700 billion proposal that gives broad power to the U.S. Treasury Department to acquire troubled assets now on the balance sheets of U.S.-based financial companies.

The legislation gives Treasury Secretary Henry Paulson authority to own as much as $700 billion in mortgage-related assets at one time. The bill would raise the nation's debt ceiling to $11.315 trillion from its current $10.615 limit.

The legislation was forwarded to congressional leaders in both political parties early this morning. The move comes as Paulson and Federal Reserve Chairman Ben S. Bernanke are pressing for action from Congress to help stop a contagion of credit risk that has toppled four financial giants and forced two into mergers as capital flight squeezes Wall Street.

``This is going to be a big package because it's a big problem,'' President George W. Bush said following a meeting with Colombian president Alvaro Uribe at the White House. ``We need to get this done quickly, and the cleaner the better.''

The proposal requires the Treasury secretary to report back to Congress three months after the government first uses its new powers, and then semiannually after that.

Bush said he called leaders in both chambers of Congress and ``found a common understanding of how severe the problem is and how necessary it is to get something done quickly.''

Wide Berth

Under the proposal, the Treasury secretary is given wide berth to take action ``as the Secretary deems necessary'' to hire people, enter into contracts, and issue regulations. The proposal requires the Treasury to simultaneously consider market stability and protecting the taxpayer.

The Treasury plans to hire asset managers to purchase the assets through so-called reverse auctions, seeking the lowest prices, a person briefed on the proposal said yesterday. The proposal specifies that only assets from U.S.-based financial institutions issued or originated on or before Sept. 17 can be purchased.

The authority expires two years after it is enacted.

Bush today said he's unconcerned that the price tag on the package may seem high.

``I'm sure there are some of my friends out there that are saying, I thought this guy was a market guy, what happened to him,'' the president said. ``My first instinct was to let the market work, until I realized, while being briefed by the experts, how significant this problem became.''

Bush said the financial crisis is putting ``hundreds of billions of dollars at risk,'' but ``over time, we're going to get a lot of the money back.''


Crisis On Wall Street; Paulson: Plan Aimed At Solving 'Heart Of Financial Crisis'

Another Taxpayer Bailout - Under Who's Authority?

I can't believe this crap - let Lehman fail and two days later bailout AIG with taxpayer funds. Who authorized this? Certainly not me - I think we should let them fail.

The main reason we're in this crisis today is because we've been living a lie - an economic facade caused by too much easy credit/money, followed by excessive fraud, corruption and manipulation... For too many years TPTB prevented us from taking the required harsh medicine (recessions) needed to cure our economic ills. Now, once again, we are delaying the inevitable and laying a larger (unpayable/unsolvable - except for default or hyperinflation) economic bill on our children - absolutely reprehensible!

Dammit folks - don't you think it's time to take the medicine?

Evening Reports:

The Fed will not comment on reports that it was considering placing AIG into conservatorship, saying it did not have the legal authority to do so.

So, policymakers were called into an emergency meeting tonight:

Attending the meeting on the Capitol Hill were Democratic Senate leaders that included
- Charles E. Schumer of New York
- Richard Durbin of Illinois
- Christopher J. Dodd of Connecticut
- Kent Conrad of North Dakota

The contingent of Republicans included
- Mitch McConnell of Kentucky, the minority leader
- Richard Shelby of Alabama
- John Kyl of Arizona
- Judd Gregg of New Hampshire

House leaders included
- John Boehner of Ohio, the Republican leader
- Spencer Bachus, Republican of Alabama
- Barney Frank, Democrat of Massachusetts.

Members of the leaders’ staffs were asked to leave the meeting shortly after it began.

If the emergency talks fail, the collapse of AIG will be far worse than that of Lehman Brothers.

Many banks and investment funds in the US and around the world would lose their insurance cover at a time when defaults on payments are likely to rise





Insurance giant on a knife edge

The future of insurance giant AIG hangs in the balance as fears grow that it could be the next firm to fold in the wake of the credit crisis.

The state of New York has enabled the firm to access a "multi-billion dollar" finance plan in the short term, but it needs further funds to remain intact.

Analysts say the collapse of AIG would have a devastating impact on markets.

Senior banking executives are reportedly holding negotiations at the US central bank, the Federal Reserve, in an attempt to arrange a rescue bid.

But on Tuesday, Mr Paterson said AIG now had one day to raise another $80bn (£45bn) to save itself from collapse.

The plan appears to be for some form of private sector rescue, perhaps with backing from the Fed, says the BBC's economics correspondent Andrew Walker.

US Treasury Secretary Henry Paulson refused to bail out Lehman Brothers, the fourth-largest investment bank in the US, at the weekend.

But our correspondent says he may deal differently with AIG if he feels the damage caused by its collapse to the wider financial system would be too great.



Fed Readies A.I.G. Loan of $85 Billion for an 80% Stake

In an extraordinary turn, the Federal Reserve was close to a deal Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan, according to people briefed on the negotiations.

All of A.I.G.’s assets would be pledged to secure the loan, these people said, and in return, the Fed would receive warrants that could be exchanged for an ownership stake. Stock of existing shareholders would be diluted, but not wiped out.

A person briefed on the matter said the agreement does not require shareholder approval.

The Fed’s action came after Treasury Secretary Henry M. Paulson and Ben S. Bernanke, president of the Federal Reserve, went to Capitol Hill on Tuesday night to meet with House and Senate leaders. Mr. Paulson called the Senate majority leader, Harry Reid, Democrat of Nevada, about 5 p.m. and asked for a meeting in the Senate leader’s office, which began about 6:30 p.m.

A.I.G.’s board approved the proposal at a meeting Tuesday night, the same individual said.

Without the help, A.I.G. was expected to be forced to file for bankruptcy protection.


Fed nears a deal to take over ailing AIG

The Federal Reserve is close to a deal to take an 80 percent stake in American International Group in exchange for an $85 billion loan, according to sources familiar with the negotiations.

AIG’s failure could open the ugliest chapter yet of the financial meltdown.

“The glimmer of hope has turned into a ray of hope,” said the person, who asked not to be named because of the sensitive nature of the talks to help AIG.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke met with members of Congress to brief them on options the government is considering. The meeting ended without Bernanke and Paulson commenting.

Hoping to stave off what would be the ugliest chapter of the financial meltdown, AIG executives huddled with Fed officials and representatives from top banks at the New York Fed in downtown Manhattan to find the cash the huge insurer needs to stay in business.

One solution: A plan to have the government provide financial backing to ensure that AIG could secure a short-term loan from banks worth up to $100 billion to stay out of bankruptcy court, the person, who had direct knowledge of the talks, said.

He said the discussions had stalled because AIG did not have enough collateral to obtain a loan of that size. Both sides were trying to figure out how to close the gap between the amount AIG needs and the amount of collateral it has.

The person said it was increasingly likely the Fed would step in with taxpayer money.

Shareholders would be severely diluted by the bailout, which involves a bridge loan, according to sources. The government would receive warrants for most of AIG's equity in the bailout being negotiated. CNBC said the deal would give AIG incentive to sell its assets quickly to help pay off the bridge loan.

“This would mean another shareholder wipeout,” said David Ader, head of government bond strategy at RBS Greenwich Capital in Greenwich, Conn.

Just days ago, Paulson said the government would not help Lehman Bros. with the kind of taxpayer-backed funding that JPMorgan Chase & Co. received six months ago to buy ailing Bear Stearns.

“They’re too big to fail. AIG touches too many people and too many companies globally, and it would be much more of a disorderly event if it went bankrupt than it was with Lehman,” said Anton Schutz, president of Mendon Capital in Rochester, New York.

Earlier, New York Governor David Paterson told CNBC that the insurer had “a day” to solve its problems. A failure would result in a “catastrophic problem” for the market, said Paterson, whose administration oversees regulation of AIG.

If AIG were to file for bankruptcy, billions of dollars of insurance contracts known as credit default swaps would likely be wiped out. Much of those losses would be absorbed by the companies holding the contracts, which were sold by AIG.

Investors Worry Over AIG's Future - DOW will be down 1,000 points tomorrow if AIG can't find solution

MSNBC: Shuster and Klein on More Government Bailouts

Lehman likely to be dead by Monday morning

Tonight, the Federal Reserve Bank of New York held an emergency meeting with top Washington policymakers and major financial institutions to discuss Lehman's future.

Attendees included Treasury Secretary Henry Paulson; Christopher Cox, chairman of the Securities and Exchange Commission; and Timothy Geithner, president of the Federal Reserve Bank of New York.


NYT: U.S. Gives Banks Urgent Warning to Solve Crisis Hat tip Justin

As Lehman Brothers teetered Friday evening, Federal Reserve officials summoned the heads of major Wall Street firms to a meeting in lower Manhattan and insisted they rescue of the stricken investment bank and develop plans to stabilize the financial markets.

Timothy F. Geithner, the president of the New York Federal Reserve, called a 6 p.m. meeting so that bank officials could review their financial exposures to Lehman Brothers and work out contingency plans over the possibility that the government would need to orchestrate an orderly liquidation of the firm on Monday, according to people briefed on the meeting.

Flanked by Treasury Secretary Henry M. Paulson Jr. and Christopher Cox, the chairman of the Securities and Exchange Commission, he gathered the executives in person to impress on them the need to work together to resolve the current crisis.

Mr. Geithner told the participants that an industry solution was needed, no matter what, and that it was not about any individual bank, according to two people briefed on the meeting but who did not attend. They said he told them that if the industry failed to solve the problem their individual banks might be next.

A spokesman for the New York Federal Reserve Bank in New York confirmed the meeting but declined to provide details on the discussions. The Wall Street executives included the following chief executives: Lloyd Blankfein of the Goldman Sachs Group, James Dimon of JPMorgan Chase, John Mack of Morgan Stanley, Vikram Pandit of Citigroup and John Thain of Merrill Lynch. Representatives from the Royal Bank of Scotland and the Bank of New York Mellon were also present. Lehman Brothers was noticeably absent from the talks.

The meeting was reminiscent of the circumstances that preceded the near-collapse 10 years go of Long Term Capital Management. At that time, William J. McDonough, then the president of the New York Fed, summoned the heads of big Wall Street banks to the Fed to stop the failure of L.T.C.M., a hedge fund firm that had made big bets on esoteric securities using borrowed money and which had already lost $4.5 billion.

The bankers ended up committing $3.65 billion to save L.T.C.M., though Bear Stearns, the hedge fund’s clearing broker, refused to contribute to the investment. Traders from the banks wound down the fund over time, averting what might have been big losses across the financial system. But the fallout from a failure of Lehman Brothers could be even more severe, given the firm’s much larger size and its entanglements with trading partners around the globe.

Policy makers fear its losses could ripple through the financial industry at a time when banks and securities firms are trying to overcome $500 billion in write-downs.

One observer briefed on the situation described the session as a “game of chicken” between the government and the heads of the major banks.

Bank of America and two British firms, Barclays and HSBC, have expressed interest in bidding for Lehman Brothers, according to people briefed on the situation. But they have indicated that their bids are contingent upon receiving support from the government, just as it did with the rescues of Bear Stearns, and the government-sponsored agencies, Fannie Mae and Freddie Mac.

But Mr. Paulson and Mr. Geithner made it clear to the company, its potential suitors and to the meeting participants on Friday that the government has no plans to put taxpayer money on the line. The government is deeply worried that its actions have created a moral hazard and the Federal Reserve does not want to reach deeper into its coffers. Instead, Mr. Paulson and Mr. Geithner insist that Wall Street needs to come up with an industry solution to try to stabilize Lehman Brothers and calm the markets.

Still, some of the other Wall Street banks, facing billions of dollars in losses themselves, have resisted this approach. They argue that Lehman Brothers overreached and brought its current troubles on itself. If there are no bidders for Lehman Brothers, these banks say they can collect their collateral and liquidate the troubled firm’s assets. In this high-stake game, they may also be trying to call the government’s bluff, knowing that if push came to shove, it would provide financial support.

Mr. Geithner, who led the session, firmly stood his ground. He told the banks that this was about fixing the system and preventing the crisis from worsening.

By the time Lehman’s shares went into a spiral this week, Fed and Treasury officials were convinced that Lehman posed far fewer real risks than Bear Stearns had back in March. The confidence by Washington officials stemmed from the fact that, after the Bear Stearns collapse, they obtained stronger regulatory powers that gave them the ability to peer into the activities and risk exposures of institutions on Wall Street.

Fed officials, for example, are now embedded at each of the big Wall Street investment banks and have at least some capacity gauge the firms’ exposure to hedge funds and other big players, as well as their positions in financial derivatives and other opaque markets. Fed and Treasury officials have also been taking the daily pulse of executives and traders on Wall Street for months, and much of that discussion has been about Lehman.

Officials detected a rising number of defections by Lehman’s institutional customers to other firms, but nothing near the panic that caused Wall Street executives to bombard Mr. Paulson with dire warnings about a Bear Stearns collapse in March.

Fed officials also saw few signs that fears about the future of the investment bank were spilling over to fears about its customers and trading partners.

And in practice, taxpayers could still end up on the hook for at least as much money as they were in the case of Bear Stearns. Lehman’s successor will still be able to borrow from the Fed’s new lending program for major investment banks, which the Fed created in response to the collapse of Bear Stearns in March. If Lehman were to borrow money and then default on its loans, the Fed’s losses would reduce the amount of money it turns over to the Treasury.

For political and economic reasons, both the Federal Reserve and the Treasury Department are loath to save financial institutions from their own folly.

But as the housing crisis has deepened, they have abandoned free-market orthodoxy, fearing that the collapse of institutions like Bear Stearns or either Fannie Mae or Freddie Mac could cripple the financial markets, and perhaps the economy itself.

One of the biggest differences between the challenge facing Lehman and the one that faced Bear Stearns is the availability of the Fed’s emergency lending program for investment banks.

When confidence evaporated in Bear, with major hedge funds pulling their prime brokerage accounts, Bear’s financing ran out almost overnight, creating a panic situation. Lehman has had the power to plug any cash shortfalls by borrowing from the Fed, though it has not actually borrowed any money from the program since March.

The Crash of 1929

Originally produced in the mid-1990s, this film remains the most authoritative account of the Crash of 1929, and includes rare testimony from the people who worked on Wall Street at the time

FDIC: Getting Ready for the Worst

The US banking system has over $8.5 Trillion in deposits, $4.4 Trillion of which are backed by the FDIC. With a paltry $45B in insurance money and a growing list of ailing banks, the FDIC is becoming very concerned they will likely run out of money if significant issues are encountered... Problem is: Significant issues are popping up everywhere and they are nearly surrounded.

Note: The failure of just one large institution (i.e. Wamu) could wipe them out.

So what's going on in the US Banking system?

From Mike Larson, Money and Markets: Latest FDIC Report Reads Like a Horror Novel

Bank income PLUNGED 86.5%! Insured commercial banks and savings institutions reported net income of $5.0 billion for the second quarter of 2008 — down a whopping 86.5% from a year earlier.

Loan loss provisions QUADRUPLED! Loss provisions totaled $50.2 billion, more than four times the $11.4 billion quarterly total of a year ago. Second-quarter provisions absorbed nearly one-third of the industry’s net operating revenue — the highest proportion in 19 years.

Actual loan losses nearly TRIPLED! Bad loan losses soared to $26.4 billion in the second quarter. That’s almost triple the $8.9 billion that was charged off in the second quarter of 2007 and the highest quarterly charge-off rate in 17 years.

Credit card losses rose 47% ... commercial and industrial loan losses more than doubled, increasing 128% ... home equity loan losses jumped 633% ...

Plus, loan defaults on residential mortgage loans soared 822%.

And get this: Bad construction and land development loans skyrocketed a staggering 1,227%!

Surging loan delinquencies signaled MUCH more pain to come! The number of past-due loans and leases rose for a ninth consecutive quarter, posting the second-largest quarterly increase in the nine-quarter streak — a dead give-away that bank losses will continue to surge for the foreseeable future.

List of Problem Banks Grow:

Guardian.UK: FDIC sees 117 problem banks; most since 2003 (Remember, INDYMAC wasn't even on the list)

The number of troubled U.S. banks rose 30 percent to 117 in the second quarter, the highest level in five years, and a top regulator warned that conditions will worsen as the housing slump and credit crisis continues to pound profitability.

Nine U.S. banks have failed so far this year, including mortgage IndyMac Bancorp Inc, which has drained the FDIC's Deposit Insurance Fund used to repay insured deposits at failed banks.

The FDIC said the sector's earnings fell 86 percent from a year earlier to $5 billion in the second quarter, mainly due to a fourfold rise in provisions for bad loans to $50.2 billion. With the exception of the fourth quarter of 2007, industry profits were the lowest since the fourth quarter of 1991.

Delinquent loans -- those more than 90 days past due -- jumped by almost 20 percent during the quarter to $162.9 billion, the FDIC said.

"The numbers are alarming, but we are coming off of an incredibly low base of problem institutions and failures," said Mike Stevens, senior vice president for regulatory policy at the Conference of State Bank Supervisors.

FDIC Lifeline:

Reuters: FDIC may borrow money from Treasury

Federal Deposit Insurance Corp (FDIC) might have to borrow money from the Treasury Department to see it through an expected wave of bank failures, the Wall Street Journal reported.

The borrowing could be needed to cover short-term cash-flow pressures caused by reimbursing depositors immediately after the failure of a bank, the paper said.

The last time the FDIC had borrowed funds from the Treasury was at nearly the tail end of the savings-and-loan crisis in the early 1990s after thousands of banks were shuttered.

The fact that the agency is considering the option again, after the collapse of just nine banks this year, illustrates the concern among Washington regulators about the weakness of the U.S. banking system in the wake of the credit crisis, the Journal said.

FDIC Getting Ready for Bigger Problems:

Bloomberg: FDIC Adds Office Space in Dallas, Ready for More Bank Failures

The Federal Deposit Insurance Corp. is preparing to sign a five-year lease to add five floors of space at its Dallas regional office as the agency prepares to increase scrutiny of failing and troubled U.S. banks.

The federal agency, which insures deposits and disposes of failed banks and their assets, will add 125,000 square feet to the 185,000 square feet it rented last year at 1601 Bryan St., a 49- story tower in downtown Dallas. That agency will add about 300 staff at the building, including some of the 69 retirees it is bringing back to help handle the increased workload, said spokesman Andrew Gray.

``Already you've seen nine failures of institutions this year,'' said Gray. ``While historically this isn't a large number, it does represent an increase over the past two years. We anticipate additional failures and thus we would anticipate additional workload.''

The staff additions would bring the total number employees at that location to about 850.


Closing:

We're currently dealing with a self-perpetuating, downward, nearly out-of-control spiral:

Debt ladened US Consumers are strapped, defaults are increasing across the spectrum, and the housing, commercial real estate and construction markets are getting worse. These issues are increasing writedowns/losses, impairing already severely deteriorated banking system capital ratios and hampering future credit creation/banking system earnings - all exacerbating the perpetual feed-back loop.

So, is there light at the end of the tunnel?

Unless the real estate markets and credit conditions improve soon (highly unlikely) I don't expect to see light at the end of the tunnel for quite some time. As a matter of fact, the odds are probably higher for a tunnel collapse than for catching a glimmer of emergent light.

Regards

Randy

Las Vegas Homeowners: 1/2 are upside down

A new report from Zillow says that half the people who have bought homes in the Valley within the last five years are now upside down.

Many more Zillow created Charts and Graphs found here



Las Vegas Sun: Vegas home prices at 2003 levels

Owners of more than half of all homes sold in the Las Vegas area in the past five years have negative equity in their homes, according to a new report.

The report from Zillow.com, which tracks real estate values across the country, indicates that home prices in the Las Vegas area have fallen to levels not seen since 2003, and homes sold for a loss in the second quarter of this year made up 69 percent of all home sales.

According to Zillow, the average home in the region -- including single-family homes and condos -- is valued at $205,500, which is down more than 27 percent from a year ago, and down more than 34 percent from the market's peak of $313,275 in the first quarter of 2006.

The report indicates that 99.4 percent of homes lost value in the past year.

Among the report's other findings:

- More than 48 percent of homes sold in the Las Vegas area in the second quarter of 2008 were foreclosures.

- About 70 percent of homeowners who purchased their homes in 2005, 2006 or 2007 have negative equity in their home. For example, about 73 percent of homes purchased in 2006 have negative equity, with homeowners having median equity of minus $52,444.



My Thoughts:

This negative equity situation was caused by excessive speculation and Subprime use - and was exacerbated by the current credit crisis.

The problem however is likely to get much worse: with a massive (>28,000 home) inventory overhang, Alt-A (Exploding ARMs/Liars loans, etc) starting to reset, significantly falling gaming revenue (Las Vegas: Gaming Revenue down > 16%) and an economy reeling from recession (Las Vegas Economic Recession is here) home prices have nowhere to go but down -- much further down.

From a report I read today: Liar Loans Stir More Defaults

~ 40 percent of loans made in California and Nevada in 2005 and 2006 were either interest-only or option ARMs -- "It was pretty evident that the only thing that was supporting these loans was higher home prices"

Closing:

So, will the headline this time next year be: Vegas home prices have fallen to 2000 levels and 60% of those who purchased in the last 8 years are upside down?

Guess only time will tell...

Regards

Randy

More bad news for Vegas

Echelon Place Complex, a $4.8 Billion Boyd Gaming Construction Project, initially scheduled to open in the third quarter of 2010, was put on a nine to 12-month delay this last Friday.

The new casino development was designed to include five hotels, including two built and operated under a joint venture with Morgans Hotel Group Co. It was also to have two theatres, a convention center and a retail ``high street,'' -- which is a joint venture with General Growth Properties Inc., the second- largest U.S. owner of shopping malls.

Las Vegas-based Boyd said it won't resume the project for three or four quarters while the U.S. economy slows and banks remain reluctant to lend.

``This is a very prudent, tough decision by management in light of the capital markets, the slowdown in Las Vegas and significant shareholder opposition,'' Joel Simkins, an analyst at Macquarie Securities USA Inc. in New York, said today.

``The delay of Echelon indicates the unprecedented downturn that Las Vegas is currently undergoing and the extreme difficulty in securing capital,'' Steven Kent, an analyst at Goldman Sachs Group Inc. in New York, said today in a note to clients.

Project shutdown leaves many workers worried

~ 800 ironworkers, carpenters, electricians, laborers and just about everyone else working on Boyd Gaming's partially finished resort left the job Friday, not knowing when or if they'd return.

Rapp, an ironworker, said he was hopeful there would be jobs at other projects. But he was also afraid the shutdown marked the end of a Las Vegas boom where jobs at decent wages were plentiful.

"It is kind of a scary thought, you know," Rapp said. "I don't think work will ever be as good as it was for the last 10 years, not for the middle class."

Rapp said he has a wife and five kids, three of whom are in college.

"They are going to have to start paying their own rent," he said.

My Note: In addition to the 800 jobs lost, Echelon was projected to add 10,000 new Las Vegas jobs when it opened in 2010 - Guess they will have to wait...

Though LV unemployment (currently at 6.5%) is already higher than the national average, If this trend continues (which I expect it will), we may have a 7.5% or better unemployment rate by the end of this year. Heck, we're already in a Recession: Las Vegas Economic Recession is here

Echelon Delay Could Have Major Economic Impact

The economic troubles could be a financial red flag at a time when other projects are facing financial woes. As Wall Street rethinks Las Vegas, jobs and housing could be hit hard.

That seems to be the perception on Wall Street. And when the projects do poorly, that means fewer jobs and houses that were expected to come online. Everything is tied together.

UNLV Professor Keith Schwer says when a project is delayed or cancelled suddenly, the impacts are felt beyond the Strip, "That's the nature of economics. It's like a cloth and each fiber is tied to the next."

Allow me to switch gears a bit -- LV Banking:

If you recall,, I warned you about SilverState Bank last weekend (excerpts below):

"Andrew McCain, son of Republican nominee John McCain, has resigned from Silver State Bank's board of directors this weekend. "

"Would a banking failure under son McCain's leadership look bad for dear old dad's election prospects? Hmmm... Well, I suggest you keep an eye on Silver State Bank -- word on the street is: they are not doing well."

"Take a look at the Bankrate and Safe and Sound ratings for Silver State Bank, Henderson Nevada: One Star (The Lowest Possible Rating) and 5G (Lowest Possible Rating)."

"I can only imagine the FDIC is working disaster/cleanup plans and decided it's probably time for Andrew to get out of the picture before the bomb goes off. "

Well, based on news reports today, it looks as if we're getting closer to the implosion:

Bank reports $62.7 million loss, replaces key officials

Silver State Bancorp, the $2 billion-asset holding company for the similarly named Henderson bank, lost $62.7 million in the second quarter and replaced its CEO as the number of bad loans grew huge.

Michael Thorell, 42, former president of an Arizona bank that Silver State acquired, was named acting CEO, replacing Corey Johnson, 50, who resigned.

The board named Phillip Peckman, 59, acting board chairman to replace Bryan Norby, 51, of Boise, Idaho.

Thorell declined to comment on Johnson's resignation. Attempts to reach Johnson were unsuccessful.

Silver State shares dropped 30 percent, or 38 cents, to 90 cents in heavy trading on Nasdaq following the announcements. Its shares hit a 52-week high of $24.10 last summer

Michael Threet, chief operating officer and chief financial officer, said the quarter's financial numbers stem from "the severe economic downturn in our nation, in our region and in the real estate values in the markets we serve."

Silver State's nonperforming assets, which include bad loans, were 83 percent larger than the total of reserves it set aside for problem loans plus its tangible equity or ownership interest in the company.

The company has been trying to raise $40 million in additional capital since June 5. It has been difficult to raise capital, because "all of the capital raised in the first quarter (for commercial and investment banks) is under water," Threet said. -- to increase deposits, the bank recently offered 4.25 percent on some certificates of deposit.

Moving on to LV Housing:

HousingTracker.net is reporting some rather awe inspiring numbers for Las Vegas today:

Inventory (28,581) continues to grow while Median prices plunged a dramatic - 30% YoY.

Additionally, RealtyTrac is showing that 36,161 homes are in some state of foreclosure for Clark County -- about 1/2 of the numbers are in preforeclosure, 1/4 in auction and another 1/4 Bank Owned.

LV Industrial Market:

Vegas Industrial Vacancy at 7.7%, Heading to 9%

LAS VEGAS-An industrial building boom than began in better economic times has been overwhelming the now tepid market over the past year or so, elevating vacancy to 7.7% from 4.5% one year ago, according to the latest report from Applied Analysis, a locally based business advisory that tracks the commercial market. Company principal Jeremy Aguero predicts the rate will rise to approximately 9% in coming quarters before demand rebounds and vacancy begins falling again.

The Las Vegas industrial market continues to be impacted by a declining economic climate, elevated fuel pricing for regional distributors, and increased caution on the part of business decision makers,” he says. “Company expansions and relocations are much more limited today than any point during the past five years.

Other LV News:

LVSands Corp. Trimming Las Vegas headcount by 1,500 --“through attrition, not layoffs”-- as part of a plan to find between $70 and $90-million in annual savings in the market. “It’s a challenging market that could continue for some time,” he said.

Businessman drops out of Tropicana bidding -- A New York developer whose group had offered $950 million to buy the Tropicana Casino and Resort says they're no longer interested. Joseph Palladino tells The Press of Atlantic City his group is looking at other casino properties in Atlantic City and Las Vegas, but no longer wants the Tropicana. The Tropicana has been for sale since last December

Airlines sound alarm for Vegas tourism -- Airlines serving McCarran International Airport have issued the bleakest economic forecast yet for Las Vegas, recommending that officials reconsider the need for a terminal that is under construction because there may not be sufficient tourism traffic to justify it. The airlines’ message to Las Vegas: The industry will not quickly recover from the tourism decline wrought by a combination of higher fuel prices and a sputtering economy.

McCarran Flier Count Dips 7 Percent in June -- Passenger counts at McCarran International Airport fell 7 percent in June, another indication that the nation's shaky economy is undermining the leisure travel industry. McCarran's top five carriers all posted declines in June, including Southwest, the No. 1 airline in Las Vegas and the only major domestic carrier making more money than it spends.

Casino bankruptcies making gaming sector a real gamble -- Already, casino owners such as Tropicana Entertainment LLC, Legends Gaming LLC and Greektown Holdings LLC have all gone bankrupt this year, but more are teetering on the brink, too... Herbst Gaming Inc. popped up on Bankruptcy Insider's Zombie Watch list three months ago... Even gaming giants Harrah's Entertainment Inc. and Station Casinos Inc. aren't immune. Moody's slashed the ratings for both on July 17 to B3, citing a deterioration in the Las Vegas gaming markets.

LAKE LAS VEGAS: Bankrupt project still alive -- tries to borrow $127 million. So what does one of the largest bankruptcies in Nevada history look like from street level?

On Monday, a Las Vegas bankruptcy judge will hold a hearing to determine whether Lake Las Vegas should be allowed to borrow $127 million from a Wall Street investment banking firm.

Company officials say they need the money to pay for repairs to the 2-mile-long man-made lake and maintain payroll, employee benefits and day-to-day operations. The company employs 260 workers, mostly for its golf courses.Rapoport said this bankruptcy "might well be" the largest Nevada has ever seen... Already it's large enough to prompt wild speculation about the city of Henderson getting dragged into bankruptcy, too. But city officials literally laugh that off.

It looked like business as usual Thursday morning at Lake Las Vegas. Golfers golfed. Mowers mowed. Waterfalls fell... But there wasn't much business.

At 10 a.m., a single player had the tables to himself at Casino MonteLago. The nine other people in the 40,000-square-foot casino confined themselves to the slots.

Outside, MonteLago Village was a ghost town of boutiques, coffee shops and high-end eateries...

Bottom line:

I feel the last few sentences above capture the Las Vegas condition/situation quite nicely, and believe we're much closer to the beginning of this unprecedented LV economic downturn than we are to the end.

You may want to hold on to your hat, because this wild downturn will likely get quite ugly in the not too distant future... As you'll see when the significant casino layoffs begin - and soon.

Again, going back to 1970, there has only been ONE OTHER time (since this recent economic downturn) where gambling revenues actually fell -- in the aftermath of the Sept. 11 terror attacks. During that timeframe (2001-2002) gaming revenue fell 1 percent. Today, LV gaming revenue is down ~ 6% for the year (16% just last month), but we've yet to see massive layoffs experienced after 9/11.

Are things different this time around? I wouldn't bet on it, as you 'd probably lose to the house - the layoffs are coming... and probably just in time for Christmas 2008.



With that, I hope you have a great weekend!

Randy

DOW Daily and Hot off the press news!

Well, I was only 1/2 right ( DOW: Below 11K this week) and underestimated the power of the Plunge Protection Team (PPT).

The Dow started off the day by opening > 150 points lower than yesterday's close, then spent much of the day fumbling along ~ 200 points lower -- and it actually dipped below 11,000 on three separate occasions, only to be followed by a massive PPT-induced 200 point rally late in the day (look at 2:30-3pm on chart below); ultimately closing 100 points above my target predicted earlier in the week. Oh well, we still have next week. I still believe 9K by end of year.




Hot off the press: Looks like INDYMAC HAS TANKED!!!!

Regulators Seize Mortgage Lender

Banking regulators seized IndyMac Bancorp, one of the country’s largest mortgage lenders, on Friday evening.

The bank, a star in the subprime era, is the second largest ever to fail and the first major bank to shut its doors since the savings and loan crisis of the 1980s.

The bank collapse came after a frenzied week as IndyMac’s executives tried — and failed — to bolster the bank’s financial footing. The bank, based in Pasadena, Calif., said on Monday that it had stopped making new loans and announced layoffs of more than half of its 7,200 workers. But IndyMac’s customers — afraid their savings might disappear — stampeded tellers, demanding their money back.

The run on the bank came after a critical letter about the bank’s future written by Senator Charles Schumer, Democrat of New York. Federal regulators said on Friday that Mr. Schumer’s letter had pushed IndyMac into collapse, causing the bank run and scaring away potential acquirers.

“The senator made comments in his letter questioning the viability of the institution,” John M. Reich, director of the Office of Thrift Supervision, said on a phone call with reporters. “When a member of the United States Senate makes such a statement, it frightens depositors.”

In the days after Mr. Schumer’s letter was released on June 26, IndyMac customers withdrew an average of $100 million a day from the bank, or a total of $1.3 billion, the government said. Before Mr. Schumer’s letter, the bank had been receiving net inflows of money from depositors, Mr. Reich said.

Mr. Schumer, who has been critical of bank regulators for months, released a statement, in turn, criticizing Mr. Reich’s agency.

“If O.T.S. had done its job as regulator and not let IndyMac’s poor and loose lending practices continue, we wouldn’t be where we are today,” he said.

For all the write-downs and bad news on Wall Street over the last year, few regional and local bank have shut their doors. The Federal Deposit Insurance Corporation listed just 76 troubled banks in its report in April. The handful that have failed have been a fraction of the size of IndyMac. IndyMac held $30 billion in deposits as of late March, according to the government release.

“It’s the biggest failure in 24 years,” said Chip MacDonald, a banking lawyer at Jones Day in Atlanta. “You haven’t had a lot of failures of that size, yet.”

IndyMac’s collapse was unrelated to the market worries about Fannie Mae and Freddie Mac, the big mortgage finance companies.

Next week should be quite interesting

Randy

Fannie and Freddy -- walking dead

I've been hammering Fannie and Freddy since my very first post in 2005 and have always suspected that they were merely walking dead, but the Gvt. couldn't allow the public to know this, so they propped up their carcass of a body just like the characters did their boss in "Weekend at Bernie's"

Well, it now looks like the cat is out of the bag, as former St. Louis Federal Reserve President William Poole said Freddie Mac and Fannie Mae are insolvent and that the government might need to step in to rescue the struggling lenders.

“Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,” Poole said Wednesday.

In other words, he believes they're virtually bankrupt!

Fannie, Freddie Tumble on Bailout Concern

July 10 (Bloomberg) -- Fannie Mae and Freddie Mac, the two biggest providers of financing for U.S. home loans, fell to the lowest levels in 17 years in New York trading after a former Federal Reserve president said the companies may need a government rescue.

Fannie Mae tumbled as much as 24 percent and Freddie Mac slumped as much as 34 percent in New York Stock Exchange composite trading after UBS AG analysts said in a report today that Freddie Mac's decline creates ``challenges'' for the company's plan to raise $5.5 billion

Chances are increasing that the U.S. will bail out Fannie Mae and Freddie Mac because they don't have enough capital to weather the worst housing slump since the Great Depression, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules. The fair value of Fannie Mae assets fell 66 percent to $12.2 billion, data provided by the Washington- based company show, and may be negative next quarter, Poole said.

The companies, created to boost homeownership and promote market stability, own or guarantee about half the $12 trillion in U.S. home loans outstanding. In addition to those obligations, Fannie Mae has $831 billion in company bonds outstanding, while Freddie Mac has $644 billion, according to Bloomberg data.

Government Ties

Congress created Freddie Mac and expanded Fannie Mae in 1970 to promote home buying in the U.S. The companies' charters give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default.

The government will likely be forced to take over the companies because of the mortgage meltdown, Poole said.

``We know in a crisis the Federal Reserve tap would be open,'' said Poole, now a senior fellow at the Cato Institute.

The bailout of Bear Stearns Cos. by JPMorgan Chase & Co., arranged by the Fed, demonstrates the government's unwillingness to allow ``large, systemically important'' financial institutions to fail, he said. Bear Stearns collapsed after customers fled amid speculation the company faced a cash shortage.

``I worry about those institutions,'' retired Richmond Fed President Alfred Broaddus said. ``They are huge. They dwarf the Bear Stearns issue. In the very worst case scenario, I don't know how you do it other than extend money and the public takes the loss.''

Bottom line:

This is huge folks! If Fannie and Freddy were allowed to fail (won't be allowed), we would quickly fall into an ECONOMIC DEPRESSION (i.e. lack of new home loan credit = lack of new money circulating, destruction of debt/bond/equity markets, a complete lack of home sales/swiftly building inventories, MANY times more home loan defaults than expected and an ABSOLUTE COLLAPSE IN HOME PRICES -- compounding several times over the current banking/financial system crisis and significant economic pains that we are now experiencing).

If the GVT indeed does bail them out (likely) expect a HYPERINFLATIONARY Spiral -- followed by a depression anyway. We're talking TRILLIONS of new dollars quickly added to a bloated fiat system that is already creating new money at a near 20% annual rate -- adding explosive fuel to a raging forest fire and increasing the velocity of US Dollar decline and ultimately Dollar hegemony collapse.

Once again, the Plunge Protection Team and Gvt are stuck between a rock and a hard-place, and the days of easy fixes have long since past... We should have taken our harsh medicine after the Dot.com crash, but the Maestro (Greenspan) wanted to leave his chair on a high note. Though honored, knighted and revered around the globe, Alan Greenspan (when history is written/analyzed) will likely go down as one of the WORST Fed Chairman EVER! I hope he can sleep well at night, knowing what he hath wrought.

As an aside: for those who don't understand the word hegemony (used above), I highly suggest you read a superb Ron Paul article written back in 2006: The End of Dollar Hegemony

All the best

Randy

DOW: Below 11K this week?

Asian Stocks are falling hard as I pen this message, following today's US indexes lower on growing credit market concerns -- Fannie and Freddie the newest cause for alarm bells:

Freddie Mac, Fannie Mae Plunge on Capital Concerns

July 7 (Bloomberg) -- Freddie Mac and Fannie Mae fell to the lowest in 13 years in New York Stock Exchange composite trading as concerns grew the two largest U.S. mortgage-finance companies may need to raise more capital to overcome writedowns and satisfy new accounting rules.

Freddie Mac fell 18 percent and Fannie Mae dropped 16 percent after Lehman Brothers Holdings Inc. analysts said in a report today that an accounting change may force them to raise a combined $75 billion. Speculation that the companies may take further writedowns also weighed on the stock, said John Tierney, a credit strategist at Deutsche Bank AG in New York.

``There's a lot of apprehension about writedowns,'' Tierney said. ``If they have writedowns, they have to raise capital. How much do they raise and how easily can they do that? Those are the questions that everybody is asking.''

Fannie Mae and Freddie Mac shares plunge

One of the strongest warning signals came Monday, when shares of two of the nation's most important housing barometers, Fannie Mae and Freddie Mac, plummeted. After falling remorselessly over the past month, in just one day Freddie Mac tumbled nearly 18 percent, and Fannie Mae lost 16 percent.

Stock prices of both companies — the nation's largest buyers of home mortgages, and traditionally the government's backstop for the housing economy — have each declined by more than 60 percent this year. Those falling prices, along with the rash of write-downs, declining stock prices and red ink at the nation's largest banks reflect a growing conviction among investors that the current housing slump will last longer, and prove more severe, than initially feared.

As a result, investors are signaling that they are far from convinced that any enterprise — even one with the strongest backing — can successfully navigate these choppy waters, and that those who do persist will pay dearly to survive.

"Everything points to a lot more bad news to come," said Paul Miller of the Friedman, Billings, Ramsey Group in Arlington, Virginia "If Fannie and Freddie are vulnerable, it means no one is absolutely safe."

Currently, futures for DOW, NASDAQ and S&P are all pointing lower for tommorow's opening. In addition, the following data products will be released tomorrow:

- International Council of Shopping Center Store Sales
- Pending Home Sales
- Wholesale Inventories
- Consumer Credit

Later this week: other data to be released:

- Jobless claims
- Import/export Prices
- Trade Balance
- Treasury Report
- Consumer Sentiment

Bottom Line: Economic reality is finally sinking in and I expect the DOW to fall/close below the psychological threshold of 11,000 THIS WEEK! Though not true chart resistance, it will be a big deal in the financial media.

Regards

Randy

We Ain't seen nothin Yet

Since the end of the housing boom in 2005, I've been stating the housing correction in Las Vegas would be significant and we'd likely see a 50% haircut (peak to trough) in home prices. Thus far, odds are looking pretty good that I'll ultimately be correct (Maybe even too optimistic).



Four years of gains wiped out in just one.

Home prices across 20 major U.S. cities have dropped a record 15.3% in the past year and are now back to where they were in the summer of 2004, according to the Case-Shiller home price index released Tuesday by Standard & Poor's.

Las Vegas saw the biggest declines, with prices falling 26.8% in the past year.

With so many homes on the market and foreclosures rising, prices are likely to keep falling, said Patrick Newport, an economist with Global Insight

"We expect the 20-city Case-Shiller composite to fall another 15% to 20%, to a bottom at the end of 2009, translating to a peak-to-trough drop of 30% to 35%," wrote Michelle Meyer, an economist for Lehman Bros.

After accounting for 4.5% inflation over the past year, real home prices are down in every region in the nation.

Closing:

Thus far, the decline in bubble-region home prices has been quick, but I still feel we've got a long way to go. Significant banking/credit issues will soon to come to light again while unemployment numbers are due to increase significantly. Combine these issues with billions in Option Arm Resets, massive inflationary pressures and soon-to-be crucified equities markets and the result is a toxic Witch's Brew of economic misery that will continue to force massive downside price pressures across the nation.



Bottom Line: We ain't seen nothing yet!

Regards
Randy

Videos of Interest

The global "Credit Crisis" is back: Stephen Long, ABC Lateline covers ongoing problems and longer term impacts -- a short video: watch to the end.




Economic Consequences of Attacking Iran




Wake Up, Peons




Ross Perot is back! Launches Public Information Website

The American people must wake up and face the reality that promises made in the past will soon bankrupt this nation.

"The economic crisis facing America today is far greater than anything since the Great Depression," said Perot. "Our federal government continues to spend us deeper into debt. The American people must get directly involved and demand an end to deficit spending. Perotcharts.com

DOW -- Trouble Ahead?

Last Dec/Jan the major US equity markets experienced significant sell offs, and the Dow nearly plunged through 11,600, but support was found, and for the next couple of months the DOW hovered slightly above the 12,000 range... Then came the month of March 08, when Bear Stearns was imploding and bad news started to pour in from every angle.

At that time, I knew the situation was grave and opined that the Plunge Protection Team (PPT) was wide awake at night, trying to find a solution -- otherwise the last leg of confidence in their "Goldilocks" economic charade would fail.

Here's my Sunday Evening, March 16th, 2008 post: Tumultuous Week Ahead

Lo and Behold, within hours of that post, opening markets around the globe began to tumble -- causing the PPT to panic and come out fighting (on a Sunday night)... With their big cannons and guns ablazing, it was announced the Fed would immediately:

Modify the Discount Window -- On March 16, 2008, the Fed further extended the term for borrowing to 90 days, and further reduced the spread to the target federal funds rate to 25 basis points.

Open the Primary Dealer Credit Facility -- The establishment of the PDCF was announced on March 16, 2008. The Board determined that unusual and exigent circumstances existed in financial markets, including a severe lack of liquidity that threatened to impair the functioning of a broad range of markets, and announced that the PDCF will be in place for at least six months and may be extended as conditions warrant.

These two new unparallelled additions would immediately join two other unprecedented actions taken earlier in the year:

- The Term Auction Facility (TAF) in Dec 07
- The Term Securities Lending Facility (TSLF) on March 11, 08

Within days, easy liquidity created through these four new monetary spigots started to calm markets, and as increasing gains were made many shills began to pronounce: "The Credit Crisis is Over".

Well, here we in June 08 and things aren't looking so well again...

With recent reports of:

- The biggest jobless increase in over two decades
- The largest housing bust since the Great Depression
- Oil/gas at an all-time high
- Contagion spreading across the banking sector (significant losses ahead)
- Recent MBIA and AMBAC downgrades

Last Friday's 400 point drop in the DOW should have been a wake-up call.

Let's look at a chart of the DOW:

Note: I'm not a chartist, but I do have a lot of common sense and believe that anyone can relate to/understand what I'm about to say.

Looking at the chart above, last Friday the DOW closed at 12,209. On the assumption more bad news will follow in the days/weeks ahead, where can one expect to see the next level of downside support and will we eventually break through it?

If you follow the chart over to March 2007, you will see that 11,939 is the next downside support level. If we break through there, it's quite likely we will also test the following downside support level-- found in Jan 08 at 11,634. Now, this 11,700-11,600 level will provide very strong downside resistance and the PPT will fight tooth and nail to prevent failure, but if we DO break through it -- look out below as automated sell signals kick in from around the Globe—potentially creating a selling panic/free-fall.

From there it's a 1,000 point drop to the next downside support level -- July 2006 @ 10,683.

Closing:

I don't expect to open in a free-fall tomorrow or the next day, but want you to be aware that we're only 300 points from breaking through key downside support levels. Once that happens (which I'm sure it will in the coming weeks) the next support level @ 11,700-11,600 becomes very vulnerable -- and if that one doesn't hold, expect all hell to break loose as the last leg of propped-up confidence in our economy gives way to unknown panic/crisis.

With that said, and expecting more bad news to roll in each and every day, I feel quite confident in stating that both of these downside support levels will eventually be broken (this year), but the real question ultimately relates to timing and the PPT -- What else do they have up their sleeves? No one yet knows, but expect a fight.

Best Regards

Randy

Economicrot.blogspot.com

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Bernanke's Next Moves

Federal Reserve Chairman Ben Bernanke this week took the unusual step of defending the US Dollar and stated:

"We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations."

In layman's terms: We understand that our policy of cutting interest rates and injecting massive sums of money into our banking/financial system is causing significant dollar devaluations which is, in-turn, stoking massive inflation and future inflationary pressures. We the Fed, are on top of things and are in the process of formulating new policies to stave off these pressures, so don't bet on future rate cuts and you might even want to plan on seeing future rate increases.

HA! What a bunch of bologna... He's trapped and knows it!

With reports of the biggest jobless increase in over two decades, the largest housing bust since the Great Depression, Contagion spreading across the banking sector -- with massive writedowns to follow, recent MBIA and AMBAC downgrades, and credit crunch phase-2 ready to kick in, he is absolutely, unequivocally a caged animal with no room to move.

If he dare increase rates (he won't) our current, severely understated economic contraction will intensify and the downward sliding economic snowball, gathering momentum, will likely burst into a banking/financial system collapse.

Previously, I stated we'll likely see a 2% FFR in 08 and a 1% rate in 09. Thus far, I've been right in 08 and I still feel strongly I'll be right in 09.

As I see it, the Fed will hold five more FOMC meetings between now and the end of this year and rate announcements will be announced on the following dates:

June 25th
Aug 5th
Sept 16th
Oct 29th
Dec 16th

Baring any drop below 11,700 on the DOW between now and June 25th, I expect the fed to pause at the next FOMC meeting(no action on rates) -- If we do drop below the stated number, expect a new rate cut.

I expect Credit Crunch Phase-2 to kick in by Aug/Sept 08, and it will likely make phase-1 look like a walk in the park, so expect a cut at one of these meetings and another in October 08.

By December, semantic debate over our full-blown economic recession will be over/recession will be unquestionable and our newly elected President will demand action -- so expect another cut.

Bottom Line: Expect a 1.5% or lower FFR between now and the end of this year and a 1% or lower in 09.

Helicopter Ben's recent "strong dollar" talk is just that -- "talk", so don't expect any change from current policy.

US Dollar index going below 70 this year and inflation will intensify... His rant was all smoke and mirrors for the gullible.




Best regards

Randy

Economicrot.blogspot.com

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Goldilocks Economy - News Roundup

U.S. stocks rose the most in almost two months today, led by energy companies and retailers. I imaging the following issues weren't taken into consideration:

U.S. Mortgage Delinquencies, Foreclosures at Record

June 5 (Bloomberg) -- The number of Americans in danger of losing their homes to foreclosure rose to the highest in at least three decades during the first quarter as borrowers who fell behind on payments were unable to sell their homes.

The total inventory of homes in foreclosure increased to 2.47 percent and the delinquency rate, loans with one or more payments overdue, grew to 6.35 percent. All were the highest in a series that goes back to 1979, the Washington-based trade group said.

Equity in Americans’ homes falls to historic low

The equity Americans have in their most important asset — their homes — has dropped to its lowest level since the end of World War II.

Homeowners’ portion of equity slipped to 46.2 percent in the first quarter from a revised 47.5 percent in the previous quarter. That was the fifth quarter in a row below the 50 percent mark, the Federal Reserve said Thursday.

The total dollar value of equity also fell for the fourth straight quarter to $9.12 trillion from $9.52 trillion in the fourth quarter, while Americans’ total mortgage debt rose to $10.6 trillion from $10.53 trillion.

Experts expect equity to decline further as falling home prices erode the value of Americans’ largest asset, dragging more homeowners “upside down” on their mortgages.

At the end of March, nearly 8.5 million homeowners had negative or no equity in their homes, representing more than 16 percent of all homeowners with a mortgage, according to Moody’s Economy.com Chief Economist Mark Zandi. By June 2009, he estimates that will increase to 12.2 million, or almost one out of every four homeowners with a mortgage.

MBIA, Ambac, $1 Trillion of Debt, Lose S&P AAA Rating (Update3)

June 5 (Bloomberg) -- MBIA Inc. and Ambac Financial Group Inc., the world's largest bond insurers, had their AAA financial strength rankings cut by Standard & Poor's, taking with them the ratings on more than $1 trillion of securities they guaranteed.

The ratings were lowered two levels to AA, New York-based S&P said in a statement today. S&P said it would keep the ratings under review pending ``clarification of ultimate potential losses as well as future business prospects, the outcome of strategic business decisions, and potential regulatory developments.''

UBS Plans to Close Its Municipal Bond Business

UBS said Thursday it would close its municipal bond business after failing to find a buyer for what was the third-largest underwriter of American state and local government debt last year.

“UBS explored a number of alternatives to exit the institutional municipals business and determined that because of the complexities of selling the business in the current market and limited market capacity for a business of this size, a sale of the business was unlikely in the near term,” the company said in a statement.

Richmond Federal Reserve Bank President Jeffrey Lacker Says Fed Loans to Wall Street Risk More Crises

June 5 (Bloomberg) -- Richmond Federal Reserve Bank President Jeffrey Lacker, challenging Chairman Ben S. Bernanke's unprecedented actions to stem a financial panic, warned that lending to securities firms raises the risk of future tumult.

``The danger is that the effect of the recent credit extension on the incentives of financial-market participants might induce greater risk taking,'' Lacker said in a speech to the European Economics and Financial Centre in London. That ``in turn could give rise to more frequent crises,'' he said.

Lacker urged that the central bank now ``clearly'' set boundaries for its help to financial markets. In an interview yesterday on the themes of his speech, Lacker said even those new boundaries may not be believed by investors unless a financial firm fails ``in a costly way.''

The remarks are the strongest warning by an official about the consequences of the Fed's aid to securities dealers, the first lending to nonbanks since the Great Depression.

Federal Reserve Vice Chairman Donald Kohn Says Writedowns to Rise, Losses May Spread (Update3)

June 5 (Bloomberg) -- Federal Reserve officials expect some U.S. banks to report ``weak earnings'' and write down more assets while operating with insufficient reserves to cover bad loans, Vice Chairman Donald Kohn said.

The economic slump may increase problem loans for consumers, credit-card holders and corporations, Kohn testified today to the Senate Banking Committee. Banks ``must be prepared for the possibility'' that they may find it harder to borrow if financial-market turmoil continues or credit availability declines further, he said.

``We expect bank holding companies to continue to report weak earnings and further asset valuation writedowns,'' Kohn said during a hearing on the banking industry. Banks aren't increasing reserves enough to keep pace with losses, he said.

US banks fear $5 trillion balance impact

US banks fear accounting changes could impact lending as they force $5 trillion of assets back on to their balance sheets.

Analysts at Citigroup warn the planned tightening of accounting rules for off-balance sheet vehicles would force US banks to reconsider arrangements and could result in up to $5 trillion (₤2.5 trillion) of assets coming back on to their books.

‘We think it is very likely that these vehicles will come back on balance sheet.’ Birgit Specht, head of securitisation analysis at Citigroup, told Financial Times.

Ford Cutting Salaried Expenses By 15%; Delaying Merit Raises

DETROIT -(Dow Jones)- Ford Motor Co. (F) notified its U.S. salaried workers that it will trim expenses in its white-collar work force by 15% through layoffs, attrition and a hiring freeze on some open positions.

All moves, which will include trimming contract jobs, are slated to be completed by Aug. 1, Ford spokesman Mark Truby said Thursday. Truby also confirmed that merit raises for North American salaried workers, due to be paid in July, will be delayed until October. The auto maker will also suspend its U.S. tuition assistance program.

U.S. Auto Sales May Fall 1 Million in 2008, Ross Says (Update1)

June 5 (Bloomberg) -- U.S. auto sales may fall by 1 million vehicles this year and 350,000 more in 2009, said billionaire investor Wilbur Ross, who has been buying up suppliers of parts to the industry.

``The American consumer is tapped out and burned out,'' Ross said today in speech at the Ward's Auto Interior Show in Detroit. ``The pressure on consumers has been intensified by the loss of jobs and the high price of gas.''

Airlines Lose A Decade To Fuel

All airlines can do is cut, cut, cut. There is just no money left after dealing with increasingly rising fuel costs to continue at current levels.

"Based on a look at industry domestic capacity among legacy carriers, regional airlines, and low cost airlines, we expect 2009 domestic capacity will be in line with where it was in 1998 to 1999, essentially wiping out 10 years of growth for the legacy carriers," said McKenzie.

Summer airfares double, triple, quadruple

The law of supply and demand is kicking in for airline passengers this summer — and not in their favor.

Despite a string of price increases this year, demand for summer flights remains strong and the USA's big airlines are continuing to fill more than 80% of their seats.

This week, six Airlines (American, United, Delta, Northwest, Continental, US Airways) raised prices again for flights on many domestic routes where there's no non-stop competition from low-fare carriers. The result, says travel price guru Tom Parsons of BestFares.com, is that the cheapest tickets available on many routes in July are 100% to 300% higher than a year ago.

These are historic rates for fare increases, but even with that, airlines are failing to keep up with their rising fuel costs.

Americans' net worth took a dive in the first quarter

Yes, you have gotten poorer. And at an accelerated pace.

The net worth of U.S. households fell in the first quarter, the second straight decline, thanks to the double-whammy of sliding home values and the plunge in stock prices, the Federal Reserve said in a report today.

The central bank’s so-called flow of funds report estimated the net worth of American households at $55.97 trillion as of March 31, down $1.7 trillion from year-end. That was more than three times the $530-billion drop in the fourth quarter.

More Troubles for the US Dollar? : Trichet Says ECB May Consider Raising Rates in July

June 5 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said officials may raise interest rates next month to combat the fastest inflation in 16 years, sparking a surge in the euro and pushing bond yields to the highest level since 2001.

``It's not excluded that, after having carefully examined the situation, that we could decide to move our rates by a small amount at our next meeting,''

Not really important, but indicative of the times we live in, so I figured I'd post it anyway:

Boxer Holyfield Joins List of Celebrities Facing Foreclosure

June 5 (Bloomberg) -- Evander Holyfield, the former heavyweight boxing champion, faces losing his home to foreclosure, joining fellow athlete Jose Canseco and former ``Tonight Show'' sidekick Ed McMahon among celebrities struggling to pay mortgages.

Holyfield's estate in Fairburn, Georgia, will be put up for auction July 1 to repay a mortgage on the property with an original principal of $10 million, according to a legal notice published yesterday in the Fayette Daily News. Washington Mutual Inc., the biggest U.S. savings and loan, filed the notice, which identifies Holyfield as the property's owner.

Closing:

Very nice "Goldilocks Economy" rally in US Stocks today. Certainly hope all the bad news has been digested.

Regards

Randy