Page 4 of 5 CREDIT BUBBLE BULLETIN Just the facts
Commentary and market watch by Doug Noland
and metal prices rose. The cost of goods leaving factories and mines in the
world's biggest energy exporter surged 28.1%, compared with 25.1% in May ... "
July 23 - Bloomberg (Jacob Greber): "Australian inflation accelerated in the
second quarter to the fastest pace in two years ... Prices gained 4.5% from a
year earlier."
July 23 - Bloomberg (Rebecca Keenan): "The number of Australians who spend more
than half their income repaying their mortgage has more than doubled the past
year, the Australian Financial Review reported ... A quarter of people use more
than
half their income on repayments, known as 'mortgage stress', compared with 12%
a year ago, the newspaper said, citing a survey ... "
July 24 - Bloomberg (Tracy Withers): "New Zealand's central bank cut its
benchmark interest rate by a quarter point to 8%, the first reduction in five
years, saying slowing economic growth will curb inflation ... New Zealand's
economy contracted in the first quarter, putting the nation on the brink of its
first recession since 1998 as drought, a slumping housing market and rising
credit costs stall spending."
Bursting Bubble Economy Watch
July 25 - Wall Street Journal (Bob Davis, Damian Paletta and Rebecca Smith):
"The housing and financial crisis convulsing the US is powering a new wave of
government regulation of business and the economy. Federal and state
governments alike are increasingly hands-on in their effort to deal with
failing businesses, plunging house prices, worthless mortgages and soaring
energy prices. The steps add up to a major challenge to the movement toward
deregulation that has defined American governance for much of the past
quarter-century since the 'Reagan Revolution' of the early 1980s. In fact, some
proponents today of a bigger oversight role for government are Republican heirs
to the legacy of President Reagan."
July 23 - Dow Jones (Meena Thiruvengadam): "The US last month saw more mass
layoffs than it has in any one month since June 2003, the Department of Labor
said ... There were 1,643 instances of mass layoffs affecting 165,697 workers
in June ... "
July 21 - Financial Times (Deborah Brewster): "US public pension funds have had
their worst returns in six years, losing an average of more than 4% in the year
to June 30, that puts them under even greater pressure to meet their growing
liabilities. The average plan's funded status has declined by close to 5%
during the year, taking it ... to be only 96% funded, according to BNY Mellon.
Until now funding had been improving, after five years of positive returns."
July 22 - Wall Street Journal (Christina M. Wright): "The job market for
teenagers is the worst it has been in decades ... A weaker summer employment
market, stemming from an anemic economy and higher age requirements for many
jobs, has resulted in a idle summer for many teens. Almost one in four 16- and
17-year-olds can't find work, and the Northeastern University Center for Labor
Market Studies found this summer's teen employment rate could reach a postwar
low."
July 22 - Financial Times (Elizabeth Rigby and Hal Weitzman): "US food
companies are preparing another round of hefty price increases as soaring
commodity costs force them to pass on rises to consumers. Sara Lee ... said
costs would compel it to push up prices on meat lines by up to a fifth later
this year. 'We will be taking price increases on the vast majority of the
protein products in this calendar year,' said CJ Fraleigh, Sara Lee's COO ...
'Price increases vary a lot by type of products but the increases will be as
low as zero and some products we will decrease on and other increases [will be]
in excess of 20%.'"
Central Banker Watch
July 22 - Wall Street Journal (Sudeep Reddy): "At least two Federal Reserve
officials appear to have entered the central bank's policy meeting last month
looking for a rate increase ... The Fed disclosed Tuesday that the boards of
two regional Fed banks - Dallas and Kansas City - voted in June to raise the
discount rate ... "
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch
July 22 - Bloomberg (Jody Shenn): "Top-rated prime-jumbo mortgage securities
tumbled to record lows last week amid concern that the debt will be downgraded,
according to JPMorgan ... The securities fell to about $12 per $100 of
principal less than similar bonds guaranteed by government-chartered Fannie Mae
and Freddie Mac, compared with about $7 less the previous week ... Fannie Mae's
5.5% securities trade at $96.5, data compiled by Bloomberg show. Concern that
credit ratings on prime-jumbo debt may be lowered has removed a 'fair amount of
bank portfolio and insurance company buyers' from the market, JPMorgan analyst
John Sim wrote ... Declining prices may force banks and real estate investment
trusts that own the securities to write down the debt, he said. 'Certainly from
a historical perspective, these levels are absurd, but any historical pricing
at this point is irrelevant,' Sim wrote ... "
July 22 - Bloomberg (Jeremy R. Cooke): "Moody's ... move to place the Aaa
ratings of Financial Security Assurance Inc. and Assured Guaranty Corp. under
review for possible cuts 'may well be the end of bond insurance as we know it,'
according to a Municipal Market Advisors research note. Investors probably will
act as if downgrades are certain, possibly leading some money-market funds to
shed variable-rate securities insured by FSA and Assured, Matt Fabian, managing
director ... said ... "
July 21 - Wall Street Journal (Mark Maremont): "Federal officials heap much of
the blame for the subprime mortgage mess on lenders, claiming they recklessly
made too many high-cost home loans to borrowers who couldn't afford them. It
turns out that the US government itself was one of the lenders giving out
high-interest, subprime mortgages, some of them predatory, according to
government documents filed in federal court. The unusual situation, which is
still bedeviling bank regulators, stems from the 2001 seizure by federal
officials of Superior Bank FSB, then a national subprime lender based in
Hinsdale, Ill. Rather than immediately shuttering or selling Superior, as it
normally does with failed banks, the Federal Deposit Insurance Corp. continued
to run the bank's subprime-mortgage business for months as it looked for a
buyer. With FDIC people supervising day-to-day operations, Superior funded more
than 6,700 new subprime loans worth more than $550 million, according to
federal mortgage data. The FDIC then sold a big chunk of the loans to another
bank. That loan pool was afflicted by the same problems for which regulators
have faulted the industry: lending to unqualified borrowers, inflated
appraisals and poor verification of borrowers' incomes, according to a written
report from a government-hired expert."
July 23 - Financial Times (Paul J Davies): "The number of specialist investment
managers in the European leveraged loan markets is set to drop almost as
quickly as it grew, with up to 20% of firms expected to disappear over the next
three years, according to Fitch ... The boom in the leveraged loan market and
its role in funding a wave of private equity buy-out deals in the two years
before the credit crunch was only possible because of an influx of managers of
structured funds called collateralised loan obligations."
Burst Mortgage Finance Bubble Watch
July 23 - Bloomberg (Bob Ivry and Sharon L. Lynch): "Fannie Mae, the largest US
mortgage finance company, couldn't find a buyer who would pay $6,900 for the
three-bedroom house at 1916 Prospect St. in Flint, Michigan. So broker Raymond
Megie, who is handling the foreclosure sale, advised cutting the price to
$5,000. Megie still couldn't sell it. 'There's oversupply,' he said. The home
sold in 2005 for $110,000. Fannie Mae acquired twice as many homes through
foreclosure in the first quarter as it sold, regulatory filings show ... Late
payments on the company's home loans, a harbinger of foreclosures, almost
doubled in the past year. Together, Fannie Mae and Freddie Mac, the two biggest
US mortgage finance companies, owned a record $6.9 billion of foreclosed homes
on March 31, compared with $8.56 billion held by all 8,500 US commercial banks
and savings and loans ... The value of Fannie Mae's foreclosed property doubled
in the first quarter to $4.72 billion from $2.4 billion a year earlier, and the
number of homes it owned climbed 64% to 43,167 ... Fannie Mae's goal in selling
its properties is to get the highest possible price, even if it means hanging
on to them longer, said Gabrielle Harrison, the company's VP for REO sales ...
Getting the highest price helps preserve neighborhood property values, she
said. 'We want to treat that home as if it was your own, or as if you were
living next door to it,' Harrison said. 'You wouldn't want that home to bring
down your property value.' The typical price Fannie Mae received for foreclosed
homes sold in the first quarter fell to 74% of the unpaid mortgage principal
from 93% in 2005, according to Harrison ... Securitization of residential
mortgages by underwriters outside of Fannie Mae and Freddie Mac has almost
stopped. Banks bundled $1.15 trillion of home loans into so-called
private-label securities in 2006, Inside Mortgage Finance reported. The number
fell to $46 billion in the first half of 2008 ... The two government-sponsored
enterprises own or guarantee 81% of US mortgages originated this year ... The
home on Prospect Street in Flint needs a new roof and carpeting and the
plumbing has been ripped out, said Megie, a broker with Realty Executive Main
Street ... , who sells Fannie Mae-owned homes. The house was originally listed
for sale in April, he said. 'Two years ago I didn't have any Fannie Mae
properties and now it's probably pushing 50% of what I have listed,' Megie
said. Fannie Mae is fixing vandalized homes instead of 'just dumping them to
investors,' he said."
July 22 - Wall Street Journal (Paul A. Gigot): "Angelo Mozilo was in one of his
Napoleonic moods. It was October 2003, and the CEO of Countrywide Financial was
berating me for The Wall Street Journal's editorials raising doubts about the
accounting of Fannie Mae. I had just been introduced to him by Franklin Raines,
then the CEO of Fannie, whom I had run into by chance at a reception hosted by
the Business Council, the CEO group that had invited me to moderate a couple of
panels. Mr. Mozilo loudly declared that I didn't know what I was talking about,
that I didn't understand accounting or the mortgage markets, and that I was in
the pocket of Fannie's competitors, among other insults. Mr. Raines, always
smoother than Mr. Mozilo, politely intervened to avoid an extended argument,
and Countrywide's bantam rooster strutted off."
Real Estate Bust Watch
July 22 - Bloomberg (Kathleen M. Howley): "US home prices fell 4.8% in May from
a year earlier ... The monthly house price index
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